##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the period ended: June 30, 2006
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number: 000-26460
 SPATIALIZER AUDIO LABORATORIES, INC.
  Delaware
    
    95-4484725(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 2025 Gateway Place, Suite 365  San Jose, California 95110
  Telephone Number: (408) 453-4180
  Yes þ No o
  Large accelerated filer o accelerated filer o non-accelerated filer þ
 Yes o No þ




---



TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM I. FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESEXHIBIT 31EXHIBIT 32    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    297,247
    
    
    $
    550,633Accounts Receivable, net
    
    
    84,020
    
    
    
    155,233Prepaid Expenses and Deposits
    
    
    61,936
    
    
    
    34,104Total Current Assets
    
    
    443,203
    
    
    
    739,970Property and Equipment, net
    
    
    10,271
    
    
    
    18,403Intangible Assets, net
    
    
    142,410
    
    
    
    138,548Total Assets
    
    $
    595,884
    
    
    $
    896,921LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Note Payable
    
    
    33,846
    
    
    
    10,443Accounts Payable
    
    
    25,158
    
    
    
    14,195Accrued Wages and Benefits
    
    
    3,706
    
    
    
    48,095Accrued Professional Fees
    
    
    10,000
    
    
    
    34,000Accrued Commissions
    
    
    35,428
    
    
    
    31,917Accrued Expenses
    
    
    6,724
    
    
    
    40,869Total Current Liabilties
    
    
    114,862
    
    
    
    179,519Commitments and ContingenciesShareholders Equity:Common shares, $.01 par value, 65,000,000 shares
authorized, 48,763,383 shares
issued and outstanding at June 30, 2006 and
December 31, 2005
    
    
    469,772
    
    
    
    469,772Additional Paid-In Capital
    
    
    46,430,030
    
    
    
    46,430,030Accumulated Deficit
    
    
    (46,418,780
    )
    
    
    (46,182,400
    )Total Shareholders Equity
    
    
    481,022
    
    
    
    717,402$
    595,884
    
    
    $
    896,921
  2




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 For the Three Month Period Ended
    
    
    For the Six Month Period EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Royalty Revenues
    
    $
    92,868
    
    
    $
    428,912
    
    
    $
    193,356
    
    
    $
    760,863Cost of Revenues
    
    
    9,288
    
    
    
    42,890
    
    
    
    19,477
    
    
    
    76,762Gross Profit
    
    
    83,580
    
    
    
    386,022
    
    
    
    173,879
    
    
    
    684,101Operating Expenses:General and Administrative
    
    
    130,766
    
    
    
    189,723
    
    
    
    249,133
    
    
    
    340,924Research and Development
    
    
    12,839
    
    
    
    83,358
    
    
    
    157,740
    
    
    
    182,649Sales and Marketing
    
    
    
    
    
    
    56,201
    
    
    
    1,241
    
    
    
    95,454143,605
    
    
    
    329,282
    
    
    
    408,114
    
    
    
    619,027Operating Income (Loss)
    
    
    (60,025
    )
    
    
    56,740
    
    
    
    (234,235
    )
    
    
    65,074Interest and Other Income
    
    
    1,702
    
    
    
    3,696
    
    
    
    4,921
    
    
    
    6,616Interest and Other Expense
    
    
    (2,266
    )
    
    
    (2,870
    )
    
    
    (2,266
    )
    
    
    (4,110
    )(564
    )
    
    
    826
    
    
    
    2,655
    
    
    
    2,506Income (Loss) Before Income Taxes
    
    
    (60,589
    )
    
    
    57,566
    
    
    
    (231,580
    )
    
    
    67,580Income Taxes
    
    
    (2,400
    )
    
    
    
    
    
    
    (4,800
    )
    
    
    Net Income (Loss)
    
    $
    (62,989
    )
    
    $
    57,566
    
    
    $
    (236,380
    )
    
    $
    67,580Basic and Diluted Earnings Per Share
    
    $
    (0.00
    )
    
    $
    0.00
    
    
    $
    (0.00
    )
    
    $
    0.00Weighted Average Shares
Outstanding
    
    
    48,763,383
    
    
    
    46,975,365
    
    
    
    48,763,383
    
    
    
    46,975,365
  3




---



##### Table of Contents



SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    (236,380
    )
    
    $
    67,580Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and Amortization
    
    
    19,283
    
    
    
    28,603Net Change in Assets and Liabilities:Accounts Receivable and Employee Advances
    
    
    71,213
    
    
    
    145,327Prepaid Expenses and Deposits
    
    
    (27,832
    )
    
    
    4,219Accounts Payable
    
    
    10,963
    
    
    
    (47,427
    )Accrued Wages and Benefits
    
    
    (44,389
    )
    
    
    (10,519
    )Accrued Professional Fees
    
    
    (24,000
    )
    
    
    (10,000
    )Accrued Commissions
    
    
    3,511
    
    
    
    (2,847
    )Accrued Expenses
    
    
    (34,145
    )
    
    
    1,000Deferred Revenue
    
    
    
    
    
    
    (313,116
    )Net Cash Provided By (Used In) Operating Activities
    
    
    (261,776
    )
    
    
    (137,180
    )Cash Flows from Investing Activities:Purchase of Property and Equipment
    
    
    
    
    
    
    (5,477
    )Increase in Capitalized Patent and Technology Costs
    
    
    (15,013
    )
    
    
    Net Cash Provided By (Used in) Investing Activities
    
    
    (15,013
    )
    
    
    (5,477
    )Cash flows from Financing Activities:Issuance (Repayment) of Notes Payable
    
    
    23,403
    
    
    
    838Net Cash Provided by Financing Activities
    
    
    23,403
    
    
    
    838Increase (Decrease) in Cash and Cash Equivalents
    
    
    (253,386
    )
    
    
    (141,819
    )Cash and Cash Equivalents, Beginning of Period
    
    
    550,633
    
    
    
    871,155Cash and Cash Equivalents, End of Period
    
    $
    297,247
    
    
    $
    729,336Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    6,766Income Taxes
    
    
    4,800
    
    
    
    
  4




---



##### Table of Contents



SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(unaudited)
 Common Shares
    
    
    
    
    
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    
    Additional
    
    
    Accumulated
    
    
    Shareholders'shares
    
    
    Par value
    
    
    paid-in-capital
    
    
    Deficit
    
    
    EquityBalance, December 31, 2005
    
    
    48,763,383
    
    
    $
    469,772
    
    
    $
    46,430,030
    
    
    $
    (46,182,400
    )
    
    $
    717,402Net (Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173,391
    )
    
    
    (173,391
    )Balance, March 31, 2006
    
    
    48,763,383
    
    
    $
    469,772
    
    
    $
    46,430,030
    
    
    $
    (46,355,791
    )
    
    $
    544,011Net (Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,989
    )
    
    $
    (62,989
    )Balance, June 30, 2006
    
    
    48,763,383
    
    
    $
    469,772
    
    
    $
    46,430,030
    
    
    $
    (46,418,780
    )
    
    $
    481,022
  5




---



##### Table of Contents



SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
  1) Nature of Business
     (2) Significant Accounting Policies
 Basis of Consolidation 
 Revenue Recognition 
 6




---



##### Table of Contents



Deferred Revenue
 Concentration of Credit Risk 
   Cash and Cash Equivalents 
 Customers Outside of the U.S. 
 Major Customers 
 Research and Development Costs 
 Property and Equipment 
 7




---



##### Table of Contents



Intangible Assets 
 Earnings Per Share 
 2006
    
    2005Options
    
    
    2,000,000
    
    
    
    2,960,000Warrants
    
    
    0
    
    
    
    02,000,000
    
    
    
    2,960,000
 Stock Option Plan 
 Impairment of Long-Lived Assets and Assets to be Disposed of Accounting for the Impairment of Long-Lived Assets,
 Segment Reporting Disclosures about Segments of an Enterprise
and Related Information
 Income Taxes
 8




---



##### Table of Contents



Recent Accounting Pronouncements
   Use of Estimates
 Fair Value of Financial Instruments
 (3) Property and Equipment
  December 31,June 30, 2006
    
    
    2005Office Computers, Software, Equipment and Furniture
    
    $
    337,144
    
    
    $
    337,145Test Equipment
    
    
    73,300
    
    
    
    73,300Tooling Equipment
    
    
    45,539
    
    
    
    45,539Trade Show Booth and Demonstration Equipment
    
    
    174,548
    
    
    
    174,548Automobiles
    
    
    0
    
    
    
    7,000Total Property and Equipment
    
    
    630,531
    
    
    
    637,531Less Accumulated Depreciation and Amortization
    
    
    620,260
    
    
    
    619,128Property and Equipment, Net
    
    $
    10,271
    
    
    $
    18,403
 9




---



##### Table of Contents



(4) Intangible Assets
  June 30,
    
    
    December 31,2006
    
    
    2005Capitalized Patent, Trademarks and Technology Costs
    
    $
    540,709
    
    
    $
    525,695Less Accumulated Amortization
    
    
    398,299
    
    
    
    387,147Intangible Assets, Net
    
    $
    142,410
    
    
    $
    138,548
  2006
    
    $
    16,7022007
    
    $
    16,7022008
    
    $
    16,7022009
    
    $
    16,702Thereafter
    
    $
    66,164
 (5) Notes Payable
  (6) Shareholders Equity
 During the quarter ended June 30, 2006, shares were issued, cancelled or converted as follows:
   Capitalization
 Series B-1 Redeemable Convertible Preferred Stock:
 10




---



##### Table of Contents



(7) Stock Options
  WEIGHTED-AVERAGEExercisable
    
    Number
    
    Exercise PriceOptions outstanding at December 31, 2003
    
    
    2,540,000
    
    
    
    3,035,000
    
    
    $
    0.18Options granted
    
    
    
    
    
    
    200,000
    
    
    $
    0.09Options exercised
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    (600,000
    )
    
    $
    0.43Options outstanding at December 31, 2004
    
    
    2,381,666
    
    
    
    2,635,000
    
    
    $
    0.11Options granted
    
    
    
    
    
    
    500,000
    
    
    $
    0.10Options exercised
    
    
    
    
    
    
    (0
    )
    
    $
    Options forfeited/expired
    
    
    
    
    
    
    (325,000
    )
    
    $
    0.31Options outstanding at December 31, 2005
    
    
    2,726,666
    
    
    
    2,810,000
    
    
    $
    0.10Options granted
    
    
    
    
    
    
    (0
    )
    
    $
    0.10Options exercised
    
    
    
    
    
    
    (0
    )
    
    $
    Options forfeited/expired
    
    
    
    
    
    
    (810,000
    )
    
    $
    0.14Options outstanding at June 30, 2006
    
    
    2,076,666
    
    
    
    2,000,000
    
    
    $
    0.09
  11




---



##### Table of Contents



(8) Commitments and Contingencies
  Operating Lease Commitments
  (9) Profit Sharing Plan
  12




---



##### Table of Contents



Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
  Executive Overview
     ®
 13




---



##### Table of Contents



Approach to MD&A
  
    
    to provide a narrative explanation of a companys financial statements in plain
English that enables the average investor to see the company through the eyes of
management;
    
    to enhance the overall financial disclosure and provide the context within which
financial information should be analyzed; and
    
    to provide information about the quality of, and potential variability of, a
companys earnings and cash flow, so that investors can ascertain the likelihood and
relationship of past performance being indicative of future performance.
  
    
    An understanding of our operating environment and its risks
    
    An outline of critical accounting policies
    
    A review of our corporate governance structure
    
    A review of the key components of the financial statements and our cash position and
capital resources
 14




---



##### Table of Contents




    
    A review of the important trends in the financial statements and our cash flow
    
    Disclosure on our internal controls and procedures
 Operating Environment
  
    
    Our Board of Directors has determined it is in the Companys and its Stockholders
interests to attempt to sell the Companys assets
    
    We face significant pricing pressure and competition that has resulted in our
technology being designed out within a short time frame, and impeded efforts to secure new
design wins
    
    New customer product development has been delayed. This resulted in delays in
revenues. Further, where our products are delayed, competitive products may reach the
market before, or replace our products.
    
    We rely on the schedules and cooperation of chip makers or other third parties to
deliver our technology in consumer products. These third parties have their own priorities
and alliances that delayed or could thwart our sales efforts to potential customers.
   15




---



##### Table of Contents



.
  Critical Accounting Policies
   16




---



##### Table of Contents



Corporate Governance
 Audit Committee
  17




---



##### Table of Contents



Compensation and Stock Committee
   Key Components of the Financial Statements and Important Trends
  Liquidity and Capital Resources.
  18




---



##### Table of Contents



Liquidity
and Capital Resources.
 Liquidity and Capital Resources.
 Results of Operations
  Revenues
  Gross Profit
  Operating Expenses
  19




---



##### Table of Contents



General and Administrative
  Research and Development
  Sales and Marketing
  Net Income (Loss)
  20




---



##### Table of Contents



Liquidity and Capital Resources
   21




---



##### Table of Contents



Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsLong-Term Debt ObligationsCapital Lease ObligationsOperating Lease Obligations
    
    $
    13,000
    
    
    $
    13,000Purchase ObligationsTotal
    
    $
    13,000
    
    
    $
    13,000
     Net Operating Loss Carry forwards
  Recently Issued Accounting Pronouncements
  22




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  23




---



##### Table of Contents



24




---



##### Table of Contents



ITEM 1 . LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 Our Board of Directors has Determined it is in the Companys and its Stockholders Best
Interests to Attempt to Sell the Companys Assets.
  Further, Even if Such Transaction is Consummated, There is no Assurance that There will be Any
Funds Available for Distribution to Stockholders.
  We May Continue to Incur the Expense of Complying with Public Company Reporting Requirements.
 25




---



##### Table of Contents



We have Suspended Our Day-to-Day Business Operations.
  We do not Currently Maintain an Independent Audit Committee or Compensation Committee.
    
 26




---



##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3 . DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5 . OTHER INFORMATION
  
 ITEM 6 . EXHIBITS
 2.1*
    
    Arrangement Agreement dated as of March 4, 1994 among
Spatializer-Yukon, DPI and Spatializer-Delaware (Incorporated by
reference to the Companys Registration Statement on Form
S-1,Registration No 33-90532, effective August 21, 1995.)3.1*
    
    Certificate of Incorporation of Spatializer-Delaware as filed
February 28, 1994. (Incorporated by reference to the Companys
Registration Statement on Form S-1, Registration No.
33-90532,effective August 21, 1995.)3.2*
    
    Amended and Restated Bylaws of Spatializer-Delaware.
(Incorporated by reference to the Companys Registration
Statement on Form S-1,Registration No. 33-90532, effective
August 21, 1995.)3.3*
    
    Certificate of Designation of Series B 10% Redeemable
Convertible Preferred Stock of the Company as filed December 27,
1999(Incorporated by reference to the Companys Annual Report on
Form10-K, for the period ended December 31, 1999.)3.4*
    
    Certificate of Amendment of Certificate of Incorporation of the
Company as filed on February 25, 2000 (Incorporated by reference
to the Companys Annual Report on Form 10-K, for the period
ended December 31, 1999.)3.5*
    
    Certificate of Designation of Series B-1 Redeemable Convertible
Preferred Stock as filed December 20, 2002 (Incorporated by
reference to the Companys Annual Report on Form 10-K, for the
period ended December 31, 2002.)3.6*
    
    Certificate of Elimination of Series A Preferred Stock as filed
December 26, 2002 (Incorporated by reference to the Companys
Annual Report on Form 10-K, for the period ended December 31,
2002.)3.7*
    
    Certificate of Elimination of Series B Preferred Stock as filed
December 26,2002 (Incorporated by reference to the Companys
Annual Report on Form 10-K, for the period ended December 31,
2002.)10.1*
    
    Spatializer-Delaware Incentive Stock Option Plan (1995 Plan).
(Incorporated by reference to the Companys Registration
Statement on Form S-1, Registration No. 33-90532, effective
August 21, 1995.)
 27




---



##### Table of Contents



10.2*
    
    Spatializer-Delaware 1996 Incentive Plan. (Incorporated by
reference to the Companys Proxy Statement dated June 25, 1996
and previously filed with the Commission.)10.3*
    
    Form of Stock Option Agreement10.4*
    
    License Agreement dated June 29, 1994 between DPI and MEC.
(Incorporated by reference to the Companys Registration
Statement on Form S-1, Registration No. 33-90532, effective
August 21,1995.)10.5*
    
    Employment Agreement dated November 12, 2004, between the
Company and Henry Mandell, as amended. (Incorporated by
reference to the Companys Annual Report on Form 10-K, for the
period ended December 31, 2004.)10.6*
    
    Related Party Promissory Note to the Successor Trustee of the
Ira A. Desper Marital Trust dated November 1, 2003.
(Incorporated by reference to the Companys Annual Report on
Form 10-K, for the period ended December 31, 2004.)10.7*
    
    Lease for Office and Research Center in San Jose, CA.
(Incorporated by reference to the Companys Annual Report on
Form 10-K, for the period ended December 31, 2004.)10.8*
    
    License Agreement between Spatializer Audio Laboratories, Inc.,
Desper Products, Inc. and Samsung Electronics, effective August
22, 2004. (Incorporated by reference to the Companys Quarterly
Report on Form 10-Q for the period ended September 30, 2004.)31
    
    Section 302 Certifications32**
    
    Section 1350 Certification
 
 *
    
    Previously filed**
    
    Certification will not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934. 28




---



##### Table of Contents



SIGNATURES
   SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)/s/ Henry R. MandellHenry R. MandellChairman of the Board  and Secretary
(Principal Executive, Financial and Accounting Officer) 29