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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 quarterly period ended: March 31, 2007
 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.)
 2060 East Avenida de Los Arboles, # D190, Thousand Oaks, California           91362-1376
 Telephone Number: (408) 453-4180
   Yes þ
    
    No o
  Large accelerated filer o accelerated filer o non-accelerated filer þ
  Yes o
    
    Noþ




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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 4T. 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
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    726,275
    
    
    $
    228,940Accounts Receivable, net
    
    
    45,551
    
    
    
    74,828Prepaid Expenses and Deposits
    
    
    41,135
    
    
    
    25,073Total Current Assets
    
    
    812,961
    
    
    
    328,841Property and Equipment, net
    
    
    3,213
    
    
    
    3,477Intangible Assets, net
    
    
    125,682
    
    
    
    131,258Total Assets
    
    $
    941,856
    
    
    $
    463,576LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Note Payable
    
    
    
    
    
    
    9,670Accounts Payable
    
    
    
    
    
    
    32,136Accrued Wages and Benefits
    
    
    2,483
    
    
    
    3,169Accrued Professional Fees
    
    
    15,000
    
    
    
    41,900Accrued Commissions
    
    
    100
    
    
    
    200Accrued Expenses
    
    
    1,000
    
    
    
    Deferred Revenue
    
    
    313,116
    
    
    
    Total
Current Liabilities
    
    
    331,699
    
    
    
    87,075Commitments and ContingenciesShareholders Equity:Common
shares, $.01 par value, 65,000,000 shares
authorized, 48,763,383 shares
issued and outstanding at March 31, 2007 and
December 31, 2006.
    
    
    469,772
    
    
    
    469,772Additional Paid-In Capital
    
    
    46,441,755
    
    
    
    46,441,755Accumulated Deficit
    
    
    (46,301,370
    )
    
    
    (46,535,026
    )Total Shareholders Equity
    
    
    610,157
    
    
    
    376,501$
    941,856
    
    
    $
    463,576
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 For the Three Month Period EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Revenues:Royalty Revenues
    
    $
    359,684
    
    
    $
    100,488359,684
    
    
    
    100,488Cost of Revenues
    
    
    31,493
    
    
    
    10,189Gross Profit
    
    
    328,191
    
    
    
    90,299Operating Expenses:General and Administrative
    
    
    97,157
    
    
    
    130,092Research and Development
    
    
    
    
    
    
    144,901Sales and Marketing
    
    
    
    
    
    
    1,24197,157
    
    
    
    276,234Operating Profit(Loss)
    
    
    231,034
    
    
    
    (185,935
    )Interest and Other Income
    
    
    3,041
    
    
    
    3,219Interest and Other Expense
    
    
    
    
    
    
    3,041
    
    
    
    3,219Income (Loss) Before Income Taxes
    
    
    234,075
    
    
    
    (182,716
    )Income Taxes
    
    
    (418
    )
    
    
    (2,400
    )Net Income (Loss)
    
    $
    233,657
    
    
    $
    (185,116
    )Basic and Diluted Earnings Per Share
    
    $
    0.00
    
    
    $
    (0.00
    )Weighted Average Shares
Outstanding
    
    
    48,763,383
    
    
    
    48,763,383
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    233,657
    
    
    $
    (185,116
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and Amortization
    
    
    5,840
    
    
    
    9,641Net Change in Assets and Liabilities:Accounts Receivable and Employee Advances
    
    
    29,277
    
    
    
    59,868Prepaid Expenses and Deposits
    
    
    (16,062
    )
    
    
    17,894Accounts Payable
    
    
    (32,136
    )
    
    
    (5,229
    )Accrued Wages and Benefits
    
    
    (686
    )
    
    
    (32,955
    )Accrued Professional Fees
    
    
    (26,900
    )
    
    
    (34,000
    )Accrued Commissions
    
    
    (100
    )
    
    
    10,188Accrued Expenses
    
    
    1,000
    
    
    
    (28,144
    )Deferred Revenue
    
    
    313,116
    
    
    
    Net Cash Provided By (Used In) Operating Activities
    
    
    507,006
    
    
    
    (187,853
    )Cash Flows from Investing Activities:Purchase/Disp of Property and Equipment
    
    
    
    
    
    
    Increase in Capitalized Patent and Technology Costs
    
    
    
    
    
    
    Net Cash Provided By (Used in) Investing Activities
    
    
    
    
    
    
    Cash flows from Financing Activities:Issuance (Repayment) of Notes Payable
    
    
    (9,670
    )
    
    
    (10,443
    )Net Cash Provided by Financing Activities
    
    
    (9,670
    )
    
    
    (10,443
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    497,336
    
    
    
    (198,296
    )Cash and Cash Equivalents, Beginning of Period
    
    
    228,940
    
    
    
    550,633Cash and Cash Equivalents, End of Period
    
    $
    726,276
    
    
    $
    352,337Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    Income Taxes
    
    
    418
    
    
    
    2,400
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
  1)
    
    Ability to Continue as a Going Concern, Sale of All or Substantially All of the
Assets of Spatializer Audio Laboratories, Inc. and Desper Products, Inc.
   This called into
question the ability of the Company to operate as a going concern
   5




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(2) Significant Accounting Policies
 Basis of Consolidation 
 Revenue Recognition 
 Deferred Revenue
 Concentration of Credit Risk 
 6




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Cash and Cash Equivalents 
 Customers Outside of the U.S. 
 Major Customers 
 Research and Development Costs 
 Property and Equipment 
 Intangible Assets 
 Earnings Per Share 
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2007
    
    2006Options
    
    
    1,750,000
    
    
    
    2,160,000Warrants
    
    
    0
    
    
    
    01,750,000
    
    
    
    2,160,000
 Stock Option Plan  Accounting for Stock-Based
Compensation ,as amended
 Share Based Payment
 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
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Income Taxes
 Recent Accounting Pronouncements
  Use of Estimates
 Fair Value of Financial Instruments
 (3) Property and Equipment
  March 31,
    
    
    December 31,2007
    
    
    2006Office 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
    
    
    7000
    
    
    
    7,000Total Property and Equipment
    
    
    637,531
    
    
    
    637,531Less Accumulated Depreciation and Amortization
    
    
    634,318
    
    
    
    634,054Property and Equipment, Net
    
    $
    3,213
    
    
    $
    3,477
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(4) Intangible Assets
  March 31,
    
    
    December 31,2007
    
    
    2006Capitalized Patent, Trademarks and Technology Costs
    
    $
    540,708
    
    
    $
    540,708Less Accumulated Amortization
    
    
    415,026
    
    
    
    409,450Intangible Assets, Net
    
    $
    125,682
    
    
    $
    131,258
  2007
    
    $
    131,2582008
    
    $
    02009
    
    $
    0Thereafter
    
    $
    0
  (5) Notes Payable
  (6) Shareholders Equity
  Capitalization
  10




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(7) Stock Options
  WEIGHTED-AVERAGEExercisable
    
    Number
    
    Exercise PriceOptions 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
    
    
    (976,666
    )
    
    
    (1,060,000
    )
    
    $
    0.10Options outstanding at December 31, 2006
    
    
    1,750,000
    
    
    
    1,750,000
    
    
    $
    0.09Options granted
    
    
    
    
    
    
    (0
    )
    
    $
    0.10Options exercised
    
    
    
    
    
    
    (0
    )
    
    $
    Options forfeited/expired
    
    
    (0
    )
    
    
    (0
    )
    
    $
    0.10Options outstanding at March 31, 2007
    
    
    1,750,000
    
    
    
    1,750,000
    
    
    $
    0.09
   2005
    
    2004NET INCOME (LOSS):As Reported
    
    $
    (81,515
    )
    
    $
    (157,490
    )Pro Forma
    
    $
    (89,715
    )
    
    $
    (172,770
    )BASIC AND DILUTED LOSS:As Reported
    
    $
    (0.00
    )
    
    $
    (0.00
    )Pro Forma
    
    $
    (0.00
    )
    
    $
    (0.00
    )
  11




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(8) Commitments and Contingencies
  Operating Lease Commitments
   12




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




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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 (see below and
Item 1A of Part II of this Form 10-Q)
    
    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
    
    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 its Stockholders
Interests to Sell the Companys Assets
    
    We Are Unable to Achieve or Sustain Profitability in the Future or Obtain Future
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Financing and Our Business Operations Will Fail
    
    There is No Guarantee That There Will be Funds Available for Distribution to
Stockholders if We Cannot Get Stockholder Approval for the Asset Sale, if the Approval is
Untimely or if Claims Arise Post-Sale During the 275-Day Warranty Period
    
    The Market For Our Stock May Not Remain Liquid And The Stock Price May Be Subject To
Volatility
   Critical Accounting Policies
  15




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Key Components of the Financial Statements and Important Trends
  Liquidity and Capital Resources.
  Liquidity and Capital Resources.
 Liquidity and Capital Resources.
 17




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Results of Operations
 Revenues
 ®
 Gross Profit
  Operating Expenses
  General and Administrative
  Research and Development
  Sales and Marketing
  18




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Net Income (Loss)
    Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating Lease
Obligations
    
    $
    900
    
    
    $
    900
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    900
    
    
    $
    900
    
    
    
    0
    
    
    
    0
    
    
    
    0
    19




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Net Operating Loss Carry forwards
  Recently Issued Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  20




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Item 4T. Controls and Procedures
  21




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ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 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
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Vote Type
    
    Shares VotedFor
    
    
    14,407,084Against
    
    
    823,182Abstain
    
    
    104,284Non-votes
    
    
    10,939,803
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 10.1
    
    Letter agreement between Spatializer Audio Laboratories, Inc.
and Henry R. Mandell extending employment agreement term
(Management Contract)31
    
    Rule 13a-14(a)/15d-14(a) Certification32*
    
    Section 1350 Certification
 
 *
    
    Certification will not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934. 
 SIGNATURES
   SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)/s/ Henry R. MandellHenry R. MandellChairman of the Board  and Secretary
(Principal Executive, Financial and Accounting Officer) 23