##### 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: March 31, 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
incorporation or organization)
    
    (IRS Employer
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




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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 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
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    352,337
    
    
    $
    550,633Accounts Receivable, net
    
    
    95,365
    
    
    
    155,233Prepaid Expenses and Deposits
    
    
    16,210
    
    
    
    34,104Total Current Assets
    
    
    463,912
    
    
    
    739,970Fixed AssetsAccumulated DepreciationProperty and Equipment, net
    
    
    14,337
    
    
    
    18,403Intangible Assets, net
    
    
    132,972
    
    
    
    138,548Total Assets
    
    $
    611,221
    
    
    $
    896,921LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Note Payable
    
    
    
    
    
    
    10,443Accounts Payable
    
    
    8,966
    
    
    
    14,195Accrued Wages and Benefits
    
    
    15,140
    
    
    
    48,095Accrued Professional Fees
    
    
    
    
    
    
    34,000Accrued Commissions
    
    
    42,105
    
    
    
    31,917Accrued Expenses
    
    
    1,000
    
    
    
    40,869Total
Current Liabilities
    
    
    67,211
    
    
    
    179,519Shareholders Equity:Common shares, $.01 par value, 65,000,000 shares
authorized, 48,763,383 shares
issued and outstanding at March 31, 2006 and
December 31, 2005
    
    
    469,772
    
    
    
    469,772Additional Paid-In Capital
    
    
    46,430,030
    
    
    
    46,430,030Accumulated Deficit
    
    
    (46,355,792
    )
    
    
    (46,182,400
    )Total Shareholders Equity
    
    
    544,010
    
    
    
    717,402$
    611,221
    
    
    $
    896,921
  2




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SPATIALIZER AUDIO LABORATORIES , INC.
AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 For the Three Month Period EndedMarch 31,
    
    
    March 31,2006
    
    
    2005Revenues:Royalty Revenues
    
    $
    100,488
    
    
    $
    331,950Cost of Revenues
    
    
    10,189
    
    
    
    33,872Gross Profit
    
    
    90,299
    
    
    
    298,078Operating Expenses:General and Administrative
    
    
    118,367
    
    
    
    151,201Research and Development
    
    
    144,901
    
    
    
    99,290Sales and Marketing
    
    
    1,241
    
    
    
    39,253264,509
    
    
    
    289,744Operating (Loss)
    
    
    (174,210
    )
    
    
    8,334Interest and Other Income
    
    
    3,219
    
    
    
    2,920Interest and Other Expense
    
    
    
    
    
    
    (1,240
    )3,219
    
    
    
    1,680Income
(Loss) Before Income Taxes
    
    
    (170,991
    )
    
    
    10,014Income Taxes
    
    
    2,400
    
    
    
    Net Income (Loss)
    
    $
    (173,391
    )
    
    $
    10,014Basic and Diluted Earnings Per Share
    
    $
    (0.00
    )
    
    $
    0.00Weighted
Average Shares Outstanding
    
    
    48,763,383
    
    
    
    46,975,365
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##### Table of Contents



SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    (173,391
    )
    
    $
    10,014Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and Amortization
    
    
    9,641
    
    
    
    17,262Net Change in Assets and Liabilities:Accounts Receivable and Employee Advances
    
    
    59,868
    
    
    
    155,102Prepaid Expenses and Deposits
    
    
    17,894
    
    
    
    34,476Accounts Payable
    
    
    (5,229
    )
    
    
    7,365Accrued Wages and Benefits
    
    
    (32,955
    )
    
    
    (3,660
    )Accrued Professional Fees
    
    
    (34,000
    )
    
    
    (20,000
    )Accrued Commissions
    
    
    10,188
    
    
    
    (14,650
    )Accrued Expenses
    
    
    (39,869
    )
    
    
    3,500Deferred Revenue
    
    
    
    
    
    
    (156,558
    )Net Cash Provided By (Used In) Operating Activities
    
    
    (187,853
    )
    
    
    32,851Cash Flows from Investing Activities:Purchase/Disp of Property and Equipment
    
    
    
    
    
    
    (3,865
    )Increase in Capitalized Patent and Technology Costs
    
    
    Net Cash Provided By (Used in) Investing Activities
    
    
    
    
    
    
    (3,865
    )Cash flows from Financing Activities:Issuance (Repayment) of Notes Payable
    
    
    (10,443
    )
    
    
    (26,237
    )Net Cash Provided by Financing Activities
    
    
    (10,443
    )
    
    
    (26,237
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    (198,296
    )
    
    
    2,749Cash and Cash Equivalents, Beginning of Period
    
    
    550,633
    
    
    
    871,155Cash and Cash Equivalents, End of Period
    
    $
    352,337
    
    
    $
    873,904Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    1,240Income Taxes
    
    
    2,400
    
    
    
    
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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 Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173,391
    )
    
    
    (173,391
    )Balance, March 31, 2006
    
    
    48,763,383
    
    
    $
    469,772
    
    
    $
    46,430,030
    
    
    $
    (46,355,791
    )
    
    $
    544,011
  5




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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
  1) Nature of Business
     (2) Significant Accounting Policies
 Basis of Consolidation 
 Revenue Recognition 
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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 
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Intangible Assets 
 Earnings Per Share 
 2006
    
    
    2005Options
    
    
    2,160,000
    
    
    
    3,135,000Warrants
    
    
    0
    
    
    
    02,160,000
    
    
    
    3,135,000
 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
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Income
Taxes 
 Recent Accounting Pronouncements
   Use
of Estimates 
 Fair
Value of Financial Instruments 
 (3) Property and Equipment
  March 31, 2006
    
    
    December 31, 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
    
    
    7,000
    
    
    
    7,000
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March 31, 2006
    
    
    December 31, 2005Total Property and Equipment
    
    
    637,531
    
    
    
    637,531Less Accumulated Depreciation and Amortization
    
    
    623,194
    
    
    
    619,128Property and Equipment, Net
    
    $
    14,337
    
    
    $
    18,403
 (4) Intangible Assets
  March 31, 2006
    
    
    December 31, 2005Capitalized Patent, Trademarks and Technology Costs
    
    $
    525,695
    
    
    $
    525,695Less Accumulated Amortization
    
    
    392,723
    
    
    
    387,147Intangible Assets, Net
    
    $
    132,972
    
    
    $
    138,548
  2006
    
    $
    16,7022007
    
    $
    16,7022008
    
    $
    16,7022009
    
    $
    16,702Thereafter
    
    $
    66,164
 (5) Notes Payable
  (6) Shareholders Equity
 During the quarter ended March 31, 2006, shares were issued, cancelled or converted as
follows:
  Capitalization
 Series B-1 Redeemable Convertible Preferred Stock:
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(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
    
    
    
    
    
    
    (650,000
    )
    
    $
    0.10Options outstanding at March 31, 2006
    
    
    2,076,666
    
    
    
    2,160,000
    
    
    $
    0.10
  11




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(8) Commitments and Contingencies
  Operating Lease Commitments
  (9) Profit Sharing Plan
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Executive Overview
      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
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
    
    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
    
    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.
  14




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15




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.
  Critical Accounting Policies
    16




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Corporate Governance
 Audit Committee
  Compensation and Stock Committee
   Key Components of the Financial Statements and Important Trends
 17




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Liquidity and Capital Resources.
  Liquidity
and Capital Resources.
 Liquidity and Capital Resources.
 Results of Operations
  18




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Revenues
  Gross Profit
  Operating Expenses
  General and Administrative
  Research and Development
  19




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Sales and Marketing
  Net Income (Loss)
     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
    
    $
    20,000
    
    
    $
    20,000Purchase ObligationsTotal
    
    $
    20,000
    
    
    $
    20,000
   20




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Net Operating Loss Carry forwards
  Recently Issued Accounting Pronouncements
  21




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  22




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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
  
 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.)
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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.)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
    
    Rule 13a-14(a)/15d-14(a) Certification32**
    
    Section 1350 Certification*
    
    Previously filed**
    
    Certification will not be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934.
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SIGNATURES
   SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)/s/ Henry R. MandellHenry R. MandellChairman of the Board  and Secretary

(Principal Executive, Financial and Accounting Officer) 25