##### 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 quarterly period ended: June 30, 2007
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 000-26460
 SPATIALIZER AUDIO LABORATORIES, INC.
  Delaware
    
    95-4484725(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
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
    
    No  þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM I. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWSNotes to Consolidated 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 10.10EXHIBIT 31EXHIBIT 32    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 ASSETS
 June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)Current Assets:Cash and Cash Equivalents
    
    $
    812,685
    
    
    $
    228,940Accounts Receivable, net
    
    
    35,137
    
    
    
    74,828Prepaid Expenses and Deposits
    
    
    55,235
    
    
    
    25,073Deferred Transaction Expense
    
    
    72,196
    
    
    
    Total Current Assets
    
    
    975,253
    
    
    
    328,841Property and Equipment, net
    
    
    2,949
    
    
    
    3,477Intangible Assets, net
    
    
    124,356
    
    
    
    131,258Total Assets
    
    $
    1,102,558
    
    
    $
    463,576LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Note Payable
    
    
    33,881
    
    
    
    9,670Accounts Payable
    
    
    44,892
    
    
    
    32,136Accrued Wages and Benefits
    
    
    1,242
    
    
    
    3,169Accrued Professional Fees
    
    
    148,974
    
    
    
    41,900Accrued Commissions
    
    
    100
    
    
    
    200Total Current Liabilties
    
    
    229,089
    
    
    
    87,075Commitments and ContingenciesShareholders Equity:Common shares, $.01 par value, 65,000,000 shares
authorized, 65,000,000 and 48,763,383 shares
issued and outstanding at June 30, 2007 and
December 31, 2006, respectively.
    
    
    650,000
    
    
    
    487,634Additional Paid-In Capital
    
    
    46,375,070
    
    
    
    46,423,893Accumulated Deficit
    
    
    (46,151,601
    )
    
    
    (46,535,026
    )Total Shareholders Equity
    
    
    873,469
    
    
    
    376,501$
    1,102,558
    
    
    $
    463,576
  2




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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 For the Three Month Period Ended
    
    
    For the Six Month Period EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues :Royalty Revenues
    
    $
    360,914
    
    
    $
    92,868
    
    
    $
    720,599
    
    
    $
    193,356Cost of Revenues
    
    
    31,312
    
    
    
    9,288
    
    
    
    62,805
    
    
    
    19,477Gross Profit
    
    
    329,602
    
    
    
    83,580
    
    
    
    657,794
    
    
    
    173,879Operating Expenses :General and Administrative
    
    
    182,735
    
    
    
    130,766
    
    
    
    280,310
    
    
    
    249,133Research and Development
    
    
    
    
    
    
    12,839
    
    
    
    
    
    
    
    157,740Sales and Marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,241182,735
    
    
    
    143,605
    
    
    
    280,310
    
    
    
    408,114Operating Income (Loss )
    
    
    146,867
    
    
    
    (60,025
    )
    
    
    377,484
    
    
    
    (234,235
    )Interest and Other Income
    
    
    5,212
    
    
    
    1,702
    
    
    
    8,253
    
    
    
    4,921Interest and Other Expense
    
    
    (2,311
    )
    
    
    (2,266
    )
    
    
    (2,311
    )
    
    
    (2,266
    )2,901
    
    
    
    (564
    )
    
    
    5,942
    
    
    
    2,655Income (Loss ) Before Income Taxes
    
    
    149,768
    
    
    
    (60,589
    )
    
    
    383,426
    
    
    
    (231,580
    )Income Taxes
    
    
    
    
    
    
    (2,400
    )
    
    
    
    
    
    
    (4,800
    )Net Income (Loss )
    
    $
    149,768
    
    
    $
    (62,989
    )
    
    $
    383,426
    
    
    $
    (236,380
    )Basic and Diluted Earnings Per Share
    
    $
    0.00
    
    
    $
    (0.00
    )
    
    $
    0.01
    
    
    $
    (0.00
    )Weighted Average Shares
Outstanding
    
    
    61,253,088
    
    
    
    48,763,383
    
    
    
    55,008,236
    
    
    
    48,763,383
  3




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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 (unaudited)
 Six Months EndedJune 30,2007
    
    
    2006Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    383,426
    
    
    $
    (236,380
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and Amortization
    
    
    11,680
    
    
    
    19,283Net Change in Assets and Liabilities:Accounts Receivable and Employee Advances
    
    
    39,691
    
    
    
    71,213Prepaid Expenses and Deposits
    
    
    (30,162
    )
    
    
    (27,832
    )Deferred Transaction Costs
    
    
    (72,196
    )Accounts Payable
    
    
    12,756
    
    
    
    10,963Accrued Wages and Benefits
    
    
    (1,927
    )
    
    
    (44,389
    )Accrued Professional Fees
    
    
    107,074
    
    
    
    (24,000
    )Accrued Commissions
    
    
    (100
    )
    
    
    3,511Accrued Expenses
    
    
    
    
    
    
    (34,145
    )Net Cash Provided By (Used In) Operating Activities
    
    
    450,242
    
    
    
    (261,776
    )Cash Flows from Investing Activities:Purchase of Property and Equipment
    
    
    
    
    
    
    Increase in Capitalized Patent and Technology Costs
    
    
    (4,250
    )
    
    
    (15,013
    )Net Cash Provided By (Used in) Investing Activities
    
    
    (4,250
    )
    
    
    (15,013
    )Cash flows from Financing Activities:Issuance (Repayment) of Notes Payable
    
    
    24,211
    
    
    
    23,403Issuance of Common Stock, net of transaction costs
    
    
    113,542
    
    
    
    Net Cash Provided by Financing Activities
    
    
    137,753
    
    
    
    23,403Increase (Decrease) in Cash and Cash Equivalents
    
    
    583,745
    
    
    
    (253,386
    )Cash and Cash Equivalents, Beginning of Period
    
    
    228,940
    
    
    
    550,633Cash and Cash Equivalents, End of Period
    
    $
    812,685
    
    
    $
    297,247Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    2,311
    
    
    $
    Income Taxes
    
    
    418
    
    
    
    4,800
  4




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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 Expense
 Deferred Revenue
 6




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




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Earnings Per Share 
 2007
    
    
    2006Options
    
    
    1,150,000
    
    
    
    2,000,000Warrants
    
    
    0
    
    
    
    0Total
    
    
    1,150,000
    
    
    
    2,000,000
 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,
 8




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Segment Reporting Disclosures about Segments of an Enterprise
and Related Information
 Income Taxes
 Recent
Accounting Pronouncements
   Use of Estimates
 Fair Value of Financial Instruments
 9




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(3) Property and Equipment
  June 30, 2007
    
    
    December 31, 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
    
    
    7,000
    
    
    
    7,000Total Property and Equipment
    
    
    637,531
    
    
    
    637,531Less Accumulated Depreciation and Amortization
    
    
    634,582
    
    
    
    634,054Property and Equipment, Net
    
    $
    2,949
    
    
    $
    3,477
 (4) Intangible Assets
  June 30,
    
    
    December 31,2007
    
    
    2006Capitalized Patent, Trademarks and Technology Costs
    
    $
    544,958
    
    
    $
    540,708Less Accumulated Amortization
    
    
    420,932
    
    
    
    409,450Intangible Assets, Net
    
    $
    124,356
    
    
    $
    131,258
  2007
    
    $
    124,3562008
    
    $
    02009
    
    $
    0Thereafter
    
    $
    0
  (5) Note Payable
  10




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(6) Shareholders Equity
   (7) Stock Options
  Exercisable
    
    
    Number
    
    
    WEIGHTED-
AVERAGEExercise 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
    )Options exercised
    
    
    
    
    
    
    (0
    )
    
    $
    Options forfeited/expired
    
    
    (600,000
    )
    
    
    (600,000
    )
    
    $
    0.12Options outstanding at June 30, 2007
    
    
    1,150,000
    
    
    
    1,150,000
    
    
    $
    0.08
   11




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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
    )
        12




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(8) Commitments and Contingencies
  Operating Lease Commitments
   13




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
   Executive Overview
  There will be no more licensing revenue in the future under
our current business model, as the assets of the Company were sold on July 2, 2007.
   14




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
    
    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
    
    A review of the important trends in the financial statements and our cash flow
    
    Disclosure on our internal controls and procedures
 Operating Environment
  
    
    The Company Has No Means to Generate Revenue
    
    The Amount of Any Cash Distribution to Stockholders is Undeterminable
    
    A New Management Group, Involved in the April 25, 2007 Stock Offering, Is Anticipated
to Take Control of the Company After the Cash Distribution. No Funding Source or Business
Model Has Been Revealed. Existing Stockholders Likely Will be Diluted
  15




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Critical Accounting Policies
  16




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17




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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.
 Results of Operations
 Revenues
 18




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Gross Profit
  Operating Expenses
  General and Administrative
  19




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




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Net Operating Loss Carry forwards
  Recently Issued Accounting Pronouncements
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  21




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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
   23




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For
    
    Against
    
    Abstain/Broker Non-Votes35,058,893
    
    
    1,080,387
    
    
    
    26,600
  For (including Broker Non-Votes)
    
    Against
    
    Abstain46,959,478
    
    
    1,728,190
    
    
    
    34,439
  For (including Broker Non-Votes)
    
    Against
    
    Abstain47,332,096
    
    
    1,367,147
    
    
    
    22,864
 
 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.)
 24




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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.)10.9*
    
    Asset Purchase Agreement between Spatializer Audio Laboratories,
Inc., Desper Products, Inc., DTS, Inc. and DTS (BVI) Limited
(Incorporated by reference to the Companys Proxy Statement
filed November 30, 2006).10.10
    
    Amendment to Asset Purchase Agreement, dated June 22, 2007
between Spatializer Audio Laboratories, Inc., Desper Products,
Inc., DTS, Inc. and DTS (BVI) Limited.10.11*
    
    Common Stock Purchase Agreement dated as of April 25, 2007 among
Spatializer Audio Laboratories, Inc., Jay A. Gottlieb, Greggory
A. Schneider and Helaine Kaplan (Incorporated by reference to
Exhibit 10.1 of the Companys Form 8-K with date of earliest
event reported of April 25, 2007).10.12*
    
    First Amendment to Common Stock Purchase Agreement, dated June
29, 2007, by and among Spatializer Audio Laboratories, Inc, Jay
A. Gottlieb, Greggory A. Schneider and Helaine Kaplan
(Incorporated by reference to Exhibit 10.1 to the Companys Form
8-K with date of earliest event reported of June 29, 2007).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.
    
    Filed electronically herewith 25




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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)