##### 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: September 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




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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 10.9EXHIBIT 31EXHIBIT 32    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    272,985
    
    
    $
    550,633Accounts Receivable, net
    
    
    69,572
    
    
    
    155,233Prepaid Expenses and Deposits
    
    
    46,937
    
    
    
    34,104Total Current Assets
    
    
    389,494
    
    
    
    739,970Property and Equipment, net
    
    
    6,205
    
    
    
    18,403Intangible Assets, net
    
    
    136,833
    
    
    
    138,548Total Assets
    
    $
    532,532
    
    
    $
    896,921LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Note Payable
    
    
    24,176
    
    
    
    10,443Accounts Payable
    
    
    18,367
    
    
    
    14,195Accrued Wages and Benefits
    
    
    2,341
    
    
    
    48,095Accrued Professional Fees
    
    
    22,500
    
    
    
    34,000Accrued Commissions
    
    
    42,202
    
    
    
    31,917Accrued Expenses
    
    
    2,998
    
    
    
    40,869Total Current Liabilities
    
    
    112,584
    
    
    
    179,519Commitments and ContingenciesShareholders Equity:Common shares, $.01 par value,
65,000,000 shares
authorized, 46,975,365 shares
issued and outstanding at September
30, 2006 and
December 31, 2005
    
    
    469,772
    
    
    
    469,772Additional Paid-In Capital
    
    
    46,430,030
    
    
    
    46,430,030Accumulated Deficit
    
    
    (46,479,854
    )
    
    
    (46,182,400
    )Total Shareholders Equity
    
    
    419,948
    
    
    
    717,402$
    532,532
    
    
    $
    896,921
  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 Nine Month Period EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    

2005
    
    
    2006
    
    
    2005Revenues:Royalty Revenues
    
    $
    67,744
    
    
    $
    270,914
    
    
    $
    261,100
    
    
    $
    1,031,77767,744
    
    
    
    270,914
    
    
    
    261,100
    
    
    
    1,031,777Cost of Revenues
    
    
    6,774
    
    
    
    12,752
    
    
    
    26,251
    
    
    
    89,514Gross Profit
    
    
    60,970
    
    
    
    258,162
    
    
    
    234,849
    
    
    
    942,263Operating Expenses:General and Administrative
    
    
    122,210
    
    
    
    116,539
    
    
    
    371,343
    
    
    
    457,463Research and Development
    
    
    
    
    
    
    62,068
    
    
    
    157,740
    
    
    
    244,717Sales and Marketing
    
    
    
    
    
    
    45,356
    
    
    
    1,241
    
    
    
    140,810122,210
    
    
    
    223,963
    
    
    
    530,324
    
    
    
    842,990Operating (Loss)
    
    
    (61,240
    )
    
    
    34,199
    
    
    
    (295,475
    )
    
    
    99,273Interest and Other Income
    
    
    1,442
    
    
    
    3,376
    
    
    
    7,087
    
    
    
    9,992Interest and Other Expense
    
    
    (2,000
    )
    
    
    (1,030
    )
    
    
    (4,266
    )
    
    
    (5,140
    )(558
    )
    
    
    2,346
    
    
    
    2,821
    
    
    
    4,852Income (Loss) Before Income Taxes
    
    
    (61,798
    )
    
    
    36,545
    
    
    
    (292,654
    )
    
    
    104,125Income Taxes
    
    
    
    
    
    
    
    
    
    
    (4,800
    )
    
    
    Net Income (Loss)
    
    $
    (61,798
    )
    
    $
    36,545
    
    
    $
    (297,454
    )
    
    $
    104,125Basic and Diluted Earnings Per Share
    
    $
    (0.00
    )
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    0.00Weighted Average Shares
Outstanding
    
    
    48,763,383
    
    
    
    46,975,365
    
    
    
    48,763,383
    
    
    
    46,975,365
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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    (297,454
    )
    
    $
    104,125Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and Amortization
    
    
    28,926
    
    
    
    37,789Net Change in Assets and Liabilities:Accounts Receivable and Employee Advances
    
    
    85,661
    
    
    
    138,359Prepaid Expenses and Deposits
    
    
    (12,833
    )
    
    
    28,660Accounts Payable
    
    
    4,172
    
    
    
    (46,170
    )Accrued Wages and Benefits
    
    
    (45,754
    )
    
    
    (5,506
    )Accrued Professional Fees
    
    
    (11,500
    )
    
    
    2,500Accrued Commissions
    
    
    9,561
    
    
    
    2,073Accrued Expenses
    
    
    (37,147
    )
    
    
    (31,995
    )Deferred Revenue
    
    
    
    
    
    
    (391,395
    )Net Cash Provided By (Used In) Operating Activities
    
    
    (276,368
    )
    
    
    (161,560
    )Cash Flows from Investing Activities:Purchase/Disp of Property and Equipment
    
    
    
    
    
    
    (5,277
    )Increase in Capitalized Patent and Technology Costs
    
    
    (15,013
    )
    
    
    Net Cash Provided By (Used in) Investing Activities
    
    
    (15,013
    )
    
    
    (5,277
    )Cash flows from Financing Activities:Issuance (Repayment) of Notes Payable
    
    
    13,733
    
    
    
    (29,891
    )Net Cash Provided by Financing Activities
    
    
    13,733
    
    
    
    (29,891
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    (277,648
    )
    
    
    (196,728
    )Cash and Cash Equivalents, Beginning of Period
    
    
    550,633
    
    
    
    871,155Cash and Cash Equivalents, End of Period
    
    $
    272,985
    
    
    $
    674,427Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    4,266
    
    
    $
    5,140Income Taxes
    
    
    4,800
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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 (Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (172,667
    )
    
    
    (172,667
    )Balance, March 31, 2006
    
    
    48,763,383
    
    
    $
    469,772
    
    
    $
    46,430,030
    
    
    $
    (46,355,066
    )
    
    $
    544,735Net (Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,989
    )
    
    $
    (62,989
    )Balance, June 30, 2006
    
    
    48,763,383
    
    
    
    469,772
    
    
    
    46,430,030
    
    
    
    (46,418,055
    )
    
    
    481,746Net (Loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,798
    )
    
    $
    (61,798
    )Balance, September 30, 2006
    
    
    48,763,383
    
    
    
    469,772
    
    
    
    46,430,030
    
    
    
    (46,479,854
    )
    
    
    419,948
  5




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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
  1)
    
    Sale of All or Substantially All of the Assets of Spatializer Audio Laboratories,
Inc. and Desper Products, Inc. and Dissolution of Spatializer
 2025 , 95110
   Background of the Sale of Assets and Dissolution
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(2) Significant Accounting Policies
 Basis of Consolidation 
 Revenue Recognition 
 Deferred Revenue
 Concentration of Credit Risk 
   11




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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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2006
    
    2005Options
    
    
    1,750,000
    
    
    
    2,960,000Warrants
    
    
    0
    
    
    
    01,750,000
    
    
    
    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
 Recent Accounting Pronouncements
  13




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Use of Estimates
 Fair Value of Financial Instruments
 (3) Property and Equipment
  September 30,
    
    
    December 31,2006
    
    
    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
    
    
    624,326
    
    
    
    619,128Property and Equipment, Net
    
    $
    6,205
    
    
    $
    18,403
 (4) Intangible Assets
  September
    
    
    December 31,30, 2006
    
    
    2005Capitalized Patent, Trademarks and Technology Costs
    
    $
    540,709
    
    
    $
    525,695Less Accumulated Amortization
    
    
    403,876
    
    
    
    387,147Intangible Assets, Net
    
    $
    136,833
    
    
    $
    138,548
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2006
    
    $
    8,3512007
    
    $
    134,0592008
    
    $
    02009
    
    $
    0Thereafter
    
    $
    0
  (5) Notes Payable
  (6) Shareholders Equity
 During the quarter ended September 30, 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
    
    
    (976,666
    )
    
    
    (1,060,000
    )
    
    $
    0.10Options outstanding at September 30, 2006
    
    
    1,750,000
    
    
    
    1,750,000
    
    
    $
    0.09
    (8) Commitments and Contingencies
  Operating Lease Commitments
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(9) Profit Sharing Plan
  17




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
   Executive Overview
 ®
     Approach to MD&A
  18




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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
  
    
    Our Board of Directors has Determined it is in the Companys and its Stockholders
Interests 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
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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.
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.
  Critical Accounting Policies
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Corporate Governance
 Audit Committee
  22




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Compensation and Stock Committee
   Key Components of the Financial Statements and Important Trends
  Liquidity and Capital Resources.
  23




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Liquidity
and Capital Resources.
 Liquidity and Capital Resources.
 Results of Operations
 Revenues
  Gross Profit
  Operating Expenses
  24




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General and Administrative
  Research and Development
  Sales and Marketing
  Net Income (Loss)
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Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating Lease
Obligations
    
    $
    7,000
    
    
    $
    7,000Total
    
    $
    7,000
    
    
    $
    7,000
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Net Operating Loss Carry forwards
  Recently Issued Accounting Pronouncements
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  28




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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
 10.9
    
    Asset Purchase Agreement, dated as of September 18, 2006, by and
among DTS, Inc., a Delaware corporation (Purchaser), DTS BVI
Limited, a corporation organized under the laws of the British
Virgin Islands and a subsidiary of Purchaser (Purchaser
Subsidiary), Spatializer Audio Laboratories, Inc., a Delaware
corporation (Seller), and Desper Products, Inc., a California
corporation which is a wholly
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owned subsidiary of Seller (Seller Subsidiary).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)
 31