##### 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
 June 30, 2005
 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.)
 2625 Townsgate Road, Suite 330  Westlake Village, California 91361
  2025 Gateway Place, Suite 365  San Jose, California 95110
  Telephone Number: (408) 453-4180
   Yes þ
    
    No o
  Yes o
    
    No þ




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TABLE OF CONTENTS  CONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWSCONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITYItem 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 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 6. EXHIBITSSIGNATURESExhibit 31.1Exhibit 32.1    Table of Contents  SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 ASSETS
 June 30,
    
    
    December 31,2005
    
    
    2004(unaudited)Current Assets:Cash and Cash Equivalents
    
    $
    729,336
    
    
    $
    871,155Accounts Receivable, net
    
    
    180,385
    
    
    
    325,712Prepaid Expenses and Deposits
    
    
    66,721
    
    
    
    70,940Total Current Assets
    
    
    976,442
    
    
    
    1,267,807Property and Equipment, net
    
    
    26,381
    
    
    
    29,527Intangible Assets, net
    
    
    146,730
    
    
    
    166,710Total Assets
    
    $
    1,149,553
    
    
    $
    1,464,044LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Note Payable
    
    
    67,090
    
    
    
    66,252Accounts Payable
    
    
    24,446
    
    
    
    71,873Accrued Wages and Benefits
    
    
    39,927
    
    
    
    50,446Accrued Professional Fees
    
    
    10,000
    
    
    
    20,000Accrued Commissions
    
    
    29,335
    
    
    
    32,182Accrued Expenses
    
    
    33,979
    
    
    
    32,979Deferred Revenue
    
    
    78,279
    
    
    
    391,395Total Current Liabilities
    
    
    283,056
    
    
    
    665,127Commitments and ContingenciesSeries B-1, Redeemable Convertible Preferred shares,
$.01 par value, 1,000,000 shares authorized, 118,351
shares issued and outstanding at June 30, 2005
and December 31, 2004
    
    
    1,182
    
    
    
    1,182Shareholders Equity:Common shares, $.01 par value, 65,000,000 shares
authorized, 46,975,365 shares
issued and outstanding at June 30, 2005 and
December 31, 2004.
    
    
    469,754
    
    
    
    469,754Additional Paid-In Capital
    
    
    46,428,866
    
    
    
    46,428,866Accumulated Deficit
    
    
    (46,033,305
    )
    
    
    (46,100,885
    )Total Shareholders Equity
    
    
    865,315
    
    
    
    797,735$
    1,149,553
    
    
    $
    1,464,044




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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 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:License Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Royalty Revenues
    
    
    428,912
    
    
    
    234,860
    
    
    
    760,863
    
    
    
    405,539Product Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    428,912
    
    
    
    234,860
    
    
    
    760,863
    
    
    
    405,539Cost of Revenues
    
    
    42,890
    
    
    
    18,133
    
    
    
    76,762
    
    
    
    35,138Gross Profit
    
    
    386,022
    
    
    
    216,727
    
    
    
    684,101
    
    
    
    370,401Operating Expenses:General and Administrative
    
    
    189,723
    
    
    
    206,284
    
    
    
    340,924
    
    
    
    372,913Research and Development
    
    
    83,358
    
    
    
    106,223
    
    
    
    182,649
    
    
    
    201,788Sales and Marketing
    
    
    56,201
    
    
    
    21,859
    
    
    
    95,454
    
    
    
    35,478329,282
    
    
    
    334,366
    
    
    
    619,027
    
    
    
    610,179Operating (Loss)
    
    
    56,740
    
    
    
    (117,639
    )
    
    
    65,074
    
    
    
    (239,778
    )Interest and Other Income
    
    
    3,696
    
    
    
    948
    
    
    
    6,616
    
    
    
    1,889Interest and Other Expense
    
    
    (2,870
    )
    
    
    (4,168
    )
    
    
    (4,110
    )
    
    
    (6,766
    )826
    
    
    
    (3,220
    )
    
    
    2,506
    
    
    
    (4,877
    )Income (Loss) Before Income Taxes
    
    
    57,566
    
    
    
    (120,859
    )
    
    
    67,580
    
    
    
    (244,655
    )Income Taxes
    
    
    
    
    
    
    (2,400
    )
    
    
    
    
    
    
    (2,400
    )Net Income (Loss)
    
    $
    57,566
    
    
    $
    (123,259
    )
    
    $
    67,580
    
    
    $
    (247,055
    )Basic and Diluted Earnings Per Share
    
    $
    0.00
    
    
    $
    (0.00
    )
    
    $
    0.00
    
    
    $
    (0.01
    )Weighted Average SharesOutstanding
    
    
    46,975,365
    
    
    
    46,975,365
    
    
    
    46,975,365
    
    
    
    46,975,365




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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 (unaudited)
 Six Months EndedJune 30,2005
    
    
    2004Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    67,580
    
    
    $
    (247,055
    )Adjustments to reconcile net income (loss)
to net cash
provided by (used in) operating activities:Depreciation and Amortization
    
    
    28,603
    
    
    
    34,669Net Change in Assets and Liabilities:Accounts Receivable and Employee Advances
    
    
    145,327
    
    
    
    63Prepaid Expenses and Deposits
    
    
    4,219
    
    
    
    (20,089
    )Accounts Payable
    
    
    (47,427
    )
    
    
    (10,275
    )Accrued Wages and Benefits
    
    
    (10,519
    )
    
    
    22,406Accrued Professional Fees
    
    
    (10,000
    )
    
    
    (10,000
    )Accrued Commissions
    
    
    (2,847
    )
    
    
    679Accrued Expenses
    
    
    1,000
    
    
    
    57,057Deferred Revenue
    
    
    (313,116
    )Net Cash Provided By (Used In) Operating Activities
    
    
    (137,180
    )
    
    
    (172,545
    )Cash Flows from Investing Activities:Purchase/Disp of Property and Equipment
    
    
    (5,477
    )
    
    
    Increase in Capitalized Patent and
Technology Costs
    
    
    
    
    
    
    (19,711
    )Net Cash Provided By (Used in) Investing Activities
    
    
    (5,477
    )
    
    
    (19,711
    )Cash flows from Financing Activities:Issuance (Repayment) of Notes Payable
    
    
    838
    
    
    
    (26,277
    )Net Cash Provided by Financing Activities
    
    
    838
    
    
    
    (26,277
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    (141,819
    )
    
    
    (218,533
    )Cash and Cash Equivalents, Beginning of Period
    
    
    871,155
    
    
    
    589,797Cash and Cash Equivalents, End of Period
    
    $
    729,336
    
    
    $
    371,264Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    6,766
    
    
    $
    6,766Income 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
    
    
    46,975,365
    
    
    $
    469,754
    
    
    $
    46,428,866
    
    
    $
    (46,100,885
    )
    
    $
    797,735Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,014
    
    
    
    10,014Balance, March 31, 2005
    
    
    46,975,365
    
    
    $
    469,754
    
    
    $
    46,428,866
    
    
    $
    (46,090,871
    )
    
    $
    807,749Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,566
    
    
    $
    57,566Balance, June 30, 2005
    
    
    46,975,365
    
    
    
    469,754
    
    
    
    46,428,866
    
    
    
    (46,033,305
    )
    
    
    865,315
     Table of Contents  SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
  (1) Nature of Business
    (2) Significant Accounting Policies
 Basis of Consolidation 
 Revenue Recognition 
 Deferred Revenue 




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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 




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Earnings Per Share 
 2005
    
    
    2004Options
    
    
    2,960,000
    
    
    
    3,135,000Warrants
    
    
    0
    
    
    
    02,960,000
    
    
    
    3,135,000
 Stock Option Plan  Accounting for Stock-Based Compensation, as amended
 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




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Use of Estimates
 Fair Value of Financial Instruments
  (3) Property and Equipment
  June 30,
    
    
    December 31,2005
    
    
    2004Office Computers, Software, Equipment and Furniture
    
    $
    337,144
    
    
    $
    335,731Test 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
    
    
    
    636,118Less Accumulated Depreciation and Amortization
    
    
    611,150
    
    
    
    606,797Property and Equipment, Net
    
    $
    26,381
    
    
    $
    29,321
 (4) Intangible Assets
  June 30,
    
    
    December 31,2005
    
    
    2004Capitalized Patent, Trademarks and Technology Costs
    
    $
    522,827
    
    
    $
    522,068Less Accumulated Amortization
    
    
    376,097
    
    
    
    368,549Intangible Assets, Net
    
    $
    146,730
    
    
    $
    153,519




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2005
    
    $
    16,7022006
    
    $
    16,7022007
    
    $
    16,7022008
    
    $
    16,702Thereafter
    
    $
    79,922
 (5) Notes Payable
   (6) Shareholders Equity
 During the quarter ended June 30, 2005, shares were issued, cancelled or converted as
follows:
  During the quarter ended March 31, 2005, shares were issued, cancelled or converted as
follows:
  During the year ended December 31, 2004, shares were issued or converted as follows:




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Capitalization
 Series A Preferred Stock:
 Series B Preferred Stock:
 Series B-1 Redeemable Convertible Preferred Stock:
 (7) Stock Options




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2005
    
    
    2004NET INCOME (LOSS):As Reported
    
    $
    57,566
    
    
    $
    (123,000
    )Pro Forma
    
    $
    56,566
    
    
    $
    (124,000
    )BASIC AND DILUTED LOSS:As Reported
    
    $
    0.00
    
    
    $
    (0.00
    )Pro Forma
    
    $
    0.00
    
    
    $
    (0.00
    )
   (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




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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 that 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
 Risk Factors
 
    
    Because The Market In Which We Operate Is Highly Competitive, We Face Significant
Pricing Pressure and Competition.
 
    
    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 May Delay or Thwart our Sales Efforts to Potential Customers
 
    
    If New Product Development Is Delayed, We Will Experience Delays In Revenues and
Competitive Products May Reach The Market Before Our Products.




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Risk Factors,
 Critical Accounting Policies




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Corporate Governance
 Audit Committee




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




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




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




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Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating Lease Obligations
    
    $
    54,955
    
    
    $
    28,680
    
    
    $
    26,275Total
    
    $
    54,955
    
    
    $
    28,680
    
    
    $
    26,275




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Net Operating Loss Carry forwards
  Recently Issued Accounting Pronouncements




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Factors That May Affect Future Results




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Our Operating Results Fluctuate and If We Are Unable to Achieve or Sustain Profitability in the
Future or Obtain Future Financing Our Business Operations May Fail
  Because The Market In Which We Operate Is Highly Competitive, We Face Significant Pricing Pressure
and Competition.
  Because Our Relative Size and Power Is Small Compared To That of Our Customers, Our Business
Leverage With Some Customers Is Generally Weak and Communication Not Always Transparent




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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
May Delay or Thwart our Sales Efforts to Potential Customers.
 .
 If New Product Development Is Delayed, We Will Experience Delays In Revenues And Competitive
Products May Reach The Market Before Our Products.




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We Expect That We Will Continue to be Dependent upon a Limited Number of OEMs for a
Significant Portion of Our Net Sales in Future Periods
  Demand for Our Products is Subject to Risks Beyond Our Control.
  
    
    competition faced by our OEM customers in their particular end markets;
    
    the technical, sales and marketing and management capabilities of our OEM
customers;
    
    the pressure faced by our OEM customers to reduce cost
  Because The Technology Environment In Which We Operate Is Rapidly Changing, We May Not Be
Successful In Establishing And Maintaining The Technological Superiority Of Our Products Over Those
Of Our Competitors.




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If We Are Unable To Attract And Retain Our Key Personnel, We May Not Be Able To Successfully
Operate Our Business.
  The Market For Our Stock May Be Not Remain Liquid And The Stock Price May Be Subject To Volatility




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




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ITEM 1. LEGAL PROCEEDINGS
  
 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
   Votes For
    
    
    Against
    
    
    WithheldCarlo Civelli
    
    
    25,498,057
    
    
    
    0
    
    
    
    319,593
   Votes For
    
    Against
    
    Withheld25,556,147
    
    251,193
    
    10,310




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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.)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.)




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31.1
    
    Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2**
    
    Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 *
    
    Previously filed**
    
    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, Chief Executive Officer
Chief Financial Officer and Secretary