##### 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: September 30, 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 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 31.1EXHIBIT 32.1    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    613,758
    
    
    $
    228,940Short Term Investments
    
    
    1,000,000
    
    
    $
    Accounts Receivable, net
    
    
    
    
    
    
    74,828Prepaid Expenses and Deposits
    
    
    38,209
    
    
    
    25,073Total Current Assets
    
    
    1,651,967
    
    
    
    328,841Property and Equipment, net
    
    
    
    
    
    
    3,477Intangible Assets, net
    
    
    
    
    
    
    131,258Total Assets
    
    $
    1,651,967
    
    
    $
    463,576LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Note Payable
    
    
    24,201
    
    
    
    9,670Accounts Payable
    
    
    
    
    
    
    32,136Accrued Wages and Benefits
    
    
    1,170
    
    
    
    3,169Accrued Professional Fees
    
    
    21,000
    
    
    
    41,900Accrued Commissions
    
    
    
    
    
    
    200Total Current Liabilties
    
    
    46,371
    
    
    
    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 September 30, 2007 and
December 31, 2006, respectively
    
    
    650,000
    
    
    
    487,634Additional Paid-In Capital
    
    
    46,634,856
    
    
    
    46,423,893Accumulated Deficit
    
    
    (45,679,260
    )
    
    
    (46,535,026
    )Total Shareholders Equity
    
    
    1,605,596
    
    
    
    376,501$
    1,651,967
    
    
    $
    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 Nine Month Period EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Royalty Revenues
    
    $
    30,107
    
    
    $
    67,744
    
    
    $
    750,706
    
    
    $
    261,100Cost of Revenues
    
    
    464
    
    
    
    6,774
    
    
    
    63,269
    
    
    
    26,251Gross Profit
    
    
    29,643
    
    
    
    60,970
    
    
    
    687,437
    
    
    
    234,849Operating Expenses:General and Administrative
    
    
    88,868
    
    
    
    122,210
    
    
    
    369,178
    
    
    
    371,343Research and Development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,740Sales and Marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,24188,868
    
    
    
    122,210
    
    
    
    369,178
    
    
    
    530,324Operating Income (Loss)
    
    
    (59,225
    )
    
    
    (61,240
    )
    
    
    318,259
    
    
    
    (295,475
    )Interest and Other Income
    
    
    16,490
    
    
    
    1,442
    
    
    
    24,743
    
    
    
    7,087Interest and Other Expense
    
    
    
    
    
    
    (2,000
    )
    
    
    (2,311
    )
    
    
    (4,266
    )Gain on Sale of Assets
    
    
    515,077
    
    
    
    
    
    
    
    515,077
    
    
    
    531,567
    
    
    
    (558
    )
    
    
    537,509
    
    
    
    2,821Income (Loss) Before Income Taxes
    
    
    472,342
    
    
    
    (61,798
    )
    
    
    855,768
    
    
    
    (292,654
    )Income Taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,800
    )Net Income (Loss)
    
    $
    472,342
    
    
    $
    (61,798
    )
    
    $
    855,768
    
    
    $
    (297,454
    )Basic and Diluted Earnings Per Share
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.02
    
    
    $
    (0.01
    )Weighted Average Shares
Outstanding
    
    
    65,000,000
    
    
    
    48,763,383
    
    
    
    58,338,824
    
    
    
    48,763,383
  3




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SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    855,768
    
    
    $
    (297,454
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Gain on Sale of Assets
    
    
    (515,077
    )Depreciation and Amortization
    
    
    
    
    
    
    28,926Net Change in Assets and Liabilities:Accounts Receivable and Employee Advances
    
    
    74,828
    
    
    
    85,661Prepaid Expenses and Deposits
    
    
    (13,138
    )
    
    
    (12,833
    )Accounts Payable
    
    
    (32,136
    )
    
    
    4,172Accrued Wages and Benefits
    
    
    (1,999
    )
    
    
    (45,754
    )Accrued Professional Fees
    
    
    (20,900
    )
    
    
    (11,500
    )Accrued Commissions
    
    
    (200
    )
    
    
    9,561Accrued Expenses
    
    
    
    
    
    
    (37,147
    )Net Cash Provided By (Used In) Operating Activities
    
    
    347,146
    
    
    
    (276,368
    )Cash Flows from Investing Activities:Short Term Investments
    
    
    (1,000,000
    )
    
    
    Net Proceeds from Asset Sale
    
    
    649,812
    
    
    
    Increase in Capitalized Patent and Technology Costs
    
    
    
    
    
    
    (15,013
    )Net Cash Provided By (Used in) Investing Activities
    
    
    (350,188
    )
    
    
    (15,013
    )Cash flows from Financing Activities:Issuance (Repayment) of Notes Payable
    
    
    14,531
    
    
    
    13,733Issuance of Common Stock Net of Transaction Costs
    
    
    373,329
    
    
    
    Net Cash Provided by Financing Activities
    
    
    387,860
    
    
    
    13,733Increase (Decrease) in Cash and Cash Equivalents
    
    
    384,818
    
    
    
    (277,648
    )Cash and Cash Equivalents, Beginning of Period
    
    
    228,940
    
    
    
    550,633Cash and Cash Equivalents, End of Period
    
    $
    613,758
    
    
    $
    272,985Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    2,311
    
    
    $
    Income Taxes
    
    
    418
    
    
    
    4,800
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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 
 7




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Earnings Per Share 
 2007
    
    2006Options
    
    
    1,150,000
    
    
    
    1,750,000Warrants
    
    
    0
    
    
    
    01,150,000
    
    
    
    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
 (3) Property and Equipment
 9




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September 30,
    
    
    December 31,2007
    
    
    2006Office Computers, Software, Equipment and Furniture
    
    
    0
    
    
    $
    337,145Test Equipment
    
    
    0
    
    
    
    73,300Tooling Equipment
    
    
    0
    
    
    
    45,539Trade Show Booth and Demonstration Equipment
    
    
    0
    
    
    
    174,548Automobiles
    
    
    0
    
    
    
    7,000Total Property and Equipment
    
    
    0
    
    
    
    637,531Less Accumulated Depreciation and Amortization
    
    
    0
    
    
    
    634,054Property and Equipment, Net
    
    
    0
    
    
    $
    3,477
 (4) Intangible Assets
  September
    
    
    December 31,30, 2007
    
    
    2006Capitalized Patent, Trademarks and Technology Costs
    
    
    0
    
    
    $
    540,708Less Accumulated Amortization
    
    
    0
    
    
    
    409,450Intangible Assets, Net
    
    
    0
    
    
    $
    131,258
  (5) Notes Payable
  (6) Shareholders Equity
  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
    )Options exercised
    
    
    
    
    
    
    (0
    )
    
    $
    Options forfeited/expired
    
    
    (600,000
    )
    
    
    (600,000
    )
    
    $
    0.12Options outstanding at September 30, 2007
    
    
    1,150,000
    
    
    
    1,150,000
    
    
    $
    0.08
   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
   There will be no more licensing revenue in the future under our current business model, as
substantially all of the assets of the Company were sold on July 2, 2007.
  13




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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
 14




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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
     Critical Accounting Policies
  15




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16




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




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Liquidity and Capital Resources.
 Liquidity and Capital Resources.
 Results of Operations
  Revenues
  Gross Profit
  Operating Expenses
  18




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General and Administrative
  Research and Development
  Sales and Marketing
  Net Income (Loss)
  19




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Net Operating Loss Carry forwards
  Recently Issued Accounting Pronouncements
  20




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




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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.)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. (Incorporated by reference to Exhibit
10.10 to the Companys Quarterly Report on Form 10-Q for the period
ended June 30, 2007).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
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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 
 SIGNATURES
   SPATIALIZER AUDIO LABORATORIES, INC.
(Registrant)/s/ Henry R. MandellHenry R. MandellChairman of the Board  and Secretary
(Principal Executive, Financial and Accounting Officer) 24