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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 1934For the period ended: September 30, 2005
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934Commission File Number: 000-26460
 SPATIALIZER AUDIO LABORATORIES, INC.
  Delaware
    
    95-4484725(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    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
    
    Noþ
  Yes o
    
    Noþ




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TABLE OF CONTENTS  Item 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
 September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    674,427
    
    
    $
    871,155Accounts Receivable, net
    
    
    187,353
    
    
    
    325,712Prepaid Expenses and Deposits
    
    
    42,280
    
    
    
    70,940Total Current Assets
    
    
    904,060
    
    
    
    1,267,807Property and Equipment, net
    
    
    22,469
    
    
    
    29,527Intangible Assets, net
    
    
    141,256
    
    
    
    166,710Total Assets
    
    $
    1,067,785
    
    
    $
    1,464,044LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Note Payable
    
    
    36,361
    
    
    
    66,252Accounts Payable
    
    
    25,703
    
    
    
    71,873Accrued Wages and Benefits
    
    
    44,940
    
    
    
    50,446Accrued Professional Fees
    
    
    22,500
    
    
    
    20,000Accrued Commissions
    
    
    34,255
    
    
    
    32,182Accrued Expenses
    
    
    984
    
    
    
    32,979Deferred Revenue
    
    
    
    
    
    
    391,395Total
Current Liabilities
    
    
    164,743
    
    
    
    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 September 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 September 30, 2005 and
December 31, 2004
    
    
    469,754
    
    
    
    469,754Additional Paid-In Capital
    
    
    46,428,866
    
    
    
    46,428,866Accumulated Deficit
    
    
    (45,996,760
    )
    
    
    (46,100,885
    )Total Shareholders Equity
    
    
    901,860
    
    
    
    797,735$
    1,067,785
    
    
    $
    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 Nine Month Period EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Royalty Revenues
    
    
    270,914
    
    
    
    205,324
    
    
    
    1,031,777
    
    
    
    610,863270,914
    
    
    
    205,324
    
    
    
    1,031,777
    
    
    
    610,863Cost of Revenues
    
    
    12,752
    
    
    
    26,114
    
    
    
    89,514
    
    
    
    61,252Gross Profit
    
    
    258,162
    
    
    
    179,210
    
    
    
    942,263
    
    
    
    549,611Operating Expenses:General and Administrative
    
    
    116,539
    
    
    
    155,268
    
    
    
    457,463
    
    
    
    528,181Research and Development
    
    
    62,068
    
    
    
    93,842
    
    
    
    244,717
    
    
    
    295,630Sales and Marketing
    
    
    45,356
    
    
    
    11,484
    
    
    
    140,810
    
    
    
    46,962223,963
    
    
    
    260,594
    
    
    
    842,990
    
    
    
    870,773Operating (Loss)
    
    
    34,199
    
    
    
    (81,384
    )
    
    
    99,273
    
    
    
    (321,162
    )Interest and Other Income
    
    
    3,376
    
    
    
    744
    
    
    
    9,992
    
    
    
    2,633Interest and Other Expense
    
    
    (1,030
    )
    
    
    (1,936
    )
    
    
    (5,140
    )
    
    
    (8,702
    )2,346
    
    
    
    (1,192
    )
    
    
    4,852
    
    
    
    (6,069
    )Income (Loss) Before Income Taxes
    
    
    36,545
    
    
    
    (82,576
    )
    
    
    104,125
    
    
    
    (327,231
    )Income Taxes
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    (400
    )Net Income (Loss)
    
    $
    36,545
    
    
    $
    (80,576
    )
    
    $
    104,125
    
    
    $
    (327,631
    )Basic and Diluted Earnings Per Share
    
    $
    0.00
    
    
    $
    (0.00
    )
    
    $
    0.00
    
    
    $
    (0.01
    )Weighted Average Shares
Outstanding
    
    
    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)
 Nine
Months Ended September 30,2005
    
    
    2004Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    104,125
    
    
    $
    (327,631
    )Adjustments to reconcile net income (loss) to net
cash
provided by (used in) operating activities:Depreciation and Amortization
    
    
    37,789
    
    
    
    52,816Net Change in Assets and Liabilities:Accounts Receivable and Employee Advances
    
    
    138,359
    
    
    
    137,382Prepaid Expenses and Deposits
    
    
    28,660
    
    
    
    (59,644
    )Accounts Payable
    
    
    (46,170
    )
    
    
    (4,245
    )Accrued Wages and Benefits
    
    
    (5,506
    )
    
    
    2,925Accrued Professional Fees
    
    
    2,500
    
    
    
    (5,000
    )Accrued Commissions
    
    
    2,073
    
    
    
    4,692Accrued Expenses
    
    
    (31,995
    )
    
    
    3,999Deferred Revenue
    
    
    (391,395
    )
    
    
    547,953Net Cash Provided By (Used In) Operating Activities
    
    
    (161,560
    )
    
    
    353,247Cash Flows from Investing Activities:Purchase/Disp of Property and Equipment
    
    
    (5,277
    )
    
    
    (3,247
    )Increase in Capitalized Patent and Technology Costs
    
    
    
    
    
    
    (16,580
    )Net Cash Provided By (Used in) Investing Activities
    
    
    (5,277
    )
    
    
    (19,827
    )Cash flows from Financing Activities:Issuance (Repayment) of Notes Payable
    
    
    (29,891
    )
    
    
    (3,170
    )Net Cash Provided by Financing Activities
    
    
    (29,891
    )
    
    
    (3,170
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    (196,728
    )
    
    
    330,250Cash and Cash Equivalents, Beginning of Period
    
    
    871,155
    
    
    
    589,797Cash and Cash Equivalents, End of Period
    
    $
    674,427
    
    
    $
    920,047Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    5,140
    
    
    $
    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, 2004
    
    
    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
    )
    
    
    865,315Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,545
    
    
    $
    36,545Balance, September 30, 2005
    
    
    46,975,365
    
    
    
    469,754
    
    
    
    46,428,866
    
    
    
    (45,996,760
    )
    
    
    901,860




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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,




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Segment
Reporting Disclosures about Segments of
an Enterprise and Related Information
 Income
Taxes
 Recent
Accounting Pronouncements




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Use
of Estimates
 Fair
Value of Financial Instruments
  (3) Property and Equipment
  September
    
    
    December 31,30, 2005
    
    
    2004Office Computers, Software, Equipment and Furniture
    
    $
    337,144
    
    
    $
    331,867Test 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
    
    
    
    632,253Less Accumulated Depreciation and Amortization
    
    
    615,062
    
    
    
    602,727Property and Equipment, Net
    
    $
    22,469
    
    
    $
    29,527
 (4) Intangible Assets
  September 30,
    
    
    December 31,2005
    
    
    2004Capitalized Patent, Trademarks and Technology Costs
    
    $
    522,827
    
    
    $
    522,827Less Accumulated Amortization
    
    
    381,571
    
    
    
    356,117Intangible Assets, Net
    
    $
    141,256
    
    
    $
    166,710




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2005
    
    $
    16,7022006
    
    $
    16,7022007
    
    $
    16,7022008
    
    $
    16,702Thereafter
    
    $
    74,448
 (5) Notes Payable
   (6) Shareholders Equity
 During the quarter ended September 30, 2005, no shares were issued, cancelled or converted.
 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:




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During the year ended December 31, 2004, shares were issued or converted as follows:
   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
    
    $
    104,125
    
    
    $
    (327,631
    )Pro Forma
    
    $
    93,625
    
    
    $
    (328,631
    )BASIC AND DILUTED LOSS:As Reported
    
    $
    0.00
    
    
    $
    (0.01
    )Pro Forma
    
    $
    0.00
    
    
    $
    (0.01
    )
    (8) Commitments and Contingencies
  Operating Lease Commitments




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(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




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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 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
  Compensation and Stock Committee
   Special Committee
  Key Components of the Financial Statements and Important Trends




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




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Operating Expenses
  General and Administrative
  Research and Development
  Sales and Marketing




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Net Income (Loss)
     Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating Lease Obligations
    
    $
    32,844
    
    
    $
    6,569
    
    
    $
    26,275Total
    
    $
    32,844
    
    
    $
    6,569
    
    
    $
    26,275




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Net Operating Loss Carry forwards
  Recently Issued Accounting Pronouncements
   Factors That May Affect Future Results




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Because The Market In Which We Operate Is Highly Competitive, We Face Significant Pricing Pressure
and Competition.




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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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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 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
  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




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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.
  If We Are Unable To Attract And Retain Our Key Personnel, We May Not Be Able To Successfully
Operate Our Business.




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The Market For Our Stock May Be Not Remain Liquid And The Stock Price May Be Subject To Volatility
  
 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
  
 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.)




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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.)31.1
    
    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
2002.32.1
    
    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.




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SIGNATURES
   SPATIALIZER AUDIO LABORATORIES, INC.(Registrant)/s/ Henry R. MandellHenry R. MandellChairman of the Board, Chief Executive OfficerChief Financial Officer and Secretary(Principal Executive, Financial and Accounting Officer)