UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549


FORM 10-K/A*




(Mark
      One)þ
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the period ended: December 31, 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.


(Exact name of registrant as
specified in its charter)




Delaware
                      
                      95-4484725(State or other jurisdiction
      of
                      
                      (I.R.S.
      Employerincorporation or
      organization)
                      
                      Identification
      No.)




2060 East Avenida de Los Arboles, #
D190, Thousand Oaks, California     91362-1376


(Address
of principal corporate offices)




Telephone
Number: (408) 453-4180


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:


None




Securities
registered pursuant to Section 12(g) of the Act:


Common Stock, $0.01 par
value




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes þ No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o Yes þ No




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes þ No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment
to this Form 10-K/A. þ




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filed” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check
one).




Large
      accelerated filer o
            
            Accelerated
      filer o
            
            Non-accelerated
      filer o
            
            Smaller
      reporting company þ(Do
      not check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). o Yes þ No




The
aggregate market value of the voting stock held by non-affiliates of the
registrant computed by reference to the price at which the common equity was
last sold as of the last business day of the registrant’s most recently
completed second quarter (June 30, 2007) was approximately
$2,600,000.




As of
February 25, 2008, there were 65,000,000 shares of the Registrant’s Common
Stock outstanding.




DOCUMENTS INCORPORATED BY
REFERENCE


None


* This
Form 10-K/A was filed April 15, 2009 to respond to SEC staff
comments.  Such filing did not reflectthe actual date of
filing.  This Amendment reflects today’s filing date, May 6,
2009.


1




TABLE OF CONTENTS





PART
IItem 1.
      BusinessItem 1A. Risk
      FactorsItem 1B. Unresolved Staff
      CommentsItem 2.
      PropertiesItem 3. Legal
      ProceedingsItem 4. Submission of Matters
      to a Vote of Security HoldersPART IIItem 5. Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity SecuritiesItem 6. Selected Financial
      DataItem 7. Management’s
      Discussion and Analysis of Financial Condition and Results of
      OperationsItem 7A. Quantitative and
      Qualitative Disclosures About Market RiskItem 8. Financial Statements
      and Supplementary DataREPORTS OF INDEPENDENT REGISTERED
      PUBLIC ACCOUNTING FIRMSCONSOLIDATED BALANCE
      SHEETSCONSOLIDATED STATEMENTS OF
      OPERATIONS (as restated)CONSOLIDATED STATEMENTS OF CASH
      FLOWSCONSOLIDATED STATEMENTS OF
      STOCKHOLDERS’ EQUITY (DEFICIT)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSItem 9. Changes in and
      Disagreements with Accountants on Accounting and Financial
      DisclosureItem 9A(T). Controls and
      ProceduresItem 9B. Other
      InformationPART
  IIIItem 10. Directors, Executive
      Officers and Corporate GovernanceItem 11. Executive
      CompensationItem 12. Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder
      MattersItem 13. Certain Relationships
      and Related Transactions, and Director
    IndependenceItem 14. Principal Accountant
      Fees and ServicesPART
  IVItem 15. Exhibits and
      Financial Statement SchedulesSIGNATURESEXHIBIT
    21.1EXHIBIT
    23.1EXHIBIT 23.2EXHIBIT
    31.1EXHIBIT 31.2EXHIBIT
    32.1EXHIBIT
32.2




2




CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS




This Annual Report on Form 10-K/A contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, reflecting
management’s current expectations. Examples of such forward-looking statements
include our expectations with respect to our strategy. Although we believe that
our expectations are based upon reasonable assumptions, there can be no
assurances that our financial goals or that any potential transactions herein
described will be realized or consummated. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Numerous factors may
affect our actual results and may cause results to differ materially from those
expressed in forward-looking statements made by or on behalf of our company. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words, “believes,” “anticipates,” “plans,” “expects” and
similar expressions are intended to identify forward-looking statements. The
important factors discussed under Item 1A, Risk Factors, among other
factors, could cause actual results to differ materially from those indicated by
forward-looking statements made herein and represent management’s current
expectations and are inherently uncertain. Investors are warned that actual
results may differ from management’s expectations. We assume no obligation to
update the forward-looking information to reflect actual results or changes in
the factors affecting such forward-looking information.




PART
I




Item 1.Business




Overview




Spatializer
Audio Laboratories, Inc. (“Spatializer” or “Company”) had been a developer,
licensor and marketer of next generation technologies for the consumer
electronics, personal computing, entertainment and cellular telephone markets.
Our technology was incorporated into products offered by our licensees and
customers on various economic and business terms. We were incorporated in the
State of Delaware in February 1994 and are the successor company in a Plan
of Arrangement pursuant to which the outstanding shares of Spatializer, a
publicly held Yukon, Canada corporation, were exchanged for an equal number of
shares of our common stock. Our corporate office is located at 2060 East Avenida
de Los Arboles, # D190, Thousand Oaks, California 91362-1376.




The
Company’s wholly-owned subsidiary, Desper Products, Inc. (“DPI” or “Desper
Products”), had been in the business of developing proprietary advanced audio
signal processing technologies and products for consumer electronics,
entertainment, and multimedia computing. All Company revenues were generated
from this subsidiary. Desper Products was the owner of all technology which was
acquired by DTS, Inc. on July 2, 2007. Desper Products is a California
corporation incorporated in June 1986.




Copies of
this Annual Report, including our financial statements, and our quarterly
reports on Form 10-Q as well as other corporate information, including press
releases, of interest to our stockholders are available by writing us at, 2060
East Avenida de Los Arboles, # D190, Thousand Oaks, California 91362-1376. As
used herein, Spatializer, the “Company,” “we” or “our” means Spatializer Audio
Laboratories, Inc. and its wholly-owned subsidiaries.





Background of the Sale of Assets and
Dissolution




Spatializer
had been under acute market pressure since 2002. In 2002, a personal computer
account began migrating to a totally new operating system, which did not include
any audio enhancements. The migration was completed in 2003 and the former
licensee chose not to include any audio software enhancements, including those
from Spatializer. This account had accounted for approximately 40% of
Spatializer’s annual revenues.




3


In 2003,
Spatializer experienced declining revenue from three major customers, primarily
from the curtailment or cessation of use of its products by these customers. Two
of these cases were in the DVD player market, where Spatializer historically had
been strong. During 2003, the DVD player market became largely commoditized,
resulting in intense pricing pressure and a steep decline in price and margins.
Manufacturers were forced to strip out features, such as those offered by
Spatializer, in order to compete. One of Spatializer’s accounts switched to
outside sourcing and Spatializer was able to expand its relationship with their
supplier to recapture most of that revenue. However, a major new design win
Spatializer was projecting for the DVD market was cancelled due to these cost
constraints.




In 2004,
the revenue mix by licensee platform was significantly different compared to the
prior year. The decrease in revenue on the DVD and personal computer accounts
previously discussed generated approximately 56% of total fiscal 2003 revenue,
which was lost in 2004. These losses were partially offset by three new revenue
sources in cellular phones, mobile audio semiconductors and personal computers
and the expansion of an existing license relating to recordable DVD. Cellular
phone, mobile audio and the personal computer markets had been targeted by
Spatializer for replacing the losses in the DVD player category. Nevertheless,
market pressures mounted and Spatializer was forced to substantially reduce
overhead in order to remain liquid.




On
December 19, 2005, at a regularly scheduled board of directors meeting, the
board of directors of Spatializer discussed Spatializer’s current financial
outlook. Management indicated to the board of directors that two customers, the
revenues from which accounted for approximately 70% of Spatializer’s income
during 2005, would not be sustainable in 2006. This called into question the ability
of the Company to operate as a going concern. The Company’s financial
statements have been prepared assuming that it will continue as a going
concern.




As
previously reported, on September 18, 2006, the Company and DPI entered
into an Asset Purchase Agreement with DTS, Inc. and a wholly owned subsidiary
thereof pursuant to which the Company and DPI agreed to sell substantially all
of their intellectual property assets. A special stockholders meeting was called
for January 24, 2007 to approve sale of assets and to authorize the
dissolution of the Company. Proxies were mailed on or about December 1,
2006. The meeting was adjourned without a final vote in the Board’s view of the
best interest of the stockholders. The meeting was reconvened on
February 21, 2007. The vote required to approve the asset sale and
dissolution was a majority of the shares outstanding on the record date. The
dissolution proposal was contingent upon approval of the asset sale. A total of
15,334,520 shares voted on the asset sale proposal, of which 14,407,084 shares
were voted in favor, 823,182 shares voted against and 104,284 votes abstained.
Although the votes cast on the proposal to sell the assets was overwhelmingly in
favor thereof, the requisite vote was not obtained. As a result, the proposal
regarding dissolution was not presented to a vote of stockholders.




On
April 25, 2007, pursuant to a Common Stock Purchase Agreement dated
April 25, 2007, the Company sold to a group of investors, in a private
transaction, an aggregate of 16,236,615 shares for an aggregate purchase price
of $422,152, of which $259,786 was placed into escrow and was released ten days
after the closing of the sale of assets to DTS.




The
Company re-solicited a vote on the sale of assets to DTS in the second quarter
of 2007. The Asset Purchase Agreement and the transactions contemplated therein
were approved by the stockholders of the Company at a special meeting on
June 15, 2007. The Asset Purchase Agreement was consummated with DTS on
July 2, 2007. Upon the conclusion of a nine month indemnification period,
the Company plans to distribute substantially all of its remaining cash assets
to its stockholders, after satisfying its liabilities and leaving a $100,000
cash residual. There is no assurance that there will be any funds available for
distribution to stockholders. The Company has no plans to dissolve.




Our
financial statements, beginning on page 18 hereof, contain information relating
to our revenues, loss and total assets for the fiscal year ended
December 31, 2007.




4


Licensing
Activities




We ceased
all licensing activities in 2007 and all material license agreements were sold
to DTS, Inc. on July 2, 2007.




As of
July 2, 2007, the date of the asset sale, our technology had been
incorporated in products offered by more than 105 separate OEM Licensees and
customers on various economic and business terms. Some of these OEM Licenses
required a license issuance fee and/or a separate per unit royalty, while others
were licensed under the Logo Usage Agreement (“LUA”) or were authorized
customers under bundled royalty licenses with the IC foundries.




In 2007
two major customers, Sharp and Samsung, not presented in order of importance,
each accounted for 10% or more of our total royalty revenues. One OEM accounted
for 83% and one accounted for 12% of our royalty revenues during 2007. All other
OEM’s accounted for less than 5% of royalty revenues individually..




Customers, Revenues and
Expenses




We
generated revenues in our audio business from royalties pursuant to our Foundry,
OEM, and other licenses, and from non-recurring engineering fees to port our
technologies to specific licensees’ applications. Our royalty revenues, which
totaled $750,000 in 2007, were derived entirely from Foundry and OEM license
fees and royalties.




Historically,
we sought to maximize return on our intellectual property base by concentrating
our efforts in higher margin licensing and software products and eliminating our
hardware product operations. Licensing operations have been managed internally
by our personnel and through use of an international sales representative
force.




In 2007,
revenues increased as compared with the prior year due to a one time extension
of an existing license agreement in which the initial authorized usage had been
exhausted and replenishment was necessary.




Competition




We
competed with a number of entities that produce various audio enhancement
processes, technologies and products, some utilizing traditional two-speaker
playback, others utilizing multiple speakers, and others restricted to headphone
listening. These include the consumer versions of multiple speakers, matrix and
discrete digital technologies developed for theatrical motion picture exhibition
(like Dolby Digital®, Dolby
ProLogic®, and
DTS®), as
well as other technologies designed to create an enhanced stereo image from two
or more speakers.




Our
principal competitors in the field of virtual audio were SRS Labs, Inc. and
Dolby Laboratories, Inc. In addition, some DSP foundries and OEMs have
proprietary virtual audio technologies that they regularly offer to OEMs at no
cost. These companies had substantially greater resources than us to devote to
further technologies and new product developments.




We were
unable to compete in this market, even though we offered a single source,
complete suite of patented and proprietary 3D Stereo, interactive positional,
virtual surround sound, headphone and speaker virtualization technologies. We
lacked sufficient financial resources to compete, our customers were too strong,
we were closely dependent on third party licensee marketing plans which
generally presented a longer or uncertain revenue stream than our cash resources
could support and found the market less receptive to our value proposition than
we had expected. This resulted in an inhospitable market for our products and we
could not compete.




Research and
Development




Our
research and development expenditures in 2007, 2006 and 2005 were approximately
0%, 23% and 30% of total operating expenses, respectively. These expenses
consisted of salaries and related costs of employees and consultants engaged in
ongoing research, design and development activities and costs for engineering
materials and supplies.




5


From
May 2006 onward, we had no employees in our R&D group, based on our
board of directors’ decision to offer our assets for sale. We discontinued our
technology development in December 2005 and support efforts in
May 2006 when the sole engineer resigned. As a result, there were no such
expenditures in 2007.




Intellectual Property and Proprietary
Information




We relied
on a variety of intellectual property protections for our products and services,
including patent, copyright, trademark and trade secret laws, and contractual
obligations. All of our intellectual property was sold to DTS, Inc. on
July 2, 2007.




Employees




We began
and ended 2007 with no full time employees and one part time employee. None of
our employees are represented by a labor union or are subject to a collective
bargaining agreement.




Item 1A.Risk
Factors




This
Annual Report on Form 10-K/A contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, reflecting
management’s current expectations. Examples of such forward-looking statements
include our expectations with respect to our strategy. Although we believe that
our expectations are based upon reasonable assumptions, there can be no
assurances that our financial goals or any transactions described herein will be
realized. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Numerous factors may affect our actual results and
may cause results to differ materially from those expressed in forward-looking
statements made by or on behalf of our company. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words,
“believes,” “anticipates,” “plans,” “expects” and similar expressions are
intended to identify forward-looking statements. The important factors discussed
under the caption “Factors That May Affect Future Results” in Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, herein, among others, would cause actual results to differ
materially from those indicated by forward-looking statements made herein and
represent management’s current expectations and are inherently uncertain.
Investors are warned that actual results may differ from management’s
expectations. We assume no obligation to update the forward-looking information
to reflect actual results or changes in the factors affecting such
forward-looking information.




Our
business environment was very competitive, which impacted us in various ways,
namely to cease operations and sell the assets of the Company and those of
Desper Products, Inc. As a result of the consummation of that asset sale, the
following risk factors became more relevant:




Unforeseen Claims May Arise Relating
to the Sale of Assets to DTS, Inc. Which Could Reduce or Eliminate Any proposed
Cash Distribution to Stockholders




After a
long process of negotiation and stockholder approval, the Company’s assets were
sold to a subsidiary of DTS, Inc on July 2, 2007. The transaction includes
a nine month window within which DTS may file any claims for breaches of our
representations and warranties. Although we believe our representations and
warranties to be true and complete, it is possible that an unforeseen claim may
arise that could put financial demands on the Company.




The Company Has No Means to Generate
Revenue




We have
no source of revenue. Accordingly, we intend to marshal our assets and satisfy
liabilities and, after the contractual nine month indemnification period
relating to the sale of assets on July 2, 2007, we intend to distribute the
remaining cash assets of the company, other than a $100,000 cash residual. While
we expect there will be a distribution to stockholders, there is no assurance of
the amount thereof or that there will be any remaining cash for
distribution.




6


The Amount of Any Cash Distribution
to Stockholders is Undeterminable




Even if
we are diligent in marshalling our assets, the amount of the ultimate cash
distribution, if any, is undeterminable. Unforeseen legal fees, creditors and
other unasserted claims and or the cost of contacting stockholders and
physically distributing the cash may be greater than anticipated. This would
reduce or eliminate cash available for distribution.




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




Upon
distribution of the cash assets, it is anticipated that each of
Messrs. Mandell and Civelli will resign from the Board of Directors and the
new investor group involved in the April 25, 2007 stock offering will take
management control of the Company. Although there is no assurance thereof, the
new investors in the Company may bring forth their own plan in the future
regarding the direction of the Company. Should the new management believe it in
the Company’s and stockholders’ best interests to raise additional financing to
pursue new business opportunities, such new financing is likely to dilute
existing stockholders. Stockholders at the special meeting held on June 15,
2007 approved amending the Company’s charter and gave the Board of Directors
authority to affect a substantial reverse stock split at the time of its
choosing and to increase the number of authorized common and preferred shares.
While a new financing and new business model, if effected, could be successful,
there is no assurance this will occur or, if it occurs, that it would be
successful.




The Market For Our Stock Is Not
Liquid And The Stock Price Is Subject To Volatility




Our stock
is quoted on the OTC Bulletin Board, where low trading volume and high
volatility is often experienced. While a few firms make a market in our stock,
the historically low trading volume and relatively few market makers of our
stock makes it more likely that a severe fluctuation in volume, either up or
down, will significantly impact the stock price. There can be no assurance that
these market makers will continue to quote our stock and a reduction in such
market makers would negatively impact trading liquidity. Further, with our
constrained resources and increased cost and time associated with implementation
of Sarbanes-Oxley, it may not be possible for us to remain listed on the OTC
Bulletin Board in the future as a fully reporting company. Lastly, the
uncertainty of the future of the Company may limit the liquidity of our stock.
This and the existing limited market and volume in the trading of our stock, may
result in our stockholders having difficulty selling our common stock. The
trading price of our Common Stock has been, and will likely continue to be,
subject to wide fluctuations in response to possible claims arising from our
asset sale, the uncertainty of the future of the Company, general market
fluctuations and other events and factors, some of which may be beyond our
control.




The Lack of Personnel Has Created a
Deficiency in the Segregation of Duties That Has Been Disclosed as a Material
Weakness




Due to
the Company’s present circumstances, there are only one remaining part-time
employee (Chairman) and a contract bookkeeper that are responsible for
maintenance of the accounting records and other aspects of internal control.
Thus, segregation of duties is limited, and there is limited oversight of the
remaining employee. Although the financials are reviewed by the Company’s
registered public accounting firm quarterly, and disbursements are initiated by
the bookkeeper and then signed by the Chairman, the lack of personnel has
created a material weakness that the Company, due to limited operations, cannot
rectify at this time.




Item 1B.Unresolved Staff
Comments




Not
applicable.




7


Item 2.
Properties




Our
corporate office and research center in San Jose, California, was the primary
location for our audio technology division, Desper Products, Inc. We occupied
approximately 1,300 square feet with an annual rent on a full service basis of
approximately $26,275 in calendar 2006. The lease expired on December 31,
2006 and, based upon the decision to try to sell the Company’s assets, was not
renewed. We leased our space at rental rates and on terms which management
believed were consistent with those available for similar space in the
applicable local area. Such property was well maintained and adequate to support
our requirements. We have no leased facilities as of December 31,
2007.




Item 3.Legal
Proceedings




From time
to time we may be involved in various disputes and litigation matters arising in
the normal course of business. As of the date of this Annual Report on Form
10-K/A, we are not involved in any legal proceedings that are expected to have a
material adverse effect on our consolidated financial position, results of
operations or cash flows. However, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur, there exists the possibility
of a material adverse impact on our results of operations of the period in which
the ruling occurs. Our estimate of the potential impact on our financial
position or overall results of operations for the above legal proceedings could
change in the future. At present, there are no active legal
proceedings.




Item 4.Submission of
Matters to a Vote of Security Holders




Not
applicable.




Item 5.Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities




Our
Common Stock was listed and commenced trading on the NASDAQ SmallCap market on
August 21, 1995 under the symbol “SPAZ”. In January 1999, the Common
Stock was delisted by the NASDAQ SmallCap Market due to our inability to
maintain listing requirements. Our Common Stock immediately commenced trading on
the OTC Bulletin Board under the same symbol. The following table sets forth the
high and low bid price of our Common Stock as reported on the OTC Bulletin Board
for fiscal years 2005 and 2006. The quotations listed below reflect interim
dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions.





Period:
                            
                            High
      (U.S. $)
                            
                            
                            Low
      (U.S. $)2006First
      Quarter
                            
                            $
                            0.04
                            
                            
                            $
                            0.02Second
      Quarter
                            
                            $
                            0.03
                            
                            
                            $
                            0.02Third
      Quarter
                            
                            $
                            0.02
                            
                            
                            $
                            0.01Fourth
      Quarter
                            
                            $
                            0.02
                            
                            
                            $
                            0.022007First
      Quarter
                            
                            $
                            0.02
                            
                            
                            $
                            0.03Second
      Quarter
                            
                            $
                            0.03
                            
                            
                            $
                            0.05Third
      Quarter
                            
                            $
                            0.04
                            
                            
                            $
                            0.06Fourth
      Quarter
                            
                            $
                            0.04
                            
                            
                            $
                            0.05




8


On
February 8, 2008 the closing price reported by the OTC Bulletin Board was
U.S. $0.04. Stockholders are urged to obtain current market prices for our
Common Stock. Computershare Investor Services, LLC is our transfer agent and
registrar.




To our
knowledge, there were approximately 200 holders of record of the stock of the
Company as of February 8, 2008. Our transfer agent has indicated that
beneficial ownership is in excess of 2,400 stockholders.




We have
not paid any cash dividends on our Common Stock and have no present intention of
paying any dividends. Our current policy is to retain earnings, if any, for
operations in connection with winding up of our business. Our future dividend
policy will be determined from time to time by the Board of
Directors.




The
Company did not repurchase any of its equity securities during the fourth
quarter of the fiscal year ended December 31, 2007.




Item 6.Selected
Financial Data




The
following selected consolidated financial data should be read in conjunction
with our Consolidated Financial Statements and related Notes and with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, included in Item 7. The selected financial data shown below
are derived from our consolidated financial statements that have been audited by
the Company’s independent certified public accountants, Farber Hass Hurley
McEwen LLP for the years ended December 31, 2005, 2004, and 2003 and
Ramirez International Financial & Accounting Services, Inc. for the years
ended December 31, 2006 and 2007. The consolidated financial statements for
the years ended December 31, 2005, 2006 and 2007 and the reports thereon
are included elsewhere in this Report.





Fiscal
      Year EndedDecember
      31, 2003
                                                                                                            
                                                                                                            
                                                                                                            December
      31, 2004
                                                                                                            
                                                                                                            
                                                                                                            December
      31, 2005
                                                                                                            
                                                                                                            
                                                                                                            December
      31, 2006
                                                                                                            
                                                                                                            
                                                                                                            December
      31, 2007Consolidated
      Statement of Operations Data (as restated):Discontinued
      Operations:Revenues
                                                                                                            
                                                                                                            $
                                                                                                            1,269
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            1,106
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            1,192
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            333
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            751Cost
      Of Revenues
                                                                                                            
                                                                                                            
                                                                                                            (122
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (111
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (106
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (63
                                                                                                            )Gross
      Profit
                                                                                                            
                                                                                                            
                                                                                                            1,147
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            995
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,086
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            332
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            688Operating
      Expenses from discontinued operations
                                                                                                            
                                                                                                            
                                                                                                            (1,215
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (843
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (939
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (459
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (224
                                                                                                            )Gain
      on Sale of Assets
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            515Gain
      (Loss) from discontinued operations
                                                                                                            
                                                                                                            
                                                                                                            (68
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            152
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            147
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (127
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            979Continuing
      Operations:Operating
      Expenses from continuing operations
                                                                                                            
                                                                                                            
                                                                                                            (416
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (303
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (238
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (227
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (210
                                                                                                            )Other
      Income (Expense), Net
                                                                                                            
                                                                                                            
                                                                                                            (6
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (5
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            8
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            6
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            38Income
      taxes
                                                                                                            
                                                                                                            
                                                                                                            (5
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (5
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (0
                                                                                                            )Loss
      from continuing operations
                                                                                                            
                                                                                                            
                                                                                                            (427
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (309
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (229
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (226
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (172
                                                                                                            )Net
      Income (Loss)
                                                                                                            
                                                                                                            $
                                                                                                            (495
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (157
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (82
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (353
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            807Basic
      Income (Loss) Per Share
                                                                                                            
                                                                                                            $
                                                                                                            (0.01
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (0.00
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (0.00
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (0.01
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            0.01Diluted
      Income (Loss) Per Share
                                                                                                            
                                                                                                            $
                                                                                                            (0.01
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (0.00
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (0.00
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            (0.01
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            0.01Weighted
      Average Common Shares
                                                                                                            
                                                                                                            
                                                                                                            47,309,171
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            46,975,363
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            46,990,059
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            48,763,383
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            59,884,354Consolidated
      Balance Sheet DataCash
      and Cash Equivalents
                                                                                                            
                                                                                                            $
                                                                                                            590
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            871
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            551
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            229
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            582Working
      Capital
                                                                                                            
                                                                                                            
                                                                                                            793
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            603
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            560
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            242
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,557Total Assets
                                                                                                            
                                                                                                            
                                                                                                            1,205
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,464
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            897
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            464
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,605Redeemable
      Preferred Stock
                                                                                                            
                                                                                                            
                                                                                                            1
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0Advances
      From Related Parties
                                                                                                            
                                                                                                            
                                                                                                            108
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            0Total
      Shareholders’ Equity
                                                                                                            
                                                                                                            $
                                                                                                            955
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            798
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            717
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            377
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            1,577





9


Item 7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations




Executive
Overview




Revenues
increased to $751,000 for the year ended December 31, 2007 compared to
$333,000 for the year ended December 31, 2006, an increase of 216%.
Revenues are almost entirely comprised of royalties pertaining to a one time
agreement extension of the licensing of Spatializer® audio
signal processing algorithms. Revenues also reflect dormant licensing activity
in 2007. As we sold all of our operating assets in 2007, we have no means to
generate new revenues.




Net
income was $807,000 for the year ended December 31, 2007 compared to net
loss of $353,000 for the year ended December 31, 2006. Net income for the
current period is primarily the result of the sale of assets, a one time
licensing extension and lower operating expenses.




At
December 31, 2007, we had $582,000 in cash and cash equivalents, as
compared to $229,000 at December 31, 2006. The increase in cash resulted
primarily from the asset sale and stock sale. We also had $1,000,000 in a
certificate of deposit at Citibank which matured in February 2007. We had
working capital of $1,557,000 at December 31, 2007 as compared with working
capital of $242,000 at December 31, 2006.




We ceased
operations in 2006 and sold substantially all of our assets, including our
intellectual property, on July 2, 2007.




Approach to
MD&A




The
purpose of MD&A is to provide our shareholders and other interested parties
with information necessary to gain an understanding of our financial condition,
changes in financial condition and results of operations. As such, we seek to
satisfy three principal objectives:




•
            
            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.




We
believe the best way to achieve this is to give the reader:




•
            
            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




10


Operating
Environment




Our
business environment was very competitive, which factor impacted us in various
ways, some of which are discussed in greater detail in our Annual Report on Form
10-K for the fiscal year ended December 31, 2006. As a result, as
previously disclosed, the Board of Directors decided in 2006 to cease operations
and sell the assets of the Company and those of Desper Products, Inc. As a
result of the consummation of that asset sale, the following risk factors became
more relevant:




•
            
            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




In
December 2005 our revenues were stagnant, with those from certain of our
major customers winding down. Revenues from certain of our other customers
appeared not to be sustainable in the future. In December 2005, two of our
three independent directors resigned and the Chairman of the Board, Chief
Executive Officer, Chief Financial Officer and Secretary resigned from all
positions held with the Company other than as a director, Chairman and
Secretary. For these and other reasons, and after exploring other exit
strategies and opportunities, our Board of Directors concluded in
December 2005 to attempt to sell the Company either through a sale of
assets or a sale of multiple, non-exclusive perpetual licenses with a subsequent
sale of the residual assets and engaged Strategic Equity Group to assist us in
this endeavor. After a long process of negotiation and stockholder approval, the
assets were sold to a subsidiary of DTS, Inc on July 2, 2007. The
transaction includes a nine month window within which DTS may file any claims
for breaches of our representations and warranties. Although we believe our
representations and warranties to be true and complete, it is possible that an
unforeseen claim may arise that could put financial demands on the
Company.




We have
had no source of revenue since the beginning of third quarter 2007. Based on
current and projected operating levels, we do not believe that we can maintain
our liquidity position at a consistent level, on a short-term or long-term
basis, without a new business model and outside funding. As such, we intend to
marshal our assets and satisfy liabilities and, after the contractual nine month
indemnification period relating to the sale of assets on July 2, 2007, and
distribute to our stockholders the remaining cash assets of the company, other
than a $100,000 cash residual. While we expect there will be a distribution to
stockholders, there is no assurance of the amount thereof or that there will be
any remaining cash for distribution.




Even if
we are diligent in marshalling our assets, the amount of the ultimate cash
distribution, if any, is undeterminable. Unforeseen legal fees, creditors and
other unasserted claims and or the cost of contacting stockholders and
physically distributing the cash may be greater than anticipated. This will
reduce or eliminate cash available for distribution.




Upon
distribution of the cash assets, it is anticipated that each of
Messrs. Mandell and Civelli will resign from the Board of Directors and the
new investor group involved in the April 25, 2007 stock offering will take
management control of the Company. Although there is no assurance thereof, the
new investors in the Company may bring forth their own plan in the future
regarding the direction of the Company. Should the new management believe it in
the Company’s and stockholders’ best interests to raise additional financing to
pursue new business opportunities, such new financing is likely to dilute
existing stockholders. Stockholders at the special meeting held on June 15,
2007 approved amending the Company’s charter and gave the Board of Directors
authority to affect a substantial reverse stock split at the time of its
choosing and to increase the number of authorized common and preferred shares.
While a new financing and new business model, if affected, could be successful,
there is no assurance this will occur.




11


Critical Accounting
Policies




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses based on historical experience and various other factors that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. In consultation
with our Board of Directors and Audit Committee, we identified three accounting
policies that we believe have historically been critical to an understanding of
our financial statements. These are important accounting policies that require
management’s most difficult, subjective judgments. While these policies become
much less relevant in the absence of revenue generating assets, they remain
relevant in the review of prior period financial statements in this report and
in understanding the residual revenue in the current quarter.




The first
critical accounting policy relates to revenue recognition. Royalty revenues have
been recognized upon shipment of products incorporating the related technology
by the original equipment manufacturers (OEMs) and foundries. These revenues
were reported to us by our Licensees in formal, written royalty reports, which
serve as the basis for our quarterly revenue accruals. Infrequently, certain
written reports were received after our required reporting deadlines, sometimes
due to contractual requirements. In such cases, management tried to obtain
verbal reports or informal reports from the Licensee. In the absence of such
information, management has utilized conservative estimates based on information
received or historical trends. In such isolated cases, management strives to
under-estimate such revenues to err on the side of caution. In the event such
estimates are used, the revenue for the following quarter is adjusted based on
receipt of the written report. In addition, any error in Licensee reporting,
which is very infrequent, is adjusted in the subsequent quarter when agreed by
both parties as correct.




The
second critical accounting policy relates to research and development expenses.
We expensed all research and development expenses as incurred. Costs incurred to
establish the technological feasibility of our algorithms (which is the primary
component of our licensing) were expensed as incurred and included in Research
and Development expenses. Such algorithms were refined based on customer
requirements and licensed for inclusion in the customer’s specific product.
There are no production costs to capitalize as defined in Statement on Financial
Accounting Standards No. 86.




The third
critical accounting policy relates to our long-lived assets. Substantially all
of our assets were sold on July 2, 2007 at a net realized value in excess
of carrying value. The Company has continually reviewed the recoverability of
the carrying value of long-lived assets using the methodology prescribed in
Statement of Financial Accounting Standards (SFAS) 144, “Accounting for the
Impairment and Disposal of Long-Lived Assets.” The Company also reviewed
long-lived assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. Upon such an occurrence, recoverability of these
assets is determined by comparing the forecasted undiscounted net cash flows to
which the assets relate, to the carrying amount. If the asset was determined to
be unable to recover its carrying value, then intangible assets, if any, are
written down first, followed by the other long-lived assets to fair value. Fair
value is determined based on discounted cash flows, appraised values or
management’s estimates, depending on the nature of the assets. Our intangible
assets consisted primarily of patents. We capitalized all costs directly
attributable to patents and trademarks, consisting primarily of legal and filing
fees, and amortize such costs over the remaining life of the asset (which range
from 3 to 20 years) using the straight-line method. In accordance with SFAS
142, “Goodwill and Other Intangible Assets”, only intangible assets with
definite lives are amortized. Non-amortized intangible assets are instead
subject to annual impairment testing. The gain on the sale of the Company’s
assets proves that the historical net carrying value of its assets exceeded the
current carrying value.




Our
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the financial statements, the
Company’s current circumstances, including the sale of all its revenue
generating assets and significant operating losses, raise substantial doubt
about the likelihood that the Company will continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




12


Key Components of the Financial
Statements and Important Trends




The
Company’s financial statements, including the Consolidated Balance Sheets, the
Consolidated Statements of Operations, the Consolidated Statements of Cash Flows
and the Consolidated Statements of Stockholders’ Equity, should be read in
conjunction with the Notes thereto included elsewhere in this report. MD&A
explains the key components of each of these financial statements, key trends
and reasons for reporting period-to-period fluctuations.




The
Consolidated Balance Sheet provides a snapshot view of our financial condition
at the end of our fiscal year. A balance sheet helps management and our
stockholders understand the financial strength and capabilities of our business.
Balance sheets can help identify and analyze trends, particularly in the area of
receivables and payables. A review of cash balances compared to the prior years
and in relation to ongoing profit or loss can show the ability of the Company to
withstand business variations. The difference between Current Assets and Current
Liabilities is referred to as Working capital and measures how much in liquid
assets a company has available to build its business. Receivables that are
substantially higher than revenue for the quarter may indicate a slowdown of
collections, with an impact on future cash position. This is addressed further
in MD&A under Liquidity
and Capital Resources.




The
Consolidated Statement of Operations tells the reader whether the Company had a
profit or loss. It shows key sources of revenue and major expense categories. It
is important to note period-to-period comparisons of each line item of this
statement, reasons for any fluctuation and how costs are managed in relation to
the overall revenue trend of the business. These statements are prepared using
accrual accounting under generally accepted accounting standards in the United
States. This is addressed further in MD&A under Revenues and
Expenses.




The
Consolidated Statement of Cash Flows explains the actual sources and uses of
cash. Some expenses of the Company, such as depreciation and amortization, do
not result in a cash outflow in the current period, since the underlying patent
expenditure or asset purchase was made years earlier. New capital expenditures,
on the other hand, result in a disbursement of cash, but will be expensed in the
Consolidated Statement of Operations over their useful lives. Fluctuations in
receivables and payables also explain why the net change in cash is not equal to
the net loss reported on the Statement of Operations. Therefore, it is possible
that the impact of a net loss on cash is less or more than the actual amount of
the loss. This is discussed further in MD&A under Liquidity and Capital
Resources.




The
Consolidated Statement of Changes in Stockholders’ Equity shows the impact of
the operating results on the Company’s equity. In addition, this statement shows
new equity brought into the Company through stock sales or stock option
exercise. This is discussed further in MD&A under Liquidity and Capital
Resources.




Results of
Operations




The
following discussion and analysis relates to our results of operations for the
year ended December 31, 2007 compared to the year ended December 31,
2006, and the year ended December 31, 2006 compared to the year ended
December 31, 2005. The following discussion should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included elsewhere
in this report.





For the Year Ended December 31,
2007, Compared to the Year Ended December 31, 2006




Continuing
Operations





Operating
Expenses




Operating
expenses from continuing operations for the year ended December 31, 2007
decreased to $210,000 from $227,000 for the year ended December 31, 2006.
The decrease resulted  from a decline in general and administrative
expenses, primarily due to lower general operating costs, partially offset by
increased legal and accounting expenses related to public filings, in part in
response to the additional requirements imposed on public companies by the
Sarbanes-Oxley Act. General operating costs include rent, telephone, legal,
public filing, office supplies and stationery.




13


Loss from
continuing operations




The loss
from continuing operations was $172,000 for the year ended December 31,
2007, compared to a loss of $226,000 for the year ended December 31, 2006.
The decreased loss for the current period is the result of lower operating
costs.





Discontinued
Operations




Revenues




Revenues
from discontinued operations increased to $751,000 for the year ended
December 31, 2007 compared to $333,000 for the year ended December 31,
2006, an increase of 216%. Revenues in 2007 were almost entirely comprised of a
one time extension of an existing agreement pertaining to the licensing of
Spatializer® audio
signal processing algorithms.




The
increase in revenue resulted primarily from a one time extension in Q1 2007 of
an existing licensing agreement in which the initial authorized usage had been
exhausted and replenishment was necessary. This was partially offset by no
revenue in the third and fourth quarter of 2007 as a result of the sale of the
underlying technology assets.




Gross
Profit




Gross
profit from discontinued operations increased to $687,000 for the year ended
December 31, 2007 from $332,000 in the comparable period last year, an
increase of 107%. Gross margin was 91% of revenue in the year ended
December 31, 2006 compared with 99% of revenue for the comparable period
last year. The increase in gross profit resulted from increased revenue,
partially offset by lower gross margin. Gross margin declined due to a
distributor commission paid on the extension contract. We maintained a high
margin since revenues are from licensing and royalty activities, which have
little or no associated direct manufacturing or selling costs other than
commissions paid to our independent representatives that solicit and oversee the
particular accounts. All development costs are expensed as engineering and
development expenses in the period they are incurred. In 2006, all major
relationships with distributors had been terminated and no commissions were
earned or payable. In 2007, we paid a commission on the license extension where
the former distributor assisted us.




Operating
Expenses




Operating
expenses for discontinued operations for the year ended December 31, 2007
decreased to $223,000 (30% of sales) from $459,000 (138% of sales) for the year
ended December 31, 2006, a decrease of 51%. The decrease in operating
expenses resulted primarily from decreases in general and administrative
expense, sales and marketing expense, and research and development expense, due
to the suspension of operations.




General and
Administrative




General
and administrative expense for discontinued operations decreased to $223,000 for
the year ended December 31, 2007 from $300,000 for the year ended
December 31, 2006, a decrease of 26%. The decrease is primarily due to
discontinued general operating costs, such as rent, telephone, depreciation and
similar costs.




Research and
Development




Research
and development costs for discontinued operations decreased to $0 for the year
ended December 31, 2007, compared to $158,000 for the year ended
December 31, 2006. The decrease in research and development expense was due
to the elimination of an in-house applications engineering position and the
resignation of the principal engineer in May 2006.




Sales and
Marketing




Sales and
marketing costs for discontinued operations decreased to $0 for the year ended
December 31, 2007, compared to $1,000 for the year ended December 31,
2006. The decrease in such expenses resulted from cessation of all licensing and
marketing activities in January 2006 due to the suspension of
operations.




14


Gain (Loss) from
Discontinued Operations




Income
from discontinued operations was $979,000 for the year ended December 31,
2007, compared to a loss of $127,000 for the year ended December 31, 2006.
The increased net income for the current period is primarily the result of a
gain of $515,077 on the sale of assets, and lower operating costs.




Net Income
(Loss)




Net
income was $807,000 for the year ended December 31, 2007, compared to net
loss of $353,000 for the year ended December 31, 2006. The increased net
income for the current period is primarily the result of the sale of assets and
lower operating costs.





For the Year Ended December 31,
2006, Compared to the Year Ended December 31, 2005





Continuing
Operations




Operating
Expenses




Operating
expenses from continuing operations for the year ended December 31, 2006
decreased to $227,000 from $238,000 for the year ended December 31, 2005.
The decrease resulted from a decline in general and administrative expenses due
to the suspension of operations.




The
decline is primarily due to reduced CEO travel and general operating costs,
partially offset by increased legal and accounting expenses related to public
filings, in part in response to the additional requirements imposed on public
companies by the Sarbanes-Oxley Act. General operating costs include rent,
telephone, legal, public filing, office supplies and stationery.





Loss from
continuing operations




The loss
from continuing operations was $226,000 for the year ended December 31,
2006, compared to a loss of $229,000 for the year ended December 31, 2005.
The decreased loss was the result of lower operating costs.





Discontinued
Operations




Revenues




Revenues
from discontinued operations decreased to $333,000 for the year ended
December 31, 2006 compared to $1,192,000 for the year ended
December 31, 2005, a decrease of 72%. Revenues are almost entirely
comprised of royalties pertaining to the licensing of Spatializer® audio
signal processing algorithms.




The
decrease in revenue resulted partially from the absence of recognition of
deferred revenue in the current year, as compared to 2005, in which a royalty
advance received during 2004 was recognized. In addition, programs were not
renewed or extended due to the termination of operations of the Company in
January 2006. Existing revenues are derived from legacy licensing programs
and are expected to wind down.




Gross
Profit




Gross
profit from discontinued operations decreased to $332,000 for the year ended
December 31, 2006 compared to $1,086,000 in the comparable period last
year, an decrease of 69%. Gross margin was 99% of revenue in the year ended
December 31, 2006 compared with 91% of revenue for the comparable period
last year. The decrease in gross profit resulted from lower revenues in fiscal
2006, partially offset by higher margins. We maintain a high margin since
revenues are from licensing and royalty activities, which have little or no
associated direct manufacturing or selling costs other than commissions paid to
our independent representatives that solicit and oversee the particular
accounts. All development costs are expensed as engineering and development
expenses in the period they are incurred. In 2006, all major relationships with
distributors were terminated and no commissions were earned or
payable.




15


Operating
Expenses




Operating
expenses for discontinued operations for the year ended December 31, 2006
decreased to $459,000 (138% of sales) from $939,000 (79% of sales) for the year
ended December 31, 2005, a decrease of 51%. The decrease in operating
expenses resulted primarily from decreases in general and administrative
expense, sales and marketing expense, and research and development expense due
to the suspension of operations.




General and
Administrative




General
and administrative expense for discontinued operations decreased to $300,000 for
the year ended December 31, 2006 from $432,000 for the year ended
December 31, 2005, a decrease of 31%. The decrease is primarily due to
discontinued CEO travel and general operating costs, including rent, telephone,
depreciation and similar costs.




Research and
Development




Research
and development costs for discontinued operations decreased to $158,000 for the
year ended December 31, 2006, compared to $354,000 for the year ended
December 31, 2005, a decrease of 55%. The decrease in research and
development expense was due to the elimination of an in-house applications
engineering position and the resignation of the principal engineer in
May 2006.




Sales and
Marketing




Sales and
marketing costs for discontinued operations decreased to $1,000 for the year
ended December 31, 2006, compared to $152,000 for the year ended
December 31, 2005, a decrease of 99%. The decrease in such expenses
resulted from cessation of all licensing and marketing activities in
January 2006 due to the suspension of operations.




Gain (Loss) from
Discontinued Operations




The loss
from discontinued operations was $127,000 for the year ended December 31,
2006, compared to income of $148,000 for the year ended December 31, 2005.
The increased net loss for the current period is primarily the result of lower
revenue, partially offset by lower overhead.




Net Income
(Loss)




The net loss was $226,000 for the year
ended December 31, 2006, compared to net loss of $229,000 for the year
ended December 31, 2005. The increased net loss for the current period is
primarily the result of lower revenue, partially offset by lower
overhead.




Liquidity and Capital
Resources




At
December 31, 2007, we had $582,000 in cash and cash equivalents as compared
to $229,000 at December 31, 2006. We also had a $1,000,000 certificate of
deposit at Citibank. The increase in cash primarily resulted from the sale of
assets and the sale of stock. We had working capital of $1,557,000 at
December 31, 2007 as compared with working capital of $242,000 at
December 31, 2006.




As
previously disclosed, pursuant to an Asset Purchase Agreement, we sold
substantially all of our assets and those of our wholly owned subsidiary, DPI
(excluding certain assets, such as cash), to a wholly owned subsidiary of DTS,
Inc. This transaction was approved by the stockholders on June 15, 2007 and
was closed on July 2, 2007.




16


There is
no current source of future cash flow for the Company as we sold substantially
all of our audio assets and those of our wholly owned subsidiary, Desper
Products, Inc., on July 2, 2007.




Based on
current and projected operating levels, we do not believe that we can maintain
our liquidity position at a consistent level, on a short-term or long-term
basis, without a new business model and outside funding. As such, we intend to
marshal our assets and after a contractual nine month indemnification period
relating to the sale of assets on July 2, 2007, we will distribute the
remaining cash assets of the company, after satisfying liabilities and leaving a
$100,000 cash residual. Upon distribution of the cash assets, it is anticipated
that each of Messrs. Mandell and Civelli will resign from the Board of
Directors and the new investor group involved in the April 25, 2007 stock
offering will take management control of the Company. Although there is no
assurance thereof, the new investors in the Company may bring forth their own
plan in the future regarding the direction of the Company, including new,
revenue generating businesses.




In
September 2006, the Company and DPI entered into an Asset Purchase
Agreement with DTS, Inc. and a wholly owned subsidiary thereof pursuant to which
we agreed to sell substantially all of our assets (other than certain excluded
assets, such as cash). The consummation of the asset sale was subject to
approval of holders of a majority of the outstanding shares of the Common Stock
of the Company. In April 2007, the Company sold an aggregate of 16,236,615
shares of its Common Stock to certain investors.




The
Company held a special meeting of stockholders on June 15, 2007 to vote on
the asset sale transaction but not with respect to the dissolution of the
Company. The asset sale transaction was approved. The asset sale transaction
closed on July 2, 2007. There is no assurance that there will be any funds
available for distribution to stockholders.




Net Operating Loss
Carryforwards




At
December 31, 2007, we had net operating loss carryforwards for Federal
income tax purposes of approximately $26,000,000 which are available to offset
future Federal taxable income, if any, through 2015. Approximately $21,700,000
of these net operating loss carryforwards are subject to an annual limitation of
approximately $1,000,000.




Recently Issued Accounting
Pronouncements




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair Value Measurements” . SFAS 157 replaces the different
definitions of fair value in the accounting literature with a single definition.
It defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 is effective for fair-value
measurements already required or permitted by other standards for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. The Company has not yet determined
the impact, if any, of adopting the provisions of SFAS 157 on its financial
position, results of operations and cash flows.




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115. SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions of SFAS 159 apply only to entities that elect the fair value option;
however, the amendment to FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to all entities with
available for sale and trading securities. The Company has not yet determined
the impact, if any, of adopting the provisions of SFAS 157 on its financial
position, results of operations and cash flows.




Item 7A.Quantitative and
Qualitative Disclosures About Market Risk




We have
not been exposed to material future earnings or cash flow fluctuations from
changes in interest rates on our short-term investments at December 31,
2007. A hypothetical decrease of 100 basis points in interest rate (ten percent
of our overall earnings rate) would not result in a material fluctuation in
future earnings or cash flow. We have not entered into any derivative financial
instruments to manage interest rate risk or for speculative purposes and we are
not currently evaluating the future use of such financial
instruments.


Item 8.Financial
Statements and Supplementary Data





17




REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM




To the Board of Directors of
Spatializer Audio Laboratories, Inc.:




We have
audited the accompanying consolidated balance sheets of Spatializer Audio
Laboratories, Inc. and subsidiaries (“Company”) as of December 31, 2007 and
2006 and the related consolidated statements of operations, stockholders’
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Spatializer Audio
Laboratories, Inc. and subsidiaries as of December 31, 2007 and 2006, and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company’s circumstances raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.




As described in Note 11, the Company
has restated its consolidated statements of operations to reflect discontinued
operations separately in conformity with accounting principles generally
accepted in the United States of America.











/s/
RAMIREZ INTERNATIONAL


Financial
& Accounting Services, Inc.


Irvine,
California


March 26,
2008, except for Note 11 as to which the date is April 15, 2009




18




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors of
Spatializer Audio Laboratories, Inc.:




We have
audited the accompanying consolidated statements of operations, shareholder’s
equity and cash flows of Spatializer Audio Laboratories, Inc. and subsidiaries
(The “Company”) as of December 31, 2005. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Spatializer Audio Laboratories, Inc. and subsidiaries for the year ended
December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company’s circumstances raise substantial doubt about
its ability to continue as a going concern.  The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.




As
described in Note 11, the Company has restated its consolidated statements of
operations to reflect discontinued operations separately in conformity with
accounting principles generally accepted in the United States of
America.





/s/
FARBER HASS HURLEY LLP


(formerly
Farber Hass Hurley & McEwen LLP)





Camarillo,
California


February 24,
2006, except for Note 11 as to which the date is April 15, 2009




19




SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS





December
      31,
                                                                                                
                                                                                                December
      31,2007
                                                                                                
                                                                                                2006ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                                                                                                $
                                                                                                582,019
                                                                                                
                                                                                                $
                                                                                                228,940Short-Term
      Investments
                                                                                                
                                                                                                1,000,000
                                                                                                
                                                                                                
                                                                                                0Accounts
      Receivable
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                74,828Prepaid
      Expenses and Other Current Assets
                                                                                                
                                                                                                22,989
                                                                                                
                                                                                                
                                                                                                25,073Total
      Current Assets
                                                                                                
                                                                                                1,605,008
                                                                                                
                                                                                                
                                                                                                328,841Property
      and Equipment, Net
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                3,477Intangible
      Assets, Net Held for Sale
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                131,258Total
      Assets
                                                                                                $
                                                                                                1,605,008
                                                                                                
                                                                                                $
                                                                                                463,576LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Notes
      Payable
                                                                                                
                                                                                                9,680
                                                                                                
                                                                                                
                                                                                                9,670Accounts
      Payable
                                                                                                
                                                                                                900
                                                                                                
                                                                                                
                                                                                                32,136Accrued
      Wages and Benefits
                                                                                                
                                                                                                1,323
                                                                                                
                                                                                                
                                                                                                3,169Accrued
      Professional Fees
                                                                                                
                                                                                                36,000
                                                                                                
                                                                                                
                                                                                                41,900Accrued
      Commissions
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                200Accrued
      Expenses
                                                                                                
                                                                                                0
                                                                                                
                                                                                                
                                                                                                0Total
      Current Liabilities
                                                                                                
                                                                                                47,903
                                                                                                
                                                                                                
                                                                                                87,075Commitments
      and ContingenciesStockholders’
      Equity (Deficit):Common
      shares, $0.01 par value; 300,000,000 shares authorized; 65,000,000 shares
      issued and outstanding at December 31, 2007 and 48,763,383 issued and
      outstanding at December 31, 2006, respectively
                                                                                                
                                                                                                650,000
                                                                                                
                                                                                                
                                                                                                487,634Additional
      Paid-In Capital
                                                                                                
                                                                                                46,634,856
                                                                                                
                                                                                                
                                                                                                46,423,893Accumulated
      Deficit
                                                                                                
                                                                                                (45,727,751)
                                                                                                
                                                                                                
                                                                                                (46,535,026)Total
      Stockholders’ Equity
                                                                                                
                                                                                                1,557,105
                                                                                                
                                                                                                
                                                                                                376,501Total
      Liabilities and Stockholders’ Equity
                                                                                                $
                                                                                                1,605,008
                                                                                                
                                                                                                $
                                                                                                463,576




20




SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(as
restated)





Year
      Ended December 31,2007
                
                
                2006
                
                
                2005Operating
      Expenses:General
      and Administrative
                
                $
                210,350
                
                
                $
                226,551
                
                
                $
                237,894210,350
                
                
                
                226,551
                
                
                
                237,894Operating
      Loss
                
                
                (210,350
                )
                
                
                (226,551
                )
                
                
                (237,894
                )Interest
      Income
                
                
                40,740
                
                
                
                6,730
                
                
                
                13,230Interest
      Expense
                
                
                (2,311
                )
                
                
                (2,266
                )
                
                
                (5,269
                )Other
      Income (Expense), Net
                
                
                0
                
                
                
                1,251
                
                
                
                038,429
                
                
                
                5,715
                
                
                
                7,961Loss
      from continuing operations before income taxes
                
                
                (171,921
                )
                
                
                (220,836
                )
                
                
                (229,933
                )Income
      Taxes
                
                
                0
                
                
                
                (4,800
                )
                
                
                874Loss
      from continuing operations
                
                
                (171,921
                )
                
                
                (225,636
                )
                
                
                (229,059
                )Gain
      (Loss) from discontinued operations (Note 11)
                
                
                979,197
                
                
                
                (126,990
                )
                
                
                147,544Net
      Income (Loss)
                
                $
                807,276
                
                
                $
                (352,626
                )
                
                $
                (81,515
                )Basic
      and Diluted Income (Loss) per Share:
                
                $
                .01
                
                
                $
                (.01
                )
                
                $
                (.00
                )Weighted-Average
      Shares Outstanding
                
                
                59,884,354
                
                
                
                48,763,385
                
                
                
                46,990,059





See
accompanying notes to consolidated financial statements




21




SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2007
                                
                                
                                2006
                                
                                
                                2005Cash
      Flows from Operating Activities:Net
      Loss
                                
                                $
                                807,276
                                
                                
                                $
                                (352,626
                                )
                                
                                $
                                (81,515
                                )Adjustments
      to Reconcile Net Loss to Net Cash Provided (Used) by Operating
      Activities:Gain
      on Sale of Assets
                                
                                
                                (515,077
                                )Depreciation
                                
                                
                                0
                                
                                
                                
                                14,926
                                
                                
                                
                                16,401Amortization
                                
                                
                                0
                                
                                
                                
                                22,303
                                
                                
                                
                                31,030Stock
      and Options Issued for Services
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,000Net
      Compensation Expense on Vested Options
                                
                                
                                0
                                
                                
                                
                                11,725Net
      Change in Assets and Liabilities:Accounts
      Receivable
                                
                                
                                74,828
                                
                                
                                
                                80,405
                                
                                
                                
                                170,479Prepaid
      Expenses, Deposits and Other Assets
                                
                                
                                2,084
                                
                                
                                
                                9,031
                                
                                
                                
                                36,836Accounts
      Payable
                                
                                
                                (31,236
                                )
                                
                                
                                17,941
                                
                                
                                
                                (57,678
                                )Accrued
      Expenses and Other Liabilities
                                
                                
                                (7,947
                                )
                                
                                
                                (109,612
                                )
                                
                                
                                18,274Deferred
      Revenue
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                (391,395
                                )Net
      Cash Provided (Used) by Operating Activities
                                
                                
                                329,928
                                
                                
                                
                                (305,907
                                )
                                
                                
                                (256,568
                                )Cash
      Flows from Investing Activities:Short
      Term Investments
                                
                                
                                (1,000,000
                                )
                                
                                
                                0
                                
                                
                                
                                0Net
      proceeds from Asset Sale
                                
                                
                                649,812
                                
                                
                                
                                0
                                
                                
                                
                                0Purchase
      of Property and Equipment
                                
                                
                                (0
                                )
                                
                                
                                (0
                                )
                                
                                
                                (5,277
                                )Intangible
      Assets
                                
                                
                                0
                                
                                
                                
                                (15,013
                                )
                                
                                
                                (2,868
                                )Net
      Cash Used by Investing Activities
                                
                                
                                (350,188
                                )
                                
                                
                                (15,013
                                )
                                
                                
                                (8,145
                                )Cash
      Flows from Financing Activities:Issuance
      (Repayment) of Notes Payable
                                
                                
                                10
                                
                                
                                
                                (773
                                )
                                
                                
                                (55,809
                                )Issuance
      of Common Stock Net of Transaction Costs
                                
                                
                                373,329
                                
                                
                                
                                0
                                
                                
                                
                                0Net
      Cash Provided by (Used) by Financing Activities
                                
                                
                                373,339
                                
                                
                                
                                (773
                                )
                                
                                
                                (55,809
                                )Increase
      (Decrease) in Cash and Cash Equivalents
                                
                                
                                353,079
                                
                                
                                
                                (321,693
                                )
                                
                                
                                (320,522
                                )Cash
      and Cash Equivalents, Beginning of Year
                                
                                
                                228,940
                                
                                
                                
                                550,633
                                
                                
                                
                                871,155Cash
      and Cash Equivalents, End of Year
                                
                                $
                                582,019
                                
                                
                                $
                                228,940
                                
                                
                                $
                                550,633Supplemental
      Disclosure of Cash Flow Information:Cash
      Paid During the Year for:Interest
                                
                                $
                                2,311
                                
                                
                                $
                                2,266
                                
                                
                                $
                                5,269Income
      Taxes
                                
                                $
                                418
                                
                                
                                $
                                4,800
                                
                                
                                $
                                0




See
accompanying notes to consolidated financial statements


22




SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)





Common
      Shares
                  
                  
                  Common
      SharesAdditional
      Paid-In-
      Capital
                  
                  TotalStockholders’
      EquityNumber
      of  Shares
                  
                  Par
      Value
                  
                  
                  
                  Accumulated
      DeficitBalance,
      December 31, 2004
                  
                  
                  46,975,365
                  
                  
                  $
                  469,754
                  
                  
                  $
                  46,428,866
                  
                  
                  $
                  (46,100,885
                  )
                  
                  $
                  797,735Conversion
      of Series B-1 Pfd to Common Shares
                  
                  
                  1,788,018
                  
                  
                  
                  17,880
                  
                  
                  
                  (16,698
                  )
                  
                  
                  
                  
                  
                  
                  1,182Net
      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (81,515
                  )
                  
                  
                  (81,515
                  )Balance,
      December 31, 2005
                  
                  
                  48,763,383
                  
                  
                  $
                  487,634
                  
                  
                  $
                  46,412,168
                  
                  
                  $
                  (46,182,400
                  )
                  
                  $
                  717,402Net
      Compensation Expense on Vested Options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,725
                  
                  
                  
                  
                  
                  
                  
                  11,725Net
      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (352,626
                  )
                  
                  
                  (352,626
                  )Balance,
      December 31, 2006
                  
                  
                  48,763,383
                  
                  
                  $
                  487,634
                  
                  
                  $
                  46,423,893
                  
                  
                  $
                  (46,535,026
                  )
                  
                  $
                  376,501Issuance
      of Common Stock
                  
                  
                  
                  
                  
                  
                  162,366
                  
                  
                  
                  210,963
                  
                  
                  
                  
                  
                  
                  
                  373,329Net
      Income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  807,276
                  
                  
                  
                  807,276Balance,
      December 31, 2007
                  
                  
                  65,000,000
                  
                  
                  $
                  650,000
                  
                  
                  $
                  46,634,856
                  
                  
                  $
                  (45,727,751
                  )
                  
                  $
                  1,557,105


See
accompanying notes to consolidated financial statements




23


SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(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. and Dissolution of
Spatializer




Spatializer
has been a developer, licensor and marketer of next generation technologies for
the consumer electronics, personal computing, entertainment and cellular
telephone markets. Our technology is incorporated into products offered by our
licensees and customers on various economic and business terms.




The
Company’s wholly-owned subsidiary, Desper Products, Inc. (“DPI”), has been in
the business of developing proprietary advanced audio signal processing
technologies and products for consumer electronics, entertainment, and
multimedia computing. All Company revenues are generated from DPI.




On
December 19, 2005, at a regularly scheduled board of directors meeting, the
board of directors of Spatializer discussed Spatializer’s current financial
outlook. Management indicated to the board of directors that two customers, the
revenues from which accounted for approximately 70% of Spatializer’s income
during 2005, would not be sustainable in 2006. This
called into question the ability of the Company to operate as a going
concern. The Company’s financial statements have been prepared assuming
that it will continue as a going concern.




As
previously reported, on September 18, 2006, the Company and DPI entered
into an Asset Purchase Agreement with DTS, Inc. and a wholly owned subsidiary
thereof pursuant to which the Company and DPI agreed to sell substantially all
of their intellectual property assets. A special stockholders meeting was called
for January 24, 2007 to approve sale of assets and to authorize the
dissolution of the Company. Proxies were mailed on or about December 1,
2006. The meeting was adjourned without a final vote in the Board’s view of the
best interest of the stockholders. The meeting was reconvened on
February 21, 2007. The vote required to approve the asset sale and
dissolution was a majority of the shares outstanding on the record date. The
dissolution proposal was contingent upon approval of the asset sale. A total of
15,334,520 shares voted on the asset sale proposal, of which 14,407,084 shares
were voted in favor, 823,182 shares voted against and 104,284 votes abstained.
Although the votes cast on the proposal to sell the assets was overwhelmingly in
favor thereof, the requisite vote was not obtained. As a result, the proposal
regarding dissolution was not presented to a vote of stockholders.




On
April 25, 2007, pursuant to a Common Stock Purchase Agreement dated
April 25, 2007, the Company sold to a group of investors, in a private
transaction, an aggregate of 16,236,615 shares for an aggregate purchase price
of $422,152, of which $259,786 was placed into escrow and was released ten days
after the closing of the sale of assets to DTS.




The
Company re-solicited a vote on the sale of assets to DTS in the second quarter
of 2007. The Asset Purchase Agreement and the transactions contemplated therein
were approved by the stockholders of the Company at a special meeting on
June 15, 2007. The Asset Purchase Agreement was consummated with DTS on
July 2, 2007. Upon the conclusion of a nine month indemnification period,
the Company plans to distribute substantially all of its remaining cash assets
to its stockholders, after satisfying its liabilities and leaving a $100,000
cash residual. There is no assurance that there will be any funds available for
distribution to stockholders. The Company has no plans to dissolve.




The
foregoing financial information has been prepared assuming that the Company will
continue as a going concern. As discussed above, the Company’s current
circumstances, including significant operating losses, raise substantial doubt
about the likelihood that the Company will continue as a going concern. The
foregoing financial information does not include any adjustments that might
result from the outcome of this uncertainty.




24


(2) Significant Accounting
Policies




Basis of Consolidation —The
consolidated financial statements include the accounts of Spatializer Audio
Laboratories, Inc. and its wholly-owned subsidiary, Desper Products, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. Corporate administration expenses are not allocated to
subsidiaries.




Revenue Recognition —The
Company recognizes revenue from product sales upon shipment to the customer.
License revenues are recognized when earned, in accordance with the contractual
provisions. Royalty revenues are recognized upon shipment of products
incorporating the related technology by the original equipment manufacturers
(OEMs) and foundries. The Company recognizes revenue in accordance with SEC
Staff Accounting Bulletin 104.




Concentration of Credit Risk —Financial instruments, which potentially subject the company to
concentrations of credit risk, consist principally of cash and cash equivalents
and trade accounts receivable. At December 31, 2007 and 2006, substantially
all cash and cash equivalents and short term investments (consisting of a
certificate of deposit) were on deposit at one financial institution, Citibank
FSB and thus were in excess of FDIC insurance limits.




At
December 31, 2007, two major customers, not presented in order of
importance, each accounted for 10% or more of our total accounts receivable:
Sharp and Samsung, not presented in order of importance, each accounted for 10%
or more of our total royalty revenues. One OEM accounted for 83% and one
accounted for 12% of our royalty revenues during 2007. There were no accounts
receivable at December 31, 2007. At December 31, 2006, two major
customers, not presented in order of importance, each accounted for 10% or more
of our total accounts receivable: Sharp and Orion Corporation. One customer
accounted for 81% and one accounted for 10% of our total accounts receivable at
December 31, 2006.




The
Company performs ongoing credit evaluations of its customers and normally does
not require collateral to support accounts receivable. Since all receivables
have been collected as of December 31, 2007, no allowance for doubtful accounts
has been provided.




The
Company does not apply interest charges to past due accounts
receivable.




Cash and Cash Equivalents —Cash equivalents consist of highly liquid investments with original
maturities of three months or less.




Customers Outside of the U.S. —Sales to foreign customers were 100%, 93% and 95% of total sales in the
years ended December 31, 2007 and 2006 and 2005, respectively.




Major Customers —During the
year ended December 31, 2007, two customers accounted for 83% and 12%,
respectively, of the Company’s net sales. During the year ended
December 31, 2006, two customers accounted for 49% and 20%, respectively,
of the Company’s net sales. During the year ended December 31, 2005, three
customers accounted for 42%, 23% and 12%, respectively, of the Company’s net
sales.




Research and Development Costs —The Company expenses research and development costs as incurred, which is
presented as a separate line on the statement of operations.




Advertising Costs —Costs
incurred for producing and communicating advertising are expensed when incurred
and included in selling, general and administrative expenses. Consolidated
advertising expense amounted to $0, $0 and $18,931 in 2007, 2006 and 2005,
respectively.




25


Property and Equipment —Property and equipment were stated at cost. Major renewals and
improvements were charged to the asset accounts while replacements, maintenance
and repairs, which did not improve or extend the lives of the respective assets,
were expensed. At the time property and equipment are retired or otherwise
disposed of, the asset and related accumulated depreciation accounts are
relieved of the applicable amounts. Gains or losses from retirements or sales
are credited or charged to income. Property and equipment are depreciated over
the useful lives of the asset ranging from 3 years to 5 years under
the straight line method. All fixed assets were sold on July 2,
2007.




Intangible Assets —Intangible
assets consisted of patent costs and trademarks which were amortized on a
straight-line basis over the estimated useful lives of the patents which range
from five to twenty years. All intangible assets were sold on July 2,
2007.




Earnings Per Share —The
Company determines earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share(“SFAS
128”). Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity.




Since the
Company generated net losses in 2006 and 2005, outstanding stock options and
warrants would have been anti-dilutive and were not applicable to this
calculation.


The
following table presents contingently issuable shares, options and warrants to
purchase shares of common stock that were outstanding during year ended
December 31, 2007. The calculation of diluted earnings per share considers
shares contingently issued in the year ended December 31,
2007.




2007Options
                    
                    
                    1,150,000Warrants
                    
                    
                    01,150,000




Stock Option Plan —During the
year ended December 31, 2005, the Company determined the effects of stock
based compensation in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation ,as amendedwhich permitted entities to recognize expense
using the “fair-value” method over the vesting period of all employee
stock-based awards on the date of grant. Alternatively, SFAS No. 123
allowed entities to continue to utilize the “intrinsic value” method for equity
instruments granted to employees and provide pro forma net income
(loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants after 1994 as if the fair-value-based method
defined in SFAS No. 123 has been applied. The Company elected to continue
to utilize the “intrinsic value” method for employee stock option grants and
provide the pro forma disclosure provisions of SFAS No. 123 (Note
7)




On
January 1, 2006 the Company adopted SFAS 123R, Share Based Payment, using
the modified prospective transition method to account for changes to the method
of accounting for options outstanding at the effective date. Estimated
compensation cost of $11,725 related to vested options outstanding as of
January 1, 2006, net of those cancelled or expired during 2006, has been
recognized as additional paid-in capital. The statement of operations for period
prior to the effective date have not been restated.




26


Impairment of Long-Lived Assets and
Assets to be Disposed of— The Company adopted the provisions of SFAS
No. 144, Accounting for
the Impairment of Long-Lived Assets,on January 1, 2002. This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amounts of the assets exceed the
fair value of the assets.




Segment Reporting— The
Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information(“SFAS No. 131”), in
December 1997. MDT has been considered a discontinued operation since
September 1998. The Company had only one operating segment, DPI, the
Company’s audio enhancement licensing business.




Income Taxes— Income taxes
are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.




Recent Accounting Pronouncements— In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair Value Measurements”. SFAS 157 replaces the different
definitions of fair value in the accounting literature with a single definition.
It defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 is effective for fair-value
measurements already required or permitted by other standards for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. The Company has not yet determined
the impact, if any, of adopting the provisions of SFAS 157 on its financial
position, results of operations and cash flows.




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115. SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions of SFAS 159 apply only to entities that elect the fair value option;
however, the amendment to FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to all entities with
available for sale and trading securities. The Company has not yet determined
the impact, if any, of adopting the provisions of SFAS 157 on its financial
position, results of operations and cash flows.




Use of Estimates— Management
of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.




Fair Value of Financial Instruments— The carrying values of cash equivalents, short term investments,
accounts receivable, notes payable, accounts payable and accrued liabilities at
December 31, 2007 and 2006 approximated fair value due to their short
maturity or nature.




27


(3) Property and
Equipment




Property
and equipment, as of December 31, 2007 and 2006, consists of the
following:




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




Intangible
assets, as of December 31, 2007 and 2006 consist of the
following:




2007
                          
                          2006Capitalized
      Patent, Trademarks and Technology Costs
                          
                          $
                          0
                          
                          
                          $
                          540,708Less
      Accumulated Amortization
                          
                          
                          0
                          
                          
                          
                          409,450Intangible
      Assets, Net
                          
                          $
                          0
                          
                          
                          $
                          131,258




(5) Notes
Payable




The
Company was indebted to the Premium Finance, Inc., an unrelated insurance
premium finance company, in the amount of $9,680 at December 31, 2007. This
note finances the Company’s annual Directors’ and Officers’ Liability Insurance.
This amount bears interest at a fixed rate of 13.25% annually, is paid in
monthly installments of $4,835 that commenced on June 1, 2007 and continues
for nine months until the entire balance of principal and interest is paid in
full.




28


(6) Shareholders’
Equity




On
April 25, 2007, pursuant to a Common Stock Purchase Agreement dated
April 25, 2007, the Company sold to a group of investors, in a private
transaction, an aggregate of 16,236,615 shares for an aggregate purchase price
of $162,366.15. At the closing of the stock sale, the investors delivered into
escrow an additional contingent amount of $259,786. Such escrowed funds were
released to the Company on July 16, 2007, within the prescribed period
after the closing of the transactions contemplated by the Asset Purchase
Agreement, dated as of September 18, 2006 by and between the Company, DPI,
DTS, Inc. and its wholly owned subsidiary.




(7) Stock
Options




In 1995,
the Company adopted a stock option plan (the “Plan”) pursuant to which the
Company’s Board of Directors may grant stock options to directors, officers and
employees. The Plan which was approved by the stockholders authorizes grants of
options to purchase authorized but unissued common stock up to 10% of total
common shares outstanding at each calendar quarter, 6,500,000 as of
December 31, 2007. Nostock options were granted under the Plan in fiscal 2007.. Outstanding
stock options under the Plan have five-year terms and vest and become fully
exercisable up to three years from the date of grant. The Plan expired in
February 2005. To date, the Company has not adopted a new stock option
plan.





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 December 31, 2007
                                                                
                                                                
                                                                1,150,000
                                                                
                                                                
                                                                
                                                                1,150,000
                                                                
                                                                
                                                                $
                                                                0.08




At
December 31, 2007 there were no additional shares available for grant under
the Plan, since the Plan had expired in 2005. The per share weighted-average
fair value of stock options granted during 2005 was $0.02, on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumption: expected dividend yield 0%, risk-free interest rate of 4.5%,
expected volatility of 150% and an expected life of 5 years.




29


Through
December 31, 2005, as permitted by SFAS No. 123, the Company applied
the “intrinsic value” method outlined in APB Opinion No. 25 in accounting
for its Plan and, accordingly, no compensation cost was recognized for the fair
value of its stock options in the consolidated financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company’s net loss for the
year December 31, 2005 would have been increased to the pro forma amounts
indicated below:




NET
      INCOME (LOSS):As
      Reported
                    
                    $
                    (81,515
                    )Pro
      Forma
                    
                    $
                    (89,715
                    )BASIC
      AND DILUTED LOSS:As
      Reported
                    
                    $
                    (0.00
                    )Pro
      Forma
                    
                    $
                    (0.00
                    )




Effective
January 1, 2006, the Company adopted SFAS 123R “Share Based Payments, using
the modified prospective transition method to account for changes to the method
of accounting for 1,750,000 vested options outstanding at the effective date.
Estimated compensation cost related to vested options outstanding as of
January 1, 2006 was recognized as additional paid-in capital. During the
year ended December 31, 2006, 1,060,000 vested options expired or were
cancelled, resulting in a reduction of compensation cost and additional paid-in
capital. Net compensation cost recorded for the year ended December 31,
2006 was $11,725; net loss for the year was increased by a corresponding amount,
or a basic and diluted loss per share of $0.00. The grant-date fair value of
vested options was estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions: expected dividend yield — 0%;
risk-free interest rate of 4.5%, expected volatility of 100% and an expected
life of 3 years.




Net
compensation cost recorded for the year ended December 31, 2007 was
$13,455; net income for the year was reduced by a corresponding amount, or a
basic and diluted loss per share of $0.00. The grant-date fair value of vested
options was estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions: expected dividend yield — 0%; risk-free
interest rate of 2.2%, expected volatility of 100% and an expected life of
1.5 years.




Options
to purchase 600,000 shares of common stock were cancelled in the quarter ended
September 30, 2006 to two former directors as a result of their resignation
form the Board of Directors, per the Plan requirements.




Options
to purchase 210,000 shares of common stock previously granted to two directors
and two employees, at an exercise price of $0.30 expired in April and
May 2006.


Options
to purchase 250,000 shares of common stock previously granted to one employee,
at an exercise price of $0.05 were cancelled after the resignation of the
employee per terms of the option agreement in August 2006.




In
June 2007, options to purchase 600,000 shares of common stock, at an
exercise price of $0.12 per share, granted to two sitting directors
expired.




At
December 31, 2007 and December 31, 2006, the number of options
exercisable and fully vested was 1,150,000. The weighted-average exercise price
of those options was $0.08; the weighted average remaining contractual term was
1.5 years; and the aggregate intrinsic value was zero per
share.




There
were no warrants outstanding at December 31, 2007 or 2006.




(8) Income
Taxes




The
Company files a consolidated return for U.S. income tax purposes. Income tax
expense for the years ended December 31, 2007, 2006 and 2005 consisted of
the following:




2007
                          
                          
                          2006
                          
                          2005State
      franchise tax
                          
                          $
                          0
                          
                          
                          $
                          4,800
                          
                          
                          
                          400Federal
      taxes
                          
                          
                          (0
                          )
                          
                          $
                          (0
                          )
                          
                          
                          (1,274
                          )Total
                          
                          $
                          0
                          
                          
                          $
                          4,800
                          
                          
                          
                          (874
                          )




30


Certain
revenues received from customers in foreign countries are subject to withholding
taxes that are deducted from outgoing funds at the time of payment. These taxes
range from approximately 10% to 16.5% and are recorded as net royalty
revenue.




Income
tax expense for the years ended December 31, 2006 and 2005 differed from
the amounts computed by applying the U.S. federal income tax rate of
34 percent to loss before income taxes primarily due to the generation of
additional net operating loss carry forwards for which no tax benefit has been
provided. In the year ended December 31, 2007, net operating loss carry
forwards of $800,000 were used.




The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets at December 31, 2007 is composed primarily of the net
loss carry forwards. The net change in the total valuation allowance for the
year ended December 31, 2007 resulted in the reduction of income tax
expense of approximately $300,000. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based upon the level of
historical taxable losses, management believes it is more likely than not the
Company will not realize the benefits of these deductible differences and has
established a valuation allowance to fully reserve the deferred tax assets at
December 31, 2007. Additionally, the ultimate realizability of net
operating losses may be limited by change of control provisions under
Section 382 of the Internal Revenue Code.




At
December 31, 2007, the Company had net operating loss carry forwards for
Federal income tax purposes of approximately $26,000,000 which are available to
offset future Federal taxable income, if any, through 2015. Approximately
$21,000,000 of these net operating loss carry forwards are subject to an annual
limitation of approximately $1,000,000.




(9) Commitments and
Contingencies




We also
anticipate that, from time to time, we may be named as a party to legal
proceedings that may arise in the ordinary course of our business.




Operating Lease
Commitments




The
Company was obligated under one non-cancelable operating lease as of
December 31, 2006. Minimum rental payments for this operating lease were
approximately $400 through April 2007, when the lease expired.




Rent
expense amounted to approximately $33,000, $25,000 and $ 23,000 for the years
ended December 31, 2006, 2005 and 2004, respectively, and related primarily
to leases for office space. These leases expired during 2006 and were not
renewed. No space was leased in
2007.




(10) Profit Sharing
Plan




The
Company had a 401(k) profit sharing plan covering substantially all employees,
subject to certain participation and vesting requirements. The Company was
permitted to make discretionary contributions to this plan, but had never done
so over the life of this plan. The amount charged to administrative expense for
the Plan in 2006 and 2005 was approximately $2,000 per annum. This plan was
dissolved in early 2007.




31


(11) Discontinued
Operations




Substantially
all of the operating assets of the Company were disposed in a transaction with
DTS that was effective in July 2007.  The consolidated statements of
operations for the years ended December 31, 2007, 2006 and 2005 have been
restated, with no effects on previously reported net income (loss) or
stockholders’ equity, to reflect separately, as discontinued operations, the
following activities related to the disposed assets.





Year
      Ended December 31,2007
                    
                    
                    2006
                    
                    
                    2005Revenues:Royalty
      Revenues
                    
                    $
                    750,706
                    
                    
                    $
                    333,201
                    
                    
                    $
                    1,192,447Cost
      of Revenues
                    
                    
                    63,269
                    
                    
                    
                    897
                    
                    
                    
                    106,062687,437
                    
                    
                    
                    332,304
                    
                    
                    
                    1,086,385Operating
      Expenses:General
      and Administrative
                    
                    
                    223,317
                    
                    
                    
                    300,314
                    
                    
                    
                    432,230Research
      and Development
                    
                    
                    0
                    
                    
                    
                    157,739
                    
                    
                    
                    354,138Sales
      and Marketing
                    
                    
                    0
                    
                    
                    
                    1,241
                    
                    
                    
                    152,473223,317
                    
                    
                    
                    459,294
                    
                    
                    
                    938,841Income
      (Loss) from discontinued operations before gain on sale of
      assets
                    
                    
                    464,120
                    
                    
                    
                    (126,990
                    )
                    
                    
                    147,544Gain
      On Sale of Assets
                    
                    
                    515,077
                    
                    
                    
                    0
                    
                    
                    
                    0Gain
      (Loss) from discontinued operations
                    
                    $
                    979,197
                    
                    
                    $
                    (126,990
                    )
                    
                    $
                    147,544




(12) Quarterly Financial Data
(unaudited) (as restated)




The
following summary of the quarterly results of operations for the years ended
December 31, 2007 and 2006 has been restated to reflect separately the results
of continuing and discontinued operations, to coincide with the restatement of
the Company’s consolidated statements of operations described in Note 11
:




Quarter
      Ended2007
                                  
                                  March
      31
                                  
                                  
                                  June
      30
                                  
                                  
                                  September
      30
                                  
                                  
                                  December
      31Discontinued
      OperationsNet
      Revenues
                                  
                                  $
                                  359,684
                                  
                                  
                                  $
                                  360,914
                                  
                                  
                                  $
                                  30,107
                                  
                                  
                                  $
                                  0Gross
      Margin
                                  
                                  $
                                  328,191
                                  
                                  
                                  $
                                  329,602
                                  
                                  
                                  $
                                  29,643
                                  
                                  
                                  
                                  40Gain
      (Loss) from discontinued operations
                                  
                                  $
                                  303,076
                                  
                                  
                                  $
                                  210,872
                                  
                                  
                                  $
                                  492,655
                                  
                                  
                                  $
                                  (27,406
                                  )Loss
      from continuing operations
                                  
                                  $
                                  (69,419
                                  )
                                  
                                  $
                                  (61,104
                                  )
                                  
                                  $
                                  (20,313
                                  )
                                  
                                  $
                                  (21,085
                                  )Net
      Income (Loss)
                                  
                                  $
                                  233,657
                                  
                                  
                                  $
                                  149,768
                                  
                                  
                                  $
                                  472,342
                                  
                                  
                                  $
                                  (48,491
                                  )Basic
      Income (Loss) Per Share
                                  
                                  $
                                  0.00
                                  
                                  
                                  $
                                  0.00
                                  
                                  
                                  $
                                  0.01
                                  
                                  
                                  $
                                  (0.00
                                  )





Quarter
      Ended2006
                                  
                                  March
      31
                                  
                                  
                                  June
      30
                                  
                                  
                                  September
      30
                                  
                                  
                                  December
      31Discontinued
      OperationsNet
      Revenues
                                  
                                  $
                                  100,488
                                  
                                  
                                  $
                                  92,868
                                  
                                  
                                  $
                                  67,744
                                  
                                  
                                  $
                                  72,101Gross
      Margin
                                  
                                  $
                                  90,299
                                  
                                  
                                  $
                                  83,580
                                  
                                  
                                  $
                                  60,970
                                  
                                  
                                  $
                                  97,455Gain
      (Loss) from discontinued operations
                                  
                                  $
                                  (121,483
                                  )
                                  
                                  $
                                  3,618
                                  
                                  
                                  $
                                  (14,431
                                  )
                                  
                                  $
                                  5,306Loss
      from continuing operations
                                  
                                  $
                                  (51,908
                                  )
                                  
                                  $
                                  (66,607
                                  )
                                  
                                  $
                                  (47,367
                                  )
                                  
                                  $
                                  (59,754
                                  )Net
      Income (Loss)
                                  
                                  $
                                  (173,391
                                  )
                                  
                                  $
                                  (62,989
                                  )
                                  
                                  $
                                  (61,798
                                  )
                                  
                                  $
                                  (54,448
                                  )Basic
      (Loss) Per Share
                                  
                                  $
                                  (0.00
                                  )
                                  
                                  $
                                  (0.00
                                  )
                                  
                                  $
                                  (0.00
                                  )
                                  
                                  $
                                  (0.00
                                  )




32


Item 9.Change in and
Disagreements with Accountants on Accounting and Financial
Disclosure




In
February 2007, Farber Hass Hurley McEwen LLP resigned as the independent
auditors for the Company and Ramirez International Financial & Accounting
Services, Inc. was engaged as the independent auditors for the Company. Such
matters were previously disclosed in a From 8-K filed with the Securities and
Exchange Commission with date of earliest event reported of February 8,
2007. The change in independent auditors was not in connection with any
disagreement of the type described in paragraph (a)(1)(iv) of Item 304(a) of
Regulation S-K or any reportable event as described in paragraph (a)(1)(v)
of said Item 304(a).




Item 9A(T).Controls and
Procedures





Management’s Report on Internal Control Over Financial
Reporting





Management
of the Company is responsible for the preparation, integrity and fair
presentation of its published consolidated financial statements. The financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles and, as such, include amounts based on judgments and
estimates made by management. The Company also prepared the other information
included in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.




Management
is also responsible for establishing and maintaining adequate internal control
over financial reporting. The Company’s internal control over financial
reporting includes those policies and procedures that pertain to the Company’s
ability to record, process, summarize and report reliable financial data. The
Company maintains a system of internal control over financial reporting, which
is designed to provide reasonable assurance to the Company’s management and
board of directors regarding the preparation of reliable published financial
statements and safeguarding of the Company’s assets. The system includes a
documented organizational structure and division of responsibility, established
policies and procedures, including a code of conduct to foster a strong ethical
climate, which are communicated throughout the Company, and the careful
selection, training and development of our people.




The
Board of Directors is responsible for the oversight of the Company’s accounting
policies, financial reporting and internal control. The Board of Directors is
responsible for the appointment and compensation of the independent registered
public accounting firm. Corrective actions are being taken to address control
deficiencies and other opportunities for improving the internal control system
as they are identified.




Management
recognizes that there are inherent limitations in the effectiveness of any
system of internal control over financial reporting, including the possibility
of human error and the circumvention or overriding of internal control.
Accordingly, even effective internal control over financial reporting can
provide only reasonable assurance with respect to financial statement
preparation and may not prevent or detect misstatements. Further, because of
changes in conditions, the effectiveness of internal control over financial
reporting may vary over time.




The
Company assessed its internal control system as of December 31, 2007 in relation
to criteria for effective internal control over financial reporting described in
“Internal Control – Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on its assessment, the Company
believes that, as of December 31, 2007, its system of internal control over
financial reporting was ineffective. The Company carried out an evaluation of
the effectiveness of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934.
Due to the Company’s circumstances for the period covered by this annual report,
there was only one remaining part-time employee and a contract bookkeeper that
were responsible for maintenance of the accounting records and other aspects of
internal control. Thus, segregation of duties was limited and there was limited
oversight of the remaining employee. While the contract bookkeeper initiated
disbursements, and while the employee signed the checks, the lack of segregation
of duties, forced by the circumstances, must be deemed a material weakness in
internal controls. Consequently, as of the date of this amended
annual  report, the Chairman of the Board and President, acting as the
principal executive officer and its principal financial officer of the Company,
have concluded that our disclosure controls and procedures as of December 31,
2007 were ineffective.




33


In order
to remediate this material weakness existing at year-end, we have taken the
steps described below during 2008.  After current management gained
control of the Company in April 2008, the Company appointed a Chief Financial
Officer so that the respective duties of the principal executive officer and
principal financial officer (unlike recent prior years) are now segregated, and
there are three functioning directors.  In addition, the Company is no
longer a one-person operation, there now being three people involved in any
Company financial transactions.  Specifically, all bills are sent to the
bookkeeper and the President/CEO authorizes all expenditures, checks are then
drawn by the bookkeeper for payment based on such authorization and, finally,
the CFO actually signs the check and distributes them.  In fact, with
regard to all expenditures, the President/CEO has never signed a check, the CFO can not sign a check
unless the bookkeeper has prepared it, and the bookkeeper has no check signing
authority. With regard to revenues, since the Company has discontinued
operations, its only function being to find a merger partner, revenues are
minimal (currently interest only) and the foregoing internal process, put in
place during 2008, should reflect a substantive improvement over that of recent
prior years, current management believing that it will have remediated the
material weakness existing at year-end 2007.




The
consolidated financial statements have been audited by the independent
registered public accounting firm of Ramirez International Financial &
Accounting Services, Inc., which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders and
the Board of Directors. The report of the Company’s independent registered
public accounting firm is presented within this annual report. This annual
report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




Item 9B.Other
Information




Not
applicable.




PART
III




Item 10.Director,
Executive Officers and Corporate Governance




Directors and
Officers




HENRY R.
MANDELL, age 51. Chairman since February 2000; Chief Executive Officer from
February 2000 through January 6, 2006; Interim Chief Executive Officer
from September 1998 to February 2000; Secretary since
September 1998; Chief Financial Officer from March 1998 through
January 6, 2006; Senior Vice President, Finance from March 1998 until
September 1998. Executive Vice President and Chief Financial Officer of The
Sirena Apparel Group, Inc. from November 1990 to January, 1998. Senior Vice
President of Finance and Administration for Media Home Entertainment, Inc. from
April 1985 to November 1990. Director of Finance and Accounting for Oak
Media Corporation from June 1982 to April 1985. Senior Corporate
Auditor for Twentieth Century Fox Film Corporation from June 1981 to
June 1982. Mr. Mandell was a Senior Auditor for Arthur Young and
Company from August 1978 to June 1981, where he qualified as a
Certified Public Accountant. Mr. Mandell is currently the President and
Chief Operating Officer of several operating entities in the apparel industry
doing business as Ed Hardy and Christian Audigier




CARLO
CIVELLI, age 57. Director since March 1993. Previously, Mr. Civelli
was our VP Finance - Europe from August 1991 to March 1995. Has
extensive experience in financing emerging public companies and has been
instrumental in funding approximately 50 new ventures of the past 20 years
which include Breakwater Resources, Callinan Mines, Granges Exploration,
Namibian Minerals, Napier International Tech, Norst Interactive, DRC Resources,
DMX Digital Music. Managing Director of Clarion Finanz AG, Zurich, Switzerland,
for more than the last ten years. Director and Financial Consultant to Clarion
Finanz AG.




JAY
GOTTLIEB, age 63. Director since May 2007. Mr. Gottlieb has been a
private investor in various companies since 1998. He is involved in analysis and
investment in undervalued special situations and shell corporations. He
presently owns between 5% and 21% of 14 public companies and is a member of the
Board of Directors of Spatializer Audio Laboratories, Inc. From 1992 to 1998 he
was the editor of an investment service that analyzed and published extensive
data on companies planning initial public offerings. From 1977 to 1991
Mr. Gottlieb was the President and Chairman of the Board of The Computer
Factory, Inc., a nationwide organization involved in retail and direct sales,
servicing and leasing of personal computers. From 1969 to 1988 he was President
of National Corporate Sciences, Inc., a registered investment advisory service.
Mr. Gottlieb holds a Bachelor of Arts from New York
University.




34


Section 16(a) Beneficial
Ownership Reporting Compliance




Based
solely upon a review of Forms 3 and 4 furnished to us during the fiscal year
ended December 31, 2007, we are not aware of any director, officer or beneficial
owner of more ten percent (10%) of the Common Stock of the Company who failed to
file on a timely basis any reports required by Section 16(a) of the Securities
Exchange Act of 1934.




Code of Ethics




We
adopted a Code of Ethics that applies to all of our directors, officers and
employees, including our Chief Executive Officer, our Chief Financial Officer
and other senior financial officers. At present, the Company’s only employee is
Henry R. Mandell who is serving as Chairman of the Board and Secretary. The
Company will provide a copy of our code of ethics to any person, free of charge,
upon written request sent to our principal corporate office at 2060 East Avenida
de Los Arboles, # D190, Thousand Oaks, California 91362-1376.




Corporate
Governance




During
the fiscal year ended December 31, 2005, Gilbert Segel served as the sole
member of the Audit Committee until his resignation from the Board of Directors
on and effective as of December 19, 2005, Mr. Segel was considered
independent, as defined in the NASD listing standards, and met the criteria for
independence set forth in the rules promulgated under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). After Mr. Segel’s resignation
in 2005, no members were nominated or appointed to the Audit Committee.
Accordingly, the Audit Committee held no meetings in fiscal 2007. At present,
the entire Board is acting in lieu of the Audit Committee.




Item 11.Executive
Compensation




Compensation Discussion and
Analysis




Henry
Mandell is the sole employee of the Company and serves as both the Chairman of
the Board and the Secretary of the Company. On December 19, 2005, Henry
Mandell gave notice that he was resigning from all positions held by him with
the Company, other than as a director, Chairman of the Board and Secretary
thereof, effective as of January 6, 2006. Effective as of January 6,
2006, the Company entered into an agreement with Mr. Mandell to continue
his employment with the Company as Chairman and Secretary. Under the terms of
that agreement, Mr. Mandell continues to provide certain specified services
to the Company, which services may be provided in person, by telephone, by email
or otherwise as Mr. Mandell sees fit, such services to be rendered at such
hours and/or on weekends as he may determine. Those services include without
limitation supervising the preparation of the Company’s financial statements and
records, reviewing and authorizing day to day disbursements, supervising all of
the Company’s licensing and business activities, handling stockholder
communications and serving as the contact person with the Company’s financial
advisor. He is permitted to accept, and has accepted, other employment during
the term of the agreement.




As an
incentive for Mr. Mandell to continue in the employ of the Company during
the term of the agreement, and in consideration for foregoing certain severance
pay to which he otherwise may have been entitled, the Company agreed to pay him
a lump sum payment of $35,733.33, which amount was paid concurrently with the
execution of the agreement. He is entitled to a monthly salary of $5,000 during
the term of the agreement, a bonus of $10,000 for his assistance in the
preparation of the Company’s Form 10-K of the Company for the fiscal year ended
December 31, 2005 and a separate bonus of $5,000 each for his assistance on
each Form 10-Q upon which he assists for any quarterly period ending after
December 31, 2005 and for each proxy statement. Additionally, should the
Company be sold or enter into certain specified extraordinary transactions
during the term of the agreement, Mr. Mandell is entitled to an additional
bonus equal to 3.5% of the total consideration, not to exceed $150,000. During
the term of the agreement, he is also entitled to employee benefits and
reimbursement of reasonable, actual and necessary business expenses. These
amounts were determined by Mr. Mandell and Mr. Civelli based on the amount
of time expected to be expended by Mr. Mandell in pursuing the winding up
of the Company’s business operations and the financial status of the
Company.




35


The
agreement contains certain non-competition, non-solicitation and confidentiality
provisions. The agreement terminated certain provisions of Mr. Mandell’s
then existing extended employment agreement (including without limitation the
compensation and severance pay obligations thereunder) but continued certain
other provisions thereof (such as the proprietary information, confidentiality
and other similar provisions thereunder).




The
agreement was scheduled to terminate by its terms upon the earlier of the
consummation of certain extraordinary transactions, the expiration, termination
or non-renewal of the directors’ and officers’ insurance policy of the Company
under which Mr. Mandell is covered as a director and officer of the Company
and June 30, 2006. The agreement was extended through the earlier of the
date of dissolution of the Company and June 30, 2007.The Company may terminate
Mr. Mandell’s employment at any time during the term and Mr. Mandell
may voluntarily resign his employment at any time during such term.




The
monthly income was agreed to be paid in order that the Company would have an
employee to oversee the sale of the assets of the Company, manage remaining
business relationships and the supervise the dissolution of the Company or any
other transaction in connection with the wind down of the business operations of
the Company. The additional sums for preparation of the Form 10-Qs and Form
10-Ks were to compensate Mr. Mandell for the additional responsibilities to
be borne by him in connection therewith. The proposed bonus was intended to
incentivize Mr. Mandell to continue the efforts to sell the Company and to
maximize value for the stockholders. Based on the aggregate price obtained in
the sale of asset transaction, Mr. Mandell was paid a bonus of $35,000 in
fiscal 2007.




The
Company is trying to minimize its cash outflow, maximize value for the
stockholders and wind down its current business operations. As such, it is no
longer trying to incentivize employees with long-term compensation plans or
stock option grants or other forms of equity ownership. Although the Company
does not intend to increase Mr. Mandell’s compensation package, any such
determination would be made by the Board, consisting of Messrs. Mandell,
Civelli and Gottlieb.




Officer
Compensation




The
following table sets forth information concerning the compensation of
Mr. Mandell, the only executive officer and employee of the Company during
fiscal 2007:





SUMMARY
      COMPENSATION TABLEAll
      OtherOptions
                    
                    
                    
                    
                    
                    CompensationName
      and Principal Position
                    
                    Year
                    
                    Salary($)
                    
                    Awards($)
                    
                    Bonus
                    
                    ($)
                    
                    Total
      ($)Henry
      R. Mandell, Chairman and
                    
                    
                    2007
                    
                    
                    $
                    95,000
                    
                    
                    
                    
                    
                    
                    
                    35,000
                    (1)
                    
                    $
                    20,000
                    (2)
                    
                    $
                    150,000Secretary
                    
                    
                    2006
                    
                    
                    $
                    90,000
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    $
                    19,000
                    (2)
                    
                    $
                    109,0002005
                    
                    
                    $
                    214,200
                    
                    
                    
                    8,000
                    
                    
                    
                    
                    
                    
                    $
                    16,000
                    
                    
                    $
                    238,200





(1)
              
              Includes
      contractual Bonus on sale of assets of 3.5% of selling price
      ($35,000)(2)
              
              Cost
      of health insurance premiums




For a
narrative description of Mr. Mandell’s employment agreement, see the
description thereof set forth under “Compensation Discussion and Analysis”
above.


Mr. Mandell
did not receive any equity incentive plan awards during the fiscal year ended
December 31, 2007. The following table sets forth information concerning
unexercised options held by Mr. Mandell as of December 31, 2007. All
options held by Mr. Mandell are fully vested.





OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-ENDOption
      AwardsNumber
      of SecuritiesUnderlyingUnexercised
                                                                                                                                Options(#)
      Exercisable
                                                                                                                              
                                                                                                                              Number
      of  SecuritiesUnderlyingUnexercised
                                                                                                                                Options(#)Unexercisable
                                                                                                                              
                                                                                                                              
                                                                                                                              Weighted
      AverageOption
      Exercise
                                                                                                                                Price($)Option
      ExpirationDate500,000
                                                                                                                              
                                                                                                                              
                                                                                                                              500,000
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              0.10
                                                                                                                              
                                                                                                                              
                                                                                                                              2/201050,000
                                                                                                                              
                                                                                                                              
                                                                                                                              50,000
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              0.09
                                                                                                                              
                                                                                                                              
                                                                                                                              06/2009350,000
                                                                                                                              
                                                                                                                              
                                                                                                                              350,000
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              0.05
                                                                                                                              
                                                                                                                              
                                                                                                                              11/200850,000
                                                                                                                              
                                                                                                                              
                                                                                                                              50,000
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              0.07
                                                                                                                              
                                                                                                                              
                                                                                                                              06/2008




36


Mr. Mandell
did not exercise any options during the fiscal year ended December 31, 2007
and all options held by Mr. Mandell were fully vested prior to
January 1, 2007.




Director
Compensation




None of
the Company’s directors received any cash compensation, stock option awards or
other arrangements for services provided in their capacity as directors during
the fiscal year ended December 31, 2007.




Item 12.Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters




The
following table sets forth information (except as otherwise indicated by
footnote) as to shares of common stock owned as of March 7, 2008 or which
can be acquired within sixty days of March 7, 2008 by (i) each person
known by management to beneficially own more than five percent (5%) of
Spatializer’s outstanding common stock, (ii) each of Spatializer’s
directors, and officers, and (iii) all executive officers and directors as
a group. On March 12, 2008, there were 48,763,383 shares of common stock
outstanding.




AMOUNT
      ANDNATURE
      OFBENEFICIAL
                
                PERCENT
      OFNAME
      OF BENEFICIAL OWNER
                
                OWNERSHIP
                
                CLASSJay
      Gottlieb(1)(2)
                
                
                13,605,615
                
                
                
                20.9
                %Greggory
      A. Schneider(1)(3)
                
                
                6,497,500
                
                
                
                10.0
                %Carlo
      Civelli(1)(4)
                
                
                5,763,780
                
                
                
                8.6
                %Henry
      R. Mandell(1)(5)
                
                
                1,662,875
                
                
                
                2.6
                %All
      directors and executive officers as a group (3
      persons)(1)(4)(5)
                
                
                21,032,270
                
                
                
                32.1
                %





(1)
            
            The
      persons named in the table have sole voting and investment power with
      respect to all shares shown to be beneficially owned by them, subject to
      community property laws, where applicable, and the information contained
      in the footnotes to this table.(2)
            
            Based
      on the Schedule 13D filed by Mr. Gottlieb with the Securities
      and Exchange Commission on April 30, 2007. Mr. Gottlieb’s
      address is 27 Misty Brook Lane, New Fairfield, Connecticut
      06812.(3)
            
            Based
      on the Schedule 13D filed by Mr. Schneider with the Securities
      and Exchange Commission on April 30, 2007. Mr. Schneider’s
      address is 10445 Wilshire Blvd., #1806, Los Angeles, California
      90024.(4)
            
            Carlo
      Civelli controls Clarion Finanz AG, a non-reporting investment company.
      Holdings of Mr. Civelli and Clarion Finanz AG are combined, and
      include all shares of Spatializer held of record or beneficially by them,
      and all additional shares over which he either currently exercises full or
      partial control, without duplication through attribution. Includes 250,000
      options to acquire common stock held by Mr. Civelli, all of which are
      vested and currently exercisable. Mr. Civelli’s address is
      Gerberstrasse 5 8023, Zurich, Switzerland.(5)
            
            Includes
      950,000 options held by Mr. Mandell, all of which are vested and are
      exercisable at various prices from $0.05 to $0.30. This includes options
      granted on February 21, 2005, and exercisable at $0.10 per share,
      relating to the extension of Mr. Mandell’s employment agreement in
      2005. The options have varying expiration dates of which the final such
      expiration date is February 21,
2010.




37


During
fiscal 2007, the Company concurrently sold to Mr. Gottlieb 8,739,115
shares, to Mr. Schneider 4,272,500 shares and to another third party 3,225,500
shares of Common Stock ,all upon similar terms and conditions. Such persons have
disclaimed being a “group” for Schedule 13D reporting purposes. The shares
so acquired, together with shares previously acquired by certain of such persons
in the open market, represent, in the aggregate, more than 35% of the issued and
outstanding shares of the Company’s Common Stock.


The
following table sets forth certain information relating to the equity
compensation plans of the Company as of December 31, 2007:





Equity
      Compensation Plan InformationNumber
      of securities
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Number
      of securitiesremaining available forto
      be issued
                                                                
                                                                
                                                                Weighted-average
                                                                
                                                                
                                                                future
      issuance underupon
      exercise of
                                                                
                                                                
                                                                exercise
      price of
                                                                
                                                                
                                                                equity
      compensation plansoutstanding
      options,
                                                                
                                                                
                                                                outstanding
      options,
                                                                
                                                                
                                                                (excluding
      securitiesPlan
      category
                                                                
                                                                warrants
      and rights
                                                                
                                                                
                                                                warrants
      and rights
                                                                
                                                                
                                                                reflected
      in column (a))(a)
                                                                
                                                                
                                                                (b)
                                                                
                                                                
                                                                (c)Equity
      compensation plans approved by security holders
                                                                
                                                                
                                                                1,150,000
                                                                (1
                                                                )
                                                                
                                                                $
                                                                0.07
                                                                (1
                                                                )
                                                                
                                                                
                                                                0Equity
      compensation plans not approved by security holders
                                                                
                                                                
                                                                0
                                                                
                                                                
                                                                
                                                                
                                                                0
                                                                
                                                                
                                                                
                                                                
                                                                0Total
                                                                
                                                                
                                                                1,150,000
                                                                
                                                                
                                                                
                                                                $
                                                                0.07
                                                                
                                                                
                                                                
                                                                
                                                                0




(1)
            
            Represents
      options to acquire the Company’s Common Stock under the Company’s 1995
      Stock Option Plan and 1996 Incentive Plan approved by the Company’s
      stockholders in 1995 and 1996, respectively. The 1995 Plan authorizes
      grants of options to purchase authorized but unissued common stock in an
      amount of up to 10% of total common shares outstanding at each calendar
      quarter or 6,500,000 as at December 31, 2007. Stock options are
      granted with an exercise price equal to the stock’s fair market value at
      the date of grant. Stock options have five-year terms and vest and become
      fully exercisable as determined by the committee on date of grant. The
      1996 Plan supplements the 1995 Plan by allowing for stock appreciation,
      incentive shares and similar accruals aggregating not more than the
      equivalent of 500,000 shares and the regrant of any Performance Shares
      that become available for regrant. See Note 2. Since the Plan expired
      in 2005, there can be no new issues of
  options.




Item 13.Certain
Relationships and Related Transactions, and Director
Independence




The
Company and Henry R. Mandell, the Chairman and Secretary of the Company and the
Company’s sole employee during the period covered by this annual request, are
parties to an employment agreement entered into in January 2006. Under the
terms of that agreement, Mr. Mandell was paid $35,000 relating to the sale
of assets of the Company consummated in July 2007.




As the
Company for the period covered by this amended annual report has only one
employee and three directors, none of whom would be considered “independent”,
the Company has no formal policy in place as to the procedure for approving any
transactions between the Company and its related persons (including officers,
directors and stockholders). In the event that the Company should undertake any
transaction that would require disclosure under this section, the Company may
consider, in light of all then existing facts and circumstances, whether
stockholder approval thereof should be sought. The Board did not seek approval
or ratification of the employment agreement with Mr. Mandell based in large
part on the circumstances of the Company at the time such agreement was
executed.




The
Company for the period covered by this amended annual report does not currently
have any director that would be considered independent under the definition
thereof underany national
securities exchange or any inter-dealer quotation system




38


Item 14.Principal
Accountant Fees and Services




The
following summarizes the fees paid to Ramirez International Financial &
Accounting Services, Inc. the principal accountant for the audit of the
Company’s annual financial statements for the fiscal years ended
December 31, 2006 and 2007:




December
      31,2006
                                                          
                                                          
                                                          2007Audit
      Fees (1)
                                                          
                                                          $
                                                          35,000
                                                          
                                                          
                                                          $
                                                          20,000Audit
      Related Fees (3)
                                                          
                                                          
                                                          8,400
                                                          
                                                          
                                                          
                                                          17,500Tax
      Fees (2)
                                                          
                                                          
                                                          8,900
                                                          
                                                          
                                                          
                                                          8,000All
      Other Fees
                                                          
                                                          
                                                          8,400
                                                          
                                                          
                                                          
                                                          —Total
      Fees
                                                          
                                                          $
                                                          52,300
                                                          
                                                          
                                                          $
                                                          45,500




(1)
                                
                                Audit
      Fees are fees for professional services rendered for the annual audit, the
      reviews of the Company’s financial statements included in Form 10-Qs and
      services normally provided in connection with statutory and regulatory
      filings. These fees were paid to Ramirez International Financial and
      Accounting Services, Inc.(2)
                                
                                Tax
      Fees are fees for professional services rendered for tax compliance, tax
      planning and tax advice, paid to Farber Hass Hurley
  LLP.(3)
                                
                                Relates
      to review of
Form 10-Qs.




Although
the Audit Committee had not adopted policies and procedures for the pre-approval
of audit and non-audit services rendered by the Company’s independent auditors,
the charter of the Audit Committee requires that the Audit Committee pre-approve
the engagement of the auditor to perform all proposed audit, review and attest
services, as well as engagements to perform any proposed permissible non-audit
services. The pre-approval of services was delegated to the Company’s Chief
Financial Officer with the decision to be reported to the Audit Committee and
ratified at its next scheduled meeting. One hundred percent of the auditors’
fees were pre-approved by the Audit Committee during 2005. Since 2006, the Audit
Committee had no members nor a Chief Financial Officer. Thus, the Company’s
Board of Directors has and will be responsible for serving in the capacity of
the Audit Committee and approving audit and non-audit services to be rendered by
the Company’s independent auditor until such time, if any, as members may be
appointed to the Audit Committee.




PART
IV




Item 15.Exhibits and
Financial Statement Schedules




(a) Financial
Statements




See Item 8.




(b) Exhibits




The following Exhibits are filed as part of, or incorporated by reference into,
this Report:




39


ExhibitNumber
                
                Description2.1
                
                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.)2.2
                
                Asset
      Purchase Agreement dated as of September 18, 2006 among the Company,
      Desper Products, Inc., DTS, Inc. and DTS-BVI (incorporated by reference to
      Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for
      the quarter ended September 30, 2006.)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 Agreement (Incorporated by reference to Exhibit 10.3
      to the Company’s Annual Report on Form 10-K for the period ended
      December 31, 2005.)10.4
                
                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, 2005, between the Company and Henry
      Mandell, as amended. (Incorporated by reference to Exhibit 10.5 to
      the Company’s Annual Report on Form 10-K for the period ended
      December 31, 2005.)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
      Exhibit 10.6 to the Company’s Annual Report on Form 10-K, for
      the period ended December 31, 2005.)10.7
                
                Lease
      for Office and Research Center in San Jose, CA. (incorporated by reference
      to )10.8
                
                Lease
      for Executive Office in Westlake Village, CA. (incorporated by reference
      to)10.9
                
                License
      Agreement between Spatializer Audio Laboratories, Inc., Desper Products,
      Inc. and Samsung Electronics, effective August 22, 2005.
      (Incorporated by reference to the Company’s Quarterly Report on
      Form 10-Q for the period ended September 30,
    2005.)10.10
                
                Employment
      Agreement dated January 6, 2006, between the Company and Henry
      Mandell. (Incorporated by reference to Exhibit 10.10 to the Company’s
      Annual Report on Form 10-K for the period ended December 31,
      2006.)10.12
                
                Management’s
      Report on Internal Control Over Financial Reporting10.11
                
                Amendment
      to Employment Agreement between the Company and Henry
    Mandell21.1
                
                Subsidiaries
      of the Company23.1
                
                Consent
      of Independent Registered Public Accounting Firm23.2
                
                Consent
      of Independent Registered Public Accounting Firm31.1
                
                Certificate
      pursuant to Section 302 of the Sarbanes-Oxley Act of
    200232.1
                
                Certificate
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (Certification will not be deemed “filed” for purposes of Section 18
      of the Securities Exchange Act of 1934, as
  amended)







40




SIGNATURES


Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





Dated:
May 6, 2009


SPATIALIZER
      AUDIO LABORATORIES, INC.
              
              (Registrant)/s/ Jay
      GottliebJay
      GottliebChairman, President,
      Secretary, Treasurer and Principal
      Executive Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Signature
                    
                    Title
                    
                    Date/s/
      Jay GottliebJay
      Gottlieb
                    
                    Director,
      Chairman, Secretary, Treasurer  and Principal Executive
      Officer
                    
                    May
      6, 2009/s
      Greggory SchneiderGreggory
      Schneider
                    
                    Director,
      Chief Financial and Principal Financial Officer
                    
                    May
      6, 2009/s/ Michael PearceMichael
      Pearce
                    
                    Director
                    
                    May
      6, 2009






41




EXHIBIT
21.1


SUBSIDIARY OF THE
COMPANY




Name
      of Subsidiary
            
            Percentage
      of Ownership
            
            State
      of IncorporationDesper
      Products, Inc.
            
            100%
            
            California







42




EXHIBIT
23.1


CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM


To the Board of Directors of
Spatializer Audio Laboratories, Inc.:





We
consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 333-27453 and 333-41170) of Spatializer Audio Laboratories,
Inc. of our report dated March 26, 2008 (except for Note 11 as to which the
date is April 15, 2009), related to the consolidated balance sheets of
Spatializer Audio Laboratories, Inc. and subsidiaries as of December 31,
2007 and 2006 and the related consolidated statements of income, stockholders’
equity and cash flows for the years then ended, which report appears in the
annual report on Form 10-K/A of Spatializer Audio Laboratories, Inc. for the
year ended December 31, 2007.





/s/
RAMIREZ INTERNATIONAL


Financial
& Accounting Services, Inc.


Irvine,
California


April 15,
2009






43





EXHIBIT
23.2


CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM


To the Board of Directors of
Spatializer Audio Laboratories, Inc.:





We
consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 333-27453 and 333-41170) of Spatializer Audio Laboratories,
Inc. of our report dated February 24, 2006 (except for Note 11 as to which the
date is April 15, 2009), related to the consolidated statements of income,
stockholders’ equity and cash flows for the year ended December 31, 2005 of
Spatializer Audio Laboratories, Inc. which report appears in the annual report
on Form 10-K/A of Spatializer Audio Laboratories, Inc. for the year ended
December 31, 2007.





/s/
FARBER HASS HURLEY LLP


(formerly
Farber Hass Hurley & McEwen LLP)


Camarillo,
California


April 15,
2009





44




EXHIBIT
31.1


CERTIFICATIONS





I, Jay
Gottlieb, certify that:





1.  I have
reviewed this annual report on Form 10-K/A of Spatializer Audio Laboratories,
Inc. (“registrant”) for the period ended December 31, 2007;


2.  Based on my
knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;


3.  Based on my
knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;


4.  The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:


a)  Designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;


b)  Designed such
internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles;


c)  Evaluated the
effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and


d)  Disclosed in
this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.


5.  The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):


a)  All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and


b)  Any fraud,
whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial
reporting.






Date:
      May 6, 2009/s/ Jay GottliebJay
      GottliebChairman
      of the Board, Secretary, Treasurer and Principal Executive
      Officer






45




EXHIBIT 31.2


CERTIFICATIONS





I,
Greggory Schneider, certify that:





1.  I have
reviewed this annual report on Form 10-K/A of Spatializer Audio Laboratories,
Inc. (“registrant”) for the period ended December 31, 2007;


2.  Based on my
knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;


3.  Based on my
knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;


4.  The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:


a)  Designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;


b)  Designed such
internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles;


c)  Evaluated the
effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and


d)  Disclosed in
this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.


5.  The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):


a)  All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and


b)  Any fraud,
whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial
reporting.





Date:
      May 6, 2009/s/ Greggory SchneiderGreggory
      SchneiderDirector,
      Chief Financial and
              Principal
      Financial Officer






46




EXHIBIT
32.1


CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS
(a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
CODE)





Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of Title 18, United States Code), the
undersigned officer of Spatializer Audio Laboratories, Inc. (the “Company”)
hereby certifies with respect to the Annual Report on Form 10-K/A of the Company
for the year ended December 31, 2007 as filed with the Securities and
Exchange Commission (the “Report”) that to his knowledge:





1)
            
            The
      Report fully complies with the requirements of Section 13(a) or 15(d) of
      the Securities and Exchange Act of 1934; and2)
            
            The
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.Date:
      May 6, 2009/s/ Jay
      GottliebJay
      GottliebChairman
      of the Board, President, Secretary, Treasurer
              and
      Principal Executive Officer





47




EXHIBIT 32.2


CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS
(a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
CODE)





Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of Title 18, United States Code), the
undersigned officer of Spatializer Audio Laboratories, Inc. (the “Company”)
hereby certifies with respect to the Annual Report on Form 10-K/A of the Company
for the year ended December 31, 2007 as filed with the Securities and
Exchange Commission (the “Report”) that to his knowledge:





1)
            
            The
      Report fully complies with the requirements of Section 13(a) or 15(d) of
      the Securities and Exchange Act of 1934; and2)
            
            The
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.Date:
      May 6, 2009/s/ Greggory SchneiderGreggory
      SchneiderDirector,
      Chief Financial and
              Principal
      Financial Officer






48