UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(MARK ONE)

Mark One)

Commission File Number:00-26460000-26460

SPATIALIZER AUDIO LABORATORIES, INC.

2625 TOWNSGATE ROAD, SUITETownsgate Road, Suite 330
WESTLAKE VILLAGE, CALIFORNIAWestlake Village, California 91361

(Address of principal executive offices)

1754 TECHNOLOGY DRIVE, SUITETechnology Drive, Suite 125
SAN JOSE, CALIFORNIASan Jose, California 95110

(Address of principal corporate offices)

TELEPHONE NUMBER:Telephone Number: (408) 453-4180

(Registrant’s telephone number, including area code)

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:

YESYesü                                                                                               Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

YesoNoü

As of July 29,October 28, 2004, there were 46,975,365 shares of the Registrant’s Common Stock outstanding.

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

SPATIALIZER AUDIO LABORATORIES, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) Nature of Business

     Spatializer Audio Laboratories, Inc. and subsidiaries (the “Company”) is in the business of developing and licensing technology. The CompanyCompany’s sales, research and subsidiary administration are conducted out of facilities in San Jose, California.

     The Company’s wholly-owned subsidiary, Desper Products, Inc. (“DPI”), is 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 this subsidiary.

     The foregoing interim financial information is unaudited and has been prepared from the books and records of the Company. The financial information reflects all adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows of the Company in conformity with generally accepted accounting principles. All such adjustments were of a normal recurring nature for interim financial reporting. Operating results for the three and sixnine months ended JuneSeptember 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Accordingly, your attention is directed to footnote disclosures found in the December 31, 2003 Annual Report and particularly to Note 1, which includes a summary of significant accounting policies.

(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.

     Deferred Revenue —The Company receives License Fee advances from certain customers in accordance with contract terms. The Company does not require advances from all customers. Advances are negotiated on a per contract basis. Cash received in advance of revenue earned from a contract is recorded as deferred revenue until the related contract revenue is earned under the Company’s revenue recognition policy.

Concentration of Credit Risk —Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents and trade accounts receivable. The Company places its temporary cash investments in certificates of deposit in excess of FDIC insurance limits, principally at CitiBank FSB. At JuneSeptember 30, 2004 substantially all cash and cash equivalents were on deposit at two financial institutions.

     At JuneSeptember 30, 2004, threefour major customers, not presented in order of importance, each accounted for 10% or more of our total accounts receivable: Matsushita, Toshiba, InterVideo

and Sharp, each of whom accounted for greater than 10% of our total 2004 accounts receivable. One

During the three months ended JuneSeptember 30, 2004, no options to purchase 200,000 shares of the Company’s common stock were granted to board members for board service compensation and options to purchase 100,000 shares granted to board members in 1999 had expired.granted.

     Impairment of Long-Lived Assets and Assets to be Disposed of- The Company adopted the provisions of SFAS No. 121,1,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,on January 1, 1996.2002. 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

     Segment Reporting- The Financial Accounting Standards Board issued Statement No. 131,Disclosures about Segments of an Enterprise and Related Information(“SFAS No. 131”), in June 1997. SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. It replaces the “industry segment” concept of SFAS No. 14,Financial Reporting for Segments of a Business Enterprise,with a “management approach” concept as to basis for identifying reportable segments. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company adopted SFAS 131 in December 1997. MDT is considered a discontinued operation as of September 1998. As of JuneSeptember 30, 2004, the Company has only one operating segment, DPI, the Company’s Audio Signal Processing 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- The FASB recently issued the following statements: FASB 146 — Accounting for Costs Associated with Exit or Disposal Activities, FASB 147 — Acquisitions of Certain Financial Institutions, FASB 148 - - Accounting for

(4) Intangible Assets

     Intangible assets, as of December 31, 2003 and JuneSeptember 30, 2004 consist of the following:

(7) Shareholders’ Equity

     During the quarter ended JuneSeptember 30, 2004, no shares were issued, cancelled or converted. Shares were cancelled as follows:

release from performance criteria to a time-based criterion, the Company recorded as compensation expense the excess of the fair market value of the 5,776,700 performance

At JuneSeptember 30, 2004, the number of options exercisable was 3,135,000 and the weighted-average exercise price of those options was $0.178.

Item 2.2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, the audited consolidated financial statements and the notes thereto included in the Form 10-K and the unaudited interim consolidated financial statements and notes thereto included in this report.

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 that enables investors to see the company through the eyes of management;
	•		to enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and
	•		to provide information about the quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.

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

	•		An understanding of our operating environment
	•		An outline of critical accounting policies
	•		A review of the key components of the financial statements and our cash position and capital resources
	•		Disclosure on our internal controls and procedures

Operating Environment

     We operate in a very competitive business environment. This environment impacts us in the following ways, further discussed in greater detail underRisk Factors:

	§•		Our Operating Results Fluctuate and If We Are Unable to Achieve or Sustain Profitability in the Future or Obtain Future Financing Our Business Operations May Fail.
	§•		Because The Market In Which We Operate Is Highly Competitive, We Face Significant Pricing Pressure and Competition.

	§•		We Rely on the Schedules and Cooperation of Chip Makers or Other Third Parties to Deliver Our Technology in Consumer Products. These Third parties Have Their Own Priorities and Alliances that May Delay or Thwart our Sales Efforts to Potential Customers.
	§•		If New Product Development Is Delayed, We Will Experience Delays In Revenues And Competitive Products May Reach The Market Before Our Products.
	§•		If We Are Unable To Attract And Retain Our Key Personnel, We May Not Be Able To Successfully Operate Our Business.

The PCfluid, competitive and dynamic nature of the market continues a degree of uncertainty to our operations. The operations of our business, and those of our competitors, may also be impacted by the continued trend in the semiconductor industry to offer free, but minimal audio solutions to certain product classes to maintain and attract market share. This challenges our ability to convert business opportunities to licensing agreements in those segments that allow us to maintain or rapidly increase revenue. As a result, we must develop and license our products and software solutions in a market that treats some audio products, including those of our competitors, on a commodity basis in those cases where the OEM product is considered a commodity product. While our software applications deliver what we and most manufacturers who listen to it believe is a significantly superior audio experience, the competitive market forces that pressure manufacturers to reduce their costs may create some resistance to new technology adoption or use. In addition, certain of our competitors appear to be pursuing a business plan that disregards commercially reasonable pricing to achieve a larger market penetration even if the penetration will not provide for viable margins or returns. We have responded by offering additional products targeted to each price/quality segment of the market and continue to aggressively pursue new opportunities in emerging product categories such as cellular phones and notebook computers that complements our existing core business. In addition, our products have been positioned as a means for manufacturers to save money while delivering an enhanced audio experience. Nevertheless, these market conditions and competitive forces make it more challenging for us, and our rational commercial competitors, to enhance their operating results.

The personal computer (PC) and consumer electronics markets are under intense pressure, primarily from retailers, to reduce selling prices, with resultant pressure to reduce costs. Cost reductions are driven by lower cost sourcing, often in China, design simplification and reduction in features. While we present a value proposition that stresses the cost reducing capabilities of our audio solutions through improved performance from lower cost components as well as product differentiation that Spatializer technology can deliver, all such features are closely scrutinized by potential customers’ product marketing and engineering. This makes it more challenging to secure new design wins, particularly in product categories that have become commoditized, such as became the case with DVD players. It also may result in the elimination of features, including ours, if cost is of paramount importance. When this occurs, we receive very short notice and revenues from such an account will typically begin a steep decline in the subsequent quarter, resulting in period-to-period fluctuation. Our response has been to strengthen our value proposition, more aggressively price and feature enrich our products and enter new segments, such as cell phones, with different competitive pressure.

Manufacturer’s design-in cycles for our technology range from four to twelve months, from

the decision to adopt our technology to actual cash flow.flow to us. These schedules are also prone to delays at the manufacturer level and in some cases, manufacturer’s new products may be cancelled due to market testing or resource allocation. Since these events are beyond our control, it is difficult to absolutely project when new deals will begin generating revenues or if signed deals will generate financial results. For this reason, we do not typically announce new deals until the target product is being introduced.

Spatializer does not develop or market semiconductors. That is why we carry no inventory or have order backlogs that typically are good indicators of near term performance. Rather, we develop audio algorithms that are embedded on third party processors or semiconductors used by our customers. While our algorithms are implemented on a wide array of processors, often times a customer uses a processor where there is no such implementation, or where a competing solution has been implemented. In this case, our customers request that our algorithm be implemented. While these requests are typically honored, processor manufacturers must schedule such implementation as their resources or corporate strategies allow. Therefore, the supply-chain is often quite long and complicated, which potentially can result in delays or deadlines that may not always coincide with our customer’s requirements and which are beyond the control of our company.

Therefore, when reviewing the operating results or drawing conclusions with regard to future performance, these competitive forces and uncertainties must be taken into consideration. Without absolute long-term visibility, it is difficult to draw such conclusions in absolute terms. Further, the dynamic nature of the business environment creates the potential for both

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 have identified three accounting policies that we believe are critical to an understanding of our financial statements. These are important accounting policies that require management’s most difficult, subjective judgments.

     The first critical accounting policy relates to revenue recognition. We recognize 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 second critical accounting policy relates to research and development expenses. We expense 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) is expensed as incurred and included in Research and Development expenses. Such algorithms are 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 intangible assets. Our intangible assets consist primarily of patents. We capitalize all costs directly attributable to patents, consisting primarily of legal and filing fees, and amortize such costs over the remaining life of the patent (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.

     Audit Committee

     This committee is directed to review the scope, cost and results of the independent audit of our books and records, the results of the annual audit with management and the internal auditors and the adequacy of our accounting, financial, and operating controls; to recommend annually to the Board of Directors the selection of the independent auditors; to approve proposals made by our independent auditors for consulting work; and to report to the Board of Directors, when so requested, on any accounting of financial matters.

Additionally, following the completion of the audit, the committee meets with the independent accountants to review with the independent accountants any problems or difficulties the accountants may have encountered in connection with the audit, the adequacy of the internal accounting controls, the financial and accounting personnel and any management letter provided by the independent accountants and the Company’s response to that letter. The committee also discusses with the independent accountants any matters that

Gross Profit

     Gross profit for the three months ended JuneSeptember 30, 2004 was $217,000 (92%$179,000 (87% of revenue) compared to gross profit of $228,000 (91%$306,000 (90% of revenue) in the comparable period last year, a decrease of 5%42%. Gross profit for the sixnine months ended JuneSeptember 30, 2004 were $370,000 (91%$550,000 (90% of revenue) compared to $525,000$831,000 (90% of revenue) in the comparable period last year. Gross profit in the three and six-monthnine-month periods decreased primarily due to the decrease in revenue. Gross margins held relatively constant.margin decline in the current three month period resulted from a portion of royalty paid and expensed on deferred revenue.

Operating Expenses

     Operating expenses in the three months ended JuneSeptember 30, 2004 were $334,000 (142%$261,000 (127% of revenue) compared to operating expenses of $438,000 (175%$409,000 (120% of revenue) in the comparable period last year, a decrease of 24%36%. Operating expenses in the sixnine months ended JuneSeptember 30, 2004 were $610,000 (150%$871,000 (143% of revenue) compared to $805,000 (138%$1,214,000 (131% of revenue) in the comparable six-monthnine-month period last year. The decrease in operating expenses for the three and sixnine months ended JuneSeptember 30, 2004 resulted primarily from reductions in occupancy and headcount effected in the fourth quarter of 2003.

General and Administrative

     General and administrative expenses in the three months ended JuneSeptember 30, 2004 were $206,000 (88%$155,000 (76% of revenue) compared to general and administrative expenses of $236,000 (94%$193,000 (57% of revenue) in the comparable period last year, a decrease of 13%20%. General and administrative expenses in the six monthsnine-months ended JuneSeptember 30, 2004 were $373,000 (92%$528,000 (86% of revenue) compared to $393,000 (67%$586,000 (63% of revenue) in the comparable six monthnine-month period last year. The decrease in general and administrative expense for the three and sixnine month periods resulted primarily from reductions in occupancy and support services, partially offset by higher legal and accounting expenses arising from new regulatory public company requirements and higher executive overseas travel by the chief executive to secure additional contracts with manufacturers and to maintain existing relationships with our customers.

Research and Development

     Research and Development expenses in the three months ended JuneSeptember 30, 2004 were $106,000 (45%$94,000 (46% of revenue) compared to research and development expenses of $102,000 (41% of revenue) in the comparable period last year, an increase of 4%. Research and Development expenses for the six months ended June 30, 2004 were $202,000 (50% of revenue) compared to $211,000$122,000 (36% of revenue) in the comparable six month period last year. The increase in three month research and development expenses resulted from greater use of outside specialist engineering consulting compared with the prior period, partially offset by lower occupancy expenses. The decrease in such expenses in the six month period resulted primarily from lower cost Silicon Valley facilities, partially offset by greater use of outside specialist engineering consulting compared with the prior period.

Sales and Marketing

Sales and Marketing expenses in the three months ended June 30, 2004 were $22,000 (9% of revenue) compared to sales and marketing expenses of $100,000 (40% of revenue) in the comparable period last year, a decrease of 78%23%. Research and Development expenses for the nine months ended September 30, 2004 were $296,000 (48% of revenue) compared to $333,000 (36% of revenue) in the comparable nine-month period last year. The decrease in three and nine-month research and development expenses resulted from lower cost Silicon Valley facilities, and greater use of lower cost off-shore applications engineering, rather than domestic contracting compared with the prior period.

Sales and Marketing

     Sales and Marketing expenses forin the three months ended September 30, 2004 were $11,000 (5% of revenue) compared to sales and marketing expenses of $93,000 (27% of

revenue) in the sixcomparable period last year, a decrease of 88%. Sales and Marketing expenses for the nine months ended JuneSeptember 30, 2004 were $35,000 (9%$47,000 (8% of revenue) compared to $202,000 (35%$295,000 (32% of revenue) in the comparable six monthnine-month period last year. The decrease in sales and marketing expense in the three and six monthnine-month periods resulted primarily from the elimination of a senior sales executive position ($50,000/$100,000)150,000), transition of Japan sales to a commission only structure ($20,000/$40,000),60,000 and lower cost Silicon Valley facilities ($15,000/12,000/$30,000), partially offset by and higher marketing support staff expense ($7,000/$3,000) as compared with the comparable period last year.40,000).

Net (Loss)

     Net loss in the three months ended JuneSeptember 30, 2004 was $123,000,($81,000), ($0.00) basic per share, compared with net loss of $212,000($107,000), ($0.00) basic per share in the comparable period last year. Net loss in the sixnine months ended JuneSeptember 30, 2004 was $247,000,($328,000), ($0.01) basic per share, compared with net loss of $287,000($393,000), ($0.01) basic per share in the comparable period last year. The net loss resulted from decreased revenues, partially offset by lower operating expenses.

Liquidity and Capital Resources

     At JuneSeptember 30, 2004, we had $371,000$920,000 in cash and cash equivalents as compared to $590,000 at December 31, 2003. The decreaseincrease in cash and cash equivalents is attributed toresults from a royalty advance received in the third quarter, partially offset by the net loss. We had working capital of $534,000$458,000 at JuneSeptember 30, 2004 as compared with working capital of $792,000 at December 31, 2003. Our future cash flow will come primarily from the audio signal processing licensing, Original Equipment Manufacturers’ (“OEM”) royalties and from possible [common] stock issuances including warrants and options. We are actively engaged in negotiations for additional audio signal processing licensing arrangements which we believe should generate additional cash flow without imposing any substantial costs on the Company. We anticipated that there would be a wind down of our licensing program in 2003 with a large computer account and reductions in licensing to DVD accounts that are under extreme pressure to reduce costs. We announced two new licensing arrangements in the cellular phone market and expect this category to expand in 2004. We are also targeting other markets where the cost pressure is not as acute and which might be more receptive to licensing our products.

     In the fourth quarter of 2003, we negotiated and completed the conversion of a $112,500 related party 10% demand note to a three-year 10% term note. Principal and interest of $5,191 is paid monthly, which we pay on a current basis. Installments due in more than twelve months are classified as Notes Payable to Related Parties-long-term.

     We continue to maintain an accrual for unasserted claims or settlement costs of approximately $28,000. We do not expect any final liability to be in excess of this balance.

     We currently believe our future cash flow will come primarily from the audio signal processing licensing, OEMoriginal equipment manufacturers’ (OEM) royalties and from possible common stock issuances including warrants and options. We are actively engaged in negotiations for additional audio signal processing licensing arrangements which we believe should generate additional cash flow without imposing any substantial costs on us. We announced two new licensing arrangements in the cellular phone market and expect this category to expand in 2004. We are also targeting other markets where the cost pressure is not as acute and which might be more receptive to licensing our products.

     We anticipated that there would be a wind down of our licensing program in 2003 with a large computer account and reductions in licensing to DVD accounts that are under extreme pressure to reduce costs. We anticipate that there may continue to be dislocations of individual licensing programs due to continuing pressure to reduce costs, particularly in the DVD player segment.

     We believe that growth from other licensing arrangements, which include new markets such as cellular phones, and other arrangements that are pending but not announced or in negotiation, will substantially offset any revenue shortfalls from market dynamics or

shortfalls from market dynamics or transitioning platforms. Further, we anticipate that our cost reduction initiative implemented in the fourth quarter of 2003 will lower the revenues needed to reach the break-even point.

     The fluid, competitive and dynamic nature of the market continues a degree of uncertainty to our operations. The operations of our business, and those of our competitors, may also be impacted by the continued trend in the semiconductor industry to offer free, but minimal audio solutions to certain product classes to maintain and attract market share. This challenges our ability to convert business opportunities to licensing agreements in those segments that allow us to maintain or rapidly increase revenue. As a result, we must develop and license our products and software solutions in a market that treats some audio products, including those of our competitors, on a commodity basis in those cases where the OEM product is considered a commodity product. While our software applications deliver what we and most manufacturers who listen to it believe is a significantly superior audio experience, the competitive market forces that pressure manufacturers to reduce their costs may create some resistance to new technology adoption or use. In addition, certain of our competitors appear to be pursuing a business plan that disregards commercially reasonable pricing to achieve a larger market penetration even if the penetration will not provide for viable margins or returns. We have responded by offering additional products targeted to each price/quality segment of the market and continue to aggressively pursue new opportunities in emerging product categories such as cellular phones and notebook computers that complements our existing core business. In addition, our products have been positioned as a means for manufacturers to save money while delivering an enhanced audio experience. Nevertheless, these market conditions and competitive forces make it more challenging for us, and our rational commercial competitors, to enhance their operating results.

     To the extent we maintain or exceed our projected revenues and are not required to fund significant contingencies, we expect to continue to retain our current cash reserves and therefore, maintain our liquidity position at a consistent level both on at least a short-term basis. ToHowever, to the extent that we do not achieve current projected operating levels, fail to close deals in process timely or are required to fund contingencies, we will be required to use our cash reserves and this will negatively impact our longer term liquidity. In addition, we wish to achieve accelerated growth and to take advantage of the dynamic market forces in which we operate, rather than to be affected by them. We believe our current cash reserves and cash generated from our existing operations and customer base are at a minimal level for us to meet our operating obligations and the anticipated additional research and development for our audio technology business for the short term. This constrained working capital currently limits our ability to capitalize fully on market opportunities and to compete as rigorously as we would like. Indeed, a continued deterioration in our cash position will, absent new financing or licensing arrangements, impair our ability to operate as a going concern. If we do not achieve current projected operating levels, our current cash reserves may be depleted within    months. In such case, we may have to rely on the sale of equity, debt or convertible debt financings in the future, which may have a dilutive effect on our existing shareholders. Further, we cannot assure you that debt or equity financing will be available as required and if not available, we would have to further scale down operations or even cease operations.

We will continue to consider and evaluate capital investment or business arrangements with financial or strategic participants or investors as such opportunities become available to us on terms that enhance shareholder value and support our business strategy.

Net Operating Loss Carry Forwards

     At December 31, 2003, we had net operating loss carry forwards for Federal income tax purposes of approximately $27,000,000 which are available to offset future Federal taxable income, if any, through 2023. Approximately $17,000,000 of these net operating loss carry

Our Operating Results Fluctuate and If We Are Unable to Achieve or Sustain Profitability in the Future or Obtain Future Financing Our Business Operations May Fail

     We continue to experience operating losses. While our objective and full effort is on managing a profitable business, due to the market conditions and factors outlined above and below and their impact on fluctuations in operating expenses and revenues, , we cannot provide assurance that we will be able to generate a positive profit position in any given future period. We cannot guarantee that we will increase sales of our products and technologies, or that we will successfully develop and market any additional products. We may not be able to re-establish or sustain future profitability. We may have to rely on the sale of sharesequity, debt or onconvertible debt financings in the future, which may have a dilutive effect on our existing shareholders. Further, we cannot assure you that debt or equity financing will be available as required and if not available, we would have to further scale down operations or even cease operations.

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

     We operate in a technology environment which is competitive and rapidly changing. While our software applications deliver what we, and most manufacturers who listen to it, believe is a significantly superior audio experience, the competitive market forces that pressure manufacturers to reduce their costs may create some resistance to new technology adoption or use. Our future success is dependent on establishing and maintaining the technological superiority of our products over those of competitors, our ability to successfully identify and bring other compatible technologies and products to market and a recognition by the market of product value. We compete with a number of entities that produce various stereo audio enhancement processes, technologies and products in both traditional two-speaker environments such as consumer electronics and multimedia computing, and in multi-channel, multi-speaker applications such as Home Theater. In the

We Rely on the Schedules and Cooperation of Chip Makers or Other Third Parties to Deliver Our Technology in Consumer Products. These Third Parties Have Their Own Priorities and Alliances that May Delay or Thwart our Sales Efforts to Potential Customers.

Spatializer does not develop or market semiconductors. That is why we carry no inventory or have order backlogs that typically are good indicators of near term performance. Rather, we develop audio algorithms that are embedded on third party processors or semiconductors used by our customers. While our algorithms are implemented on a wide array of processors, often times a customer uses a processor where there is no such implementation, or where a competing solution has been implemented. In this case, our customers request that our algorithm be implemented. While these requests are typically honored, processor manufacturers must schedule such implementation as their resources or corporate strategies allow. Therefore, the supply-chain is often quite long and complicated, which potentially can result in delays or deadlines that may not always coincide with our customer’s requirements and which are beyond the control of our company.

If New Product Development Is Delayed, We Will Experience Delays In Revenues And Competitive Products May Reach The Market Before Our Products.

     Since our inception, we have experienced delays in bringing new products to market and commercial application as a result of delays inherent in technology development, financial resource limits and industry responses and maturity. These delays have resulted in delays in the timing of revenues and product introduction. In the future, delays in new product development or technology introduction on behalf of us, our original equipment manufacturers of consumer electronics and multimedia computer products (OEMs), integrated circuit (IC) foundries or our software producers and marketers could result in further delays in revenues and could allow competitors to reach the market with products before us. In view of the emerging nature of the technology involved, and the rapidly changing character of the entire media, internet and computer markets, our expansion into other technology areas, such as cellular telephones, and the uncertainties concerning the ability of our current products and new products to achieve meaningful commercial

a similarly sized account or accounts would have a material short term impact on our operations and there is no assurance that we will not lose all or some of the revenues from one or more of these accounts. While we are working to broaden the sources of our royalty streams, there can be no assurance that we will be successful in retaining or attracting such key accounts and broadening such revenue stream sources.

     Our products are typically one of many related products used by consumer electronic users. Demand for our products is therefore subject to many risks beyond our control, including, among others:

	•		competition faced by our OEM customers in their particular end markets;
	•		the technical, sales and marketing and management capabilities of our OEM customers; and
	•		the pressure faced by our OEM customers to reduce cost

     There can be no assurance that we will not lose sales in the future as a result of the pressure to reduce costs faced by our customers. The reduction of orders from our significant OEM customers, or the discontinuance of our products by our end users may subject us to potential adverse revenue fluctuations.

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

     Our future success primarily depends on the abilities and efforts of a small number of individuals, with particular management obligations and technical expertise. Loss of the services of any of these persons could adversely affect our business prospects. There is no assurance that we will be able to retain this group or successfully recruit other personnel, as needed. We compete with other enterprises with stronger financial resources and larger staffs that may offer employment opportunities to our staff which are more desirable than those which we are able to offer. Failure to maintain skilled personnel with the software and

The Company carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer had concluded that the Company’s disclosure controls and procedures as of JuneSeptember 30, 2004 were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended JuneSeptember 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. 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 July 29,November 8, 2004, 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 new legal proceedings could change in the future.

ITEM 2. CHANGES INUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 11, 2004 we held our Annual Meeting of Shareholders. Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management’s nominees as listed in the Proxy Statement and all of such nominees were elected.

At the Annual Meeting, the following person was elected by the vote indicated as director to serve until the Annual Meeting of Stockholders to be held in 2006:

At the Annual Meeting, the following person was elected by the vote indicated as director to serve until the Annual Meeting of Stockholders to be held in 2007:

The two directors whose terms of office continued after the Annual Meeting were Carlo Civelli and Henry R. Mandell whose terms expire in 2005.

(b) Reports on Form 8-K:

     On May 13,August 10, 2004, we filed a Current Report on Form 8-K regarding a press release issued with earnings information for the quarter ended March 31,June 30, 2004. The information furnished in the report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934.

     On June 14,August 26, 2004, we filed a Current Report on Form 8-K regarding a press release issued with information on the Annual Meeting of Stockholders held on June 11, 2004.License Agreement between Spatializer Audio Laboratories, Inc., Desper Products, Inc. and Samsung Electronics. The information furnished in the report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements 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: November 10, 2004