UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(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, 2008





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.)




410
Park Avenue--15th
Floor   New York, New York 10022


(Address
of principal corporate offices)




Telephone
Number: (212)  231-8359


(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. oYes þNo




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. oYes þNo




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 þNo 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 or any amendment to
this Form 10-K. 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). þYes  No o





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, 2008) was approximately
$1,470,021.





As
of March 25, 2009, there were 6,500,000 shares of the Registrant’s Common
Stock outstanding.





DOCUMENTS INCORPORATED BY
REFERENCE;     None











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 OPERATIONSCONSOLIDATED 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
      SchedulesSIGNATURES




2


CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING STATEMENTS





This
Annual Report on Form 10-K 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 the “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 through 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 410 Park Avenue
-- 15th Floor ,
New York, New York 10022.




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 was a California
corporation incorporated in June 1986 and dissolved on December 5,
2008.




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 410
Park Avenue -- 15th
Floor,  New York, New York 10022.





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 its’ 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 meeting, Spatializer’s board of
directors discussed its’ 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 would
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 Board adjourned the meeting without a final vote in for reasons it
believed to be in 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 1,533,452 shares voted on the asset sale proposal, of which 1,440,708
shares were voted in favor, 82,318 shares voted against and 10,424 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 1,623,661 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 distributed $0.21/share, substantially all of its remaining cash
assets, to its stockholders, after satisfying its liabilities and leaving an
approximate $100,000 cash residual.  The Company has no plans to
dissolve.




The
company effectuated a 1 for 10 reverse split during the fiscal year 2008,
resulting in 6,500,000 outstanding shares vs. 65,000,000 at the end of fiscal
2007.




Our
financial statements contain information relating to our revenues, loss and
total assets for the fiscal year ended December 31, 2008.





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.




4


In 2007,
two major customers, Sharp and Samsung, presented in no particular 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 OEMs 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 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.   With the sale of
assets described above, revenues declined to $0.





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 2008, 2007 and 2006 were approximately
0%, 0% and 23% 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.




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 or 2008.





5


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
2008 with no full time employees and one part time employee and ended 2008 with
no full time employees and three part time employees.





Item 1A. Risk Factors





This
Annual Report on Form 10-K 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:





The
Company Has No Means to Generate Revenue





We have
no source of revenue. After the contractual nine month indemnification period
relating to the sale of assets on July 2, 2007, we distributed the remaining
cash assets of the company, other than an approximate $100,000 cash residual, in
April 2008. This cash balance has been further diminished during the remainder
of 2008 by general and administrative expenses.





A
New Management Group, Involved in the April 25, 2007 Stock Offering,
Took  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, each of Messrs. Mandell and Civelli
resigned from the Board of Directors and the new investor group involved in the
April 25, 2007 stock offering took control of the management 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 management believe it is in the Company’s and stockholders’
best interests to raise additional financing to pursue new business
opportunities,  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.





6


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.





Item 1B. Unresolved Staff
Comments





Registrant
is in receipt of comments from the SEC Staff regarding Form 10-K for the year
ended December 31, 2007 and the three Forms 10-Q for the first three quarters in
2008.  Those comments are being addressed concurrently and will be the
subject of amended filings to be made as expeditiously as
possible.  Registrant believes that any Staff comments outstanding
have been addressed in this 2008 Form 10-K and wanted to file this annual report
on as timely a basis as possible.





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,
2008.





Item 3. Legal
Proceedings





From time
to time we were involved in various disputes and litigation matters arising in
the normal course of business. As of the date of this Form 10-K Annual Report,
we are not involved in any legal proceedings.





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





Not
applicable.





7




PART
II





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 2007 and 2008. The quotations listed below
reflect interim dealer prices without retail mark-up, mark-down or commission
and may not represent actual transactions Since November 21, 2008 the new stock
symbol is SPZR.




Period:
                                      
                                      High
      (U.S. $)
                                      
                                      
                                      Low
      (U.S. $)2007First
      Quarter
                                      
                                      $
                                      0.30
                                      
                                      
                                      $
                                      0.17Second
      Quarter
                                      
                                      $
                                      0.55
                                      
                                      
                                      $
                                      0.30Third
      Quarter
                                      
                                      $
                                      0.55
                                      
                                      
                                      $
                                      0.34Fourth
      Quarter
                                      
                                      $
                                      0.46
                                      
                                      
                                      $
                                      0.342008First
      Quarter
                                      
                                      $
                                      0.58
                                      
                                      
                                      $
                                      0.14Second
      Quarter
                                      
                                      $
                                      0.58
                                      
                                      
                                      $
                                      0.18Third
      Quarter
                                      
                                      $
                                      0.24
                                      
                                      
                                      $
                                      0.15Fourth
      Quarter
                                      
                                      $
                                      0.18
                                      
                                      
                                      $
                                      0.05




On
March 6, 2009, the closing price reported by the OTC Bulletin Board was
U.S. $0.08 per share. Stockholders are urged to obtain current market prices for
our Common Stock. Corporate Stock Transfer is our transfer agent and
registrar.  The Company had a 1 for 10 reverse split of its stock on
November 21, 2008, which split is reflected in the above table. Likewise, share
and per share data disclosed in the remainder of this report have been restated
to reflect the results of this split, unless otherwise noted.


To our
knowledge, because most shares are held in street name, there were approximately
200 holders of record of the stock of the Company as of March 25, 2009. Our
transfer agent has indicated that beneficial ownership is believed to be in
excess of 2,000 stockholders.


Other
than the $0.21 cash distribution in April 2008, 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 selling the Company as a shell corporation, maintain our status
as a reporting company and/or merge the Company successfully into a new
operating 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, 2008.





8


Item 6. Selected Financial
Data







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


Executive
Overview




There was
no revenue for the year ended December 31, 2008 compared to $751,000 for the
year ended December 31, 2007 (due to a one time extension of a then
existing licensing agreement as described above in “Customers, Revenues and
Expenses”). As we sold all of our operating assets in 2007, we have no means to
generate new revenues.




Net loss
was $144,000 for the year ended December 31, 2008 compared to net income of
$807,000 for the year ended December 31, 2007.




At
December 31, 2008, we had $67,000 in cash and cash equivalents, as compared to
$582,000 at December 31, 2007. We had working capital of $48,000 at
December 31, 2008 as compared with working capital of $1,557,000 at
December 31, 2007.




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




Our
current policy is to retain earnings, if any, for operations in connection with
selling the Company as a shell corporation, maintain our status as a reporting
company and/or merge the Company successfully into a new operating
business.





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.





9


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





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 Reports on
Form 10-K for the fiscal years ended December 31, 2006 and 2007,
respectively. 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., its wholly-owned subsidiary. (See Item 1
above.)




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 our 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 as described
in Item 1 above.




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. We
distributed to our stockholders the remaining cash assets of the Company, other
than an approximate $100,000 cash residual, since reduced to approximately
$67,000 as of December 31, 2008.





Critical
Accounting Policies





This
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 important accounting policies 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 period.




10


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.
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 had utilized estimates based on
information received or historical trends. This information is not relevant in
the current period.  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 both
parties agree 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 established that the historical net carrying value of its assets exceeded
the current carrying value.




Our unaudited and audited 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.





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 latest 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.




11


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, 2008 compared to the year ended December 31,
2007, and the year ended December 31, 2007 compared to the year ended
December 31, 2006. The following discussion should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included elsewhere
in this report.





Continuing
Operations





For the Year Ended
December 31, 2008, Compared to the Year Ended December 31,
2007





Revenues





There
were no revenues for the year ended December 31, 2008 and no revenues from
continuing operations for the year ended December 31, 2007 due to the
suspension of operations as described in item 1 above.




Operating
Expenses





Operating expenses for continuing operations for the year ended December 31,
2008 decreased to $151,000 from $210,000 for the year ended December 31, 2007, a
decrease of 28%. The decrease in operating expenses resulted from a
decrease in general and administrative expense due to the suspension of
operations. This total is primarily general operating costs, including
telephone, legal, public filing, office supplies and postage.





Income
(Loss) from Continuing Operations





The loss
from continuing operations was $144,000 for the year ended December 31,
2008, compared to a loss of $172,000 for the year ended December 31,
2007.





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





12


Revenues





There
were no revenues from continuing operations for the years ended
December 31, 2007 and  December 31, 2006.





Operating
Expenses





`   
Operating expenses for continuing operations for the year ended
December 31, 2007 decreased to $210,000  from
$227,000  for the year ended December 31, 2006, a decrease of 7%.
The decrease in operating expenses resulted from a decrease in general and
administrative expense. The decrease is primarily due to a decline in 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,
postage, depreciation and similar costs.





Income
(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.





Discontinued
Operations





For the Year Ended
December 31, 2008, Compared to the Year Ended December 31,
2007





Revenues





There
were no revenues from discontinued operations for the year ended
December 31, 2008 compared to $751,000 for the year ended December 31,
2007, due to the suspension of operations as described in item 1
above.





Gross
Profit





There was
no gross profit from discontinued operations for the year ended
December 31, 2008 compared to $687,000 in the comparable period last
year,due to the
suspension of operations as described in Item 1 above. Gross margin was
99% of revenue in the year ended December 31, 2007.


Operating
Expenses





Operating
expenses for discontinued operations for the year ended December 31, 2008
decreased to $0 from $223,000 (30% of sales) for the year ended December 31,
2007, a decrease of 100%. The decrease in operating expenses resulted
primarily from decreases in general and administrative expense due to the
suspension of operations.





General
and Administrative





General
and administrative expense for discontinued operations decreased to $0 for the
year ended December 31, 2008 from $223,000 for the year ended
December 31, 2007, a decrease of 100%. The decrease is primarily due to a
decline in general operating costs, including telephone, legal, public filing,
office supplies and postage and similar costs.





Research
and Development





Research
and development costs for discontinued operations were $0 for the year ended
December 31, 2008, compared to $0 for the year ended December 31, 2007
due to the suspension of operations as described in Item 1 above.





13


Sales
and Marketing





Sales and
marketing costs for discontinued operations were $0 for the year ended
December 31, 2008, compared to $0 for the year ended December 31, 2007
due to the suspension of operations as described in Item 1 above.





Income
(Loss) from Discontinued Operations





The loss
from discontinued operations was $0 for the year ended December 31, 2008,
compared to income of $979,000 for the year ended December 31, 2007. The
difference is due to the absence of revenues in 2008, the sale of assets in 2007
and the suspension of operations as described in Item 1 above.





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





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 the
Company’s Spatializeraudio
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 2006 period, an increase
of 107%. Gross margin was 91% of revenue in the year ended December 31,
2006 compared with 99% of revenue for the 2007 comparable period. 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 were expensed as engineering and development expenses in the
period incurred. In 2006, all major relationships with distributors had been
terminated and no commissions were earned or payable in 2007. In 2007, we paid a
commission on the license extension where the former distributor assisted us,
but none in 2008.





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 a
decrease in general operating costs as a result of the decline in the Company’s
sales activity.





14


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.





Income
(Loss) from Discontinued Operations





The
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 the sale of assets and lower overhead due to the
suspension of operations.





Liquidity
and Capital Resources





At
December 31, 2008, we had $66,800 in cash and cash equivalents as compared
to $582,000 at December 31, 2007. The decrease in cash primarily resulted
from the distribution of $1,365,000 or $0.21/share during 2008. We had working
capital of $48,000 at December 31, 2008 as compared with working capital of
$1,557,000 at December 31, 2007.




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.




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. We distributed the
remaining cash assets of the company, after satisfying liabilities and leaving
an approximately $100,000 cash residual. Upon distribution of the cash assets,
Messrs. Mandell and Civelli resigned from the Board of Directors and the
new investor group involved in the April 25, 2007 stock offering took
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 (1,623,662 shares after the 1-for-10 reverse stock split effected in
December, 2008) 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.  $0.21/share, or $1,365,000, was
distributed to shareholders in April 2008 upon completion of a 270 day escrow
period.




15


Our
current policy is to retain earnings, if any, for operations in connection with
selling the Company as a shell corporation, maintain our status as a reporting
company and/or merge the Company successfully into a new operating
business.





Net
Operating Loss Carryforwards





At December 31, 2008, we had net
operating loss carryforwards for Federal income tax purposes of approximately
$26,150,000 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.
Utilization of these loss carryforwards is subject to further limitation as a
result of change in ownership of the Company, as defined by Federal tax
law.




Item 7A. Quantitative and Qualitative
Disclosures About Market Risk





We are
not exposed to material future earnings or cash flow fluctuations from changes
in interest rates at December 31, 2008 because of our suspension of
operations. 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




16





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, 2008 and
2007 and the related consolidated statements of operations, stockholders’
equity, and cash flows for the three years ended December 31, 2008. 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. The Company is not
required to have, nor were we engaged to perform, an audit of the Company’s
internal control over financial reporting. Our audits 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 financial position of Spatializer Audio
Laboratories, Inc. and subsidiaries as of December 31, 2008 and 2007, and
the results of its operations and its cash flows for the three years ended
December 31, 2008, 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 7, the Company has restated its consolidated statements of
operations for the years ended December 31, 2007 and 2006 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 31,
2009











17


SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS






December
      31,
                          
                          
                          December
      31,2008
                          
                          
                          2007ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                          
                          $
                          66,833
                          
                          
                          $
                          582,019Short-Term
      Investments
                          
                          
                          0
                          
                          
                          
                          1,000,000Prepaid
      Expenses and Other Current Assets
                          
                          
                          2,842
                          
                          
                          
                          22,989Total
      Current Assets
                          
                          
                          69,675
                          
                          
                          
                          1,605,008Total
      Assets
                          
                          $
                          69,675
                          
                          
                          $
                          1,605,008LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Notes
      Payable
                          
                          $
                          0
                          
                          
                          $
                          9,680Accounts
      Payable
                          
                          
                          5,206
                          
                          
                          
                          900Accrued
      Wages and Benefits
                          
                          
                          0
                          
                          
                          
                          1,323Accrued
      Professional Fees
                          
                          
                          16,000
                          
                          
                          
                          36,000Total
      Current Liabilities
                          
                          
                          21,206
                          
                          
                          
                          47,903Commitments
      and ContingenciesStockholders’
      Equity (Deficit):Common
      stock, $0.01 par value; 300,000,000 shares authorized; 6,500,000 shares
      issued and   outstanding.
                          
                          
                          650,000
                          
                          
                          
                          650,000Additional
      Paid-In Capital
                          
                          
                          46,634,856
                          
                          
                          
                          46,634,856Accumulated
      Deficit
                          
                          
                          (45,871,387
                          )
                          
                          
                          (45,727,751
                          )Total
      Stockholders’ Equity
                          
                          
                          48,469
                          
                          
                          
                          1,557,105Total
      Liabilities and Stockholders’ Equity
                          
                          $
                          69,675
                          
                          
                          $
                          1,605,008




See
accompanying notes to consolidated financial statements





18


SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS






Year
      Ended December 31,2008
                    
                    2007
                    
                    2006(as
      restated)
                    
                    
                    (as
      restated)Operating
      Expenses:General
      and Administrative
                    
                    $
                    151,441
                    
                    
                    $
                    210,350
                    
                    
                    $
                    226,551Operating
      Income (Loss)
                    
                    
                    (151,441
                    )
                    
                    
                    (210,350
                    )
                    
                    
                    (226,551
                    )Interest
      Income
                    
                    
                    12,648
                    
                    
                    
                    40,740
                    
                    
                    
                    6,730Interest
      Expense
                    
                    
                    0
                    
                    
                    
                    (2,311
                    )
                    
                    
                    (2,266
                    )Other
      Income (Expense), Net
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    125112,648
                    
                    
                    
                    38,429
                    
                    
                    
                    5,715Loss  from
      continuing operations before income taxes
                    
                    
                    (138,793
                    )
                    
                    
                    (171,921
                    )
                    
                    
                    (220,836
                    )Income
      Taxes
                    
                    
                    (4,843
                    )
                    
                    
                    0
                    
                    
                    
                    (4,800
                    )Loss
      from continuing operations
                    
                    
                    (143,636
                    )
                    
                    
                    (171,921
                    )
                    
                    
                    (225,636
                    )Gain
      (Loss) from discontinued operations (Note 7)
                    
                    
                    0
                    
                    
                    
                    979,197
                    
                    
                    
                    (126,990
                    )Net
      Income (Loss)
                    
                    $
                    (143,636
                    )
                    
                    $
                    807,276
                    
                    
                    $
                    (352,626
                    )Basic
      and Diluted Income (Loss) per Share:
                    
                    $
                    (.02
                    )
                    
                    $
                    .13
                    
                    
                    $
                    (.07
                    )Weighted-Average
      Shares Outstanding
                    
                    
                    6,500,000
                    
                    
                    
                    5,988,435
                    
                    
                    
                    4,876,338




See
accompanying notes to consolidated financial statements


19


SPATIALIZER AUDIO LABORATORIES,
INC.


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS






Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Cash
      Flows from Operating Activities:Net
      Loss
                  
                  $
                  (143,636)
                  
                  
                  $
                  807,276
                  
                  
                  $
                  (352,626
                  )Adjustments
      to Reconcile Net Loss to Net Cash (Used) by Operating
      Activities:Gain
      on Sale of Assets
                  
                  
                  0
                  
                  
                  
                  (515,077)
                  
                  
                  
                  0Depreciation
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  14,926Amortization
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  22,303Net
      Compensation Expense on Vested Options
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  11,725Net
      Change in Assets and Liabilities:Accounts
      Receivable
                  
                  
                  0
                  
                  
                  
                  74,828
                  
                  
                  
                  80,405Prepaid
      Expenses, Deposits and Other Assets
                  
                  
                  20,146
                  
                  
                  
                  2,084
                  
                  
                  
                  9,031Accounts
      Payable
                  
                  
                  4,307
                  
                  
                  
                  (31,236)
                  
                  
                  
                  17,941Accrued
      Expenses and Other Liabilities
                  
                  
                  (31,003
                  )
                  
                  
                  (7,947
                  )
                  
                  
                  (109,612)Net
      Cash Provided (Used) by Operating Activities
                  
                  
                  (150,186)
                  
                  
                  
                  329,928
                  
                  
                  
                  (305,907
                  )Cash
      Flows from Investing Activities:Short
      Term Investments
                  
                  
                  1,000,000
                  
                  
                  
                  (1,000,000)
                  
                  
                  
                  0Net
      proceeds from Asset Sale
                  
                  
                  0
                  
                  
                  
                  649,812
                  
                  
                  
                  0Intangible
      Assets
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  (15,013
                  )Net
      Cash Provided (Used) by Investing Activities
                  
                  
                  1,000,000
                  
                  
                  
                  (350,188
                  )
                  
                  
                  (15,013
                  )Cash
      Flows from Financing Activities:Cash
      Distribution
                  
                  
                  (1,365,000)
                  
                  
                  
                  0
                  
                  
                  
                  0Issuance
      (Repayment) of Notes Payable
                  
                  
                  0
                  
                  
                  
                  10
                  
                  
                  
                  (773
                  )Issuance
      of Common Stock Net of Transaction Costs
                  
                  
                  0
                  
                  
                  
                  373,329
                  
                  
                  
                  0Net
      Cash Provided (Used) by Financing Activities
                  
                  
                  (1,365,000)
                  
                  
                  
                  373,339
                  
                  
                  
                  (773
                  )Increase
      (Decrease) in Cash and Cash Equivalents
                  
                  
                  (515,186)
                  
                  
                  
                  353,079
                  
                  
                  
                  (321,693
                  )Cash
      and Cash Equivalents, Beginning of Year
                  
                  
                  582,019
                  
                  
                  
                  228,940
                  
                  
                  
                  550,633Cash
      and Cash Equivalents, End of Year
                  
                  $
                  66,833
                  
                  
                  $
                  582,019
                  
                  
                  $
                  228,940Supplemental
      Disclosure of Cash Flow Information:Cash
      Paid During the Year for:Interest
                  
                  $
                  0
                  
                  
                  $
                  2,311
                  
                  
                  $
                  2,266Income
      Taxes
                  
                  $
                  4,843
                  
                  
                  $
                  418
                  
                  
                  $
                  4,800




See
accompanying notes to consolidated financial statements





20


SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)





Common
      SharesNumber
      of Shares
                    
                    
                    Par
      Value
                    
                    
                    Additional
      Paid-In-Capital
                    
                    
                    Accumulated
      Deficit
                    
                    
                    Total
      Stockholders’ EquityBalance,
      December 31, 2005
                    
                    
                    4,876,338
                    
                    
                    $
                    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
                    
                    
                    4,876,338
                    
                    
                    $
                    487,634
                    
                    
                    $
                    46,423,893
                    
                    
                    $
                    (46,535,026
                    )
                    
                    
                    376,501Issuance
      of Common Stock
                    
                    
                    1,623,662
                    
                    
                    
                    162,366
                    
                    
                    
                    210,963
                    
                    
                    
                    
                    
                    
                    
                    373,329Net
      Income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    807,276
                    
                    
                    
                    807,276Balance,
      December 31, 2007
                    
                    
                    6,500,000
                    
                    
                    $
                    650,000
                    
                    
                    $
                    46,634,856
                    
                    
                    $
                    (45,727,751
                    )
                    
                    $
                    1,557,105Net
      Loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (143,636
                    )
                    
                    
                    (143,636
                    )Balance,
      December 31, 2008
                    
                    
                    6,500,000
                    
                    
                    $
                    650,000
                    
                    
                    $
                    46,634,856
                    
                    
                    $
                    (45,871,387
                    )
                    
                    $
                    48,469








See
accompanying notes to consolidated financial statements






21


SPATIALIZER
AUDIO LABORATORIES, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





(1)
Ability to Continue as a Going Concern; Sale of Substantially All
Assets





Spatializer
was a developer, licensor and marketer of next generation technologies for the
consumer electronics, personal computing, entertainment and cellular telephone
markets.




The
Company’s wholly-owned subsidiary, Desper Products, Inc. (“DPI”), was 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 DPI. DPI was dissolved during December,
2008.




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.




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 distributed substantially
all of its remaining cash assets to its stockholders, after satisfying its
liabilities and leaving a cash residual of approximately $100,000.




The
foregoing financial information has been prepared assuming that the Company will
continue as a going concern. As a result of the sale of substantially all of the
Company’s assets as discussed above, the Company is now a shell company and its
future plans are uncertain. These circumstances 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.





(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.





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





Concentration of Credit Risk —
Financial instruments, which have potentially subjected the Company to
concentrations of credit risk, have consisted principally of cash and cash
equivalents and short term investments. At December 31, 2007, 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.





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





22


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 2008 and 2006, outstanding stock options would
have been anti-dilutive and were not applicable to these
calculations.




The
calculation of diluted earnings per share for the year ended December 31, 2007
included consideration of 115,000 shares contingently issuable in connection
with stock option grants.





Stock Option Plan — 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.





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.





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.





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 payable and accrued liabilities at December 31,
2008 and 2007 approximated fair value due to their short maturity or
nature.





(3)
Notes Payable





The
Company was indebted to Premium Finance, Inc. in the amount of $9,680 at
December 31, 2007. This note financed the Company’s annual directors’ and
officers’ liability insurance premiums and was paid in monthly installments of
$4,835 including interest at 13.25%.





(4)
Shareholders’ Equity





The
Company effected a 1-for-10 reverse stock split as of November 21, 2008.
Accordingly, all common share data in the accompanying consolidated financial
statements have been restated to reflect the effects of the split.





23


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 1,623,661 shares for an aggregate purchase price of $162,366. 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 described in Note 1. The aggregate
purchase price of the shares, net of transaction costs of $48,823, was recorded
as common stock and additional paid-in capital.





(5)
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 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. 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 and no
additional stock option grants have been made. The Company has not adopted a new
stock option plan subsequently.




Exercisable
                                                              
                                                              
                                                              Exercise
      Price
                                                              
                                                              Weighted-AverageOptions
      outstanding at December 31, 2005
                                                              
                                                              
                                                              272,6666
                                                              
                                                              
                                                              
                                                              281,000
                                                              
                                                              
                                                              $
                                                              1.00Options
      granted
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (0
                                                              )Options
      exercised
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (0
                                                              )
                                                              
                                                              $
                                                              —Options
      forfeited/expired
                                                              
                                                              
                                                              (97,666
                                                              )
                                                              
                                                              
                                                              (106,000
                                                              )
                                                              
                                                              $
                                                              1.00Options
      outstanding at December 31, 2006
                                                              
                                                              
                                                              175,000
                                                              
                                                              
                                                              
                                                              175,000
                                                              
                                                              
                                                              $
                                                              .90Options
      granted
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (0
                                                              )Options
      exercised
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (0
                                                              )
                                                              
                                                              $
                                                              —Options
      forfeited/expired
                                                              
                                                              
                                                              (60,000
                                                              )
                                                              
                                                              
                                                              (60,000
                                                              )
                                                              
                                                              $
                                                              1.20Options
      outstanding at December 31, 2007
                                                              
                                                              
                                                              115,0000
                                                              
                                                              
                                                              
                                                              115,000
                                                              
                                                              
                                                              $
                                                              .80Options
      granted
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (0
                                                              )Options
      exercised
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (0
                                                              )
                                                              
                                                              $
                                                              —Options
      forfeited/expired
                                                              
                                                              
                                                              (55,000
                                                              )
                                                              
                                                              
                                                              (55,000
                                                              )
                                                              
                                                              $
                                                              .60Options
      outstanding at December 31, 2008
                                                              
                                                              
                                                              60,000
                                                              
                                                              
                                                              
                                                              60,000
                                                              
                                                              
                                                              $
                                                              .98





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 175,000 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, 106,000 vested options expired or were cancelled 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.




24


Net
compensation cost recorded for the year ended December 31, 2007 was $13,455, 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.




Net
compensation cost for the year ended December 31, 2008 was $0, as determined
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 one year.




At
December 31, 2008 and December 31, 2007, the number of options exercisable and
fully vested was 60,000 and 115,000, respectively.





(6)
Income Taxes





The
Company files a consolidated return for U.S. income tax purposes. Income tax
expense for the years ended December 31, 2008, 2007 and 2006 consisted of the
following:


2008
                            
                            2007
                            
                            2006State
      franchise tax
                            
                            $
                            4,843
                            
                            
                            $
                            0
                            
                            
                            $
                            4,800Federal
      taxes
                            
                            
                            
                            
                            
                            
                            0
                            
                            
                            
                            0Total
                            
                            $
                            4,843
                            
                            
                            $
                            0
                            
                            
                            $
                            4,800





Income
tax expense for the years ended December 31, 2008 and 2006 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 carryforwards of $800,000 were
used.




The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets 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, 2008. Additionally, the ultimate
realizability of net operating losses may be limited by change of control
provisions under Section 382 of the Internal Revenue
Code.





25


(7) Discontinued
Operations





As
described in Note 1, substantially all of the operating assets of the Company
were disposed in a transaction with DTS that was effective in July 2007. 
The Company’s consolidated statements of operations for the years ended December
31, 2007 and 2006 have been restated to reflect separately the results of the
Company’s discontinued operations related to the disposed assets, as summarized
below:





Year
      Ended December 31,2008
                          
                          2007
                          
                          2006Revenues:Royalty
      Revenues
                          
                          $
                          0
                          
                          
                          $
                          750,706
                          
                          
                          $
                          333,201Cost
      of Revenues
                          
                          
                          0
                          
                          
                          
                          63,269
                          
                          
                          
                          8970
                          
                          
                          
                          687,437
                          
                          
                          
                          332,304Operating
      Expenses:General
      and Administrative
                          
                          
                          0
                          
                          
                          
                          223,317
                          
                          
                          
                          300,314Research
      and Development
                          
                          
                          0
                          
                          
                          
                          0
                          
                          
                          
                          157,739Sales
      and Marketing
                          
                          
                          0
                          
                          
                          
                          0
                          
                          
                          
                          1,2410
                          
                          
                          
                          223,317
                          
                          
                          
                          459,294Income
      (Loss) from discontinued operations before gain on sale of
      assets
                          
                          
                          0
                          
                          
                          
                          464,120
                          
                          
                          
                          (126,990
                          )Gain
      On Sale of Assets
                          
                          
                          0
                          
                          
                          
                          515,077
                          
                          
                          
                          0Gain
      (Loss) from discontinued operations
                          
                          $
                          0
                          
                          
                          $
                          979,197
                          
                          
                          $
                          (126,990
                          )





(8) Quarterly
Financial Data (unaudited) (restated)





Following
is a summary of the quarterly results of operations for the years ended December
31, 2008 and 2007, with the information for 2007 and the first three quarters of
2008 restated to reflect
separately the results of the Company’s discontinued operations related to
disposed assets, as described in Notes 1 and 7:


Quarter
      Ended2007
                                          
                                          March
      31
                                          
                                          June
      30
                                          
                                          September
      30
                                          
                                          December
      31Discontinued
      OperationsNet
      Revenues
                                          
                                          $
                                          359,684
                                          
                                          
                                          $
                                          360,914
                                          
                                          
                                          $
                                          30,107
                                          
                                          
                                          $
                                          0Gross
      Margin
                                          
                                          $
                                          328,191
                                          
                                          
                                          $
                                          329,602
                                          
                                          
                                          $
                                          29,644
                                          
                                          
                                          $
                                          0Gain
      (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
                                          
                                          $
                                          0.05
                                          
                                          
                                          $
                                          0.02
                                          
                                          
                                          $
                                          0.07
                                          
                                          
                                          $
                                          (0.01
                                          )
   Quarter
      Ended2008
                        
                        March
      31
                        
                        June
      30
                        
                        September
      30
                        
                        December
      31Net
      Revenues
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        0Gross
      Margin
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        0
                        
                        
                        $
                        0Loss
      from continuing operations
                        
                        $
                        (64,391
                        )
                        
                        $
                        (36,484
                        )
                        
                        $
                        (7,747
                        )
                        
                        $
                        (35,014
                        )Net
      Income (Loss)
                        
                        $
                        (64,391
                        )
                        
                        $
                        (36,484
                        )
                        
                        $
                        (7,747
                        )
                        
                        $
                        (35,014
                        )Basic
      (Loss) Per Share
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.00
                        )
                        
                        $
                        (0.00
                        )


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 following which 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).





26


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 quarterly and as of December 31,
2008 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. 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. Based on its assessment, the Company believes that, as
of the date of this report, its system of internal control over financial
reporting as well as the disclosure controls and procedures was effective.





As
previously reported in our annual report for the year ended December 31, 2007,
there had been a lack of segregation of duties that was deemed a material
weakness in internal control as well as disclosure controls and procedures at
that time. In order to remediate this material weakness, 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.  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 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 should
reflect a substantive improvement over that of recent prior years, current
management believing that it has remediated the material weakness existing at
year-end 2007 and first quarter 2008.  Consequently, as of the date of this
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 system of internal control over financial reporting and
disclosure controls and procedures as of December 31, 2008  were
effective.





27


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





Michael
Pearce,  age 46,has been Chief Executive Officer and President
of Golf Trust of America, Inc. since November 8, 2007. Mr. Pearce has
been a private investor in various companies since 2002, with emphasis in
distressed securities of publicly traded entities. From late 1999 through 2001,
he served as Chief Executive Officer of iEntertainment Network. From 1996 to
1998, he served as Senior Vice President of Sales and Marketing of publicly
traded VocalTec Communications, later returning in 1999 in a consulting capacity
to its Chairman on matters pertaining to strategic alternatives, business
development and mergers and acquisitions. From 1983 to 1996, he was employed in
various technology industry management positions, including Senior Vice
President of Sales and Marketing at Ventana Communications, a subsidiary of
Thomson Corporation; Vice President of Sales at Librex Computer Systems, a
subsidiary of Nippon Steel; and National Sales Manager at Hyundai Electronics
America. From 1979 to 1983, he attended Southern Methodist
University.





Gregg Schneider , age 33,is a private investor who specializes in undervalued publicly traded
securities. During the past fourteen years, Mr. Schneider has been an
active dealer in numismatic items, specializing in U.S. rare coins and currency.
Mr. Schneider attended two years of courses at UCLA and is involved in
several charitable organizations.





Jay Gottlieb, age 64,
has been a 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 the Company. 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.





28


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, 2008, 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, in the future, any other officers. 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 410 Park Avenue—15th Floor,
New York, New York 10032.





Corporate
Governance





Mr.
Pearce is currently 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”). Since 2005, no members have been nominated or appointed to the Audit
Committee. In fact, the entire Board is acting in lieu of the Audit Committee
and held four meetings during 2008.





Item 11. Executive
Compensation





Compensation
Discussion and Analysis





The
Company does not currently have any full-time employees.  The
following summarizes payments made to Mr. Mandell, the former sole officer of
the Company and its two part-time officers (both of whom are
unpaid).  The following table sets forth information concerning the
compensation of Mr. Mandell, the only executive officer and employee of the
Company during fiscal 2008 (until his resignation in April 2008).'






SUMMARY
      COMPENSATION TABLEAll
      OtherOptions
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      CompensationName
      and Principal Position
                                                                                                                                                                                                      
                                                                                                                                                                                                      Year
                                                                                                                                                                                                      
                                                                                                                                                                                                      Salary($)
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      Awards($)
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      Bonus
                                                                                                                                                                                                      
                                                                                                                                                                                                      ($)
                                                                                                                                                                                                      
                                                                                                                                                                                                      Total
      ($)Henry
      R. Mandell, Former Chairman and sole officer
                                                                                                                                                                                                      
                                                                                                                                                                                                      2008
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      20,108
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      10,000
                                                                                                                                                                                                      (1)
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      0
                                                                                                                                                                                                      (2)
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      30,1082007
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      95,000
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      —
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      35,000
                                                                                                                                                                                                      (1)
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      20,000
                                                                                                                                                                                                      (2)
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      150,0002006
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      90,000
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      _
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      19,000
                                                                                                                                                                                                      
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      109,000Jay
      Gottlieb, Chairman of the Board, Chief Executive Officer
                                                                                                                                                                                                      
                                                                                                                                                                                                      2008
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      0Gregg
      Schneider, Chief Financial Officer
                                                                                                                                                                                                      
                                                                                                                                                                                                      2008
                                                                                                                                                                                                      
                                                                                                                                                                                                      $
                                                                                                                                                                                                      0




(1)
            
            Includes
      bonus of $10,000 for work performed on the company’s 2008 10-K filing and
      in 2007 for 3.5% of $1,000,000 asset sale amount.(2)
            
            Cost
      of health insurance premiums






29


OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-ENDOption
      AwardsNumber
      of Securities
                                                                                            
                                                                                            Number
      of SecuritiesUnderlying
                                                                                            
                                                                                            UnderlyingUnexercised
                                                                                            
                                                                                            Unexercised
                                                                                            
                                                                                            Weighted
      AverageOptions(#)
                                                                                            
                                                                                            Options(#)
                                                                                            
                                                                                            Option
      Exercise
                                                                                            
                                                                                            Option
      ExpirationExercisable
                                                                                            
                                                                                            Unexercisable
                                                                                            
                                                                                            Price($)
                                                                                            
                                                                                            Date50,000
                                                                                            
                                                                                            50,000
                                                                                            
                                                                                            $
                                                                                            1.00
                                                                                            
                                                                                            2/21/201010,000
                                                                                            
                                                                                            10,000
                                                                                            
                                                                                            $
                                                                                            0.90
                                                                                            
                                                                                            6/14/2009





Mr. Mandell
did not exercise any options during the fiscal year ended December 31,
2008.  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, 2008.





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, 2009 or which
can be acquired within sixty days of March 7, 2009 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 7, 2009, there were 6,500,000 shares of common
stock outstanding.




AMOUNT
      ANDNATURE
      OFBENEFICIAL
                                      
                                      
                                      PERCENT
      OFNAME
      OF BENEFICIAL OWNER
                                      
                                      OWNERSHIP
                                      
                                      
                                      CLASSGreggory
      A. Schneider(1)(3)
                                      
                                      
                                      645,150
                                      
                                      
                                      
                                      9.9
                                      %Mike
      Pearce
                                      
                                      
                                      0All
      directors and executive officers as a group (3
      persons)(1)(4)(5)
                                      
                                      
                                      2,010,311
                                      
                                      
                                      
                                      30.9
                                      %




(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 13-D filed by Mr. Gottlieb with the Securities
      and Exchange Commission on April 30,
      2008.  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,
      2008.  Mr. Schneider’s address is 10445 Wilshire Blvd.,
      #1806, Los Angeles,
California 90024.




30


During
fiscal 2007, the Company concurrently sold to Mr. Gottlieb 873,911 shares,
to Mr. Schneider 427,250 shares and to another third party 322,550 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.




Item 13. Certain Relationships and Related
Transactions, and DirectorIndependence





The
Company and Henry R. Mandell, the prior Chairman and Secretary of the Company
and its prior sole employee, were 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 consum-mated in
July 2007.  Such agreement has expired by its term and there are
no employment agreements in place with regard any person associated with the
Company.





At this
time, the Company has only two part-time employees (both unpaid officers) and an
ad hoc bookkeeper.  It has three directors, one of whom would be
defined as independent  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”). 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.





Item 14. Principal Accountant Fees and
Services





The
following summarizes the fees paid to Ramirez International Financial &
Accounting Services, Inc. the principal accountant in connection with services
related to the fiscal years ended December 31, 2008 and 2007:





December
      31,2008
                          
                          
                          2007Audit
      Fees (1)
                          
                          $
                          10,000
                          
                          
                          $
                          20,000Audit
      Related Fees (2)
                          
                          
                          7,500
                          
                          
                          
                          17,500All
      Other Fees
                          
                          
                          
                          
                          
                          
                          —Total
      Fees
                          
                          $
                          17,500
                          
                          
                          $
                          37,500







(1)
            
            Audit
      Fees are fees for professional services rendered for the annual audit and
      services normally provided in connection with statutory and regulatory
      filings.(2)
            
            Relates
      to review of Form 10-Qs.





Since
2006, the Board of Directors’ Audit Committee has had no
members.  Thus, the Company’s Board of Directors has been 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.




31




(b) Exhibits




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


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.)


32


ExhibitNumber
                                                                                
                                                                                Description10.5
                                                                                
                                                                                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.)10.11
                                                                                
                                                                                Amendment
      to Employment Agreement between the Company and Henry
    Mandell21.1
                                                                                
                                                                                Subsidiaries
      of the Company23.1
                                                                                
                                                                                Consent
      of Independent Auditors31.1
                                                                                
                                                                                Principal
      Executive Officer Certificate pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                                                                                
                                                                                Principal
      Financial Officer Certificate pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                                                                                
                                                                                Principal
      Executive Officer 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)32.2
                                                                                
                                                                                Principal
      Financial Officer 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)


33


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:
April 15, 2009


SPATIALIZER
      AUDIO LABORATORIES, INC.
              (Registrant)/s/
      Jay GottliebJay
      GottliebChairman of the
      Board, 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/ Michael Pearce
              
              Director
              
              April
      15, 2009Michael
      Pearce/s/ Gregg Schneider
              
              Director , Chief
      Financial and Principal Financial Officer
              
              April
      15, 2009Gregg
      Schneider
                
                /s/
      Jay GottliebJay
      Gottlieb
              
              Chairman
      of the Board, Secretary, Treasurer and Principal Executive
      Officer
              
              April
      15, 2009








34