STEREO COMPANY HAS BAD CASE OF THE BLUES; YEARS OF LOSSES, JOB CUTS ROCK SPATIALIZER AUDIO.

Byline: Deborah Adamson Daily News Staff Writer

The sweet sound of success at Spatializer Audio Laboratories has struck a discordant note.

When it first began, the company had a promising technology that translated two-speaker sounds into three-dimensional surround sound, a system invented by a former recording engineer for the Beach Boys who's also a company director.

But the maker of audio products has since fallen on hard times.

Last week, Steven D. Gershick stepped down as chief executive of the company and president of its MultiDisc Technologies subsidiary but retained his title as chairman. Half of the company's employees were laid off, leaving slightly more than a dozen left. Spatializer has put its MultiDisc unit up for sale because it's running out of money for development.

Into this leadership vacuum steps Henry R. Mandell, who in one day switched from chief financial officer to interim CEO. He has a challenging task ahead: turning around a company that has lost money since 1995. It also means saying goodbye to a product upon which the company has pinned a lot of its hope and invested $6 million it can barely afford: MultiDisc.

``It's really beyond the resources of the company to see it to market,'' acknowledged Mandell, saying millions of dollars more are needed to develop the MultiDisc server technology. ``It has consumed the resources of the company.''

Spatializer was excited about MultiDisc. It promised quick access to stored data, almost as fast as online access, with the lower costs of offline storage, such as individual computer tapes.

The company has hired Kibel Green Issa Inc. to help it find a buyer for MultiDisc and to streamline and restructure the remaining operations.

Spatializer will focus its efforts on its core audio products under its Desper Products division, whose president has resigned.

Late last week, Spatializer won a four-year court case in which rival QSound Labs had alleged that the company infringed on its technology. Mandell said Spatializer is seeking damages from QSound for filing the lawsuit.

Spatializer bases its product lines on a technology patented by Stephen Desper, a former recording engineer for the Beach Boys and other bands.

The system manipulates the frequency and timing of audio signals to fool the ear into thinking the sounds are coming from different places other than the two speakers in front. For example, if a video game shows an aircraft firing a missile at a player, the explosion would sound like it was beside the player.

Spatializer's technology is incorporated into products of well-known brand names such as Toshiba, Panasonic, Hitachi, Sharp and Sanyo.

Their 3D Stereo product line goes into VCRs and personal computers, the N-2-2 virtual surround sound is used in DVD players, and the just-released enCompass product line is incorporated into computer games.

In comparing the array of audio technology products from Spatializer and its rivals, Will Strauss, a multimedia market researcher in Arizona, said each has its own strengths and weaknesses. Spatializer's main rivals include QSound, Aureal and SRS Labs, he added.

At least two rivals share Spatializer's financial woes: QSound and Aureal. Both show substantial losses in the past few years.

Last year, Spatializer lost $4.7 million, or 23 cents per diluted share, on record sales of $2.8 million. Most of the loss resulted from a $3.8 million expenditure for research and development at MultiDisc.