<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                           --------------------------
                                    FORM 10-Q
                           --------------------------

 (MARK ONE)

    [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934

        For the period ended: SEPTEMBER 30, 2000

                                       OR

    [ ] Transition report pursuant to Section 13 or 15(d) of the
        Securities Exchange Act of 1934

                        Commission File Number: 33-90532


                      SPATIALIZER AUDIO LABORATORIES, INC.
             (Exact name of registrant as specified in its charter)

            DELAWARE                                           95-4484725
 (State or other jurisdiction of                              (IRS Employer
  incorporation or organization)                            Identification No.)

                       20700 VENTURA BOULEVARD, SUITE 140
                      WOODLAND HILLS, CALIFORNIA 91364-2357

                    (Address of principal executive offices)

                        TELEPHONE NUMBER: (818) 227-3370

              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:

                        YES  [X]                          NO  [ ]
                             ---

As of October 20, 2000 there were 46,752,971 shares of the Registrant's Common
Stock outstanding.


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<PAGE>   2

                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                               SEPTEMBER 30,        DECEMBER 31,
                                                                                                  2000                  1999
                                                                                              ------------         ------------
                                                                                              (unaudited)
<S>                                                                                           <C>                  <C>
    Current Assets:
         Cash and Cash Equivalents                                                            $  1,518,781         $  1,021,998
         Accounts Receivable, net                                                                  580,000              687,595
         Employee Advances                                                                           1,003                   --
         Inventory                                                                                  12,993               12,993
         Prepaid Expenses and Deposits                                                              55,634               22,640
                                                                                              ------------         ------------
    Total Current Assets                                                                         2,168,411            1,745,226

    Property and Equipment, net                                                                    124,187              132,803
    Capitalized Patent and Technology Costs, net                                                   209,904              207,793
    Other Assets                                                                                    39,769               32,177
                                                                                              ------------         ------------

    Total Assets                                                                              $  2,542,271         $  2,117,999
                                                                                              ============         ============

                                                  LIABILITIES AND SHAREHOLDERS' EQUITY

    Current Liabilities:
         Notes Payable                                                                        $     14,149         $     14,149
         Notes Payable to Related Parties                                                          337,742              337,742
         Accounts Payable                                                                           28,463              234,117
         Accrued Wages and Benefits                                                                 21,660               53,136
         Accrued Expenses and Taxes                                                                223,026              291,118
         Net Liabilities of Discontinued Operation                                                 297,386              419,600
                                                                                              ------------         ------------
    Total Current Liabilities                                                                      922,426            1,349,862

    Shareholders' Equity:
         Series B, 10% Redeemable Convertible Preferred shares, $.01 par value,
            1,000,000 shares authorized, 102,967 and 102,967 shares issued and
            outstanding at September 30, 2000
            and December 31, 1999, respectively                                                      1,030                1,030
         Common shares, $.01 par value, 65,000,000 shares
            authorized, 46,752,971 and 46,174,970 shares
            issued and outstanding at September 30, 2000 and
            December 31, 1999, respectively                                                        467,530              461,750
         Additional Paid-In Capital                                                             46,373,042           45,913,503
         Accumulated Deficit                                                                   (45,221,757)         (45,608,146)
                                                                                              ------------         ------------
    Total Shareholders' Equity                                                                   1,619,845              768,137
                                                                                              ------------         ------------

    Total Liabilities and Shareholder's Equity                                                $  2,542,271         $  2,117,999
                                                                                              ============         ============

</TABLE>




                                       2
<PAGE>   3

                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                          FOR THE THREE MONTH PERIOD ENDED      FOR THE NINE MONTH PERIOD ENDED
                                         ----------------------------------     --------------------------------
                                           SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,     SEPTEMBER 30,
                                              2000               1999               2000               1999
                                          ------------       ------------       ------------       ------------
<S>                                       <C>                <C>                <C>                <C>
    Revenues:
      License Revenues                    $         --       $         --       $         --       $         --
      Royalty Revenues                         630,129            324,473          1,665,829            976,525
      Product Development Revenues                  --                 --                 --                 --
      Product Revenues                              --                 --                 --                 --
                                          ------------       ------------       ------------       ------------
                                               630,129            324,473          1,665,829            976,525

    Cost of Revenues                            70,022             20,000            168,088             28,619
                                          ------------       ------------       ------------       ------------
    Gross Profit                               560,107            304,473          1,497,741            947,906

    Operating Expenses:
      General and Administrative               181,669             98,785            426,458            310,662
      Research and Development                 186,294             73,469            388,338            323,929
      Sales and Marketing                       90,172             66,713            276,858            189,091
                                          ------------       ------------       ------------       ------------
                                               458,135            238,967          1,091,654            823,682
                                          ------------       ------------       ------------       ------------

    Operating Profit                           101,972             65,506            406,087            124,224

    Interest Income                             19,624                600             50,526              4,401
    Interest Expense                            (8,782)           (31,454)           (25,953)           (77,150)
                                          ------------       ------------       ------------       ------------
                                                10,842            (30,854)            24,573            (72,749)
                                          ------------       ------------       ------------       ------------

    Income  Before Income Taxes                112,814             34,652            430,660             51,475

    Income Taxes                                (9,000)            (1,500)           (44,271)            (4,500)
                                          ------------       ------------       ------------       ------------

    Net Income                            $    103,814       $     33,152       $    386,389       $     46,975
                                          ============       ============       ============       ============

    Basic/Diluted Earnings Per Share      $       0.00       $       0.00       $       0.01       $       0.00
                                          ============       ============       ============       ============

    Weighted Average Shares
       Outstanding                          46,706,986         35,322,153         46,622,002         31,423,618
                                          ============       ============       ============       ============
</TABLE>




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<PAGE>   4


                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                        NINE MONTHS ENDED
                                                                          SEPTEMBER 30,
                                                                  -----------------------------
                                                                      2000             1999
                                                                  -----------       -----------
<S>                                                               <C>               <C>
    Cash flows from operating activities:
         Net Income                                               $   386,389       $    46,975
         Adjustments to reconcile net income to net cash
         used in operating activities:
         Depreciation and Amortization                                 64,099            25,157
         Stock Issued for Services                                     30,000                --
    Net change in Assets and Liabilities:
         Accounts Receivable and Employee Advances                    106,592          (259,922)
         Inventory                                                         --            (5,000)
         Prepaid Expenses and Deposits                                (40,586)           (3,011)
         Accounts Payable                                            (205,654)           12,822
         Deferred Revenue                                                  --          (250,000)
         Changes in Discontinued Operation                           (122,214)           (8,496)
         Accrued Liabilities                                          (99,568)          (82,885)
                                                                  -----------       -----------
    Net Cash Provided (Used) In Operating Activities                  119,058          (524,360)
                                                                  -----------       -----------
    Cash Flows from Investing Activities:
         Purchase of Property and Equipment                           (42,497)           (1,570)
         Increase in Capitalized Patent and Technology Costs          (15,097)            4,672
                                                                  -----------       -----------
    Net Cash Provided (Used) in Investing Activities                  (57,594)            3,102
                                                                  -----------       -----------
    Cash flows from Financing Activities:
         Issuance of Preferred Shares, Net                                 --                --
         Exercise of Options                                          435,319                --
         Exercise of Warrants                                              --                --
         Issuance of Notes Payable                                         --           360,000
         Issuance of Related Party Payable                                 --                --
         Repayment of Notes Payable                                        --              (646)
                                                                  -----------       -----------
    Net Cash Provided by Financing Activities                         435,319           359,354
                                                                  -----------       -----------
    Increase (Decrease) in Cash and Cash Equivalents                  496,783          (161,904)

    Cash and Cash Equivalents, Beginning of Period                  1,021,998           264,054
                                                                  -----------       -----------

    Cash and Cash Equivalents, End of Period                      $ 1,518,781       $   102,150
                                                                  ===========       ===========

    Supplemental Disclosure of Cash Flow Information:
         Cash paid during the period for:
         Interest                                                 $    19,688       $        --
         Income Taxes                                                   1,500                --
                                                                  ===========       ===========

</TABLE>


                                       4
<PAGE>   5

                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                        SERIES B, 10% REDEEM. CONV.
                             PREFERRED SHARES             COMMON SHARES
                         --------------------------  --------------------------                                  TOTAL
                            NUMBER OF                  NUMBER OF                  ADDITIONAL    ACCUMULATED   SHAREHOLDERS'
                             SHARES      PAR VALUE      SHARES      PAR VALUE   PAID-IN-CAPITAL   DEFICIT        EQUITY
                         ------------  ------------  ------------  ------------  ------------  ------------   ------------
<S>  >                   <C>           <C>           <C>           <C>           <C>            <C>           <C>
  Balance, December 31,
    1999                      102,967     $1,030       46,174,970    $461,750     $45,913,503  $(45,608,146)   $  768,137

  Issuance of Preferred
    Shares, Net                    --         --               --          --              --            --            --
  Options Exercised                --         --          523,001       5,230         430,089            --       435,319
  Warrants Exercised               --         --               --          --              --            --            --
  Stock Issued for
    Services                       --         --           55,000         550          29,450            --        30,000
  Conv. of Pref
    Shares, net                    --         --               --          --              --            --            --
  Net Income                                  --               --          --              --        386,389      386,389

                         ------------     ------     ------------    --------     -----------  ------------    ----------
  Balance, September 30,
    2000                      102,967     $1,030       46,752,971    $467,530     $46,373,042  $(45,221,757)   $1,619,845
                         ------------     ------     ------------    --------     -----------  ------------    ----------

</TABLE>


                                       5
<PAGE>   6

                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(1)     NATURE OF BUSINESS

Spatializer Audio Laboratories, Inc. and subsidiaries (the "Company", "our" and
"we") are in the business of developing and licensing technology.

Our wholly owned subsidiary Desper Products, Inc. ("DPI") is in the business of
developing proprietary advanced audio signal processing technologies and
products for consumer electronics, entertainment, and multimedia computing.

Our wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT") was in the
business of developing scaleable, modular compact disc ("CD") and digital
versatile disc ("DVD") server technologies associated with a network based CD /
DVD server for internet and intranet applications. Operations of MDT were
discontinued in the fourth quarter of 1998. Our efforts to sell these assets,
though continuing, have not been successful to date.


(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
The interim consolidated financial statements of the Company are condensed and
do not include some of the information necessary to obtain a complete
understanding of the financial data. Management believes that all adjustments
necessary for a fair presentation of results have been included in the unaudited
consolidated Financial Statements for the interim periods presented. Operating
results for the nine-month period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000. Accordingly, your attention is directed to footnote disclosures found in
the December 31, 1999 Annual Report and particularly to Note 2 which includes a
summary of 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.
MultiDisc Technologies, Inc. has been presented as a discontinued operation. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Revenue Recognition
We accrue revenues based on licensee royalty reports, management estimates and
reports from third parties. While management endeavors to minimize the use of
estimates, any deviation from estimates utilized are adjusted in the subsequent
quarter. Royalty income reported is based on the shipment of product
incorporating the related technology by the original equipment manufacturer or
foundries.

Research and Development Expenditures
We expense research and development expenditures as incurred.



(3)     EARNINGS PER SHARE

On December 31, 1997, the Company retroactively adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128") which replaces the presentation of primary and fully diluted earnings per
share with a presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings 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. Diluted earnings per share
is computed similarly to fully diluted earnings per share pursuant to the
Accounting Principles Board ("APB") Opinion No. 15. The following table presents
contingently issuable shares, options and warrants to purchase shares of common
stock that were outstanding



                                       6
<PAGE>   7

during the nine month periods ended September 30, 2000 and 1999 which were not
included in the computation of diluted loss per share because the impact would
have been anti-dilutive or insignificant:


<TABLE>
<CAPTION>

                                              2000           1999
                                            ---------      ---------
<S>                                         <C>            <C>
                 Options                    2,077,301      2,122,300
                 Warrants                   2,830,000      1,017,000
                                            ---------      ---------
                                            5,083,134      3,139,300
                                            =========      =========
</TABLE>


(4)     COMPREHENSIVE INCOME

The Financial Accounting Standards Board issued Statement No. 130, Reporting
Comprehensive Income ("SFAS 130"), in June 1997. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. We adopted SFAS No. 130 on January 1, 1998. Comprehensive
income is the change in equity of a business enterprise during a period from
transactions and all other events and circumstances from non-owner sources.
Other comprehensive income includes foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain investments in
debt and equity securities. We did not have components of other comprehensive
income during the nine-month periods ended September 30, 2000 and 1999. As a
result, comprehensive income is the same as the net income for the nine-month
periods ended September 30, 2000 and 1999.

(5)     SEGMENT REPORTING

The Financial Accounting Standards Board issued Statement No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS No. 131"), in
June 1997. SFAS No.131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires enterprises to report selected information
about operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. It replaces the "industry segment"
concept of SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, with a "management approach" concept as to basis for identifying
reportable segments. SFAS 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. We adopted SFAS 131 in December 1997.
At September 30, 2000, we have only one operating segment, DPI, the Company's
Audio Signal Processing business.

(6)     MAJOR CUSTOMERS

A substantial portion of the Company's licensing and royalty revenues are
derived from three major customers. The following customers comprised greater
than 10% of total revenues during the nine months ended September 30, 2000 and
1999:

<TABLE>
<CAPTION>

                                    2000        1999
                                  ---------   ----------
<S>                                <C>        <C>
                 Customer A         39%          0%
                 Customer B         38%          26%
                 Customer C         13%          15%
</TABLE>


(7)     CONTINGENCIES

Legal


In February 1999, a complaint was filed in the Superior Court of Los Angeles
County, Northwest District, by I.N. Associates, Inc., against the Company's
wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT"), alleging breach
of contract and fraud, and claiming $499,954 in damages, attorneys fees,
interest and the costs of suit. MDT has answered and denied the claims. The
matter was subject to a mediation preceding in March 2000, and has been


                                       7
<PAGE>   8

settled. The settlement specifies that I.N. will be entitled to a cashless
exercise of warrants for the 125,000 shares originally issued to them in 1997
and 1998.

In connection with the downsizing of the Company, a number of employees were
terminated and have filed, on various dates since the downsizing in 1998,
various employment and compensation related claims with the various State labor
authorities, all but two of which claims have either been settled or have been
paid as of the date of this report. In February, 2000, an appeal was heard in
the Superior Court of Orange County, California, relating to a claim filed by a
former employee of MDT for back vacation pay and penalties. In March 2000, both
parties agreed to dismiss the action as part of a settlement, which was not
material to the financial statements for the period ended March 31, 2000. In
July 2000, the Labor Commission of the State of California awarded $122,000 to a
claimant arising from a claim for commissions over a three-year period. We
appealed the order to the Superior Court of California, Santa Clara County,
since, under California law, the Labor Commission order will have no effect on
the court's consideration of the matter. On October 27, 2000, the matter was
settled by mutual release and payment in an amount which was not material to the
financial statements of the Company for the period ended September 30, 2000. Two
former officers and employees of MDT initiated proceedings before the Labor
Commissioner in 2000 seeking amounts allegedly due under their employment
agreements, which claims, if resolved in favor of the claimants, could be
material to the financial statements of the Company. The Labor Commissioner has
postponed those proceedings. Separately, MDT has initiated litigation in the
Superior Court, Orange County seeking declaratory relief to bar the labor
claims, as well as return of intellectual property and unspecified damages for
breaches of the former officers' and employees' employment agreements.


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


(8)     SALE OF PREFERRED STOCK

   On April 14, 1998, we entered into a private placement for up to $5 million
of which $3 million was funded. In connection with the private placement, the
Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred
Stock at a stated price of $50 per share and issued 60,000 shares for $3
million. In connection with the April funding, we issued purchase warrants,
exercisable for three years and entitling the holders to acquire one share of
the Company's common stock for each warrant. Of the warrants, 450,000 were
issued and 150,000 warrants were issued to placement agents. The investor
warrants are exercisable at 140% and the placement warrants are exercisable at
120%, respectively, of the average closing bid price of our common stock for the
10 days preceding the closing. In addition, cash placement fees of 10% were
paid. A related party received 50,000 of the placement agent warrants and
$100,000 of the placement agent cash fee for arranging $1 million of the $3
million investment. We do not expect any additional investment above the initial
$3 million to be received under this placement. At December 31, 1999, 60,000
shares of Series A Convertible Preferred Stock, representing the entire
placement had been converted into a total of 30,517,943 shares of our Common
Stock, which are covered by Form S-1.


   In the December 1999 transaction, $895,000 in short term loan advances from
officers, directors and their affiliates and certain other securities holders,
and accrued interest of $134,647, were restructured into the $1,000,000 in new
Series B Preferred Stock. The Series B Preferred Stock, and any dividends
therefrom not converted into cash, are convertible commencing in 2001 into
restricted Common Stock at a 10% discount, based on the 10 day average closing
bid price prior to the conversion, but subject to a minimum conversion of $.56
per share and a maximum of $1.12 per share. We have a three year option to
redeem any Series B Preferred Stock, not sooner converted, in whole or in part,
in cash.

(9)     SALE OF COMMON STOCK

   In December 1999, we completed a set of financial transactions (the "December
Transactions") with certain existing holders of our equity and debt and with new
institutional investors. The December Transactions included the private
placement of 1,884,254 additional shares of our Common Stock ($1.05 million in
new capital or $0.56 per share), the issuance of warrants to acquire 2,100,000
shares of Common Stock exercisable for three years at an exercise price of


                                       8
<PAGE>   9

$.67 per share), the cancellation of 500,000 warrants to acquire Common Stock
issued in the April 1998 financing. The placement of common shares was at no
discount to market. We have registered these shares and warrants for resale
under Form S-1, as required by the placement documents.


(10)    DISCONTINUED OPERATIONS

In September, 1998, the Board of Directors approved a plan to refocus corporate
activities on our core audio business, Desper Products, Inc. In conjunction to
this strategic refocusing, we permanently suspended operations of MDT and placed
the business and its related patent portfolio up for sale. We are accounting for
the on-going operating and termination expenses of MDT as a discontinued
operation .





                                       9
<PAGE>   10

Item 2. Management's discussion and analysis of financial condition and
        results of operations

 RESULTS OF OPERATIONS

 RESULTS OF OPERATIONS

This form 10-Q contains forward-looking statements, within the meaning of the
Private Securities Reform Act of 1995, which are subject to a variety of risks
and uncertainties. Our actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements.

 REVENUES

Revenues for the three months ended September 30, 2000 were $630,000, compared
to revenues of $324,000 in the comparable period last year, an increase of 94%.
Revenues for the nine months ended September 30, 2000 were $1,666,000, compared
with $977,000 in the comparable period last year, an increase of 71%. The
increase in such revenues resulted primarily from running royalties earned in
the third quarter, and in the nine month period of 2000 from a license agreement
for which there were no comparable running royalties, from this account, in the
comparable period last year. In addition, in both current year periods, we
earned increased royalties from Spatializer N-2-2 on higher DVD player and
digital signal processor (DSP) sales by our licensees. This increase was
partially offset by lower royalty rates as compared to those earned in the
comparable period last year. Some of our license agreements provide for royalty
rate reductions as volume milestones are achieved. As such, the royalty rates
earned in the comparable period last year when one licensee initially began
shipping its DSP were significantly higher when cumulative volume levels were
low. Virtually all volume milestones have been achieved at September 30, 2000,
which should result in the stabilization of the royalty rate going forward.

 GROSS PROFIT

Gross profit for the three months ended September 30, 2000 was $560,000 (89% of
revenue) compared to gross profit of $304,000 (94% of revenue) in the comparable
period last year, an increase of 84%. Gross profit for the nine-months ended
September 30, 2000 were $1,498,000, compared with $948,000 in the comparable
period last year, an increase of 58%. Gross profit primarily increased due to
the increase in revenue. Gross margin decreased due to commissions paid to
foreign sales reps in both current year periods due to a change in mix to higher
foreign derived revenue, which is commission bearing.

 OPERATING EXPENSES

Operating expenses in the three months ended September 30, 2000 were $458,000
(73% of revenue) compared to operating expenses of $239,000 (74% of revenue) in
the comparable period last year, an increase of 92%. Operating expenses in the
nine months ended September 30, 2000 were $1,092,000 (66% of revenue) compared
to operating expenses of $824,000 (84% of revenue) in the comparable period last
year, an increase of 33%. The increase in operating expenses for both the three
and nine months ended September 30, 2000 resulted primarily from a significant
expansion of the Company's research and development staff and effort, increased
sales and marketing activity, legal expense and the ongoing investor relations
program.

General and Administrative

General and administrative expenses in the three months ended September 30, 2000
were $182,000 (29% of revenue) compared to general and administrative expenses
of $99,000 (31% of revenue) in the comparable period last year, an increase of
84%. General and administrative expenses in the nine months ended September 30,
2000 were $426,000 (26% of revenue) compared to general and administrative
expenses of $311,000 (32% of revenue) in the comparable period last year, an
increase of 37%. The increase in general and administrative expense in both
current periods resulted from an increase in legal expenses relating to the
corporate finance, transaction negotiations and settlements, normalized
operating activities and the ongoing investor relations program.


                                       10
<PAGE>   11

Research and Development

Research and development expenses in the three months ended September 30, 2000
were $186,000 (30% of revenue) compared to research and development expenses of
$73,000 (23% of revenue) in the comparable period last year, an increase of
155%. Research and development expenses in the nine months ended September 30,
2000 were $388,000 (23% of revenue) compared to research and development
expenses of $324,000 (33% of revenue) in the comparable period last year, an
increase of 20%. The increase in such expenses in the three month period
resulted primarily from significantly higher engineering headcount in the
current period as compared with the comparable period last year. Current
staffing levels are now approaching that which existed in early 1999, prior to
significant attrition while we sought new financing.

Sales and Marketing

Sales and marketing expenses in the three months ended September 30, 2000 were
$90,000 (14% of revenue) compared to sales and marketing expenses of $67,000
(21% of revenue) in the comparable period last year, an increase of 34%. Sales
and marketing expenses in the nine months ended September 30, 2000 were $277,000
(17% of revenue) compared to sales and marketing expenses of $189,000 (19% of
revenue) in the comparable period last year, an increase of 47%.The increase in
sales and marketing expense in both periods resulted primarily from greater
international travel in the current period and marketing support expense as
compared with the comparable period last year.


NET INCOME

Net Income in the three months ended September 30, 2000 was $104,000 (16% of
revenues), $0.00 per share, compared to net income of $33,000 (10% of revenue),
$0.00 per share in the comparable period last year, an increase of 215%. Net
Income in the nine months ended September 30, 2000 was $386,000 (23% of
revenues), $0.01 per share, compared to net income of $47,000 (10% of revenue),
$0.00 per share in the comparable period last year, an increase of 215%. The
increase in net income was the result of the increase in revenues, partially
offset by lower gross margin and the increase in operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2000, we had $1,519,000 in cash and cash equivalents as
compared to $1,022,000 at December 31, 1999. The increase in cash and cash
equivalents is attributed to cash provided by the exercise of options to
purchase shares of common stock and cash provided by other operating activities.
We had working capital of $1,246,000 at September 30, 2000 as compared with
working capital of $395,000 at December 31, 1999. Our future cash flow will come
primarily from the audio signal processing licensing business' Foundry and
Original Equipment Manufacturers' ("OEM") royalties and common stock issuances
including warrant and option exercises. At September 30, 2000 we had six Foundry
licensees, seventy-seven OEM Licensees and sixteen authorized customers for its
audio signal processing business, an increase of three over that at December 31,
1999. We are actively engaged in negotiations for additional audio signal
processing licensing arrangements which will generate additional cash flow
without imposing any substantial costs on the Company.

We have related party obligations of $225,000, which are convertible into Common
Stock at our or Debtee's option. The obligation matures in June 2001. The
Company owed a total of $337,700 to related parties as of September 30, 2000 and
December 31, 1999.


On April 14, 1998, we entered into a private placement for up to $5 million of
which $3 million was funded. In connection with the private placement, the
Company authorized 100,000 shares of a new Series A, 7% Convertible Preferred
Stock at a stated price of $50 per share and issued 60,000 shares for $3
million. In connection with the April funding, we issued purchase warrants,
exercisable for three years and entitling the holders to acquire one share of
the Company's common stock for each warrant. Of the warrants, 450,000 were
issued and 150,000 warrants were issued to placement agents. The investor
warrants are exercisable at 140% and the placement warrants are exercisable at
120%, respectively, of the average closing bid price of our common stock for the
10 days preceding the closing. In addition, cash placement fees of 10% were
paid. A related party received 50,000 of the placement agent warrants and
$100,000 of the placement agent cash fee for arranging $1 million of the $3
million investment. We do not expect any additional investment above the initial
$3 million to be received under this placement. At December 31, 1999, 60,000
shares of


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<PAGE>   12


Series A Convertible Preferred Stock, representing the entire placement had been
converted into a total of 30,517,943 shares of our Common Stock, which are
covered by Form S-1.

On September 25, 1998, we announced that our Board of Directors was refocusing
our business on the exploitation of its audio technologies, and, as noted above,
to properly position the MultiDisc assets for sale. Currently we are actively
pursuing licensing opportunities, including possible strategic alliances and
capital funding opportunities based on its core audio technologies. In reaching
its decision of September 25, 1998, we indicated that while we recognized the
prospects of MultiDisc, the capital investment required to properly
commercialize the technology was beyond our capacity and, therefore, we made the
decision to seek a sale transaction. Effective as of that date, Steven D.
Gershick resigned as chief executive officer of the Company and as president of
MultiDisc Technologies, Inc., but continued to serve as chairman of the board
and director of the Company until February 10, 2000. Henry R. Mandell, who
joined the Company in March, 1998 as senior vice president finance was
designated as interim chief executive officer to oversee all of the corporate
activities, reporting to the Board of Directors, and continues in that capacity.
Michael Bolcerek resigned as president of Desper Products, Inc. Mr. Mandell was
elected as a director by the stockholders on February 10, 2000 and also was
designated chief executive officer and chairman of the board.

We responded to inquiries from NASDAQ and attended a hearing with respect to its
continued listing on October 29, 1998 at which time it outlined its strategy for
continued listing. In November, 1998, NASDAQ provided us with an extension and
conditional listing until December 31, 1998 to provide evidence of compliance
with all requirements for continued listing. On December 31, 1998, we informed
NASDAQ that we would be unable to comply with these requirements. On January 5,
1999, our common stock was delisted from the NASDAQ SmallCap Market and, on the
same day, commenced trading on the NASD Bulletin Board under the symbol "SPAZ".

In December 1999, we completed a set of financial transactions (the "December
Transactions") with certain existing holders of our equity and debt and with new
institutional investors. The December Transactions included the private
placement of 1,884,254 additional shares of our Common Stock ($1.05 million in
new capital or $0.56 per share), the issuance of warrants to acquire 2,100,000
shares of Common Stock exercisable for three years at an exercise price of $.67
per share), the cancellation of 500,000 warrants to acquire Common Stock issued
in that earlier financing, the conversion of $1 million of short term debt into
a new Series B Redeemable Convertible Preferred Stock ("Series B Preferred
Stock") and the conversion of $225,000 of secured debt into secured convertible
debt.

In the December Transactions, $895,000 in short term loan advances from
officers, directors and their affiliates and certain other securities holders,
and accrued interest of $134,647, were restructured into the $1,000,000 in new
Series B Preferred Stock. The Series B Preferred Stock, and any dividends
therefrom not converted into cash, are convertible commencing in 2001 into
restricted Common Stock at a 10% discount, based on the 10 day average closing
bid price prior to the conversion, but subject to a minimum conversion of $.56
per share and a maximum of $1.12 per share. We have a three year option to
redeem any Series B Preferred Stock, not sooner converted, in whole or in part,
in cash.

In the December Transactions, $225,000 of secured debt, including accrued
interest, was converted into secured long term convertible debt. The long term
debt is held by existing institutional investors and is secured by essentially
all of our assets. The debt, and accrued interest, is convertible at our or the
holder's options into registered Common Stock at a conversion price equal to the
average 10 day closing bid price prior to conversion but subject to the same
minimum and maximum conversion prices set for the Series B Preferred Stock.

Funds generated by these financing activities as well as cash generated from our
existing operations is expected to be sufficient for us to meet our operating
obligations and the anticipated additional research and development for its
audio technology business.



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<PAGE>   13

                           PART II. OTHER INFORMATION


ITEM 1.     LEGAL PROCEEDINGS

Reference is made to the Company's Form 10-K for the year ended December 31,
2000 with respect to the Company's litigation with QSound Labs, Inc. and others.

In February 1999, a complaint was filed in the Superior Court of Los Angeles
County, Northwest District, by I.N. Associates, Inc., against the Company's
wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT"), alleging breach
of contract and fraud, and claiming $499,953.94 in damages, attorneys fees,
interest and the costs of suit. MDT has answered and denied the claims. The
matter was subject to a mediation preceding in March 2000, and has been settled.
The settlement specifies that I.N. will be entitled to a cashless exercise of
warrants for the 125,000 shares originally issued to them in 1997 and 1998.

In connection with the downsizing of the Company, a number of employees were
terminated and have filed, on various dates since the downsizing in 1998,
various employment and compensation related claims with the various State labor
authorities, all but two of which claims have either been settled or have been
paid as of the date of this report. In February, 2000, an appeal was heard in
the Superior Court of Orange County, California, relating to a claim filed by a
former employee of MDT for back vacation pay and penalties. In March 2000, both
parties agreed to dismiss the action as part of a settlement, which was not
material to the financial statements for the period ended March 31, 2000. In
July 2000, the Labor Commission of the State of California awarded $122,000 to a
claimant arising from a claim for commissions over a three-year period. We
appealed the order to the Superior Court of California, Santa Clara County,
since, under California law, the Labor Commission order will have no effect on
the court's consideration of the matter. On October 27, 2000, the matter was
settled by mutual release and payment in an amount which was not material to the
financial statements of the Company for the period ended September 30, 2000. Two
former officers and employees of MDT initiated proceedings before the Labor
Commissioner in 2000 seeking amounts allegedly due under their employment
agreements, which claims, if resolved in favor of the claimants, could be
material to the financial statements of the Company. The Labor Commissioner has
postponed those proceedings. Separately, MDT has initiated litigation in the
Superior Court, Orange County seeking declaratory relief to bar the labor
claims, as well as return of intellectual property and unspecified damages for
breaches of the former officers' and employees' employment agreements.

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

 No material developments in such litigation occurred during the three-month
period ended September 30, 2000



ITEM 2.     CHANGES IN SECURITIES

None


ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

None


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

None


ITEM 5.     OTHER INFORMATION



                                       13
<PAGE>   14

None


ITEM 6.     EXHIBITS AND REPORTS ON FORM 8K

None
         (b)21.1   Schedule of Subsidiaries of the Company:

        Desper Products, Inc., a California Corporation
        MultiDisc Technologies, Inc. (inactive), a Delaware Corporation




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<PAGE>   15

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated:  November 7, 2000


                             SPATIALIZER AUDIO LABORATORIES, INC.
                             (REGISTRANT)


                              /s/ HENRY R. MANDELL
                             ------------------------------------------------
                                  HENRY R. MANDELL
                                  CHAIRMAN OF THE BOARD
                                  Chief Executive Officer
                                  Chief Financial Officer