<PAGE>   1
 
================================================================================
 
                                 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, 1997
 
                                            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)
 
<TABLE>
            <S>                                           <C>
                   DELAWARE                                     95-4484725
                (STATE OR OTHER                              (I.R.S. EMPLOYER
                 JURISDICTION OF                            IDENTIFICATION NO.)
               INCORPORATION OR
                  ORGANIZATION)                                                
</TABLE>
 
                       20700 VENTURA BOULEVARD, SUITE 134
                     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 November 6, 1997 there were 20,893,679 shares of the Registrant's
Common Stock outstanding.
 
================================================================================
<PAGE>   2
 
                         PART I.  FINANCIAL INFORMATION
 
ITEM I. FINANCIAL STATEMENTS
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,     DECEMBER 31,
                                                                      1997              1996
                                                                  -------------     ------------
                                                                   (UNAUDITED)
<S>                                                               <C>               <C>
Current Assets:
  Cash and Cash Equivalents.....................................  $     770,203     $  1,587,395
  Trade Receivables and Employee Advances.......................        833,970          820,856
  Inventory.....................................................        100,871          296,539
  Prepaid Expenses and Deposits.................................        163,843          260,984
                                                                   ------------     ------------
          Total Current Assets..................................      1,868,887        2,965,774
Fixed Assets, Net (Note 3)......................................        614,859          622,856
Intangible Assets (Note 4)......................................        575,575          451,733
Other Assets....................................................        102,653          100,832
                                                                   ------------     ------------
                                                                  $   3,161,974     $  4,141,195
                                                                   ============     ============
                              LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Accounts Payable..............................................  $     381,207     $    403,870
  Accrued Liabilities...........................................        185,722          333,152
  Advances from Related Parties.................................        112,500          112,500
  Notes Payable.................................................         69,824           23,800
                                                                   ------------     ------------
          Total Current Liabilities.............................        749,253          873,322
                                                                   ------------     ------------
Shareholders' Equity:
  Preferred shares, $.01 par value, 1,000,000 shares authorized,
     no shares issued or outstanding............................             --               --
  Common shares, $.01 par value, 50,000,000 shares authorized,
     20,826,429 and 19,115,429 shares issued and outstanding at
     September 30, 1997 and December 31, 1996, respectively.....        208,264          191,154
  Additional Paid-In Capital....................................     40,514,790       38,527,775
  Accumulated Deficit...........................................    (38,310,333)     (35,451,056)
                                                                   ------------     ------------
          Total Shareholders' Equity............................      2,412,721        3,267,873
                                                                   ------------     ------------
                                                                  $   3,161,974     $  4,141,195
                                                                   ============     ============
</TABLE>
 
          See accompanying notes to consolidated financial statements
 
                                        1
<PAGE>   3
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                          FOR THE THREE MONTH PERIOD        FOR THE NINE MONTH PERIOD ENDED
                                                     ENDED
                                        -------------------------------     -------------------------------
                                        SEPTEMBER 30,     SEPTEMBER 30,     SEPTEMBER 30,     SEPTEMBER 30,
                                            1997              1996              1997              1996
                                        -------------     -------------     -------------     -------------
<S>                                     <C>               <C>               <C>               <C>
Revenues:
  Product Revenues....................   $     26,911      $     72,417      $    312,698      $    265,681
  Licensing Revenues..................        805,971           399,760         1,615,514         1,143,074
                                          -----------       -----------       -----------       -----------
                                              832,882           472,177         1,928,212         1,408,755
     Cost of Revenues.................         36,261            70,113           223,502           153,799
                                          -----------       -----------       -----------       -----------
                                              796,621           402,064         1,704,710         1,254,956
                                          -----------       -----------       -----------       -----------
Operating Expenses:
  General and Administrative..........        458,236           561,830         1,566,791         1,632,783
  Research and Development............        775,166           561,446         2,154,231         1,073,065
  Sales and Marketing.................        211,519           396,885           831,403         1,298,718
     In Process Research & Development
       (Note 5).......................             --                --                --           679,684
                                          -----------       -----------       -----------       -----------
                                            1,444,921         1,520,161         4,552,425         4,684,250
                                          -----------       -----------       -----------       -----------
     Operating Loss...................       (648,300)       (1,118,097)       (2,847,715)       (3,429,294)
Interest and Other Income.............         11,645            38,777            43,337           103,094
Interest and Other Expense............         (6,028)           (3,392)          (15,647)          (10,995)
                                          -----------       -----------       -----------       -----------
                                                5,617            35,385            27,690            92,099
     Loss Before Income Taxes.........       (642,683)       (1,082,712)       (2,820,025)       (3,337,195)
     Income Taxes.....................        (18,752)          (18,967)          (39,252)         (293,385)
                                          -----------       -----------       -----------       -----------
     Net Loss.........................   $   (661,435)     $ (1,101,679)     $ (2,859,277)     $ (3,630,580)
                                          ===========       ===========       ===========       ===========
     Net Loss Per Common Share........   $      (0.03)     $      (0.08)     $      (0.14)     $      (0.29)
                                          ===========       ===========       ===========       ===========
Weighted Average Common Shares
  Outstanding.........................     20,807,516        13,107,485        20,406,282        12,710,884
                                          ===========       ===========       ===========       ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements
 
                                        2
<PAGE>   4
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                         NINE MONTHS ENDED
                                                                    ---------------------------
                                                                     SEPTEMBER       SEPTEMBER
                                                                        30,             30,
                                                                       1997            1996
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Cash Flows from Operating Activities:
  Net Loss........................................................  $(2,859,277)    $(3,630,580)
  Adjustments to reconcile net income to net cash provided by
     operating activities:
     Depreciation and Amortization................................      211,625          91,343
     In Process Research & Development (Note 5)...................           --         679,684
  Net Change in Assets and Liabilities:
     Trade Receivables & Employee Advances........................      (13,114)       (324,052)
     Inventory....................................................      195,668         (78,941)
     Prepaid Expenses and Deposits................................       97,141        (188,642)
     Accounts Payable.............................................      (22,663)        171,243
     Accrued Liabilities..........................................     (147,430)        (22,583)
     Other Assets.................................................       (1,821)             --
                                                                    -----------     -----------
Net Cash Used in Operating Activities.............................   (2,539,871)     (3,302,528)
                                                                    -----------     -----------
Cash Flows from Financing Activities:
     Issuance of Common Shares, net...............................    2,004,125       4,511,129
     Due to Related Parties.......................................           --        (212,561)
     Issuance of Notes Payable....................................       59,532          15,237
     Repayment of Notes Payable...................................      (13,508)         (4,884)
                                                                    -----------     -----------
Net Cash Provided by (Used In) Financing Activities...............    2,050,149      (4,308,921)
                                                                    -----------     -----------
Cash Flows from Investing Activities:
     Purchase of Fixed Assets (Note 5)............................     (179,633)       (199,289)
     MDT Asset Acquisition (Note 5)...............................           --      (1,062,156)
     Increase in Intangible Assets (Note 5).......................     (147,837)          7,225
                                                                    -----------     -----------
Net Cash Used in Investing Activities.............................     (327,470)     (1,254,220)
                                                                    -----------     -----------
Decrease in Cash and Cash Equivalents.............................     (817,192)       (247,827)
Cash and Cash Equivalents, Beginning of Period....................    1,587,395       3,113,057
                                                                    -----------     -----------
Cash and Cash Equivalents, End of Period..........................  $   770,203     $ 2,865,230
                                                                    ===========     ===========
Supplemental Disclosure of Cash Flow Information:
     Cash paid during the period for:
     Interest.....................................................  $    15,647     $    10,996
     Income Taxes.................................................  $    39,252     $   293,385
</TABLE>
 
          See accompanying notes to consolidated financial statements
 
                                        3
<PAGE>   5
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                COMMON SHARES
                                   ----------------------------------------                      TOTAL
                                   NUMBER OF                  ADDITIONAL      ACCUMULATED    SHAREHOLDERS'
                                     SHARES     PAR VALUE   PAID-IN-CAPITAL     DEFICIT         EQUITY
                                   ----------   ---------   ---------------   ------------   -------------
<S>                                <C>          <C>         <C>               <C>            <C>
Balance, December 31, 1996.......  19,115,429   $ 191,154     $38,527,775     $(35,451,056)   $  3,267,873
Private Placements, Net (Note 6).   1,667,500      16,675       1,949,468                        1,966,143
Options Exercised................      43,500         435          37,547                           37,982
Net Loss.........................                                               (2,859,277)     (2,859,277)
                                   ----------    --------     -----------     ------------      ----------
Balance, September 30, 1997......  20,826,429   $ 208,264     $40,514,790     $(38,310,333)   $  2,412,721
                                   ==========    ========     ===========     ============      ==========
</TABLE>
 
          See accompanying notes to consolidated financial statements
 
                                        4
<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") is in
the business of technology development and licensing.
 
     The Company's wholly owned subsidiary Desper Products, Inc. ("DPI") is in
the business of developing proprietary advanced audio signal processing
technologies and products for consumer electronics, entertainment, and
multimedia computing.
 
     The Company's wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT")
is in the business of developing scaleable, modular compact disc/DVD server
technologies for licensing. Currently the development focus is on technologies
associated with a network based compact disc/DVD server for internet and
intranet applications.
 
(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. Accordingly, your attention is directed to
footnote disclosures found in the December 31, 1996 Annual Report and
particularly to Note 1 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 subsidiaries, Desper Products,
Inc. and MultiDisc Technologies, Inc. All material inter-company transactions
have been eliminated.
 
  Research and Development Expenditures
 
     The Company expenses research and development expenditures as incurred.
 
(3) FIXED ASSETS
 
     Fixed assets, at cost, as of September 30, 1997 and December 31, 1996
consist of the following:
 
<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,     DECEMBER 31,
                                                                     1997              1996
                                                                 -------------     ------------
    <S>                                                          <C>               <C>
    Office Computers, Software, Equipment and Furniture........   $   751,927        $595,993
    Test Equipment.............................................       114,225          97,928
    Tooling Equipment..........................................        44,136          44,136
    Trade Show Booth and Demonstration Equipment...............       135,222         130,846
    Leasehold Improvements.....................................        48,782          45,756
                                                                   ----------        --------
                                                                    1,094,292         914,659
    Less Accumulated Depreciation and Amortization.............       479,433         291,803
                                                                   ----------        --------
                                                                  $   614,859        $622,856
                                                                   ==========        ========
</TABLE>
 
                                        5
<PAGE>   7
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(4) INTANGIBLE ASSETS
 
     Intangible assets, as of September 30, 1997 and December 31, 1996 consist
of the following:
 
<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,     DECEMBER 31,
                                                                     1997              1996
                                                                 -------------     ------------
    <S>                                                          <C>               <C>
    Capitalized patent and technology costs....................    $ 457,059         $309,222
    Capitalized patent costs in association with MDT Asset
      Acquisition..............................................      200,000          200,000
                                                                    --------         --------
                                                                     657,059          509,222
    Less Accumulated Amortization..............................       81,484           57,489
                                                                    --------         --------
                                                                   $ 575,575         $451,733
                                                                    ========         ========
</TABLE>
 
(5) ASSET ACQUISITION
 
     In September 1996, the Company purchased certain assets from Home Theater
Products International, Inc. ("HTP"), a debtor in possession, for $1,062,156
including acquisition costs. Of the purchase price, $679,684 was allocated to
In-Process Research & Development ("IPR&D") and expensed at the Closing. IPR&D
is defined as those research and development efforts that, as of the acquisition
date, June 24, 1996, have not yet generated commercializable products and thus
the revenue generating capability of the products is uncertain. At the date of
acquisition there were no existing products acquired. IPR&D represents 64% of
the total acquisition costs. The remaining 36% was allocated as follows:
approximately $200,000 to intangible assets, primarily representing acquired
patent applications, and approximately $182,000 to fixed assets, including
computers, office equipment, and furniture. The Company has not begun amortizing
the intangible assets purchased since the patents had not been approved as of
September 30, 1997.
 
(6) SHAREHOLDERS' EQUITY
 
     During the nine month period ended September 30, 1997, shares of common
stock were issued as follows:
 
     In March 1997, the Company completed a private placement of 1,600,000 units
at a price of $1.25 US per unit comprised of one common share of the Company's
stock and one-half of one, one-year non-transferable common stock purchase
warrant. One warrant entitles the holder to purchase one additional share of
common stock in the capital of the Company on or before April 7, 1998 at the
price of $1.75 US per share.
 
     The Company received proceeds of $1,966,143 from the private placement of
the Company's common stock, net of finders fees of $33,857 in cash and 67,500
shares of common stock valued at $1.75 US per share.
 
     On July 18, 1997, the Compensation Committee of the Board of Directors took
action to re-price qualified stock options to purchase 220,103 shares of common
stock granted to various employees beginning in September, 1995. The option
exercise price for these shares was adjusted to $1.31 per share (the closing
market price on July 18, 1997), reducing grant date exercise prices ranging from
$1.50 to $4.73 per share. The vesting schedules and expiration dates for these
options were not modified.
 
(7) MAJOR CUSTOMERS
 
     A substantial portion of the Company's licensing revenues are derived
primarily from running royalties based on usage and include revenues from three
major customers. In the nine-month period ended September 30, 1997 these major
customers represent 57%, 22% and 6%, respectively, compared to 30%, 23% and 16%
for the same period in 1996.
 
                                        6
<PAGE>   8
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(8) SUBSEQUENT EVENT
 
     On October 31, 1997, the Company entered into a line of credit agreement
with Silicon Valley Bank for up to $600,000 in short term financing based upon
the Company's accounts receivable base. As of November 13, 1997 there were no
borrowings against this line of credit.
 
     On November 5, 1997, the Board of Directors adopted a plan in which MDT
will be spun-off into a newly formed and separately financed corporation.
Venture and strategic investors are expected to provide a minimum of $6,000,000
in new equity financing to this new company, resulting in a post-financing
valuation for this new company of not less than $18,000,000. Under the plan, the
Company will, upon closing, receive approximately 67% interest in this new
company which will be distributed to the Company's shareholders of record on
January 7, 1998. The spin-off is subject to the Company obtaining an independent
fairness opinion on behalf of shareholders and shareholder approval.
 
                                        7
<PAGE>   9
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     The following discussion and analysis relates to the financial condition
and results of operations of Spatializer Audio Laboratories, Inc. and
subsidiaries (the "Company") for the nine-month and three-month periods ended
September 30, 1997, compared with the nine-month and three-month periods ended
September 30, 1996.
 
RESULTS OF OPERATIONS
 
FOR THE NINE-MONTH AND THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997, COMPARED TO
THE SAME PERIODS ENDED SEPTEMBER 30, 1996
 
  Revenues
 
     The Company reported an increase in revenues of 37% or $520,000, reaching
$1,928,000 for the nine-month period ended September 30, 1997 compared to
$1,409,000 for the nine-month period ended September 30, 1996. The Company
reported increased revenues of 76% or $361,000, reaching $833,000 for the
three-month period ended September 30, 1997 compared to $472,000 for the
three-month period ended September 30, 1996. Revenues include sales of
professional recording systems, consumer products, license issuance fees and
royalties pertaining to the licensing of Spatializer(R) audio signal processing
designs.
 
     The increase in revenues is attributed primarily to an increase in
recurring royalties for the licensing of the Spatializer technologies, reporting
of which is based upon product sales reports supplied by the Company's
customers. The increase in recurring royalties reflects strong unit license
growth as a direct result of design wins and product introductions from the
forty-seven new customers adopting the usage of Spatializer(R) advanced audio
solutions over the last five quarters. In addition, the Company further
solidified its market position in multimedia computing with the signing during
the quarter of a multi-year, multi-technology license agreement with one of the
Company's IC Foundries.
 
     A portion of the Company's revenues are for product sales based on the
shipment of the Company's consumer product, the HTMS-2510(TM), which inventory
is expected to be depleted over the next couple of quarters due to discontinued
production of this product. In the future the Company expects the majority of
revenues to come from licensing activities.
 
Gross profit for the nine-month period ended September 30, 1997, was
approximately 88% as compared with 89% for the same period in 1996. The Company
maintains a high margin as the majority of revenues are from licensing
activities which have little or no direct costs associated with them.
 
  Operating Expenses
 
     The operating expenses for the nine-month period ended September 30, 1997
decreased by approximately 3% or $132,000 for a total of $4,552,000 compared to
$4,684,000 for the same nine-month period in 1996. Operating expenses for the
three-month period ended September 30, 1997, decreased by approximately 5% or
$75,000, for a total of $1,445,000 compared to $1,520,000 for the same period of
1996. The reduction in operating costs is a direct result of continued cost
controls implemented in the forth quarter of 1996. The effects of these costs
controls can be seen primarily in the General and Administrative and Sales and
Marketing departments. Cost savings measures in the Company's Research and
Development departments for DPI, the Company's advanced audio technology
business, have been more than offset by increased costs in MDT, the Company's
server technology business.
 
                                        8
<PAGE>   10
 
     General and Administrative
 
     General and administrative costs had a decrease of approximately 4% or
$66,000, to $1,567,000 for the nine-month period ended September 30, 1997 as
compared with $1,633,000 for the same period in 1996. General and administrative
costs had a decrease of approximately 18% or $104,000, for a total of $458,000
for the three-month period ended September 30, 1997 as compared with $562,000
for the same period in 1996. The change is primarily the result of increased
payroll and payroll related costs as the Company transitioned consulting and
temporary help to permanent positions during 1996 partially offset by cost
savings in professional service fees and general operating costs. General
operating costs include rent, telephone, office supplies and stationery,
postage, depreciation and similar costs.
 
     Research and Development
 
     Research and Development costs increased by approximately 101% or
$1,081,000, to $2,154,000 for the nine-month period ended September 30, 1997,
compared to $1,073,000 for the same nine-month period in 1996. The research and
development activity grew approximately 38% or $214,000, to $775,000 for the
three-month period ended September 30, 1997, compared to $561,000 for the same
period in 1996. The increase in research and development expense was due to the
increased cost of MDT's research and development activity of technology
demonstrators for the MultiDisc eXpandable Network Server, XNS(TM), technology
partially offset by savings in the DPI subsidiary of the Company.
 
     MDT, which began operations on June 24, 1996, represented approximately 76%
or $1,632,000 of the total research and development costs of $2,154,000 for the
nine-month period ended September 30, 1997 and approximately 81% or $631,000 of
the total research and development costs of $775,000 for the three-month period
ended September 30, 1997.
 
     In addition, the Company continued efforts to identify, validate, and
develop new product ideas through DPI. Specific engineering efforts were
directed toward porting support of N22(TM) -- Digital Virtual Surround
technologies to current and potential licensees during the quarter and toward
enCompass, a true interactive, real-time 3-D audio positioning technology.
 
     A one-time cost for In Process Research and Development of $679,684 is
included in the operating expenses for the nine-month period ended September 30,
1996 and is related to the acquisition of assets in the prior year period. This
one-time cost is not included in research and development department costs for
purposes of a more accurate comparison of actual and on-going research and
development costs of the Company.
 
     Sales and Marketing
 
     Sales and marketing costs decreased approximately 36%, or $467,000 for a
total of $831,000 for the nine-month period ended September 30, 1997, compared
to $1,299,000 for the same nine-month period in 1996. Sales and marketing costs
decreased approximately 47%, or $185,000, for a total of $212,000 for the three-
month period ended September 30, 1997, compared to $397,000 for the same period
in 1996. The decrease is attributed to cost containment efforts which began in
the fourth quarter of 1996 along with a reduction in 1997 trade show and trade
show related costs and advertising costs associated with the 1996 launch of the
Company's discontinued consumer product, the HTMS-2510.
 
                                        9
<PAGE>   11
 
  Liquidity and Capital Resources
 
     During the three-month period ended September 30, 1997 the Company's audio
licensing subsidiary, DPI, was profitable for the first time in the Company's
history. The results of operations do not reflect this profitability because of
the Company's commitment to the development of the MultiDisc server technology.
In an effort to relieve the Spatializer shareholders from the significant
capital outlays and negative earnings impact of funding this development, on
November 5, 1997, the Board of Directors adopted a plan in which MDT, will be
spun-off into a newly formed and separately financed corporation. Under the
plan, the Company will, upon closing, receive approximately 67% interest in this
new company which will be distributed to the Company's shareholders of record on
January 7, 1998. Venture and strategic investors are expected to provide a
minimum of $6,000,000 in new equity financing to this new company, resulting in
a post-financing valuation for this new company of not less than $18,000,000.
The spin-off is subject to the Company obtaining an independent fairness opinion
on behalf of shareholders and shareholder approval.
 
     If MDT is not successful in its plan for independent funding then cash and
cash equivalents and cash generated from the Company's existing operations is
not expected to be sufficient for the Company to meet the Company's operating
obligations and the anticipated additional research, development, and commercial
prototype cost for the MultiDisc business during the next twelve months. As a
result, the Company would need to identify other debt, equity or strategic
investment sources, and if such funding were not available, management may be
required to modify or delay the timing of the additional MultiDisc development
activities.
 
     At September 30, 1997, the Company had $770,000 in cash and cash
equivalents as compared to $1,587,000 at December 31, 1996. The decrease in cash
and cash equivalents is attributed to cash used for the development of MDT's
principal technology demonstrators and cash used in other operating activities.
The Company had working capital of $1,120,000 at September 30, 1997 as compared
with $2,092,000 at December 31, 1996. The Company's 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, 1997 the Company had
five Foundry licensees and sixty-two OEM Licensees for its audio signal
processing business as compared with three Foundry licensees and forty-eight OEM
Licensees at December 31, 1996. The Company is 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.
 
     The Company continues to have no long-term debt and has no present
commitments or agreements which would require any long-term debt to be incurred.
The Company owed $112,500 to related parties as of September 30, 1997 and at
December 31, 1996.
 
     On July 18, 1997, the Compensation Committee of the Board of Directors took
action to re-price qualified stock options to purchase 220,103 shares of common
stock granted to various employees beginning in September, 1995. The option
exercise price for these shares was adjusted to $1.31 per share (the closing
market price on July 18, 1997) reducing grant date exercise prices ranging from
$1.50 to $4.73 per share. The vesting schedules and expiration dates for these
options were not modified.
 
     On October 31, 1997, the Company entered into a line of credit agreement
with Silicon Valley Bank for up to $600,000 in short term financing based upon
the Company's accounts receivable base. As of November 13, 1997 there were no
borrowings against this line of credit.
 
                                       10
<PAGE>   12
 
  Recently Issued Accounting Standards
 
     The Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("FAS 128"), in February 1997. FAS 128 is effective for
both interim and annual periods ending after December 15, 1997. The Company will
adopt the provision in the fourth quarter of 1997. FAS 128 requires the
presentation of "Basic" earnings per share which represents income available to
common shareholders divided by the weighted average number of common shares
outstanding for the period. A dual presentation of "Diluted" earnings per share
will also be required. The Diluted presentation is similar to the current
presentation of all prior period earnings per share data presented. Management
believes the adoption of FAS 128 will not have a material impact on the
Company's financial position or results of operations.
 
     The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("FAS 130"), in June 1997. FAS 130 establishes
standards for reporting and display of comprehensive income and its components
in financial statements. FAS 130 is effective for both interim and annual
periods beginning after December 15, 1997. The Company will adopt FAS 130 in the
first quarter of fiscal year end December 31, 1998. Management believes that the
adoption of FAS 130 will not have a material impact on the Company's financial
position or results of operations.
 
     The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"), in June 1997. FAS 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 FAS No. 14. "Financial Reporting for Segments of a Business
Enterprise", with a "management approach" concept as to basis for identifying
reportable segments. FAS 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company will adopt FAS 131 in the annual
financial statements of fiscal year end December 31, 1998. Management believes
that the adoption of FAS 131 will not have a material impact on the Company's
financial position of results of operations.
 
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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, 1996 with respect to the Company's litigation with QSound Labs, Inc. In the
nine-month period ended September 30, 1997 the parties filed their legal briefs
with the Court of Appeals for the Federal Circuit with respect to the appeal
taken by QSound. On November 5, 1997 counsel for the respective parties
presented oral argument to a three judge panel of that Court of Appeals. The
parties are now awaiting that court's decision.
 
ITEM 2. CHANGES IN SECURITIES
 
     None
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
     None
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     There were no matters submitted to a vote of the security holders of the
Company either through solicitation of proxies or otherwise in the third quarter
of the fiscal year ending September 30, 1997.
 
ITEM 5. OTHER INFORMATION
 
     None
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
 
     (a)         11.1     Computation of Loss Per Common Share
                 21.1     Schedule of Subsidiaries of the Company
 
     (b)         None
 
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<PAGE>   14
 
                                   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 13, 1997
                                          SPATIALIZER AUDIO LABORATORIES, INC.
                                          (Registrant)
 
                                          /s/ STEVEN D. GERSHICK
                                          --------------------------------------
                                          STEVEN D. GERSHICK
                                          President & Chief Executive Officer
 
                                          /s/ MICHAEL R. BOLCEREK
                                          --------------------------------------
                                          MICHAEL R. BOLCEREK
                                          Chief Financial Officer
 
                                       13