<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: JUNE 30, 1998
 
                                       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 JURISDICTION OF                         (IRS EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
</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 August 14, 1998 there were 21,653,668 shares of the Registrant's
Common Stock outstanding.
 
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<PAGE>   2
 
                         PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                JUNE 30,      DECEMBER 31,
                                                                  1998            1997
                                                              ------------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>             <C>
Current Assets:
  Cash and Cash Equivalents.................................  $    619,260    $    577,413
  Accounts Receivable, net..................................     1,160,611         911,505
  Employee Advances.........................................        29,312          59,086
  Inventory.................................................       100,944          93,250
  Prepaid Expenses and Deposits.............................       194,450         135,702
  Deferred Transaction Costs................................       185,701         146,529
                                                              ------------    ------------
Total Current Assets........................................     2,290,278       1,923,485
Property and Equipment, net.................................       528,408         586,961
Capitalized Patent and Technology Costs, net................       808,223         654,668
                                                              ------------    ------------
Total Assets................................................  $  3,626,909    $  3,165,114
                                                              ============    ============
                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Bank Line of Credit Payable...............................  $         --    $    400,000
  Notes Payable.............................................        52,639          64,272
  Accounts Payable..........................................       311,254         651,376
  Accrued Liabilities.......................................        87,954          79,140
  Accrued Wages and Benefits................................       176,193         332,713
  Due to Related Parties....................................       762,500         112,500
                                                              ------------    ------------
Total Current Liabilities...................................     1,390,540       1,640,001
Shareholders' Equity:
  Series A, 7% Convertible Preferred shares, $.01 par value,
     100,000 shares authorized, 60,000 and 0 shares issued
     and outstanding at June 30, 1998 and December 31, 1997,
     respectively...........................................           600              --
  Common shares, $.01 par value, 50,000,000 shares
     authorized, 21,442,345 and 21,410,012 shares issued and
     outstanding at June 30, 1998 and December 31, 1997,
     respectively...........................................       214,423         214,100
  Additional Paid-In Capital................................    44,204,768      41,481,890
  Accumulated Deficit.......................................   (42,183,422)    (40,170,877)
                                                              ------------    ------------
Total Shareholders' Equity..................................     2,236,369       1,525,113
                                                              ------------    ------------
                                                              $  3,626,909    $  3,165,114
                                                              ============    ============
</TABLE>
 
                                        2
<PAGE>   3
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                       FOR THE THREE MONTH PERIOD ENDED     FOR THE SIX MONTH PERIOD ENDED
                                       ---------------------------------    ------------------------------
                                          JUNE 30,           JUNE 30,         JUNE 30,         JUNE 30,
                                            1998               1997             1998             1997
                                       --------------     --------------    -------------    -------------
<S>                                    <C>                <C>               <C>              <C>
Revenues:
  License Revenues...................   $   605,000        $   120,000       $   605,000      $   120,000
  Royalty Revenues...................         8,938            291,828           525,282          689,542
  Product Development Revenues.......        50,000                 --            50,000               --
  Product Revenues...................        10,639            165,041            17,704          285,788
                                        -----------        -----------       -----------      -----------
                                            674,577            576,869         1,197,986        1,095,330
Cost of Revenues.....................         9,931            122,986            30,290          187,242
                                        -----------        -----------       -----------      -----------
Gross Profit.........................       664,646            453,883         1,167,696          908,088
Operating Expenses:
  General and Administrative.........       727,329            535,457         1,167,451        1,108,555
  Research and Development...........       563,970            810,237         1,163,507        1,379,064
  Sales and Marketing................       452,026            278,526           813,499          619,884
                                        -----------        -----------       -----------      -----------
                                          1,743,325          1,624,220         3,144,457        3,107,503
                                        -----------        -----------       -----------      -----------
Operating Loss.......................    (1,078,679)        (1,170,337)       (1,976,761)      (2,199,415)
Interest Income......................        14,056             22,233            15,135           31,692
Interest Expense.....................       (18,482)            (5,299)          (30,539)          (9,619)
                                        -----------        -----------       -----------      -----------
                                             (4,426)            16,934           (15,404)          22,073
                                        -----------        -----------       -----------      -----------
Loss Before Income Taxes.............    (1,083,105)        (1,153,403)       (1,992,165)      (2,177,342)
Income Taxes.........................        (9,228)           (17,602)          (20,380)         (20,500)
                                        -----------        -----------       -----------      -----------
Net Loss.............................   $(1,092,333)       $(1,171,005)      $(2,012,545)     $(2,197,842)
                                        ===========        ===========       ===========      ===========
Basic and Diluted Loss Per Share.....   $     (0.07)       $     (0.06)      $     (0.11)     $     (0.11)
                                        ===========        ===========       ===========      ===========
Weighted Average Shares
  Outstanding........................    21,439,422         20,806,429        21,428,850       20,202,341
                                        ===========        ===========       ===========      ===========
</TABLE>
 
                                        3
<PAGE>   4
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                                                       JUNE 30,
                                                              --------------------------
                                                                 1998           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
Cash flows from operating activities:
  Net Loss..................................................  $(2,012,545)   $(2,197,842)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
  Depreciation and Amortization.............................      116,562        120,660
  Options Issued for Services...............................       56,954             --
Net change in Assets and Liabilities:
  Accounts Receivable and Employee Advances.................     (219,332)        81,973
  Inventory.................................................       (7,694)       166,787
  Prepaid Expenses and Deposits.............................      (58,748)       107,067
  Deferred Transaction Costs................................      (39,172)            --
  Accounts Payable..........................................     (340,122)      (146,318)
  Accrued Liabilities.......................................     (147,706)       (91,825)
                                                              -----------    -----------
Net Cash Used In Operating Activities.......................   (2,651,803)    (1,959,498)
                                                              -----------    -----------
Cash Flows from Investing Activities:
  Purchase of Property and Equipment........................      (39,399)      (171,511)
  Increase in Capitalized Patent and Technology Costs.......     (172,165)       (69,062)
                                                              -----------    -----------
Net Cash Used in Investing Activities.......................     (211,564)      (240,573)
                                                              -----------    -----------
Cash flows from Financing Activities:
  Issuance of Preferred Shares, Net.........................    2,620,893             --
  Issuance of Common Shares, Net............................           --      1,966,144
  Exercise of Options.......................................       12,704         20,741
  Exercise of Warrants......................................       33,250             --
  Issuance of Notes Payable.................................           --         59,532
  Issuance of Related Party Payable.........................      650,000             --
  Repayment of Bank Line of Credit..........................     (400,000)            --
  Repayment of Notes Payable................................      (11,633)        (8,216)
                                                              -----------    -----------
Net Cash Provided by Financing Activities...................    2,905,214      2,038,201
                                                              -----------    -----------
Increase (Decrease) in Cash and Cash Equivalents............       41,847       (161,870)
Cash and Cash Equivalents, Beginning of Period..............      577,413      1,587,395
                                                              -----------    -----------
Cash and Cash Equivalents, End of Period....................  $   619,260    $ 1,425,525
                                                              ===========    ===========
Supplemental Disclosure of Cash Flow Information:
  Cash paid during the period for:
  Interest..................................................  $    30,539    $     9,619
  Income Taxes..............................................       20,380         20,500
                                                              ===========    ===========
</TABLE>
 
                                        4
<PAGE>   5
 
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                 SERIES A, 7%
                                  CONVERTIBLE
                               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,
  1997.....................       --       $ --      21,410,012   $214,100      $41,481,890     $(40,170,877)     1,525,113
Issuance of Preferred
  Shares, Net..............   60,000        600              --         --        2,620,293               --      2,620,893
Options Exercised..........       --         --          13,333        133           12,571               --         12,704
Warrants Exercised.........       --         --          19,000        190           33,060               --         33,250
Options Issued for
  Services.................       --         --              --         --           56,954               --         56,954
Net Loss...................       --         --              --         --               --       (2,012,545)    (2,012,545)
                              ------       ----      ----------   --------      -----------     ------------    -----------
Balance, June 30, 1998.....   60,000       $600      21,442,345   $214,423      $44,204,768     $(42,183,422)   $ 2,236,369
                              ------       ----      ----------   --------      -----------     ------------    -----------
</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") are
in the business of developing and licensing technology.
 
     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 ("CD") and
digital versatile disc ("DVD") server technologies associated with a network
based CD / DVD server for internet and intranet applications. MDT plans to
either license its technology or engage in third party manufacturing
arrangements.
 
(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.
Accordingly, your attention is directed to footnote disclosures found in the
December 31, 1997 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 significant intercompany balances and
transactions have been eliminated in consolidation.
 
  Revenue Recognition
 
     The Company accrues foundry revenues based on licensee royalty reports,
management estimates and reports from third parties. At March 31, 1998, the
Company accrued $362,750 of royalty revenue from a major customer based on the
results of a royalty audit, which was settled in June 1998 for $350,000.
 
Research and Development Expenditures
 
     The Company expenses research and development expenditures as incurred.
 
(3) LOSS PER SHARE
 
     Loss per share for the three and six months ended June 30, 1998 includes
the effect of approximately $262,000 of the beneficial conversion feature of the
Series "A", 7% Convertible Preferred Stock as well as dividends in arrears of
$43,750 related to the Series "A", 7% Convertible Preferred Stock.
 
                                        6
<PAGE>   7
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The following table presents options and warrants to purchase shares of
common stock that were outstanding during the six month periods ended June 30,
1998 and 1997 which were not included in the computation of diluted loss per
share because the impact would have been antidilutive:
 
<TABLE>
<CAPTION>
                                                  1998         1997
                                                ---------    ---------
<S>                                             <C>          <C>
Options.......................................  1,958,300    1,986,403
Warrants......................................  1,521,750      834,750
                                                ---------    ---------
                                                3,480,050    2,821,153
                                                =========    =========
</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. The Company adopted SFAS No. 130 on January 1, 1998.
Comprehensive income (loss) 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 (loss) includes foreign currency
items, minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. The Company did not have
components of other comprehensive income (loss) during the three and six-month
periods ended June 30, 1998 and 1997. As a result, comprehensive loss is the
same as the net loss for the three and six-month periods ended June 30, 1998 and
1997.
 
(5) SEGMENT REPORTING
 
     The following table presents information about reported segment losses and
segment assets as of and for the six-month periods ended June 30, 1998 and 1997.
 
<TABLE>
<CAPTION>
                                         1998                                     1997
                        --------------------------------------   --------------------------------------
                                                     SEGMENT                                  SEGMENT
                           DPI           MDT          TOTAL         DPI           MDT          TOTAL
                        ----------   -----------   -----------   ----------   -----------   -----------
<S>                     <C>          <C>           <C>           <C>          <C>           <C>
Revenues from External
  Customers...........  $1,147,986   $    50,000   $ 1,197,986   $1,095,330   $        --   $ 1,095,330
  Segment Loss........    (460,869)   (1,368,488)   (1,849,357)    (537,025)   (1,233,406)   (1,770,431)
  Segment Assets......   1,826,008       856,152     2,682,160    1,409,008       732,531     2,141,539
</TABLE>
 
     The following is a reconciliation of reportable segment loss to the
Company's consolidated totals.
 
<TABLE>
<CAPTION>
                                               1998           1997
                                            -----------    -----------
<S>                                         <C>            <C>
Loss:
  Total Loss for Reportable Segments......  $(1,849,357)   $(1,770,431)
  Other Corporate Expenses................     (163,188)      (427,411)
                                            -----------    -----------
Consolidated Total........................  $(2,012,545)   $(2,197,842)
                                            ===========    ===========
</TABLE>
 
(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 six months ended June 30, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                         1998    1997
                                                         ----    ----
<S>                                                      <C>     <C>
Customer A.............................................   76%     30%
</TABLE>
 
                                        7
<PAGE>   8
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(7) CONTINGENCIES
 
  Legal
 
     On August 29, 1996, the Court granted the Company's summary judgment motion
in its entirety and denied the motion by QSound in the pending patent
infringement litigation between the Company and QSound. In granting the
Company's summary judgment motion, the Court found that the Company's IC
(Integrated Circuit) does not infringe the QSound patent and denied QSound's
motion with respect to infringement. The Company's claim that the QSound patent
is invalid was not decided and, since the issues which the Court would need to
consider on the patent invalidity claim are similar to certain issues considered
in the infringement claim, QSound was granted the right to immediately appeal
the denial of its motion and trial on the invalidity issue was deferred until
after that appeal. In substance, the Court's finding confirms the Company's
position that there is no infringement by the Company's IC of any patent held by
QSound and that the claims by QSound were without merit. The Court of Appeals
for the Federal Circuit heard oral arguments on November 5, 1997. The parties
are now waiting for the decision of the appellate court. If the appeal is denied
and the Court's decision is confirmed on appeal, the Company intends to pursue
the remaining claims for damages and for a decision that the QSound patent is
invalid. If the appeal is granted and the Court's decision on the motion is
overruled, a trial on the merits would follow at which time the Company will
again assert its current position, which already was adopted in the grant of the
Company's summary judgment motion, and will assert its remaining claims against
QSound. QSound has appealed and the appeal is pending.
 
(8) SALE OF PREFERRED STOCK
 
     On April 14, 1998, the Company entered into a private placement for up to
$5 million of which $3 million was funded at June 30, 1998. 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, the Company
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 to investors 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 the Company's common stock for the 10 days preceding the closing.
In addition, cash placement fees of 10% were paid. A related party of the
Company 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.
As of June 30, 1998, $1 million of the remaining $2 million of the funding was
due but had not yet been received.
 
     Holders of the Series A Preferred Stock have a right to convert their
shares, at their option on the earlier of (x) ninety (90) days after issuance or
(y) on the effective date of a Form S-3 Registration Statement (the "Conversion
Date") with such conversion to be based on a per share conversion price
("Conversion Price") equal to the lesser of a price that reflects a discount
(the "Conversion Discount") to the average of any three (3) consecutive closing
bid prices for the Company's Common Stock within twenty (20) trading days
immediately prior to the conversion date (the "Floating Conversion Price") or a
price which is equal to one hundred thirty percent (130%) of the closing bid
prices of the Company's Common Stock for the ten (10) trading days immediately
preceding the date of issuance (the "Fixed Conversion Price") provided that in
determining the Conversion Price, the holder shall not count any day on which
its sales account for greater than twenty percent (20%) of the volume of the
Company's Common Stock and on which the holder has sales in the last hour of
trading. The Conversion Discount shall be equal to fifteen percent (15%) if the
Conversion Rights are exercised within one hundred twenty (120) days of first
issuance of the Series A Preferred Stock and shall be equal to seventeen and
one-half percent (17.5%) if the Conversion Rights are exercised after one
hundred (120) days and prior to one hundred forty-nine (149) days of first
issuance of the Series A Preferred
 
                                        8
<PAGE>   9
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Stock. The applicable Conversion Discount increases by five percent (5%) if the
Company is de-listed on NASDAQ. In addition, the percentage of shares that can
be converted at any one time is limited during such time periods and the holders
cannot own more than 4.99% of the equity of the Company after the Conversion.
 
     The beneficial conversion feature of the Series A Preferred Stock will be
recorded as a dividend using the most favorable conversion terms available to
the shareholder to calculate the dividend in accordance with FASB (Emerging
Issues Task Force) Topic D-60. Since the Company has an accumulated deficit and,
under Delaware Law, must charge dividends against additional paid in capital,
the net impact of recording the beneficial conversion feature is zero since both
sides of the entry are recorded in additional paid in capital. At June 30, 1998,
dividends in arrears were $43,750.
 
     In the private placement, the participants were granted certain rights to
participate in the separate financing of approximately $6 million currently
being pursued by the Company to fund the commercial introduction of its
MultiDisc CD/DVD server technology.
 
                                        9
<PAGE>   10
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. The Company's actual results, performance, or
achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements.
 
REVENUES
 
     Revenue increased to $675,000 in the three months ended June 30, 1998 from
$577,000 in the comparable period last year, an increase of 17%. Revenue in the
six-months ended June 30, 1998 increased to $1,198,000 from $1,095,000 in the
comparable period last year, an increase of 9%. Revenues include licensing and
royalties pertaining to the licensing of Spatializer(R) audio signal processing
designs, product development and evaluation fees at MultiDisc Technologies, Inc.
and sales of professional recording systems and consumer products. The increase
in revenue results primarily from the signing of new technology license
agreements or extensions, partially offset by decreases in recurring royalties
for the licensing of the Spatializer technologies and on chip foundry sales
incorporating the usage of Spatializer(R) advanced audio solutions by the
Company's licensees, reflecting weakness in the Asian Market. The Company
recognized revenue of $50,000 in its MultiDisc Technologies, Inc. subsidiary in
the three months ended June 30, 1998. This comprises product development revenue
and represents the first ever revenue generated by MultiDisc Technologies, Inc.
 
     Desper Products, Inc.'s licensing and royalty revenues increased to
$614,000 and $1,130,000 in the three and six months ended June 30, 1998, from
$412,000 and $810,000 in the comparable periods last year, increases of 49% and
40%, respectively.
 
     In addition, there were negligible product sales in the three and six
months ended June 30, 1998 as compared with the same periods in 1997. The
Company made the decision in late 1997 to discontinue sales of hardware products
in order to focus its efforts on licensing and software-only products. Product
sales for the three months ended June 30, 1998 were $11,000 as compared to
$165,000 for the comparable period last year. Product sales for the six months
ended June 30, 1998 were $18,000 as compared to $286,000 for the comparable
period last year.
 
GROSS PROFIT
 
     Gross profit increased to $665,000 (99% of revenue) in the three months
ended June 30, 1998 from $454,000 (79% of revenue) in the comparable period last
year, an increase of 46%. Gross profit for the six-months ended June 30, 1998
increased to $1,168,000 (97% of revenue) from $908,000 (83% of revenue) in the
comparable period last year, an increase of 29%. Gross profit increased due to
the increase in revenue as well as the shift in product mix to licensing
revenues, which provide a higher margin than product revenues.
 
OPERATING EXPENSES
 
     Operating expenses increased to $1,743,000 (258% of revenue) in the three
months ended June 30, 1998 from $1,624,000 (281% of revenue) in the comparable
period last year, an increase of 7%. Operating expenses in the six-months ended
June 30, 1998 increased to $3,144,000 (262% of revenue) from $3,108,000 (284% of
revenue) in the comparable period last year, an increase of 1%. The increase in
operating expenses for the three months ended June 30, 1998 results primarily
from increased general and administrative and sales and marketing expenses
partially offset by lower research and development expenses. The decrease in
operating expenses as a percentage of sales in the three and six months ended
June 30, 1998 result from revenue growth outpacing overhead growth.
 
  General and Administrative
 
     General and administrative expenses increased to $727,000 (108% of revenue)
in the three months ended June 30, 1998 from $535,000 (93% of revenue) in the
comparable period last year, an increase of 36%.
 
                                       10
<PAGE>   11
 
General and administrative expenses increased to $1,167,000 (97% of revenue) in
the six-months ended June 30, 1998 from $1,109,000 (101% of revenue) in the
comparable period last year, an increase of 5%. The increase in general and
administrative expense result from staffing of key executive positions and
related expenses in 1998 that were vacant in the prior comparable period.
 
  Research and Development
 
     Research and Development expenses decreased to $564,000 (84% of revenue) in
the three months ended June 30, 1998 from $810,000 (140% of revenue) in the
comparable period last year, a decrease of 30%. Research and Development
expenses decreased to $1,164,000 (97% of revenue) in the six-months ended June
30, 1998 from $1,379,000 (126% of revenue) in the comparable period last year, a
decrease of 16%. The decrease in research and development in the three and six
month periods result from lower research and development expenditures for
prototypes of the MultiDisc eXpandable Network Server and XNSTM technology
required in the current period compared to the prior year as well as
efficiencies in research and development activities at Desper Products Inc.
 
     MultiDisc Technologies, Inc., which began operations on June 24, 1996,
represented approximately 69% or $391,000 of the total research and development
costs of $564,000 for the three-month period ended June 30, 1998. The balance
was applied to the Company's continued efforts to identify, validate, and
develop new products at Desper Products Inc. Specific engineering efforts were
directed toward porting support of N-2-2(TM) -- Digital Virtual Surround
technologies to current and potential licensees during the quarter and toward an
advanced version of enCompass(TM), the Company's interactive, real-time 3-D
audio positioning technology.
 
  Sales and Marketing
 
     Sales and marketing expenses increased to $452,000 (67% of revenue) in the
three months ended June 30, 1998 from $279,000 (48% of revenue) in the
comparable period last year, an increase of 62%. Sales and marketing expenses
increased to $813,000 (68% of revenue) in the six-months ended June 30, 1998
from $620,000 (57% of revenue) in the comparable period last year, an increase
of 31%. The increase is attributed to the hiring of additional sales executives
at Desper Products Inc., and the initiation of marketing activity at MultiDisc
Technologies, Inc. as it enters its next phase of development.
 
NET LOSS
 
     Net loss declined to $1,092,000 (162% of revenues) in the three months
ended June 30, 1998 from $1,171,000 (203% of revenues) in the comparable period
last year, a decrease of 7%. Net loss decreased to $2,013,000 (168% of revenue)
in the six-months ended June 30, 1998 from $2,198,000 (201% of revenue) in the
comparable period last year, a decrease of 8%. The decreased net loss for the
three and six month period, is primarily a result of the increase in gross
profit, partially offset by increases in operating expenses. The increase in
loss per share resulted from the beneficial conversion discount on the issuance
of the Preferred Stock.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At June 30, 1998, the Company had $619,000 in cash and cash equivalents as
compared to $577,000 at December 31, 1997. The increase in cash and cash
equivalents is attributed to net proceeds of $2,620,893 from the sale of
preferred stock on April 14, 1998 and proceeds from a $650,000 related party
note payable partially offset by the repayment of $400,000 of borrowings on a
bank line of credit and cash used for research and development at MDT on the
Modular Scalable Storage Library and cash used in other operating activities.
The Company had working capital of $900,000 at June 30, 1998 as compared with
working capital of $283,000 at December 31, 1997. The Company's future cash
flows are expected to come primarily from audio signal processing licensing,
Foundry and Original Equipment Manufacturers' ("OEM") royalties, common and/or
preferred stock issuances including warrant and option exercises, through
venture and/or strategic investors or product development revenues of MDT. At
June 30, 1998 the Company had six Foundry licensees, seventy-
 
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<PAGE>   12
 
two OEM Licensees and eight authorized customers for its audio signal processing
business as compared with five Foundry licensees and sixty-two OEM Licensees and
fourteen authorized customers at December 31, 1997. The Company is actively
engaged in negotiations for additional audio signal processing licensing
arrangements, which should generate additional cash flow without imposing any
substantial costs on the Company.
 
     The Company continues to have no material long-term obligations and has no
present commitments or agreements that would require any long-term debt or
obligations to be incurred. The Company owed $762,500 to related parties as of
June 30, 1998 and $112,500 at December 31, 1997.
 
     On April 14, 1998, the Company entered into a private placement for up to
$5 million of which $3 million was funded at June 30, 1998. 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, the Company
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 the
Company's common stock for the 10 days preceding the closing. In addition, cash
placement fees of 10% were paid. A related party of the Company 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. As of June 30, 1998, $1
million of the remaining $2 million of the funding was due but had not yet been
received.
 
     Holders of the Series A Preferred Stock have a right to convert their
shares, at their option on the earlier of (x) ninety (90) days after issuance or
(y) on the effective date of this Registration (the "Conversion Date") with such
conversion to be based on a per share conversion price ("Conversion Price")
equal to the lesser of a price that reflects a discount (the "Conversion
Discount") to the average of any three (3) consecutive closing bid prices for
the Company's Common Stock within twenty (20) trading days immediately prior to
the conversion date (the "Floating Conversion Price") or a price which is equal
to one hundred thirty percent (130%) of the closing bid prices of the Company's
Common Stock for the ten (10) trading days immediately preceding the date of
issuance (the "Fixed Conversion Price") provided that in determining the
Conversion Price, the holder shall not count any day on which its sales account
for greater than twenty percent (20%) of the volume of the Company's Common
Stock and on which the holder has sales in the last hour of trading. The
Conversion Discount shall be equal to fifteen percent (15%) if the Conversion
Rights are exercised within one hundred twenty (120) days of first issuance of
the Series A Preferred Stock, shall be equal to seventeen and one-half percent
(17.5%) if the Conversion Rights are exercised after one hundred (120) days and
prior to one hundred forty-nine (149) days of first issuance of the Series A
Preferred Stock. The applicable Conversion Discount increases by five percent
(5%) if the Company is de-listed on NASDAQ. In addition, the percentage of
shares that can be converted at any one time is limited during such time periods
and the holders cannot own more than 4.99% of the equity of the Company after
the Conversion.
 
     The beneficial conversion feature of the Series A Preferred Stock will be
recorded as a dividend using the most favorable conversion terms available to
the shareholder to calculate the dividend in accordance with EITF Topic D-60.
Since the Company has an accumulated deficit and, under Delaware Law, must
charge dividends against additional paid in capital, the net impact of recording
the beneficial conversion feature is zero since both sides of the entry are
recorded in additional paid in capital. At June 30, 1998, dividends in arrears
were $43,750.
 
     In the private placement, the participants were granted certain rights to
participate in the separate financing of approximately $6 million currently
being pursued by the Company to fund the commercial introduction of its
MultiDisc CD/DVD server technology.
 
     Funds generated by these financing activities as well as cash generated
from the Company's existing operations is expected to be sufficient for the
Company to meet its operating obligations and the anticipated additional
research, development, and commercial prototype cost for the MultiDisc business
during the next twelve months. However, there are currently no firm commitments
from outside parties to provide any
                                       12
<PAGE>   13
 
additional debt or equity financing. If the remaining $2 million of the $5
million private placement and the separate MultiDisc funding requirement, set at
a $4 - 6 million is not completed, the Company will require additional capital,
and will need to identify other debt, equity or strategic investment sources to
complete the research, development and commercial introduction of the MultiDisc
CD/DVD server technology and for marketing costs related to such activities. If
the Company is unsuccessful in completing these fundings, it will have to modify
or delay the timing of the additional MultiDisc development and marketing
activities and the ability of the Company to meet its immediate operating needs
will be materially adversely impacted.
 
     The Company has responded to an inquiry from NASDAQ and confirmed that
based on the April 14, 1998 financing and its option to request shareholder
approval to effect a reverse stock split which has not been approved yet, the
Company believes it can continue to meet the requirements for its continued
listing on the NASDAQ Small Cap Market.
 
YEAR 2000
 
     The Company is aware that many computer software programs may not currently
be designed to properly handle the system date change after December 31, 1999.
The Company is addressing this contingency with its computer consultants and is
currently upgrading its software programs, the cost of which is expected to be
no more than $15,000.
 
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<PAGE>   14
 
                           PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
     Reference is made to the Company's Form 10-K for the year ended December
31, 1997 with respect to the Company's litigation with QSound Labs, Inc. No
material developments in such litigation occurred during the three-month period
ended June 30, 1998.
 
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 first quarter
of the fiscal year ending December 31, 1998.
 
ITEM 5. OTHER INFORMATION
 
     None
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
 
          (a)  3.3 Amended Certificate of Designation of Series A Preferred
                   Stock (Incorporated by reference to the Company's Form S-3
                   (Registration Number 333-52863) filed with the Securities and
                   Exchange Commission on May 15, 1998
 
          (b) 21.1 Schedule of Subsidiaries of the Company
 
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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: August 14, 1998                    SPATIALIZER AUDIO LABORATORIES, INC.
                                          (Registrant)
 
                                          /s/ STEVEN D. GERSHICK
 
                                          --------------------------------------
                                          Steven D. Gershick
                                          President & Chief Executive Officer
 
                                          /s/ HENRY R. MANDELL
 
                                          --------------------------------------
                                          Henry R. Mandell
                                          Senior Vice President, Finance
                                          Chief Financial Officer
 
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