<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:  JUNE 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 jurisdiction of                (I.R.S. 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 7, 1997 there were 20,806,429 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


<TABLE>
<CAPTION>
                                                      JUNE 30,       DECEMBER 31,
                                                        1997            1996
                                                   ------------      ------------
                                                   (unaudited)
<S>                                                <C>               <C>         
ASSETS

Current Assets:
  Cash and Cash Equivalents                        $  1,425,525      $  1,587,395
  Trade Receivables and Employee Advances               738,883           820,856
  Inventory                                             129,752           296,539
  Prepaid Expenses and Deposits                         153,917           260,984
                                                   ------------      ------------

             Total Current Assets                     2,448,077         2,965,774

Fixed Assets, Net (Note 3)                              673,707           622,856

Intangible Assets (Note 4)                              518,974           451,733
 
Other Assets                                            102,653           100,832
                                                   ------------      ------------

                                                   $  3,743,411      $  4,141,195
                                                   ============      ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
  Accounts Payable                                 $    257,552      $    403,870
  Accrued Liabilities                                   241,327           333,152
  Advances from Related Parties (Note 5)                112,500           112,500
  Notes Payable                                          75,116            23,800
                                                   ------------      ------------

             Total Current Liabilities                  686,495           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, 20,806,429 and 19,115,429
    shares issued and outstanding at June 30,
    1997 and December 31, 1996, respectively            208,064           191,154
  Additional Paid-In Capital                         40,497,750        38,527,775
  Accumulated Deficit                               (37,648,898)      (35,451,056)
                                                   ------------      ------------

             Total Shareholders' Equity               3,056,916         3,267,873
                                                   ------------      ------------

                                                   $  3,743,411      $  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 ENDED      FOR THE SIX MONTH PERIOD ENDED
                                   ---------------------------------      -------------------------------
                                      JUNE 30,           JUNE 30,            JUNE 30,          JUNE 30,
                                        1997               1996               1997               1996
                                    ------------       ------------       ------------       ------------
<S>                                 <C>                <C>                <C>                <C>         
Revenues:
  Product Revenues                  $    165,041       $    110,335       $    285,788       $    193,264
  Licensing Revenues                     411,828            397,679            809,542            743,314
                                    ------------       ------------       ------------       ------------
                                         576,869            508,014          1,095,330            936,578

    Cost of Revenues                     122,986             52,966            187,242             83,686
                                    ------------       ------------       ------------       ------------
                                         453,883            455,048            908,088            852,892
                                    ------------       ------------       ------------       ------------

Operating Expenses:
  General and Administrative             535,457            532,716          1,108,555          1,066,619
  Research and Development               810,237            284,434          1,379,064            511,620
  Sales and Marketing                    278,526            491,166            619,884            906,166
  In Process Research &
   Development  (Note 6)                    --              679,684               --              679,684
                                    ------------       ------------       ------------       ------------
                                       1,624,220          1,988,000          3,107,503          3,164,089
                                    ------------       ------------       ------------       ------------

     Operating Loss                   (1,170,337)        (1,532,952)        (2,199,415)        (2,311,197)

Interest and Other Income                 22,233             22,047             31,692             64,318
Interest  and Other Expense               (5,299)            (3,546)            (9,619)            (8,403)
                                    ------------       ------------       ------------       ------------
                                          16,934             18,501             22,073             55,915

    Loss Before Income Taxes         (1,153 ,403         (1,514,451)        (2,177,342)        (2,255,282)

    Income Taxes                         (17,602)          (260,055)           (20,500)          (273,618)
                                    ------------       ------------       ------------       ------------

    Net Loss                        $ (1,171,005)      $ (1,774,506)      $ (2,197,842)      $ (2,528,900)
                                    ============       ============       ============       ============

    Net Loss Per Common Share       $      (0.06)      $      (0.14)      $      (0.11)      $      (0.21)
                                    ============       ============       ============       ============

Weighted Average Common Shares
Outstanding                           20,806,429         12,290,777         20,202,341         12,039,532
                                    ============       ============       ============       ============
</TABLE>


See accompanying notes to consolidated financial statements


                                       2
<PAGE>   4

                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED
                                                      ----------------------------
                                                        JUNE 30,         JUNE 30,
                                                          1997             1996
                                                      -----------      -----------
<S>                                                   <C>              <C>         
Cash Flows from Operating Activities:
  Net Loss                                            $(2,197,842)     $(2,528,900)

  Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation                                          120,660           42,478
    In Process Research & Development (Note 6)               --            679,684
  Net Change in Assets and Liabilities:
    Trade Receivables & Employee Advances                  81,973         (224,792)
    Inventory                                             166,787          (81,241)
    Prepaid Expenses and Deposits                         107,067         (103,068)
    Accounts Payable                                     (146,318)         170,129
    Accrued Liabilities                                   (91,825)         (42,588)
                                                      -----------      -----------


Net Cash Used in Operating Activities                  (1,959,498)      (2,088,298)
                                                      -----------      -----------


Cash Flows from Financing Activities:
    Issuance of Common Shares. net                      1,986,885        1,773,321
    Common Stock Subscribed                                  --          1,403,894
    Unearned Revenue                                         --              1,750
    Due to Related Parties                                   --           (197,165)
    Issuance of Notes Payable                              59,532           15,237
    Repayment of Notes Payable                             (8,216)          (3,430)
                                                      -----------      -----------


Net Cash Provided by (Used In) Financing                2,038,201       (2,993,607)
Activities
                                                      -----------      -----------
Cash Flows from Investing Activities:
    Purchase of Fixed Assets (Note 6)                    (171,511)        (118,559)
    MDT Asset Acquisition (Note 6)                           --         (1,062,156)
    Increase in Intangible  Assets (Note 6)               (69,062)          (3,208)
                                                      -----------      -----------


Net Cash Used in Investing Activities                    (240,573)      (1,183,923)
                                                      -----------      -----------

Decrease in Cash and Cash Equivalents                    (161,870)        (278,614)

Cash and Cash Equivalents, Beginning of
Period                                                  1,587,395        3,113,057
                                                      -----------      -----------


Cash and Cash Equivalents, End of Period              $ 1,425,525      $ 2,834,443
                                                      ===========      ===========
Supplemental Disclosure of Cash Flow
Information:
    Cash paid during the period for:
    Interest                                          $     5,124      $     2,746
    Income Taxes                                      $    20,500      $   273,618
</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

Options Exercised                     23,500           235           20,507                            20,742
Private Placements, Net (Note 7)   1,667,500        16,675        1,949,468                         1,966,143
Net Loss                                                                          (2,197,842)      (2,197,842)
                                  ----------      --------      -----------     ------------       ----------

Balance, June 30, 1997            20,806,429      $208,064      $40,497,750     $(37,648,898)      $3,056,916
                                  ==========      ========      ===========     ============       ==========
</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 June 30, 1997 and December 31, 1996
         consist of the following:

<TABLE>
<CAPTION>
                                                                  June 30,    December 31,
                                                                   1997          1996
                                                                ----------    ----------
         <S>                                                    <C>           <C>       
         Office Computers, Software, Equipment and Furniture    $  747,298    $  595,993
         Test Equipment                                            114,225        97,928
         Tooling Equipment                                          44,136        44,136
         Trade Show Booth and Demonstration Equipment              131,729       130,846
         Leasehold Improvements                                     48,782        45,756
                                                                ----------    ----------
                                                                 1,086,170       914,659
         Less Accumulated Depreciation and Amortization            412,463       291,803
                                                                ----------    ----------
                                                                $  673,707    $  622,856
                                                                ==========    ==========
</TABLE>



                                       5
<PAGE>   7

(4)      INTANGIBLE ASSETS

         Intangible assets, as of June 30, 1997 and December 31, 1996 consist of
the following:

<TABLE>
<CAPTION>
                                                              June 30,   December 31,
                                                                1997        1996
                                                              -------    ------------
          <S>                                                 <C>          <C>    
         Capitalized patent and technology costs              393,188      309,222
         Capitalized patent costs in association with 
           MDT Asset Acquisition                              200,000      200,000
                                                              -------      -------
                                                              593,188      509,222
         Less Accumulated Amortization                         74,214       57,489
                                                              -------      -------
                                                              518,974      451,733
                                                              =======      =======
</TABLE>


(5)      ADVANCES FROM RELATED PARTIES

         The Company was indebted to certain related parties for amounts
         totaling $112,500 at June 30, 1997 and December 31, 1996, respectively.
         Amounts bear interest at a fixed 10% annually and are due on demand.

(6)      ASSET ACQUISITION

         In June 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 June 30, 1997.

(7)      SHAREHOLDERS' EQUITY

         During the six month period ended June 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 June,
         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.


                                       6
<PAGE>   8

(8)      ESCROW PERFORMANCE SHARES

         In December 1996, the Company accepted the terms outlined by the
         British Columbia Securities Commissions ("BCSC") for the release of the
         then outstanding Company's 5,776,700 escrowed "Performance Shares" from
         the vesting arrangements into a revised escrow arrangement with the
         Company. The overall modification had been approved by the Company's
         shareholders in August 1996. As provided under the arrangement, 5% of
         the performance shares were released on June 22, 1997 and the remainder
         of the performance shares are to be released automatically as follows:
         5% on June 22, 1998; 10% on June 22, 1999; 20% on June 22, 2000; 30% on
         June 22, 2001; and 30% on June 22, 2002. In addition to the automatic
         releases, performance shares can be released based on the cash flow
         release criteria contained in the original June 22, 1992 escrow
         agreement although, to maintain a stable market in the Company's stock,
         in any year not more than 30% of the shares will be released, based on
         the cash flow criteria.

         Under the revised escrow arrangement, the performance shares will vest
         provided the individual has not voluntarily terminated his/her
         relationship with the Company prior to applicable vesting dates.

         All of the performance shares are included in the issued and
         outstanding shares as of June 30, 1997 and December 31, 1996.

         For financial reporting purposes, such shares were treated as issued
         and outstanding but were not reflected in the calculation of loss per
         common share until earned by and released to the holders as they would
         be antidilutive. At June 30, 1996, no performance shares had been
         earned out. At June 30, 1997, all shares have been earned out and are
         included in the calculation of loss per common share.


(9)      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 six-month period ended June 30, 1997
         these major customers represent 33%, 26%, and 16%, respectively,
         compared to 22%, 17%, and 11% for the same period in 1996.


                                       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 six-month and three-month periods ended June 30, 1997,
compared with the six-month and three-month periods ended June 30, 1996.


RESULTS OF OPERATIONS

FOR THE SIX-MONTH AND THREE-MONTH PERIODS ENDED JUNE 30, 1997, COMPARED TO THE
SAME PERIODS ENDED JUNE 30, 1996


REVENUES

The Company reported an increase in revenues of 17% or $158,000, reaching
$1,095,000 for the six-month period ended June 30, 1997 compared to $937,000 for
the six-month period ended June 30, 1996. The Company reported increased
revenues of 14% or $69,000, reaching $577,000 for the three-month period ended
June 30, 1997 compared to $508,000 for the three-month period ended June 30,
1996. Revenues include sales of professional recording systems, consumer
products, license issuance fees and royalties pertaining to the licensing of
Spatializer(TM) audio signal processing designs.

The increase in revenues is attributed to increases in both recurring royalties
and product sales. Recurring royalties are primarily based upon product sales
reports supplied by the Company's customers. The increase in recurring royalties
reflects expansion and growth in the usage of Spatializer(TM) audio signal
processing designs. The Company expects these designs to continue to be licensed
in the third quarter of 1997. Product sales are based on the shipment of the
Company's consumer product, the HTMS-2510(R), which inventory is expected to be
depleted over the next couple of quarters due to discontinued production of this
product. In the second half of the year the Company expects the majority of
revenues to come from licensing activities.

Gross profit for the six-month period ended June 30, 1997, was approximately 83%
as compared with 91% for the same period in 1996. Profit margins decreased
slightly due to the increase in product sales relative to licensing and lower
sales prices for these products.


OPERATING EXPENSES

The operating expenses for the six-month period ended June 30, 1997 decreased by
approximately 2% or $56,000 for a total of $3,108,000 compared to $3,164,000 for
the same six-month period in 1996. Operating expenses for the three-month period
ended June 30, 1997, decreased by approximately 18% or $364,000, for a total of
$1,624,000 compared to $1,988,000 for the same period of 1996. This decrease in
operating expenses is related to In Process Research and Development costs
recognized in the second quarter of 1996 in addition to reduced sales and
marketing costs offset by research and development expenses. The Company's
reorganization begun in the fourth quarter of 1996, resulted in lower headcount
and costs associated with personnel in the first and second quarters of 1997.
This reduction in operating expenses would have been even greater except for
increases in research and development expenses related to the Company's
MultiDisc Technologies, Inc. ("MDT") subsidiary's development of the technology
demonstrators for the MultiDisc eXpandable Network Server, XNS, technology.


                                       8
<PAGE>   10

GENERAL AND ADMINISTRATIVE

General and administrative costs had a minor increase of approximately 4% or
$42,000, to $1,109,000 for the six-month period ended June 30, 1997 as compared
with $1,067,000 for the same period in 1996. General and administrative costs
were relatively flat with a total of $535,000 for the three-month period ended
June 30, 1997 as compared with $533,000 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 offset by cost savings in professional service fees and investor relations.

         Payroll and Payroll Related

         Payroll and payroll related costs for General and Administrative
         increased approximately 82% or $293,000, to $651,000 for the six-month
         period ended June 30, 1997 as compared with $358,000 for the same
         period in 1996. Payroll and payroll related costs increased
         approximately 87%, or $149,000, to $320,000 for the three-month period
         ended June 30, 1997 as compared with $171,000 for the same period in
         1996. The increase is attributed to the increase in staff from ten
         full-time and one part-time staff in 1996 to thirteen full-time and two
         part-time staff in 1997. The increase in staff count is related
         primarily to a transition from consulting and temporary positions to
         permanent hires and includes the addition, late in the second quarter
         of 1997, of the Company's new Chief Financial Officer.

         Consulting Fees and Temporary Help

         Consulting fees and temporary help expenses decreased 99% or $99,000 to
         $1,000 for the six-month period ended June 30, 1997, compared to
         $100,000 for the same six-month period in 1996. Consulting fees and
         temporary help decreased 100%, or $41,000, for a total of $0 for the
         three-month period ended June 30, 1997, compared to $41,000 for the
         same period in 1996. The reduction in costs relates to the completion
         of multiple consulting projects in 1996, including the analysis of
         technologies for potential acquisition and the permanent hire or
         elimination of temporary staff in the late 1996 period.

         Professional Service Fees

         Professional services include legal fees and accounting fees.
         Professional service fees decreased by approximately 27%, or $57,000,
         for a total of $156,000 for the six-month period ended June 30, 1997,
         compared to $213,000 for the same six-month period in 1996. The fees
         for professional services decreased approximately 39%, or $56,000, for
         a total of $89,000 for the three-month period ended June 30, 1997,
         compared to $145,000 for the same period in 1996. The decrease was
         primarily due to lower legal fees related to litigation matters.

         Investor Relations

         Investor Relations expenses decreased by approximately 61%, or $61,000,
         to a total of $39,000 for the six-month period ended June 30, 1997,
         compared to $100,000 for the same six-month period in 1996. Investor
         relations related costs decreased by approximately 70%, or $19,000, for
         a total of $8,000 in the three-month period ended June 30, 1997
         compared with $27,000 in the same period in 1996. This decrease is
         attributed to substantial efforts made in 1996 to promote interest in
         the Company generated by the third quarter 1995 listing of the
         Company's common stock on NASDAQ as well as efforts in 1997 to control
         costs.

         General Operating

         General operating costs include rent, telephone, office supplies and
         stationery, postage, depreciation and similar costs. General operating
         costs decreased by approximately 11%, or $34,000, to a total of
         $262,000 for the six-month period ended June 30, 1997, compared to
         $296,000 for the same six-month period ended June 30, 1996. General
         operating costs decreased by approximately 21%, or $31,000, to a total
         of $118,000 for the three-month period ended June 30, 1997, compared to
         $149,000 for the same three-month period ended June 30, 1996. The cost
         reduction between periods is the direct result of internal cost
         controls and cost savings measures taken by the Company offset by the
         increase in permanent full-time staff.


                                       9
<PAGE>   11

RESEARCH AND DEVELOPMENT

Research and Development costs increased by approximately 169% or $867,000, to
$1,379,000 for the six-month period ended June 30, 1997, compared to $512,000
for the same six-month period in 1996. The research and development activity
grew approximately 185% or $526,000, to $810,000 for the three-month period
ended June 30, 1997, compared to $284,000 for the same period in 1996. The
increase in research and development expense was primarily due to the increased
cost of MDT's development of technology demonstrators.

MDT, which began operations on June 24, 1996, represented approximately 79% or
$637,000 of the total research and development costs for the three-month period
ended June 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. All research and development
activities and related costs continue to be expensed in the period incurred.

         Payroll and Payroll Related

         Payroll and payroll related costs for Research and Development
         increased approximately 185% or $548,000, to $844,000 for the six-month
         period ended June 30, 1997 as compared with $296,000 for the same
         period in 1996. Payroll and payroll related costs for Research and
         Development increased approximately 187% or $301,000, to $462,000 for
         the three-month period ended June 30, 1997 as compared with $161,000
         for the same period in 1996. The increase is attributed to the increase
         in staff from eight in 1996 to fifteen in 1997. The increase in staff
         includes eight staff members involved in the MDT research and
         development efforts.

         Prototype Development

         Prototype Development costs increased substantially, to $191,000 for
         the six-month period ended June 30, 1997 compared to $4,000 for the
         same period in 1996. Prototype Development costs increased
         substantially, to $191,000 for the three-month period ended June 30,
         1997 compared to $1,000 for the same period in 1996. The increase in
         research and development expense was primarily due to the manufacturing
         cost of the technology demonstrators at the Company's MDT subsidiary.

         Other Research and Development

         Other research and development costs increased approximately 62%, or
         $132,000, to $344,000 for the six-month period ended June 30, 1997
         compared to $212,000 for the same period in 1996. Other research and
         engineering costs increased approximately 29%, or $35,000, to $157,000
         for the three-month period ended June 30, 1997 compared to $122,000 for
         the same period in 1996. The increase in other research and development
         costs was primarily due to associated costs related to development
         efforts at MDT of the technology demonstrators.


SALES AND MARKETING

Sales and marketing costs decreased approximately 32%, or $286,000 for a total
of $620,000 for the six-month period ended June 30, 1997, compared to $906,000
for the same six-month period in 1996. Sales and marketing costs decreased
approximately 43%, or $212,000, for a total of $279,000 for the three-month
period ended June 30, 1997, compared to $491,000 for the same period in 1996.
The decrease is attributed to a reduction in 1997 payroll and payroll related
costs, advertising costs associated with the launch of the Company's consumer
product, the HTMS-2510, and cost containment efforts which began in the fourth
quarter of 1996.


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<PAGE>   12

         Payroll and Payroll Related

         Payroll and payroll related costs for Sales and Marketing decreased
         approximately 45% or $163,000, to $200,000 for the six-month period
         ended June 30, 1997 as compared with $363,000 for the same period in
         1996. Payroll and payroll related costs for the Sales and Marketing
         Department decreased approximately 64% or $136,000, to $75,000 for the
         three-month period ended June 30, 1997 as compared with $211,000 for
         the same period in 1996. The decrease is attributed to the reduction in
         staff from eleven in 1996 to four in 1997 due the Company's
         reorganization effort begun in the fourth quarter of 1996.

         Advertising and Trade Show Related

         Advertising and Trade Show expenses which include trade show booth
         rental, publicity, public relations, and press release costs decreased
         approximately 9%, or $15,000, for a total of $146,000 for the six-month
         period ended June 30, 1996, compared to $161,000 for the same period in
         1996. Advertising and trade show costs decreased approximately 10%, or
         $6,000, for a total of $56,000 for the three-month period ended June
         30, 1997, compared to $62,000 for the same period in 1996. The decrease
         is associated with the reduction in trade show presence in 1997
         compared to 1996 and the elimination of a promotional campaign launched
         in 1996 to promote the Company's consumer product, the HTMS-2510, due
         to the discontinuance of this product line.

         Other Sales and Marketing

         Other costs including travel and entertainment, outside services and
         general operating costs decreased approximately 28% or $108,000, for a
         total of $274,000 for the six-month period ended June 30, 1997,
         compared to $382,000 for the same six-month period in 1996. Other costs
         had a decrease of approximately 32% or $70,000, for a total of $148,000
         for the three-month period ended June 30, 1997, compared to $218,000
         for the same period in 1996. This reduction in cost is a factor of the
         reduction in staff and costs associated with this staff.


NET LOSS

The net loss for the six-month period ended June 30, 1997 decreased
approximately 13% or $331,000, for a total net loss of $2,198,000 compared to
$2,529,000 in the same six-month period in 1996. The net loss for the
three-month period ended June 30, 1997 decreased approximately 34% or $603,000,
for a total net loss of $1,171,000, compared to $1,774,000 in the same
three-month period in 1996. The decreased net loss for both periods is primarily
a result of the In Process Research and Development expense of $680,000 which
was recognized in June 1996 in conjunction with the acquisition of assets from
Home Theater Products to form MDT. The net losses also decreased as a result of
the cost savings realized by the continuation of the Company's cost cutting
measures begun in the fourth quarter of 1996 partially offset by research and
development efforts at the Company's subsidiary, MDT.


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LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, the Company had $1,426,000 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 $1,762,000 at June 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 from revenues, if any,
generated when its MultiDisc technology reaches commercial distribution or
licensing. At June 30, 1997 the Company had four Foundry licensees and sixty 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 should generate additional cash flow
without imposing any substantial costs on the Company.

On March 7, 1997, the Company raised $1,966,143, net of issuance costs, through
a private placement of 1,600,000 units in the Company consisting of a share of
common stock and one-half of one non-transferable share purchase warrant.

During the second quarter of 1997, the Company, through its subsidiary MultiDisc
Technologies, Inc. ("MDT"), completed the development of MDT's principal
technology demonstrators. This technology serves to significantly broaden the
Company's technology base and is the direct result of the Company's investment
in MDT's research and development in the first and second quarters of 1997 and
its commitment to pursue the development of selected technologies for commercial
exploitation and licensing.

The Company's current plan for developing its MultiDisc business is to identify
strategic partners and enter into licensing agreements with them. The Company
will initially seek licensing arrangements that provide for up-front payments to
the Company, using an approach similar to the strategy employed in the early
stages of developing its audio signal processing business. The Company believes
that additional cash flow will be received from such agreements. Management
anticipates such agreements may commence as early as the first quarter of 1998
but there is no assurance that the Company will enter into any such agreement.

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 costs for the MultiDisc business during
the next twelve months. As a result the Company plans to fund these additional
costs through debt, equity or strategic investments, as available. If such
funding is not available to meet the current development schedule, management
may be required to modify or delay the timing of the additional MultiDisc
development activities.

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 June 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 June, 1995. The option exercise
price for these shares was adjusted to $1.31 per share (the closing market price
on July 18, 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.

NEWLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share" ("FAS 120"), 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.


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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,
1996 with respect to the Company's litigation with QSound Labs, Inc. No material
developments in such litigation occurred during the six months ended June 30,
1997.


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 June 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)            On June 24, 1997 the Company filed a Form 8-K related to action
               taken by the Board of Directors to amend outstanding
               non-qualified stock options granted to certain directors,
               employees and principals of the Company as well as to amend
               outstanding stock purchase warrants issued in connection with
               private placements in May and June of 1996.





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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 12, 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



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