<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, 1999

                                       OR

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

                        Commission File Number: 33-90532


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

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

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

                    (Address of principal executive offices)

                        TELEPHONE NUMBER: (818) 227-3370

              (Registrant's telephone number, including area code)


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

                              YES [X]    NO [ ]

As of July 28, 1999 there were 34,646,033 shares of the Registrant's Common
Stock outstanding.


================================================================================


                                       1
<PAGE>   2
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                                JUNE 30,             DECEMBER 31,
                                                                                                  1999                   1998
                                                                                              ------------           ------------
<S>                                                                                           <C>                    <C>
                                                                                               (unaudited)
Current Assets:
     Cash and Cash Equivalents                                                                $    112,168           $    264,054
     Accounts Receivable, net                                                                      324,776                134,633
     Employee Advances                                                                              11,508                      -
     Inventory                                                                                      12,993                  7,993
     Prepaid Expenses and Deposits                                                                  70,492                 65,718
                                                                                              ------------           ------------
Total Current Assets                                                                               531,937                472,398

Property and Equipment, net                                                                        185,710                184,140
Capitalized Patent and Technology Costs, net                                                       215,085                236,913
                                                                                              ------------           ------------

Total Assets                                                                                  $    932,732           $    893,451
                                                                                              ============           ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
     Notes Payable                                                                                 374,311                 14,795
     Notes Payable to Related Parties                                                              857,500                857,500
     Accounts Payable                                                                              380,506                335,784
     Accrued Wages and Benefits                                                                     48,763                 84,423
     Accrued Expenses and Taxes                                                                    285,822                370,548
     Deferred Income                                                                                     -                250,000
     Net Liabilities of Discontinued Operation                                                     525,497                533,891
                                                                                              ------------           ------------
Total Current Liabilties                                                                         2,472,399              2,446,941

Shareholders' Equity:
     Series A, 7% Convertible Preferred shares, $.01 par value, 1,000,000 shares
        authorized, 43,230 and 52,900 shares issued and outstanding at June 30, 1999
        and December 31, 1998, respectively                                                            432                    529
     Common shares, $.01 par value, 50,000,000 shares
        authorized, 31,681,044 and 25,841,867 shares
        issued and outstanding at June 30, 1999 and
        December 31, 1998, respectively                                                            316,811                258,418
     Additional Paid-In Capital                                                                 44,092,205             44,150,501
     Accumulated Deficit                                                                       (45,949,115)           (45,962,938)
                                                                                              ------------           ------------
Total Shareholders' (Deficit)                                                                   (1,539,667)            (1,553,490)

                                                                                              ------------           ------------

Total Liabilities and Shareholder's Equity                                                    $    932,732           $    893,451
                                                                                              ============           ============
</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,
                                                1999                   1998                   1999                   1998
                                            ------------           ------------           ------------           ------------
<S>                                         <C>                    <C>                    <C>                    <C>
Revenues:
  License Revenues                          $          -           $    605,000           $          -           $    605,000
  Royalty Revenues                               294,122                  8,938                652,052                525,282
  Product Development Revenues                         -                 50,000                      -                 50,000
  Product Revenues                                     -                 10,639                      -                 17,704
                                            ------------           ------------           ------------           ------------
                                                 294,122                674,577                652,052              1,197,986

Cost of Revenues                                   7,784                  9,931                  8,619                 30,290
                                            ------------           ------------           ------------           ------------
Gross Profit                                     286,338                664,646                643,433              1,167,696

Operating Expenses:
  General and Administrative                     107,709                727,329                211,877              1,167,451
  Research and Development                        92,741                563,970                250,460              1,163,507
  Sales and Marketing                             49,216                452,026                122,378                813,499
                                            ------------           ------------           ------------           ------------
                                                 249,666              1,743,325                584,715              3,144,457
                                            ------------           ------------           ------------           ------------

Operating Profit (Loss)                           36,672             (1,078,679)                58,718             (1,976,761)

Interest Income                                    1,046                 14,056                  3,801                 15,135
Interest Expense                                 (24,139)               (18,482)               (45,696)               (30,539)
                                            ------------           ------------           ------------           ------------
                                                 (23,093)                (4,426)               (41,895)               (15,404)
                                            ------------           ------------           ------------           ------------

Income (Loss) Before Income Taxes                 13,579             (1,083,105)                16,823             (1,992,165)

Income Taxes                                      (2,000)                (9,228)                (3,000)               (20,380)
                                            ------------           ------------           ------------           ------------

Net Income (Loss)                           $     11,579           $ (1,092,333)          $     13,823           $ (2,012,545)
                                            ============           ============           ============           ============

Basic/Diluted Inc.(Loss) Per Share          $       0.00           $      (0.07)          $       0.00           $      (0.11)
                                            ============           ============           ============           ============

Weighted Average Shares
   Outstanding                                29,155,651             21,439,422             28,575,159             21,428,850
                                            ============           ============           ============           ============
</TABLE>


                                       3
<PAGE>   4
                      SPATIALIZER AUDIO LABORATORIES, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED
                                                                               JUNE 30,
                                                                  ---------------------------------
                                                                      1999                  1998
                                                                  -----------           -----------
<S>                                                               <C>                   <C>
Cash flows from operating activities:
     Net Income (Loss)                                            $    13,823           $(2,012,545)
     Adjustments to reconcile net loss to net cash
     used in operating activities:
     Depreciation and Amortization                                     17,156               116,562
     Options Issued for Services                                            -                56,954
Net change in Assets and Liabilities:
     Accounts Receivable and Employee Advances                       (201,651)             (219,332)
     Inventory                                                         (5,000)               (7,694)
     Prepaid Expenses and Deposits                                     (4,774)              (58,748)
     Deferred Transaction Costs                                             -               (39,172)
     Accounts Payable                                                  44,722              (340,122)
     Deferred Revenue                                                (250,000)                    -
     Changes in Discontinued Operation                                 (8,394)                    -
     Accrued Liabilities                                             (120,386)             (147,706)
                                                                  -----------           -----------
Net Cash Used In Operating Activities                                (514,504)           (2,651,803)
                                                                  -----------           -----------
Cash Flows from Investing Activities:
     Purchase of Property and Equipment                                (1,570)              (39,399)
     Increase in Capitalized Patent and Technology Costs                4,672              (172,165)
                                                                  -----------           -----------
Net Cash Used in Investing Activities                                   3,102              (211,564)
                                                                  -----------           -----------
Cash flows from Financing Activities:
     Issuance of Preferred Shares, Net                                      -             2,620,893
     Exercise of Options                                                    -                12,704
     Exercise of Warrants                                                   -                33,250
     Issuance of Notes Payable                                        360,000                     -
     Issuance of Related Party Payable                                      -               650,000
     Repayment of Bank Line of Credit                                       -              (400,000)
     Repayment of Notes Payable                                          (484)              (11,633)
                                                                  -----------           -----------
Net Cash Provided by Financing Activities                             359,516             2,905,214
                                                                  -----------           -----------
Increase (Decrease) in Cash and Cash Equivalents                     (151,886)               41,847

Cash and Cash Equivalents, Beginning of Period                        264,054               577,413
                                                                  -----------           -----------

Cash and Cash Equivalents, End of Period                          $   112,168           $   619,260
                                                                  ===========           ===========

Supplemental Disclosure of Cash Flow Information:
     Cash paid during the period for:
     Interest                                                     $         -           $    30,539
     Income Taxes                                                           -                20,380
                                                                  -----------           -----------
</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
                                         ----------------------------------        ---------------------------------
                                            NUMBER OF                                NUMBER OF
                                             SHARES             PAR VALUE              SHARES            PAR VALUE
                                         -------------        -------------        -------------       -------------
<S>                                      <C>                  <C>                  <C>                 <C>
Balance, December 31, 1998                      52,900        $         529           25,841,867       $     258,418

Issuance of Preferred Shares, Net                    -                    -                    -                   -
Options Exercised                                    -                    -                    -                   -
Warrants Exercised                                   -                    -                    -                   -
Options Issued for Services                          -                    -                    -                   -
Conv. of Pref. Shares, net                      (9,670)                 (97)           5,839,177              58,393
Net Income                                           -                    -                    -                   -

                                         -------------        -------------        -------------       -------------
Balance, June 30, 1999                          43,230        $         432           31,681,044       $     316,811
                                         -------------        -------------        -------------       -------------
</TABLE>


<TABLE>
<CAPTION>


                                                                                         TOTAL
                                            ADDITIONAL          ACCUMULATED         SHAREHOLDERS'
                                         PAID-IN-CAPITAL          DEFICIT               EQUITY
                                         ---------------       -------------        -------------
<S>                                      <C>                   <C>                  <C>
Balance, December 31, 1998                $  44,150,501        $ (45,962,938)          (1,553,490)

Issuance of Preferred Shares, Net                     -                    -                    -
Options Exercised                                     -                    -                    -
Warrants Exercised                                    -                    -                    -
Options Issued for Services                           -                    -                    -
Conv. of Pref. Shares, net                      (58,296)
Net Income                                            -               13,823               13,823

                                          -------------        -------------        -------------
Balance, June 30, 1999                    $  44,092,205        $ (45,949,115)       $  (1,539,667)
                                          -------------        -------------        -------------
</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") is 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") was
in the business of developing scaleable, modular compact disc and digital
versatile disc ("DVD") server technologies associated with a network based
compact disc/DVD server for Internet and Intranet applications. Operations of
MDT were discontinued in the fourth quarter of 1998 and the assets are being
marketed for sale (see Note 9)

On December 5, 1995, the Board of Directors of the Company authorized the
liquidation of Spatializer Audio Laboratories, Inc. - Yukon pursuant to S.213 of
the Business Corporations Act (Yukon). This action was taken to minimize the tax
consequences to the Company. The liquidation was completed during the first
quarter of 1996.

Although the Company generated net income of $2,244 in the quarter ended March
31, 1999, the first quarterly profit in the history of the Company, and net
income of $11,579 in the quarter ended June 30, 1999, the Company has
experienced significant operating losses for the three years ended December 31,
1998. In addition, the Company has negative working capital of $1,940,462 and
shareholder's deficit of $1,539,667 at June 30, 1999. The financial statements
have been prepared assuming the Company will continue to operate as a going
concern which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. No adjustment has been made to the
recorded amount of assets or the recorded amount or classification of
liabilities which would be required if the Company were unable to continue its
operations.


(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, 1998 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 subsidiary, Desper Products, Inc.
MultiDisc Technologies, Inc. has been presented as a discontinued operation. All
significant intercompany balances and transactions have been eliminated in
consolidation.

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

Research and Development Expenditures
The Company expenses research and development expenditures as incurred.


                                       6
<PAGE>   7
(3)     INCOME (LOSS) PER SHARE

On December 31, 1997, the Company retroactively adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128") which replaces the presentation of primary and fully diluted earnings
(loss) per share with a presentation of basic and diluted earnings (loss) per
share. Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Diluted
earnings (loss) per share is computed similarly to fully diluted earnings (loss)
per share pursuant to the Accounting Principles Board ("APB") Opinion No. 15.
The following table presents options and warrants to purchase shares of common
stock that were outstanding during the six month periods ended June 30, 1999 and
1998 which were not included in the computation of diluted loss per share
because the impact would have been antidilutive or insignificant:


<TABLE>
<CAPTION>
                                 1999             1998
                              ---------        ---------
<S>                           <C>              <C>
              Options         2,122,300        1,958,300
              Warrants        1,017,000        1,521,750
                              ---------        ---------
                              3,139,300        3,480,050
                              =========        =========
</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-month and
six-month periods ended June 30, 1999 and 1998. As a result, comprehensive loss
is the same as the net loss for the three-month and six-month periods ended June
30, 1999 and 1998.

(5)     SEGMENT REPORTING

The Financial Accounting Standards Board issued Statement No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS No. 131"), in
June 1997. SFAS No.131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires enterprises to report selected information
about operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. It replaces the "industry segment"
concept of SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, with a "management approach" concept as to basis for identifying
reportable segments. SFAS 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. The Company adopted SFAS 131 in
December 1997. At June 30, 1999, the Company has only one operating segment,
DPI, the Company's audio signal processing business.


                                       7
<PAGE>   8
(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, 1999 and 1998:

<TABLE>
<CAPTION>
                          1999         1998
                          ----         ----
<S>                       <C>          <C>
        Customer A         37%          0%
        Customer B          0%          57%
        Customer C         26%          0%
</TABLE>


(7)     CONTINGENCIES

Legal

In the Fall of 1994, QSound Labs, Inc. ("QSound") advised MEC that, in its view,
the Spatializer technology infringed certain U.S. patents held by QSound. In
October 1994 the Company and DPI initiated a proceeding against QSound seeking a
determination that the technology did not infringe on QSound's patents and other
relief.

On August 29, 1996 the Court granted the Company's summary judgment motion of
non-infringement in its entirety and denied the motion by QSound in the pending
patent infringement litigation between the Company and QSound. In September,
1998, the U.S. Court of Appeals for the Federal Court upheld the U.S. District
Court's ruling of August 1996, finding in favor of DPI and the Company on all
aspects of the appeal.

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. QSound
has not appealed and the Company is not pursuing its other claims at the present
time.

In December 1998, a complaint was filed in the United States District Court for
the Northern District of New York, by Alexander, Wescott & Co., Inc., against
the Company alleging breach of contract and seeking fees from the Company based
on its claim that the amounts were due for arranging a financing. The action
also sought attorneys' fees, interest and the costs of suit. The Company filed a
motion to dismiss the action. On July 20, 1999, the Court found in favor of the
Company and dismissed the complaint.

In February 1999, a complaint was filed in the Superior Court of Los Angeles
County, Northwest District, by I.N. Associates, Inc., against the Company's
wholly owned subsidiary, MultiDisc Technologies, Inc. ("MDT"), alleging breach
of contract and fraud, and claiming $499,953.94 in damages, attorneys fees,
interest and the costs of suit. MDT has answered and denied the claims.

In connection with the downsizing of the Company, a number of employees have
been terminated and have filed various employment and compensation related
claims with the various State labor authorities which claims have either been
settled or are pending resolution and funding if Company resources allow. The
Company also anticipates that, from time to time, it may be named as a party to
other legal proceedings that may arise in the ordinary course of its business.


                                       8
<PAGE>   9
(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, 1999. 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 1998 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, 1999, $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 Stock. Pursuant to the agreement, the applicable Conversion
Discount increased by five percent (5%) when the Company was 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.

At June 30, 1999, 16,770 shares of Series A Convertible Preferred Stock had been
converted into a total of 10,238,699 shares of the Company's Common Stock, some
of which are covered by Form S-3 and the balance of which were issued as
restricted shares.

The beneficial conversion feature of the Series A Preferred Stock has been
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, 1999,
dividends in arrears were approximately $240,000.

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. However, as reported by the Company on
September 25, 1998, the Company has decided to refocus on the core audio
technologies and to properly position the assets for sale. Therefore, this
financing is not being pursued actively.


(9)     DISCONTINUED OPERATIONS

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


                                       9
<PAGE>   10
(10)    NOTES PAYABLE

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 $857,500 to related parties as of
June 30, 1999 and $857,500 at December 31, 1998. Included in these amounts, at
June 30, 1999, the Company was indebted to four of its directors and one of its
executives for an amount totaling $745,000. This amount bears interest at a
fixed rate of 10% annually. Of this amount, $650,000 was due on December 31,
1998, and is currently in default. The remaining $95,000 is due on November 30,
1999, or upon the sale of the MDT assets and is secured by such assets. The
Company granted 95,000 warrants to purchase common stock at $0.20 per share in
connection with the $95,000 of indebtedness. In March 1999, one of the holders
of the Company's Convertible Preferred Stock advanced the Company $75,000, and
in the quarter ended June 30, 1999 advanced an additional $185,000 under the
same terms as the $95,000 advanced by the directors and management due on
November 30, 1999. An unrelated investor advanced the Company $100,000 in the
quarter ended June 30, 1999 on identical terms. These advances are secured by
the assets of the Company.


                                       10
<PAGE>   11
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 decreased to $294,000 in the three months ended June 30, 1999
from $675,000 in the comparable period last year, a decrease of 56%. Revenue in
the six-months ended June 30, 1999 decreased to $652,000 from $1,198,000 in the
comparable period last year, a decrease of 46%. 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 decrease
in revenue results primarily from running royalties and a flat fee royalty
buy-out from a particular customer in the three and six month periods ended June
30, 1998, for which there were no revenues from that customer in the current
periods. In addition, the Company recognized revenue of $50,000 in its MultiDisc
Technologies, Inc. subsidiary in the three months ended June 30, 1998, for which
there was no comparable revenue in the current period. The decrease in revenue
for the six months ended June 30, 1999 was partially offset by non-recurring
engineering fees in the quarter ended March 31, 1999, for which there were no
comparable revenues in the prior period.
        Recurring running royalties for the three months ended June 30, 1999
were $294,000, compared to running royalty revenue of $9,000 in the comparable
period last year, an increase of 3166%. This reflects the repositioning of the
Company's pricing strategy from royalty buy-outs to per unit running royalties
in the current year, as well as growth generated from royalties on the Company's
N-2-2TM virtual surround sound technology which began generating revenues in the
quarter ended June 30, 1999.

GROSS PROFIT

        Gross profit decreased to $286,000 (97% of revenue) in the three months
ended June 30, 1999 from $665,000 (98% of revenue) in the comparable period last
year, a decrease of 57%. Gross profit for the six-months ended June 30, 1998
decreased to $643,000 (98% of revenue) from $1,168,000 (97% of revenue) in the
comparable period last year, a decrease of 45%. Gross profit decreased due to
the decrease in revenue.

OPERATING EXPENSES

        Operating expenses decreased to $250,000 (85% of revenue) in the three
months ended June 30, 1999 from $1,743,000 (258% of revenue) in the comparable
period last year, a decrease of 86%. Operating expenses in the six-months ended
June 30, 1999 decreased to $585,000 (89% of revenue) from $3,144,000 (262% of
revenue) in the comparable period last year, a decrease of 81%. The decrease in
operating expenses for the three and six months ended June 30, 1999 results
primarily from the impact of the restructuring initiatives implemented in the
fourth quarter of 1998 and the discontinued operation of MultiDisc Technologies,
Inc.

General and Administrative

        General and administrative expenses decreased to $108,000 (36% of
revenue) in the three months ended June 30, 1999 from $727,000 (107% of revenue)
in the comparable period last year, a decrease of 85%. General and
administrative expenses decreased to $212,000 (32% of revenue) in the six-months
ended June 30, 1999 from $1,167,000 (97% of revenue) in the comparable period
last year, a decrease of 81%. The decrease in general and administrative expense
result from the elimination of two executive positions and corporate office
staff, the closure of the Newbury Park and Huntington Beach facilities and the
suspension of activities at MultiDisc Technologies, Inc.


                                       11
<PAGE>   12
Research and Development

        Research and Development expenses decreased to $93,000 (31% of revenue)
in the three months ended June 30, 1999 from $564,000 (83% of revenue) in the
comparable period last year, a decrease of 83%. Research and Development
expenses decreased to $250,000 (38% of revenue) in the six-months ended June 30,
1999 from $1,164,000 (97% of revenue) in the comparable period last year, a
decrease of 78%. The decrease in research and development in the three and six
month periods result from the suspension of activities at MultiDisc
Technologies, Inc. and staff reductions in research and development activities
at Desper Products Inc.

        Research and Development activities comprised 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 development of products to support the Company's Internet
applications initiative.

Sales and Marketing

        Sales and marketing expenses decreased to $49,000 (16% of revenue) in
the three months ended June 30, 1999 from $452,000 (66% of revenue) in the
comparable period last year, a decrease of 89%. Sales and marketing expenses
decreased to $122,000 (18% of revenue) in the six-months ended June 30, 1999
from $813,000 (67% of revenue) in the comparable period last year, a decrease of
84%. The decrease is attributed to the suspension of activities at MultiDisc
Technologies, Inc. and the elimination of four marketing positions at Desper
Products Inc., primarily in the fourth quarter of 1998 to adjust expenditures to
projected operating levels.

NET INCOME (LOSS)

        Net Income increased to $12,000 (4% of revenues), $0.00 per share, in
the three months ended June 30, 1999 from a net loss of $1,092,000 (161% of
revenues), ($0.07) per share in the comparable period last year. Net Income
increased to $14,000 (2% of revenue), $0.00 per share, in the six-months ended
June 30, 1999 from a net loss of $2,013,000 (168% of revenue), ($0.11) per share
in the comparable period last year. The increased net income for the three and
six month period is primarily a result of the decrease in operating expenses,
partially offset by the decrease in gross profit.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1999, the Company had $112,000 in cash and cash equivalents as
compared to $264,000 at December 31, 1998. The decrease in cash and cash
equivalents is attributed to cash used in general operating activities. This was
partially offset by proceeds from $360,000 in notes payable. The Company had a
working capital deficit of $1,940,000 at June 30, 1999 as compared with a
working capital deficit of $1,975,000 at December 31, 1998. The Company's future
cash flows are expected to come primarily from audio signal processing
licensing, Foundry and Original Equipment Manufacturers' ("OEM") royalties, debt
issuances, common and/or preferred stock issuances including warrant and option
exercises or through venture and/or strategic investors. At June 30, 1999, the
Company had six Foundry licensees, seventy-six OEM Licensees and nine authorized
customers for its audio signal processing business, an increase of three OEM
Licensees and one authorized customer compared to December 31, 1998. The Company
is actively engaged in discussions or negotiations for additional audio signal
processing licensing arrangements and debt or equity financing, which, if
consummated, 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 $857,500 to related parties as of
June 30, 1999 and $857,500 at December 31, 1998. Included in these amounts, at
June 30, 1999, the Company was indebted to four of its directors and one of its
executives for an amount totaling $745,000. This amount bears interest at a
fixed rate of 10% annually. Of this amount, $650,000 was due on December 31,
1998, and is currently in default. The remaining $95,000 is due on November 30,
1999, or upon the sale of the MDT assets and is secured by such assets. The
Company granted 95,000 warrants to purchase common stock at $0.20 per share in
connection with the $95,000 of indebtedness. In March 1999, one of the holders
of the Company's Convertible Preferred Stock advanced the Company $75,000, and
in the quarter ended June 30, 1999 advanced an additional $185,000 under the
same terms as the $95,000 advanced by the directors and management due on
November 30, 1999. An unrelated investor advanced the Company $100,000 in the
quarter ended June 30, 1999 on identical terms. These advances are secured by
the assets of the Company.


                                       12
<PAGE>   13
On October 30, 1998, the Compensation Committee of the Board of Directors
re-priced qualified stock options to purchase 121,000 shares of common stock
granted to various employees beginning in June 1995. The exercise price for
these options was adjusted to $0.1875 per share (the closing market price on
October 30, 1998) reducing grant date exercise prices ranging from $0.72 to
$2.34 per share. Also, on November 12, 1998, the Compensation Committee of the
Board of Directors re-priced qualified stock options to purchase 100,000 shares
of common stock granted to an employee in March 1998. The exercise price for
these options was adjusted to $0.125 per share (the closing market price on
November 12, 1998) reducing the grant date exercise price from $1.18 per share.
The vesting schedules and expiration dates for these options were not modified.

On April 14, 1998, the Company entered into a private placement for up to $5
million of which $3 million was funded at September 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, 1999, $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 increased by five percent (5%) when the Company
was 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 has been
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, 1999, dividends in arrears
were approximately $240,000.

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. However, as reported by the Company on
September 25, 1998, the Company has decided to refocus on the core audio
technologies and to properly position the MultiDisc assets for sale. Therefore
this financing is not currently being pursued actively.

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


                                       13
<PAGE>   14
Funds generated from the financing business activities and capital transactions
described above, as well as cash generated from the Company's existing
operations and the cost reductions being undertaken, may not be sufficient for
the Company to meet its operating obligations during the next twelve months. In
addition, if the refocus on the audio technologies strategy is not successful,
if a strategic alliance including capital funding is not concluded, or if an
appropriate transaction is not undertaken with respect to the MultiDisc assets,
the ability of the Company to meet its operating needs will be materially
adversely affected. As of June 30, 1999, the company had a working capital
deficit of $1,940,000 and, absent continued and improved revenues and successful
funding activities, the company may not be in a position to resolve this
deficit. The financial statements have been prepared assuming the Company will
continue to operate as a going concern which contemplates the realization of
assets and the settlement of liabilities in the normal course of business. No
assurance can be provided that this will ultimately be the case. No adjustment
has been made to the recorded amount of assets or the recorded amount or
classification of liabilities which would be required if the Company were unable
to continue its operations.

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

On October 31, 1997, the Company entered into a line of credit agreement with
Silicon Valley Bank to provide up to $750,000 in short term financing based upon
the Company's accounts receivable base. The line of credit bears interest at an
annual rate of 18% in addition to an administration fee of .50% of the purchased
account receivable. In addition, the advance rate on the line of credit cannot
exceed 80% of the gross receivable purchased.The line of credit expired on
October 23, 1998. As of December 31, 1998 and June 30, 1999, no borrowings were
outstanding.


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 has
upgraded its software programs, the cost of which was approximately $15,000.


                                       14
<PAGE>   15
                           PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

Reference is made to the Company's Form 10-K for the year ended December 31,
1998 with respect to the Company's litigation with QSound Labs, Inc. On July 20,
1999, the Court found in favor of the Company and dismissed the complaint filed
by Alexander Wescott. 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 second quarter of the
fiscal year ending December 31, 1999.


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


                                       15
<PAGE>   16
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 9, 1999


                                 SPATIALIZER AUDIO LABORATORIES, INC.
                                 (REGISTRANT)


                                  /s/ HENRY R. MANDELL
                                 ----------------------------------------------
                                 HENRY R. MANDELL
                                 Interim Chief Executive Officer
                                 Chief Financial Officer


                                       16