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Quarterly Loss Narrows from Prior Two Quarters, While Base Business Returns to Profitability

The Company reported revenue of $8.0 million and a net loss of $1.2 million, or $0.10 loss per share, for this year's third quarter, which includes a loss of $1.1 million from its SRSWOWcast.com Internet technology subsidiary and acquisition-related costs of $332,796. Revenue for the comparable prior year quarter was $10.0 million with net income of $310,422 or $0.03 per share. When compared to the second quarter of this year, the loss was reduced by 70 percent, the gross margin increased to 42.4 percent, and the revenues increased by more than 21 percent.

According to SRS Labs Chairman and CEO Thomas Yuen, ``Our management team has focused on executing our stated plan and we are pleased that our effort has resulted in the return to profitability of our base business and the successful completion of private funding for our Internet subsidiary, SRSWOWcast.com. Our continued de-emphasis of distributing low-margin products has resulted in an increase of the gross profit margin to 42.4 percent in the third quarter ended September 30, 2000.''

``During the third quarter, we made tremendous progress in bringing a number of new and innovative audio applications from the development stage to pre-market testing,'' continued Yuen. ``These products target several high-growth segments in the voice market including wireless communications, text-to-speech (TTS), voice over IP (VoIP), and other voice-related markets. Our product group has also completed several consumer audio enhancement products that are being launched into the retail market currently. These additional revenue sources should help us to off-set fluctuations in royalty revenue from our traditional audio enhancement technology licensing.''

For the nine months ended September 30, 2000, the Company reported revenue of $21.8 million and a net loss of $9.7 million, or $0.79 loss per share. For the comparable prior year-to-date period, revenue was $25.9 million with a net loss of $1.2 million, or $0.10 loss per share. Softness in demand throughout the year for Valence's ASIC chips as well as lower licensing revenue caused by factors outside the control of SRS resulted in licensing and chip revenue being lower by $2.8 million than the comparable period last year. Although year-to-date sales were lower this year than the comparable prior year period, the gross margin percentage remained the same. Seventy-five percent of the $9.7 million loss, for the nine months ending September 30, 2000, is attributable to the following items that were not present in the comparable prior year period: $3.1 million in accounting charges related to the acquisition of the Company's common stock and the issuance of a warrant for the purchase of shares in SRSWOWcast.com to Microsoft; the write-off of Valence IPO and associated costs totaling $1.9 million; and Internet technology subsidiary start-up losses totaling $2.3 million.

The Company's balance sheet remains strong with cash, cash equivalents and investments totaling $31.2 million at the end of the quarter -- an increase of approximately $6 million when compared to the $25.3 million on hand on December 31, 1999.

The Company's management team will continue to focus on these strategic initiatives:

ValenceTech continues to increase gross profit margins

ValenceTech's product distribution business has steadily increased gross profit margins for the past consecutive seven quarters as a result of the Company's strategy to de-emphasize low-margin products. As a result, their overall revenue is lower, but the gross margin has increased to 16.8 percent this quarter from 2 percent in Q1 of 1999. Valence is currently developing a digital signal processor (DSP) to implement SRS technologies. This effort will be instrumental in the Company's future growth in the audio, voice and data application markets. ValenceTech is a subsidiary of SRS Labs, Inc. It designs and sells technology solutions through custom analog, digital and mixed-signal ASICs for OEM manufacturers worldwide in the consumer electronics, computer, game and telecommunications markets.

SRS Labs audio technologies featured in branded products worldwide

SRS Labs continues to license its flagship audio and voice enhancement technologies to major chip partners and consumer electronics manufacturers worldwide such as Broadcom, STMicroelectronics, Sony and Pioneer. Current products on the market that feature SRS technologies include; Sony WEGA televisions, Toshiba's high-definition televisions and a tuners, Kenwood receivers, Marantz amplifiers and DVD players, the Olympus Eye-Trek and many more. ``We are seeing an increase in the use of our TruSurround technology in DVD players because it produces surround sound effects from 5.1 channel encoded DVD movies when played over a two channel speaker system,'' stated Tom Yuen. ``Continued efforts to market our flagship audio technologies and the addition of our new voice technologies for GSM, CDMA, text-to-speech, and voice over IP (VoIP) should expand our customer base and tap into new high-growth markets over the coming year. We also are continuing our strategic technology alliance with Microsoft that is exposing our technologies to millions of Windows Media Player 7 and Windows ME users. Our inclusion in the Windows Media Player and a hyperlink from the player to our technology page and website is a valuable marketing tool for us and we will continue to leverage the opportunities that it brings to the company.''

SRSWOWcast.com successfully completes $6,000,000 in private funding

SRS Labs' Internet subsidiary, SRSWOWcast.com announced on October 3rd the successful completion of their private placement funding. The strategic and financial investments of $6 million in the series A round of financing were led by the WI Harper Group. The costs of development and the Q3 launch of the site impacted the Company's financials for the quarter, however, the funding received this month will provide the working capital for the subsidiary to grow and expand. SRSWOWcast.com will focus on narrowing the losses by securing revenue generating relationships such as content syndication, technology hosting and others. Through a strategic technology alliance with Microsoft, the Company's WOW technology is featured within Microsoft's Windows Media Player 7 with the SRS corporate logo on the player and a hyperlink to a technology web page that explains the WOW technology and links to SRSWOWcast.com. This hyperlink from the WMP7 has quickly accelerated the amount of traffic the site has received since its launch on July 18th of this year. The site received over 750,000 unique visitors and has delivered over 2 million page views within the third quarter of this year and on the heels of the recent launch of Microsoft's Windows ME operating system, which includes the Windows Media Player 7, the site has already seen a doubling of October's traffic when compared to average monthly traffic.

WOW Thing and WOW-related products launch into retail

The Company's product group has been developing a line of consumer audio enhancement products for the computer and video game markets based on the Company's WOW(TM) technology. The WOW Thing for Computers and the WOW Thing for Game Consoles will enhance the audio dynamics and bass performance of games over external multimedia speakers and game consoles connected to televisions. The Company's launch of the WOW Thing for Game Consoles is closely timed with this week's release of Sony's PlayStation 2 in the US market. The first company to feature the WOW Thing for Game Consoles this holiday season will be national gaming retail specialist, Electronics Boutique who will sell the product in approximately 530 stores nationwide. Other products in development include additional WOW-based products for the gaming and MP3 markets, a line of slim-profile high-performance home theater speakers, and a series of professional audio products based on the Company's proprietary audio and voice technologies.

Voice technology business expands into wireless and telecommunications markets

SRS Labs announced the expansion of their voice technology development and marketing to address the high-growth wireless and telecommunications markets. The company is working with telecommunications partners to test the technologies in a variety of applications from GSM and CDMA phones, to text-to-speech (TTS) applications and Voice over IP. The company will demonstrate these technologies to the speech technology community for the first time next week at the SpeechTek convention in New York City. The Company's VIP, NuVoice and WOWVoice technologies have been created and customized for specific voice-related applications and are designed to increase intelligibility of speech and restore speech quality even over narrow bandwidths. Some of our wireless phone manufacturers will be announcing these features in their phones over the next 90 to 180 days.

About SRS Labs, Inc.

SRS Labs is the world's leading provider of audio and voice enhancement technology solutions. SRS Labs' businesses consist of licensing audio and voice enhancement technologies to manufacturers of consumer electronics, and telecommunications equipment, computer, and gaming products; the design, manufacture and distribution of components, integrated circuits, sub-assemblies; sales and marketing of products for the consumer electronics and home entertainment markets and broadcasting Internet music and entertainment utilizing proprietary audio technologies through the Company's subsidiary, SRSWOWcast.com.

For more information on SRS Labs' technologies, the Company's worldwide licensing program or its design and manufacturing capabilities, visit the SRS Labs website at http://www.srslabs.com.

Except for historical information contained in this release, statements in this release and other statements by Mr. Yuen in paragraph 3, 4, and 9 and the discussion regarding the Company's business structure, are forward-looking statements and projections (which include statements concerning plans and objectives of management for future operations) that are based on management's belief, as well as assumptions made by, and information currently available to, management.

While the Company believes that its expectations are based upon reasonable assumptions, there can be no assurances that the Company's goals and incubator strategy will be realized. Numerous factors (including risks and uncertainties) may affect the Company's actual results and may cause results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company. Some of these factors include the acceptance of the Company's Internet strategy and general market conditions concerning internet business, the acceptance of new SRS Labs' products and technologies, the impact of competitive products and pricing, the timely development and release of media content by the Company, general business and economic conditions, especially in Asia, and other risks detailed in the Company's Form 10-K and Form 10-Q statements filed with the SEC.

SRS, WOW, WOW Thing, VIP, NuVoice, WOWVoice and the SRS symbol are registered trademarks of SRS Labs, Inc. in the United States and selected foreign countries.

                                SRS LABS, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (unaudited)

                           Three Months Ended          Nine Months Ended
                                Sept. 30                    Sept. 30
                            2000         1999         2000           1999
    Revenues:
     Chip & licensing
      revenue           $3,871,803    $4,849,251   $9,611,135   $12,408,799
     Product and
      component sales    4,136,104     5,167,720   12,180,530    13,455,140
       Total revenues    8,007,907    10,016,971   21,791,665    25,863,939
    Cost of sales        4,616,384     6,293,066   13,732,550    16,340,007
    Gross margin         3,391,523     3,723,905    8,059,115     9,523,932
    Expenses:
     Sales & marketing   1,913,199     1,027,296    4,620,676     3,176,782
     Research &
      development        1,087,849     1,026,822    3,011,946     3,097,746
     General &
      administrative     1,722,389     1,412,824    7,336,349     4,926,645
     Non-cash stock
      issuance cost             --            --    3,111,859            --
    (Loss) income
     from operations    (1,331,914)      256,963  (10,021,715)   (1,677,241)
    Other income, net      332,152       141,391      850,128       407,978
    (Loss) income
     before income tax
     (benefit) expense    (999,762)      398,354   (9,171,587)   (1,269,263)
    Income tax
     (benefit) expense     222,189        87,932      498,773       (88,450)
    Net (loss)
     income            $(1,221,951)     $310,422  $(9,670,360)  $(1,180,813)
    Net (loss)
     income per
     common share:
       Basic                ($0.10)        $0.03       ($0.79)       ($0.10)
       Diluted              ($0.10)        $0.03       ($0.79)       ($0.10)
    Weighted average
     number shares used
     in the calculation
     of net (loss) income
     per common share
       Basic            12,540,336    11,682,336   12,313,491    11,683,634
       Diluted          12,540,336    12,108,558   12,313,491    11,683,634

For further information, contact: investors, Jill Cieslak, or media, Len Hall, both of Allen & Caron Inc., 949-474-4300, for SRS Labs, Inc.; or James F. Gardner, Vice President, Operations of SRS Labs, Inc., 949-442-1070 x5010.

SOURCE: SRS Labs, Inc.