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                                                                    EXHIBIT 10.1


                              EMPLOYMENT AGREEMENT


        This Agreement is made and entered into as of July 1, 1998 by and
between SRS Labs, Inc., a Delaware corporation (the "Company") and John AuYeung,
an individual (the "Employee").


                                    RECITALS

        A. The Company develops, markets, sells, and licenses unique,
leading-edge, proprietary semiconductor designs and audio technologies. The
Company also distributes semiconductor products and other electronic component
products throughout China and parts of Asia. The Company has a need for
management personnel.

        B. The Company desires to employ the Employee as the Vice President of
Business Development upon the terms and conditions set forth in this Agreement.

        C. The Employee is willing to enter into this Agreement with respect to
the Employee's employment and services upon the terms and conditions set forth
in this Agreement.

                                    AGREEMENT

        In consideration of the provisions set forth in this Agreement, the
parties agree as follows:

        1.     EMPLOYMENT; DUTIES AND OBLIGATIONS

               1.1 EMPLOYMENT. The Company hereby employs the Employee as the
Vice President of Business Development for the Company for the term of this
Agreement, and the Employee hereby accepts such employment upon the terms and
conditions hereinafter set forth. Notwithstanding anything to the contrary
herein, except with the consent of the Employee, the Employee's principal place
of employment during the term of this Agreement or any renewal thereof shall be
located in Santa Ana, California, or within a radius of 25 miles of Santa Ana,
California, provided that the Employee recognizes that the position of Employee
will require substantial time traveling in the U.S. and abroad, and in
particular to China, Hong Kong and Taiwan to manage and develop the business
opportunities of the Company's licensable technologies in these regions and with
the assistance of the Company's subsidiary, Valence Technology Inc.

               1.2 SERVICE TO THE COMPANY. Subject to applicable law, the
policies of the Board of Directors and the Executive Committee of the Company's
Board of Directors, the Employee shall have primary responsibility for, among
other things, managing and directing the business development activities of the
Company and in particular managing, directing, developing and expanding the
Company's licensing business of its technologies into the


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Greater China region (China, Taiwan, Hong Kong). Specifically, the Employee
shall be responsible in developing the business strategies and championing the
implementation of such strategies in launching VIP, Circle Surround, DVD and the
other Company technologies into the consumer and telecom markets in the
above-mentioned geographical markets and coordinating such activities, as
needed, with the operations of the Company's subsidiary, Valence Technology,
Inc.

               1.3 DEVOTION OF TIME TO THE BUSINESS. The Employee shall devote
no less than seventy percent (70%) of his entire professional time and best
efforts to the business of the Company and its subsidiaries, if any, and shall
not during the term of this Agreement engage in any other business activities;
provided, however, the parties acknowledge that the Employee serves as President
of Communications Management, Inc. and may continue to serve in such capacity to
the extent the Employee's duties in connection therewith do not materially
interfere with the services required by this Agreement. This Agreement shall not
be construed as preventing the Employee from investing his assets in such form
or manner as will not require any services on the part of the Employee for or
with respect to any of the entities in which such investments are made, except
as otherwise restricted in Section 7 herein. This Agreement shall not be
interpreted to prohibit the Employee from making passive personal investments or
conducting private business affairs if those activities do not materially
interfere with the services required under this Agreement. The Employee shall
not, directly or indirectly, acquire, hold, or retain any interest in any
business directly competing with or similar in nature to the business of
Employer; provided however, that the Employee's beneficial ownership of debt
securities in an amount not exceeding $500,000 and/or publicly-traded equity
securities in an amount not exceeding 5% of the total outstanding number of
shares of the particular class of such equity securities, which are issued by
any entity engaged in activities which are competitive with the business of the
Company or any of its subsidiaries, if any, shall not be deemed to be a breach
of any duty or obligation owed by the Employee to the Company or any of its
subsidiaries, if any, hereunder.

        2. TERM. The initial term of this Agreement shall commence as of July 1,
1998 and shall continue in effect until June 30, 1999. The Company may renew the
term of this contract for subsequent year periods by giving written notice to
the Employee of its intention to do so and assent thereto by the Employee.

        3. COMPENSATION

           3.1 BASE SALARY. For all services rendered by the Employee under
this Agreement, the Company (or its designee) shall pay the Employee an annual
base salary related to the fiscal year of the Company (the "Base Salary"),
payable in accordance with the regular payroll practices of the Company (but at
least once a month), at a rate determined in accordance with this Agreement.

               3.1.1  BASE SALARY.  The Base Salary to be paid to the Employee
hereunder is $150,000 per year for the Company's 1998 fiscal year. The Base
Salary to be paid to the Employee hereunder during the Company's 1999 fiscal
year shall be $150,000 per year and shall remain at such level until amended.


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               3.1.2 ADJUSTMENTS TO BASE SALARY. Within six months of the end of
each of the Company's fiscal years, commencing with the Company's 1999 fiscal
year, the Compensation Committee of the Board (or in the absence of a
compensation committee, the Board committee performing equivalent functions or
the entire Board of Directors of the Company) shall review the Base Salary of
the Employee and determine whether to adjust it; provided however that the Base
Salary for any fiscal year shall not be less than the initial Base Salary to be
paid to the Employee for the Company's 1998 fiscal year.

           3.2 401(K) PLAN. The Employee shall be eligible to participate in the
Company's voluntary salary deferral plan and such other similar plans as the
Company may adopt from time to time.

           3.3 PERFORMANCE BONUS. Irrespective of any other bonus payment
payable to the Employee pursuant to this Agreement, the Compensation Committee
(or in the absence of a compensation committee, the Board committee performing
equivalent functions or the entire Board of Directors of the Company) shall
evaluate the Employee's performance at the end of each fiscal year and determine
whether the Employee's performance merits payment of a performance bonus to the
Employee. The performance bonus is wholly discretionary.

           3.4 LONG-TERM INCENTIVE COMPENSATION. The Employee shall be eligible
to participate in all of the Company's long-term incentive compensation plans,
including, but not limited to, any Company stock option, restricted stock or SAR
plan (with the exception of those plans only applicable to non-employee
directors).

           3.5 OTHER BENEFITS. The Employee shall be eligible to participate in,
and be covered by, all such other employee benefits generally provided to an
executive officer of the Company. Such benefits include but are not limited to,
health (including coverage for family members subject to plan limitations), life
and disability insurance (including tax gross up amounts), vacation and sick
leave.

           3.6 NO PROHIBITION AS TO OTHER COMPENSATION. Nothing herein shall be
deemed to preclude the Company, or any of the Company's subsidiaries, if any,
from awarding additional compensation or benefits to the Employee during the
term of this Agreement, upon approval of the Compensation Committee (or in the
absence of a compensation committee, the Board committee performing equivalent
functions or the entire Board of Directors of the Company), whether in the form
of raises, bonuses, additional fringe benefits or otherwise.

           3.7 EXPENSES. The Company, in accordance with its policy (which may
be modified from time to time) shall promptly reimburse the Employee for all
expenses incurred by the Employee in relation to the business of the Company,
including, without limitation, expenses pertaining to travel, lodging, meals,
entertainment, seminars and periodicals. The Employee shall provide the Company
or the applicable subsidiary of the Company, as the case may be, with reasonable
documentation showing the business purpose and cost of each item of expense
submitted for reimbursement.


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           3.8 TAX WITHHOLDING. The Company and, to the extent applicable, any
other subsidiary of the Company, shall have the right to deduct and withhold
from the compensation payable to the Employee hereunder such amounts as may be
necessary to satisfy such corporation's obligations to federal, state and local
authorities to withhold taxes from compensation otherwise payable to the
Employee.

        4. TERMINATION

           4.1 TERMINATION FOR CAUSE. The Company may terminate this Agreement
and discharge the Employee for cause at any time upon written notice. For
purposes of this Agreement, "cause" shall mean (i) the failure to follow the
reasonable instructions of the Board of Directors, (ii) the material breach of
any term of this Agreement and failure to cure such breach within ten (10) days
after written notice thereof from the Company, or (iii) the misappropriation of
assets of the Company or any subsidiary of the Company by the Employee resulting
in a material loss to such entity. The Employee shall not be entitled to receive
any further payments or other benefits under this Agreement after the expiration
of 30 days from the date of such notice, other than benefits which have
previously vested in the Employee.

               4.1.1 DISPUTE REGARDING TERMINATION FOR CAUSE. In the event the
Company gives the Employee written notice of termination for cause, it shall
specify therein the reasons for such termination, and the Employee may, within
five days after the date of the Company's notice, give written notice to the
Company that he disputes the grounds for such termination. Any such dispute
shall be determined by arbitration as set forth herein. Within seven days after
the date of the Employee's written notice, each party shall select and notify
the other of the name and address of an arbitrator. The two arbitrators shall
promptly meet to determine whether the Employee's termination was for cause as
defined hereunder, and render a decision within fifteen days of submission of
the controversy to them. If the two arbitrators cannot within such a period
agree, then they shall, within five days thereafter, jointly select a third
arbitrator whose decision on the question of whether there was cause for the
termination of the Employee shall be final and binding. If the arbitrators
decide that there was not cause for the termination of the Employee, the
Employee shall be entitled to the full benefits of this Agreement for the
remainder of the then term thereof, less any amounts attributable to the
Employee's obligation to mitigate damages as determined by the arbitration
process. Each side shall pay its own arbitrator and the cost of the third
arbitrator, if required, shall be shared equally between the Company and the
Employee.

           4.2 TERMINATION UPON DEATH. This Agreement shall automatically
terminate upon the death of the Employee, and the Employee shall not be entitled
to receive any further payments or benefits under this Agreement, except that
the Company and/or its subsidiaries, if any, as the case may be, shall pay to
the Employee's legal representative the full salary for the month in which he
dies and such legal representative shall be entitled to receive those benefits
which have previously vested in the Employee.

           4.3 TERMINATION BY THE COMPANY WITHOUT CAUSE/SEVERANCE. In the event
the Company shall give written notice of termination without cause during the
then current term of this Agreement, the Employee's term of employment shall
terminate effective on the last day of


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the month such notice is deemed effective. Thereafter, the Employee shall be
entitled to receive for the remainder of the then current term of this
Agreement, or for a period of six (6) months (the "continuation" period),
whichever is longer, the Base Salary then in effect and the health, life,
disability insurance benefits and the other employee benefits which the Employee
had prior to such termination including, but not limited to those set forth in
Sections 3.3 through 3.7 herein (collectively referred to herein as the
"Termination Benefits"). During the continuation period, the Employee will
provide advisory services from time to time to the Chairman of the Board of the
Company and the Chief Executive Officer of the Company, as reasonably requested
by such individuals and acceptable in timing and scope to the Employee. The
Company anticipates that such advisory services will be limited to transitional
or management continuity matters and market trends in the Company's primary
market segments. During the continuation period outstanding options shall
continue to vest and vesting or performance restrictions on any stock awards
shall continue to lapse according to the schedules set forth in the respective
stock option or stock award agreements. If the Employee accepts employment from
any other party during the continuation period, the continuation period cash
salary and Termination Benefits will immediately terminate on the date on which
such new employment commences and the Employee will receive a lump sum severance
payment equal to 80% of the balance of the continued salary payable under this
Section 4.3. Any cash bonus amount which would otherwise be payable within the
twelve month period, if not paid on or prior to such acceptance date shall not
be paid. In addition, for purposes of options or other awards pursuant to the
Company's employee benefit plans, such acceptance date shall be deemed the
termination date under such plans. For purposes of this Section 4.3 and subject
to Section 5 herein, "employment" shall exclude (a) service as an officer or
director of the Employee's personal investment holding company, (b) service as a
director on the board of a corporation, (c) engagement as a bona fide part-time
consultant, or (d) self-employment or engagement as an officer or director of an
operating corporation or enterprise (as opposed to a personal investment holding
company) founded or controlled by the Employee and which has revenues of less
than $5,000,000 per year.

           4.4 TERMINATION BY THE EMPLOYEE. Notwithstanding anything to the
contrary herein, this Agreement may be terminated voluntarily by the Employee
and the Employee agrees to provide 60 days prior written notice to the Company.


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        5. TERMINATION FOLLOWING CHANGE IN CONTROL.

           5.1 ELECTION. If either the Company elects to terminate the Employee
without cause pursuant to Section 4.3 within 90 days before or one year after a
Change in Control (as hereinafter defined) or the Employee elects to resign with
Good Reason (as hereinafter defined) within one year after a Change in Control,
then as a severance benefit and in lieu of all compensation or damages, the
Company shall (i) pay the Employee in one lump sum or in equal monthly
installments, at the sole election of the Employee, an aggregate amount equal to
the Base Salary in effect at the time of such termination or resignation for the
remainder of the then current term of this Agreement, or for six (6) months,
whichever is longer; (ii) pay the Employee any bonus amount earned pursuant to
the Company's annual incentive bonus plan or such similar plan and which would
otherwise be paid if the Employee were employed by the Company, one of its
subsidiaries, if any, or successors thereto during the six month period
commencing on the day of such termination or resignation under this Section 5
(the "Termination Period"); and (iii) provide to the Employee all Termination
Benefits (as such term is defined in Section 4.3 herein).

           5.2 TERMS OF STOCK OPTIONS OR OTHER STOCK-BASED AWARDS. Any stock
option agreement or other stock award agreement heretofore or hereafter granted
under the Company's stock based compensation plans shall have as a term and
condition of such grant or award (in addition to such other provisions and
whether inserted into the applicable agreement or not) the following provision:

               "Notwithstanding anything to the contrary, if in connection with
               or as a result of a Change in Control (as defined in the
               Employment Agreement, hereinafter defined) the Company elects to
               terminate the Employee or the Employee elects to resign under
               Section 5 of the Employment Agreement by and between the Company
               and the Employee dated as of July 1, 1998 (the "Employment
               Agreement"), then the date of exercisability of each outstanding
               option, and the date on which all vesting or performance
               restrictions lapse on any award pursuant to the Company's
               employee benefit plans, shall be immediately accelerated,
               allowing the Employee to immediately acquire all of the
               outstanding unvested options or to immediately hold such stock
               free and clear of any vesting or performance restrictions, as the
               case may be."


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           5.3 DEFINITIONS

               5.3.1 For purposes of this Section 5 "Change in Control" shall
mean:

                     (i) The Company is merged, consolidated or reorganized into
               or with another corporation or other legal person and as a result
               of such merger, consolidation or reorganization less than a
               majority of the combined voting power of the then-outstanding
               securities of such corporation or person immediately after such
               transaction are held in the aggregate by the holders of Voting
               Stock (as that term is defined in subsection (iii) hereof) of the
               Company immediately prior to such transaction;

                     (ii) The Company sells all or substantially all of its
               assets to any other corporation or other legal person, less than
               a majority of the combined voting power of the then-outstanding
               voting securities of which are held directly or indirectly in the
               aggregate by the holders of Voting Stock of the Corporation
               immediately prior to such sale;

                     (iii) There is a report filed on Schedule 13D or Schedule
               14D-1 (or any successor schedule, form or report), each as
               promulgated pursuant to the Securities Exchange Act of 1934 (the
               "Exchange Act"), disclosing that any person (as the term "person"
               is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange
               Act) has become the beneficial owner (as the term "beneficial
               owner" is defined under Rule 13d-3 or any successor rule or
               regulation promulgated under the Exchange Act) of securities
               representing 20% or more of the combined voting power of the
               then-outstanding securities of the Company entitled to vote
               generally in the election of directors of the Company ("Voting
               Stock");

                     (iv) The Company files a report or proxy statement with the
               Securities and Exchange Commission pursuant to the Exchange Act
               disclosing in, or in response to, Form 8-K or Schedule 14A (or
               any successor schedule, form or report or item therein) that a
               Change in Control of the Corporation has or may have occurred or
               will or may occur in the future pursuant to any then-existing
               contract or transaction;

                     (v) If during any period of two consecutive years,
               individuals who at the beginning of any such period constitute
               the Directors of the Company cease for any reason to constitute
               at least a majority thereof unless the election, or the
               nomination for election by the Company's stockholders, of each
               Director of the Company first elected during such period was
               approved by a vote of at least two-thirds of the Directors of the
               Company then still in office who were Directors of the Company at
               the beginning of any such period; or


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                     (vi) Notwithstanding the foregoing provisions of (a)
               subsections (iii) or (iv) hereof, a "Change in Control" shall not
               be deemed to have occurred for purposes of this Agreement solely
               because the Company, an entity in which the Company directly or
               indirectly beneficially owns 50% or more of the voting securities
               of such entity (an "Affiliate"), any Company-sponsored employee
               stock ownership plan or any other employee benefit plan of the
               Company either files or becomes obligated to file a report or a
               proxy statement under or in response to Schedule 13D, Schedule
               14D-1, Form 8-K or Schedule 14A (or any successor schedule, form
               or report or item therein) under the Exchange Act, disclosing
               beneficial ownership by it of shares of voting securities of the
               Corporation, whether in excess of 20% or otherwise, or because
               the Company reports that a Change in Control of the Company has
               or may have occurred or will or may occur in the future by reason
               of such beneficial ownership or (b) Subsection (iii) hereof, a
               "Change in Control" shall not be deemed to have occurred for
               purposes of this Agreement solely because a person who is a
               holder of five percent (5%) or more of the Voting Stock and who
               also is an officer and director of the Company on the date of
               this Agreement acquires 20% or more of the Voting Stock.

                     (vii) Notwithstanding the foregoing provisions of
               subsections (i) and (ii) hereof, a "Change of Control" shall not
               be deemed to have occurred for purposes of this Agreement solely
               because the Company engages in an internal reorganization, which
               may include a transfer of assets to one or more Affiliates,
               provided that such transaction has been approved by at least
               two-thirds of the Directors of the Company and as a result of
               such transaction or transactions, at least 80% of the combined
               voting power of the then-outstanding securities of the Company or
               its successor are held in the aggregate by the holders of Voting
               Stock immediately prior to such transactions.

               5.3.2 For purposes of this Section 5, the Employee shall be
deemed to have resigned "with Good Reason" if he does so following a Change in
Control as a result of the Company or any or its subsidiaries, if any, having
done any or all of the following without the Employee's express written consent:
(i) assigned the Employee different duties or made changes in his reporting
responsibilities, title, or office that are substantially inconsistent with the
Employee's duties, responsibilities, titles, or offices immediately prior to the
Change in Control; (ii) reduced the Employee's Base Salary from that in effect
at the time of the Change in Control; (iii) failed to continue any bonus plan in
substantially the same form as it existed prior to the Change in Control; (iv)
required the Employee to be based more than 25 miles from his present office
location, except for required travel consistent with the Employee's present
business travel obligations; (v) failed to continue any plan or program for
compensation, employee benefits, stock purchase or ownership, life insurance,
group medical, disability, or vacation in substantially the same form as
immediately prior to the Change in Control, or otherwise made any material
reduction in the Employee's fringe benefits including but not limited to those
described in Section 3 herein; or (vi) failed to obtain the assumption of this
Agreement by any successor to the Company.


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           5.4 RELATIONSHIP TO OTHER TERMINATION SECTIONS. The Employee shall
not be entitled to the benefits of this Section 5 if this Agreement and his
employment are terminated pursuant to Sections 4.1, 4.2, 4.3 or 4.4.

           5.5 COMPANY'S SOLE OBLIGATIONS. In the event of any termination
pursuant to this Section 5, the payment of all compensation owing for services
rendered by the Employee prior to such termination and of the severance benefits
set forth in this Section 5 as applicable constitute the sole obligations of the
Company and are in lieu of any damages or other compensation that the Employee
may claim in connection with this Agreement.

        6. RESIGNATION AS DIRECTOR AND OFFICER. In the event of any termination
or resignation pursuant to Sections 4.1, 4.3, 4.4 or 5, the Employee shall be
deemed to have resigned voluntarily as an officer and director of the Company
(and of any subsidiaries of the Company, if any) if he was serving in either of
such capacities at the time of termination.

        7. NON-COMPETITION, COVENANT NOT TO HIRE CERTAIN THE EMPLOYEES; TRADE
SECRETS. The Employee acknowledges that in the course of his employment
hereunder he will have access and be made privy to the marketing, business and
financial plans and trade secrets of the Company and the Company's subsidiaries,
if any, (for purposes of this Section 7 and Section 8 herein, collectively and,
as the case may be, each such subsidiary individually, referred to as the
"Company") and will have access to information of the Company important in its
operations. The Employee recognizes that it is vital to the Company's business
that such plans and secrets not be disclosed to or used by others, and that the
Company's relations with its employees not be disrupted. The Employee,
therefore, hereby agrees as follows:

           (a) the Employee shall not at any time during the term of this
Agreement engage or be interested in, directly or indirectly, for himself or for
anyone else, or render any services or advice (as employee, consultant or
otherwise) to anyone directly or indirectly engaged in the operation or
management of, or the rendition of services to, any entity doing business in the
United States, directly competitive with or similar in nature to that operated
by the Company or any of its subsidiaries, if any;

           (b) the Employee shall not at any time during the term of this
Agreement and for a period of one year after such termination (i) employ any
individual who was employed by the Company or any of its affiliates, during (i)
the one year period commencing one year prior to the date the Employee's
employment terminates, or (ii) in any way, cause, influence, or participate in
the employment of any such individual by anyone else during said period;

           (c) the Employee shall not disclose or use any trade secrets of the
Company, either during the term hereof or six months after termination of this
Agreement; and provided however, that any disclosure to a governmental agency as
required by law by the Employee will not be a breach of this Section 5(c) of
this Agreement.


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        8. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of Section 7 of this Agreement, the Company shall be entitled to an
injunction restraining the Employee from such breach. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies for such
breach or threatened breach.

        9. INVENTIONS AND IMPROVEMENTS.

           (a) The Employee hereby assigns to the Company an exclusive right to
all inventions, discoveries, ideas and improvements made by him, whether alone
or jointly with others, relevant to the subject matter of his employment.

           (b) The Employee hereby recognizes as the exclusive property of the
Company and hereby assigns to the Company without further consideration:

               (i) all inventions, discoveries, ideas and improvements made,
conceived or discovered, by the Employee during the term of this Agreement,
whether by himself or jointly with others (whether or not employees of the
Company) and whether or not made at the Company's premises or during working
hours, relating or pertaining in any way to the kind of business or any tests,
research or development carried on by the Company, or any subsidiary or
affiliate of the Company; and

               (ii) all of his right, title and interest in and to each
application for Letters Patent of the United States or of any foreign country
that he either alone or jointly with others (whether or not employees of the
Company), may hereafter file with respect to any such invention, discovery, idea
or improvement and each patent that may be issued thereon.

           (c) The Employee agrees to execute any assignments to the Company or
its nominee of his rights, title and interest in any such invention,
discoveries, ideas and improvements, and any other instruments and documents
requisite or desirable in applying for and obtaining patents at the cost of the
Company with respect thereto in the United States and all foreign countries as
and when requested by the Company. The Employee further agrees whether in the
employ of the Company or nit, to cooperate to the extent and in the manner
requested by the Company in the prosecution or defense of any patent claims or
any litigation or other proceedings involving any inventions, discoveries or
improvements covered by this Agreement, but all expenses thereof shall be paid
by the Company. Any invention, discovery, idea or improvement within the scope
of this Section 9 shall be disclosed promptly in writing to the Board of
Directors of the Company.

           (d) In the event the Company is unable to secure the Employee's
signature on any document or documents needed to apply for or prosecute any
patent, copyright or other right or protection relating to an invention,
discovery, idea or improvement, whether because of his physical or mental
incapacity or for any other reason whatsoever, the Employee hereby irrevocably
designates and appoints the Company and its duly authorized officers and agents
as his agent and attorney-in-fact, to act for and in his behalf and stead to
execute and file any such application or applications and to do all other
lawfully permitted acts to further the prosecution and issuance of patents,
copyrights, or similar protections thereon with the same legal force and effect
as if executed by him.


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        10. INSURANCE. The Company shall purchase and keep in full force and
effect for the Employee a policy of directors' and officers' liability insurance
at coverage levels consistent with other executive officers of the Company.

        11. AUTHORITY. The individual executing this Agreement on behalf of the
Company represents and warrants to the Employee that the performance of this
Agreement and consummation of the transactions contemplated hereby have been
duly authorized by all requisite action and that he has the power and authority
to execute this Agreement.

        12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be given by hand delivery, telecopy,
overnight courier service, or by United States certified or registered mail,
return receipt requested. Each such notice, request, demand or other
communication shall be effective (a) if delivered by hand or by overnight
courier service, when delivered at the address specified in this Section; (b) if
given by telecopy, when such telecopy is transmitted to the telecopy number
specified in this Section and confirmation is received; and (c) if given by
certified or registered mail, three days after the mailing thereof.

               Address for notices (unless and until written notice is given of
any other address):

               If to the Company:

                      SRS Labs, Inc.
                      2909 Daimler Street
                      Santa Ana, California 92705
                      Attention: Ms. Janet M. Biski
                                 Chief Financial Officer and Secretary
                      Fax: (714) 852-1099

               If to the Employee:

                      John AuYeung
                      Fax: (949) 724-9646

        13. FURTHER DOCUMENTS AND ACTS. Each of the parties hereto agrees to
cooperate in good faith with the other and to execute and deliver such further
instruments and perform such other acts as may be reasonably necessary or
appropriate to consummate and carry into effect the transactions contemplated
under this Agreement.

        14. FINANCIAL REPORTING. Any computation pertaining to Employer's
financial affairs to be made hereunder or referenced herein shall be based on
generally accepted accounting principles, applied on a consistent basis.

        15. ATTORNEYS' FEES. In any action, litigation or proceeding between the
parties arising out of or in relation to this Agreement, the prevailing party in
such action shall be awarded, in addition to any damages, injunctions or other
relief, and without regard to whether or not such matter be prosecuted to final
judgment, such party's costs and expenses, including reasonable attorneys' fees.


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        16. CALIFORNIA LAW. This Agreement has been negotiated and executed in
the State of California and is to be performed in Orange County, California.
This Agreement shall be governed by and interpreted in accordance with the laws
of the State of California, including all matters of construction, validity,
performance and enforcement, without giving effect to principles of conflict of
laws. Any dispute, action, litigation or other proceeding concerning this
Agreement shall be instituted, maintained, heard and decided in Orange County,
California.

        17. AMENDMENTS/WAIVER. This Agreement may be amended, supplemented,
modified and/or rescinded only through an express written instrument signed by
all the parties or their respective successors and assigns. Any party may
specifically and expressly waive in writing any portion of this Agreement or any
breach hereof, but no such waiver shall constitute a further or continuing
waiver of any preceding or succeeding breach of the same or any other provision.
The consent by one party to any act for which such consent was required shall
not be deemed to imply consent or waiver of the necessity of obtaining such
consent for the same or similar acts in the future.

        18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.

        19. SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity
and enforceability of any such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired or affected, it
being intended that all of the rights and privileges shall be enforceable to the
fullest extent permitted by law.

        20. ENTIRE AGREEMENT. This Agreement contains the entire and complete
understanding between the parties concerning its subject matter and all
representations, agreements, arrangements and understandings between or among
the parties, whether oral or written, have been fully merged herein and are
superseded hereby.

        21. REMEDIES. All rights, remedies, undertakings, obligations, options,
covenants, conditions and agreements contained in this Agreement shall be
cumulative and no one of them shall be exclusive of any other.

        22. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective heirs, legatees, legal
representatives, personal representatives, successors and assigns.


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<PAGE>   13

        23. INTERPRETATION. The language in all parts of this Agreement shall be
in all cases construed simply according to its fair meaning and not strictly for
or against any party. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice versa, and
each gender will include any other gender. The captions of the Sections of this
Agreement are for convenience only and shall not affect the construction or
interpretation of any of the provision herein.

        24. MISCELLANEOUS. Each provision of this Agreement to be performed by a
party hereto shall be deemed both a covenant and condition, and shall be a
material consideration for the other party's performance hereunder, and any
breach thereof by the party shall be deemed a material default hereunder. The
recitals and all other documents referenced in this Agreement are fully
incorporated into this Agreement by reference. Unless expressly set forth
otherwise, all references herein to a "day" shall be deemed to be a reference to
a calendar day. Unless expressly stated otherwise, cross-references herein shall
refer to provisions within this Agreement, and shall not be deemed to be
references to the overall transaction or to any other document. Time is of the
essence in the performance of this Agreement.

        IN WITNESS WHEREOF, the parties have executed this Agreement in Orange
County as of the date first written above.

COMPANY:                                  SRS LABS, INC., a Delaware corporation


                                          By: /s/ THOMAS C. K. YUEN
                                              ----------------------------------
                                              Thomas C.K. Yuen
                                              Chairman of the Board and Chief
                                              Executive Officer

                                          By: /s/ JANET M. BISKI
                                              ----------------------------------
                                              Janet M. Biski
                                              Chief Financial Officer and
                                              Secretary


EMPLOYEE:                                 /s/ JOHN AU YEUNG
                                          --------------------------------------
                                              John AuYeung



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