<PAGE>   1

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


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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


(Mark One)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 2000

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

        For the transition period from _______________ to ______________

                         Commission File Number 0-21123

                                 SRS LABS, INC.
             (Exact name of registrant as specified in its charter)

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


                  DELAWARE                                  33-0714264
       (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                   Identification No.)

                2909 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705
               (Address of principal executive offices) (Zip Code)

                                 (949) 442-1070
              (Registrant's telephone number, including area code)

                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                          if changes since last report)

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

    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. [X] Yes [ ] No

                      APPLICABLE ONLY TO CORPORATE ISSUERS

    Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: as of May 5, 2000, 12,564,273
shares of the issuer's common stock, par value $.001 per share, were
outstanding.

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

<PAGE>   2

                                 SRS LABS, INC.

                                    Form 10-Q
                       For the Period Ended March 31, 2000

                                      Index

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>      <C>                                                                <C>
PART I - FINANCIAL INFORMATION

     Item 1. Financial Statements.                                             3

             Consolidated Balance Sheets as of March 31, 2000 (Unaudited)
               and December 31, 1999                                           3

             Consolidated Statements of Operations for the three months
               ended March 31, 2000 and 1999 (Unaudited)                       4

             Consolidated Statements of Comprehensive Loss for the three
               months ended March 31, 2000 and 1999 (Unaudited)                5


             Consolidated Statements of Cash Flows for the three months
               ended March 31, 2000 and 1999 (Unaudited)                       6

             Notes to the Interim Consolidated Financial Statements
               (Unaudited)                                                     8

     Item 2. Management's Discussion and Analysis of Financial Condition
               and Results of Operations.                                     11

     Item 3. Quantitative and Qualitative Disclosures About Market Risk.      18

PART II - OTHER INFORMATION

     Item 2. Changes in Securities and Use of Proceeds.                       19

     Item 6. Exhibits and Reports on Form 8-K.                                20

SIGNATURES                                                                    21

</TABLE>

                           FORWARD-LOOKING INFORMATION

     This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended, reflecting
management's current expectations. Examples of such forward-looking statements
include the expectations of the Company with respect to its strategy. Although
the Company believes that its expectations are based upon reasonable
assumptions, there can be no assurances that the Company's financial goals will
be realized. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Numerous factors 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. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words, "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. The important
factors discussed in Part I, Item 2, Management Discussion and Analysis of
Financial Condition and Results of Operation - Factors That May Affect Future
Results", herein, among others, could cause actual results to differ materially
from those indicated by forward-looking statements made herein and presented
elsewhere by management. Such forward-looking statements represent management's
current expectations and are inherently uncertain. Investors are warned that
actual results may differ from management's expectations. The Company assumes no
obligation to update the forward-looking information to reflect actual results
or changes in the factors affecting such forward-looking information.


                                       2
<PAGE>   3

                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

                                 SRS LABS, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                            MARCH 31,         DECEMBER 31,
                                                              2000                1999
                                                          ------------        ------------
                                                          (UNAUDITED)
<S>                                                       <C>                 <C>
                           ASSETS
CURRENT ASSETS
    Cash and cash equivalents                             $ 21,086,022        $ 15,969,678
    Investments available for sale                           3,221,617           3,011,250
    Accounts receivable, net                                 2,434,338           2,495,157
    Inventories, net                                         2,446,185           2,726,193
    Prepaid expenses and other current assets                1,101,393             729,881
    Deferred income taxes                                       81,467              81,467
                                                          ------------        ------------

         TOTAL CURRENT ASSETS                               30,371,022          25,013,626

  Investments available for sale                             4,593,045           6,331,483
  Furniture, fixtures & equipment, net                       1,220,296           1,166,757
  Intangible assets, net                                     5,135,670           5,425,273
  Deferred income taxes                                        740,889             740,889
  Other assets                                                 422,493             422,493
                                                          ------------        ------------

         TOTAL ASSETS                                     $ 42,483,415        $ 39,100,521
                                                          ============        ============

            LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable                                      $  2,290,615        $  2,882,686
    Accrued liabilities                                      1,324,215           1,658,964
    Line of credit                                           8,000,000           8,000,000
    Income taxes payable                                     1,431,425           1,518,548
                                                          ------------        ------------

         TOTAL CURRENT LIABILITIES                          13,046,255          14,060,198

STOCKHOLDERS' EQUITY

    Preferred stock - $.001 par value;
     2,000,000 shares authorized; no shares
     issued and outstanding                                         --                  --
    Common stock - $.001 par value;
     56,000,000 shares authorized; 12,398,107
     and 11,890,691 shares issued; and
     12,327,007 and 11,819,591 shares outstanding
     at March 31, 2000 and December 31, 1999,
     respectively                                               12,399              11,891
    Additional paid-in capital                              49,034,525          40,312,336
    Deferred stock option compensation                         292,431             264,557
    Cumulative other comprehensive income                       10,642              23,330
    Retained deficit                                       (19,649,556)        (15,308,510)
    Less treasury stock at cost, 71,100 shares
     at March 31, 2000 and December 31, 1999                  (263,281)           (263,281)
                                                          ------------        ------------

         TOTAL STOCKHOLDERS' EQUITY                         29,437,160          25,040,323
                                                          ------------        ------------

         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $ 42,483,415        $ 39,100,521
                                                          ============        ============
</TABLE>

     See accompanying notes to the interim consolidated financial statements


                                       3
<PAGE>   4

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

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED
                                                           MARCH 31,
                                               --------------------------------
                                                   2000                1999
                                               ------------        ------------
<S>                                            <C>                 <C>
REVENUES
Chip and licensing revenue                     $  2,879,079        $  3,581,158
Product and component sales                       4,311,473           4,073,412
                                               ------------        ------------
   TOTAL REVENUES                                 7,190,552           7,654,570
COST OF SALES                                     4,848,701           5,093,785
                                               ------------        ------------
GROSS MARGIN                                      2,341,851           2,560,785

Sales and marketing                               1,284,734           1,284,332
Research and development                            939,189           1,089,906
General and administrative                        1,418,587           2,121,559
Non-cash stock issuance cost                      3,111,859                  --
                                               ------------        ------------
LOSS FROM OPERATIONS                             (4,412,518)         (1,935,012)

OTHER INCOME, NET                                   209,564             127,978
                                               ------------        ------------
LOSS BEFORE INCOME TAX (EXPENSE) BENEFIT         (4,202,954)         (1,807,034)
INCOME TAX (EXPENSE) BENEFIT                       (138,093)            309,924
                                               ------------        ------------
NET LOSS                                       $ (4,341,047)       $ (1,497,110)
                                               ============        ============

NET LOSS PER COMMON SHARE
   Basic                                       $      (0.36)       $      (0.13)
                                               ============        ============
   Diluted                                     $      (0.36)       $      (0.13)
                                               ============        ============

WEIGHTED AVERAGE SHARES USED IN THE
CALCULATION OF NET LOSS PER COMMON SHARE
   Basic                                         11,982,392          11,681,419
                                               ============        ============
   Diluted                                       11,982,392          11,681,419
                                               ============        ============
</TABLE>


    See accompanying notes to the interim consolidated financial statements


                                       4
<PAGE>   5

                                 SRS LABS, INC.
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                                             MARCH 31,
                                                  ------------------------------
                                                     2000               1999
                                                  -----------        -----------
<S>                                               <C>                <C>
Net loss                                          $(4,341,047)       $(1,497,110)
Other comprehensive income (loss)
    Foreign currency translation                       (1,544)                --
   Unrealized loss on investments available
   for sale, net of tax                               (11,144)            (7,916)
                                                  -----------        -----------
Comprehensive loss                                $(4,353,735)       $(1,505,026)
                                                  ===========        ===========
</TABLE>


    See accompanying notes to the interim consolidated financial statements


                                       5
<PAGE>   6

                                 SRS LABS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED
                                                                                    MARCH 31,
                                                                        --------------------------------
                                                                            2000                1999
                                                                        ------------        ------------
<S>                                                                     <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                $ (4,341,047)       $ (1,497,110)
Adjustments to reconcile net loss to net cash used in operating
 activities:
     Non-cash stock issuance cost                                          3,111,859                  --
     Depreciation and amortization                                           558,498             499,913
     Other                                                                    (1,210)                 --
     Amortization of premium on investments available for sale                 9,185              14,171
     Increase in deferred stock option compensation                           27,874              90,561
     Changes in operating assets and liabilities:
         Accounts receivable                                                  60,819           2,305,349
         Inventories                                                         280,008            (988,193)
         Prepaid expenses and other current assets                          (371,512)           (219,882)
         Accounts payable                                                   (592,071)         (2,714,869)
         Accrued liabilities                                                (334,749)          1,463,578
         Income taxes payable                                                (79,379)            (83,171)
                                                                        ------------        ------------
     Net cash used in operating activities                                (1,671,725)         (1,129,653)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment                               (202,769)            (28,425)
Proceeds from sale of investments available for sale                       1,500,000                  --
Expenditures related to patents and intangible assets                       (120,000)             (8,496)
                                                                        ------------        ------------
     Net cash provided by (used in) investing activities                   1,177,231             (36,921)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock                                         5,000,291                  --
Purchase of treasury stock                                                        --             (52,500)
Proceeds from exercise of stock options                                      610,547              37,471
                                                                        ------------        ------------
     Net cash provided by (used in) financing activities                   5,610,838             (15,029)
                                                                        ------------        ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       5,116,344          (1,181,603)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                            15,969,678          12,341,242
                                                                        ------------        ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                $ 21,086,022        $ 11,159,639
                                                                        ============        ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the period for:
     Interest                                                           $    140,695        $    112,307
     Income taxes                                                       $    177,191        $         --
</TABLE>

    See accompanying notes to the interim consolidated financial statements


                                       6
<PAGE>   7

                                 SRS LABS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                                              MARCH 31,
                                                        --------------------
                                                          2000        1999
                                                        --------     -------
<S>                                                     <C>          <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
 FINANCING ACTIVITIES:
   Unrealized loss on investments, net                  $(11,144)    $(7,916)
</TABLE>

In January 1999, the Company received certain computer equipment and a fully
paid-up license for MPEG-1 Technology Core from DVS Inc. in payment for $300,000
of license fees due to the Company for the use of its technologies.

    See accompanying notes to the interim consolidated financial statements


                                       7
<PAGE>   8

                                 SRS LABS, INC.
             NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1. GENERAL/BASIS OF PRESENTATION

     SRS Labs, Inc. is a developer and provider of technology solutions for the
consumer electronics, computer, game and telecommunications markets. The
Company's principal business activities in these markets include:

     o    Developing and licensing audio and voice technologies to original
          equipment manufacturers ("OEMs") and semiconductor manufacturers
          around the world; and

     o    Through its subsidiary, ValenceTech Limited and its foreign
          subsidiaries (collectively "Valence"), designing and selling
          technology solutions through custom application specific integrated
          circuits ("ASICs") to OEMs; and designing, distributing and
          manufacturing components, sub-assemblies and electronics products for
          the OEM and retail communities within the Company's targeted markets.

     The accompanying interim consolidated financial statements have been
prepared by the Company without audit (except for the balance sheet information
as of December 31, 1999) in conformity with accounting principles generally
accepted in the United States for interim financial information and with the
rules and regulations of the U.S. Securities and Exchange Commission. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) considered necessary for a fair presentation have been included.
Certain accounts as previously reported have been reclassified to conform to the
current period presentation.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Therefore, the interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999. Current and future financial statements
may not be directly comparable to the Company's historical financial statements.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year.

2. INVESTMENTS AVAILABLE FOR SALE

     The Company has classified its investments as available-for-sale in
accordance with Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities". As of March 31, 2000,
the Company's available-for-sale investments had a cost of $7,785,825 and an
estimated fair value of $7,814,662, based on quoted market prices. The
unrealized gains on these investments of $28,837 net of income taxes of $11,824,
are reported as a separate component of stockholders' equity.

3. INVENTORIES

     Inventories, which consist of finished goods, are stated at the lower of
cost or net realizable value. Cost is calculated using the weighted average
method and is comprised of material costs and, where applicable, subcontracting
and overhead costs that have been incurred in bringing the inventories to their
present location and condition. Net realizable value represents the estimated
selling price less estimated costs to completion and costs to be incurred in
selling and distribution.

4. NET LOSS PER COMMON SHARE

     The Company computes earnings per share (EPS) in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS
128 requires the Company to disclose basic and diluted earnings per share.

5. CONTINGENCIES

     The Company is subject to legal proceedings and claims that arise in the
normal course of business. While the outcome of these proceedings and claims
cannot be predicted with certainty, management does not believe that the outcome
of any of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.


                                       8
<PAGE>   9

                                 SRS LABS, INC.
             NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


6. STOCKHOLDERS' EQUITY

     During Fiscal 1998, the Company's Board of Directors authorized the
repurchase of up to 500,000 of the outstanding shares of the Company's common
stock. As of March 31, 2000, 71,100 shares had been repurchased at a cost of
$263,281. Such repurchased shares are reflected as treasury stock in the
accompanying consolidated balance sheets.

     In March 2000, the Company entered into a technology and marketing alliance
with Microsoft Corporation ("Microsoft"). In conjunction with this transaction,
Microsoft purchased 290,529 shares of the Company's common stock for $17.21 per
share or $5,000,000 in the aggregate. The difference between the purchase price
and the fair value of the common stock on the date of purchase, totaling
approximately $555,000, was recorded as non-cash stock issuance cost by the
Company during the quarter ended March 31, 2000. The Company also granted
Microsoft warrants to purchase up to 200,000 shares of common stock of the
Company and the Company's wholly-owned subsidiary, SRSWOWcast.com, Inc., granted
a warrant to purchase up to 1,250,000 shares of its common stock. The fair value
of these warrants, aggregating approximately $2,555,000, has been recorded as
non-cash stock issuance cost by the Company during the quarter ended March 31,
2000.

7. SEGMENT INFORMATION

     The Company operates in two business segments: (a) the development and
marketing of technology either in the form of integrated circuits through
Valence (ASICs) or the licensing of technologies developed by the Company to
original equipment manufacturers and semiconductor manufacturers and (b) the
sale of consumer electronic products and components. The Company does not
allocate operating expenses or specific assets to these segments. Therefore,
segment information includes only net revenues, cost of sales and gross margin.

<TABLE>
<CAPTION>
                         THREE MONTHS ENDED MARCH 31, 2000
                    --------------------------------------------
                    CHIPS AND        PRODUCT AND
                    LICENSING      COMPONENT SALES      TOTAL
                    ----------     ---------------    ----------
<S>                 <C>            <C>                <C>
Net revenues        $2,879,079       $4,311,473       $7,190,552
Cost of sales          883,000        3,965,701        4,848,701
                    ----------       ----------       ----------
Gross margin        $1,996,079       $  345,772       $2,341,851
                    ==========       ==========       ==========

<CAPTION>
                         THREE MONTHS ENDED MARCH 31, 2000
                    --------------------------------------------
                    CHIPS AND        PRODUCT AND
                    LICENSING      COMPONENT SALES      TOTAL
                    ----------     ---------------    ----------
<S>                 <C>            <C>                <C>
Net revenues        $3,581,158       $4,073,412       $7,654,570
Cost of sales        1,064,716        4,029,069        5,093,785
                    ----------       ----------       ----------
Gross margin        $2,516,442       $   44,343       $2,560,785
                    ==========       ==========       ==========
</TABLE>


                                       9
<PAGE>   10

                                 SRS LABS, INC.
             NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


8.  SUBSEQUENT EVENTS

     On March 3, 2000, ValenceTech Limited (the successor entity to Valence
Technology Inc. for purposes of listing common shares on the Growth Enterprise
Market of the Hong Kong Stock Exchange (the "GEM)) filed an application to list
its common shares on the GEM in connection with an initial public offering. The
Company estimates that the completion of the offering will occur during the
second quarter of Fiscal 2000. As contemplated in the offering documents,
approximately one-third of the net proceeds of the offering is earmarked to be
repatriated to the Company. The amount of such repatriation is currently not
determinable. In April 2000, in connection with the capitalization of
ValenceTech Limited, the Company paid approximately $428,000 for 100% of the
common stock of ValenceTech Limited.


                                       10
<PAGE>   11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

OVERVIEW

     SRS Labs, Inc. is a developer and provider of technology solutions for the
consumer electronics, computer, game and telecommunications markets. The
Company's principal business activities in these markets include:

     o    Developing and licensing audio and voice technologies to original
          equipment manufacturers ("OEMs") and semiconductor manufacturers
          around the world; and

     o    Through its subsidiary, ValenceTech Limited and its foreign
          subsidiaries (collectively, "Valence"), designing and selling
          technology solutions through custom application specific integrated
          circuits ("ASICs") to OEMS; and designing, distributing and
          manufacturing components, sub-assemblies and finished goods for the
          OEM and retail communities within the Company's targeted markets.

     The Company was formed in 1993 by purchasing all rights and assets of
various audio and speaker technologies from the Hughes Aircraft Company. The
Company successfully completed its initial public offering in August 1996,
raising approximately $22 million. From the Company's inception in 1993 until
February 1998, the Company derived substantially all of its revenues from audio
technology licensing activities for the consumer electronics, computer and game
markets. The primary technologies that contributed to revenue were SRS(R) (Sound
Retrieval System(R)) ("SRS"), which produces a 3D sound-enhanced stereo image
from any mono or stereo source, and TruSurroundTM, a "virtual" audio technology
which processes multi-channel surround sound through any standard pair of stereo
speakers.

     On March 2, 1998, the Company acquired 100% of the outstanding stock of
Valence Technology Inc., a British Virgin Islands holding company with its
principal business operations in Hong Kong and China. This acquisition
significantly expanded the Company's business activities from the original
licensing model to include the design, manufacture and marketing of chips,
components and products.

     In addition to the acquisition of Valence Technology, Inc. during the
fiscal year ended December 31, 1998 ("Fiscal 1998"), the Company acquired two
additional technologies. In the first quarter of Fiscal 1998, the Company
acquired certain rights to Voice Intelligibility Processor ("VIP"), a patented
voice processing technology that improves the intelligibility of the spoken
voice, especially in high ambient noise environments and, in the following
quarter, acquired certain rights to Circle Surround, a patented audio delivery
system that allows multi-channel surround sound to be encoded into a two-channel
stereo format and allows an encoded two-channel audio source to be decoded into
a multi-channel surround format.

     During the fiscal year ended December 31, 1999 ("Fiscal 1999"), the Company
re-engineered its business model and operational structure. Valence Technology,
Inc., while continuing to expand its ASICs business, exited certain of the lower
margin distribution product lines and directed more of its resources to develop
and market solutions that integrate the SRS technologies. In addition, the
Company began to explore the feasibility of selling a minority interest in
Valence Technology Inc. to the public in Asia by listing such shares on a
foreign exchange. This strategy materialized when ValenceTech Limited, the
ultimate successor corporation to Valence Technology Inc. ("ValenceTech"), filed
an application to list on the Growth Enterprise Market of the Hong Kong Stock
Exchange on March 3, 2000. The Company anticipates retaining 75% ownership of
ValenceTech Limited upon completion of an initial public offering in Asia
targeted for the second quarter of the fiscal year ended December 31, 2000. In
connection with the capitalization of ValenceTech, in April 2000, the Company
paid approximately $428,000 for 100% of the common stock of ValenceTech.

     With respect to its licensing business, the Company changed its focus from
entering into technology licenses with PC chip manufacturers to developing a new
business model which focuses on Internet radio. This new focus resulted in the
Company launching the WOWThing product family and establishing a new
wholly-owned subsidiary, SRSWOWcast.com, Inc., to be the platform to launch this
business. In March 2000, Microsoft Corporation ("Microsoft") and the Company
entered into a strategic alliance whereby Microsoft and the Company entered into
a License Agreement relating to the Company's WOW Technology. The License
Agreement will facilitate the incorporation of the WOW Technology into the
Windows 2000 Media Player and provide a click-through hyper-link on the
interface of the Windows Media Player to the SRSWOWcast.com website. In
addition, Microsoft made an equity investment into the Company and was granted a
warrant to purchase additional shares of the Company's common stock as well as a
warrant to purchase shares of common stock in SRSWOWcast.com, Inc.


                                       11
<PAGE>   12

     The Company's technologies also were implemented in new consumer products
in Fiscal 1999. Among the most notable implementations included the Kenwood
receiver (CircleSurround), the Sony Walkman (SRS Headphones), Philips
(TruSurround) and Sony (SRS Headphone) DVD players, as well as Hitachi TVs
(Focus). In addition to these new implementations, the Company entered into new
licenses with key industry manufacturers including Loewe, ST Microelectronics
and TCE in Europe; Yamaha and Marantz in Japan; Konka and TCL in China; Samsung
and LG in Korea and Cirrus Logic, Lucent and Peavey in the United States.

     SRS currently operates in two business segments: (a) the development and
marketing of technology in the forms of integrated circuits design and
distributed through Valence and the licensing of technologies developed by the
Company to OEMs and semiconductor manufacturers, and (b) the sale of consumer
electronic products and components. A summary of the Company's operations and
activities by business segment and geographic area is included in the
accompanying notes to the interim consolidated financial statements.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2000 Compared To Three Months Ended March 31, 1999
-------------------------------------------------------------------------------

Revenues

     Chip and licensing revenue consists of design fees and sales of custom
application specific integrated circuits (ASICs) by Valence to OEM manufacturers
and sales of general purpose integrated circuits ("IC"s) designed by the Company
under the brand name ASP Microelectronics. Licensing revenues are royalties
generated primarily from the license of the Company's audio technologies.
License and royalty agreements generally provide for the license of technologies
for a specified period of time for either a single fee or a fee based on the
number of units distributed by the licensee. Product and component sales
primarily represent (a) the manufacture and sale of Valence's own branded
product line of VCD players, amplifiers, and game products and (b) the
distribution of semiconductor products, manufacturing components and
sub-assemblies to OEMs for the Hong Kong and China markets.

     Total revenues for the three months ended March 31, 2000 were $7,190,552
compared to $7,654,570 for the three months ended March 31, 1999, a decrease of
$464,018. This minor decrease in revenues is due primarily to the timing of ASIC
orders placed by one of the Company's larger customers.

Gross Margin

     Cost of sales consists primarily of fabrication costs, assembly and test
costs, and the cost of materials and overhead from operations. The gross margin
percentage decreased slightly from 33.5% for the quarter ended March 31, 1999,
to 32.6% for the same period in 2000. The decrease is attributable primarily to
efforts by Valence to clear older technologies from its inventories through
aggressive pricing, and due to higher ASIC fabrication costs. The higher ASIC
fabrication costs are attributable to higher worldwide demand for
semiconductors, and limited fabrication capacity.

Sales and Marketing

     Sales and marketing expenses consist primarily of employee salaries and
sales consultants' fees and related expenses, sales commissions and product
promotion. Sales and marketing expenses were $1,284,734 for the three months
ended March 31, 2000 compared to $1,284,332 for the same prior year period.
Sales and marketing expenses increased slightly from 16.7% of revenues for the
quarter ended March 31, 1999 to 17.9% for the same period this year. Sales and
marketing expenses may increase in the future as a result of anticipated
spending associated with the launch and promotional activities of its
wholly-owned subsidiary, SRSWOWcast.com, Inc.

Research and Development

     Research and development expenses consist of salaries and related costs of
employees engaged in ongoing research, design and development activities and
costs for engineering materials and supplies. Research and development expenses
were $939,189 for the three months ended March 31, 2000 compared to $1,089,906
for the same prior year period, a decrease of 13.8%. Research and development
costs decreased slightly from 14.2% of revenues for the quarter ended March 31,
1999, to 13.0% of revenue for the same period this year. Research and
development expenses may increase in the future as a result of ongoing product
development efforts.


                                       12
<PAGE>   13

General and Administrative

     General and administrative expenses consist primarily of employee-related
expenses, legal costs associated with the administration of intellectual
property and other professional fees. General and administrative expenses were
$1,418,587 for the three months ended March 31, 2000 compared to $2,121,559 for
the same prior year period, a decrease of 33%. The decrease was primarily
attributable to lower employee related expenses, bad debt expense, and lower
legal and professional fees. As a percentage of total revenues, general and
administrative expenses decreased from 27.7% for the quarter ended March 31,
1999, to 19.7% for the same period this year. As part of the acquisition of
Valence Technology Inc., the Company allocated a portion of the purchase price
to various intangible assets totaling approximately $5,910,400. This amount was
capitalized and is being amortized on a straight line basis over periods ranging
from three to eleven years with the related amortization expense of $332,796 and
$322,796 for the quarters ended March 31, 2000 and March 31, 1999, respectively,
and is included in general and administrative expenses.

Non-cash Stock Issuance Costs

     In March 2000, the Company entered into a technology and marketing alliance
with Microsoft Corporation. In conjunction with this transaction, Microsoft
purchased shares of common stock of the Company and was issued warrants to
purchase additional shares of the Company and its subsidiary. As a result of the
transaction, the Company recognized one-time, non-cash charges totaling
$3,111,859. See Note 6 of the Notes to the Interim Consolidated Financial
Statements for more information concerning the Microsoft transaction.

Other Income, Net

     Net other income consists primarily of interest income, interest expense
and foreign currency transaction gains and losses. Net other income was $209,564
for the three months ended March 31, 2000 compared to $127,978 for the same
prior year period, an increase of 63.7%. The increase is primarily due to higher
interest income which is attributable to higher average cash and investment
balances during the current year quarter.

Provision for Income Taxes

     The income tax expense for the three months ended March 31, 2000 was
$138,093 compared to a tax benefit of $309,906 for the same prior year period.
Commencing in the fiscal year ending December 31, 2000, the Company recorded a
tax provision at statutory tax rates in the Asian countries where Valence has
its principal business operations. In Fiscal 1999, the Company recognized tax
benefits related to domestic operations in connection with federal refundable
taxes which could be recovered through a net operating loss carryback.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal source of liquidity at March 31, 2000 consisted of
cash, cash equivalents and investments aggregating $28,900,684, as well as
borrowings available under its credit facilities. At December 31, 1999, the
Company had cash, cash equivalents and long-term investments of $25,312,411. In
March 2000, the Company sold shares of its common stock to Microsoft
Corporation, for aggregate cash proceeds of $5,000,000. See Note 6 to the
Interim Consolidated Financial Statements.

     The Company's operating activities utilized $1,671,725 in cash for the
three months ended March 31, 2000, and $1,129,653 for the three months ended
March 31, 1999. The use of cash in operations was primarily due to the Company'
s loss from operations for the quarter, after adjustment for non-cash charges
related to the Microsoft transaction. The net increase in cash and cash
equivalents of $5,116,344 for the quarter is attributable primarily to proceeds
from sale of long-term investments, proceeds from stock option exercises and
proceeds from the sale of common stock to Microsoft.

     In March, 1998, the Company obtained a revolving line of credit (and letter
of credit facility) with a bank which expires on April 1, 2001 and is secured by
certain of the Company's cash, cash equivalents and investments. As of March 31,
2000, approximately $1.4 million in cash and cash equivalents and $7.8 million
in investments were pledged as collateral for the line of credit. The total
availability under the line of credit is the lesser of $10 million or a
percentage of the fair market value of the collateral. The line of credit bears
interest at the bank's prime rate or LIBOR plus 0.75%. As of March 31, 2000, the
Company had $8.0 million outstanding under the line of credit and was
contingently liable for $1.0 million under an irrevocable letter of credit which
expires July 31, 2000. The collateral requirements under the above referenced
credit facility may have the effect of restricting the amounts of cash available
to pay dividends.


                                       13
<PAGE>   14

     In November 1999, Valence obtained a credit facility with a bank that
provides for borrowings aggregating approximately $5,000,000. The facility has
no fixed expiration date and is collateralized by certain of Valence's assets on
deposit with the bank. The facility provides for a variety of import/export
trade instruments which bear interest rates ranging from 1% over the Hong Kong
Dollar prime rate to 1.75% over LIBOR. The facility also provides for a
revolving line of credit of up to $3,500,000 which bears interest at 1.25% over
the related collateral deposit interest rate. At March 31, 2000, there were no
obligations outstanding under this credit facility.

     The Company anticipates that its primary uses of working capital in future
periods will be to acquire new technologies and to fund increased costs for
additional sales and engineering headcount and marketing activities associated
with the introduction of new technologies and products into the market.

     Based on current plans and business conditions, the Company expects that
its cash, cash equivalents, investments and/or available borrowings under its
credit facilities, together with any amounts generated from operations, will be
sufficient to meet the Company's cash requirements for the next 12 months.
However, there can be no assurance that the Company will not be required to seek
other financing sooner or that such financing, if required, will be available on
terms satisfactory to the Company.

Subsequent Events

     On March 3, 2000, ValenceTech Limited (the successor entity to Valence
Technology Inc. for purposes of listing common shares on the Growth Enterprise
Market of the Hong Kong Stock Exchange (the "GEM)) filed an application to list
its common shares on the GEM in connection with an initial public offering. The
Company estimates that the completion of the offering will occur during the
second quarter of Fiscal 2000. As contemplated in the offering documents,
approximately one-third of the net proceeds of the offering is earmarked to be
repatriated to the Company. The amount of such repatriation is currently not
determinable. In connection with the capitalization of ValenceTech in April
2000, the Company paid approximately $428,000 for 100% of the common stock of
ValenceTech Limited.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Quarterly Fluctuations

     The Company's operating results may fluctuate from those in prior quarters
and will continue to be subject to quarterly and other fluctuations due to a
variety of factors, including the extent to which the Company's licensees
incorporate the Company's technologies into their products; the timing of orders
from and the shipments to major customers; the timing of new product
introductions by the Company; the gain or loss of significant customers;
competitive pressures on selling prices; the market acceptance of new or
enhanced versions of the Company's technologies; the rate that the Company's
semiconductor licensees manufacture and distribute chips to product
manufacturers; and fluctuations in general economic conditions, particularly
those affecting the consumer electronics market. Due to the Company's dependence
on the consumer electronics market, the substantial seasonality of sales in the
market has impacted the Company's revenues and net income. In particular, the
Company believes that there is seasonality relating to the Christmas season,
generally, and the Chinese New Year within the Asia region, which fall into the
fourth and first quarters, respectively. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.

Valence's Business

     The Company derives a significant amount of its revenue from Valence's ASIC
and component distribution business. Valence's engineering team focuses on the
design of custom ASIC to meet specific customers' requirements and outsources
the production of the design to mask houses, foundaries and packaging houses
located primarily in Asia. The operations of Valence could be affected by a
variety of factors, including the timing of customer orders, the timing of
development revenue, changes in the mix of products distributed and the mix of
distribution channels employed, the emergence of new industry standards, product
obsolescence and changes in pricing policies by the Company, its competitors or
its suppliers.

     The ASIC business' revenue is concentrated in a limited number of customers
in the areas of consumer electronics, communications products, computers and
computer peripherals. As such, the loss of any such customers or any bad debt
arising from them may have a material adverse impact on the Company's financial
condition and results of operation. Beginning in Fiscal 1999, Valence began to
exit from certain lower margin product offerings in the distribution side of the
business and has begun developing


                                       14
<PAGE>   15

and distributing products that are related to or incorporate the Company's
proprietary technologies. As a result, the immediate loss in revenue of the low
margin distribution business will not be entirely offset by the new proprietary
technology based products, which will take time to develop and be introduced
into the marketplace. There can be no assurance that the Company will be able to
quickly introduce new products to offset the loss in revenue or that the new
products developed will receive a favorable market acceptance.

    The public offering of common shares of ValenceTech Limited in Hong Kong is
intended to bring new capital to grow Valence's core business while, at the same
time, adding significant value to the Company's shareholders. Although the
Company expects that such offering will be completed during the second quarter
of Fiscal 2000, there is no assurance that the offering will be completed during
that time period or at all. Changes in the economic environment of Hong Kong
and/or the PRC may adversely affect the offering or, if the offering is
completed, may adversely affect the market price of the common shares.

    The acquisition of Valence has added significant diversity to the Company's
overall business structure and the Company's opportunities. The Company
recognizes that in the presence of such corporate diversity, and in particular
with regard to the semiconductor industry, there will always exist a potential
for a conflict among sales channels between the Company and certain of the
Company's technology licensees. Although the operations of the Company's
licensing business and those of Valence are generally complementary, there can
be no assurances that sales channel conflicts will not arise. If such potential
conflicts do materialize, the Company may or may not be able to mitigate the
effect of such perceived conflicts, which, if not resolved, may impact the
results of operations.

Internet Business

    In Fiscal 1999, the Company launched its Internet business with the
formation of SRSWOWcast.com, Inc. SRSWOWcast.com plans to develop and acquire
engaging and audio based content to generate and retain visitor traffic to its
web site. The revenue of SRSWOWcast.com will, in turn, depend on fees charged to
third party businesses for advertising on the site as well as e-commerce
products sold to visitors to the site. The Company has planned for other
Internet subsidiaries in different geographical regions to be launched at a
later date by duplicating the business model of SRSWOWcast.com and with content
that is adapted for local culture and taste. However, there can be no assurance
that SRSWOWcast.com and other planned subsidiaries or business ventures will be
able to develop or acquire the content necessary to attract significant Internet
traffic or able to generate substantial revenue from advertising and e-commerce.

Product Business

    In Fiscal 1999, the Company developed and marketed on its e-commerce site,
www.wowthing.com, its first consumer audio product, the WOWThing Processor Box.
The WOWThing Processor Box enhances the sound quality of music downloaded over
the Internet as well as audio performance of computer and home entertainment
products and speakers. This was the Company's first entry into the consumer
market in the United States which is both competitive and demands products with
short life cycles.

    The Company intends to expand its offerings of high-end audio enhancement
products in the year 2000 and beyond. There can be no assurance that the Company
will be able to develop an effective distribution channel and build brand
recognition as a product manufacturer. And as the business increases, it is
anticipated that significant capital will be required to finance product
inventory and account receivables. As a result, the Company is subject to risks
of product obsolescence, bad debt and insufficient financial resources to grow
the business.

    The Company also recognizes that as new consumer audio products are
developed and marketed by the Company, there will always exist a potential for a
conflict and competition between the Company and certain of the Company's
technology licensees. Although the intended products of the Company and those of
its licenses do not generally overlap, there can be no assurance that the
Company's products will not compete with those of their licensees. If such
conflicts do materialize, it is uncertain whether the Company will be able to
mitigate the effect of such conflicts, which if not resolved, may impact the
results of operations.

Economic Risks Associated with Doing Business in Asia, Particularly in Hong Kong
and the PRC

    The Company's significant operations in China and Asia have required, and
will continue to require, refinement to adapt to the changing market conditions
in the region. The Company's operations in Asia, and internationally in general,
are subject to risks of unexpected changes in, or impositions of legislative or
regulatory requirements.


                                       15
<PAGE>   16

    The PRC economy has experienced significant growth in the past decade, but
such growth has been uneven across geographic and economic sectors and has
recently been slowing. There can be no assurance that such growth will not
continue to decrease or that any slow down will not have a negative effect on
the Company's business, including Valence. The PRC economy is also experiencing
deflation which may continue in the future. The current economic situation may
adversely affect the Company's profitability over time as expenditures for
consumer electronics products and information technology may decrease due to the
results of slowing domestic demand and deflation.

    Hong Kong is a Special Administrative Region of the PRC with its own
government and legislature. Hong Kong enjoys a high degree of autonomy from the
PRC under the principle of "one country, two systems". The Company can give no
assurance that Hong Kong will continue to enjoy autonomy from the PRC.

    The Hong Kong dollar has remained relative constant due to the US dollar peg
and currency board system that has been in effect in Hong Kong since 1983. Since
mid-1997, interest rates in Hong Kong have fluctuated significantly and real
estate and retail sales have declined. The Company can give no assurance that
the Hong Kong economy will not worsen or that the historical currency peg of the
Hong Kong dollar to the U.S. dollar will be maintained. Continued recession in
Hong Kong, deflation or the discontinuation of the currency peg could adversely
affect the Company's business.

Currency Risk/Stability of Asian Markets

    The Company expects that international sales will continue to represent a
significant portion of total revenues. To date, all of the Company's licensing
revenues have been denominated in U.S. dollars and most costs have been incurred
in U.S. dollars. It is the Company's expectation that licensing revenues will
continue to be denominated in U.S. dollars for the foreseeable future. Because
Valence and its subsidiaries' business is primarily focused in Asia and because
of the Company's anticipated expansion of its business in China and other parts
of Asia, the Company's consolidated operations and financial results could be
significantly affected by risks associated with international activities,
including economic and labor conditions, political instability, tax laws
(including U.S. taxes on foreign subsidiaries) and changes in the value of the
U.S. dollar versus the local currency in which the products are sold. In
addition, the Company's valuation of assets recorded as a result of the Valence
acquisition may also be adversely impacted by the currency fluctuations relative
to the U.S. dollar. The Company intends to actively monitor its foreign exchange
exposure and to implement strategies to reduce its foreign exchange risk at such
time that the Company determines the benefits of such strategies outweigh the
associated costs. However, there is no guarantee that the Company will take
steps to insure against such risks, and should such risks occur, there is no
guarantee that the Company will not be significantly impacted. Countries in the
Asia Pacific region have experienced weakness in their currency, banking and
equity markets. These weaknesses could adversely affect consumer demand for
Valence's products, the U.S. dollar value of the Company's and its subsidiaries'
foreign currency denominated sales, the availability and supply of product
components to Valence and ultimately, the Company's consolidated results of
operations.

Competitive Pressures

    The Company's existing and potential competitors include both large and
emerging domestic and international companies that have substantially greater
financial, manufacturing, technical, marketing, distribution and other
resources. The Company's present or future competitors may be able to develop
products and technologies comparable or superior to those offered by the
Company, and to adapt more quickly than the Company to new technologies or
evolving market needs. The Company believes that the competitive factors
affecting the market for the Company's products and technologies include product
performance, price and quality; product functionality and features; the ease of
integration; and implementation of the products and technologies with other
hardware and software components in the OEM's products. In addition, the markets
in which the Company competes are intensely competitive and are characterized by
rapid technological changes, declining average sales prices and rapid product
obsolescence. Accordingly, there can be no assurance that the Company will be
able to continue to compete effectively in its respective markets, that
competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results, cash flows
and financial condition.

Importance of Intellectual Property

    The Company's ability to compete may be affected by its ability to protect
its proprietary information. The Company has filed several U.S. and foreign
patent applications and to date has a number of issued U.S. and foreign patents
covering various aspects of its technologies. There can be no assurance that the
steps taken by the Company to protect its intellectual property will be adequate
to prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology. In addition, the laws of certain foreign
countries may not protect the


                                       16
<PAGE>   17

Company's intellectual property rights to the same extent, as do the laws of the
U.S. The semiconductor industry is characterized by frequent claims and
litigation regarding patent and other property rights. The Company is not
currently a party to any claims of this nature. There can be no assurances that
third parties will not assert additional claims or initiate litigation against
the Company or its customers with respect to existing or future products. In
addition, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to determine the scope
and validity of the proprietary rights of the Company or others.

Management of Growth; Dependence on Key Personnel

    The continued growth of the Company and its subsidiaries has placed, and
will continue to place, a significant strain on its administrative, operational
and financial resources, and has increased, and will continue to increase, the
level of responsibility for both existing and new management personnel. The
Company's future success depends in part on the continued service of its key
engineering, sales, marketing and executive personnel, including highly skilled
semiconductor design personnel. The Company anticipates that any future growth
will require it to recruit and hire a number of new personnel in engineering,
operations, finance, sales and marketing. Competition for such personnel is
intense, and there can be no assurance that the Company can retain and recruit
necessary personnel to operate its business and support future growth. The
Company's ability to manage its growth successfully also will require the
Company to continue to expand and improve its administrative, operational,
management and financial systems and controls.

Volatility of Stock Price

    The trading price of the Common Stock has been, and will likely continue to
be, subject to wide fluctuations in response to quarterly variations in the
Company's operating results, announcements of new products or technological
innovations by the Company or its competitors, strategic alliances between the
Company and third parties, general market fluctuations and other events and
factors. Changes in earnings estimates made by brokerage firms and industry
analysts relating to the markets in which the Company does business, or relating
to the Company specifically, have in the past resulted in, and could in the
future result in, an immediate and adverse effect on the market price of the
Common Stock.

Acquisitions

    From time-to-time, the Company expects to make acquisitions of businesses or
technologies that are complementary to its business strategy. Such future
acquisitions would expose the Company to risks commonly encountered in
acquisitions of businesses. Such risks include, among others, difficulty of
assimilating the operations, information systems and personnel of the acquired
businesses, the potential disruption of the Company's ongoing business; and the
inability of management to maximize the financial and strategic position of the
Company through successful incorporation of the acquired technologies, employees
and customers. There can be no assurance that any potential acquisition will be
consummated or, if consummated, that it will not have a material adverse effect
on the Company's business, financial condition and results of operations.

Acquired In-Process Research and Development

    Uncertainties that could impede the progress of converting a development
project to a developed technology include the availability of financial
resources to complete the project, failure of the technology to function
properly, continued economic feasibility of developed technologies, customer
acceptance, customer demand and customer qualification of such new technology
and general competitive conditions in the industry. There can be no assurance
that the acquired in-process research and development projects associated with
the acquisitions of Valence and VIP will be successfully completed and
commercially introduced.


                                       17
<PAGE>   18

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of its debt.

FOREIGN CURRENCY

    The Company has subsidiary operations in Hong Kong and China, and
accordingly, the Company is exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates. The Company uses the
local currency (Hong Kong dollars) as the functional currency for its Asian
subsidiaries. Translation adjustments resulting from the process of translating
foreign currency financial statements into U.S. dollars were not significant in
Fiscal 1999 and for the quarter ended March 31, 2000, due to the fact that the
value of the Hong Kong dollar is currently pegged to the U.S. dollar, and the
exchange rate remained constant throughout such periods. Under the current
circumstances, the Company believes that the foreign currency market risk is not
material. The Company actively monitors its foreign exchange exposure and,
should circumstances change, intends to implement strategies to reduce its risk
at such time that it determines that the benefits of such strategies outweigh
the associated costs. There can be no assurance that management's efforts to
reduce foreign exchange exposure will be successful.

INTEREST RATES

    The Company's credit facilities bear interest based on the lending bank's
prime rate or LIBOR plus 0.75%. The interest rate on the balance of $8.0 million
outstanding at March 31, 2000 was 6.81%. If interest rates were to increase by
10%, the impact on the Company's consolidated financial statements would be
additional interest expense of approximately $13,900 per quarter.


                                       18
<PAGE>   19
                           PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

SECURITIES SOLD

    On March 8, 2000, the Company entered into a technology and marketing
alliance with Microsoft Corporation ("Microsoft"). In connection with this
transaction, on March 9, 2000, Microsoft purchased 290,529 shares of the
Company's common stock for $17.21 per share or $5,000,000 in the aggregate.

    In connection with this transaction, the Company and its wholly-owned
subsidiary, SRSWOWcast.com, Inc. each granted warrants to purchase shares of
their common stock to Microsoft. The Company issued to Microsoft on March 8,
2000 a three-year warrant to purchase up to 200,000 shares of the common stock
of the Company at an exercise price per share of $17.21, subject to adjustment
as set forth in the SRS Labs, Inc. Common Stock Purchase Warrant Agreement dated
March 8, 2000. SRSWOWcast.com, Inc. also issued to Microsoft on March 8, 2000 a
three-year warrant to purchase up to 1,250,000 shares of its common stock at a
price per share equal to the lesser of (a) $4.00 or (b) the price per share in a
future financing, as described in the SRSWOWcast.com, Inc. Common Stock Purchase
Warrant Agreement dated March 8, 2000, subject to adjustment as set forth in
such Warrant Agreement.

    The above-referenced securities were issued in reliance on the private
offering exemption set forth in Section 4(2) of the Securities Act of 1933, as
amended, on the basis that they were issued under circumstances not involving a
public offering.

USE OF PROCEEDS

    The effective date of the Company's initial public offering of its Common
Stock was August 8, 1996 (SEC Registration No. 333-4974-LA). During the first
quarter of Fiscal 2000, the Company utilized approximately $1,528,071 of the
$22,052,955 net offering proceeds for working capital. The table below sets
forth at March 31, 2000, the amount of the net offering proceeds used for the
purposes noted in the table.

<TABLE>
<CAPTION>
                                                   Direct or indirect payments to directors,
                                                  Officers, general partners of the issuer or
                                                their associates, to persons owning ten percent
                                                   or more of any class of equity securities        Direct or indirect
                                                 of the issuer, and to affiliates of the issuer     Payments to others
                                                -----------------------------------------------     ------------------
<S>                                             <C>                                                     <C>
Construction of plant, building and
  Facilities                                                           --                                   --
Purchase and installation of machinery and
  Equipment                                                            --                                   --
Purchase of real estate                                                --                                   --
Acquisition of other business(es)/assets                               --                               $8,394,222(1)
Repayment of indebtedness                                              --                                   --
Working capital                                                        --                               $5,844,071
Temporary investment (cash and municipal
  bonds)                                                               --                               $7,814,662
</TABLE>


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

(1)  During the second quarter of Fiscal 1998, the Company utilized $500,000 of
     the net offering proceeds as part of the consideration to acquire assets
     related to the Circle Surround technology. During the first quarter of
     Fiscal 1998, the Company utilized an aggregate of $7,894,222 in connection
     with two other acquisitions.


                                       19
<PAGE>   20

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits. The exhibits listed below are hereby filed with the U.S.
Securities and Exchange Commission (the "Commission") as part of this Report.

      EXHIBIT
        NO.                            DESCRIPTION
     -------                           -----------

       10.1       Common Stock Purchase Agreement dated as of March 8, 2000 by
                  and among SRS Labs, Inc., SRSWOWcast.com, Inc. and Microsoft
                  Corporation.

       10.2       Common Stock Purchase Warrant dated March 8, 2000 granted to
                  Microsoft Corporation by SRS Labs, Inc.

       10.3       Common Stock Purchase Warrant dated March 8, 2000 granted to
                  Microsoft Corporation by SRSWOWcast.com, Inc.

       27         Financial Data Schedule.

    (b) Reports on Form 8-K. No reports on Form 8-K were filed with the
        Commission during the three month period ended March 31, 2000.


                                       20
<PAGE>   21
                                   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.

                                          SRS LABS, INC.,
                                          a Delaware corporation


Date: May 15, 2000                        By: /s/ JOHN AUYEUNG
                                              ----------------------------------
                                              John AuYueng
                                              Executive Vice President,
                                              Chief Operating Officer,
                                              Chief Financial Officer, Treasurer
                                              and Secretary
                                              (Authorized Signatory and
                                              Principal Financial Officer)


                                       21
<PAGE>   22

                                  EXHIBIT INDEX

     EXHIBIT
        NO.                            DESCRIPTION
     -------                           -----------

       10.1       Common Stock Purchase Agreement dated as of March 8, 2000 by
                  and among SRS Labs, Inc., SRSWOWcast.com, Inc. and Microsoft
                  Corporation.

       10.2       Common Stock Purchase Warrant dated March 8, 2000 granted to
                  Microsoft Corporation by SRS Labs, Inc.

       10.3       Common Stock Purchase Warrant dated March 8, 2000 granted to
                  Microsoft Corporation by SRSWOWcast.com, Inc.

       27         Financial Data Schedule.