<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 SEPTEMBER 30, 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)

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

<TABLE>
<S>                                        <C>
             DELAWARE                                  33-0714264
---------------------------------          -----------------------------------
(STATE OR OTHER JURISDICTION OF                     (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NO.)
</TABLE>

                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 CHANGED 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 October 31,
2000, 12,642,844 shares of the issuer's common stock, par value $.001 per share,
were outstanding; of that amount, 71,100 shares were held as treasury shares.

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


<PAGE>   2

                                 SRS LABS, INC.

                                    FORM 10-Q
                     FOR THE PERIOD ENDED SEPTEMBER 30, 2000

                                      INDEX

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

    Item 1. Financial Statements...................................................................................   4

       Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and December 31, 1999......................   4

       Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and        5
       1999 (Unaudited)............................................................................................

       Consolidated Statements of Comprehensive (Loss) Income for the three months and nine months ended              6
       September 30, 2000 and 1999 (Unaudited).....................................................................

       Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 (Unaudited).....   7

       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.............................................  20

PART II - OTHER INFORMATION

    Item 2. Changes in Securities and Use of Proceeds..............................................................  21

    Item 6. Exhibits and Reports on Form 8-K.......................................................................  21

SIGNATURES.........................................................................................................  22
</TABLE>



                                       2
<PAGE>   3

                           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's Discussion and Analysis of
Financial Condition and Results of Operations - 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.



                                       3
<PAGE>   4

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                                 SRS LABS, INC.
                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                          SEPTEMBER 30,            DECEMBER 31,
                                                                                              2000                     1999
                                                                                          ------------             ------------
                                                                                           (UNAUDITED)
<S>                                                                                       <C>                      <C>
CURRENT ASSETS
    Cash and cash equivalents .......................................................     $ 24,891,301             $ 15,969,678
    Investments available for sale ..................................................        3,213,600                3,011,250
    Accounts receivable, net ........................................................        1,983,351                2,495,157
    Inventories, net ................................................................        2,632,409                2,726,193
    Prepaid expenses and other current assets .......................................          802,680                  729,881
    Deferred income taxes ...........................................................           81,467                   81,467
                                                                                          ------------             ------------
         TOTAL CURRENT ASSETS .......................................................       33,604,808               25,013,626
  Investments available for sale ....................................................        3,081,720                6,331,483
  Furniture, fixtures & equipment, net ..............................................        1,237,151                1,166,757
  Intangible assets, net ............................................................        5,278,916                5,425,273
  Deferred income taxes .............................................................          740,889                  740,889
  Other assets ......................................................................               --                  422,493
                                                                                          ------------             ------------
         TOTAL ASSETS ...............................................................     $ 43,943,484             $ 39,100,521
                                                                                          ============             ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable ................................................................     $  2,374,011             $  2,882,686
    Accrued liabilities .............................................................        2,028,194                1,658,964
    Line of credit ..................................................................        8,000,000                8,000,000
    Obligation to issue preferred shares in subsidiary ..............................        5,000,000                       --
    Income taxes payable ............................................................        1,656,379                1,518,548
                                                                                          ------------             ------------
         TOTAL CURRENT LIABILITIES ..................................................       19,058,584               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; 12,641,844 and 11,890,691 shares issued; and
     12,570,744 and 11,819,591 shares outstanding
     at September 30, 2000 (unaudited) and December 31, 1999,
     respectively ...................................................................           12,642                   11,891
    Additional paid-in capital ......................................................       49,831,798               40,312,336
    Deferred stock option compensation ..............................................          352,616                  264,557
    Cumulative other comprehensive (loss) income ....................................          (70,005)                  23,330
    Retained deficit ................................................................      (24,978,870)             (15,308,510)
    Less treasury stock at cost, 71,100 shares
     at September 30, 2000 (unaudited) and December 31, 1999 ........................         (263,281)                (263,281)
                                                                                          ------------             ------------
         TOTAL STOCKHOLDERS' EQUITY .................................................       24,884,900               25,040,323
                                                                                          ------------             ------------

         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................     $ 43,943,484             $ 39,100,521
                                                                                          ============             ============
</TABLE>

     See accompanying notes to the interim consolidated financial statements


                                       4
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED                        NINE MONTHS ENDED
                                                               SEPTEMBER 30                              SEPTEMBER 30
                                                     ---------------------------------        ---------------------------------
                                                         2000                 1999                2000                 1999
                                                     ------------         ------------        ------------         ------------
<S>                                                  <C>                  <C>                 <C>                  <C>
REVENUES
Chip and licensing revenue ..................        $  3,871,803         $  4,849,251        $  9,611,135         $ 12,408,799
Product and component sales .................           4,136,104            5,167,720          12,180,530           13,455,140
                                                     ------------         ------------        ------------         ------------

   TOTAL REVENUES ...........................           8,007,907           10,016,971          21,791,665           25,863,939
COST OF SALES ...............................           4,616,384            6,293,066          13,732,550           16,340,007
                                                     ------------         ------------        ------------         ------------
GROSS MARGIN ................................           3,391,523            3,723,905           8,059,115            9,523,932

EXPENSES
Sales and marketing .........................           1,913,199            1,027,296           4,620,676            3,176,782
Research and development ....................           1,087,849            1,026,822           3,011,946            3,097,746
General and administrative ..................           1,722,389            1,412,824           7,336,349            4,926,645
Non-cash stock issuance cost ................                  --                   --           3,111,859                   --
                                                     ------------         ------------        ------------         ------------

(LOSS) INCOME FROM OPERATIONS ...............          (1,331,914)             256,963         (10,021,715)          (1,677,241)

OTHER INCOME, NET ...........................             332,152              141,391             850,128              407,978
                                                     ------------         ------------        ------------         ------------

(LOSS) INCOME BEFORE INCOME TAX (EXPENSE)
   BENEFIT ..................................            (999,762)             398,354          (9,171,587)          (1,269,263)


INCOME TAX EXPENSE (BENEFIT) ................             222,189               87,932             498,773              (88,450)
                                                     ------------         ------------        ------------         ------------

NET (LOSS) INCOME ...........................        $ (1,221,951)        $    310,422        $ (9,670,360)        $ (1,180,813)
                                                     ============         ============        ============         ============

NET (LOSS) INCOME PER COMMON SHARE
   Basic ....................................        $      (0.10)        $       0.03        $      (0.79)        $      (0.10)
                                                     ============         ============        ============         ============
   Diluted ..................................        $      (0.10)        $       0.03        $      (0.79)        $      (0.10)
                                                     ============         ============        ============         ============

WEIGHTED AVERAGE SHARES USED IN THE
   CALCULATION OF NET (LOSS)
   INCOME PER COMMON SHARE
   Basic ....................................          12,540,336           11,682,336          12,313,491           11,683,634
                                                     ============         ============        ============         ============
   Diluted ..................................          12,540,336           12,108,558          12,313,491           11,683,634
                                                     ============         ============        ============         ============
</TABLE>




     See accompanying notes to the interim consolidated financial statements



                                       5
<PAGE>   6

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED                        NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                            SEPTEMBER 30,
                                                          -------------------------------         -------------------------------
                                                             2000                1999                2000                1999
                                                          -----------         -----------         -----------         -----------
<S>                                                       <C>                 <C>                 <C>                 <C>
Net (loss) income ................................        $(1,221,951)        $   310,422         $(9,670,360)        $(1,180,813)
Other comprehensive (loss) income
    Foreign currency translation .................            (82,489)                 --             (81,219)                 --
    Unrealized loss on investments available
      for sale, net of tax .......................                (52)            (18,477)            (12,116)            (89,307)
                                                          -----------         -----------         -----------         -----------
Comprehensive (loss) income ......................        $(1,304,492)        $   291,945         $(9,763,695)        $(1,270,120)
                                                          ===========         ===========         ===========         ===========
</TABLE>




     See accompanying notes to the interim consolidated financial statements



                                       6
<PAGE>   7

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

<TABLE>
<CAPTION>
                                                                                    NINE MONTHS ENDED
                                                                                      SEPTEMBER 30,
                                                                            ---------------------------------
                                                                                2000                 1999
                                                                            ------------         ------------
<S>                                                                         <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...........................................................        $ (9,670,360)        $ (1,180,813)
Adjustments to reconcile net loss to net cash used in operating
 activities:
     Non-cash stock issuance cost ..................................           3,111,859                   --
     Depreciation and amortization .................................           1,875,715            1,572,928
     Other .........................................................             (20,512)              42,515
     Increase in deferred stock option compensation ................              88,059              148,022
     Changes in operating assets and liabilities:
         Accounts receivable .......................................             552,613              587,959
         Inventories ...............................................              27,734              265,943
         Prepaid expenses and other current assets .................             349,694            2,213,009
         Accounts payable ..........................................            (508,675)          (7,777,380)
         Accrued liabilities .......................................             369,230              995,943
         Income taxes payable ......................................             146,250               79,094
                                                                            ------------         ------------
     Net cash provided by (used in) operating activities ...........          (3,678,393)          (3,052,780)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment ......................            (488,338)            (330,851)
Proceeds from sale of investments available for sale ...............           3,000,000            1,000,001
Expenditures related to patents and intangible assets ..............          (1,320,000)            (348,221)
                                                                            ------------         ------------

     Net cash provided by investing activities .....................           1,191,662              320,929

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock .................................           5,000,291                   --
Obligation to issue Preferred Stock in Subsidiary ..................           5,000,000                   --
Proceeds from line of credit .......................................                  --               28,444
Purchase of treasury stock .........................................                  --             (129,031)
Proceeds from exercise of stock options ............................           1,408,063               57,136
                                                                            ------------         ------------

     Net cash provided by (used in) financing activities ...........          11,408,354              (43,451)
                                                                            ------------         ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...............           8,921,623           (2,775,302)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .....................          15,969,678           12,341,242
                                                                            ------------         ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD ...........................        $ 24,891,301         $  9,565,940
                                                                            ============         ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the period for:
     Interest ......................................................        $    435,056         $    364,085
     Income taxes ..................................................        $    177,191         $         --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
    FINANCING ACTIVITIES:
    Unrealized loss on investments, net ............................        $    (12,116)        $    (89,307)
</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
                           SEPTEMBER 30, 1999 AND 2000
                                   (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:

        -    Developing and licensing audio and voice technologies to original
             equipment manufacturers ("OEMs") and semiconductor manufacturers
             around the world and through its subsidiary, SRSWOWcast.com, Inc.,
             an internet based business organized in 1999, developing website
             content employing SRS Labs, Inc. technologies designed to attract
             website viewers and advertisers; and

        -    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 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. NET LOSS PER COMMON SHARE

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

3. RECLASSIFICATIONS

        Certain amounts as previously reported have been reclassified to conform
to the current period presentation.

4. INVESTMENTS AVAILABLE FOR SALE

        The Company has classified its investments as available-for-sale in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities". As of September 30, 2000, the Company's available-for-sale
investments had a cost of $6,268,132 and an estimated fair value of $6,295,320,
based on quoted market prices. The unrealized gains on these investments of
$27,188 net of income taxes of $11,147, are reported as a separate component of
stockholders' equity.

5. INTANGIBLE ASSETS

        During the nine months ended September 30, 2000, the Company purchased
software and related intellectual property rights for an aggregate purchase
price of $1,320,000. The purchases are included in intangible assets in the
accompanying financial statements and will be amortized over estimated useful
lives between 2 and 5 years.



                                       8
<PAGE>   9

                                 SRS LABS, INC.
             NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 2000
                                   (UNAUDITED)

6. OBLIGATION TO ISSUE PREFERRED SHARES IN SUBSIDIARY

        On September 29, 2000, the Company's wholly-owned subsidiary
SRSWOWcast.com, Inc. ("SRSWOWcast") and certain investors entered into a Series
A Preferred Stock and Warrant Purchase Agreement (the "Agreement") relating to
the purchase and sale of up to 3,000,000 shares of SRSWOWcast Series A
Convertible Preferred Stock ("Preferred Stock") for a purchase price of $2.00
per share (the "Private Placement"). Pursuant to the Agreement, investors are to
receive at the closing of the Private Placement, an immediately exercisable,
three year warrant evidencing a right to purchase one-tenth of a share of
SRSWOWcast's common stock for each share of Preferred Stock purchased by such
investor, exercisable at $2.50 per whole share. Prior to the closing of the
Private Placement and pursuant to its terms, SRSWOWcast received $5,000,000 as
of September 30, 2000 and, after such date, SRSWOWcast received an additional
$1,000,000 (collectively, the "SRSWOWcast Investment"). The closing of the
Private Placement, at which the purchase and sale of all 3,000,000 shares of
Preferred Stock took place and at which the warrants were issued, occurred in
November 2000.

7. 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. 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 for a period from December 23, 1998 through December 31, 1999. As of
December 31, 1999, 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, 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, was recorded as non-cash stock
issuance cost by the Company during the quarter ended March 31, 2000.

9. SEGMENT INFORMATION

        The Company operates in three 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; (b) the sale
of consumer electronic products and components; and (c) the SRSWOWcast internet
based business. The Company does not allocate operating expenses or specific
assets to the segments described in clauses (a) and (b) above. Therefore,
segment information includes only net revenues, cost of sales and gross margin
for those segments. The Company's internet-based business generated
insignificant revenues and incurred operating losses of $1,059,566 and
$2,218,615 for the three month and nine month periods ended September 30, 2000.
These losses were composed primarily of sales and



                                       9
<PAGE>   10

                                 SRS LABS, INC.
             NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1999 AND 2000
                                   (UNAUDITED)

marketing expenses and general and administrative expenses associated with the
development of web content, and the promotion and launch of the Company's
website.

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED SEPTEMBER 30, 2000
                                      ----------------------------------------------
                                      CHIPS AND         PRODUCT AND
                                      LICENSING       COMPONENT SALES       TOTAL
                                      ----------      ---------------     ----------
<S>                                   <C>             <C>                 <C>
Net revenues .................        $3,871,803        $4,136,104        $8,007,907
Cost of sales ................         1,178,066         3,438,318         4,616,384
                                      ----------        ----------        ----------
Gross margin .................        $2,693,737        $  697,786        $3,391,523
                                      ==========        ==========        ==========
</TABLE>

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED SEPTEMBER 30, 1999
                                      -----------------------------------------------
                                      CHIPS AND         PRODUCT AND
                                      LICENSING       COMPONENT SALES        TOTAL
                                      ----------      ---------------     -----------
<S>                                   <C>             <C>                 <C>
Net revenues .................        $4,849,251        $5,167,720        $10,016,971
Cost of sales ................         1,436,632         4,856,434          6,293,066
                                      ----------        ----------        -----------
Gross margin .................        $3,412,619        $  311,286        $ 3,723,905
                                      ==========        ==========        ===========
</TABLE>

<TABLE>
<CAPTION>
                                           NINE MONTHS ENDED SEPTEMBER 30, 2000
                                      -----------------------------------------------
                                      CHIPS AND         PRODUCT AND
                                      LICENSING       COMPONENT SALES        TOTAL
                                      ----------      ---------------     -----------
<S>                                   <C>             <C>                 <C>
Net revenues .................        $9,611,135        $12,180,530       $21,791,665
Cost of sales ................         2,961,730         10,770,820        13,732,550
                                      ----------        -----------       -----------
Gross margin .................        $6,649,405        $ 1,409,710       $ 8,059,115
                                      ==========        ===========       ===========
</TABLE>

<TABLE>
<CAPTION>
                                            NINE MONTHS ENDED SEPTEMBER 30, 1999
                                      -----------------------------------------------
                                      CHIPS AND         PRODUCT AND
                                      LICENSING       COMPONENT SALES        TOTAL
                                      ----------      ---------------     -----------
<S>                                   <C>             <C>                 <C>
Net revenues .................        $12,408,799       $13,455,140       $25,863,939
Cost of sales ................          3,441,415        12,898,592        16,340,007
                                      -----------       -----------       -----------
Gross margin .................        $ 8,967,384       $   556,548       $ 9,523,932
                                      ===========       ===========       ===========
</TABLE>

10. RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133" which amends certain provisions of SFAS 133 to clarify four areas causing
difficulties in implementation. The amendment included expanding the normal
purchase and sale exemption for supply contracts, permitting the offsetting of
certain intercompany foreign currency derivatives and thus reducing the number
of third party derivatives, permitting hedge accounting for foreign-currency
denominated assets and liabilities and redefining interest rate risk to reduce
sources of ineffectiveness. SFAS 133, as amended by SFAS 138, is not expected to
have a material impact on the Company's consolidated results of operations,
financial position or cash flows.

        In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company does not expect the implementation of SAB No. 101 to
have an effect on its revenue recognition policy.

        In March 2000, FASB issued Interpretation No. ("FIN") 44 of Accounting
Principles Board Opinion No. 25 "Accounting for Certain Transactions Involving
Stock Compensation", which, among other things, addresses accounting
consequences of a modification that reduces the exercise price of a fixed stock
option award (otherwise known as repricing). FIN 44 applies to modifications
made after December 15, 1998, and will be applied prospectively as of July 1,
2000. FIN 44 is not expected to have a material impact on the Company's
consolidated results of operations, financial position or cash flows.



                                       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:

        -    Developing and licensing audio and voice technologies to original
             equipment manufacturers ("OEMs") and semiconductor manufacturers
             around the world and through its subsidiary, SRSWOWcast.com, Inc.,
             ("SRSWOWcast") an internet based business organized in 1999,
             developing website content employing SRS Labs, Inc. technologies
             designed to attract website viewers and advertisers; and

        -    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.
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, 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 has
facilitated the incorporation of the WOW Technology into the Windows 2000 Media
Player and 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.

        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



                                       11
<PAGE>   12

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 three business segments: (a) the development
and marketing of technology in the forms of integrated circuits designed and
distributed through Valence and the licensing of technologies developed by the
Company to OEMs and semiconductor manufacturers, (b) the sale of consumer
electronic products and components, and (c) the SRSWOWcast internet based
business. A summary of the Company's operations and activities by business
segment is included in the accompanying notes to the interim consolidated
financial statements.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999

    Revenues

        Chip and licensing revenue consists of design fees and sales of 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 September 30, 2000, were
$8,007,907, compared to $10,016,971 for the same period in the prior year, a
decrease of $2,009,064, or 20%. The decrease was due primarily to lower demand
during the quarter for the Company's ASIC design services and products, which
are order specific and custom in nature, and subject to variability based on
timing of customer orders, and to a decrease in licensing revenue during the
quarter compared to the same period in the prior year. Revenues generated by the
Company's internet based business were not significant during the quarter ended
September 30, 2000.

        Product and component revenues decreased $1,031,616, or 20%. This
decrease is consistent with the Company's strategy to exit certain of its low
margin distribution product lines in order to focus resources on expansion of
its ASIC business and integration of SRS technologies into its products.

    Gross Margin

        Cost of sales consists primarily of fabrication costs, assembly and test
costs, and the cost of materials and overhead from operations. For the three
months ended September 30, 2000, the gross margin percentage increased to 42%,
compared to 37% for the same period in the prior year. The increase in margin
percentage is attributable to the shift away from low margin distribution
product lines partially offset by higher ASIC fabrication costs within the chip
and licensing product lines. Higher ASIC fabrication costs are a result of
higher worldwide demand for semiconductors and limited fabrication capacity. The
Company expects that gross margins in future quarters will continue to be
negatively impacted by higher fabrication costs.

    Sales and Marketing

        Sales and marketing expenses consist primarily of employee salaries and
sales consultants' fees and related expenses, sales commissions, advertising,
and product promotion. Sales and marketing expenses were $1,913,199 for the
three months ended September 30, 2000 compared to $1,027,296 for the same prior
year period, an increase of $885,903, or 86%. The increase is due primarily to
spending associated with the development and promotion of the SRSWOWcast.com
website ("website") and creation of program content for such website. The
website was launched July 18, 2000 and it is the Company's expectation that
sales and marketing expenses will continue to increase as a result of the
expansion and growth of SRSWOWcast.com business operations.



                                       12
<PAGE>   13

    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 $1,087,849 for the three months ended September 30, 2000 compared to
$1,026,822 for the same prior year period, an increase of $61,027, or 6%.
Research and development expenses may increase in the future as a result of
ongoing product development efforts and activity related to the expansion and
growth of SRSWOWcast.com business operations and expansion of consumer products
incorporating the Company's WOW technology.

    General and Administrative

        General and administrative expenses consist primarily of
employee-related expenses, legal costs and patent and intangible asset
amortization costs. General and administrative expenses were $1,722,389 for the
three months ended September 30, 2000 compared to $1,412,824 for the same prior
year period, an increase of $309,565 or 22%. The increase is due primarily to
expenses associated with the launch of SRSWOWcast plus higher salaries and
benefits, legal, and other administrative expenses in the Company's core
licensing business.

    Other Income, Net

        Net other income consists primarily of interest income, interest expense
and foreign currency transaction gains and losses. Net other income was $332,152
for the three months ended September 30, 2000 compared to $141,391 for the same
prior year period, an increase of $190,761 or 135%. 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 September 30, 2000 was
$222,189 compared to $87,932 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.

NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999

    Revenues

        Total revenues for the nine months ended September 30, 2000, were
$21,791,665, compared to $25,863,939 for the same period in the prior year, a
decrease of $4,072,274, or 16%. The decrease was due primarily to lower demand
during the period for the Company's ASIC design services and products, which are
order specific and custom in nature, and subject to variability based on timing
of customer orders, and to a comparative decrease in licensing revenue during
the period resulting from the Company's recording of a large one-time technology
transfer fee in the second quarter of 1999, and to a decline in licensing fees
generated by computer manufacturer related activity for the period. Revenues
generated by the Company's internet based business were not significant during
the nine months ended September 30, 2000.

        Product and component revenues decreased $1,274,610, or 9%. This
decrease is consistent with the Company's strategy to exit certain of its low
margin distribution product lines in order to focus resources on expansion of
its ASIC business and integration of SRS technologies into its products.

    Gross Margin

        For the nine months ended September 30, 2000, the gross margin
percentage increased to 37.0%, compared to 36.8% for the same period in the
prior year. The increase in margin percentage is attributable to the strategy to
exit certain of its low margin distribution product lines offset somewhat by
higher ASIC fabrication costs during the nine months ended September 30, 2000.
The Company expects that gross margins within the chip and licensing category
will continue to be negatively impacted by higher fabrication costs.



                                       13
<PAGE>   14

    Sales and Marketing

        Sales and marketing expenses were $4,620,676 for the nine months ended
September 30, 2000, compared to $3,176,782 for the same period in the prior
year, an increase of $1,443,894 or 45%. The increase is due primarily to
spending during the second and third quarters of 2000, associated with the
development and promotion of the SRSWOWcast.com website, and creation of program
content for the website. The website was launched July 18, 2000, and it is the
Company's expectation that sales and marketing expenses will continue to
increase as a result of the expansion and growth of SRSWOWcast.com business
operations.

    Research and Development

        Research and development costs were $3,011,946 for the nine months ended
September 30, 2000, compared to $3,097,746 for the same period in the prior
year, a decrease of $85,800, or 3%. The decrease is due primarily to lower
staffing levels at Valence. Research and development costs may increase in the
future as a result of ongoing product development efforts.

    General and Administrative

        General and administrative costs were $7,336,349 for the nine months
ended September 30, 2000, compared to $4,926,645 for the same period in the
prior year, an increase of $2,409,704, or 49%. The increase is primarily due to
compensation costs incurred as a result of the resignation of an employee of
Valence, accelerated amortization of intellectual property incorporating
outdated technologies, higher legal and employee related expenses associated
with the launch of SRSWOWcast, postponed IPO related expenses, plus higher
salaries and benefits, legal, and other administrative expenses in the Company's
core licensing business.

        Amortization expense related to intangible assets associated with the
Valence acquisition was $998,388 for both the nine month periods ended
September, 30, 2000 and 1999, and is included in general and administrative
expenses.

    IPO related expenses

        On March 3, 2000, the Company filed an application to list the common
shares of Valence on the Growth Enterprise Market of the Hong Kong Stock
Exchange (the "GEM"), in order to sell a minority interest in Valence to the
public. The initial public offering was targeted for completion in the second
quarter of 2000. However, due to negative market conditions affecting equity
markets worldwide, including the GEM, the Company elected to postpone the
offering indefinitely. Offering costs incurred by the Company, comprised
primarily of legal, accounting and underwriting fees, totaled $1,142,175 as of
September 30, 2000. These costs are included in general and administrative
expense in the accompanying financial statements.

    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 common stock of the Company and of its
subsidiary, SRSWOWcast. As a result of the transaction, the Company recognized
one-time, non-cash charges totaling $3,111,859. See Note 8 of the Notes to the
Interim Consolidated Financial Statements for more information concerning the
Microsoft transaction.

    Other income, Net

        Net other income was $850,128 for the nine months ended September 30,
2000, compared to $407,978 for the same period in the prior year, an increase of
$442,150 or 108%. The increase is due primarily to higher interest income
associated with higher cash and investment balances, and favorable foreign
currency transaction gains.

    Income Taxes

        The income tax expense for the nine months ended September 30, 2000 was
$498,773 compared to a tax benefit of $88,450 for the same period in the prior
year. Commencing in the fiscal year ended December 31, 2000, the Company
recorded a tax provision at statutory tax rates in the Asian countries where
Valence has its principal



                                       14
<PAGE>   15

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 carry back.


LIQUIDITY AND CAPITAL RESOURCES

        The Company's principal source of liquidity at September 30, 2000
consisted of cash, cash equivalents and investments aggregating $31,186,621, 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 8 to the
Interim Consolidated Financial Statements). In November 2000, the Company's
wholly-owned subsidiary, SRSWOWcast sold to investors 3,000,000 shares of its
Series A Convertible Preferred Stock for an aggregate amount of $6,000,000 and
granted warrants to purchase shares of SRSWOWcast common stock to such investors
at an exercise price of $2.50 per share (the "SRSWOWcast Investment"). All
proceeds from the SRSWOWcast Investment will be used exclusively by SRSWOWcast.
(See Note 6 to the Interim Consolidated Financial Statements.)

        The Company's operating activities utilized $3,678,393 in cash for the
nine months ended September 30, 2000, and $3,052,780 for the nine months ended
September 30, 1999. The use of cash in operations for the nine months ended
September 30, 2000 was primarily due to the Company's loss from operations for
the period, after adjustment for non-cash charges related to the Microsoft
transaction, depreciation and amortization. The net increase in cash and cash
equivalents of $8,921,623 for the period is attributable primarily to the
receipt of funds from the SRSWOWcast Investment, proceeds from the sale of
long-term investments, proceeds from stock option exercises and proceeds from
the sale of the Company's common stock to Microsoft.

        In March 1998, the Company obtained a revolving line of credit (and
letter of credit facility) with a bank that expires on April 1, 2001 and is
secured by certain of the Company's cash, cash equivalents and investments. As
of September 30, 2000, approximately $5,930,000 million in cash and cash
equivalents and $6,295,000 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%. The Company had $8.0 million outstanding under the line of credit as
of September 30, 2000. The collateral requirements under the above referenced
credit facility may have the effect of restricting the amounts of cash available
to pay dividends.

        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 U.S. $3,500,000 which bears interest at 1.25%
over the related collateral deposit interest rate. At September 30, 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, 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 and,
notwithstanding the Company's decision in June 2000 to indefinitely postpone the
ValenceTech Limited public offering, to expand Valence's core business. The
Company expects that the proceeds from the SRSWOWcast Investment will fund
operations of SRSWOWcast for at least the next 12 months.

        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 and
amounts received from the SRSWOWcast Investment, 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.



                                       15
<PAGE>   16

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; results of operations of SRSWOWcast; 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, foundries 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 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 favorable market acceptance.

        The public offering of common shares of ValenceTech Limited in Hong Kong
was intended to bring new capital to grow Valence's core business while, at the
same time, adding significant value to the Company's shareholders. Postponement
of the offering is not expected to adversely affect Valence's core business
operations, and the Company will continue to evaluate its financing options
domestically and in foreign capital markets. There is no assurance however, that
the Company will be successful in a future initial public offering or in
securing alternate sources of capital.

        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

        The Company launched its Internet business with the formation of
SRSWOWcast. SRSWOWcast plans to develop and acquire engaging and audio based
content to generate and retain visitor traffic to its web site. The



                                       16
<PAGE>   17

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. However, there can be no assurance that SRSWOWcast.com
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.

        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 relatively 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



                                       17
<PAGE>   18

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 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.



                                       18
<PAGE>   19

  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.



                                       19
<PAGE>   20

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 nine months ended September 30, 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 relatively 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 ranging from the lending
bank's prime rate to LIBOR plus 1.75%. The interest rate on the balance of $8.0
million outstanding at September 30, 2000 was 7.5%. If interest rates were to
increase by 10%, the impact on the Company's consolidated financial statements
would be additional interest expense of approximately $15,000 per quarter.



                                       20
<PAGE>   21

                           PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

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
third quarter of Fiscal 2000, the Company utilized $113,234 of the $22,052,955
net offering proceeds for working capital. The table below sets forth at
September 30, 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.........................................                        --                                      9,714,222(1)
  Repayment of indebtedness........................                        --                                             --
  Working capital..................................                        --                                     $8,485,709
  Temporary investment (cash and
    municipal bonds)...............................                        --                                     $3,853,024
</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. During the nine month period ended September
    30, 2000, the Company utilized approximately $1,320,000 of the net offering
    proceeds as consideration for the purchase of software and related
    intellectual property rights.



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.

<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER       DESCRIPTION
   ------       -----------
<S>             <C>
    10.1        Settlement and Release Agreement by and among Thomas Wah Tong
                Wan, the Company and ValenceTech Limited dated July 27, 2000.

    10.2        Series A Preferred Stock and Warrant Purchase Agreement dated
                September 29, 2000 between SRSWOWcast.com, Inc. and the Investors
                named on Schedule A to the Series A Preferred Stock and Warrant
                Purchase Agreement.

    10.3        Investor Rights Agreement dated as of September 29, 2000 between
                SRSWOWcast.com, Inc. and the persons whose names appear on the
                Signature Page to the Investor Rights Agreement.

    27          Financial Data Schedule.
</TABLE>

(b) Reports on Form 8-K. No reports on Form 8-K were filed with the Commission
    during the quarter for which this report is filed.



                                       21
<PAGE>   22

                                   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: November 6, 2000                 By:     /s/   JOHN AUYEUNG
                                          ----------------------------------
                                                     John AuYeung
                                               Executive Vice President,
                                               Chief Operating Officer,
                                               Chief Financial Officer,
                                               Treasurer and Secretary
                                              (Authorized Signatory and
                                             Principal Financial Officer)



                                       22
<PAGE>   23

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER       DESCRIPTION
   ------       -----------
<S>             <C>
    10.1        Settlement and Release Agreement by and among Thomas Wah Tong
                Wan, the Company and ValenceTech Limited dated July 27, 2000.

    10.2        Series A Preferred Stock and Warrant Purchase Agreement dated
                September 29, 2000 between SRSWOWcast.com, Inc. and the Investors
                named on Schedule A to the Series A Preferred Stock and Warrant
                Purchase Agreement.

    10.3        Investor Rights Agreement dated as of September 29, 2000 between
                SRSWOWcast.com, Inc. and the persons whose names appear on the
                Signature Page to the Investor Rights Agreement.

    27          Financial Data Schedule.
</TABLE>