SRS LABS INC, DEF 14A, 1997-04-30

SRS LABS INC
DEF 14A, 1997-04-30
PATENT OWNERS & LESSORS

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<PAGE> 1

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X] Filed by a Party other than the Registrant [ ]
- --------------------------------------------------------------------------------

Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12

SRS LABS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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

(2) Aggregate number of securities to which transaction applies:

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

(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act
Rule 0-11 (Set forth the amount on which the filing fee is calculated and
state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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

(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE> 2

SRS LABS, INC.
2909 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------

You are invited to attend the Annual Meeting of Stockholders of SRS Labs,
Inc. the ("Company") to be held at 10:00 A.M., California time, on Wednesday,
June 11, 1997, at the Irvine Marriott Hotel, located at 18000 Von Karman Avenue,
Irvine, California 92612 for the following purposes:

1. To elect one Class I director to the Board of Directors to hold
office for a term of three years and until his respective successor is
elected and qualified.

2. To consider and act upon a proposal to approve the SRS Labs, Inc.
Amended and Restated 1996 Long-Term Incentive Plan.

3. To transact such other business as may properly come before the
meeting or any adjournment thereof.

The Board of Directors nominates Jeffrey I. Scheinrock as the nominee for
election to the Board of Directors as a Class I director.

The Board of Directors has fixed the close of business on April 25, 1997,
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the meeting.

EACH STOCKHOLDER IS CORDIALLY INVITED TO BE PRESENT AND TO VOTE AT THIS
ANNUAL MEETING IN PERSON. STOCKHOLDERS ARE REQUESTED TO SIGN, DATE
AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID AND ADDRESSED
ENVELOPE, WHETHER OR NOT THEY EXPECT TO ATTEND. IN THE EVENT A STOCKHOLDER WHO
HAS RETURNED A SIGNED PROXY ELECTS TO ATTEND THE ANNUAL MEETING AND VOTE IN
PERSON, THE STOCKHOLDER WILL BE ENTITLED TO VOTE.

By Order of the Board of Directors,

/s/ Janet M. Biski
---------------------------------
Janet M. Biski
Secretary

Santa Ana, California
April 30, 1997
<PAGE> 3

SRS LABS, INC.
2909 DAIMLER STREET
SANTA ANA, CALIFORNIA 92705

PROXY STATEMENT
------------------------

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of SRS Labs, Inc. (the "Company") to be voted
at the Annual Meeting of Stockholders of the Company to be held on Wednesday,
June 11, 1997, at the Irvine Marriott Hotel located at 18000 Von Karman Avenue,
Irvine, California 92612 at 10:00 A.M., California time, and at any adjournments
thereof (the "Annual Meeting"), for the purposes set forth in the accompanying
Notice of Annual Meeting of Stockholders and described herein. The approximate
date on which this Proxy Statement and the enclosed form of proxy are first
being sent or given to stockholders is May 8, 1997.

VOTING RIGHTS AND SOLICITATION OF PROXIES

The Board of Directors of the Company (the "Board of Directors" or the
"Board") has fixed the close of business on April 25, 1997, as the record date
for the determination of stockholders entitled to receive notice of, and to vote
at, the Annual Meeting (the "Record Date"). The only outstanding class of stock
of the Company is its common stock, par value $.001 per share ("Common Stock"),
and, at the Record Date, 9,540,005 shares were issued and outstanding. Each
share of Common Stock entitles the record holder on the Record Date to one vote
on all matters. With respect to the election of directors only (Proposal 1),
stockholders may vote in favor of the nominee or withhold their votes as to the
nominee.

Any stockholder giving a proxy has the power to revoke the proxy prior to
its exercise. A proxy may be revoked (i) by delivering to the Secretary of the
Company, Janet M. Biski, at or prior to the Annual Meeting, an instrument of
revocation or a duly executed proxy bearing a date or time later than the date
or time of the proxy being revoked or (ii) at the Annual Meeting if the
stockholder is present and elects to vote in person. Mere attendance at the
Annual Meeting will not serve to revoke a proxy.

All proxies received and not revoked will be voted as directed. If no
directions are specified, such proxies will be voted "FOR" (i) election of the
Board's nominee for a Class I director and (ii) approval of the SRS Labs, Inc.
Amended and Restated 1996 Long-Term Incentive Plan. As to any other business
which may properly come before the Annual Meeting, the persons named in such
proxies will vote in accordance with their best judgment, although the Company
does not presently know of any other such business.

A majority of the outstanding shares of Common Stock entitled to vote must
be represented in person or by proxy at the Annual Meeting in order to
constitute a quorum for the transaction of business. Abstentions and non-votes
will be counted for purposes of determining the existence of a quorum at the
Annual Meeting. The candidate for election as a Class I director will be elected
by a plurality of the votes of shares of Common Stock present in person or by
proxy at the Annual Meeting and entitled to vote on such election. The
affirmative vote of a majority of the shares of Common Stock present in person
or by proxy at the Annual Meeting and entitled to vote on a particular proposal
(other than the election of directors) is required for the adoption of the
proposal. Abstentions will be counted as votes against any of the proposals as
to which a stockholder abstains, but non-votes will have no effect on the voting
with respect to any proposal as to which there is a non-vote. A non-vote may
occur when a nominee holding shares of Common Stock for a beneficial owner does
not vote on a proposal because such nominee does not have discretionary voting
power and has not received instructions from the beneficial owner.

The expenses of soliciting proxies for the Annual Meeting are to be paid by
the Company. Solicitation of proxies may be made by means of personal calls
upon, or telephonic or telegraphic communications with, stockholders or their
personal representatives by directors, officers and employees of the Company who
will not be specially compensated for such services. Although there is no formal
agreement to do so, the Company may reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable
<PAGE> 4

expenses in forwarding this Proxy Statement to stockholders whose Common Stock
is held of record by such entities. The Company's Board of Directors has
authorized the Executive Committee of the Board to retain the services of a
proxy solicitation firm if, in such Committee's view, it is deemed necessary.
The Executive Committee has not engaged such a firm at this time; however, to
the extent it decides to do so, the Committee will utilize the services of
Corporate Investor Communications, Inc. to assist in the solicitation of proxies
in connection with this Proxy Statement, and such firm will receive a fee
estimated to be $4,000 and will be reimbursed for out-of-pocket expenses.

The Company was incorporated in the State of California in June 1993 and
reincorporated in the State of Delaware in June 1996. All references to the
Company reflect this continuation. The Company first became a reporting company
pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, in
August 1996.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table contains certain information as of the Record Date
regarding all persons who, to the knowledge of the Company, were the beneficial
owners of more than 5% of the outstanding shares of Common Stock, each of the
directors of the Company, each nominee for director, each of the executive
officers named in the Summary Compensation Table set forth herein under the
caption "Compensation of Executive Officers" (such officers are collectively
referred to herein as the "Named Executive Officers") and all directors and
executive officers as a group. The persons named hold sole voting and investment
power with respect to the shares shown opposite their respective names, unless
otherwise indicated. The information with respect to each person specified is as
supplied or confirmed by such person or based upon statements filed with the
Securities and Exchange Commission (the "SEC").

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OWNERSHIP(1)(2) CLASS(1)(2)
- ----------------------------------------------------------------- --------------- -----------
<S> <C> <C>
Walter W. Cruttenden III(3)...................................... 650,229 6.8%
Packard Bell Electronics, Inc.(4)................................ 954,165 9.6%
Frank W. Cutler(5)............................................... 563,873 5.9%
Thomas C.K. Yuen and Misako Yuen(6)(7)........................... 3,128,483 32.5%
Class I Director/Nominee:
Jeffrey I. Scheinrock(7)(8).................................... 11,811 *
Class II Directors:
John AuYeung(7)(8)............................................. 10,000 *
John Tu(7)(9).................................................. 221,152 2.3%
Class III Directors:
Stephen V. Sedmak(7)(10)....................................... 918,557 9.4%
Thomas C.K. Yuen(6)(7)......................................... 3,128,483 32.5%
Named Executive Officers, Who are Not Directors
Robert A. Veri(7).............................................. -- --
James S. Lucas(7)(11).......................................... 225,855 2.3%
Janet M. Biski(7)(12).......................................... 33,793 *
All directors and executive officers as a group (8
persons)(13)................................................... 4,549,651 45.0%
</TABLE>

- ---------------
* Less than one percent.

(1) Subject to applicable community property and similar statutes.

(2) Includes (a) shares beneficially owned, whether directly or indirectly,
individually or together with associates, and (b) shares of which
beneficial ownership may be acquired within 60 days of the Record Date by
exercise of stock options ("Stock Option Shares").

(Footnotes continued on the next page)

2
<PAGE> 5

(Footnotes continued from the preceding page)

(3) Includes 108,618 shares of Common Stock held by Mr. Cruttenden as custodian
for three of his minor children, Rian P. Cruttenden (36,206 shares),
Jeffrey J. Cruttenden (36,206 shares) and Alexander Cruttenden (36,206
shares). Also includes an additional 36,206 shares of Common Stock held by
another of his children, Christopher L. Cruttenden. Mr. Walter Cruttenden
disclaims beneficial ownership of the 36,206 shares held by Christopher L.
Cruttenden. Mr. Walter Cruttenden's mailing address is c/o Cruttenden Roth
Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715.

(4) Includes 382,104 Stock Option Shares. The mailing address for Packard Bell
Electronics, Inc. is 31717 La Tinda Drive, Westlake Village, California
91362.

(5) Includes 724 shares of Common Stock held by Mr. Cutler as custodian for his
niece, Lakin Alexis McCarthy. Mr. Cutler's mailing address is c/o The
Cutler Group, 711 North Bayfront, Newport Beach, California 92662.

(6) Includes 2,835,210 shares of Common Stock held by Mr. and Mrs. Yuen,
co-trustees of the Thomas Yuen Family Trust, and 90,518 Stock Option Shares
granted to Mr. Yuen. Also includes 202,755 shares of Common Stock held by
Atsuko Hamasaki as trustee of the Yuen 1993 Irrevocable Trust (144,825
shares) and as custodian for Mr. and Mrs. Yuen's children, Jennifer Wen Lee
Yuen (28,965 shares) and Constance Kahlee Yuen (28,965 shares). Mr. and
Mrs. Yuen disclaim beneficial ownership of the 202,755 shares held by
Atsuko Hamasaki.

(7) The mailing address of such stockholder is c/o SRS Labs, Inc., 2909 Daimler
Street, Santa Ana, California 92705.

(8) All Stock Option Shares.

(9) Includes 10,000 Stock Option Shares.

(10) Includes 232,809 Stock Option Shares.

(11) Includes 178,998 Stock Option Shares.

(12) Includes 33,493 Stock Option Shares.

(13) Includes 567,629 Stock Option Shares.

ELECTION OF DIRECTORS
(PROPOSAL 1)

Under the Company's Certificate of Incorporation (the "Certificate") and
Bylaws (the "Bylaws"), which provide for a "classified" Board, one person,
Jeffrey I. Scheinrock, has been nominated by the Board of Directors for election
at the Annual Meeting to serve a three year term expiring at the annual meeting
in 2000 and until his successor is elected and qualified. A plurality of the
votes of shares of Common Stock present in person or by proxy at the Annual
Meeting and entitled to vote on such election is required for election of the
nominee.

The Bylaws provide for five directors. Currently, there is one Class I
director (Mr. Scheinrock), whose term expires at the Annual Meeting; two Class
II directors (Messrs. AuYeung and Tu), whose term expires at the 1998 annual
meeting of stockholders; and two Class III directors (Messrs. Sedmak and Yuen),
whose term expires at the 1999 annual meeting of stockholders.

The nominee presently serves as a Class I director and has served
continuously as a director of the Company since the date indicated in his
biography below. In the event the nominee is unable to or declines to serve as a
director at the time of the Annual Meeting (which is not anticipated), the
persons named in the proxy will vote for the election of such person or persons
as may be designated by the present Board of Directors. UNLESS OTHERWISE
DIRECTED IN THE ACCOMPANYING PROXY, THE PERSONS NAMED THEREIN WILL VOTE FOR THE
ELECTION OF THE DIRECTOR NOMINEE LISTED BELOW.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF
JEFFREY I. SCHEINROCK AS A CLASS I DIRECTOR.

3
<PAGE> 6

INFORMATION WITH RESPECT TO THE CLASS I DIRECTOR NOMINEE

The following table sets forth information regarding the nominee, including
age on the date of the Annual Meeting, present position with the Company, period
served as a director and other business experience during the past five years.

<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION AND OTHER
NAME AGE SINCE INFORMATION CONCERNING NOMINEE
- ------------------------- --- -------- -----------------------------------------------------
<S> <C> <C> <C>
Jeffrey I. Scheinrock.... 46 1996 Mr. Scheinrock has served as a director of the
Company and a member of the Board's Audit Committee
since June 1996. Mr. Scheinrock has served as Vice
Chairman and Chief Financial Officer of Kistler
Aerospace Corporation, a manufacturer of reusable
launch vehicles, since July 1996. Prior thereto, he
served as Vice Chairman -- Finance and Strategic
Planning and Chief Financial Officer of Packard Bell
Electronic's, Inc., a manufacturer of personal
computers, from March 1989 to June 1996. Mr.
Scheinrock also has served as a director of
SmartTalk, a prepaid phone card company, since July
1996, and a director of Brilliant Digital
Entertainment, a developer and distributor of digital
equipment, since October 1996.
</TABLE>

INFORMATION WITH RESPECT TO DIRECTORS WHOSE TERMS CONTINUE

The following table sets forth similar information regarding the members of
the Board of Directors who are designated either Class II or Class II Directors
and are continuing in office as Directors of the Company.

John AuYeung............. 45 1996 Dr. AuYeung has served as a director of the Company
since May 1996. Since June 1996, Dr. AuYeung also has
served as a member of the Audit and Compensation
Committees of the Board of Directors. Since November
1, 1996, Dr. AuYeung has served as President,
Secretary and Treasurer of ACG (U.S.), Inc., the U.S.
subsidiary of a foreign-based internet company, and
has served as President of Communications Management,
Inc., a management consulting firm. Since October
1996, Dr. AuYeung has also served as Assistant
Secretary of Asia Communications Global Limited, an
internet technology company focusing on the
dissemination of financial, homeshopping and other
information to substantially all of the Asian market.
Prior thereto, Dr. AuYeung served as Vice President,
Technology and Business Development of Atlantis
Computers, Inc. d/b/a NuReality, a manufacturer of
computer multimedia and consumer audio/video products
and a licensee of the Company, from May 1995 to
October 1996. In addition, Dr. AuYeung served in a
variety of management positions with Newport
Corporation, a scientific research instrument
manufacturer, from March 1982 to April 1996. Prior to
joining Newport Corporation, Dr. AuYeung was a
research scientist at the Jet Propulsion Laboratory.
Dr. AuYeung holds a B.S. from the Massachusetts
Institute of Technology and an M.S. and a Ph.D. in
electrical engineering from the California Institute
of Technology.
</TABLE>

4
<PAGE> 7

John Tu.................. 55 1994 Mr. Tu has served as a director of the Company since
May 1994. In addition, since June 1996, Mr. Tu has
served as a member of the Audit and Compensation
Committees of the Board. Mr. Tu has served as a
director and President of Kingston Technology Company
(and its predecessor, Kingston Technology
Corporation), a manufacturer of computer
enhancements, since October 1987. Mr. Tu was also a
co-founder of Kingston Technology Corporation. Prior
thereto, from 1982 to 1986, Mr. Tu served as
President of Camintonn Corporation, a manufacturer of
board level products for the DEC marketplace, and
from 1986 to 1987 he served as Vice President and
General Manager of the Digital Division after the
company's sale to AST Research. Mr. Tu was also a
co-founder of Camintonn Corporation. Mr. Tu earned a
degree in electrical engineering from the Technische
Hochschule Darmstadt in Germany.

Class III Directors -- Term Expiring at the 1999 Annual Meeting

Stephen V. Sedmak........ 48 1993 Mr. Sedmak, one of the founders of the Company, has
served as President of the Company since its
inception in June 1993. In addition, Mr. Sedmak has
served as a director of the Company since June 1993
and as Chief Operating Officer since June 1996. Prior
to joining the Company, Mr. Sedmak served as Vice
President of Sales for PTC Corporation, a provider of
telecommunications systems, from January 1973 to
March 1982, as Vice President of Sales for The ICT
Group, a provider of database marketing and
telemarketing services, from March 1985 to September
1987, and as Vice President of Sales for TeleRelation
Systems Inc., a software development company, from
January 1991 to June 1992. Mr. Sedmak was involved as
a founder of each of these companies. In addition,
Mr. Sedmak held a variety of executive sales and
marketing positions with IBM/ROLM Corporation, a
leading telecommunications manufacturer, from March
1982 to March 1985. Furthermore, in addition to his
positions with the Company, Mr. Sedmak currently
serves as a director of MidiSoft Corporation, a
software developer.
</TABLE>

5
<PAGE> 8

<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION AND OTHER
NAME AGE SINCE INFORMATION CONCERNING INCUMBENT
- ------------------------- --- -------- -----------------------------------------------------
<S> <C> <C> <C>
Thomas C.K. Yuen......... 45 1994 Mr. Yuen has served as Chairman, Chief Executive
Officer and a director of the Company since January
1994. In addition, Mr. Yuen served as Chief Financial
Officer of the Company from January 1994 to July
1994. Since May 1995, Mr. Yuen has also served as
Chairman and a director for Asia Communications
Global Limited, a privately held internet technology
company focusing on the dissemination of financial,
home shopping and other information to substantially
all of the Asian market. Since June 1993, Mr. Yuen
has served as Chairman, Chief Executive Officer,
President and a director for Atlantis Computers, Inc.
d/b/a NuRealty, a privately held company that
manufactures computer multimedia and consumer
audio/video products and a licensee of the Company.
Since February 1994, Mr. Yuen has also served as
Chairman and President of MPC Technologies, Inc., a
privately held company that is a reseller of computer
products. Mr. Yuen is one of the founders of AST
Research, Inc., where he served as a director from
such company's inception in 1981 until June 1992 and
the Company's Co-Chairman and Chief Operating Officer
from August 1987 to June 1992. Currently, Mr. Yuen
devotes approximately 40% of his time to his duties
and obligations to the Company which primarily
involve strategic and corporate planning. The
remaining time is allocated between Asia
Communications Global, Ltd., Atlantis Computers,
Inc., MPC Technologies, Inc. and a variety of other
business interests. Mr. Yuen is also a director of
Graphix Zone, Inc. (dba, Ignite, Inc.), a corporation
involved in the branded and traditional personal
computer game markets.
</TABLE>

INFORMATION WITH RESPECT TO EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

The following table sets forth similar information as that provided for the
director nominees with respect to the executive officers of the Company who are
not director nominees.

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND OTHER
NAME AGE INFORMATION CONCERNING EXECUTIVE OFFICER
- ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
Janet M. Biski................ 41 Ms. Biski, a certified public accountant, has served
as Chief Financial Officer of the Company since July
1994, Secretary of the Company since May 1995, and
Vice President and Treasurer of the Company since June
1996. Prior to joining the Company, Ms. Biski served
as Chief Financial Officer of Remedial Management,
Inc., an environmental consulting firm, from April
1992 to February 1994. Prior thereto, Ms. Biski served
as Regional Controller of Fujitsu Business
Communications, an international manufacturer and
supplier of telecommunications systems, from April
1991 to April 1992. From April 1984 to April 1991, Ms.
Biski held various financial positions with IBM/ROLM
Corporation.
</TABLE>

6
<PAGE> 9

James S. Lucas................ 42 Mr. Lucas, one of the founders of the Company, has
served as Vice President, Sales of the Company since
its inception in June 1993. In addition, Mr. Lucas
served as Secretary of the Company from June 1993 to
May 1995, and a director of the Company from June 1993
to January 1994. Prior to joining the Company, Mr.
Lucas served as National Sales Manager for Hughes
Aircraft Company from February 1991 to June 1993,
where he managed the sales and distribution of SRS
based products before the SRS technology was sold by
Hughes Aircraft Company to the Company.

Robert A. Veri................ 48 Mr. Veri has served as Vice President, General Manager
of the Company since March 1997 and General Manager
since September 1996. Prior to joining the Company,
Mr. Veri served as Executive Vice President, General
Manager and a director of Fostex Corporation of
America, an audio recording technology company, from
May 1991 to March 1996.
</TABLE>

INFORMATION WITH RESPECT TO SIGNIFICANT EMPLOYEES

The following table sets forth similar information as that provided for
directors and executive officers who are not directors with respect to
significant employees of the Company.

Alan D. Kraemer............... 46 Mr. Kraemer has served as Director of Engineering of
the Company since February 1994. In addition, Mr.
Kraemer has served as President of Sierra Digital
Productions, Inc., a compact disc production and
recording company, since August 1989. Prior to joining
the Company, Mr. Kraemer also served as Vice President
of Engineering of De LaRue Printrak, a manufacturer of
automatic fingerprint identification systems, from
January 1989 to December 1989. Prior thereto, Mr.
Kraemer served as Vice President of Engineering for
AST Research, a personal computer manufacturer. Mr.
Kraemer also served as Vice President of Engineering
with Point4 Data Corporation from May 1986 to December
1986, and as Director of Software Engineering of
Northrop Electronics from May 1984 to May 1986.
</TABLE>

7
<PAGE> 10

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND OTHER
NAME AGE INFORMATION CONCERNING SIGNIFICANT EMPLOYEE
- ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
Edward J. Treska.............. 32 Mr. Treska has served as General Counsel and Director
of Patents and Licensing of the Company since May
1996. Prior to joining the Company, Mr. Treska served
as an associate attorney for the intellectual property
law firm of Knobbe, Martens, Olson & Bear from
September 1992 to April 1996. Prior thereto, Mr.
Treska served as an electronics design engineer for
TRW Inc.'s Space and Technology Sector from June 1987
to June 1989. Mr. Treska holds a B.S. degree
(Electrical Engineering) from Colorado State
University and a J.D. degree from the University of
San Diego School of Law.
Jennifer A. Drescher.......... 33 Ms. Drescher has served as Director of Marketing
Services of the Company since April 1994. In addition,
Ms. Drescher served as Marketing and Communications
Manager of the Company from August 1993 to April 1994.
Prior to joining the Company, Ms. Drescher served as
advertising and Public Relations Manager for
Barcu-Berry, Inc., a manufacturer of musical
equipment, from September 1990 to August 1993. Prior
thereto, Ms. Drescher served as Operations Manager of
BBE, Inc., an audio licensing company, from April 1984
to June 1990.
</TABLE>

INFORMATION ABOUT THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD

MEETINGS OF THE BOARD AND ITS COMMITTEES

The Board of Directors manages the business of the Company. It establishes
overall policies and standards for the Company and reviews the performance of
management. In addition, in June 1996 the Board established an Executive
Committee, an Audit Committee and a Compensation Committee whose functions are
briefly described below. The Board has not established a Nominating Committee.
The directors are kept informed of the Company's operations at meetings of the
Board and its committees through reports and analyses from, and discussions
with, management.

During the fiscal year ended December 31, 1996 (the "Fiscal Year" or
"Fiscal 1996"), the Board of Directors met on one occasion and took action by
Unanimous Written Consent on five occasions.

Executive Committee. At times when the Board of Directors is not in
session, the Executive Committee is empowered to exercise the authority of the
Board of Directors in the management of the business and affairs of the Company,
except as provided by the Bylaws or limited by the provisions of the Delaware
General Corporation Law. The members of the Executive Committee are Thomas C.K.
Yuen (Chairman) and Stephen V. Sedmak. During the Fiscal Year, the Executive
Committee met informally on a regular basis.

Audit Committee. The Audit Committee recommends to the Board of Directors
the appointment of the independent certified public accountants for the
following year and reviews the scope of the audit, the independent certified
public accountants' report and the auditors' comments relative to the adequacy
of the Company's system of internal controls and accounting policies. The
members of the Audit Committee are John AuYeung (Chairman), John Tu and Jeffrey
I. Scheinrock. During the Fiscal Year, the Audit Committee did not meet.

Compensation Committee. The Compensation Committee is comprised of all
non-employee directors, each of whom has never been an officer or employee of
the Company. The members of the Compensation Committee are John AuYeung
(Chairman) and John Tu. The Compensation Committee is responsible for making
determinations regarding salaries, bonuses and other compensation for the
Company's officers and making decisions with respect to awards, including but
not limited to stock option grants, to the Company's

8
<PAGE> 11

directors, officers, key employees, consultants and important business
associates pursuant to the 1993 Plan (hereinafter defined) and the Incentive
Plan (hereinafter defined). The Compensation Committee did not meet during the
Fiscal Year; however, it acted by Unanimous Written Consent on two occasions.

Each incumbent director attended at least 75% of the aggregate of (i) the
total number of meetings of the Board of Directors held during the Fiscal Year
(held during the period for which he has been a director) and (ii) the total
number of meetings held by all committees of the Board on which he served during
the Fiscal Year (held during the period that he served).

COMPENSATION OF DIRECTORS

Directors who are also employees of the Company are not paid any fees or
remuneration, as such, for service on the Board or on any Board Committee.

Cash Compensation. In Fiscal 1996, each non-employee director received
$500 for each Board meeting that he attended and $250 for each telephonic Board
meeting in which he participated. Each non-employee director also received $250
for each committee meeting that he attended in person or telephonically. In
addition, each Non-employee Director was reimbursed for reasonable travel and
other expenses incurred in connection with attending Board and committee
meetings.

Non-Employee Directors Nonqualified Stock Option Plan. Each non-employee
director is eligible to receive stock options under the SRS Labs, Inc. 1996
Non-Employee Directors Stock Option Plan (the "Non-Employee Directors Plan"), a
non-discretionary, formula stock option plan pursuant to which 120,000 shares of
Common Stock have been authorized for issuance. Each non-employee director of
the Company who was in office prior to the date of the closing of the Company's
Initial Public Offering (the "IPO") and remained in office as of such date
(namely, Messrs. AuYeung, Scheinrock and Tu) was granted an option to purchase
10,000 shares of Common Stock pursuant to the Non-Employee Directors Plan which
vested upon the date of grant. Each non-employee director who first becomes a
member of the Board after the date of closing of the IPO will be granted an
option to purchase 10,000 shares of Common Stock, subject to adjustment,
automatically upon election to the Board of Directors which will vest upon the
date of grant. On an ongoing basis, each non-employee director will be granted
an option to purchase 15,000 additional shares of Common Stock, subject to
adjustment, automatically effective the close of business on the date of each of
the Company's annual meeting of stockholders at which such non-employee director
is elected. The exercise price for all options granted under the Non-Employee
Directors Plan have been and will be based upon the fair market value of the
Common Stock on the date of grant. These options (other than the initial
options) will become exercisable in three equal annual installments beginning on
the date of grant. Upon the occurrence of certain events or series of events
which will or is likely to, if carried out, result in a change of control of the
Company, as defined in the Non-Employee Directors Stock Option Agreements, the
options shall, notwithstanding the three-year vesting period, become immediately
exercisable in full.

9
<PAGE> 12

COMPENSATION OF EXECUTIVE OFFICERS

The following table discloses compensation paid by the Company during
Fiscal 1996 to (i) the Company's Chief Executive Officer and (ii) the four most
highly-compensated executive officers, other than the Chief Executive Officer,
who were serving as executive officers at the end of Fiscal 1996. The Company
first became a reporting Company pursuant to Section 13(a) of the Securities
Exchange Act of 1934, as amended, during Fiscal 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
---------------------------- OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) (#) ($)
- -------------------------------------- ----- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas C.K. Yuen...................... 1996 $ 87,504 $ -- 112,762 $ --
Chairman of the Board and Chief
Executive Officer
Stephen V. Sedmak..................... 1996 135,581 32,115 137,315 1,919(3)
President and Chief Operating
Officer
Robert A. Veri(4)..................... 1996 49,805 -- -- --
General Manager
James S. Lucas........................ 1996 105,000 23,590 105,996 --
Vice President, Sales
Janet M. Biski........................ 1996 77,084 28,215 37,588 --
Vice President, Chief Financial
Officer, Treasurer and Secretary
</TABLE>

- ---------------
(1) A portion of the salary for Ms. Biski was deferred under the Company's
401(k) Plan.

(2) Portions of the bonuses for Messrs. Sedmak and Lucas and Ms. Biski were
deferred under the Company's Bonus Plan.

(3) Premiums for term life insurance paid by the Company on behalf of Mr.
Sedmak.

(4) Mr. Veri was hired by the Company in September 1996.

STOCK OPTIONS

Stock Option Grants. During Fiscal 1996, stock options were awarded to the
Company's Chief Executive Officer and the other Named Executive Officers in the
amounts and with the terms indicated in the following table:

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE
- ------------------------------------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Thomas C.K. Yuen.......................... 112,762(2)(4) 19.12% $8.00 08/15/2006
Steven V. Sedmak.......................... 137,315(2)(4) 23.28 8.00 08/15/2006
James S. Lucas............................ 105,996(3)(4) 17.97 8.00 08/15/2006
Janet M. Biski............................ 37,588(3)(4) 6.37 8.00 08/15/2006
</TABLE>

- ---------------
(1) All options were granted at the fair market value on the date of grant.

(2) Nonqualified stock options which vest pro rata over a four-year period from
the date of grant.

(3) Combination of nonqualified stock options and incentive stock options which
vest pro rata over a four-year period from the date of grant.

(Footnotes continued on the next page)

10
<PAGE> 13

(Footnotes continued from the preceding page)

(4) Upon a change in control of the Company (as defined in the stock option
agreements relating to the respective plans), the options shall,
notwithstanding the installment provisions, become immediately exercisable
in full.

Option Exercises/Fiscal Year End Value. During Fiscal 1996, none of the
Named Executive Officers, including the Chief Executive Officer, exercised any
stock options or SARs. The following table includes the number of shares of
Common Stock covered by both exercisable and unexercisable stock options as of
December 31, 1996 for the Named Executive Officers who hold options.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#) FY-END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas C.K. Yuen................................ 54,311 275,690 $ 286,337 $ 935,462
Stephen V. Sedmak............................... 214,706 225,294 1,727,943 558,913
James S. Lucas.................................. 188,998 121,202 1,586,774 149,433
Janet M. Biski.................................. 22,631 87,369 146,492 319,257
</TABLE>

- ---------------
(1) Represents the positive difference between the closing price of the Common
Stock on Tuesday, December 31, 1996 (the last stock trading day of the
Fiscal Year) and the exercise price of the options.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS

Each of Messrs. Yuen and Sedmak have entered into employment agreements
with the Company effective as of July 1, 1996. Such agreements provide for a
fixed base salary, with annual increases and performance bonuses at the
discretion of the Board of Directors. The respective agreements provide for base
salaries for (i) Mr. Yuen of $175,000 per year commencing July 1, 1996 and
$225,000 per year for the 12 month period commencing January 1, 1997; and (ii)
Mr. Sedmak of $145,000 per year commencing July 1, 1996 and $180,000 per year
for the 12 month period commencing January 1, 1997. Mr. Yuen's employment
agreement provides that he shall devote at least 40% of his time (based on an
average eight hour work day) to the business of the Company. Mr. Yuen is
permitted to directly engage in other business activities provided such
activities are not competitive with the Company. The employment agreements with
both Mr. Yuen and Mr. Sedmak may be terminated by the Company for cause which is
defined as (i) the failure to follow the reasonable instructions of the Board of
Directors, (ii) the material breach of any term of the employment agreement and
failure to cure such breach within ten (10) days after written notice thereof
from the Company, or (iii) the misappropriation of assets of the Company or any
subsidiary by the employee resulting in a material loss to such entity. The
employment agreements may be terminated by the employee upon sixty (60) days
prior written notice. The initial term of the employment agreements are two (2)
years for each of Messrs. Yuen and Sedmak. The employment agreements
automatically renew for additional one (1) year periods unless prior notice of
termination is given by either the Company or the employee. In the event that
the Company either terminates the employment agreement at the end of the current
term, or terminates the employment agreement during the current term without
cause, the employee is entitled to receive his salary and benefits for the
remainder of the current term of the employment agreement plus an additional
period of twelve months. During the period, the employee is obligated to provide
advisory services and may not compete with the Company. The employment
agreements also generally provide the employee with compensation for the
remainder of the current term plus an additional 12 months and certain other
benefits and for the acceleration of the date of exercisability and the date of
vesting for outstanding stock options if the employee is terminated or
terminates his employment for certain enumerated reasons within 90 days before
or one year after a change in control in the Company, as defined in the
employment agreements.

In addition to the agreements with Messrs. Yuen and Sedmak, certain of the
Company's plans contain termination or change of control provisions.

11
<PAGE> 14

TRANSACTIONS WITH MANAGEMENT AND OTHERS

The Company was incorporated on June 23, 1993 and, in connection with its
initial capitalization, issued an aggregate of 2,389,617 shares of Common Stock
to its founders, Stephen V. Sedmak, Walter W. Cruttenden III and James S. Lucas,
each of whom are executive officers, directors and/or principal stockholders of
the Company, for the following consideration: (i) 724,128 shares were issued to
each of Messrs. Sedmak and Cruttenden for $10,000 each, (ii) 72,412 shares were
issued to each of Messrs. Sedmak, Cruttenden and Lucas in exchange for services
previously rendered to the Company in connection with the acquisition of certain
assets from Hughes Aircraft Company ("Hughes Aircraft") , and (iii) 724,126
shares were issued to Mr. Cruttenden in exchange for the pledge of certain
securities to Hughes Aircraft to secure the Company's obligations under the
asset purchase agreement with Hughes Aircraft.

On June 30, 1993, Messrs. Sedmak and Cruttenden each loaned the Company
$90,000 for working capital and other general corporate purposes. Both of the
loans were unsecured and accrued interest at the rate of 10% per annum. Both
loans were repaid in full by the Company on January 27, 1994.

On August 31, 1993, the Company (i) issued 362,064 shares of Common Stock
to Frank W. Cutler for $100,000, and (ii) granted an option to purchase an
additional 362,064 shares of Common Stock to Mr. Cutler at an exercise price of
$0.28 per share. In connection with this transaction, Mr. Cutler was elected to
the Board of Directors. Mr. Cutler is a principal stockholder and a former
director of the Company. On January 17, 1996, such option was exercised in full.

On January 27, 1994, the Company issued 2,389,621 shares of Common Stock
and certain stockholders, including Messrs. Cruttenden, Lucas and Sedmak, sold
an aggregate of 724,128 shares of Common Stock to the Thomas Yuen Family Trust,
the beneficiaries of which are Thomas C.K. Yuen and Misako Yuen, for $1,710,000
and $1,000,000, respectively. In connection with this transaction, Mr. and Mrs.
Yuen became directors and principal stockholders of the Company, and Mr. Yuen
also became an executive officer of the Company.

On June 1, 1994, the Company entered into a lease (the "Lease") with
Daimler Commerce Partners, L.P. (the "Partnership") with respect to the
Company's headquarters facility. The general partner of the Partnership is
Conifer Investments, Inc. ("Conifer"), the sole shareholder of Conifer is the
Thomas Yuen Family Trust, and the executive officers of Conifer include Mr. and
Mrs. Yuen. The headquarters facility consists of 11,700 square feet of office
and warehouse space. The Lease term commenced on June 1, 1994, and will expire
on May 31, 1997. Rent for the first year was 45 cents per square foot per month
(an initial annual rent of $63,180) plus common area expenses, real property
taxes, utilities, insurance premiums, and maintenance. Pursuant to the Lease,
the rent was increased by 4% on each of June 1, 1995 and June 1, 1996. Pursuant
to the Lease, the Company paid the Partnership rent of $52,463 during the period
ended December 31, 1994, $63,180 during the fiscal year ended December 31, 1995
and $63,430 during the fiscal year ended December 31, 1996.

On September 14, 1994, the Thomas Yuen Family Trust entered into a First
Amendment to Security Agreement with Hughes Aircraft and certain other parties
whereby the Thomas Yuen Family Trust guaranteed certain deferred payments,
certain guaranteed chip sales gross profits, and royalties on certain product
sales owed by the Company to Hughes Aircraft in connection with the purchase of
the SRS technology and other technologies. The guarantee by the Thomas Yuen
Family Trust, in the form of a pledge of stock (other than Common Stock),
replaced a similar guarantee by Cruttenden & Company and Walter W. Cruttenden
III.

On October 20, 1994, the Company entered into a license agreement (the
"NuReality License") with NuReality (dba for Atlantis Computers, Inc.), whereby
the Company licensed the SRS technology to NuReality for use with multimedia
products and cartridge-based game accessories. The sole stockholder of NuReality
is the Thomas Yuen Family Trust, and the executive officers of NuReality include
Mr. and Mrs. Yuen. Royalties are payable under the NuReality License in the
amount of $3.00 per unit for the first 100,000 units sold, $2.00 per unit for
between 100,001 and 200,000 units sold, $1.75 per unit for between 200,001 and
300,000 units sold, and $1.50 per unit for 300,001 or more units sold. Pursuant
to the NuReality

12
<PAGE> 15

License, NuReality paid the Company royalties of $70,380 during the fiscal year
ended December 31, 1994, $71,217 during the fiscal year ended December 31, 1995
and $28,449 during the fiscal year ended December 31, 1996.

On January 9, 1995, the Company entered into a stock purchase agreement
whereby Packard Bell Electronics, Inc. ("Packard Bell") purchased 572,061 shares
of Common Stock of the Company for $1,500,000. The Company and Packard Bell also
entered into a stock option agreement (the "Packard Bell Option") whereby
Packard Bell was granted an option to purchase 382,104 shares of Common Stock at
an exercise price of $4.14 per share. The option vested on January 9, 1995 and
the option expires on May 9, 2001. Packard Bell is a principal stockholder of
the Company. In connection with the stock purchase by Packard Bell, the Company
entered into a license agreement (the "Packard Bell License") with Packard Bell,
whereby the Company licensed the SRS technology to Packard Bell for use in its
multimedia computers. In connection with such stock purchase, Packard Bell also
entered into a shareholders' agreement which provides, among other things, that
Packard Bell has certain rights with respect to the registration of the shares
of Common Stock purchased by Packard Bell.

No royalties were payable under the Packard Bell License in 1995, and a
fixed quarterly royalty payment of $375,000 is due in advance under the Packard
Bell License for each quarter beginning January 1, 1996 that Packard Bell
desires to use the licensed rights. For the fiscal year ended December 31, 1996,
Packard Bell paid the Company royalties of $1,500,000. Mr. Scheinrock, an
incumbent director and a nominee for election as a Class I Director at the
Annual Meeting, served as an executive officer of Packard Bell from 1989 to June
1996.

On April 21, 1995, the Company issued 285,668 shares of Common Stock to
John Tu, a director of the Company, for $1,183,500.

Mr. Cruttenden, a principal stockholder of the Company, is also a principal
of Cruttenden Roth Incorporated, an investment banking firm. Cruttenden Roth
Incorporated has not performed any services for the Company since its inception,
other than participating as one of the co-managing Underwriters for the
Company's initial public offering which was declared effective by the SEC on
August 8, 1996.

Thomas C.K. Yuen and Misako Yuen, as co-trustees of the Thomas Yuen Family
Trust, Stephen V. Sedmak and Walter W. Cruttenden III have entered into an
agreement with the Company which grants the Company the right to require such
persons to divest stock on a pro rata basis to an aggregate level to ensure that
more than 50% in value of Common Stock is owned by more than five individuals at
any time the Board of Directors deems such action to be in the best interests of
the Company to avoid personal holding company status. Failure to divest such
shares within 15 days of being notified to do so by the Company will give the
Company an assignable option to purchase such shares at the then prevailing
market prices.

In the opinion of management, the terms of the above-described agreements
are fair and reasonable and as favorable to the Company as those which could
have been obtained from unrelated third parties at the time of their execution.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten-percent stockholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1996, its
officers, directors and greater than ten percent beneficial owners complied with
all Section 16(a) filing requirements.

13
<PAGE> 16

APPROVAL OF THE AMENDED AND RESTATED
1996 LONG-TERM INCENTIVE PLAN
(PROPOSAL 2)

BACKGROUND

The Board of Directors has adopted, and the stockholders have approved the
SRS Labs, Inc. 1996 Long-Term Incentive Plan (the "Incentive Plan"), a
discretionary incentive plan which affords the Compensation Committee of the
Company's Board of Directors the ability to design compensatory awards to
attract and retain officers (including directors who also are officers of the
Company), other key employees and consultants of the Company. Currently, the
number of shares of Common Stock which may be issued or transferred (i) upon the
exercise of Option Rights or Appreciation Rights, (ii) as Restricted Shares and
released from all substantial risks of forfeiture, (iii) as Deferred Shares,
(iv) in payment of Performance Shares or Performance Units that have been
earned, or (v) in payment of dividend equivalents paid with respect to awards
made under this Plan, shall not exceed 1,000,000 (subject to adjustment as
provided in the Incentive Plan). As of the Record Date, Option Rights to
purchase 912,301 shares of Common Stock have been awarded, leaving only 87,699
shares of Common Stock remaining to be issued or transferred pursuant to awards
made under the Incentive Plan.

In addition to the Incentive Plan, the Company maintains the SRS Labs, Inc.
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan -- 1993, a discretionary plan authorizing the grant of awards to officers,
directors, key employees and consultants (the "1993 Plan"), Stock Option
Agreements dated January 19, 1994 between the Company and Stephen V. Sedmak and
James S. Lucas (the "Sedmak Plan" and the "Lucas Plan") and the SRS Labs, Inc.
1996 Nonemployee Directors Stock Option Plan, a non-discretionary, formula stock
option plan in which only non-employee directors are eligible to participate.
Under the 1993 Plan, 1,448,256 shares of common stock have been authorized for
issuance, and options to purchase 801,971 shares have been granted and reserved
for issuance. At this time, the Board has determined not to grant awards under
the 1993 Plan which exceed the 801,971 shares of Common Stock already granted.
Under the Sedmak Plan and Lucas Plan, the Company has reserved for issuance
181,032 shares of Common Stock under each of such Plans, and no other shares are
authorized for issuance under such Plans (the Incentive Plan, the 1993 Plan, the
Sedmak Plan and the Lucas Plan are collectively referred to as the
"Discretionary Plans"). Accordingly, as of the Record Date, approximately 87,699
shares of Common Stock remained available for grant under the Discretionary
Plans. The Board of Directors continues to believe that such a compensatory
award program is an important factor in attracting, retaining and motivating
officers, other key employees and consultants of the Company and has recognized
the need for an additional number of shares of Common Stock which may be issued
or transferred in connection with awards made under the Incentive Plan, the only
current Discretionary Plan under which new awards are being made.

In view of the foregoing, the Compensation Committee and the Board of
Directors believe that it is appropriate to increase the number of shares of
Common Stock which may be issued or transferred pursuant to the Incentive Plan
and, at the same time, make certain conforming and "clean-up" changes to the
Incentive Plan in the form of an amendment and restatement to the Incentive Plan
to be presented to the stockholders. Accordingly, the Compensation Committee and
the Board of Directors have adopted, subject to stockholder approval, the SRS
Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan (the "Amended and
Restated Incentive Plan"). The principal difference between the Amended and
Restated Incentive Plan and the Incentive Plan is that under the Amended and
Restated Incentive Plan the number of shares which may be issued or transferred
pursuant to awards granted thereunder has been increased by 1,000,000 shares of
Common Stock from 1,000,000 to 2,000,000 shares of Common Stock. If the proposal
is not approved by the stockholders at the Annual Meeting, the Incentive Plan
will remain in effect; however, as stated above, only 87,699 shares of Common
Stock remain available for grant as of the Record Date.

The Company has registered with the U.S. Securities and Exchange Commission
(the "Commission") on a Form S-8 Registration Statement the initial 1,000,000
shares of Common Stock issuable under the Incentive Plan, and the Board intends
to cause the additional shares of Common Stock to be issued under the Amended
and Restated Incentive Plan to be registered on a Form S-8 Registration
Statement to be filed with the Commission at the Company's expense.

14
<PAGE> 17

The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the
Internal Revenue Code of 1968, as amended. Subject to certain exceptions,
Section 162(m) generally limits the corporate income tax deductions to
$1,000,000 annually for compensation paid to each of the Chief Executive Officer
and the other four highest paid executive officers of the Company. Currently,
the performance-based compensation paid by the Company pursuant to the
Discretionary Plans (including the Incentive Plan) is excluded from this
$1,000,000 limitation. If the Amended and Restated Incentive Plan is approved by
the stockholders, such approval will constitute approval of the
performance-based compensation payable under the Amended and Restated Incentive
Plan under Section 162(m) and allow the Company to rely upon the exception under
Section 162(m) for performance-based compensation awarded under the Amended and
Restated Incentive Plan.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR APPROVAL OF THE AMENDED AND RESTATED INCENTIVE PLAN. THE AFFIRMATIVE VOTE OF
THE HOLDERS OF A MAJORITY OF THE SHARES OF COMMON STOCK PRESENT IN PERSON OR
REPRESENTED BY PROXY AT THE ANNUAL MEETING AND ENTITLED TO VOTE ON THE PROPOSAL
IS REQUIRED FOR APPROVAL OF THIS PROPOSAL.

SUMMARY OF THE PLAN

The Amended and Restated Incentive Plan is set forth in full as Appendix
"A" to this Proxy Statement and is summarized below. The following summary is
not intended to be complete and reference should be made to Appendix "A" for a
complete statement of the terms and provisions of the Amended and Restated
Incentive Plan. Capitalized terms used in this Summary and not otherwise defined
shall have the meanings ascribed to such terms in the Amended and Restated
Incentive Plan.

Plan Limits

The maximum number of shares of Common Stock that may be issued or
transferred (i) upon the exercise of Option Rights or Appreciation Rights, (ii)
as Restricted Shares and released from substantial risk of forfeiture, (iii) as
Deferred Shares, (iv) in payment of Performance Shares or Performance Units that
have been earned, or (vi) in payment of dividend equivalents paid with respect
to awards made under the Amended and Restated Incentive Plan, may not in the
aggregate exceed 2,000,000 shares of Common Stock, which may be shares of
original issuance or treasury shares or a combination thereof. These limits are
subject to adjustments as provided in the Amended and Restated Incentive Plan
for stock splits, stock dividends, recapitalizations and other similar events.

Upon the payment of any option price by the transfer to the Company of
Common Stock or upon related satisfaction of tax withholding obligations or any
other payment made or benefit realized under the Amended and Restated Incentive
Plan by the transfer or relinquishment of Common Stock, there shall be deemed to
have been issued or transferred only the net number of shares actually issued or
transferred by the Company. Upon the payment in cash of a benefit provided by
any award under the Amended and Restated Incentive Plan, any shares of Common
Stock that were covered by such award shall again be available for issuance or
transfer under the Amended and Restated Incentive Plan. If any award terminates,
expires or is cancelled with respect to any shares of Common Stock, new awards
may thereafter be granted covering such Common Stock.

No participant may be granted Option Rights for more than 750,000 shares of
Common Stock during any three consecutive calendar years, subject to adjustment
pursuant to the Amended and Restated Incentive Plan. No participant may receive
in any one calendar year awards of Performance Shares and Performance Units
having an aggregate value as of their respective dates of grant in excess of
$750,000.

As of the Record Date, the fair market value of a share of Common Stock was
$9.875 share.

Option Rights

Option Rights provide the right to purchase shares of the Company's Common
Stock at a price not less than its fair market value on the date of the grant
with respect to Incentive Options and not less than eighty-five percent (85%) of
its fair market value with respect to other options. The option price is payable
in cash, nonforfeitable, unrestricted Common Stock already owned by the
optionee, any other legal consideration that the Committee deems appropriate,
including, without limitation, promissory notes, or any combination of

15
<PAGE> 18

these methods. Any grant of Option Rights may provide for the deferred payment
of the option price on the sale of some or all of the shares obtained from the
exercise. Any grant may provide for the automatic grant of additional Option
Rights to an optionee upon the exercise of Option Rights using Common Stock as
payment.

Option Rights granted under the Amended and Restated Incentive Plan may be
Option Rights that are intended to qualify as incentive stock options ("ISO's")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or Option Rights that are not intended to so qualify or
combinations thereof. Except in the case of grants of ISO's, the Committee may
provide for the payment to the optionee of dividend equivalents in the form of
cash or Common Stock paid on a current, deferred or contingent basis or may
provide that the equivalents be credited against the option price.

No Option Rights may be exercised more than ten years from the date of
grant. Each grant must specify the period of continuous employment that is
necessary before the Option Rights become exercisable and may provide for the
earlier exercisability of the Option Rights in the event of retirement, death or
disability of the participant or a change in control of the Company. Any grant
of Option Rights may specify Management Objectives (as described below) that
must be achieved as a condition to exercise such rights.

Appreciation Rights

Appreciation Rights represent the right to receive from the Company an
amount, determined by the Committee and expressed as a percentage not exceeding
100 percent, of the difference between the base price established for such
Rights and the market value of the Common Stock on the date the rights are
exercised. Appreciation Rights can be tandem (granted with Option Rights to
provide an alternative to exercise of the Option Rights) or free-standing.
Tandem Appreciation Rights may only be exercised at a time when the related
Option Right is exercisable and the spread is positive, and requires that the
related Option Right be surrendered for cancellation. Free-standing Appreciation
Rights must have a base price per Right that is not less than the fair market
value of the Common Stock on the date of grant, must specify the period of
continuous employment that is necessary before such Appreciation Rights become
exercisable (except that they may provide for the earlier exercise of the
Appreciation Rights in the event of retirement, death or disability of the
participant or a change in control of the Company) and may not be exercisable
more than ten years from the date of grant. Any grant of Appreciation Rights may
specify that the amount payable by the Company on exercise of an Appreciation
Right may be paid in cash, in Common Stock or in any combination thereof, and
may either grant to the recipient or retain in the Committee the right to elect
among those alternatives. Any grant of Appreciation Rights may provide with
respect to any grant of Appreciation Rights for the payment of dividend
equivalents in the form of cash or Common Stock paid on a current, deferred or
contingent basis. Any grant of Appreciation Rights may specify Management
Objectives that must be achieved as a condition to exercise such rights.

Restricted Shares

Restricted Shares constitute an immediate transfer of ownership to the
recipient in consideration of the performance of services. The participant has
dividend and voting rights on such shares. Restricted Shares must be subject to
a "substantial risk of forfeiture" of the shares, within the meaning of Section
83 of the Code for a period to be determined by the Committee on the date of the
grant. In order to enforce these forfeiture provisions, the transferability of
Restricted Shares will be prohibited or restricted in the manner prescribed by
the Committee on the date of grant for the period during which such forfeiture
provisions are to continue. The Committee may provide for the earlier
termination of the forfeiture provisions in the event of retirement, death or
disability of the participant or a change in control of the Company.

Any grant of Restricted Shares may specify Management Objectives which, if
achieved, will result in termination or early termination of the restrictions
applicable to such shares. Any such grant must also specify in respect of such
specified Management Objectives, a minimum acceptable level of achievement and
must set forth a formula for determining the number of Restricted Shares on
which restrictions will terminate if performance is at or above the minimum
level, but below full achievement of the specified Management Objectives.

16
<PAGE> 19

Deferred Shares

Deferred Shares constitute an agreement to issue shares to the recipient in
the future in consideration of the performance of services, but subject to the
fulfillment of such conditions as the Committee may specify. The participant has
no right to transfer any rights under his or her award and no right to vote the
Deferred Shares. The Committee may authorize the payment of dividend equivalents
on the Deferred Shares, in cash or Common Stock, on a current, deferred or
contingent basis. The Committee must fix a deferral period at the time of grant,
and may provide for the earlier termination of the deferral period in the event
of retirement, death or disability of the participant or a change in control of
the Company.

Performance Shares and Performance Units

A Performance Share is the equivalent of one share of Common Stock and a
Performance Unit is the equivalent of $100.00. The participant will be given one
or more Management Objectives to meet within a specified period (the
"Performance Period"). The specified Performance Period may be subject to
earlier termination in the event of retirement, death or disability of the
participant or a change in control of the Company. A minimum level of acceptable
achievement will also be established by the Committee. If by the end of the
Performance Period, the participant has achieved the specified Management
Objectives, the participant will be deemed to have fully earned the Performance
Shares or Performance Units. If the participant has not achieved the Management
Objectives, but has attained or exceeded the predetermined minimum level of
acceptable achievement, the participant will be deemed to have partly earned the
Performance Shares or Performance Units in accordance with a predetermined
formula. To the extent earned, the Performance Shares or Performance Units will
be paid to the participant at the time and in the manner determined by the
Committee in cash, Common Stock or any combination thereof. The grant may
provide for the payment of dividend equivalents thereon in cash or in Common
Stock on a current, deferred or contingent basis.

Management Objectives

The Amended and Restated Incentive Plan requires that the Committee
establish "Management Objectives" for purposes of Performance Shares and
Performance Units. When so determined by the Committee, Option Rights,
Appreciation Rights, Restricted Shares and dividend equivalents may also specify
Management Objectives. Management Objectives may be described in terms of either
Company-wide objectives or objectives that are related to the performance of the
individual participant or subsidiary, division, department or function within
the Company or a subsidiary in which the participant is employed. Management
Objectives applicable to any award to a participant who is, or is determined by
the Committee likely to become, a "covered employee" within the meaning of
Section 162(m)(3) of the Code shall be limited to specified levels of or growth
in (i) return on invested capital, (ii) earnings per share, (iii) return on
assets, (iv) return on equity, (v) stockholder return, (vi) sales growth, (vii)
productivity improvement, and/or (viii) net income. Except in the case of such a
covered employee, if the Committee determines that a change in the business,
operations, corporate structure or capital structure of the Company, or the
manner in which it conducts its business, or other events or circumstances
render the Management Objectives unsuitable, the Committee may modify such
Management Objectives, in whole or in part, as the Committee deems appropriate
and equitable.

Administration

The Compensation Committee of the Board of Directors will administer and
interpret the Amended and Restated Incentive Plan. The Committee is composed of
not less than two directors, each of whom must be a "non-employee director"
within the meaning of Rule 16b-3 and an "outside director" within the meaning of
Section 162(m) of the Code.

Eligibility

Officers (including officers who are members of the Board of Directors) and
key employees of, and consultants to, the Company and its subsidiaries, as
determined by the Committee, may be selected to receive

17
<PAGE> 20

benefits under the Amended and Restated Incentive Plan. As of the Record Date,
approximately 5 officers, 12 key employees and 3 consultants of the Company were
eligible to participate in the Amended and Restated Incentive Plan.

Transferability

Option Rights and other derivative securities awarded under the Amended and
Restated Incentive Plan will not be transferable by a participant other than by
will or the laws of descent and distribution or, other than an ISO, a qualified
domestic relations order. Any award made under the Amended and Restated
Incentive Plan may provide that any Common Stock issued or transferred as a
result of the award will be subject to further restrictions upon transfer.

Adjustments

The Committee may make or provide for adjustment in the number of shares
covered by outstanding Option Rights, Appreciation Rights, Deferred Shares and
Performance Shares, the prices per share applicable thereto and kind of shares
(including shares of another issuer), as the Committee in its sole discretion
may in good faith determine to be equitably required in order to prevent
dilution or enlargement of the rights of participants that would otherwise
result from (i) any stock dividend, stock split, combination of shares,
recapitalization or other change in the capital structure of the Company, (ii)
any merger, consolidation, spin-off, spin-out, split-off, split-up,
reorganization, partial or complete liquidation or other distribution of assets,
issuance of rights or warrants to purchase securities, or (iii) any other
corporate transaction or event having an effect similar to any of the foregoing.
In the event of any such transaction or event, the Committee may provide in
substitution for any or all of the outstanding awards under the Amended and
Restated Incentive Plan such alternative consideration as it may in good faith
determine to be equitable in the circumstances and may require in connection
therewith the surrender of all awards so replaced. Moreover, the Committee may
on or after the Date of Grant provide in the agreement evidencing any award
under the Amended and Restated Incentive Plan that the holder of the award may
elect to receive an equivalent award in respect of securities of the surviving
entity of any merger, consolidation or other transaction or event having a
similar effect, or the Committee may provide that the holder will automatically
be entitled to receive such an equivalent award. In any case, such substitution
of securities shall not require the consent of any person who is granted awards
pursuant to the Amended and Restated Incentive Plan.

Amendments and Miscellaneous

The Amended and Restated Incentive Plan may be amended by the Committee or,
if there shall be no Committee as contemplated in the Amended and Restated
Incentive Plan, the Company's Board of Directors, so long as the amendments do
not increase the maximum number of shares specified in Section 3(a) of the
Amended and Restated Incentive Plan (except as expressly authorized by the
Amended and Restated Incentive Plan) or cause Rule 16b-3 to become inapplicable
to the Amended and Restated Incentive Plan. However, the Committee, or the Board
in the absence of such Committee, may amend the Amended and Restated Incentive
Plan to eliminate provisions which are no longer necessary as a result of
changes in tax or securities laws and regulations, or in the interpretation of
such laws and regulations. The Incentive Plan provides that only the Committee
(with no specific reference to the Board) has the authority to amend the
Incentive Plan.

Where the Committee has established conditions to the exercisability or
retention of certain awards, the Amended and Restated Incentive Plan allows the
Committee to take action in its sole discretion subsequently to equitably adjust
such conditions in certain circumstances, including in the case of death,
disability or retirement.

With the concurrence of the affected Optionee, the Committee may cancel any
agreement evidencing Option Rights or any other award granted under the Amended
and Restated Incentive Plan. In the event of such cancellation, the Committee
may authorize the granting of new Option Rights or other awards, which may or
may not cover the same number of shares of Common Stock that had been the
subject of the prior award, at such Option Price and subject to such other
terms, conditions and discretions as would have been applicable under the
Amended and Restated Incentive Plan had the cancelled Option Rights or other
awards not been granted.

FEDERAL INCOME TAX CONSEQUENCES

The following is a brief summary of certain of the Federal income tax
consequences of certain transactions under the Amended and Restated Incentive
Plan. This summary is not intended to be complete and does not describe state or
local tax consequences.

18
<PAGE> 21

Tax Consequences to Participants

Nonqualified Stock Options. In general, (i) no income will be recognized
by an optionee at the time a nonqualified Option Right is granted; (ii) at the
time of exercise of a nonqualified Option Right ordinary income will be
recognized by the optionee in an amount equal to the difference between the
option price paid for the shares and the fair market value of the shares, if
unrestricted, on the date of exercise; and (iii) at the time of sale of shares
acquired pursuant to the exercise of a nonqualified Option Right appreciation
(or depreciation) in value of the shares after the date of exercise will be
treated as either short-term or long-term capital gain (or loss) depending on
how long the shares have been held.

Incentive Stock Options. No income generally will be recognized by an
optionee upon the grant or exercise of an ISO. If shares of Common Stock are
issued to the optionee pursuant to the exercise of an ISO, and if the optionee
satisfies certain employment and holding period requirements, then upon sale of
such shares, any amount realized in excess of the option price will be taxed to
the optionee as a long-term capital gain and any loss sustained will be a
long-term capital loss. To satisfy the employment requirement, the optionee must
exercise the ISO not later than three months after he or she ceases to be an
employee of the Company (or one year if he or she is disabled). To satisfy the
holding period requirement, the optionee must not dispose of the shares issued
pursuant to the exercise of the ISO within two years after the date of grant of
the ISO and within one year after the transfer of such shares to the optionee.

If shares of Common Stock acquired upon the timely exercise of an ISO are
disposed of prior to the expiration of either holding period described above,
the optionee generally will recognize ordinary income in the year of disposition
in an amount equal to the excess (if any) of the fair market value of such
shares at the time of exercise (or, if less, the amount realized on the
disposition of such shares if a sale or exchange) over the option price paid for
such shares. Any further gain (or loss) realized by the participant generally
will be taxed as short-term or long-term capital gain (or loss) depending on the
holding period.

Appreciation Rights. No income will be recognized by a participant in
connection with the grant of a tandem Appreciation Right or a free-standing
Appreciation Right. When the Appreciation Right is exercised, the participant
normally will be required to include as taxable ordinary income in the year of
exercise an amount equal to the amount of cash received and the fair market
value of any unrestricted shares of Common Stock received on the exercise.

Restricted Shares. The recipient of Restricted Shares generally will be
subject to tax at ordinary income rates on the fair market value of the
Restricted Shares (reduced by any amount paid by the participant for such
Restricted Shares) at such time as the shares are no longer subject to
forfeiture or restrictions on transfer for purposes of Section 83 of the Code
("Restrictions"). However, a recipient who so elects under Section 83(b) of the
Code within 30 days of the date of transfer of the shares will have taxable
ordinary income on the date of transfer of the shares equal to the excess of the
fair market value of such shares (determined without regard to the Restrictions)
over the purchase price, if any, of such Restricted Shares. If a Section 83(b)
election has not been made, any dividends received with respect to Restricted
Shares that are subject to the Restrictions generally will be treated as
compensation that is taxable as ordinary income to the participant.

Deferred Shares. No income generally will be recognized upon the award of
Deferred Shares. The recipient of a Deferred Share award generally will be
subject to tax at ordinary income rates on the fair market value of unrestricted
shares of Common Stock on the date that such shares are transferred to the
participant under the award (reduced by any amount paid by the participant for
such Deferred Shares), and the capital gains/loss holding period for such shares
also will commence on such date.

Performance Shares and Performance Units. No income generally will be
recognized upon the grant of Performance Shares or Performance Units. Upon
payment in respect of the earn-out of Performance Shares or Performance Units,
the recipient generally will be required to include as taxable ordinary income
in the year of receipt an amount equal to the amount of cash received and the
fair market value of any nonrestricted shares of Common Stock received.

Special Rules Applicable to Officers and Directors. In limited
circumstances where the sale of stock received as a result of a grant or award
could subject an officer or Director to suit under Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the tax
consequences to the officer or Director may differ from the tax consequences
described above. In these circumstances, unless a special election under Section
83(b) of the Code has been made, the principal difference (in cases where the
officer or Director would otherwise be currently taxed upon his receipt of the
stock) usually will be to postpone valuation and taxation of the stock received
so long as the sale of the stock received could subject the officer or Director
to suit under Section 16(b) of the Exchange Act, but no longer than six months.

19
<PAGE> 22

Tax Consequences to the Company or Subsidiary

To the extent that a participant recognizes ordinary income in the
circumstances described above, the Company or subsidiary for which the
participant performs services will be entitled to a corresponding deduction
provided that, among other things, the income meets the test of reasonableness,
is an ordinary and necessary business expense, is not an "excess parachute
payment" within the meaning of Section 280G of the Code and is not disallowed by
the $1 million limitation on certain executive compensation.

NEW PLAN BENEFITS

The benefits or amounts to be awarded in the future under the Amended and
Restated Incentive Plan are not determinable at this time and it is not possible
to determine the benefits or amounts which would have been received or allocated
to eligible participants under the Amended and Restated Incentive Plan, other
than those actually received under the Incentive Plan during Fiscal 1996 and
during the current fiscal year ending December 31, 1997 as of the Record Date.
Mr. Jeffrey I. Scheinrock, a current non-employee director of the Company and a
nominee for election as a Class I Director, and John AuYeung and John Tu, other
non-employee directors of the Company are not eligible to participate in the
Incentive Plan or the Amended and Restated Incentive Plan. The table below
indicates the Option Rights granted under the Incentive Plan in Fiscal 1996 and
in January and March 1997 utilizing shares of Common Stock already reserved for
issuance or transfer under the Incentive Plan.

<TABLE>
<CAPTION>
POTENTIAL
POTENTIAL REALIZABLE REALIZABLE VALUE AT
VALUE AT ASSUMED ASSUMED ANNUAL
OPTION ANNUAL RATES OF STOCK OPTION RATES OF STOCK
RIGHTS PRICE APPRECIATION RIGHTS PRICE APPRECIATION
GRANTED IN FOR OPTION TERM(1) GRANTED IN FOR OPTION TERM(1)
FISCAL EXERCISE --------------------- FISCAL EXERCISE -------------------
NAME AND POSITION 1996 PRICE 5% 10% 1997 PRICE 5% 10%
- ----------------------- ---------- -------- -------- ---------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas C.K. Yuen....... 112,762 $ 8.00 $567,323 $1,437,126 15,000 $7.625 $71,906 $182,210
Chairman of the Board
and Chief Executive
Officer
Stephen V. Sedmak...... 137,315 8.00 690,620 1,750,048 15,000 7.625 71,906 182,210
President and Chief
Operating Officer
Robert A. Veri......... -- -- -- -- 65,000 7.625 311,591 789,578
General Manager
James S. Lucas......... 105,996 8.00 533,102 1,350,895 7,500 7.625 35,953 91,105
Vice President, Sales
Janet M. Biski......... 37,588 8.00 189,047 479,050 15,000 7.625 71,906 182,210
Vice President, Chief
Financial Officer,
Treasurer and
Secretary
All current Executive
Officers as a Group
(5 persons).......... 393,661 8.00 1,979,901 5,017,120 117,500 7.625 563,260 1,427,315
All current Directors
who are not Executive
Officers (3
persons)............. -- -- -- -- -- -- -- --
All employees,
including all current
officers who are not
executive officers,
as a group (12
persons)............. 188,914 8.00 950,135 2,407,666 169,000 8.35(2) 887,165 2,248,098
</TABLE>

- ---------------
(1) In accordance with the rules of the U.S. Securities and Exchange Commission,
shown are the hypothetical gains or "option spreads" that would exist for
the respective options. These gains are based

(Footnotes continued on the next page)

20
<PAGE> 23

(Footnotes continued from the preceeding page)

on assumed rates of annual compounded stock price appreciation of 5% and 10%
from the date the option was granted over the full term. The full term for
each of the respective options is ten years from the date of grant. The 5%
and 10% assumed rates of appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection of
future increases in the price of its Common Stock.

(2) The price shown is the weighted average exercise price based on 46,500
options granted with an exercise price of $7.625 per share and 122,500
options granted with an exercise price of $8.625 per share.

RELATIONSHIP OF THE COMPANY WITH INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors selected the firm of Deloitte & Touche LLP
("Deloitte & Touche"), independent certified public accountants, as auditors for
Fiscal 1996, and upon the recommendation of the Audit Committee of the Board of
Directors, have selected such firm to act as auditors for the fiscal year ending
December 31, 1997. During Fiscal 1996, Deloitte & Touche also were engaged by
the Company to provide certain consulting services. Representatives of the firm
are expected to be present at the Annual Meeting and will have the opportunity
to make a statement if they desire to do so and are expected to be available to
respond to appropriate questions.

STOCKHOLDER PROPOSALS

Stockholders of the Company who intend to submit proposals to the Company's
stockholders at the annual meeting of stockholders to be held in 1998 must
submit such proposals to the Company no later than December 31, 1997 in order
for them to be included in the Company's proxy materials for such meeting.
Stockholder proposals should be directed to the attention of the Secretary of
the Company at the address of the Company set forth on the first page of this
Proxy Statement.

ANNUAL REPORT

A COPY OF THE ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR (THE "FORM
10-KSB"), INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL STATEMENT
SCHEDULES REQUIRED TO BE FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 13A-1 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, MAY
BE OBTAINED BY EACH STOCKHOLDER OF RECORD (AND EACH BENEFICIAL HOLDER) ON THE
RECORD DATE, WITHOUT CHARGE. COPIES OF EXHIBITS TO THE FORM 10-KSB ARE
AVAILABLE, BUT A REASONABLE FEE WILL BE CHARGED TO A STOCKHOLDER REQUESTING
EXHIBITS. ALL SUCH REQUESTS SHOULD BE MADE IN WRITING TO THE COMPANY AT THE
ADDRESS OF THE COMPANY SET FORTH ON THE FIRST PAGE OF THIS PROXY STATEMENT,
ATTENTION: MS. JANET M. BISKI, VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
TREASURER AND SECRETARY.

By Order of the Board of Directors,

/s/ Janet M. Biski
-------------------------
Janet M. Biski
Secretary

Santa Ana, California
April 30, 1997

21
<PAGE> 24

APPENDIX A

SRS LABS, INC.

AMENDED AND RESTATED
1996 LONG-TERM INCENTIVE PLAN

1. PURPOSE. The purpose of this Plan is to attract and retain directors,
officers, key employees and consultants for SRS Labs, Inc., a Delaware
corporation (the "Corporation"), and its Subsidiaries and to provide such
persons with incentives and rewards for superior performance.

2. DEFINITIONS. As used in this Plan,

"APPRECIATION RIGHT" means a right granted pursuant to Section 5 of this
Plan, including a Free-standing Appreciation Right and a Tandem Appreciation
Right.

"BASE PRICE" means the price to be used as the basis for determining the
Spread upon the exercise of a Free-standing Appreciation Right.

"BOARD" means the Board of Directors of the Corporation.

"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.

"COMMITTEE" means the committee described in Section 16(a) of this Plan.

"COMMON SHARES" means (i) shares of the common stock of the Corporation,
par value $.001 per share, and (ii) any security into which Common Shares may be
converted by reason of any transaction or event of the type referred to in
Section 10 of this Plan.

"DATE OF GRANT" means the date specified by the Committee on which a grant
of Option Rights or Appreciation Rights or Performance Shares or Performance
Units or a grant or sale of Restricted Shares or Deferred Shares shall become
effective, which shall not be earlier than the date on which the Committee takes
action with respect thereto.

"DEFERRAL PERIOD" means the period of time during which Deferred Shares are
subject to deferral limitations under Section 7 of this Plan.

"DEFERRED SHARES" means an award pursuant to Section 7 of this Plan of the
right to receive Common Shares at the end of a specified Deferral Period.

"FREE-STANDING APPRECIATION RIGHT" means an Appreciation Right granted
pursuant to Section 5 of this Plan that is not granted in tandem with an Option
Right or similar right.

"INCENTIVE STOCK OPTIONS" means Option Rights that are intended to qualify
as "incentive stock options" under Section 422 of the Code or any successor
provision.

"LESS-THAN-80-PERCENT SUBSIDIARY" means a Subsidiary with respect to which
the Corporation directly or indirectly owns or controls less than 80 percent of
the total combined voting or other decision-making power.

"MANAGEMENT OBJECTIVES" means the achievement of a performance objective or
objectives established pursuant to this Plan for Participants who have received
grants of Performance Shares or Performance Units or, when so determined by the
Committee, Option Rights, Appreciation Rights, Restricted Shares and dividend
credits. Management Objectives may be described in terms of Corporation-wide
objectives or objectives that are related to the performance of the individual
Participant or of the Subsidiary, division, department or function within the
Corporation or Subsidiary in which the Participant is employed. The Management
Objectives applicable to any award to a Participant who is, or is determined by
the Committee to

A-1
<PAGE> 25

be likely to become, a "covered employee" within the meaning of Section 162(m)
of the Code (or any successor provision) shall be limited to specified levels of
or growth in:

(i) return on invested capital;

(ii) earnings per share;

(iii) return on assets;

(iv) return on equity;

(v) shareholder return;

(vi) sales growth;

(vii) productivity improvement; and/or

(viii) net income.

Except in the case of such a covered employee, if the Committee determines that
a change in the business, operations, corporate structure or capital structure
of the Corporation, or the manner in which it conducts its business, or other
events or circumstances render the Management Objectives unsuitable, the
Committee may modify such Management Objectives or the related minimum
acceptable level of achievement, in whole or in part, as the Committee deems
appropriate and equitable.

"MARKET VALUE PER SHARE" means, at any date, (i) the closing sales price
for the Common Shares on that date, if available, or, if there are no sales on
that date or if a closing sales price is not available, (ii) the average of the
"bid" and "asked" prices of the Common Shares on that date, in each case as
reported by the National Association of Securities Dealers Automated Quotation
System or any national securities exchange on which the Common Shares are then
traded, or, if (i) or (ii) are not available, the fair market value of the
Common Shares as determined by the Committee from time to time.

"OPTIONEE" means the person so designated in an agreement evidencing an
outstanding Option Right.

"OPTION PRICE" means the purchase price payable upon the exercise of an
Option Right.

"OPTION RIGHT" means the right to purchase Common Shares upon exercise of
an option granted pursuant to Section 4 of this Plan.

"PARTICIPANT" means a person who is selected by the Committee to receive
benefits under this Plan and who is at that time an officer, including without
limitation an officer who may also be a member of the Board, any other key
employee of, or a consultant to, the Corporation or any Subsidiary, or who has
agreed to commence serving in any such capacity.

"PERFORMANCE PERIOD" means, in respect of a Performance Share or
Performance Unit, a period of time established pursuant to Section 8 of this
Plan within which the Management Objectives relating thereto are to be achieved.

"PERFORMANCE SHARE" means a bookkeeping entry that records the equivalent
of one Common Share awarded pursuant to Section 8 of this Plan.

"PERFORMANCE UNIT" means a bookkeeping entry that records a unit equivalent
to $100.00 awarded pursuant to Section 8 of this Plan.

"RELOAD OPTION RIGHTS" means additional Option Rights granted automatically
to an Optionee upon the exercise of Option Rights pursuant to Section 4(f) of
this Plan.

"RESTRICTED SHARES" mean Common Shares granted or sold pursuant to Section
6 of this Plan as to which neither the substantial risk of forfeiture nor the
restrictions on transfer referred to in Section 6 hereof has expired.

"RULE 16b-3" means Rule 16b-3 of the Securities and Exchange Commission (or
any successor rule to the same effect), as in effect from time to time.

A-2
<PAGE> 26

"SPREAD" means, in the case of a Free-standing Appreciation Right, the
amount by which the Market Value per Share on the date when any such right is
exercised exceeds the Base Price specified in such right or, in the case of a
Tandem Appreciation Right, the amount by which the Market Value per Share on the
date when any such right is exercised exceeds the Option Price specified in the
related Option Right.

"SUBSIDIARY" means a corporation, partnership, joint venture,
unincorporated association or other entity in which the Corporation has a direct
or indirect ownership or other equity interest; provided, however, for purposes
of determining whether any person may be a Participant for purposes of any grant
of Incentive Stock Options, "Subsidiary" means any corporation in which the
Corporation owns or controls directly or indirectly more than 50 percent of the
total combined voting power represented by all classes of stock issued by such
corporation at the time of such grant.

"TANDEM APPRECIATION RIGHT" means an Appreciation Right granted pursuant to
Section 5 of this Plan that is granted in tandem with an Option Right or any
similar right granted under any other plan of the Corporation.

3. SHARES AVAILABLE UNDER THE PLAN. (a) Subject to adjustment as provided
in Section 10 of this Plan, the number of Common Shares issued or transferred
(i) upon the exercise of Option Rights or Appreciation Rights, (ii) as
Restricted Shares and released from all substantial risks of forfeiture, (iii)
as Deferred Shares, (iv) in payment of Performance Shares or Performance Units
that have been earned, or (v) in payment of dividend equivalents paid with
respect to awards made under this Plan, shall not in the aggregate exceed
2,000,000 Common Shares, which may be Common Shares of original issuance or
Common Shares held in treasury or a combination thereof. If any award
terminates, expires or is cancelled with respect to any Common Shares, new
awards may thereafter be granted covering such Common Shares.

(b) Upon the full or partial payment of any Option Price by the transfer
to the Corporation of Common Shares or upon satisfaction of tax withholding
provisions in connection with any such exercise or any other payment made or
benefit realized under this Plan by the transfer or relinquishment of Common
Shares, there shall be deemed to have been issued or transferred under this Plan
only the net number of Common Shares actually issued or transferred by the
Corporation.

(c) Upon payment in cash of the benefit provided by any award granted
under this Plan, any Common Shares that were covered by that award shall again
be available for issuance or transfer hereunder.

(d) Notwithstanding any other provision of this Plan to the contrary, no
Participant shall be granted Option Rights for more than 750,000 Common Shares
during any period of three consecutive calendar years subject to adjustment as
provided in Section 10 of this Plan.

(e) Notwithstanding any other provision of this Plan to the contrary, in
no event shall any Participant in any period of one calendar year receive awards
of Performance Shares and Performance Units having an aggregate value as of
their respective Dates of Grant in excess of $750,000.

4. OPTION RIGHTS. The Committee may from time to time authorize grants to
Participants of options to purchase Common Shares upon such terms and conditions
as the Committee may determine in accordance with the following provisions:

(a) Each grant shall specify the number of Common Shares to which it
pertains, subject to the limitations set forth in Section 3 of this Plan.

(b) Each grant shall specify an Option Price per Common Share, which in
the case of Incentive Options, shall be equal to or greater than the Market
Value per Share on the Date of Grant and, in the case of other options, shall
not be less than eighty-five percent (85%) of the Market Value per Share on the
Date of Grant.

(c) Each grant shall specify the form of consideration to be paid in
satisfaction of the Option Price and the manner of payment of such
consideration, which may include (i) cash in the form of currency or check or
other cash equivalent acceptable to the Corporation, (ii) nonforfeitable,
unrestricted Common Shares, which are already owned by the Optionee and have a
value at the time of exercise that is equal to

A-3
<PAGE> 27

the Option Price, (iii) any other legal consideration, including, without
limitation, promissory notes, that the Committee may deem appropriate, including
without limitation any form of consideration authorized under Section 4(d)
below, on such basis as the Committee may determine in accordance with this Plan
and (iv) any combination of the foregoing.

(d) Any grant may provide that payment of the Option Price may also be
made in whole or in part in the form of Restricted Shares or other Common Shares
that are subject to risk of forfeiture or restrictions on transfer. Unless
otherwise determined by the Committee whenever any Option Price is paid in whole
or in part by means of any of the forms of consideration specified in this
Section 4(d), the Common Shares received by the Optionee upon the exercise of
the Option Rights shall be subject to the same risks of forfeiture or
restrictions on transfer as those that applied to the consideration surrendered
by the Optionee; provided, however, that such risks of forfeiture and
restrictions on transfer shall apply only to the same number of Common Shares
received by the Optionee as applied to the forfeitable or restricted Common
Shares surrendered by the Optionee.

(e) Any grant may provide for deferred payment of the Option Price from
the proceeds of sale through a bank or broker on the date of exercise of some or
all of the Common Shares to which the exercise relates.

(f) Any grant may provide for the automatic grant to the Optionee of
Reload Option Rights upon the exercise of Option Rights, including Reload Option
Rights, for Common Shares or any other non-cash consideration authorized under
Sections 4(d) and (e) above.

(g) Successive grants may be made to the same Participant regardless of
whether any Option Rights previously granted to such Participant remain
unexercised.

(h) Each grant shall specify the period or periods of continuous
employment of the Optionee by the Corporation or any Subsidiary that are
necessary before the Option Rights or installments thereof shall become
exercisable, and any grant may provide for the earlier exercisability of such
rights in the event of retirement, death or disability of the Participant or a
change in control of the Corporation or other similar transaction or event.

(i) Any grant of Option Rights may specify Management Objectives that
must be achieved as a condition to the exercise of such rights.

(j) Option Rights granted under this Plan may be (i) options that are
intended to qualify under particular provisions of the Code, including without
limitation Incentive Stock Options, (ii) options that are not intended to so
qualify or (iii) combinations of the foregoing.

(k) On or after the Date of Grant of any Option Rights other than
Incentive Stock Options, the Committee may provide for the payment to the
Optionee of dividend equivalents thereon in cash or Common Shares on a current,
deferred or contingent basis.

(l) No Option Right granted under this Plan may be exercised more than
10 years from the Date of Grant.

(m) Each grant shall be evidenced by an agreement, which shall be
executed on behalf of the Corporation by any officer thereof and delivered to
and accepted by the Optionee and shall contain such terms and provisions as the
Committee may determine consistent with this Plan.

5. APPRECIATION RIGHTS. The Committee may also authorize grants to
Participants of Appreciation Rights. An Appreciation Right shall be a right of
the Participant to receive from the Corporation an amount, which shall be
determined by the Committee and shall be expressed as a percentage (not
exceeding 100 percent) of the Spread at the time of the exercise of such right.
Any grant of Appreciation rights under this Plan shall be upon such terms and
conditions as the Committee may determine in accordance with the following
provisions:

(a) Any grant may specify that the amount payable upon the exercise of
an Appreciation Right may be paid by the Corporation in cash, Common Shares or
any combination thereof and may (i) either grant

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to the Participant or reserve to the Committee the right to elect among those
alternatives or (ii) preclude the right of the Participant to receive and the
Corporation to issue Common Shares or other equity securities in lieu of cash;
provided, however, that no form of consideration or manner of payment that would
cause Rule 16b-3 to cease to apply to this Plan shall be permitted.

(b) Any grant may specify that the amount payable upon the exercise of
an Appreciation Right shall not exceed a maximum specified by the Committee on
the Date of Grant.

(c) Any grant may specify (i) a waiting period or periods before
Appreciation Rights shall become exercisable and (ii) permissible dates or
periods on or during which Appreciation Rights shall be exercisable.

(d) Any grant may specify that an Appreciation Right may be exercised
only in the event of retirement, death or disability of the Participant or a
change in control of the Corporation or other similar transaction or event.

(e) Any grant may provide for the payment to the Participant of dividend
equivalents thereon in cash or Common Shares on a current, deferred or
contingent basis.

(f) Each grant shall be evidenced by an agreement, which shall be
executed on behalf of the Corporation by any officer thereof and delivered to
and accepted by the Optionee and shall describe the subject Appreciation Rights,
identify any related Option Rights, state that the Appreciation Rights are
subject to all of the terms and conditions of this Plan and contain such other
terms and provisions as the Committee may determine consistent with this Plan.

(g) Any grant of Appreciation Rights may specify Management Objectives
that must be achieved as a condition of the exercise of such rights.

(h) Regarding Tandem Appreciation Rights only: Each grant shall provide
that a Tandem Appreciation Right may be exercised only (i) at a time when the
related Option Right (or any similar right granted under any other plan of the
Corporation) is also exercisable and the Spread is positive and (ii) by
surrender of the related Option Right (or such other right) for cancellation.

(i) Regarding Free-standing Appreciation Rights only:

(i) Each grant shall specify in respect of each Free-standing
Appreciation Right a Base Price per Common Share, which shall
be equal to or greater than the Market Value per Share on the
Date of Grant;

(ii) Successive grants may be made to the same Participant
regardless of whether any Free-standing Appreciation Rights
previously granted to such Participant remain unexercised;

(iii) Each grant shall specify the period or periods of continuous
employment of the Participant by the Corporation or any
Subsidiary that are necessary before the Free-standing
Appreciation Rights or installments thereof shall become
exercisable, and any grant may provide for the earlier
exercise of such rights in the event of retirement, death or
disability of the Participant or a change in control of the
Corporation or other similar transaction or event; and

(iv) No Free-standing Appreciation Right granted under this Plan
may be exercised more than 10 years from the Date of Grant.

6. RESTRICTED SHARES. The Committee may also authorize grants or sales to
Participants of Restricted Shares upon such terms and conditions as the
Committee may determine in accordance with the following provisions:

(a) Each grant or sale shall constitute an immediate transfer of the
ownership of Common Shares to the Participant in consideration of the
performance of services, entitling such Participant to dividend, voting and
other ownership rights, subject to the substantial risk of forfeiture and
restrictions on transfer hereinafter referred to.

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(b) Each grant or sale may be made without additional consideration from
the Participant or in consideration of a payment by the Participant that is less
than the Market Value per Share on the Date of Grant.

(c) Each grant or sale shall provide that the Restricted Shares covered
thereby shall be subject to a "substantial risk of forfeiture" within the
meaning of Section 83 of the Code for a period to be determined by the Committee
on the Date of Grant, and any grant or sale may provide for the earlier
termination of such period in the event of retirement, death or disability of
the Participant or a change in control of the Corporation or other similar
transaction or event.

(d) Each grant or sale shall provide that, during the period for which
such substantial risk of forfeiture is to continue, the transferability of the
Restricted Shares shall be prohibited or restricted in the manner and to the
extent prescribed by the Committee on the Date of Grant. Such restrictions may
include without limitation rights of repurchase or first refusal in the
Corporation or provisions subjecting the Restricted Shares to a continuing
substantial risk of forfeiture in the hands of any transferee.

(e) Any grant of Restricted Shares may specify Management Objectives
which, if achieved, will result in termination or early termination of the
restrictions applicable to such shares and each such grant shall specify in
respect of such specified Management Objectives, a minimum acceptable level of
achievement and shall set forth a formula for determining the number of
Restricted Shares on which restrictions will terminate if performance is at or
above the minimum level, but falls short of full achievement of the specified
Management Objectives.

(f) Any grant or sale may require that any or all dividends or other
distributions paid on the Restricted Shares during the period of such
restrictions be automatically sequestered. Such distribution may be reinvested
on an immediate or deferred basis in additional Common Shares, which may be
subject to the same restrictions as the underlying award or such other
restrictions as the Committee may determine.

(g) Each grant or sale shall be evidenced by an agreement, which shall
be executed on behalf of the Corporation by any officer thereof and delivered to
and accepted by the Participant and shall contain such terms and provisions as
the Committee may determine consistent with this Plan. Unless otherwise directed
by the Committee, all certificates representing Restricted Shares, together with
a stock power that shall be endorsed in blank by the Participant with respect to
such shares, shall be held in custody by the Corporation until all restrictions
thereon lapse.

7. DEFERRED SHARES. The Committee may also authorize grants or sales of
Deferred Shares to Participants upon such terms and conditions as the Committee
may determine in accordance with the following provisions:

(a) Each grant or sale shall constitute the agreement by the Corporation
to issue or transfer Common Shares to the Participant in the future in
consideration of the performance of services, subject to the fulfillment during
the Deferral Period of such conditions as the Committee may specify.

(c) Each grant or sale shall provide that the Deferred Shares covered
thereby shall be subject to a Deferral Period, which shall be fixed by the
Committee on the Date of Grant, and any grant or sale may provide for the
earlier termination of such period in the event of retirement, death or
disability of the Participant or a change in control of the Corporation or other
similar transaction or event.

(d) During the Deferral Period, the Participant shall not have any right
to transfer any rights under the subject award, shall not have any rights of
ownership in the Deferred Shares and shall not have any right to vote such
shares, but the Committee may on or after the Date of Grant authorize the
payment of dividend equivalents on such shares in cash or additional Common
Shares on a current, deferred or contingent basis.

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<PAGE> 30

(e) Each grant or sale shall be evidenced by an agreement, which shall
be executed on behalf of the Corporation by any officer thereof and delivered to
and accepted by the Participant and shall contain such terms and provisions as
the Committee may determine consistent with this Plan.

8. PERFORMANCE SHARES AND PERFORMANCE UNITS. The Committee may also
authorize grants to Participants of Performance Shares and Performance Units,
which shall become payable to the Participant upon the achievement of specified
Management Objectives, upon such terms and conditions as the Committee may
determine in accordance with the following provisions:

(a) Each grant shall specify the number of Performance Shares or
Performance Units to which it pertains, subject to the limitations in Section 3,
which may be subject to adjustment to reflect changes in compensation or other
factors.

(b) The Performance Period with respect to each Performance Share or
Performance Unit shall be determined by the Committee on the Date of Grant and
may be subject to earlier termination in the event of retirement, death or
disability of the Participant or a change in control of the Corporation or other
similar transaction or event.

(c) Each grant shall specify the Management Objectives that are to be
achieved by the Participant and each grant shall specify in respect of the
specified Management Objectives a minimum acceptable level of achievement below
which no payment will be made and shall set forth a formula for determining the
amount of any payment to be made if performance is at or above the minimum
acceptable level but falls short of full achievement of the specified Management
Objectives.

(d) Each grant shall specify the time and manner of payment of
Performance Shares or Performance Units that shall have been earned, and any
grant may specify that any such amount may be paid by the Corporation in cash,
Common Shares or any combination thereof and may either grant to the Participant
or reserve to the Committee the right to elect among those alternatives.

(e) Any grant of Performance Shares may specify that the amount payable
with respect thereto may not exceed a maximum specified by the Committee on the
Date of Grant. Any grant of Performance Units may specify that the amount
payable, or the number of Common Shares issued, with respect thereto may not
exceed maximums specified by the Committee on the Date of Grant.

(f) Any grant may provide for the payment to the Participant of dividend
equivalents thereon in cash or in additional Common Shares on a current,
deferred or contingent basis.

(g) Each grant of Performance Shares or Performance Units shall be
evidenced by an agreement, which shall be executed on behalf of the Corporation
by any officer thereof and delivered to and accepted by the Participant and
shall contain such terms and provisions as the Committee may determine
consistent with this Plan.

9. TRANSFERABILITY. (a) No Option Right or other derivative security (as
that term is used in Rule 16b-3) awarded under this Plan shall be transferable
by a Participant other than by will or the laws of descent and distribution or,
other than with respect to an Incentive Stock Option, a qualified domestic
relations order, as defined in the Code. Option Rights and Appreciation Rights
shall be exercisable during a Participant's lifetime only by the Participant or,
in the event of the Participant's legal incapacity, by his guardian or legal
representative acting in a fiduciary capacity on behalf of the Participant under
state law and court supervision. Notwithstanding the foregoing, the Committee,
in its sole discretion, may provide for transferability of particular awards
under this Plan so long as such provisions will not disqualify the exemption for
other awards under Rule 16b-3.

(b) Any award made under this Plan may provide that all or any part of
the Common Shares that are (i) to be issued or transferred by the Corporation
upon the exercise of Option Rights or Appreciation Rights or upon the
termination of the Deferral Period applicable to Deferred Shares, or in payment
of Performance Shares or Performance Units or (ii) no longer subject to the
substantial risk of forfeiture and restrictions on transfer referred to in
Section 6 of this Plan, shall be subject to further restrictions upon transfer.

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10. ADJUSTMENTS. The Committee may make or provide for such adjustments in
the (a) number of Common Shares covered by outstanding Option Rights,
Appreciation Rights, Deferred Shares and Performance Shares granted hereunder,
(b) prices per share applicable to such Option Rights and Appreciation Rights,
and (c) kind of shares (including shares of another issuer) covered thereby, as
the Committee in its sole discretion may in good faith determine to be equitably
required in order to prevent dilution or enlargement of the rights of
Participants that otherwise would result from (x) any stock dividend, stock
split, combination of shares, recapitalization or other change in the capital
structure of the Corporation, (y) any merger, consolidation, spin-off, spin-out,
split-off, split-up, reorganization, partial or complete liquidation or other
distribution of assets, issuance of rights or warrants to purchase securities or
(z) any other corporate transaction or event having an effect similar to any of
the foregoing. In the event of any such transaction or event, the Committee may
provide in substitution for any or all outstanding awards under this Plan such
alternative consideration as it may in good faith determine to be equitable
under the circumstances and may require in connection therewith the surrender of
all awards so replaced. Moreover, the Committee may on or after the Date of
Grant provide in the agreement evidencing any award under this Plan that the
holder of the award may elect to receive an equivalent award in respect of
securities of the surviving entity of any merger, consolidation or other
transaction or event having a similar effect, or the Committee may provide that
the holder will automatically be entitled to receive such an equivalent award.
In any case, such substitution of securities shall not require the consent of
any person who is granted awards pursuant to this Plan.

11. FRACTIONAL SHARES. The Corporation shall not be required to issue any
fractional Common Shares pursuant to this Plan. The Committee may provide for
the elimination of fractions or for the settlement thereof in cash.

12. WITHHOLDING TAXES. To the extent that the Corporation is required to
withhold federal, state, local or foreign taxes in connection with any payment
made or benefit realized by a Participant or other person under this Plan, and
the amounts available to the Corporation for such withholding are insufficient,
it shall be a condition to the receipt of such payment or the realization of
such benefit that the Participant or such other person make arrangements
satisfactory to the Corporation for payment of the balance of such taxes
required to be withheld. At the discretion of the Committee, such arrangements
may include relinquishment of a portion of such benefit. The Corporation and any
Participant or such other person may also make similar arrangements with respect
to the payment of any taxes with respect to which withholding is not required.

13. PARTICIPATION BY EMPLOYEES OF A LESS-THAN-80-PERCENT SUBSIDIARY. As a
condition to the effectiveness of any grant or award to be made hereunder to a
Participant who is an employee of a Less-Than-80-Percent Subsidiary, regardless
whether such Participant is also employed by the Corporation or another
Subsidiary, the Committee may require the Less-Than-80-Percent Subsidiary to
agree to transfer to the Participant (as, if and when provided for under this
Plan and any applicable agreement entered into between the Participant and the
Less-Than-80-Percent Subsidiary pursuant to this Plan) the Common Shares that
would otherwise be delivered by the Corporation upon receipt by the
Less-Than-80-Percent Subsidiary of any consideration then otherwise payable by
the Participant to the Corporation. Any such award may be evidenced by an
agreement between the Participant and the Less-Than-80-Percent Subsidiary, in
lieu of the Corporation, on terms consistent with this Plan and approved by the
Committee and the Less-Than-80-Percent Subsidiary. All Common Shares so
delivered by or to a Less-Than-80-Percent Subsidiary will be treated as if they
had been delivered by or to the Corporation for purposes of Section 3 of this
Plan, and all references to the Corporation in this Plan shall be deemed to
refer to the Less-Than-80-Percent Subsidiary except with respect to the
definitions of the Board and the Committee and in other cases where the context
otherwise requires.

14. CERTAIN TERMINATIONS OF EMPLOYMENT, HARDSHIP AND APPROVED LEAVES OF
ABSENCE. Notwithstanding any other provision of this Plan to the contrary, in
the event of termination of employment by reason of death, disability, normal
retirement, early retirement with the consent of the Corporation, termination of
employment to enter public service with the consent of the Corporation or leave
of absence approved by the Corporation, or in the event of hardship or other
special circumstances, of a Participant who holds an Option Right or
Appreciation Right that is not immediately and fully exercisable, any Restricted
Shares as to which the substantial risk of forfeiture or the prohibition or
restriction on transfer has not lapsed, any Deferred

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Shares as to which the Deferral Period is not complete, any Performance Shares
or Performance Units that have not been fully earned, or any Common Shares that
are subject to any transfer restriction pursuant to Section 6(d) of this Plan,
the Committee may in its sole discretion take any action that it deems to be
equitable under the circumstances or in the best interests of the Corporation,
including without limitation waiving or modifying any limitation or requirement
with respect to any award under this Plan.

15. FOREIGN EMPLOYEES. In order to facilitate the making of any grant or
combination of grants under this Plan, the Committee may provide for such
special terms for awards to Participants who are foreign nationals, or who are
employed by the Corporation or any Subsidiary outside of the United States of
America, as the Committee may consider necessary or appropriate to accommodate
differences in local law, tax policy or custom. Moreover, the Committee may
approve such supplements to, or amendments, restatements or alternative versions
of, this Plan as it may consider necessary or appropriate for such purposes
without thereby affecting the terms of this Plan as in effect for any other
purpose, and the Secretary or other appropriate officer of the Corporation may
certify any such document as having been approved and adopted in the same manner
as this Plan. No such special terms, supplements, amendments, or restatements
shall include any provisions that are inconsistent with the terms of this Plan,
as then in effect, unless this Plan could have been amended to eliminate such
inconsistency without further approval by the shareholders of the Corporation.

16. ADMINISTRATION OF THE PLAN. (a) This Plan shall be administered by the
Compensation Committee of the Board appointed from time to time by the Board of
Directors of the Corporation. The Committee shall be composed of not less than
two members of the Board, each of whom shall be a "non-employee director" within
the meaning of Rule 16b-3 and an "outside director" within the meaning of
Section 162(m) of the Code. A majority of the Committee shall constitute a
quorum, and the acts of the members of the Committee who are present at any
meeting thereof at which a quorum is present, or acts unanimously approved by
the members of the Committee in writing, shall be the acts of the Committee.

(b) The interpretation and construction by the Committee of any
provision of this Plan or of any agreement, notification or document evidencing
the grant of Option Rights, Appreciation Rights, Restricted Shares or Deferred
Shares, Performance Shares and Performance Units and any determination by the
Committee pursuant to any provision of this Plan or any such agreement,
notification or document, shall be final and conclusive. No member of the
Committee shall be liable for any such action taken or determination made in
good faith.

17. AMENDMENTS AND OTHER MATTERS. (a) This Plan may be amended from time
to time by the Committee or, if there shall be no Committee as contemplated in
Section 16(a) of this Plan, the Board, but except as expressly authorized by
this Plan no such amendment shall increase the maximum number of shares
specified in Section 3(a) of this Plan, increase the number of Performance Units
specified in Section 3(e) of this Plan, or cause Rule 16b-3 to become
inapplicable to this Plan, without the further approval of the shareholders of
the Corporation, unless permitted by Rule 16b-3. Without limiting the generality
of the foregoing, the Committee, or the Board in the absence of the Committee,
may amend this Plan to eliminate provisions which are no longer necessary as a
result of changes in tax or securities laws or regulations, or in the
interpretation thereof.

(b) With the concurrence of the affected Optionee, the Committee may
cancel any agreement evidencing Option Rights or any other award granted under
this Plan. In the event of such cancellation, the Committee may authorize the
granting of new Option Rights or other awards hereunder, which may or may not
cover the same number of Common Shares that had been the subject of the prior
award, at such Option Price and subject to such other terms, conditions and
discretions as would have been applicable under this Plan had the cancelled
Option Rights or other awards not been granted.

(c) The Committee also may permit Participants to elect to defer the
issuance of Common Shares or the settlement of awards in cash under the Plan
pursuant to such rules, procedures or programs as it may establish for purposes
of this Plan. The Committee also may provide that deferred settlements include
the payment or crediting of interest on the deferral amounts, or the payment or
crediting of dividend equivalents where the deferral amounts are denominated in
Common Shares.

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(d) This Plan shall not confer upon any Participant any right with
respect to continuance of employment or other service with the Corporation or
any Subsidiary and shall not interfere in any way with any right that the
Corporation or any Subsidiary would otherwise have to terminate any
Participant's employment or other service at any time.

(e) (i) To the extent that any provision of this Plan would prevent any
Option Right that was intended to qualify under particular provisions of the
Code from so qualifying, such provision of this Plan shall be null and void with
respect to such Option Right; provided, however, that such provision shall
remain in effect with respect to other Option Rights, and there shall be no
further effect on any provision of this Plan.

(ii) Any award that may be made pursuant to an amendment to this Plan
that shall have been adopted without the approval of the shareholders of the
Corporation shall be null and void if it is subsequently determined that such
approval was required in order for Rule 16b-3 to remain applicable to this Plan.

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PROXY

PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS OF
SRS LABS, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE

The undersigned shareholder(s) of SRS Labs, Inc., a Delaware corporation (the
"Company") hereby appoints Stephen V. Sedmak, Janet M. Biski, or either of them,
proxies, each with full power of substitution, for and in the name of the
undersigned at the Annual Meeting of Stockholders of the Company to be held on
June 11, 1997, and at any and all adjournments, to vote all shares of the
capital stock of said Company held of record by the undersigned on April 25,
1997, as if the undersigned were present and voting the shares.

THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED. IN
THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR PROPOSAL 2, FOR THE
NOMINEE NAMED IN PROPOSAL 1 ON THE REVERSE SIDE AND IN ACCORDANCE WITH THEIR
DISCRETION ON SUCH OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.

(CONTINUED AND TO BE VOTED, SIGNED AND DATED ON THE REVERSE SIDE)

<PAGE> 35
SRS LABS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/

THE LISTED NOMINEE AND THE PROPOSAL HAVE BEEN PROPOSED BY THE COMPANY.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEE LISTED
AND "FOR" THE LISTED PROPOSAL.

1. ELECTION OF DIRECTORS WITHHOLD
Nominee for election to the FOR the AUTHORITY to vote
Board of Directors as a nominee listed for the nominee listed
Class I Director:
Jeffrey I. Scheinrock. / / / /

FOR AGAINST ABSTAIN
2. Proposal to approve the
SRS Labs, Inc. Amended and / / / / / /
Restated 1996 Long-Term
Incentive Plan.

3. The proxies are authorized to vote
in their discretion upon such other
business as may properly come
before the meeting.

I PLAN TO ATTEND THE MEETING. / /

Dated: _____________________________________, 1997

__________________________________________________
(Signature)

Please date this Proxy and sign exactly as your
name appears hereon. When signing as attorney,
executor administrator, trustee or guardian,
please give your full title. If there is more than
one trustee, all should sign. All joint owners
should sign.