QSound Labs Reports Third Quarter Results for 2006

QSound Labs, Inc. (NASDAQ: QSND), a leading developer of audio and voice software solutions, today reported financial results for the third quarter of FY2006. For the three months ended September 30, 2006, the consolidated revenues were $342,000 as compared to $262,000 for the same quarter in FY2005. The net loss for the third quarter was $(534,000) or $(0.06) per share as compared to $(1,219,000) or $(0.14) per share in FY2005. Included in this loss are stock compensation expenses totaling $71,000 (FY2005 - $28,000) and debt discount accretion and debt revaluation net expenses totaling $32,000 (FY2005 - NIL).

Consolidated revenues for the nine months ended September 30, 2006 were $1,446,000 compared to $1,140,000 for the same period in FY2005. Net loss for the nine month period was $(1,339,000) or $(0.15) per share as compared to $(2,075,000) or $(0.25) per share in FY2005. Included in this loss are stock compensation expenses totaling $194,000 (FY2005 - $98,000) and debt discount accretion and debt revaluation net expenses totaling $287,000 (FY2005 - NIL).

The Company had working capital of $2,637,000 and negative cash flow from operations during the quarter of $191,000.

"During the third quarter the Company made significant progress in executing its strategy for monetizing its microQ® technology," stated David Gallagher, President and CEO of QSound Labs. "Our goal for 2006 has been to align with as many platform providers for the mobile device market as possible. The conclusion of the strategic collaboration with ARM Holdings in the third quarter represents a pinnacle milestone for this strategy.

The collaboration includes joint engineering, marketing and roadmap alignment activities related to the QSound microQ audio software solution across the ARM family of processors. The collaboration is a clear indication that QSound has established itself within the mobile device market and is well positioned for volume deployment."

Other highlights of the quarter included:

- The first design win in the important Japanese market occurred when SoftBank began shipping its 705P mobile handset which includes the microQ solution. This handset is SoftBank's first 3G/GSM offering and is manufactured by Panasonic.

- microQ has been ported to Aricent's (formerly Emuzed) multimedia solution. This solution is now available to Aricent's customer base and it is expected that some of the larger volume customers will begin shipping the microQ enabled solution in Q4 of this year.

- HiSilicon completed the port of microQ to its 3G platform and expects handset shipments by its customers in Q1 of next year.

- Broadcom announced that its microQ enabled chipset has been selected by Samsung for its new line of consumer and small business Wi-Fi VoIP phones. Additionally, it is expected that the first mobile phones using these chipsets will ship early next year.

- Prima Technologies announced that they are planning to use QSound technology in their 2007 LCD and Plasma TV models.

"The progress made this year in executing our strategy has been in line with management's expectations and it is anticipated that further progress will be made before this year ends."

About QSound Labs, Inc.

Since its inception in 1988, QSound Labs, Inc. has established itself as one of the world's leading audio technology companies. The company has developed proprietary audio solutions that include virtual surround sound, positional audio and stereo enhancement for the mobile devices, consumer electronics, PC/multimedia, and Internet markets. QSound Labs' cutting-edge audio technologies create rich 3D audio environments allowing consumers to enjoy stereo surround sound from two, four and up to 7.1 speaker systems. The company's customer and partner roster includes Aplix, Aricent, ARM, ATI, BenQ, Broadcom, HiSilicon, Intel (Marvell), Lenovo, MITAC, PacketVideo, Philips, Qualcomm, RealNetworks, Sony VAIO, Sanyo, Tensilica, Texas Instruments, Thomson, Toshiba, UTStarcom, Zoran and ZTE among others. To hear 3D audio demos and learn more about QSound, visit our web site at http://www.qsound.com.

This release contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 concerning, among other things, expectation in Q4 of 2006 and in 2007 of increased shipments of microQ enabled devices, and planned use in 2007 of QSound technology in LCD and plasma TV's. Investors are cautioned that such forward-looking statements involve risk and uncertainties, which could cause actual results, performance or achievements of QSound, or industry results to differ materially from those reflected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, risks associated with loss of relationships with companies, including ARM, that do business with QSound, achievement of volume sales of microQ-enabled platforms by QSound's licensees to their mobile devices customers, successful development, introduction and acceptance of QSound's products and technologies, QSound's ability to carry out its business strategy and marketing plans, dependence on intellectual property, rapid technological change, competition, general economic and business conditions, continued growth of multimedia usage in the mobile devices market and other risks detailed from time to time in QSound's periodic reports filed with the Securities and Exchange Commission. Forward-looking statements are based on the current expectations, projections and opinions of QSound's management, and QSound undertakes no obligation to publicly release the results of any revisions to such forward-looking statements which may be made, for example to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Consolidated Balance sheets As at September 30, 2006 and December 31, 2005 (Expressed in United States dollars under United States GAAP)

September 30, 2006 December 31, 2005 (unaudited)

ASSETS Current assets Cash and cash equivalents $ 2,307,783 $ 1,222,729 Accounts receivable 637,609 401,524 Note receivable 6,000 82,648 Inventory 44,162 40,438 Deposits and prepaid expenses 107,550 76,146 --------------------------------------------------------------------------- 3,103,104 1,823,485

Note receivable 53,893 - Property and equipment 423,131 670,635 Deferred development costs 253,285 271,879 Intangible assets 147,446 155,445 --------------------------------------------------------------------------- $ 3,980,859 $ 2,921,444 --------------------------------------------------------------------------- ---------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities $ 220,971 $ 285,786 Deferred revenue 245,329 45,011 --------------------------------------------------------------------------- 466,300 330,797

Convertible loan 1,000,000 - Debt discount (898,741) - Fair value of convertible debt conversion feature 750,307 - --------------------------------------------------------------------------- 1,317,866 330,797 --------------------------------------------------------------------------- ---------------------------------------------------------------------------

Shareholders' equity Share capital 47,296,319 46,181,113 Warrants 1,720,489 1,502,331 Contributed surplus 1,520,152 1,442,408 Deficit (47,873,967) (46,535,205) --------------------------------------------------------------------------- 2,662,993 2,590,647 --------------------------------------------------------------------------- $ 3,980,859 $ 2,921,444 --------------------------------------------------------------------------- ---------------------------------------------------------------------------

Consolidated Statements of Operations and Deficit For the periods ended September 30, 2006 and 2005 (Expressed in United States dollars under United States GAAP)

For the three For the three For the nine For the nine months ended months ended months ended months ended September 30, September 30, September 30, September 30, 2006 2005 2006 2005 (unaudited) (unaudited) (unaudited) (unaudited)

REVENUE Royalties and license fees $ 262,307 $ 167,087 $ 1,219,078 $ 758,591 Product sales 79,380 95,350 226,547 381,634 --------------------------------------------------------------------------- 341,687 262,437 1,445,625 1,140,225

Cost of product

sales 8,065 14,605 12,888 82,295 --------------------------------------------------------------------------- 333,622 247,832 1,432,737 1,057,930

EXPENSES Marketing 270,591 256,592 698,576 754,891 Operations 35,427 53,305 105,237 150,951 Product engineering 194,244 226,433 627,074 710,807 Administration 222,094 230,812 666,600 617,514 Foreign exchange loss (gain) (8,343) 5,902 564 3,333 Depreciation and amortization 100,303 71,080 362,225 277,293 --------------------------------------------------------------------------- 814,316 844,124 2,460,276 2,514,789

--------------------------------------------------------------------------- Loss before other items (480,694) (596,292) (1,027,539) (1,456,859)

OTHER ITEMS Interest income 23,722 11,939 55,998 40,958 Interest on convertible debt (20,794) - (40,541) - Change in fair value of convertible debt conversion feature 19,001 - 38,718 - Accretion of debt discount (50,356) - (101,259) - Excess fair value of convertible debt at transaction date - - (224,633) - Other (5,439) (623,278) (7,075) (626,484) --------------------------------------------------------------------------- (33,866) (611,339) (278,792) (585,526)

--------------------------------------------------------------------------- Loss before taxes (514,560) (1,207,631) (1,306,331) (2,042,385)

Foreign withholding tax (18,954) (11,547) (32,431) (33,100) --------------------------------------------------------------------------- Net loss for period (533,514) (1,219,178) (1,338,762) (2,075,485)

Deficit, beginning of period (47,340,453) (44,759,933) (46,535,205) (43,903,626) ---------------------------------------------------------------------------

Deficit, end of period $(47,873,967) $(45,979,111) $(47,873,967) $(45,979,111) --------------------------------------------------------------------------- ---------------------------------------------------------------------------

Loss per common share (basic and diluted) $ (0.06) $ (0.14) $ (0.15) $ (0.25) --------------------------------------------------------------------------- ---------------------------------------------------------------------------

Consolidated Statements of Cash Flows For the periods ended September 30, 2006 and 2005 (Expressed in United States dollars under United States GAAP)

For the three For the three For the nine For the nine months ended months ended months ended months ended September 30, September 30, September 30, September 30, 2006 2005 2006 2005 (unaudited) (unaudited) (unaudited) (unaudited)

Cash provided by (used in)

OPERATIONS Loss for the period $ (533,514) $ (1,219,178) (1,338,763) (2,075,485) Items not requiring cash: Depreciation and amortization 100,303 71,080 362,225 277,293 Stock based compensation 70,505 28,086 193,717 97,814 Impairment of assets - 556,332 - 556,332 Change in fair value of convertible debt conversion feature (19,001) - (38,718) - Accretion of debt discount 50,356 - 101,259 - Excess fair value of convertible debt at transaction date - - 224,633 - Changes in working capital balances 140,530 122,567 (135,710) (405,736) --------------------------------------------------------------------------- (190,821) (441,113) (631,357) (1,549,782)

FINANCING Issuance of common shares, net 43,820 14,664 781,782 53,713 Proceeds from convertible debt - - 1,000,000 - --------------------------------------------------------------------------- 43,820 14,664 1,781,782 53,713

INVESTMENTS Note receivable (728) - 22,755 - Purchase of property and equipment (2,070) (3,191) (26,080) (135,432) Purchase of deferred development costs - - (39,500) - Purchase of intangible assets (6,540) (16,953) (22,546) (38,806) --------------------------------------------------------------------------- (9,338) (20,144) (65,371) (174,238)

--------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (156,339) (446,593) 1,085,054 (1,670,307) Cash and cash equivalents, beginning of period 2,464,122 2,103,829 1,222,729 3,327,543 ---------------------------------------------------------------------------

Cash and cash equivalents, end of period $ 2,307,783 $ 1,657,236 $ 2,307,783 $ 1,657,236 --------------------------------------------------------------------------- ---------------------------------------------------------------------------

Contacts: QSound Labs, Inc. Paula Murray Investor Relations Contact (954) 796-8798 Email: paula.murray@qsound.com Website: www.qsound.com

SOURCE:  QSound Labs, Inc.

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