UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-Q

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

For the Quarterly Period Ended September 30, 2007

Commission File Number 000-50335

DTS, Inc.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)                                  |  | 77-0467655(I.R.S. Employer
Identification No.)                    
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------
|5171 Clareton Drive
Agoura Hills, California 91301(Address of principal executive
offices and zip code) |  | (818) 706-3525(Registrant's telephone number,
including area code)

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Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes ý    No o

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large
accelerated filer o                Accelerated filer ý                Non-accelerated
filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes o    No ý

As of October 31, 2007 a total of 17,623,881 shares of the Registrant's Common Stock, $0.0001 par value, were issued and outstanding.



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DTS, INC.    FORM 10-Q    TABLE OF CONTENTS

|PART I     |  | FINANCIAL INFORMATION                                                                 |  | 1 
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|Item 1.    |  | Financial Statements (unaudited):                                                     |  | 1 
|           |  | Consolidated Balance Sheets                                                           |  | 1 
|           |  | Consolidated Statements of Operations                                                 |  | 2 
|           |  | Consolidated Statements of Cash Flows                                                 |  | 3 
|           |  | Notes to Consolidated Financial Statements                                            |  | 4 
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 14
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 21
|Item 4.    |  | Controls and Procedures                                                               |  | 22
|PART II.   |  | OTHER INFORMATION                                                                     |  | 23
|Item 1.    |  | Legal Proceedings                                                                     |  | 23
|Item 1A.   |  | Risk Factors                                                                          |  | 23
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 39
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 40
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 40
|Item 5.    |  | Other Information                                                                     |  | 40
|Item 6.    |  | Exhibits                                                                              |  | 40
|SIGNATURES |  | 41                                                                                   

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DTS, INC.        PART I        FINANCIAL INFORMATION

Item 1.    Financial Statements

DTS, INC.        CONSOLIDATED BALANCE SHEETS

|                                                     |                                                                                                                                                                                                                                                                                                 | As of
December 31,
2006    |                                            | As of
September 30,
2007 |        
|---------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------------------------ | -------
|
|ASSETS                                               |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|Current assets:                                      |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|                                                     | Cash and cash equivalents                                                                                                                                                                                                                                                                       |                            | $                                          | 14,392                   |        
|                                                     | Short-term investments                                                                                                                                                                                                                                                                          |                            |                                            | 94,368                   |        
|                                                     | Accounts receivable, net of allowance for doubtful accounts of $48 and $186 at December 31, 2006 and September 30, 2007, respectively                                                                                                                                                           |                            |                                            | 2,550                    |        
|                                                     | Deferred income taxes                                                                                                                                                                                                                                                                           |                            |                                            | 7,059                    |        
|                                                     | Prepaid expenses and other current assets                                                                                                                                                                                                                                                       |                            |                                            | 1,525                    |        
|                                                     | Income taxes receivable, net                                                                                                                                                                                                                                                                    |                            |                                            | 2,244                    |        
|                                                     | Assets of discontinued operations held for sale                                                                                                                                                                                                                                                 |                            |                                            | 11,290                   |        
|                                                     |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|                                                     |                                                                                                                                                                                                                                                                                                 | Total current assets       |                                            |                          | 133,428
|Property and equipment, net                          |                                                                                                                                                                                                                                                                                                 |                            | 5,982                                      |                          |        
|Intangible assets, net                               |                                                                                                                                                                                                                                                                                                 |                            | 1,852                                      |                          |        
|Deferred income taxes                                |                                                                                                                                                                                                                                                                                                 |                            | 305                                        |                          |        
|Other assets                                         |                                                                                                                                                                                                                                                                                                 |                            | 989                                        |                          |        
|Assets of discontinued operations held for sale      |                                                                                                                                                                                                                                                                                                 |                            | 25,644                                     |                          |        
|                                                     |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|                                                     |                                                                                                                                                                                                                                                                                                 | Total assets               |                                            | $                        | 168,200
|                                                     |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                 |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|Current liabilities:                                 |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|                                                     | Accounts payable                                                                                                                                                                                                                                                                                |                            | $                                          | 1,142                    |        
|                                                     | Accrued expenses and other liabilities                                                                                                                                                                                                                                                          |                            |                                            | 3,832                    |        
|                                                     | Liabilities of discontinued operations held for sale                                                                                                                                                                                                                                            |                            |                                            | 7,944                    |        
|                                                     |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|                                                     |                                                                                                                                                                                                                                                                                                 | Total current liabilities  |                                            |                          | 12,918 
|Other long-term liabilities                          |                                                                                                                                                                                                                                                                                                 |                            |                                           |                          |        
|Liabilities of discontinued operations held for sale |                                                                                                                                                                                                                                                                                                 |                            | 1,466                                      |                          |        
|Commitments and contingencies (Note 7)               |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|Stockholders' equity:                                |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|                                                     | Preferred stock$0.0001 par value, 5,000 shares authorized at December 31, 2006 and September 30, 2007; no shares issued and outstanding                                                                                                                                                        |                            |                                            |                         |        
|                                                     | Common stock$0.0001 par value, 70,000 shares authorized at December 31, 2006 and September 30, 2007; 18,024 and 18,566 shares issued at December 31, 2006 and September 30, 2007, respectively;
18,024 and 17,566 shares outstanding at December 31, 2006 and September 30, 2007, respectively |                            |                                            | 2                        |        
|                                                     | Additional paid-in capital                                                                                                                                                                                                                                                                      |                            |                                            | 129,549                  |        
|                                                     | Treasury stock, at costzero and 1,000 shares at December 31, 2006 and September 30, 2007, respectively                                                                                                                                                                                         |                            |                                            |                         |        
|                                                     | Accumulated other comprehensive income                                                                                                                                                                                                                                                          |                            |                                            |                         |        
|                                                     | Retained earnings                                                                                                                                                                                                                                                                               |                            |                                            | 24,265                   |        
|                                                     |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|                                                     |                                                                                                                                                                                                                                                                                                 | Total stockholders' equity |                                            |                          | 153,816
|                                                     |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        
|                                                     |                                                                                                                                                                                                                                                                                                 |                            | Total liabilities and stockholders' equity |                          | $      
|                                                     |                                                                                                                                                                                                                                                                                                 |                            |                                            |                          |        

See accompanying notes to consolidated financial statements.

1

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DTS, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                            |                                     | For the Three Months
Ended September 30, |        | For the Nine Months
Ended September 30, |      
|--------------------------------------------------------------------------- | ----------------------------------- | ---------------------------------------- | ------ | --------------------------------------- | -----
|
|
|Revenue                                                                     |                                     | $                                        | 9,514  |                                         | $    
|Cost of revenue                                                             |                                     |                                          | 485    |                                         |      
|                                                                            |                                     |                                          |        |                                         |      
|Gross profit                                                                |                                     |                                          | 9,029  |                                         |      
|Operating expenses:                                                         |                                     |                                          |        |                                         |      
|                                                                            | Selling, general and administrative |                                          |        | 7,504                                   |      
|                                                                            | Research and development            |                                          |        | 1,723                                   |      
|                                                                            |                                     |                                          |        |                                         |      
|                                                                            |                                     | Total operating expenses                 |        |                                         | 9,227
|                                                                            |                                     |                                          |        |                                         |      
|Income (loss) from operations                                               |                                     |                                          | (198   | )                                       |      
|Interest and other income, net                                              |                                     |                                          | 1,398  |                                         |      
|                                                                            |                                     |                                          |        |                                         |      
|Income from continuing operations before income taxes                       |                                     |                                          | 1,200  |                                         |      
|Provision for income taxes                                                  |                                     |                                          | 278    |                                         |      
|                                                                            |                                     |                                          |        |                                         |      
|Income from continuing operations                                           |                                     |                                          | 922    |                                         |      
|Loss from discontinued operations, net of tax                               |                                     |                                          | (1,820 | )                                       |      
|                                                                            |                                     |                                          |        |                                         |      
|Net income (loss)                                                           |                                     | $                                        | (898   | )                                       | $    
|                                                                            |                                     |                                          |        |                                         |      
|Net income (loss) per common share:                                         |                                     |                                          |        |                                         |      
|Basic:                                                                      |                                     |                                          |        |                                         |      
|                                                                            | Continuing operations               |                                          | $      | 0.05                                    |      
|                                                                            | Discontinued operations             |                                          |        | (0.10                                   | )    
|                                                                            |                                     |                                          |        |                                         |      
|                                                                            | Net income (loss)                   |                                          | $      | (0.05                                   | )    
|                                                                            |                                     |                                          |        |                                         |      
|                                                                            | Diluted:                            |                                          |        |                                         |      
|                                                                            | Continuing operations               |                                          | $      | 0.05                                    |      
|                                                                            | Discontinued operations             |                                          |        | (0.10                                   | )    
|                                                                            |                                     |                                          |        |                                         |      
|                                                                            | Net income (loss)                   |                                          | $      | (0.05                                   | )    
|                                                                            |                                     |                                          |        |                                         |      
|Weighted average shares used to compute net income (loss) per common share: |                                     |                                          |        |                                         |      
|                                                                            | Basic                               |                                          |        | 17,654                                  |      
|                                                                            |                                     |                                          |        |                                         |      
|                                                                            | Diluted                             |                                          |        | 18,385                                  |      
|                                                                            |                                     |                                          |        |                                         |      

See
accompanying notes to consolidated financial statements.

2

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DTS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |                                                                                    | For the Nine Months
Ended September 30,                  |       
|-------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------------------------------------- | ------
|
|
|Cash flows from operating activities:                                                              |                                                                                    |                                                          |       
|Net income (loss)                                                                                  |                                                                                    | $                                                        | 7,992 
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                                                    |                                                          |       
|                                                                                                   | Depreciation and amortization                                                      |                                                          |       
|                                                                                                   | Stock-based compensation charges                                                   |                                                          |       
|                                                                                                   | Deferred income taxes                                                              |                                                          |       
|                                                                                                   | Tax benefits from stock-based awards                                               |                                                          |       
|                                                                                                   | Excess tax benefits from stock-based awards                                        |                                                          |       
|                                                                                                   | Other                                                                              |                                                          |       
|                                                                                                   | Changes in operating assets and liabilities:                                       |                                                          |       
|                                                                                                   |                                                                                    | Accounts receivable                                      |       
|                                                                                                   |                                                                                    | Inventories                                              |       
|                                                                                                   |                                                                                    | Prepaid expenses and other assets                        |       
|                                                                                                   |                                                                                    | Accounts payable, accrued expenses and other liabilities |       
|                                                                                                   |                                                                                    | Deferred revenue                                         |       
|                                                                                                   |                                                                                    | Income taxes receivable                                  |       
|                                                                                                   |                                                                                    |                                                          |       
|                                                                                                   |                                                                                    | Net cash provided by (used in) operating activities      |       
|                                                                                                   |                                                                                    |                                                          |       
|Cash flows from investing activities:                                                              |                                                                                    |                                                          |       
|                                                                                                   | Purchases of investments                                                           |                                                          |       
|                                                                                                   | Maturities of investments                                                          |                                                          |       
|                                                                                                   | Sales of investments                                                               |                                                          |       
|                                                                                                   | Cash paid for business and technology acquisitions, net of cash acquired           |                                                          |       
|                                                                                                   | Purchase of property and equipment                                                 |                                                          |       
|                                                                                                   | Payment for patents and trademarks in process                                      |                                                          |       
|                                                                                                   |                                                                                    |                                                          |       
|                                                                                                   |                                                                                    | Net cash provided by (used in) investing activities      |       
|                                                                                                   |                                                                                    |                                                          |       
|Cash flows from financing activities:                                                              |                                                                                    |                                                          |       
|                                                                                                   | Proceeds from the issuance of common stock upon exercise of employee stock options |                                                          |       
|                                                                                                   | Proceeds from the issuance of common stock under employee stock purchase plan      |                                                          |       
|                                                                                                   | Excess tax benefits from stock-based awards                                        |                                                          |       
|                                                                                                   | Purchase of treasury stock                                                         |                                                          |       
|                                                                                                   |                                                                                    |                                                          |       
|                                                                                                   |                                                                                    | Net cash provided by (used in) financing activities      |       
|                                                                                                   |                                                                                    |                                                          |       
|Net change in cash and cash equivalents of discontinued operations                                 |                                                                                    |                                                          |      
|                                                                                                   |                                                                                    |                                                          |       
|                                                                                                   |                                                                                    | Net increase in cash and cash equivalents                |       
|Cash and cash equivalents, beginning of period                                                     |                                                                                    |                                                          | 33,254
|                                                                                                   |                                                                                    |                                                          |       
|Cash and cash equivalents, end of period                                                           |                                                                                    | $                                                        | 43,328
|                                                                                                   |                                                                                    |                                                          |       

See
accompanying notes to consolidated financial statements.

3

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DTS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Unaudited)        (Amounts in thousands, except per share data)

Note 1Basis of Presentation

The accompanying unaudited consolidated financial statements of DTS, Inc. (the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the unaudited consolidated
financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position at September 30,
2007, and the results of operations and cash flows for the periods presented. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and nine
months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2007. The information included in this
Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2006.

The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period.
Actual results could differ from those estimates. Certain prior year amounts in previously issued financial statements have been reclassified to conform to the current year presentation.

In
January 2007, the Company combined its Cinema and Digital Images businesses into a single business known as "DTS Digital Cinema." In February 2007, the Company's Board
of Directors approved a plan to sell its DTS Digital Cinema business to enable the Company to focus exclusively on licensing branded entertainment technology to the large and evolving audio, game
console, personal computer, portable, broadcast, and other markets. The sales process has begun and management is working to conclude this process over the coming months. In accordance with Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," during the first quarter of 2007, DTS Digital Cinema's assets
and liabilities began to be classified as held for sale and its operations began to be classified as discontinued operations. As a result, the Company has reclassified its balance sheets and
statements of operations for all periods presented in this report to reflect DTS Digital Cinema as discontinued operations. Depreciation and amortization has been eliminated from discontinued
operations from the date the Board of Directors approved the plan to sell this business. In the statements of cash flows, the cash flows of discontinued operations are not separately classified or
aggregated. The discontinued operations are reported in the respective categories of the statements of cash flows with those of continuing operations. For additional information, refer to Footnote 11
of the consolidated financial statements, "Discontinued Operations."

All
discussions and amounts in the consolidated financial statements and related notes, except for cash flows, for all periods presented relate to continuing operations only, unless
otherwise noted.

4

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Note 2Significant Accounting Policy



Repurchased shares of the Company's common stock are held as treasury shares until they are reissued or retired. Should the Company reissue treasury stock, and
the proceeds from the sale exceed the average price that was paid by the Company to acquire the shares, the Company would record such excess as an increase in additional paid-in capital.
Conversely, if the proceeds from the sale are less than the average price the Company paid to acquire the shares, the Company would
record such difference as a decrease in additional paid-in capital to the extent of increases previously recorded, with the balance recorded as a decrease in retained earnings.



During the quarter ended March 31, 2007, the functional currency of one of the Company's wholly-owned subsidiaries changed from the United States dollar to
the currency of the primary economic environment in which it operates. The translation adjustments resulting from translating the functional currency into United States dollars have been deferred as a
component of accumulated other comprehensive income in stockholders' equity. The functional currency of the Company's other wholly-owned subsidiaries is the United States dollar and accordingly, gains
and losses resulting from the translation of accounts denominated in currencies other than the functional currency are reflected in the determination of net income. To date, annual gains and losses
have not been significant.

Note 3Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The
Company plans to adopt SFAS No. 157 effective January 1, 2008. The Company is in the process of determining the effect, if any, the adoption of SFAS No. 157 will have on its
financial statements.

In
February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This
standard allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge
accounting provisions. SFAS 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. The Company plans to adopt SFAS
No. 159 effective January 1, 2008. The Company is in the process of determining the effect, if any, the adoption of SFAS No. 159 will have on its financial statements.

Note 4Short-term Investment Income

In the first quarter of 2007, the Company's management identified an error in its accrued interest income balances related to 2005 and 2006 that was corrected
during the first quarter of 2007. The correction had the effect of reducing short-term investments and decreasing interest income by $660. The correction decreased income from continuing
operations before income taxes by $660 and income

5

---



from
continuing operations by $500. Although this correction was an out-of-period adjustment, the Company's management determined that the effect on previously filed reports
was not material.

Note 5Property and Equipment, Net

Property and equipment consist of the following:

As of
December 31,
2006

As of
September 30,
2007Machinery and equipment

$
1,414

$
1,411Office furniture and fixtures


3,345


3,924Leasehold improvements


2,830


2,847Software


3,606


4,10911,195


12,291Less: Accumulated depreciation


(5,213
)

(6,612
)Property and equipment, net

$
5,982

$
5,679


Note 6Acquired Technology

On July 2, 2007, the Company acquired certain assets of Spatializer Audio Laboratories, Inc. ("Spatializer") and its wholly-owned subsidiary, Desper
Products, Inc ("Desper") for a cash payment of $1,000. These assets consist primarily of intellectual property and assumed customer contracts. The Company also assumed certain performance obligations
arising after the closing date under assumed customer contracts. Spatializer and Desper have been developers, licensors and marketers of virtualization technologies, proprietary advanced audio signal
processing technologies and products for consumer electronics. The Company has capitalized the value of the assets acquired as intangible assets with a three year life.

Note 7Commitments and Contingencies

Indemnities, Commitments and Guarantees

In the normal course of business, the Company makes certain indemnities, commitments and guarantees under which the Company may be required to make payments in
relation to certain transactions. These indemnities, commitments and guarantees include, among others, intellectual property indemnities to customers in connection with the sale of products and
licensing of technology, indemnities for liabilities associated with the infringement of other parties' technology based upon the Company's products and technology, guarantees of timely performance of
the Company's obligations, and indemnities to the Company's directors and officers to the maximum extent permitted by law. The duration of these indemnities, commitments and guarantees varies, and in
certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be
obligated to make. The Company

6

---



has
not recorded a liability for these indemnities, commitments or guarantees in the accompanying balance sheets, as future payment is not probable.

Note 8Income Taxes

For the three months ended September 30, 2007, the Company recorded an income tax provision of $1,692 on pre-tax income from continuing
operations of $2,532. For the nine months ended September 30, 2007, the Company recorded an income tax provision of $4,174 on pre-tax income from continuing operations of $9,360.
This resulted in an annualized effective tax rate of 45%. This rate differed from the U.S. statutory rate of 35% primarily due to recent results of an ongoing transfer pricing study relating to the
establishment of the Company's international licensing operation earlier this year, partially offset by tax exempt interest and research and development credits. In determining the income tax
provision for continuing operations, the continuing operations were considered a stand alone entity. The residual amount of tax expense or benefit due to the difference between the income tax
provision for the Company as a whole and the income tax provision as calculated for continuing operations was recorded in discontinued operations.

Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement
No. 109" ("FIN 48"). The Company has also applied FASB Staff Position No. FIN 48-1, "Definition of Settlement in FASB Interpretation No. 48" to clarify when a
tax position has been settled under paragraph 10(b) of FIN 48. Upon adoption of FIN 48, the Company recognized a $547 increase in tax reserves, which was accounted for as a
reduction of $547 in the beginning retained earnings.

Upon
the Company's adoption of FIN 48 during the first quarter of 2007, its liability for uncertain tax positions was $1,392, which was recorded in other long-term
liabilities. At September 30, 2007, the Company's liability for uncertain tax positions increased to $3,529, which was recorded in other long-term liabilities. The increase in
unrecognized tax benefits during the nine months ended September 30, 2007 was primarily attributable to uncertain tax positions on transfer pricing positions taken with respect to the Company's
foreign subsidiaries. These unrecognized tax benefits would affect the Company's effective tax rate if recognized. At the beginning of 2007, there was an immaterial liability for uncertain tax
positions for the possible payment of interest and penalties. The Company does not anticipate any significant changes to its total unrecognized tax benefit within the next twelve months.

The
Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the
Company's financial results. In accordance with the Company's accounting policy, interest expense and penalties related to income taxes are included in income tax expense.

The
Company, or one of its subsidiaries, files income tax returns in the U.S. and other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal
income tax examinations by tax authorities for the years prior to 2004. The Internal Revenue Service will begin its examination of the Company's 2005 federal tax return during the fourth quarter of
2007.

7

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Note 9Comprehensive Income (Loss)

At September 30, 2007, accumulated other comprehensive is comprised mostly of foreign currency translation.

Comprehensive
income (loss) for the three months ended September 30, 2006 and 2007 was ($898) and ($1,091), respectively, and $7,992 and ($2,481) for the nine months ended
September 30, 2006 and 2007, respectively.

Note 10Operating Segment and Geographic Information

Prior to 2007, the Company operated its business in three reportable segments: the Consumer business segment, the Cinema business segment and the Digital Images
business segment. In January 2007, the Company combined its Cinema and Digital Images businesses into a single business known as "DTS Digital Cinema." In February 2007, the Company's
Board of Directors approved a plan to sell its DTS Digital Cinema business. Due to the plan of sale, DTS Digital Cinema has been classified as discontinued operations. Therefore, the Company's
continuing business operates as a single reporting unit previously known as the Consumer business.

The
Company's revenue by geographical area, based on the customer's country of domicile, for the three and nine months ended September 30, 2006 and 2007 was as follows:

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,2006

2007

2006

2007United States

$
587

$
493

$
3,060

$
3,348International


8,927


10,221


36,716


32,885Total revenue

$
9,514

$
10,714

$
39,776

$
36,233


The
following table sets forth, for the periods indicated, long-lived assets by geographic area in which the Company held assets at December 31, 2006 and
September 30, 2007:

Long-Lived AssetsAs of
December 31,
2006

As of
September 30,
2007United States

$
5,550

$
5,269International


432


410Total long-lived assets

$
5,982

$
5,679


Note 11Discontinued Operations

The Cinema and Digital Images businesses that management is working to sell over the coming months are combined as the DTS Digital Cinema business and presented
below as discontinued operations.

8

---



In
August 2007, in response to changing market conditions, including tightening in the credit markets, the Company reevaluated its sales strategy in an effort to maximize
shareholder value, and it has modified its sale approach to offer the assets of the Cinema and Digital Images businesses together or individually. Additonally, the Company engaged a valuation firm
during the third quarter of 2007 to perform an interim evaluation of goodwill, per SFAS No. 142, "Goodwill and Other Intangible Assets," in order to determine whether the changing market
conditions represent impairment indicaters for the goodwill classified as held for sale. The results from this interim evaluation were important factors in the Company's determination that impairment
did not exist at September 30, 2007, as the valuation of the businesses or assets comprising the DTS Digital Cinema business exceeds the carrying value of the net assets held for sale. Due to
the changing market conditions and the decision to offer the assets of the Cinema and Digital Images businesses together or individually, the Company reevaluated SFAS No. 144 during the third
quarter of 2007 and determined that the businesses or assets comprising the DTS Digital Cinema business and the related operations still meet the criteria for the held for sale and discontinued
operations classifications, respectively.

9

---



The
following table presents the major classes of the assets and liabilities of discontinued operations held for sale in the consolidated balance sheets as of December 31, 2006
and September 30, 2007.

|                                                                     |  | As of
December 31,
2006 |        | As of
September 30,
2007
|-------------------------------------------------------------------- |  | ----------------------- | ------ | ------------------------
|Assets:                                                              |  |                         |        |                         
|Cash                                                                 |  | $                       | 2,705  |                         
|Accounts receivable, net                                             |  |                         | 4,922  |                         
|Inventories                                                          |  |                         | 3,058  |                         
|Prepaid expenses and other current assets                            |  |                         | 605    |                         
|                                                                     |  |                         |        |                         
|Total current assets of discontinued operations held for sale        |  |                         | 11,290 |                         
|Property and equipment, net                                          |  |                         | 5,356  |                         
|Intangible assets, net                                               |  |                         | 16,572 |                         
|Goodwill                                                             |  |                         | 3,585  |                         
|Other                                                                |  |                         | 131    |                         
|                                                                     |  |                         |        |                         
|Total long-term assets of discontinued operations held for sale      |  |                         | 25,644 |                         
|Total assets of discontinued operations held for sale                |  | $                       | 36,934 |                         
|                                                                     |  |                         |        |                         
|Liabilities:                                                         |  |                         |        |                         
|Accounts payable                                                     |  | $                       | 4,829  |                         
|Accrued expenses and other liabilities                               |  |                         | 3,115  |                         
|                                                                     |  |                         |        |                         
|Total current liabilities of discontinued operations held for sale   |  |                         | 7,944  |                         
|Other long-term liabilities                                          |  |                         | 1,466  |                         
|                                                                     |  |                         |        |                         
|Total long-term liabilities of discontinued operations held for sale |  | $                       | 1,466  |                         
|Total liabilities of discontinued operations held for sale           |  | $                       | 9,410  |                         
|                                                                     |  |                         |        |                         
|Net assets of discontinued operations held for sale                  |  | $                       | 27,524 |                         
|                                                                     |  |                         |        |                         

In
presenting discontinued operations, general corporate overhead expenses that have been allocated historically to DTS Digital Cinema for segment presentation purposes
are not included in discontinued operations. The following table presents revenue and expense information for the

10

---



discontinued
operations of DTS Digital Cinema for the three and nine months ended September 30, 2006 and 2007.

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,2006

2007

2006

2007Revenue

$
5,739

$
4,777

$
21,075

$
15,903Pre-tax loss


(2,949
)

(3,554
)

(5,827
)

(12,581
)Income tax benefit


1,129


1,577


5,222


4,835Loss from discontinued operations, net of tax

$
(1,820
)
$
(1,977
)
$
(605
)
$
(7,746
)


For
the three and nine months ended September 30, 2007, $937 and $2,210, respectively, of depreciation and amortization was not expensed due to the cessation of such expenses upon
DTS Digital Cinema being classified as held for sale.



In November 2006, the Company closed a worldwide exclusive license agreement with Avica Technology Corporation ("Avica"), a provider of a suite of
technologies, products and services that handle content delivery and presentation for digital distribution networks. Although the Company currently has no ownership interest in Avica, it is considered
to be a variable interest entity of the Company, in conformity with FIN 46(R), "Consolidation of Variable Interest Entitiesan Interpretation of Accounting Research Bulletin
No. 51," as the Company is considered to be the primary beneficiary of Avica. Therefore, the Company has included the assets, liabilities, and results of operations of Avica in its consolidated
financial statements from the date of the close of the license agreement. The Company expects the consolidation of Avica will continue to have an impact on its financial results from discontinued
operations in future periods, because it will continue to recognize the operating losses generated by Avica given that Avica's shareholders' equity is in a net deficit position.

While
the Company has consolidated the liabilities of Avica in accordance with FIN 46(R), it has no obligation to pay any amounts to any of Avica's creditors. As such, creditors
of Avica lack any recourse against the Company.

The
changes to the Company's total assets and total liabilities related to the consolidation of Avica included in the Company's Consolidated Balance Sheets as assets and liabilities of
discontinued operations held for sale as of December 31, 2006 were $3,616 and $3,878, respectively. The changes to the Company's total assets and total liabilities related to the consolidation
of Avica included in the Company's Consolidated Balance Sheets as assets and liabilities of discontinued operations held for sale as of September 30, 2007 were $1,548 and $2,516, respectively.
Included in the loss from discontinued operations, net of tax, for the three and nine months ended September 30, 2007 are Avica's losses for these periods of $175 and $706, respectively.

11

---



Note 12Net Income (Loss) Per Common Share

Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per common share is calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus the dilutive effect of
unvested restricted stock, outstanding stock options, common stock warrants, and the employee stock purchase plan ("ESPP") using the "treasury stock" method.

The
following table sets forth the computation of basic and diluted net income (loss) per common share:

|                                            |                                            | For the Three Months
Ended September 30,   |        | For the Nine Months
Ended September 30, |       
|------------------------------------------- | ------------------------------------------ | ------------------------------------------ | ------ | --------------------------------------- | ------
|
|Basic net income (loss) per common share:   |                                            |                                            |        |                                         |       
|                                            | Numerator:                                 |                                            |        |                                         |       
|                                            |                                            | Income from continuing operations          |        | $                                       | 922   
|                                            |                                            | Loss from discontinued operations          |        |                                         | (1,820
|                                            |                                            |                                            |        |                                         |       
|                                            |                                            | Net income (loss)                          |        | $                                       | (898  
|                                            |                                            |                                            |        |                                         |       
|                                            | Denominator:                               |                                            |        |                                         |       
|                                            |                                            | Weighted average common shares outstanding |        |                                         | 17,654
|                                            |                                            |                                            |        |                                         |       
|                                            | Continuing operations                      |                                            | $      | 0.05                                    |       
|                                            | Discontinued operations                    |                                            |        | (0.10                                   | )     
|                                            |                                            |                                            |        |                                         |       
|                                            | Basic net income (loss) per common share   |                                            | $      | (0.05                                   | )     
|                                            |                                            |                                            |        |                                         |       
|Diluted net income (loss) per common share: |                                            |                                            |        |                                         |       
|                                            | Numerator:                                 |                                            |        |                                         |       
|                                            |                                            | Income from continuing operations          |        | $                                       | 922   
|                                            |                                            | Loss from discontinued operations          |        |                                         | (1,820
|                                            |                                            |                                            |        |                                         |       
|                                            |                                            | Net income (loss)                          |        | $                                       | (898  
|                                            |                                            |                                            |        |                                         |       
|Denominator:                                |                                            |                                            |        |                                         |       
|                                            | Weighted average shares outstanding        |                                            |        | 17,654                                  |       
|                                            | Effect of dilutive securities:             |                                            |        |                                         |       
|                                            |                                            | Common stock options                       |        |                                         | 707   
|                                            |                                            | Restricted stock                           |        |                                         | 12    
|                                            |                                            | Common stock warrants                      |        |                                         | 7     
|                                            |                                            | ESPP                                       |        |                                         | 5     
|                                            |                                            |                                            |        |                                         |       
|Diluted shares outstanding                  |                                            |                                            | 18,385 |                                         |       
|                                            |                                            |                                            |        |                                         |       
|                                            | Continuing operations                      |                                            | $      | 0.05                                    |       
|                                            | Discontinued operations                    |                                            |        | (0.10                                   | )     
|                                            |                                            |                                            |        |                                         |       
|                                            | Diluted net income (loss) per common share |                                            | $      | (0.05                                   | )     
|                                            |                                            |                                            |        |                                         |       

12

---



For
the three months ended September 30, 2006 and 2007, 2,529 and 54 shares, respectively, of the Company's stock options and restricted stock were excluded from
the calculation of diluted earnings (loss) per share because their inclusion would have been anti-dilutive. For the nine months ended September 30, 2006 and 2007, 1,314 and 219
shares, respectively, of the Company's stock options and restricted stock were excluded from the calculation of diluted earnings (loss) per share because their inclusion would have been
anti-dilutive.

Note 13Stock Repurchase Plan

In August 2006, the Company's Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 1,000 shares of the
Company's common stock in the open market or in privately negotiated transactions. At September 30, 2007, the Company had repurchased all shares of common stock under this authorization for an
aggregate cost of $22,670.

13

---





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

Forward-Looking Statements May Prove Inaccurate

This Form 10-Q and the documents incorporated herein by reference contain forward-looking statements based on our current beliefs,
expectations, estimates and projections about our industry, and certain assumptions made by us. Words such as "believes," "anticipates," "estimates," "expects," "projections," "may," "potential,"
"plan," "continue" and words of similar effect, constitute "forward-looking statements." The forward-looking statements contained in this report involve known and unknown risks, uncertainties and
other factors that may cause our actual results to be materially different from those expressed in or implied by these statements. These factors include those listed under the "Risk Factors" section
contained below and elsewhere in this Form 10-Q, and the other documents we file with the Securities and Exchange Commission, or SEC, including our most recent reports on
Form 8-K and Form 10-K. We cannot guarantee future results, levels of activity, performance, or achievements. We do not intend to update these forward-looking
statements to reflect future events or circumstances. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial
statements and the notes to those statements included elsewhere in this Form 10-Q.

Overview

We are a leading provider of entertainment technology, products and services to the audio and image entertainment markets worldwide. Historically we have been
focused on high quality digital multi-channel audio, commonly referred to as surround sound, which provides more than two-channels of audio, allowing the listener to simultaneously hear
discrete sounds from multiple speakers. Our DTS digital multi-channel audio technology delivers compelling surround sound for the motion picture and consumer electronics markets. We also provide high
quality digital image processing, enhancement and restoration services for motion pictures, digital cinema, and television content.

In
January 2007, we combined our Cinema and Digital Images businesses into a single business known as DTS Digital Cinema. In February 2007, our Board of Directors approved
a plan to sell our DTS Digital Cinema business to enable us to focus exclusively on licensing branded entertainment technology to the large and evolving audio, game console, personal computer,
portable and broadcast markets. The sales process has begun and we are working to conclude this process over the coming months. The DTS Digital Cinema business intends to focus on the potentially
large and emerging market for digital cinema products and services. In accordance with SFAS No. 144, during the first quarter of 2007, DTS Digital Cinema's assets and liabilities were
classified as held for sale and its operations were reported as discontinued operations. As a result, we reclassified our balance sheets and statements of operations for all periods presented in this
report to reflect DTS Digital Cinema as discontinued operations. In the statements of cash flows, the cash flows of discontinued operations are not separately classified or aggregated. The
discontinued operations are reported in the respective categories of the statements of cash flows with those of continuing operations.

In
August 2007, in response to changing market conditions, including tightening in the credit markets, we reevaluated our sales strategy in an effort to maximize shareholder
value, and we have modified our sales approach to offer the assets of the Cinema and Digital Images businesses together or individually. Additonally, we engaged a valuation firm during the third
quarter of 2007 to perform an interim evaluation of goodwill, per SFAS No. 142, in order to determine whether the changing market conditions represent impairment indicaters for the goodwill
classified as held for sale. The results from this interim evaluation were important factors in our determination that impairment did not exist at September 30, 2007, as the valuation of the
businesses or assets comprising the DTS Digital Cinema business exceeds the carrying value of the net assets held for sale. Due to the changing market conditions and the decision to offer the assets
of the Cinema and Digital Images businesses together or individually, we reevaluated SFAS No. 144 during the third quarter of 2007 and determined that the

14

---



businesses
or assets comprising the DTS Digital Cinema business and the related operations meet the criteria for the held for sale and discontinued operations classifications, respectively.

All
discussions and amounts in Management's Discussion and Analysis, except for Liquidity and Capital Resources, for all periods presented relate to continuing operations only, unless
otherwise noted.

We
derive revenues from licensing our audio technology, trademarks, and know-how under agreements with substantially all of the major consumer audio electronics
manufacturers. Our business model provides for these manufacturers to pay us a per-unit amount for DTS-enabled products that they manufacture. Through our DTS Entertainment
label, we derive revenues from the sale of multi-channel music titles in our digital multi-channel format.

We
actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technology, trademarks, or
know-how without a license or who have under-reported the amount of royalties owed under license agreements
with us. We continue to invest in our compliance and enforcement infrastructure to support the value of our intellectual property to us and our licensees and to improve the long-term
realization of revenue from our intellectual property. As a result of these activities, from time to time we recognize royalty revenues that relate to consumer electronics manufacturing activities
from prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. While we consider such revenues
to be a regular part of our normal operations, we cannot predict such recoveries or the amount or timing of such revenues.

Our
cost of revenues consists primarily of amounts paid for products and materials, salaries and related benefits for operations personnel, amortization of acquired intangibles and
payments to third parties for copyrighted material.

Our
selling, general, and administrative expenses consist primarily of salaries and related benefits for personnel engaged in sales and costs associated with promotional and other
selling activities. Selling, general, and administrative expenses also include professional fees, facility-related expenses, and other general corporate expenses, including personnel engaged in
corporate administration, finance, human resources, information systems and legal.

Our
research and development costs consist primarily of salaries and related benefits for research and development personnel, engineering consulting expenses associated with new product
and technology development, and quality assurance and testing costs. Research and development costs are expensed as incurred.

We
have a licensing team that markets our technology directly to consumer electronics products manufacturers and semiconductor manufacturers. This team includes employees located in the
United States, China, Japan, Hong Kong, Ireland and Northern Ireland. We sell music content released under our DTS Entertainment label through exclusive distribution arrangements in the United States,
Europe and Japan. We employ consultants to coordinate sales to independent retailers and we sell this music to consumers through web-based retailers and distributors.

Management Discussion Regarding Trends, Opportunities, and Challenges



Our revenue is primarily dependent upon the DVD-based home theater market, which has experienced rapid growth over the past several years. However, we
have recently experienced softness in our DVD player trademark licensing program, and expect continued softness in this area as the DVD player market transitions to high definition formats. The
success of DVD-Video-based systems and products has fueled a demand for higher quality entertainment in the home, and this demand is extending to the car audio and personal computer
markets as well. In addition, we expect the recent

15

---



acceleration
of the market for high definition televisions to drive demand for high definition optical disc players and advanced home theater systems over the next several years. Because we have been
selected as a mandatory technology for next generation players, our revenue growth should more closely track the growth rate for sales of these players over the next several years. We expect that the
market for high definition players will yield new growth that provides an offset to the expected further decline in DVD player shipments. Further, we believe that mandatory inclusion in next
generation optical disc standards will help to improve the adoption rate of our technologies in other consumer products such as next generation video game consoles, personal audio and video players,
personal computers and in-car entertainment systems.

While
we are optimistic about the expected growth in next generation optical disc products over the next several years, we do not have near-term visibility into the precise
timing of this expected growth or how smooth or linear this growth will be. For example, revenues from next generation high definition optical disc formats comprised 5% and 12% of revenues for our
first and second quarters of 2007, respectively, but then fell to 9% of revenue in our third quarter of 2007. Factors that could potentially affect this growth in the near term include the pace of
consumer adoption of these next generation products, product pricing, manufacturer redesign cycles, competition among competing formats, content availability, and the impact of format competition on
consumer buying patterns.

In
July 2004, we acquired QDesign Corporation, or QDesign, a company focused on lower bit-rate audio delivery technology. The market for higher quality entertainment
is expanding into portable devices that require the use of low-bit rate audio coding systems including portable audio players, PDAs and wireless handset applications. Concurrent with this
trend, there is a growing need for a good link between home and portable devices that preserves as much quality as possible and allows consumers a seamless technology solution for the storage and
playback of their content. In October 2004, leveraging our existing research and development efforts and the intellectual property acquired in the QDesign acquisition, we launched our
DTS-HD initiative. This technology is a scalable coding system that will allow content to be played in home and portable devices. We believe that the broad and robust nature of this
offering improves the probability of inclusion of our technologies in next generation products.

In
January 2007, along with Coding Technologies we announced the availability of a broadcast solution which will allow high definition broadcasts of MPEG-4
transmissions in the advanced AAC-Plus audio codec to be transcoded to DTS Digital Surround in set-top boxes for playout through DTS-capable AV receivers. This
DTS/Coding Technologies solution has been adopted as a mandatory part of Norway's digital terrestrial set-top box standard.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, estimates and judgments are evaluated,
including those related to revenue recognition, inventories, intangible assets, income taxes, impairment of long-lived assets, stock-based compensation, and contingencies and litigation.
These estimates and judgments are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty.
Actual results may differ from these estimates. There has been no material change to our critical accounting policies and estimates from the information provided in our Form 10-K
filed on March 16, 2007.

16

---



Results of Continuing Operations



Change2007

2006

$

%($ in thousands)Three months ended September 30,

$
10,714

$
9,514

$
1,200

13
%Nine months ended September 30,

$
36,233

$
39,776

$
(3,543
)
(9
)%


The
increase in revenues for the quarter ended September 30, 2007, compared to the third quarter of 2006, was primarily attributable to continued strength in our car audio systems
business and royalties from next generation high definition optical disc formats, which we first began to record in 2007. However, revenue from the next generation optical disc formats fell
significantly from the quarter ended June 30, 2007, as certain consumer electronics product manufacturers reduced production levels in advance of product change-overs in response to significant
feature and price pressures leading into the holiday selling season. We will continue to monitor the Blu-ray and HD DVD markets, particularly during the critical holiday season, and remain
cautious in our overall outlook due to uncertainties regarding the timing and rate of adoption of the new formats. However, we expect technology licensing revenues to grow during the remainder of the
year, as wider availability of high definition player, PC and game console models coupled with aggressive pricing and promotion of these products should result in increased licensing revenues from the
new formats, and from continued strength in the car audio systems market.

The
decrease in revenues for the nine months ended September 30, 2007, compared to the same prior year period, was primarily attributable to an $8.9 million decrease in
royalty recoveries from intellectual property compliance and enforcement activities, partially offset by increased revenues from the car audio market and the inclusion of new revenue streams from the
Blu-ray and HD DVD markets. Revenues from the car audio market increased more than 50% during the nine months ended September 30, 2007, compared to the same period in the prior
year. Additionally, royalties from Blu-ray and HD DVD comprised 9% of total revenue for the nine months ended September 30, 2007.



2007

%

2006

%

Percentage point change
in gross profit margin
relative to prior period($ in thousands)Three months ended September 30,

$
10,426

97
%
$
9,029

95
%
2%Nine months ended September 30,

$
35,391

98
%
$
38,350

96
%
2%


The
increase in gross profit margin in the current year relates to a reduction of prepaid production costs, including the recognition of these deferred costs, for DTS Entertainment,
which were substantially written-off in the fourth quarter of 2006. We expect consolidated gross profit margins in the 97% to 98% range for 2007.



Change2007

2006

$

%($ in thousands)Three months ended September 30,

$
7,195

$
7,504

$
(309
)
(4
)%% of Revenue


67
%

79
%Nine months ended September 30,

$
23,289

$
21,814

$
1,475

7
%% of Revenue


64
%

55
%


17

---



The
decrease for the three months ended September 30, 2007, compared to the same prior year period, is primarily due to a reduction in employee related costs in response to
reduced revenue expectations.

The
increase for the nine months ended September 30, 2007, compared to the same prior year period, is primarily due to increases in stock-based compensation expense related to
additional employee equity grants since September 30, 2006 and employee related costs. We also incurred higher expenses for audit related services during this period.

We
expect SG&A expenses to continue to increase, primarily to support activities such as new technology initiatives, international expansion and intellectual property enforcement.



Change2007

2006

$

%($ in thousands)Three months ended September 30,

$
1,611

$
1,723

$
(112
)
(7
)%% of Revenue


15
%

18
%Nine months ended September 30,

$
4,881

$
5,034

$
(153
)
(3
)%% of Revenue


13
%

13
%


The
decrease for the three months ended September 30, 2007, compared to the same prior year period, is primarily attributable to decreases in outside consultant related costs
during the current quarter, partially offset by increases in employee related expenses.

The
decrease for the nine months ended September 30, 2007, compared to the same prior year period, is primarily attributable to decreases in outside consultant related costs and
expense reimbursements under certain research grants, partially offset by increases in employee related expenses. We intend to continue to invest in R&D to support our broadening product development
agenda and the ongoing support of the rollout of Blu-Ray Disc and HD DVD, and thus expect to see sequential growth through the remainder of the year.



Interest and other income, net, for the three months ended September 30, 2007 decreased 35% to $0.9 million from $1.4 million for the three
months ended September 30, 2006. The decrease is primarily attributable to lower average invested balances as a result of our stock repurchases during the second and third quarters of 2007, and
from a greater focus on tax exempt investments in 2007, which have lower nominal interest rates, but greater after-tax yields.

Interest
and other income, net, for the nine months ended September 30, 2007 decreased 42% to $2.1 million from $3.7 million for the nine months ended
September 30, 2006. The decrease is largely due to the factors mentioned above. Additionally, we recorded an adjustment in the first quarter of 2007 to correct an error. In the first quarter of
2007, management identified an error in our accrued interest income balances related to 2005 and 2006 that was corrected during the first quarter of 2007. The correction had the effect of reducing
short-term investments and decreasing interest income by $0.7 million. The correction has decreased income from continuing operations before income taxes by $0.7 million and
income from continuing operations by $0.5 million for the nine months ended September 30, 2007. Although this correction was an out-of-period adjustment,
management determined that the effect on previously filed reports was not material. Going forward, we expect interest income for the year to be in the range of $2.5 to $3.0 million, based on
the current interest rate environment and current investment balances.

18

---





For the three months ended September 30, 2007, we recorded an income tax provision of $1.7 million on pre-tax income from continuing
operations of $2.5 million. For the three months ended September 30, 2006, we recorded an income tax provision of $0.3 million on pre-tax income from continuing
operations of $1.2 million.

For
the nine months ended September 30, 2007, we recorded an income tax provision of $4.2 million on pre-tax income from continuing operations of
$9.4 million. This resulted in an annualized effective tax rate of 45%. This rate differed from the U.S. statutory rate of 35% primarily due to recent results of an ongoing transfer pricing
study relating to the establishment of our international licensing operation earlier this year, partially offset by tax exempt interest and research and development credits. For the nine months ended
September 30, 2006, we recorded an income tax provision of $6.6 million on pre-tax income from continuing operations of $15.2 million. This resulted in an annualized
effective tax rate of 43%. This rate differed from the U.S. statutory rate of 35% primarily due to the effect of different tax rates in foreign juristictions, partially offset by tax exempt interest
and research, development credits and the extraterritorial income exclusion. In determining the income tax provision for continuing operations, the continuing operations were considered a stand alone
entity. The residual amount of tax expense or benefit due to the difference between the income tax provision for the Company as a whole and the income tax provision as calculated for continuing
operations was recorded in discontinued operations. We expect the effective tax rate for 2007 will be approximately 45%.

Results of Discontinued Operations

Loss from discontinued operations, net of tax, for the three months ended September 30, 2007 was $2.0 million, compared to a loss from discontinued
operations, net of tax, of $1.8 million for the three months ended September 30, 2006. Revenues declined $1.0 million for the three months ended September 30, 2007,
compared to the same prior year period due to softness in our cinema hardware and image restoration activities. Additionally, operating expenses decreased $0.3 million for the three months
ended September 30, 2007, compared to the same prior year period due to a decrease in cost of sales associated with the overall decline in net sales. Partially offsetting the remaining decline
in results from discontinued operations, net of tax, is an increase in the income tax benefit during the three months ended September 30, 2007, compared to the same prior year period.

Loss
from discontinued operations, net of tax, for the nine months ended September 30, 2007 was $7.7 million, compared to loss from discontinued operations, net of tax, of
$0.6 million for the nine months ended September 30, 2006. Net sales decreased $5.2 million for the nine months ended September 30, 2007, compared to the same prior year
period. Operating expenses increased $1.5 million for the nine months ended September 30, 2007, compared to the same prior year period. The decrease in sales is largely due to the
factors mentioned above. The increase in operating expenses is due to
increased employee related expenses including stock-based compensation expense, professional service fees relating to the sales process and the inclusion of Avica's losses. Partially offsetting the
increased operating expenses was a decrease in cost of sales associated with the overall decline in net sales and the cessation of depreciation and amortization during the current year upon the
discontinued operations being classified as held for sale. The remaining decline in results from discontinued operations, net of tax, relates primarily to a decrease in the income tax benefit during
the nine months ended September 30, 2007, compared to the same prior year period.

While
we believe the likelihood is remote for an impairment resulting from the net assets of the DTS Digital Cinema business, less costs to sell, exceeding a potential sale price, there
can be no assurance that a sale of these assets subsequent to quarter end will not result in an impairment.

19

---



Liquidity and Capital Resources

At September 30, 2007, we had cash, cash equivalents and short-term investments of $87.0 million, compared to $108.8 million at
December 31, 2006.

Net
cash used in operating activities was $0.4 million for the nine months ended September 30, 2007, compared to net cash provided by operating activities of
$11.6 million for the nine months ended September 30, 2006. The decrease in operating cash flows during the nine months ended September 30, 2007, compared to the same prior year
period, results largely from an $8.9 decrease in royalty settlements received during the first nine months of 2007, compared to the same prior year period. Additionally, cash flows from accounts
receivable decreased $2.3 million during the nine months ended September 30, 2007, compared to the same prior year period, due primarily to accrued licensing revenues from
Blu-ray Disc and HD DVD based products, which began in 2007, and current year accrued revenues relating to licensing enforcement settlements.

Net
cash provided by investing activities totaled $38.1 million for the nine months ended September 30, 2007, compared to net cash used in investing activities of
$3.5 million for the nine months ended September 30, 2006. Cash provided by investing activities for the nine months ended September 30, 2007 primarily consists of net sales of
available for sale investments and maturation of held to maturity securities of $43.4 million in total, offset by purchases of property and equipment of $3.8 million.

Net
cash used by financing activities totaled $18.1 million for the nine months ended September 30, 2007, compared to net cash provided by financing activities of
$1.9 million for the nine months ended September 30, 2006. Cash used by financing activities for the nine months ended September 30, 2007
primarily consists of stock repurchases, offset by proceeds from issuances of common stock under the employee stock purchase plan, exercise of stock options and related excess tax benefits.

In
2005, we entered into an agreement for the purchase of a new enterprise resource planning ("ERP") system, for approximately $0.7 million. From inception of this project through
September 30, 2007, we incurred approximately $6.1 million for the purchase of the ERP system and implementation costs. We expect that we will incur additional costs over the next
several years as we continue to refine the system's functionality.

In
August 2006, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to one million shares of our common stock in the open
market or in privately negotiated transactions. During the nine months ended September 30, 2007, we repurchased all shares of common stock under this authorization for an aggregate of
$22.7 million.

On
July 2, 2007, we acquired certain assets of Spatializer Audio Laboratories, Inc. ("Spatializer") and its wholly-owned subsidiary, Desper Products, Inc ("Desper") for a
cash payment of $1.0 million.

We
are continuing to fund the obligations of the DTS Digital Cinema business, and will continue to do so through the close of a sale transaction. All expenses incurred relating to the
sales transaction, while classified as discontinued operations, will continue to affect our liquidity and capital resources and utilize portions of the cash that is generated or held by
DTS, Inc. At this time, we are unable in good faith to make a full determination of the estimated expenses which will be incurred relating to the sales transaction. The sales process has begun
and we are working to conclude this process over the coming months.

We
believe that our cash, cash equivalents, short-term investments, and cash flows from operations will be sufficient to satisfy our working capital and capital expenditure
requirements for at least the next twelve months. Beyond the next twelve months, additional financing may be required to fund working capital and capital expenditures. Changes in our operating plans
including lower than anticipated revenues, increased expenses, acquisition of companies, products or technologies or other

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events,
including those described in "Risk Factors" included elsewhere herein, in our Form 10-K filed on March 16, 2007 and in other filings may cause us to seek additional
debt or equity financing on an accelerated basis. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans
and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash
payment obligations and financial or operational covenants that restrict our ability to operate our business.



There have been no material changes to our contractual obligations since December 31, 2006, with the exception of the increased obligations associated with
our gross unrecognized tax benefits recorded in conjunction with the adoption of FIN 48. As of September 30, 2007, our total amount of unrecognized tax benefits was $3.5 million
and is considered a long-term obligation. We are currently unable to make reasonably reliable estimates of the periods of cash settlements associated with these obligations.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We
plan to adopt SFAS No. 157 effective January 1, 2008. We are in the process of determining the effect, if any, the adoption of SFAS No. 157 will have on our financial statements.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This standard allows companies to elect to follow
fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. SFAS 159 is
applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. We plan to adopt SFAS No. 159 effective January 1, 2008. We
are in the process of determining the effect, if any, the adoption of SFAS No. 159 will have on our financial statements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At September 30, 2007, we did not have any
long-term debt; however, the amount of outstanding debt at any time may fluctuate and we may from time to time be subject to refinancing risk.

Our
interest income is sensitive to changes in the general level of U.S. interest rates, particularly since a significant portion of our investments are and will be in
short-term marketable
securities, U.S. government securities and corporate bonds. Due to the nature and maturity of our short-term investments, we have concluded that there is no material market risk exposure
to our principal. The average duration of our investment portfolio is typically less than 90 days. As of September 30, 2007, a 1% change in interest rates throughout a
one-year period would have an annual effect of approximately $0.9 million on our income from continuing operations before income taxes.

We
derive over 90% of our revenues from continuing operations from sales outside the United States, and maintain international research, sales, marketing, and business development
offices. Therefore, our results could be negatively affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns,
and changes in regional or worldwide economic or political conditions. The risks of our international operations are

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mitigated
in part by the extent to which our revenues are denominated in U.S. dollars and, accordingly, we are not exposed to significant foreign currency risk on these items. We do have limited
foreign currency risk on certain revenues and operating expenses such as salaries and overhead costs of our foreign operations and cash maintained by these operations. Revenues denominated in foreign
currencies accounted for approximately 3% of total revenues during the nine months ended September 30, 2007. Operating expenses, including cost of sales, for our foreign subsidiaries were
approximately $3.7 million in the nine months ended September 30, 2007. Based upon the expenses for the nine months ended September 30, 2007, a 1% change in foreign currency rates
throughout a one-year period would have an immaterial annual effect on income from continuing operations before income taxes.

Our
international business is subject to risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations
and restrictions, and foreign exchange rate volatility when compared to the United States dollar. Accordingly, our future results could be materially impacted by changes in these or other factors.

We
are also affected by exchange rate fluctuations as the financial statements of our foreign subsidiaries are translated into the United States dollar in consolidation. As exchange
rates vary, these results, when translated, may vary from expectations and could adversely or positively impact overall profitability. During the nine months ended September 30, 2007, the
impact of foreign exchange rate fluctuations related to translation of our foreign subsidiaries' financial statements was immaterial to comprehensive income.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-l5(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We
carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that as of the
end of the period covered by this report our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

In
April 2007, we implemented a new ERP system in our U.S. and UK operations. We believe that we have adequately controlled the transition and that there will be no significant
negative impact to our internal control environment. We expect this ERP system to further advance our control environment by automating certain aspects of our internal controls, improving management
visibility with respect to detailed financial information and standardizing processes as its full capabilities are utilized.

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PART II    OTHER INFORMATION

Item 1.    Legal Proceedings

None.

Item 1A.    Risk Factors

Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause our actual results to differ
materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make. If any of the following risks actually occurs, our business,
financial condition, or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business



Growth
in our business over the past several years is due in large part to the rapid growth in sales of DVD players and home theater systems incorporating our technologies. As the
markets for DVD players mature, we expect sales of traditional consumer DVD players to decline. To the extent that sales of DVD players and home theater systems level off or decline, our business will
be adversely affected. Additionally, the release and consumer adoption of next-generation optical disc players has only just begun. There are currently two competing formats for
high-definition optical discs and consumers may not react favorably to having to make a choice between formats. There is also the risk of consumer confusion and frustration over the
inability of a given format player to play a disc in the competing format. The slow adoption by consumers of these new formats, as well as the inability of traditional DVD players to sustain their
past growth rates, could adversely affect our business, as revenue and earnings derived from these new players and associated home theater system sales may not fully replace the anticipated decline in
revenue and earnings associated with traditional DVD players and home theater systems. Even assuming resolution of the competing disc format conflict, the rate of consumer adoption and ultimate
penetration of next-generation optical disc players is uncertain and may be slower than past growth rates of traditional DVD players. In addition, if new technologies are developed for use
with DVDs or new technologies are developed that substantially compete with or replace DVDs as a dominant medium for consumer video entertainment, our business, operating results and prospects will be
adversely affected.



In order to better address rapidly evolving markets, meet the needs of customers and increase stockholder value, we are proceeding with the sale of our DTS
Digital Cinema business. In August 2007, in response to changing market conditions, including tightening in the credit markets and the resulting uncertainty, we reevaluated our sales strategy
in an effort to maximize shareholder value, and we have modified our sales approach to offer the assets of the Cinema and Digital Images

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businesses
together or individually. The sales process may be costly. The sale might not be accomplished by the end of 2007 or at all. The sales process requires significant time and attention from
our management, finance, accounting and legal teams, which could disrupt our day-to-day operations and shift the allocation of these resources away from matters related to our
core business. In addition, implementing any transaction would involve a number of operational, legal and, possibly, regulatory steps. Implementation could be costly, cause further disruption to our
day-to-day operations, and result in the loss of customers and/or sales revenue, which could cause our business and operating results to suffer. Furthermore, implementation of
a sale is a complicated process and there is a risk that we may not be successful in the execution of our sales strategy, which could cause our business to suffer and our stock price to decline.



Establishing, maintaining and strengthening our "DTS" brand is critical to our success. Our brand identity is key to maintaining and expanding our business and
entering new markets. Our success depends in large part on our reputation for providing high quality products, services and technologies to the entertainment industry and the consumer electronics
products industry. If we fail to promote and maintain our brand successfully, our business and prospects may suffer. Moreover, we believe that the likelihood that our technologies will be adopted in
industry standards depends, in part, upon the strength of our brand, because professional organizations and industry participants are more likely to incorporate technologies developed by a
well-respected and well-known brand into standards. Maintaining and strengthening our brand will depend heavily on our ability to develop innovative technologies for the
entertainment industry, to continue to provide high quality products and services, and manage brand transition in connection with the process of selling the businesses or assets that comprise our DTS
Digital Cinema business, which we may not do successfully.



The market for our technology, products, and services is characterized by:



Our
future success depends on our ability to enhance our existing technology, products, and services and to develop acceptable new technology, products, and services on a timely basis.
The development of enhanced and new technology, products, and services is a complex and uncertain process requiring high levels of innovation, highly-skilled engineering and development personnel, and
the accurate anticipation of technological and market trends. We may not be able to identify, develop, market, or support new or enhanced technology, products, or services on a timely basis, if at
all. Furthermore, our new technology, products, and services may never gain market acceptance, and we may not be able to respond effectively to evolving consumer demands, technological changes,
product announcements by competitors, or emerging industry standards. For example, we may not be able to effectively address concerns in the film and music industries relating to piracy in our current
or future products. Any failure to respond to these changes or concerns would likely prevent our technology, products, and services from gaining market acceptance or maintaining market share and could
lead to our technology, products and services becoming obsolete.

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Protection of our intellectual property is critical to our success. Patent, trademark, copyright, and trade secret laws and confidentiality and other contractual
provisions afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We face numerous risks in protecting our intellectual
property rights, including the following:



As
a result, our means of protecting our intellectual property rights and brands may not be adequate. Furthermore, despite our efforts, third parties may violate, or attempt to violate,
our intellectual property rights. Infringement claims and lawsuits would likely be expensive to resolve and would require management's time and resources. In addition, we have not sought, and do not
intend to seek, patent and other intellectual property protections in all foreign countries. In countries where we do not have such protection, products incorporating our technology may be lawfully
produced and sold without a license.



Companies that participate in the digital audio, digital image processing, consumer electronics, and entertainment industries hold a large number of patents,
trademarks, and copyrights, and are frequently involved in litigation based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes
frequently involve highly complex and costly scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and uncertainty. Accordingly, intellectual
property disputes, with or without merit, could be costly and time consuming to litigate or settle, and could divert management's attention from executing our business plan. In addition, our
technology and products may not be able to withstand any third-party claims or rights against their use. If we were unable to obtain any necessary license following a determination of infringement or
an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our products to avoid infringing a third party's rights and could be
required to temporarily or permanently discontinue licensing our products.

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The digital audio, digital imaging, consumer electronics, cinema and entertainment markets are intensely competitive, subject to rapid change, and significantly
affected by new product introductions and other market activities of industry participants. Our principal competitor is Dolby Laboratories, Inc., who competes with us in most of our markets. We
also compete with other companies offering:



Many
of our current and potential competitors enjoy substantial competitive advantages, including:



As
a result, these current and potential competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or
customer requirements.

In
addition to the competitive advantages described above, Dolby also enjoys other unique competitive strengths relative to us. For example, it introduced multi-channel audio technology
before we did and has a larger base of installed movie theaters for its cinema playback equipment. Its technology has been incorporated in significantly more DVD-Video films than our
technology. It has also achieved mandatory standard status in product categories that we have not, including DVD-Video and DVD-Audio Recordable, for its stereo technology and
terrestrial digital television broadcasts in the United States. It also currently has more depth in digital cinema. As a result of these factors, Dolby

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has
a competitive advantage in selling its digital multi-channel audio technology to consumer electronics products manufacturers and in selling products and services designed for use in the digital
cinema space.

Sony
Corporation is both a competitor and a significant customer in most of our markets. If Sony decides to eliminate the use of our technology in its products or to compete with us more
aggressively in our markets, the revenues that we derive from Sony would be lower than expected.



We are dependent on our customers and licenseesincluding consumer electronics products manufacturers, semiconductor manufacturers, movie theaters,
producers and distributors of content for music, films, videos, and games and builders and integrators of digital cinema
networksto incorporate our technology in their products, purchase our products and services, or release their content in our proprietary DTS audio format. Although we have contracts and
license agreements with many of these companies other than builders and integrators of digital cinema networks, these agreements do not require any minimum purchase commitments, are on a
non-exclusive basis, and do not require incorporation or use of our technology, trademarks or services. Our customers, licensees and other manufacturers might not utilize our technology or
services in the future.



We expect to derive a significant percentage of our revenues from the technology, products, and services that we offer to manufacturers of consumer electronics
products. To date, the most significant driver for the use of our technology in the home theater market has been the release of major movie titles with DTS audio soundtracks. We also believe that
demand for our DTS audio technology in emerging markets for multi-channel audio, including homes, cars, personal computers, and video games and consoles, will be based on the number, quality, and
popularity of the audio DVDs, computer software programs, and video games released with DTS audio soundtracks. Although we have existing relationships with many leading providers of movie, music,
computer, and video game content, we do not have contracts that require any of these parties to develop and release content with DTS audio soundtracks. In addition, we may not be successful in
maintaining existing relationships or developing relationships with other existing providers or new market entrants that provide content. As a result, we cannot assure you that a significant amount of
content in movies, audio DVDs, computer software programs, video games, or other entertainment mediums will be released with DTS audio soundtracks. If the amount, variety, and popularity of
entertainment content released with DTS audio soundtracks do not increase, consumer electronics products manufacturers that pay us per-unit licensing fees may discontinue offering DTS
playback capabilities in the consumer electronics products that they sell.



The market for consumer electronics products is intensely competitive and price sensitive. Retail prices for consumer electronics products that include our DTS
audio technology, such as DVD players and home theater systems, have decreased significantly and we expect prices to continue to decrease for the foreseeable future. Declining prices for consumer
electronics products could create downward pressure on the licensing fees we currently charge our customers who integrate our technology into the consumer electronics products that they sell and
distribute. Most of the consumer electronics products that include our audio technology also include Dolby's multi-channel audio technology. As a result of pricing pressure, consumer electronics
products manufacturers who manufacture products in which our

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audio
technology is not a mandatory standard could decide to exclude our DTS audio technology from their products altogether.

The
market for consumer video products is also intensely competitive and price sensitive. Retail prices for consumer video products have experienced price pressure and we expect this
price pressure to continue for the foreseeable future. Declining retail prices for such video products could create downward pressure on the fees we charge our customers for the image processing,
enhancement and restoration services we provide. If the motion picture studios, content owners, producers or distributors were to believe that the existing image quality is satisfactory or that the
pricing for our services is too high, they could decide to not use our services altogether.



Our licensing revenue from consumer electronics product manufacturers depends in large part upon the availability of ICs, that implement our technologies. IC
manufacturers incorporate our technologies into these ICs, which are then incorporated in consumer electronics products. We do not manufacture these ICs, but rather depend on IC manufacturers to
develop, produce and then sell them to licensed consumer electronics product manufacturers. We do not control the IC manufacturers' decisions whether or not to incorporate our technologies into their
ICs, and we do not control their product development or commercialization efforts. If these IC manufacturers are unable or unwilling, for any reason, to implement our technologies into their ICs, or
if, for any reason, they sell fewer ICs incorporating our technologies, our operating results will be adversely affected.



A significant percentage of our revenues are generated from consumer electronics products manufacturers who license and incorporate our technology in their
consumer electronics products. Under our existing arrangements, these customers pay us per-unit licensing fees based on the number of consumer electronics products manufactured that
incorporate our technology. We rely on our customers to accurately report the number of units manufactured in collecting our license fees, preparing our financial reports, projections, budgets, and
directing our sales and product development efforts. Most of our license agreements permit us to audit our customers, but audits are generally expensive, time consuming, difficult to manage
effectively, dependent in large part on the cooperation of our licensees and the quality of the records they keep, and could harm our customer relationships. If any of our customer reports understate
the number of products they manufacture, we may not collect and recognize revenues to which we are entitled.



Although we have been in business since 1990, we have only achieved annual profitability since fiscal 2001. We expect our operating expenses to increase as we,
among other things:



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As
a result, we will need to grow our revenues in order to maintain and increase our profitability. In addition, we may fail to accurately estimate and assess our increased operating
expenses as we grow.



Our capital requirements will depend on many factors, including:



In
the future, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise
additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders. If
we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products and services, execute our business plan, take advantage of future opportunities, or respond to
competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations, and financial condition.



Although the first movie with a DTS audio soundtrack was released in 1993, we did not enter the home theater market until 1996, and our technology has only
recently been incorporated into other consumer electronics markets, such as car audio, personal computers, video games and consoles, portable electronics devices, and digital satellite and cable
broadcast products. In addition, while we have completed over 100 digital image processing, enhancement and restoration film projects, it is only recently that a large number of these projects have
been completed. As a result, the demand for our technology, products, and services and the income potential of these businesses are unproven. In addition, because the market for digital audio
technology and image services is relatively new and rapidly evolving, we have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to
relevant business trends, which could harm our business.

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Before
investing in our common stock, you should consider the risks, uncertainties, and difficulties frequently encountered by companies in new and rapidly evolving markets such as ours. We may not be
able to successfully address any or all of these risks.



Our technology or products could contain errors that could cause our products or technology to operate improperly and could cause unintended consequences. If our
products or technology contain errors we could be required to replace them, and if any such errors cause unintended consequences we could face claims for product liability. Although we generally
attempt to contractually limit our exposure to incidental and consequential damages, as well as provide insurance coverage to such events, if these contract provisions are not enforced or are
unenforceable for any reason, if liabilities arise that are not effectively limited, or if our insurance coverage is inadequate to satisfy the liability, we could incur substantial costs in defending
and/or settling product liability claims.



We recently implemented a new enterprise resource planning, or ERP, system to enhance operating efficiencies and provide more effective management of our
business. The implementation of this new
ERP system is costly and involves numerous risks including: disruption to our normal accounting procedures and internal control over financial reporting, inaccuracies in the conversion of electronic
data, difficulties integrating the systems and processes, additional costs to continue to refine the system's functionality, and disruption of our financial reporting process. Failure to adequately
address these issues could materially adversely affect our operating results, internal control over financial reporting, ability to manage our business effectively, and ability to meet regulatory
filing deadlines.



Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on Form 10-K our assessment
of the effectiveness of our internal controls over financial reporting. We cannot assure you that our system of internal controls will be effective in the future as our operations and control
environment change. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, our financial reporting may be inaccurate. If reporting errors actually occur,
we could be subject to sanctions or investigation by regulatory authorities, such as the SEC. These results could adversely affect our financial results or the market price of our common stock. If our
independent registered public accounting firm is unable to provide us with an unqualified report as to the adequacy of our internal controls over financial reporting as required by Section 404
of the Sarbanes Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our stock.



We market and sell our products and services outside the United States, and currently have employees located in more than ten countries worldwide. Many of our
customers and licensees are located outside the United States. As a key component of our business strategy, we intend to expand our international sales. During the nine months ended
September 30, 2007, over 90% of our revenues

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from
continuing operations were derived internationally. We face numerous risks in doing business outside the United States, including:



Such
factors could cause our future international sales to decline.

Our
business practices in international markets are also subject to the requirements of the Foreign Corrupt Practices Act. If any of our employees is found to have violated these
requirements, we could be subject to significant fines and other penalties.

Our
international revenue is mostly denominated in U.S. dollars. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our technology, products, and
services more expensive for international customers, which could cause them to decrease their purchases from us. Expenses for our subsidiaries are denominated in their respective local currencies.
Significant fluctuations in the value of the U.S. dollar and foreign currencies could have a material impact on our consolidated financial statements. The main foreign currencies we encounter in our
operations are the Yen, Euro, RMB and GBP. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.



One of our key strategies is to expand our business operations in China. However, we may be unsuccessful in implementing this strategy as planned or at all.
Factors that could inhibit our successful expansion into China include its historically poor recognition of intellectual property rights and poor performance in stopping counterfeiting and piracy
activity. If we are unable to successfully stop unauthorized use of our intellectual property and assure compliance by our Chinese licensees, we could experience increased operational and enforcement
costs both inside and outside China.

Even
if we are successful in expanding into China, we may be greatly impacted by the political, economic, and military conditions in China, Taiwan, North Korea, and South Korea. Such
disputes may continue or escalate, resulting in economic embargos, disruptions in shipping, or even military hostilities. This could severely harm our business by interrupting or delaying production
or shipment of our products or products that incorporate our technology.

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Negative trends in the general economy, including trends resulting from actual or threatened military action by the United States and threats of terrorist attacks
in the United States and abroad, could cause a decrease in consumer spending on entertainment in general. Any reduction in consumer confidence or disposable income in general may affect the demand for
consumer electronics products that incorporate our digital audio technology and demand by film studios and movie theaters for our cinema products and services.



We expect to consider opportunities to acquire or make investments in other technologies, products, and businesses that could enhance our technical capabilities,
complement our current products and services, or expand the breadth of our markets, including without limitation the potential acquisition of substantially all of the assets of Avica. We have a
limited history of acquiring and integrating businesses. Acquisitions and strategic investments involve numerous risks, including:



If
we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our
business may be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders would be diluted.
Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different geographies, cultures and languages, currency
risks and risks associated with the particular economic, political and regulatory environment in specific countries. Also, the anticipated benefit of our acquisitions may not materialize, whether
because of failure to obtain stockholder approval or otherwise. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent
liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our operating results or financial condition. Future acquisitions may also require us to obtain
additional equity or debt financing, which may not be available on favorable terms or at all.

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As a result of a combination of internal growth and growth through acquisitions, we expect to continue to experience growth in the scope of our operations and the
number of our employees. If this growth continues, it will place a significant strain on our management team and on our operational and financial systems, procedures, and controls. Our future success
will depend in part on the ability of our management team to manage any growth effectively. This will require our management to:



Any
failure to successfully manage our growth could distract management's attention, and result in our failure to execute our business plan.



We have historically experienced moderate seasonality in our business due to our business mix and the nature of our products. In our consumer business, consumer
electronics manufacturing activities are generally lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. Manufacturing output is generally
strongest in the third and fourth quarters as our technology licensees increase manufacturing to prepare for the holiday buying season. Since recognition of revenues in our consumer business generally
lags manufacturing activity by one quarter, our revenues and earnings from the consumer business are generally lowest in the second quarter. Film licensing revenues are generally strongest in the
second and fourth quarters due to the abundance of movies typically released during the summer and year-end holiday seasons. The introduction of new products and inclusion of our
technologies in new and rapidly growing markets can distort and amplify the seasonality described above. For example, the introduction of next generation optical disc players may result in an overall
near-term slowdown in our business as sales of standard definition players slow in anticipation of purchasing next generation products, but purchases of next generation products are in an
early-adopter only phase. Similar issues may affect our cinema hardware business during the expected transition to digital cinema. Our revenues may continue to be subject to fluctuations, seasonal or
otherwise, in the future. Unanticipated fluctuations, whether due to seasonality, product cycles, or otherwise, could cause us to miss our earnings projections, or could lead to higher than normal
variation in short-term earnings, either of which could cause our stock price to decline.

In
addition, we actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technology,
trademarks, or know-how without a license or who have underreported to us the amount of royalties owed under license agreements with us. As a result of these activities, from time to time,
we may recognize royalty revenues that relate to consumer electronics manufacturing activities from prior periods and we may incur expenditures related to enforcement activity. These expenditures and
royalty recoveries, as applicable, may cause revenues to be higher than expected, or net profit to be lower than expected, during a particular reporting period and may not recur in future reporting
periods. Such fluctuations in our revenues and operating results may cause declines in our stock price.

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Even if a standards-setting body mandates our technologies for a particular market, our technologies may not be the sole technologies adopted for that market as
an industry standard. Accordingly, our business may depend upon participants in that market choosing to adopt our technologies instead of or in addition to competitive technologies that also may be
acceptable under such standard.



When a standards-setting body adopts our technologies as explicit industry standards, we generally must agree to license such technologies on a fair, reasonable
and non-discriminatory basis, which could limit our control over the use of these technologies. In these situations, we may be required to limit the royalty rates we charge for these
technologies, which could adversely affect our business. Furthermore, we may be unable to limit to whom we license such technologies, and may be unable to restrict many terms of the license. From time
to time, we may be subject to claims that our licenses of our industry standard technologies may not conform to the requirements of the standards-setting body. Claimants in such cases could seek to
restrict or change our licensing practices or our ability to license our technologies in ways that could injure our reputation and otherwise materially and adversely affect our business, operating
results and prospects.



Standards-setting bodies, such as those for digital cinema technologies, may require the use of so-called "open standards," meaning that the
technologies necessary to meet those standards are publicly available. The use of open standards may reduce our opportunity to generate revenue, as open standards technologies are based upon
non-proprietary technology platforms in which no one company maintains ownership over the dominant technologies.



Our success depends, in part, upon the continued availability and contributions of our management team and engineering and technical personnel because of the
complexity of our products and services. Important factors that could cause the loss of key personnel include:



The
loss of key personnel or an inability to attract qualified personnel in a timely manner could slow our technology and product development and harm our ability to execute our business
plan.

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From time to time, one or a small number of our customers or licensees may represent a significant percentage of our revenue. Although we have agreements with
many of these customers, these agreements typically do not require any material minimum purchases or minimum royalty fees and do not prohibit customers from purchasing products and services from
competitors. A decision by any of our major customers or licensees not to use our technologies, or their failure or inability to pay amounts owed to us in a timely manner, or at all, could have a
significant adverse effect on our business.



We are subject to income taxes in both the United States and foreign jurisdictions. Our effective income tax rates have recently been and could in the future be
adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, by discovery of new information in
the course of our tax return preparation process, or by changes in the valuation of our deferred tax assets and liabilities. Significant judgment is required in determining our worldwide provision for
income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We may come under audit by tax authorities. For
instance, the Internal Revenue Service will begin an examination of our 2005 federal income tax return during the fourth quarter of 2007. Although we believe our tax estimates are reasonable, the
final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Based on the results of an audit or litigation, a
material effect on our income tax provision, net income or cash flows in the period or periods for which that determination is made could result.



Technology standards are important in the audio and video industry as they help to assure compatibility across a system or series of products. Generally,
standards adoption occurs on either a mandatory basis, requiring a particular technology to be available in a particular product or medium, or an optional basis, meaning that a particular technology
may be, but is not required to be, utilized. For example, both our digital multi-channel audio technology and Dolby's have optional status in Standard and High Definition-DVD and
Blu-ray. In the standards for High Definition-DVD and Blu-ray, both DTS and Dolby technologies have been selected as mandatory standards for two-channel
output. However, if either or both
of these standards are re-examined or a new standard is developed, we may not be included as mandatory in any such new or revised standard which would cause revenue growth in our consumer
business to be significantly lower than expected and could have a material adverse affect on our business.

Various
national governments have adopted or are in the process of adopting standards for all digital television broadcasts, including cable, satellite, and terrestrial. In the United
States, Dolby's audio technology has been selected as the sole, mandatory audio standard for terrestrial digital television broadcasts. As a result, the audio for all digital terrestrial television
broadcasts in the United States must include Dolby's technology and must exclude any other format, including ours. We do not know whether this standard will be reopened or amended. If it is not, our
audio technology may never be included in that standard. Certain large and developing markets, such as China, have not fully developed their digital television standards. Our technology may or may not
ultimately be included in these standards.

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As
new technologies and entertainment media emerge, new standards relating to these technologies or media may develop. New standards may also emerge in existing markets that are
currently characterized by competing formats, such as the market for personal computers. We may not be successful in our efforts to include our technology in any such standards.



Although we have established relationships with a number of motion picture studios, content owners, producers and distributors, we do not have any contractual
agreements that require them to provide us image content for processing. Further, the demand for image processing, enhancement and restoration of cinema, home video or broadcast television content may
not materialize or accelerate as we anticipate, which would have a negative impact on our business.



Although the major U.S. film producers and distributors are customers of ours, we generally do not have contractual arrangements that require them to use our DTS
audio technology or our digital image services. Our cinema and digital images business depends on our having good relations with these film studios and other content owners. A deterioration in our
relationship with any of these customers could cause them to stop using our DTS audio technology or our digital image enhancement services. Any significant decline or delay in the release of motion
pictures with DTS audio soundtracks would decrease the demand for and revenues from the playback products and services that we offer to movie theaters. In addition, other motion picture studios,
content owners, producers, and distributors throughout the world generally adopt and use the processes and the technologies used by the major U.S. film studios. Therefore, if the major U.S. motion
picture studios, content owners, producers or distributors stop using our technology, we would not only lose the per-movie licensing fee we receive from these customers, but may also lose
per-movie licensing fees from other film studios throughout the world. Furthermore, poor box-office performance caused by a weak film release calendar or declining consumer
interest in the films being released could have a negative impact on the demand for the products and services we sell to the motion picture industry.



Our cinema business depends in part on the construction of new screens and the renovation of existing theaters that install our DTS playback systems and cinema
processors. Over the past decade, aggressive building of megaplexes by companies that operate movie theaters has generated significant competition and resulted in an oversupply of screens in some
domestic and international markets. The resulting oversupply of screens led to significant declines in revenues per screen and, eventually, to an inability by many major film exhibitors to satisfy
their financial obligations. Several major movie theater operators have reorganized through bankruptcy proceedings, and many movie theaters have closed. As a result, our playback systems and cinema
processors that we previously sold to movie theaters that have reorganized and closed have been relocated to other theaters or have been available for resale in the secondary market to movie theaters
that might otherwise have purchased these products directly from us. More recently, the industry has experienced a decline in movie theater attendance. If this decline were to continue, exhibitors
could see a decline in revenue per screen and, potentially, an inability to satisfy their financial obligations resulting in the closure of screens. If movie theater operators decide to close a
significant number of screens in the future or cut their capital spending, demand for our playback systems and cinema processors will decline. Additionally, the expected transition to digital cinema
could harm our legacy cinema business because operators may decide to

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delay
procurement decisions as they wait to evaluate the widespread roll out of digital cinema, operators may decide to purchase digital cinema systems that do not require our existing products and
services, and as existing screens are repurposed to digital cinema, the quantity of our existing products on the secondary market may increase significantly. These developments may harm our business
and operating results.



If the film industry broadly adopts digital cinema, the demand for our current or "legacy" cinema products and production services could decline. If, in such
circumstances, we are unable to adapt our professional products and production services or replace such business with new products for the market for digital cinema successfully, our business could be
materially adversely affected.



We purchase a small number of parts from sole-source suppliers. In addition, our professional audio encoding devices and movie theater playback
systems are manufactured according to our specifications by single third-party manufacturers. Because we have no direct control over these third-party suppliers and manufacturers, interruptions or
delays in the products and services provided by these third parties may be difficult to remedy in a timely fashion. In addition, if such suppliers or manufacturers are incapable of or unwilling to
deliver the necessary parts or products, we may be unable to redesign our technology to work without such parts or find alternative suppliers or manufacturers. In such events, we could experience
interruptions, delays, increased costs, or quality control problems.



Some of our operations use substances regulated under various federal, state, local and international laws governing the environment, including those governing
the discharge of pollutants into the air and water, the management, disposal and labeling of hazardous substances and wastes and the cleanup of contaminated sites. We could incur costs, fines and
civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable
under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. The ultimate costs under environmental laws and the timing of these costs
are difficult to predict.

We
also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products. For example, restrictions on
lead and other hazardous substances that apply to specified electronic products put on the market in the European Union became effective as of July 1, 2006 and similar requirements related to
marking of electronic products became effective in China as of March 1, 2007.

Substituting
particular components containing regulated hazardous substances can be difficult or costly, and redesign efforts could result in production delays. Products that we maintain
in inventory may be rendered obsolete if not in compliance with the new environmental laws, which could negatively impact our ability to generate revenue from those products. We could also face
significant costs and liabilities in connection with product take-back legislation. The European Union Directive 2002/96/EC as amended by 2003/108/EC (Waste Electrical and Electronic
Equipment Directive also known as the "WEEE Directive") requires producers of particular electrical and electronic equipment, including broadcast equipment, to be financially responsible for specified
collection, recycling, treatment and

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disposal
of past and future covered products. As of December 2006, not all member states within the EU have enacted enabling legislation under the WEEE Directive, and in the absence of such
legislation, it is difficult to determine the costs to comply with the WEEE Directive.

Other
countries, such as China and the United States, may enact similar product-content and take-back legislation, the cumulative impact of which could significantly increase
our operating costs and adversely affect our operating results. We also expect that our operations, whether manufacturing or licensing, will be affected by other new environmental laws and regulations
on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs or decreased revenue, and could require that we
redesign or change how we manufacture our products, any of which could have a material adverse effect on our business.

Risks Related to Our Common Stock



The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:



In
addition, the stock market in general, and the Nasdaq Global Select Market and the market for technology companies in particular, has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of technology companies have been particularly volatile.
These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market
price of a company's securities, securities class-action litigation has often been instituted against that company.

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Such
litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources.



As a result of our relatively small public float, our common stock may be less liquid than the common stock of companies with broader public ownership. Among
other things, trading of a relatively small volume of our common shares may have a greater impact on the trading price for our shares than would be the case if our public float were larger.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price
of our stock.

Our
Restated Certificate of Incorporation and Restated Bylaws contain provisions that could delay or prevent a change of control of our company or changes in our Board of Directors that
our stockholders might consider favorable. Some of these provisions:



In
addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15%
or more of our outstanding voting stock. These and other provisions in our Restated Certificate of Incorporation, Restated Bylaws and Delaware law could make it more difficult for stockholders or
potential acquirors to obtain control of our Board or initiate actions that are opposed by the then-current Board, including delay or impede a merger, tender offer, or proxy contest
involving our company. Any delay or prevention of a change of control transaction or changes in our Board could cause the market price of our common stock to decline.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

(c)   Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Stock repurchase activity during the quarter ended September 30, 2007 was as follows:

Period

Total Number
of Shares
Purchased

Average
Price Paid
per Share

Total Number of
Shares
Purchased as
Part of Publicly
Announced Plan

Maximum Number
of Shares that May
Yet Be Purchased
Under the PlanJuly 1, 2007 through July 31, 2007

491,500

$
22.88

491,500

343,500August 1, 2007 through August 31, 2007

343,500

$
22.55

343,500

September 1, 2007 through September 30, 2007








Total

835,000

$
22.74
(2)
835,000


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Notes:

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

Item 5.    Other Information

None.

Item 6.    Exhibits

|Exhibit
Number |  | Exhibit Description                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------
|31.1           |  | Certification of the Chief Executive Officer under Securities Exchange Act Rules 13a-14(a) or 15d-14(a)                   
|31.2           |  | Certification of the Chief Financial Officer under Securities Exchange Act Rules 13a-14(a) or 15d-14(a)                   
|32.1           |  | Certification of the Chief Executive Officer under Securities Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. 1350
|32.2           |  | Certification of the Chief Financial Officer under Securities Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. 1350

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                       |  | DTS, Inc.
|---------------------- |  | ---------
|Date: November 9, 2007 |  | by:      
|Date: November 9, 2007 |  | by:      

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EXHIBIT INDEX

|Exhibit
Number |  | Exhibit Description                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------
|31.1           |  | Certification of the Chief Executive Officer under Securities Exchange Act Rules 13a-14(a) or 15d-14(a)                   
|31.2           |  | Certification of the Chief Financial Officer under Securities Exchange Act Rules 13a-14(a) or 15d-14(a)                   
|32.1           |  | Certification of the Chief Executive Officer under Securities Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. 1350
|32.2           |  | Certification of the Chief Financial Officer under Securities Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. 1350

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