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UNITED STATESSECURITIES 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 March 31, 2010

Commission File Number 000-50335

LOGO

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

Delaware

77-0467655(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)5220 Las Virgenes Road
Calabasas, California 91302(Address of principal executive
offices and zip code)

(818) 436-1000(Registrant's telephone number,
including area code)




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 the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company 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 April 30, 2010 a total of 17,389,298 shares of the Registrant's Common Stock, $0.0001 par value, were outstanding.



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Table of Contents

DTS, INC.
FORM 10-Q
TABLE OF CONTENTS



PART I

FINANCIAL INFORMATION

1Item 1.

Financial Statements (unaudited):

1Consolidated Balance Sheets

1Consolidated Statements of Income

2Consolidated Statements of Cash Flows

3Notes to Consolidated Financial Statements

4Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

12Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18Item 4.

Controls and Procedures

19PART II.

OTHER INFORMATION

20Item 1.

Legal Proceedings

20Item 1A.

Risk Factors

20Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34Item 3.

Defaults Upon Senior Securities

34Item 4.

(Removed and Reserved)

34Item 5.

Other Information

34Item 6.

Exhibits

35SIGNATURES

36


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DTS, INC.        PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements



DTS, INC.        CONSOLIDATED BALANCE SHEETS

As of
March 31,
2010

As of
December 31,
2009(Unaudited)
(Amounts in thousands,
except per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
31,877

$
42,222Short-term investments


46,941


33,129Accounts receivable, net of allowance for doubtful accounts of $224 and $229 at March 31, 2010 and December 31, 2009, respectively


6,737


5,731Deferred income taxes


4,926


4,945Prepaid expenses and other current assets


1,736


1,617Income taxes receivable, net


2,360


2,613Total current assets


94,577


90,257Property and equipment, net


34,490


33,885Intangible assets, net


6,280


6,565Goodwill


1,257


1,257Deferred income taxes


13,579


13,152Long-term investments


6,044


8,515Other assets


713


587Total assets

$
156,940

$
154,218LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
1,040

$
826Accrued expenses


5,138


5,663Deferred revenue


3,669


43Total current liabilities


9,847


6,532Other long-term liabilities


6,184


5,862Commitments and contingencies (Note 5)Stockholders' equity:Preferred stock$0.0001 par value, 5,000 shares authorized at March 31, 2010 and December 31, 2009; no shares issued and
outstanding





Common stock$0.0001 par value, 70,000 shares authorized at March 31, 2010 and December 31, 2009; 19,770 and 19,652 shares issued at
March 31, 2010 and December 31, 2009, respectively; 17,385 and 17,522 shares outstanding at March 31, 2010 and December 31, 2009, respectively


2


2Additional paid-in capital


165,517


161,710Treasury stock, at cost2,385 and 2,130 shares at March 31, 2010 and December 31, 2009, respectively


(53,953
)

(45,498
)Accumulated other comprehensive income


345


362Retained earnings


28,998


25,248Total stockholders' equity


140,909


141,824Total liabilities and stockholders' equity

$
156,940

$
154,218


See accompanying notes to consolidated financial statements.

1

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DTS, INC.        CONSOLIDATED STATEMENTS OF INCOME

For the Three Months
Ended March 31,2010

2009(Unaudited)
(Amounts in thousands,
except per share amounts)Revenue

$
21,736

$
17,262Cost of revenue


450


445Gross profit


21,286


16,817Operating expenses:Selling, general and administrative


12,399


12,788Research and development


2,473


2,183Total operating expenses


14,872


14,971Income from operations


6,414


1,846Interest and other income, net


212


144Income from continuing operations before income taxes


6,626


1,990Provision for income taxes


2,706


1,800Income from continuing operations


3,920


190Loss from discontinued operations, net of tax


(170
)

(3
)Net income

$
3,750

$
187Net income per common share:Basic:Continuing operations

$
0.23

$
0.01Discontinued operations


(0.01
)

Net income

$
0.22

$
0.01Diluted:Continuing operations

$
0.22

$
0.01Discontinued operations


(0.01
)

Net income

$
0.21

$
0.01Weighted average shares used to compute net income per common share:Basic


17,216


17,067Diluted


17,950


17,322


See
accompanying notes to consolidated financial statements.

2

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DTS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31,2010

2009(Unaudited)
(Amounts in thousands)Cash flows from operating activities:Net income

$
3,750

$
187Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


1,240


909Stock-based compensation charges


1,968


1,511Deferred income taxes


(408
)

(697
)Tax benefits (shortfalls) from stock-based awards


524


(98
)Excess tax shortfalls (benefits) from stock-based awards


(521
)

100Other


(17
)

104Changes in operating assets and liabilities:Accounts receivable


(1,006
)

2,296Prepaid expenses and other assets


(245
)

39Accounts payable, accrued expenses and other liabilities


(77
)

925Deferred revenue


3,626


295Income taxes receivable


253


71Net cash provided by operating activities


9,087


5,642Cash flows from investing activities:Purchases of held-to-maturity investments


(24,898
)

(9,681
)Maturities of held-to-maturity investments


13,307


17,775Sales of available for sale investments


250


2,950Cash paid for business acquisition, net





(24
)Purchase of property and equipment


(1,356
)

(1,164
)Payment for patents and trademarks in process


(116
)

(91
)Net cash provided by (used in) investing activities


(12,813
)

9,765Cash flows from financing activities:Proceeds from the issuance of common stock under stock-based compensation plans


2,035


Repurchase and retirement of common stock for restricted stock award withholdings


(720
)

(254
)Excess tax benefits (shortfalls) from stock-based awards


521


(100
)Purchase of treasury stock


(8,455
)

Net cash used in financing activities


(6,619
)

(354
)Net increase in cash and cash equivalents


(10,345
)

15,053Cash and cash equivalents, beginning of period


42,222


25,658Cash and cash equivalents, end of period

$
31,877

$
40,711


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 of America 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 of America 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 March 31, 2010, 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 months ended
March 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2010. 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, 2009, filed on March 3, 2010.

The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.



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. For additional information, refer to Footnote 9 of the consolidated financial statements, "Discontinued Operations."



The Company has evaluated subsequent events through the date that the consolidated financial statements were issued. During this
period, there were no material subsequent events that required recognition or disclosure.

Note 2Significant Accounting Policies



Deferred revenues arise primarily from payments for licensing audio technology received in advance of the culmination of the earnings
process. Deferred revenues expected to be recognized within the next twelve months are classified within current liabilities. Deferred revenues will be recognized as revenue in future periods when the
applicable revenue recognition criteria are met. For additional information regarding the Company's significant accounting policies for revenue recognition, refer to Footnote 2 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2009, filed on March 3, 2010, "Significant Accounting Policies."

4

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)



In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU") 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements" and ASU 2009-14, "Software: Certain Revenue Arrangements That Include Software
Elements." ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy.
ASU 2009-13 also eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. In addition,
ASU 2009-13 expands the disclosure requirements for revenue recognition. ASU 2009-14 removes tangible products from the scope of software revenue guidance and
provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance.
ASU 2009-13 and ASU 2009-14 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted
provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently evaluating the future impact of this new accounting update on its
consolidated financial statements.

In
January 2010, the FASB issued ASU 2010-6, "Fair Value Measurements and Disclosures: Improving Disclosures About Fair Value Measurements," which requires
entities to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-6 is effective for annual
reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The
adoption of ASU 2010-6, with respect to Level 1 and Level 2 guidance, did not have a material impact on the Company's consolidated financial statements. The Company is
currently evaluating the future impact of this new accounting update, with respect to Level 3 guidance, on its consolidated financial statements.

Note 3Fair Value Measurements

As of March 31, 2010 and December 31, 2009, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These financial
assets are the Company's auction rate security instruments, which are classified as available-for-sale investments. The auction rate securities held at March 31, 2010
and December 31, 2009 are tax-exempt municipal bonds issued by governmental entities located within the United States that are insured and have a AAA rating.

Liquidity
for these auction rate security instruments is typically provided by a Dutch auction process that resets the applicable interest rate at pre-determined intervals,
usually every 7, 28, or 35 days. Historically, auction rate security instruments would also be purchased or sold at these pre-determined intervals, creating a liquid market.
Investment earnings paid during a given period are based upon the reset interest rate determined during the prior auction. For each unsuccessful auction, the interest rate moves to a maximum rate
defined for each security, which is generally higher than

5

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 3Fair Value Measurements (Continued)

short-term
interest indices. To date, the Company has collected all interest receivable on its auction rate security instruments when due.

On
October 24, 2008, the Company accepted an offer from UBS AG ("UBS") to liquidate its auction rate securities held in UBS accounts on February 13, 2008. The terms or
rights of the UBS offer were publicly filed in a prospectus, dated October 7, 2008. As of March 31, 2010 and December 31, 2009, the Company owned $2,000 and $2,250, respectively,
par value of these securities. From January 2, 2009 and ending January 4, 2011, the Company has the right, but not the obligation, to sell, at par, these auction rate securities to UBS,
and such a transaction would be initiated by UBS. Prior to January 4, 2011, the Company will continue to earn and receive all interest that is payable for these auction rate securities.
Furthermore, prior to January 4, 2011, UBS, at its sole discretion, may sell, or otherwise dispose of, and/or enter orders in the auctions process with respect to these securities on the
Company's behalf so long as it receives par value for the auction rate securities sold. UBS has also agreed to use its best
efforts to facilitate issuer redemptions and/or to resolve the liquidity concerns of holders of their auction rate securities through restructurings and other means. In addition, UBS has agreed to
provide "no net cost" loans to holders of the illiquid securities that are subject to bank repurchase, thereby providing the Company with short-term liquidity on its auction rate
securities portfolio at no additional cost. As a result of this arrangement with UBS, the Company believes that it has Level 2 inputs within the fair value hierarchy as of March 31, 2010
and December 31, 2009, and par value or cost is a reasonable approximation of fair value.

Due
to the Company's belief that it may take until January 2011 to liquidate the remaining securities, its auction rate security instruments have been classified as
long-term investments on the consolidated balance sheet as of December 31, 2009. As of March 31, 2010, the Company has classified its auction rate security instruments as
short-term investments on the consolidated balance sheet.

Any
future fluctuation in fair value related to these securities that the Company deems to be temporary, including any recoveries of previous write-downs, will be recorded to accumulated
other comprehensive income. If the Company determines that any future valuation adjustment is other than temporary, it will record a charge to earnings.

The
Company's financial assets measured at fair value on a recurring basis were as follows:

Fair Value Measurements at
Reporting Date UsingAuction Rate Securities

Total

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)As of March 31, 2010

$
2,000

$


$
2,000

$
As of December 31, 2009

$
2,250

$


$
2,250

$



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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 4Property and Equipment

Property and equipment consist of the following:

As of
March 31,
2010

As of
December 31,
2009Land

$
6,600

$
6,600Building and improvements


20,823


19,946Machinery and equipment


2,827


2,647Office furniture and fixtures


5,580


5,300Leasehold improvements


1,152


1,156Software


5,689


5,60842,671


41,257Less: Accumulated depreciation


(8,181
)

(7,372
)Property and equipment, net

$
34,490

$
33,885


Note 5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 has not recorded a liability for these indemnities, commitments or guarantees in the accompanying consolidated balance sheets, as future payment is
currently not probable.

Note 6Income Taxes

For the three months ended March 31, 2010, the Company recorded an income tax provision of $2,706 on pre-tax income from continuing operations of $6,626. This resulted
in an effective tax rate of 41% for the quarter. This rate differed from the U.S. statutory rate of 35% primarily due to state income taxes and reserves for federal and state tax audits.

In
the first quarter of 2009, the Company's management identified an adjustment in its reserve for unrecognized tax benefits. This adjustment primarily related to imputed interest on
inter-company balances for the years 2003 through 2008, that was recorded during the quarter. The adjustment had the effect of increasing income tax expense in the quarter by $882. The adjustment has
decreased

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6Income Taxes (Continued)

income
from continuing operations by $882 and net income by $882. The Company's management determined that the effect on previously filed reports was not material.

Other
long-term liabilities at March 31, 2010 and December 31, 2009, include unrecognized tax benefits of $5,877 and $5,578, respectively, for both domestic and
foreign issues. The net increase of $299 was due primarily for uncertainties relating to the Company's transfer pricing with its foreign licensing subsidiaries and the California franchise tax
sourcing methodology. The Company believes that its accruals for uncertain tax positions are adequate for all open years, based on the assessment of many factors including past experience and
interpretations of tax law applied to the facts of each matter. Inherent uncertainties exist in estimating accruals for uncertain tax positions due to the progress of income tax audits and changes in
tax law, both legislated and concluded through the various jurisdictions' tax court systems.

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 is examining the Company's 2005 through 2007 federal income tax returns, including certain prior
period carry forwards. In addition, the California Franchise Tax Board is conducting a state tax examination for the years 2004 and 2005.

Licensing
revenue is recognized gross of withholding taxes that are remitted by the Company's licensees directly to their local tax authorities. For the three months ended
March 31, 2010 and 2009, withholding taxes were $1,318 and $1,189, respectively.

Note 7Comprehensive Income

At March 31, 2010 and December 31, 2009, accumulated other comprehensive income was comprised mostly of foreign currency translation.

Comprehensive
income for the three months ended March 31, 2010 and 2009 was $3,733 and $164, respectively.

8

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 8Operating Segment and Geographic Information

The Company's revenue by geographical area, based on the customer's country of domicile, was as follows:

For the Three Months
Ended March 31,2010

2009United States

$
1,732

$
1,703International


20,004


15,559Total revenue

$
21,736

$
17,262


The
following table sets forth long-lived tangible assets by geographic area:

As of
March 31,
2010

As of
December 31,
2009United States

$
33,123

$
32,494International


1,367


1,391Total long-lived tangible assets

$
34,490

$
33,885


Note 9Discontinued Operations

The following table presents expense and tax information for discontinued operations during the three months ended March 31, 2010 and 2009.

For the Three Months
Ended March 31,2010

2009Pre-tax loss

$
(275
)(1)
$
(3
)Income tax benefit


(105
)

Loss from discontinued operations, net of tax

$
(170
)
$
(3
)


---

Note 10Net Income Per Common Share

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share
is calculated by dividing net income by the sum of the weighted average number of common shares

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 10Net Income Per Common Share (Continued)

outstanding
plus the dilutive effect of unvested restricted stock, outstanding stock options, 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 per common share:

For the Three Months
Ended March 31,2010

2009Basic net income per common share:Numerator:Income from continuing operations

$
3,920

$
190Loss from discontinued operations


(170
)

(3
)Net income

$
3,750

$
187Denominator:Weighted average common shares outstanding


17,216


17,067Continuing operations

$
0.23

$
0.01Discontinued operations


(0.01
)

Basic net income per common share

$
0.22

$
0.01Diluted net income per common share:Numerator:Income from continuing operations

$
3,920

$
190Loss from discontinued operations


(170
)

(3
)Net income

$
3,750

$
187Denominator:Weighted average shares outstanding


17,216


17,067Effect of dilutive securities:Common stock options


600


202Restricted stock


114


53ESPP


20


Diluted shares outstanding


17,950


17,322Continuing operations

$
0.22

$
0.01Discontinued operations


(0.01
)

Diluted net income per common share

$
0.21

$
0.01


For
the three months ended March 31, 2010 and 2009, 247 and 1,777 shares, respectively, of the Company's stock options and restricted stock were excluded from the calculation of
diluted earnings per share because their inclusion would have been anti-dilutive.

10

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 11Common Stock Repurchases

In November 2009, 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. During the first quarter of 2010, the Company repurchased 255 shares of common stock under this authorization for an aggregate of $8,455.

All
shares repurchased under this authorization are accounted for as treasury stock.

11

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

Forward-Looking Statements May Prove Inaccurate

This quarterly report on Form 10-Q and the documents incorporated herein by reference contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "believes,"
"anticipates," "estimates," "expects," "projections," "may," "potential," "plan," "continue" and similar expressions are intended to identify forward-looking statements, but are not the exclusive
means of identifying forward-looking statements in this report. All
statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial
performance or position, our business strategy, plans or expectations, and our objectives for future operations, including relating to our products and services. Although forward-looking statements in
this report reflect our good faith judgment, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements contained herein are inherently
subject to risks and uncertainties and our actual results and outcomes may be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without limitation, those discussed under the "Risk Factors" section contained in Part II Item 1A, and elsewhere in this
report and in other documents we file with the Securities and Exchange Commission, or SEC. We cannot guarantee future results, levels of activity, performance or achievements. 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 report.
You are urged not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the date of this report. We do not undertake any obligation to revise or
update these forward-looking statements to reflect future events or circumstances.

Overview

We are a leading provider of high quality branded entertainment technologies, which are incorporated into an array of entertainment
products by hundreds of licensee customers around the world. Our core DTS digital multi-channel audio technology enables the delivery and playback of compelling surround sound and is currently used in
a variety of product applications, including audio/video receivers, Blu-ray Disc players, DVD based products, personal computers or PCs, car audio products, video game consoles, network
capable televisions, digital media players, home theater systems and mobile handsets. In addition, we provide products and services to studios, radio and television broadcasters, game developers and
other content creators to facilitate the inclusion of compelling, realistic DTS-encoded soundtracks in movies, sporting events, television shows and music content.

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.

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

12

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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 licensee support, as well as costs associated with
promotional and other selling and licensing 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.

Executive Summary

Financial Highlights



Trends, Opportunities, and Challenges

Historically, our revenue has been primarily dependent upon the DVD based home theater market. The success of DVD based systems and
products has fueled a demand for higher quality entertainment in the home, and this demand is extending into the car audio, personal computer, portable electronics, online networked devices,
broadcast, video game console and mobile handset markets as well. We have seen the acceleration of the market for high definition televisions drive demand for Blu-ray Disc players and
advanced home theater systems. Consumers are more broadly embracing the Blu-ray technology as prices decline and content availability increases, and as customers realize the value of the
advanced features that
Blu-ray provides, such as the ability to connect to the internet and ultimately playback 3-D content.

Because
we are a mandatory technology in the Blu-ray Disc standard, our revenue growth is closely tracking the growth in sales of Blu-ray equipped players, game
consoles and PCs. Further, we believe that this mandatory position in the Blu-ray Disc standard will give us the ability to extend the reach of a broad array of our technologies in several
large markets, such as applications beyond optical media. For example, we have signed agreements with a number of digital media player, network-connected digital television and mobile handset
manufacturers to incorporate DTS decoders into their products.

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One
of the largest challenges that we face is the growing consumer trend toward open platform, on-line entertainment consumption and the need to constantly and rapidly evolve
our technologies to address the emerging markets. We believe that although the trend has begun, any transition to such open platform, on-line entertainment will take many years. During the
transition period, we expect that both optical media and on-line entertainment formats will continue to thrive.

Further,
we currently face a challenge regarding our ability to determine the impact of the current global economic downturn on consumer buying patterns. While we do not have
near-term visibility into the timing or extent of an economic recovery, we continue to remain optimistic that our revenues from both Blu-ray enabled products and our newer
markets will continue to grow.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated 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, allowance for doubtful accounts, impairment of long-lived assets, stock-based compensation,
and income taxes. These estimates and judgments are based on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, 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 3, 2010.

Results of Continuing Operations



Change2010

2009

$

%($ in thousands)Three months ended March 31,

$
21,736

$
17,262

$
4,474


26
%


The
increase in revenues for the three months ended March 31, 2010, compared to the same prior year period, was largely attributable to continued growth in Blu-ray
related royalties. Blu-ray related royalties comprised over 30% and 20% of total revenue for the three months ended March 31, 2010 and 2009, respectively. In dollar terms, these
royalties were up 77% for the three months ended March 31, 2010, compared to the same prior year period. We have also recently begun to experience growth in royalties from newer markets,
including televisions and digital media players, as a result of growing consumer interest in on-line content. Royalties from newer markets comprised over 10% and less than 5% of total
revenue for the three months ended March 31, 2010 and 2009, respectively. Royalties from the car market has also increased for the three months ended March 31, 2010, compared to the same
prior year period. Partially offsetting these increases are declines in DVD related royalties. We continue to be cautious regarding the outlook for the consumer electronics industry as a whole, and
the revenues we derive from that industry, in light of the turmoil in the global economic environment. However, we expect technology licensing revenues to grow as wider availability of
Blu-ray enabled players, PCs and game consoles, coupled with expected aggressive pricing and promotion of these products by retailers and consumer electronics product manufacturers, should
result in increasing licensing revenues from the Blu-ray format.

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2010

%

2009

%

Percentage point change
in gross profit margin
relative to prior period($ in thousands)Three months ended March 31,

$
21,286


98
%
$
16,817


97
%

1%


Consolidated
gross profit percentage for the three months ended March 31, 2010, compared to the same prior year period, increased as a result of an increase in revenues.

We
expect consolidated gross margins in the 97% to 98% range for 2010.



Change2010

2009

$

%($ in thousands)Three months ended March 31,

$
12,399

$
12,788

$
(389
)

(3
)%% of Revenue


57
%

74
%


The
decrease for the three months ended March 31, 2010, compared to the same prior year period, was primarily due to a $2.6 million decrease in professional fees. This
decrease results largely from the fees associated with the Zoran litigation matters in the prior year period. Partially offsetting this decrease was a $1.6 million increase in employee related
costs and a $0.5 million increase in advertising expenses. The increase in employee related costs is primarily attributable to expanded operations and stock-based compensation for the three
months ended March 31, 2010, compared to the same prior year period. The increase in advertising expenses is primarily attributable to increased tradeshow advertising and related activities.

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



Change2010

2009

$

%($ in thousands)Three months ended March 31,

$
2,473

$
2,183

$
290


13
%% of Revenue


11
%

13
%


The
dollar increase for the three months ended March 31, 2010, compared to the same prior year period, was primarily due to an increase in employee related costs, including
expanded operations and stock-based compensation.

We
intend to continue to invest in R&D to support the activities mentioned above, and thus expect to see sequential growth through the remainder of the year.



Change2010

2009

$

%($ in thousands)Three months ended March 31,

$
212

$
144

$
68


47
%


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The
increase for the three months ended March 31, 2010, compared to the same prior year period, was due to interest and other income associated with certain royalty recoveries.

We
expect interest and other income for the year to be in the range of $0.8 to $1.0 million, based on the current interest rate environment and current investment balances.



2010

2009($ in thousands)Three months ended March 31,

$
2,706

$
1,800Effective tax rate


41
%

90
%


Our
effective tax rate is based upon a projection of annual fiscal year results, and these rates differed from the U.S. statutory rate of 35% primarily due to state income taxes and
reserves for federal and state audits. Also, in the first quarter of 2009, the Company's management identified an adjustment in its reserve for unrecognized tax benefits. This adjustment primarily
related to imputed interest on inter-company balances for the years 2003 through 2008, that was recorded during the quarter. The adjustment has the effect of increasing income tax expense in the
quarter by $882. The adjustment has decreased income from continuing operations by $882 and net income by $882. The Company's management determined that the effect on previously filed reports was not
material.



The loss from discontinued operations for the three months ended March 31, 2010, resulted primarily from legal fees associated
with the Company's efforts to collect certain contingent consideration from the buyer of the cinema business.

As
further relevant information becomes available relating to the contingent consideration or further obligations of ours, if any, additional adjustments and expenses may be recorded
through discontinued operations in future periods. As a result of the business sales in 2008, the periods presented are not comparable.

Liquidity and Capital Resources

At March 31, 2010, we had cash, cash equivalents and short-term investments of $78.8 million, compared to
$75.4 million at December 31, 2009.

Net
cash provided by operating activities was $9.1 million and $5.6 million for the three months ended March 31, 2010 and 2009, respectively. Cash flows from
operating activities consisted of net income adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, and the effect of changes in working
capital and other operating activities. The increase in operating cash flows during the three months ended March 31, 2010, compared to the same prior year period, results largely from increases
in deferred revenue arising primarily from payments for licensing audio technology received in advance of the culmination of the earnings process and income from operations. Partially offsetting these
increases for the three months ended March 31, 2010, compared to the same prior year period, was a decrease in cash flows from accounts receivable due to the timing of collections.

We
typically use cash in investing activities primarily to purchase office equipment, fixtures, computer hardware and software, engineering and manufacturing test and certification
equipment, for business and technology acquisitions, for securing patent and trademark protection for our proprietary technology and brand name, and to purchase short-term and
long-term investments such as bank certificates of deposit and municipal bonds. Cash used in investing activities totaled $12.8 million for the three months ended March 31,
2010. Cash provided by investing activities totaled $9.8 million for

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the
three months ended March 31, 2009. Investing activities for the three months ending March 31, 2010 and 2009 were primarily impacted by the net impact of investment purchases, sales
and maturities. Also impacting investing activities for the three months ending March 31, 2010 and 2009 were capital expenditures to support our growth.

Cash
used in financing activities totaled $6.6 million and $0.4 million for the three months ended March 31, 2010 and 2009, respectively, which results primarily
from the purchase of treasury stock
during the three months ended March 31, 2010 and restricted stock award withholdings during the three months ended March 31, 2010 and 2009. Partially offsetting the cash used in
financing activities for the three months ended March 31, 2010, were proceeds from the issuance of common stock under stock-based compensation plans.



As of March 31, 2010, we held approximately $2.0 million in auction rate securities. The auction rate securities held at
March 31, 2010 are tax-exempt municipal bonds issued by governmental entities located within the United States that are insured and have a AAA rating.

On
October 24, 2008, we accepted an offer from UBS AG, or UBS, to liquidate our auction rate securities held in UBS accounts on February 13, 2008. The terms or rights of
the UBS offer were publicly filed in a prospectus, dated October 7, 2008. As of March 31, 2010, we owned $2.0 million par value of these securities. From January 2, 2009
and ending January 4, 2011, we have the right, but not the obligation, to sell, at par, these auction rate securities to UBS, and such transaction would be initiated by UBS. Prior to
January 4, 2011, we will continue to earn and receive all interest that is payable for these auction rate securities. Furthermore, prior to January 4, 2011, UBS, at its sole discretion,
may sell, or otherwise dispose of, and/or enter orders in the auctions process with respect to these securities on our behalf so long as we receive par value for the auction rate securities sold. UBS
has also agreed to use its best efforts to facilitate issuer redemptions and/or to resolve the liquidity concerns of holders of their auction rate securities through restructurings and other means. In
addition, UBS has agreed to provide "no net cost" loans to holders of the illiquid securities that are subject to bank repurchase, thereby providing us with short-term liquidity on our
auction rate securities portfolio at no additional cost to us. As a result of this arrangement with UBS, we believe par value or cost is a reasonable approximation of fair value.

Due
to our belief that our auction rate security instruments will be liquidated by or before January 2011, we have classified these instruments as short-term
investments on the consolidated balance sheet as of March 31, 2010.

To
date, we have collected all interest receivable on our auction rate security instruments when due and expect to continue to do so in the future. Based on current cash, cash
equivalents and short-term investment balances and expected operating cash flows, we do not anticipate a lack of liquidity associated with our auction rate securities to adversely affect
our ability to conduct business, and we believe that we have the ability and intent to hold these securities throughout the estimated recovery period.

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. Changes in our operating plans, including lower than anticipated revenues, increased expenses, acquisition of companies, products or technologies or
other events, including those described in "Risk Factors" included elsewhere herein, in our Form 10-K filed on March 3, 2010 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, particularly given current economic conditions, including lack of confidence
in the financial markets and limited availability of capital and demand for debt and equity securities. Our failure to raise capital when needed could negatively impact

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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, and 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, 2009, with the exception of the increased
obligations associated with our gross unrecognized tax benefits. As of March 31, 2010, our total amount of unrecognized tax benefits was $5.9 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

Refer to Footnote 2 of the consolidated financial statements, "Significant Accounting Policies."

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.

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 and long-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 at March 31, 2010. Based on current cash, cash equivalents and short-term investment balances and
expected operating cash flows, we do not anticipate a lack of liquidity associated with our auction rate security instruments to adversely affect our ability to conduct business, and we believe that
we have the ability and intent to hold these securities throughout the estimated recovery period. In the event that we are unable to sell the underlying securities at or above our carrying value,
these securities may not provide us a liquid source of cash. The estimated average maturity of our investment portfolio is less than one year. As of March 31, 2010, a one percentage point
change in interest rates throughout a one-year period would have an annual effect of approximately $0.8 million on our income before income taxes.

During
the three months ended March 31, 2010, we derived approximately 92% 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 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 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 4% of total revenues during the three months ended March 31, 2010. Operating expenses, including cost of sales, for our foreign subsidiaries were approximately $3.5 million
for the three months ended March 31, 2010. Based upon the expenses for the three months ended March 31, 2010, a one percentage point 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

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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 three months ended March 31, 2010, 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-15(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 (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

In the ordinary course of our business, we actively pursue legal remedies to enforce our intellectual property rights and to stop
unauthorized use of our technology and trademarks.

The
description of legal matters with Datasat Digital Entertainment, Inc., Beaufort International Group Plc and Datasat Communications Limited referred to in our Annual
Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on March 3, 2010, is incorporated herein by reference.

We
are not currently a party to any other material legal proceedings. We may, however, become subject to lawsuits from time to time in the course of our business.

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. The risk factors described below include any material changes to and supersede the risk factors previously disclosed in Part I, Item 1A of our most recent Annual Report on
Form 10-K.

Risks Related to Our Business



Past growth in our business has been due in large part to the rapid growth in sales of DVD based products and home theater systems incorporating our technologies.
As the markets for DVD based
products mature, we expect sales of these products to decline. To the extent that sales of DVD based products and home theater systems level off or decline, our business will be adversely affected.
Additionally, the release and consumer adoption of Blu-ray Disc players has only just begun to ramp up. A potentially slow adoption by consumers of Blu-ray Disc players, as
well as the inability of DVD based products 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 DVD based products and home theater systems. Even with the resolution of the competing disc format
conflict in early 2008, the rate of consumer adoption and ultimate penetration of Blu-ray Disc players is uncertain and may be slower than past growth rates of DVD based products. In
addition, if new technologies are developed for use with DVDs or new technologies, including direct downloads of content, are developed or deployed that substantially compete with or replace DVDs as a
dominant medium for consumer video entertainment, our business, operating results and prospects could be adversely affected.



Negative trends in the general economy could cause a downturn in the market for our technology, products and services. The current and continuing financial
disruption affecting the global financial

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markets
and the concern whether investment banks and other financial institutions will continue operations in the foreseeable future have resulted in a tightening in the credit markets, a low level of
liquidity in many financial markets and extreme volatility in credit and equity markets. The ongoing financial crisis may adversely affect our operating results if it results, for example, in the
insolvency of a key licensee or other customer, the inability of our licensees and/or other customers to obtain credit to finance their operations, including to finance the manufacture of products
containing our technologies, and delays in reporting and/or payments from our licensees. Tight credit markets could also delay or prevent us from acquiring or making investments in other technologies,
products or businesses that could enhance our technical capabilities, complement our current products and services, or expand the breadth of our markets. If we are unable to execute such acquisitions
and/or strategic investments, our operating results and business prospects may suffer.

In
addition, global economic conditions, including the credit crisis, increased cost of commodities, widespread employee layoffs, actual or threatened military action by the United
States and the continued threat of terrorism, have resulted in decreased consumer spending and may continue to negatively impact consumer confidence and spending. Any reduction in consumer confidence
or disposable income, in general, may negatively affect the demand for consumer electronics products that incorporate our digital audio technology.

We
cannot predict other negative events that may have adverse effects on the global economy in general and the consumer electronics industry specifically. However, the factors described
above and such unforeseen events could negatively affect our revenues and operating results.



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. Enforcement, including infringement claims and lawsuits would likely be expensive to resolve and would require management's time and resources. In addition, we have
not

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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.



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 consumer electronics products industry and the
entertainment 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.



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. 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.



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

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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.



In the past, we have been a party to litigation related to protection and enforcement of our intellectual property, and we may be a party to additional litigation
in the future. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages (including treble damages under the Clayton
Act) and an injunction prohibiting us from licensing our technology in particular ways or at all. Were an unfavorable ruling to occur, our business and results of operations could be materially
harmed. In addition, any protracted litigation could divert management's attention from our day-to-day operations, disrupt our business and cause our operating results to
suffer.



The digital audio, consumer electronics 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 digital audio technology
incorporated into consumer electronics product and entertainment mediums, including Fraunhofer Institut Integrierte Schaltungen, Koninklijke Philips Electronics N.V. (Philips), Microsoft
Corporation, Sony Corporation, Thomson and SRS Labs, Inc.

Certain
of our current and potential competitors may 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. Its technology has been incorporated in significantly more DVD based products than our technology. It has also achieved mandatory standard status in product categories that we have not,
including DVD based products, for its stereo technology and terrestrial digital television broadcasts in

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the
United States. As a result of these factors, Dolby has a competitive advantage in selling its digital multi-channel audio technology to consumer electronics products manufacturers.



Except for Blu-ray enabled products, where our technology is mandatory, we are dependent on our customers and licenseesincluding consumer
electronics product manufacturers, semiconductor manufacturers, producers and distributors of content for music, videos, and gamesto incorporate our technology into 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, these agreements do
not require any minimum purchase commitments, are on a non-exclusive basis, and do not typically 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 growing markets for multi-channel audio, including cars, personal computers, video game consoles, digital media players and mobile handsets will be based on the
number, quality, and popularity of the Blu-ray Disc titles, computer software programs, and video games either released with DTS audio soundtracks or capable of being coded and played in
DTS format. 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, Blu-ray Disc titles, 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 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 audio technology is not a mandatory standard could decide to exclude our DTS audio technology from their products altogether.

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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 into 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.



Most of our revenues are generated from consumer electronics product manufacturers who license and incorporate our technology in their consumer electronics
products. Under our existing agreements, 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, or may endure significant expense to obtain compliance.



We expect our operating expenses to increase as we, among other things:



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

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Our technology has only recently been incorporated into other consumer electronics markets, such as personal computers, video game consoles, portable electronics
devices, digital satellite and cable broadcast products, digital media players and mobile handsets. Recently, we have also entered into the "virtual" surround space with the internal development of
technology that we have branded DTS Surround Sensation. We do not have experience in this specific segment of the market and it is dominated by existing technologies from companies including Dolby
Laboratories, Inc., SRS Labs, Inc. and BBE Sound, Inc. 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 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. 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 for 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.



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 control over financial reporting. We cannot assure you that our system of internal control will be effective in the future as our operations and control
environment change. If we cannot adequately maintain the effectiveness of our internal control over financial reporting, our financial reporting may not be timely and/or accurate. If reporting delays
or errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the SEC. Moreover, even if we conclude that our internal control is effective, our
independent registered public accounting firm may disagree. If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at
which our internal control over financial reporting is documented, designed, operated or reviewed, or if the independent registered public accounting firm interprets the requirements, rules or
regulations differently than we do, then it may issue an adverse or qualified opinion. Any of the above outcomes could adversely affect our financial results or result in a loss of investor confidence
in the reliability of our financial information, which could materially and adversely affect the market price of our common stock.



Our licensing headquarters are located in Limerick, Ireland, and we market and sell our products and services outside the United States. We currently have
employees located in eight countries, and 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 and customer support. For the quarter

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ended
March 31, 2010, approximately 92% of our revenues 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 and our employees could be subject to significant fines, criminal sanctions 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. As
a result, if the U.S. dollar weakens against the local currency, the translation of our foreign-currency-denominated expenses will result in higher operating expense without a corresponding increase
in revenue. 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, CAD, RMB and GBP. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.



An important strategy of ours 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 as well as enforcing judgments. 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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We have historically experienced moderate seasonality in our business due to our business mix and the nature of our products. 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 generally lags manufacturing activity by one quarter, our
revenues and earnings are generally lowest in the second quarter. 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 Blu-ray Disc players may result in an overall near-term slowdown in our business as sales of DVD based products
slow in anticipation of purchasing Blu-ray Disc products, but purchases of Blu-ray Disc products are in an early phase market adoption. Our revenues may continue to be subject
to fluctuations, seasonal or otherwise, in the future. Unanticipated fluctuations, whether due to seasonality, economic down turns, 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 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.



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, particularly given the continuing credit crisis and downturn in
the overall global economy. 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, or at all, 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.

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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. Further, even when inclusion of certain of our technologies is mandated by a particular standard, market participants may choose not to implement or adopt any of our technologies
beyond those required by the mandate. Our revenues and operating results depend on manufacturers choosing to adopt our technologies instead of or along with competitive technologies that may also be
acceptable under industry standards. For example, the continued growth of our revenue from the Blu-ray Disc market depends upon both the continued growth of the format generally and
manufacturers' choosing to incorporate our multi-channel technologies where they are an optional industry 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 have limited control over 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 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. For instance, in 2009, one customer
accounted for 15% of revenues from our continuing operations. Although we have agreements with many of our 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, 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 is examining our 2005 to 2007 federal income tax
returns, including certain prior period carryforwards, and the State of California is examining our 2004 and 2005 corporate tax returns. 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. In addition, changes in tax rules
may adversely affect our future reported financial results or the way we conduct our business. For example, we consider the operating earnings of our foreign subsidiaries to be invested indefinitely
outside the United States. We have not provided for United States federal or foreign withholding taxes that may result on future remittances of undistributed earnings of foreign subsidiaries. Our
future reported financial results may be adversely affected if tax or accounting rules regarding unrepatriated earnings change.



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 DVD based products and Blu-ray Disc. In the
standard for Blu-ray Disc, 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

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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.

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.



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. 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 our growth continues, it may 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.

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

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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. 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.



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.

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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 March 31, 2010 was as follows:

Period

Total
Number
of Shares
Purchased(1)

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 PlanJanuary 1, 2010 through January 31, 2010











870,000February 1, 2010 through February 28, 2010


26,336

$
26.36





870,000March 1, 2010 through March 31, 2010


255,735

$
33.16


255,000


615,000Total


282,071

$
32.53
(2)

255,000


615,000


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Notes:

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    (Removed and Reserved)

Item 5.    Other Information

None.

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Item 6.    Exhibits

Exhibit
Number

Exhibit Description10.1

Employment Agreement, executed on March 3, 2010, effective as of February 26, 2010, by and between Frederick L. Kitson and the Company#10.2

2003 Equity Incentive Plan, as amended on May 9, 2005, May 15, 2008, February 19, 2009 and February 15, 2010#10.3

Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under 2003 Equity Incentive Plan#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: May 10, 2010

by:

/s/ JON E. KIRCHNER Jon E. Kirchner Chairman and Chief Executive Officer
(Duly Authorized Officer)Date: May 10, 2010

by:

/s/ MELVIN L. FLANIGAN Melvin L. Flanigan Executive Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)


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EXHIBIT INDEX

Exhibit
Number

Exhibit Description10.1

Employment Agreement, executed on March 3, 2010, effective as of February 26, 2010, by and between Frederick L. Kitson and the Company#10.2

2003 Equity Incentive Plan, as amended on May 9, 2005, May 15, 2008, February 19, 2009 and February 15, 2010#10.3

Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under 2003 Equity Incentive Plan#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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