Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-Q

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

For the Quarterly Period Ended March 31, 2011

Commission File Number 000-50335

GRAPHIC

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

Delaware(State or other jurisdiction of
incorporation or organization)

77-0467655(I.R.S. Employer
Identification No.)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 29, 2011 a total of 17,401,411 shares of the Registrant's Common Stock, $0.0001 par value, were outstanding.



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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


10Item 3.

Quantitative and Qualitative Disclosures About Market Risk


15Item 4.

Controls and Procedures


16PART II.

OTHER INFORMATION


17Item 1.

Legal Proceedings


17Item 1A.

Risk Factors


17Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


32Item 3.

Defaults Upon Senior Securities


32Item 4.

(Removed and Reserved)


32Item 5.

Other Information


32Item 6.

Exhibits


33SIGNATURES


34


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DTS, INC.    PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements



DTS, INC.        CONSOLIDATED BALANCE SHEETS

As of
March 31,
2011

As of
December 31,
2010(Unaudited)
(Amounts in thousands,
except per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
43,135

$
41,744Short-term investments


58,892


54,387Accounts receivable, net of allowance for doubtful accounts of $243 and $226 at March 31, 2011 and December 31, 2010, respectively


7,798


6,078Deferred income taxes


5,499


5,551Prepaid expenses and other current assets


1,764


1,666Income taxes receivable, net


2,406


2,099Total current assets


119,494


111,525Property and equipment, net


33,077


33,638Intangible assets, net


7,268


7,525Goodwill


1,257


1,257Deferred income taxes


11,737


12,192Long-term investments


2,972


5,313Other assets


1,409


845Total assets

$
177,214

$
172,295LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
846

$
774Accrued expenses


7,126


9,659Deferred revenue


4,551


5,698Total current liabilities


12,523


16,131Other long-term liabilities


9,194


8,596Commitments and contingencies (Note 3)Stockholders' equity:Preferred stock$0.0001 par value, 5,000 shares authorized at March 31, 2011 and December 31, 2010; no shares issued and
outstanding





Common stock$0.0001 par value, 70,000 shares authorized at March 31, 2011 and December 31, 2010; 20,389 and 20,325 shares issued at
March 31, 2011 and December 31, 2010, respectively; 17,389 and 17,325 shares outstanding at March 31, 2011 and December 31, 2010, respectively


3


3Additional paid-in capital


182,910


180,708Treasury stock, at cost3,000 shares at March 31, 2011 and December 31, 2010


(74,923
)

(74,923
)Accumulated other comprehensive income


529


491Retained earnings


46,978


41,289Total stockholders' equity


155,497


147,568Total liabilities and stockholders' equity

$
177,214

$
172,295


See accompanying notes to consolidated financial statements.

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DTS, INC.        CONSOLIDATED STATEMENTS OF INCOME

For the Three Months
Ended March 31,2011

2010(Unaudited)
(Amounts in thousands,
except per share amounts)Revenue

$
26,779

$
21,736Cost of revenue


211


450Gross profit


26,568


21,286Operating expenses:Selling, general and administrative


13,949


12,399Research and development


3,252


2,473Total operating expenses


17,201


14,872Operating income


9,367


6,414Interest and other income (expense), net


(74
)

212Income from continuing operations before income taxes


9,293


6,626Provision for income taxes


3,604


2,706Income from continuing operations


5,689


3,920Loss from discontinued operations, net of tax





(170
)Net income

$
5,689

$
3,750Net income per common share:Basic:Continuing operations

$
0.33

$
0.23Discontinued operations





(0.01
)Net income

$
0.33

$
0.22Diluted:Continuing operations

$
0.32

$
0.22Discontinued operations





(0.01
)Net income

$
0.32

$
0.21Weighted average shares used to compute net income per common share:Basic


17,205


17,216Diluted


17,903


17,950


See
accompanying notes to consolidated financial statements.

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DTS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months
Ended March 31,2011

2010(Unaudited)
(Amounts in thousands)Cash flows from operating activities:Net income

$
5,689

$
3,750Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


1,263


1,240Stock-based compensation charges


1,972


1,968Deferred income taxes


507


(408
)Tax benefits from stock-based awards


182


524Excess tax benefits from stock-based awards


(138
)

(521
)Other


150


(17
)Changes in operating assets and liabilities:Accounts receivable


(1,737
)

(1,006
)Prepaid expenses and other assets


(698
)

(245
)Accounts payable, accrued expenses and other liabilities


(1,992
)

(77
)Deferred revenue


(1,027
)

3,626Income taxes receivable


(307
)

253Net cash provided by operating activities


3,864


9,087Cash flows from investing activities:Purchases of held-to-maturity investments


(21,159
)

(24,898
)Maturities of held-to-maturity investments


18,995


13,307Sales of available for sale investments





250Purchase of property and equipment


(355
)

(1,356
)Purchase of intangible assets


(140
)

(116
)Net cash used in investing activities


(2,659
)

(12,813
)Cash flows from financing activities:Proceeds from the issuance of common stock under stock-based compensation plans


1,478


2,035Repurchase and retirement of common stock for restricted stock tax withholdings


(1,430
)

(720
)Excess tax benefits from stock-based awards


138


521Purchase of treasury stock





(8,455
)Net cash provided by (used in) financing activities


186


(6,619
)Net increase (decrease) in cash and cash equivalents


1,391


(10,345
)Cash and cash equivalents, beginning of period


41,744


42,222Cash and cash equivalents, end of period

$
43,135

$
31,877


See
accompanying notes to consolidated financial statements.

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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, 2011, 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, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. 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, 2010, filed on March 3, 2011.

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 8 of the consolidated financial statements, "Discontinued Operations."

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 2Property and Equipment

Property and equipment consist of the following:

As of
March 31,
2011

As of
December 31,
2010Land

$
6,600

$
6,600Building and improvements


21,068


21,057Machinery and equipment


2,918


2,854Office furniture and fixtures


5,155


5,045Leasehold improvements


1,575


1,527Software


5,737


5,64743,053


42,730Less: Accumulated depreciation


(9,976
)

(9,092
)Property and equipment, net

$
33,077

$
33,638


Note 3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 technologies, indemnities for liabilities associated with the infringement of other parties' technology based upon the Company's products and technologies,
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 4Income Taxes

For the three months ended March 31, 2011, the Company recorded an income tax provision of $3,604 on pre-tax income from continuing operations of $9,293, which
resulted in an annualized effective tax rate of 39%. 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, partially
offset by the reversal of a reserve for a foreign transfer pricing issue that has been effectively settled and the effects of foreign operations, as our tax rates on those operations are generally
lower than the U.S. statutory rate.

Other
long-term liabilities at March 31, 2011 and December 31, 2010, include unrecognized tax benefits of $7,778 and $7,271, respectively, for both domestic and
foreign issues. The net increase of $507 was due primarily for uncertainties relating to the Company's transfer pricing with its foreign

5

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 4Income Taxes (Continued)

licensing
subsidiaries and 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
carryforwards. 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, 2011 and 2010, withholding taxes were $1,684 and $1,318, respectively.

Note 5Stock-Based Compensation

On February 27, 2011, the Compensation Committee of the Board of Directors of the Company approved market stock unit agreements ("MSU Agreements") for the grant of certain
performance-based equity awards under the Company's 2003 Stock Plan.

Pursuant
to the MSU Agreements, units payable in shares of common stock (the "Units") will vest based on the attainment of certain performance criteria regarding both the Company's total
shareholder return and the performance of the Company as measured against the performance of the NASDAQ Composite Total Return Index ("NASDAQ" or "XCMP") over a 3-year performance period.
This 3-year performance period began on January 1, 2011 and ends on December 31, 2013, which aligns with the Company's fiscal year. In order for the Units to vest, the
Company must first satisfy a vesting threshold, defined as the Company achieving a total shareholder return equal to the greater of (i) 15% adjusted for inflation (using the Consumer Price
Index); and (ii) 20% over the performance period.

Assuming
this vesting threshold is satisfied, the number of Units that vest will be determined by comparing the Company's performance to the performance of the NASDAQ for the performance
period. If the Company's performance is 20% greater than the return for the NASDAQ, then the "baseline" number of Units will vest. If the Company's performance exceeds this baseline level of
performance, then a greater number of Units will vest on a 2.5:1 basis for each percentage point that the Company's performance is above 20% greater than the performance of the NASDAQ. The

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 5Stock-Based Compensation (Continued)

maximum
number of Units that may vest is equal to 200% of each individual's baseline number of Units.

If
the Company outperforms the NASDAQ by at least 10%, but less than 20%, then the number of baseline Units that vest will be determined by reducing the baseline number for each
individual on a 5:1 basis for the first five percentage points that the Company's performance is less than 20% greater than the performance of the NASDAQ and on a 15:1 basis for the next five
percentage points that the Company's performance is less than 15% greater than the performance of the NASDAQ, such that if the Company outperforms NASDAQ by 10% or less, the number of Units that vest
will be zero.

If
a "fundamental transaction" (as defined in the 2003 Stock Plan, as amended) occurs prior to the end of the 3-year performance period, the performance period will end as of
the consummation of the fundamental transaction and the pro rata portion of the Units, if any, that vest under the formulae described above will immediately vest, with the remainder of such Units
vesting ratably over the remainder of the 3-year period (with accelerated vesting if a grantee is terminated without "cause" or quits with "good reason" after the fundamental transaction).

Since
the vesting of these performance-based equity awards are subject to market conditions, these awards were measured on the date of grant using the Monte Carlo simulation model. The
Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market conditions stipulated in the award grant and calculates the fair market value for
the performance units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the market conditions and the resulting
fair value of the award.

The
Company granted 199 Units on February 27, 2011, which have an aggregate grant-date fair value of $5,287. The aggregate grant-date fair value for these
awards shall be recognized as compensation expense on a straight-line basis over the requisite service period, which began on the date of grant and ends on December 31, 2013.

For
additional information regarding the Company's Stock-Based Compensation, refer to Footnote 12, "Stock-Based Compensation," of our audited financial statements for the fiscal
year ended December 31, 2010 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2011.

Note 6Comprehensive Income

At March 31, 2011 and December 31, 2010, accumulated other comprehensive income was comprised mostly of foreign currency translation.

Comprehensive
income for the three months ended March 31, 2011 and 2010 was $5,727 and $3,733, respectively.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 7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 31,2011

2010United States

$
2,863

$
1,732International


23,916


20,004Total revenue

$
26,779

$
21,736


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

As of
March 31,
2011

As of
December 31,
2010United States

$
31,672

$
32,207International


1,405


1,431Total long-lived tangible assets

$
33,077

$
33,638


Note 8Discontinued Operations

The following table presents expense and tax information for discontinued operations during the three months ended March 31, 2011 and 2010.

For the Three Months
Ended March 31,2011

2010Pre-tax loss

$


$
(275
)(1)Income tax benefit





(105
)Loss from discontinued operations, net of tax

$


$
(170
)


(1)The
loss from discontinued operations resulted primarily from legal fees associated with the Company's efforts to collect certain amounts due and contingent
consideration from Datasat Digital Entertainment, Inc., previously known as Beaufort California, Inc., and Beaufort International Group Plc.


Note 9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 9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 31,2011

2010Basic net income per common share:Numerator:Income from continuing operations

$
5,689

$
3,920Loss from discontinued operations





(170
)Net income

$
5,689

$
3,750Denominator:Weighted average common shares outstanding


17,205


17,216Continuing operations

$
0.33

$
0.23Discontinued operations





(0.01
)Basic net income per common share

$
0.33

$
0.22Diluted net income per common share:Numerator:Income from continuing operations

$
5,689

$
3,920Loss from discontinued operations





(170
)Net income

$
5,689

$
3,750Denominator:Weighted average shares outstanding


17,205


17,216Effect of dilutive securities:Common stock options


572


600Restricted stock


121


114ESPP


5


20Diluted shares outstanding


17,903


17,950Continuing operations

$
0.32

$
0.22Discontinued operations





(0.01
)Diluted net income per common share

$
0.32

$
0.21


For
the three months ended March 31, 2011 and 2010, 130 and 247 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.

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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 those 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 audio technologies enable the delivery and playback of clear, compelling high-definition audio and are
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, set-top-boxes or STBs, mobile phones and home theater systems. In addition, we provide products and services to
motion picture 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 also provide a suite of audio processing technologies designed to enhance the entertainment experience from products subject to physical
limitations, such as TVs, PCs and smartphones.

We
derive revenues from licensing our audio technologies, 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.

Generally,
we actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technologies,
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

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of
revenue from our intellectual property. As a result of these activities, from time to time, we recognize royalty revenues that relate to consumer electronics manufacturing activities from prior
periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. While we consider such revenues to be a
regular part of our normal operations, we cannot predict such recoveries or the amount or timing of such revenues.

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

Our
selling, general, and administrative expenses consist primarily of salaries and related benefits for personnel engaged in sales and 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 salaries and related benefits for 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 approach
DVD pricing, 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.

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Because
we are a mandatory technology in the Blu-ray Disc standard, our revenue growth from this market 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.

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. Further,
we believe that this trend demands that playback devices be capable of processing content originating in any form, whether disk-based or on-line, which creates a substantial
opportunity for our technologies to extend into network connected products that may not have an optical drive. 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 and the natural disasters in Japan on consumer buying
patterns. While we do not have visibility into the timing or extent of an economic recovery, nor of the impact of the natural disasters in Japan, 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, 2011.

Results of Continuing Operations



Change2011

2010

$

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

$
26,779

$
21,736

$
5,043


23
%


Revenues
for the three months ended March 31, 2011, compared to the same prior year period, included an $0.8 million decrease in royalties recovered through intellectual
property compliance and enforcement activities, which we characterize as "royalty recoveries." Royalty recoveries may cause revenues to be higher than expected during a particular period and may not
occur in subsequent

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periods.
Therefore, unless otherwise noted, the impact of royalty recoveries has been excluded from our revenue discussions in order to provide a more meaningful and comparable analysis.

The
increase in revenues for the three months ended March 31, 2011, compared to the same prior year period, was largely attributable to continued growth in Blu-ray
related royalties and royalties from network connected markets, which include televisions and digital media players. Blu-ray related royalties comprised over 40% and 30% of revenue for the
three months ended March 31, 2011 and 2010, respectively. In dollar terms, these royalties were up 60% for the three months ended March 31, 2011, compared to the same prior year period.
Royalties from newer markets comprised nearly 15% and just over 10% of revenue for the three months ended March 31, 2011 and 2010, respectively. The growth in newer markets results from a
growing consumer interest in network connected consumer electronic products that access on-line content. Royalties from the car market also increased for the three months ended
March 31, 2011, compared to the same prior year period, due to improvement in the auto industry and continued expansion of our technology into additional new car models. Partially offsetting
these increases were continuing 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 current turmoil in the global economic environment and the natural disaster in Japan. 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.



2011

%

2010

%

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

$
26,568


99
%
$
21,286


98
%

1
%


Consolidated
gross profit percentage for the three months ended March 31, 2011, compared to the same prior year period, remained fairly consistent.

We
expect consolidated gross margins to remain in this range for 2011.



Change2011

2010

$

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

$
13,949

$
12,399

$
1,550


13
%% of Revenue


52
%

57
%


The
dollar increase for the three months ended March 31, 2011, compared to the same prior year period, was primarily due to a $0.8 million increase in employee related
costs, including expanded operations and increased headcount. Other increases include $0.4 million for advertising and travel related expenses for tradeshows 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.

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Change2011

2010

$

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

$
3,252

$
2,473

$
779


32
%% of Revenue


12
%

11
%


The
increase for the three months ended March 31, 2011, compared to the same prior year periods, was primarily due to an increase in employee related costs, including expanded
operations, increased headcount 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.



Change2011

2010

$

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

$
(74
)
$
212

$
(286
)

-135
%


The
interest and other expense, net, for the three months ended March 31, 2011 was due to the effects of translation for certain foreign subsidiaries to the U.S. dollar or
functional currency, partially offset by interest income. The interest and other income, net, for the three months ended March 31, 2010 was due to interest on our investments and other income
associated with certain royalty recoveries.



2011

2010($ in thousands)Three months ended March 31,

$
3,604

$
2,706Effective tax rate


39
%

41
%


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, partially offset by the effects of foreign operations, as our tax rate on those operations are generally lower than the U.S. statutory rate. Our effective tax
rate for the three months ended March 31, 2011 was also partially offset by the reversal of a reserve for a foreign transfer pricing issue that has been effectively settled.

Liquidity and Capital Resources

At March 31, 2011, we had cash, cash equivalents and short-term investments of $102.0 million, compared to
$96.1 million at December 31, 2010. At March 31, 2011, $45.2 million of cash, cash equivalents, and short-term investments was held by our foreign subsidiaries. If these funds are needed
for our operations in the U.S., they would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. However, our intent is to permanently reinvest these funds outside of
the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

Net
cash provided by operating activities was $3.9 million and $9.1 million for the three months ended March 31, 2011 and 2010, 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 operating cash flows during the three months ended March 31, 2011, were largely impacted by income from operations, partially offset by certain
non-cash items. These cash flows were also impacted by decreases

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in
cash flows from accounts receivable due to the timing of collections and the timing of payment for certain liabilities. The operating cash flows during the three months ended March 31, 2010,
were largely impacted by 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 certification equipment, for business and
technology acquisitions, for securing patent and trademark protection for our proprietary technologies and brand name and to purchase short-term and long-term investments such
as bank certificates of deposit and municipal bonds. Net cash used in investing activities totaled $2.7 million and $12.8 million for the three months ended March 31, 2011 and
2010, respectively. Investing activities for the three months ended March 31, 2011 and 2010, were primarily impacted by investment purchases, net, and capital expenditures.

Net
cash provided by financing activities totaled $0.2 million for the three months ended March 31, 2011, which resulted primarily from proceeds from the issuance of common
stock under stock-based compensation plans, partially offset by restricted stock tax withholdings. Net cash used in financing activities totaled $6.6 million for the three months ended
March 31, 2010, which resulted primarily from the purchase of treasury stock, partially offset by proceeds from the issuance of common stock under stock-based compensation plans.

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 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 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, 2010, with the exception of the increased
obligations associated with our gross unrecognized tax benefits. As of March 31, 2011, our total amount of unrecognized tax benefits was $7.8 million and was considered a
long-term obligation. We are currently unable to make reasonably reliable estimates of the periods of cash settlements associated with these obligations.

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, 2011. The estimated average maturity of our investment portfolio is less than

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one
year. As of March 31, 2011, a one percentage point change in interest rates throughout a one-year period would have an annual effect of approximately $1.0 million on our
income before income taxes.

During
the three months ended March 31, 2011, we derived nearly 90% of our revenues 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 5% of total revenues during the three months ended March 31, 2011. Operating expenses, including cost of sales, for our foreign subsidiaries were
approximately $4.2 million for the three months ended March 31, 2011. Based upon the expenses for the three months ended March 31, 2011, a 10% or greater change in foreign
currency rates throughout a one-year period could have a material impact on our operating income.

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

We
are also affected by exchange rate fluctuations as the financial statements of our foreign subsidiaries are translated into the United States dollar in consolidation. As exchange
rates fluctuate, these results, when translated, may vary from expectations and could adversely or positively impact overall profitability. During the three months ended March 31, 2011, 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 technologies and trademarks.

We
are not currently a party to any 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 events
identified in the risk factors 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 certain updates to and supersede the risk factors previously disclosed in Part I, Item 1A of our most recent Annual Report on
Form 10-K. The risk factor with the following heading has been added since that Annual Report:



Other
than the inclusion of this new fisk factor, we do not believe that the risk factors below have materially changed the type or magnitude of risks we face in comparison to the
disclosure provided in Part I, Item 1A of our most recent Annual Report on Form 10-K.

Risks Related to Our Business



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



Our
future success depends on our ability to enhance our existing technologies, products, and services and to develop acceptable new technologies, products, and services on a timely
basis. The development of enhanced and new technologies, 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 technologies, products, or services on a timely
basis, if at all. Furthermore, our new technologies, 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 technologies, products, and services from
gaining market

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acceptance
or maintaining market share and could lead to our technologies, products and services becoming obsolete.



Protection of our intellectual property is critical to our success. Copyright, trademark, patent, 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 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.



Except for Blu-ray 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 technologies 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 technologies, trademarks or services. Furthermore, the
decision by a party dominant in the entertainment value chain to provide audio technology at very low or no cost could impact a licensee's decision to use our technology. Our customers, licensees and
other manufacturers might not utilize our technologies or services in the future.

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We expect to derive a significant percentage of our revenues from the technologies, products, and services that we offer to manufacturers of consumer electronics
products. To date, the most significant driver for the use of our technologies 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 technologies 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 generally do not have contracts that require 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.



Movie and music content for the last 15 years has been primarily purchased and consumed via optical media, such as Blu-ray, DVD, and CD. Today,
these are still the dominant way consumers purchase and watch or listen to their favorite content. However, the growth of the internet and home computer usage, and a shift to home network and
cloud-based content acquisition has occurred, including the recent trend to full movie download and streaming services becoming mainstream with consumers in various parts of the world.

The
services that provide movie content from the cloud are not generally governed by international or national standards and are thus free to choose any media format(s) in order to
deliver their product and/or service. This freedom of choice on the part of the content provider could limit DTS' ability to grow if such content providers do not incorporate DTS' technologies into
their movies.



Standards-setting bodies may require the use of so-called "open standards," meaning that the technologies necessary to meet those standards are
publicly available free of charge and often on an "open source" basis. These standards are a relatively recent and limited occurrence and have primarily been focused on markets and regions
traditionally adverse to the notion of intellectual property ownership and the associated royalties. Examples of such markets and regions would include the personal computer, or PC, market, and the
China region. If the concept of "open standards" gains industry momentum in the future, 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.

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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 are seeing sales of these products declining and growth in our business shifting to Blu-ray Disc based products. While the release and
consumer adoption of Blu-ray Disc players continues to ramp up, potentially slow adoption by consumers of Blu-ray Disc players, particularly in the PC market, could adversely
affect our business. In addition, if new technologies, including content streaming on direct downloads of content, are developed or deployed that substantially compete with or replace
Blu-ray Disc products as a dominant medium for consumer video entertainment, our business, operating results and prospects could be adversely affected.



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.



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.



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

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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 Blu-ray Disc, while both our two-channel
output and Dolby's technologies have been selected as mandatory standards in Blu-ray Disc. However, if either or both of these standards are re-examined or a new standard is developed, we
may not be included as mandatory in any such new or revised standard which would cause revenue growth in our consumer business to be significantly lower than expected and could have a material adverse
affect on our business.

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

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.



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:



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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.



Our technologies or products could contain errors that could cause our products or technologies to operate improperly and could cause unintended consequences. If
our products or technologies 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.



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
technologies and products may not be able to withstand any third-party claims or rights against their use. If we were unable to obtain any necessary license following a determination of infringement
or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our products to avoid infringing a third party's rights and could be
required to temporarily or permanently discontinue licensing our products.

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 technologies 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.



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

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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.



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 2010, two customers
accounted for 17% and 15%, respectively, 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.



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.

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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. It has also achieved mandatory standard status in product categories that we have not, including terrestrial digital television broadcasts in 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.



Our technologies have only recently been incorporated into certain markets, such as digital media players, televisions, personal computers, digital satellite and
cable broadcast products, portable electronics devices and mobile handsets. We do not have the same experience in these markets as in our traditional consumer electronics business, nor do we have as
much operating history as companies such as Dolby Laboratories, Inc., SRS Labs, Inc. and BBE Sound, Inc. As a result, the demand for our technologies, products, and services and
the income potential of these businesses is unproven. In addition, because our participation in these markets is relatively new and rapidly evolving, we may 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.



The market for consumer electronics products is intensely competitive and price sensitive. Retail prices for consumer electronics products that include our DTS
audio technologies 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 technologies into the consumer electronics products that they sell and distribute. Most of the consumer electronics
products that include our audio technologies 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 technologies are not a mandatory standard could decide to exclude our DTS audio technologies from their products altogether.



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

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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 technologies.

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.



Natural or other disasters such as earthquakes, hurricanes, tsunamis or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, and
the consequences and effects thereof, including energy shortages and public health issues, could disrupt our operations, or the operations of our business partners and customers, or result in economic
instability that may negatively impact our
operating results and financial condition. Our corporate headquarters and many of our operations are located in California, a seismically active region, potentially exposing us to greater risk of
natural disasters. Further, we have operations and assets in Japan and, while as of the date of this filing, we do not believe these operations and assets have been materially affected by the
earthquake on March 11, 2011 and the resulting tsunami, we are still assessing the impact. However, the implications from ongoing events and widespread damage to the nation's infrastructure,
consumer confidence and overall economy remain unclear. Although we cannot fully assess the financial impact of these ongoing events at this time, we believe that our future operating results could be
negatively impacted. In addition, our operating results may be further negatively impacted by, among other things, the rolling electrical blackouts and certain industry wide shutdowns now occurring in
Japan as well as the potential of a nuclear reactor disaster occurring at a power plant within Japan.



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.



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:



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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.



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. During the three months ended March 31, 2011, nearly 90% of our revenues were derived internationally. We face numerous risks in doing business outside the United
States, including:



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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, KRW, HKD, TWD and GBP. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.



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.



Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the Sarbanes-Oxley Act

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of
2002, and the rules and regulations promulgated thereunder have created uncertainty for public companies and significantly increased the costs and risks associated with operating as a publicly
traded company in the United States. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which
will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. Furthermore, with such
uncertainties, we cannot assure you that our system of internal control will be effective or satisfactory to our independent registered public accounting firm. As a result, our financial reporting may
not be timely and/or accurate and we may be issued an adverse or qualified opinion by our independent registered public accounting firm. If reporting delays or errors actually occur, we could be
subject to sanctions or investigation by regulatory authorities, such as the SEC, and 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.

Further,
the SEC has passed, promulgated and proposed new rules on a variety of subjects including the requirement that we must file our financial statements with the SEC using the
interactive data format eXtensible Business Reporting Language, or XBRL, and the possibility that we would be required to adopt International Financial Reporting Standards, or IFRS. In order to comply
with XBRL and IFRS requirements, we may have to add additional accounting staff, engage consultants or change our internal practices, standards and policies which could significantly increase our
costs.

We
believe that these new and proposed laws and regulations could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve
on our audit committee, and qualified executive officers.



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 we believe means that we treat similarly situated licensees similarly. 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 to, 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.



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. Our revenues may continue to be subject to fluctuations, seasonal or otherwise, in the future. Unanticipated fluctuations, whether due to seasonality, economic downturns,
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.

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In
addition, we actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technologies,
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 royalty recoveries and expenditures,
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.



We hold patents covering much of the technologies that we license to system licensees, and our licensing revenue is tied in large part to the life of those
patents. Our right to receive royalties related to our patents terminates with the expiration of the last patent covering the relevant technologies. Accordingly, to the extent that we do not replace
licensing revenue from technologies covered by expiring patents with licensing revenue based on new patents and proprietary technologies, our revenue could decline.



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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Risks Related to Our Common Stock



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



In
addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15%
or more of our outstanding voting stock. These and other provisions in our Restated Certificate of Incorporation, Restated Bylaws and Delaware law could make it more difficult for stockholders or
potential acquirors to obtain control of our Board or initiate actions that are opposed by the then-current Board, and could 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.



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



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

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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, 2011 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, 2011 throughJanuary 31, 2011











February 1, 2011 throughFebruary 28, 2011


29,128

$
47.39





March 1, 2011 throughMarch 31, 2011


1,102

$
46.96





Total


30,230

$
47.38
(2)







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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

Form of Market Stock Unit Agreement under 2003 Equity Incentive Plan (for Jon Kirchner)#10.2

Form of Market Stock Unit Agreement under 2003 Equity Incentive Plan (for executives other than Jon Kirchner)#10.3

Employment Agreement, dated February 17, 2011, between DTS, Inc. and Jon Kirchner.(1)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 9, 2011

by:

/s/ JON E. KIRCHNER Jon E. Kirchner Chairman and Chief Executive Officer
(Duly Authorized Officer)Date: May 9, 2011

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

Form of Market Stock Unit Agreement under 2003 Equity Incentive Plan (for Jon Kirchner)#10.2

Form of Market Stock Unit Agreement under 2003 Equity Incentive Plan (for executives other than Jon Kirchner)#10.3

Employment Agreement, dated February 17, 2011, between DTS, Inc. and Jon Kirchner.(1)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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