SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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Form 10-Q

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

For the Quarterly Period Ended June 30, 2004

Commission File Number 000-50335

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Digital Theater Systems, Inc.(Exact name of registrant as specified in its charter)

|Delaware                                                       |  | 77-0467655                                          
|-------------------------------------------------------------- |  | ----------------------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. employer identification number)             
|5171 Clareton Drive
Agoura Hills, California 91301             |  | (818) 706-3525                                      
|(Address of principal executive offices
and zip code)          |  | (Registrant's telephone number,
Including area code)

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

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

As of July 31, 2004 a total of 16,998,736 shares of the Registrant's Common Stock, $0.0001 par value, were issued and outstanding.



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DIGITAL THEATER SYSTEMS, INC.

FORM 10-Q

TABLE OF CONTENTS

|PART I     |  | FINANCIAL INFORMATION                                                                 |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|Item 1.    |  | Financial Statements:                                                                 |  |   
|           |  | Condensed Consolidated Balance Sheets                                                 |  | 3 
|           |  | Condensed Consolidated Statements of Operations                                       |  | 4 
|           |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5 
|           |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6 
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 12
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 30
|Item 4.    |  | Controls and Procedures                                                               |  | 30
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|Item 1.    |  | Legal Proceedings                                                                     |  | 31
|Item 2.    |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 31
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 31
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 31
|Item 5.    |  | Other Information                                                                     |  | 32
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 32
|SIGNATURES |  | 33                                                                                   

2

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DIGITAL THEATER SYSTEMS, INC.

PART I        FINANCIAL INFORMATION

Item 1.Financial Statements

Digital Theater Systems, Inc.        Condensed Consolidated Balance Sheets

|                                       |                                                                                                                                                                                                                   | As of
December 31,
2003    |                                            | As of
June 30,
2004
|-------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | -------------------
|
|
|ASSETS                                
|Current assets:                        |                                                                                                                                                                                                                   |                            |                                            |                    
|                                       | Cash and cash equivalents                                                                                                                                                                                         |                            | $                                          | 89,341             
|                                       | Short-term investments                                                                                                                                                                                            |                            |                                            | 10,048             
|                                       | Accounts receivable, net of allowance for doubtful accounts of $429 and $441 at December 31, 2003 and June 30, 2004, respectively                                                                                 |                            |                                            | 3,962              
|                                       | Inventories                                                                                                                                                                                                       |                            |                                            | 7,552              
|                                       | Deferred tax assets, net                                                                                                                                                                                          |                            |                                            | 6,025              
|                                       | Prepaid expenses and other                                                                                                                                                                                        |                            |                                            | 1,846              
|                                       | Income tax receivable                                                                                                                                                                                             |                            |                                            | 660                
|                                       |                                                                                                                                                                                                                   |                            |                                            |                    
|                                       |                                                                                                                                                                                                                   | Total current assets       |                                            |                    
|Long-term investments                  |                                                                                                                                                                                                                   |                            | 2,998                                      |                    
|Property and equipment, net            |                                                                                                                                                                                                                   |                            | 3,092                                      |                    
|Patents and trademarks                 |                                                                                                                                                                                                                   |                            | 424                                        |                    
|Deferred tax assets                    |                                                                                                                                                                                                                   |                            | 1,527                                      |                    
|Other assets                           |                                                                                                                                                                                                                   |                            | 20                                         |                    
|                                       |                                                                                                                                                                                                                   |                            |                                            |                    
|                                       |                                                                                                                                                                                                                   | Total assets               |                                            | $                  
|                                       |                                                                                                                                                                                                                   |                            |                                            |                    
|LIABILITIES AND STOCKHOLDERS' EQUITY  
|Current liabilities:                   |                                                                                                                                                                                                                   |                            |                                            |                    
|                                       | Accounts payable                                                                                                                                                                                                  |                            | $                                          | 2,829              
|                                       | Accrued expenses                                                                                                                                                                                                  |                            |                                            | 5,795              
|                                       | Income tax payable                                                                                                                                                                                                |                            |                                            |                   
|                                       |                                                                                                                                                                                                                   |                            |                                            |                    
|                                       |                                                                                                                                                                                                                   | Total current liabilities  |                                            |                    
|Commitments and contingencies (Note 6) |                                                                                                                                                                                                                   |                            |                                            |                    
|Stockholders' equity:                  |                                                                                                                                                                                                                   |                            |                                            |                    
|                                       | Preferred stock$0.0001 par value, 5,000,000 shares authorized at December 31, 2003 and June 30, 2004; no shares outstanding at December 31, 2003 and June 30, 2004                                               |                            |                                            |                   
|                                       | Common stock$0.0001 par value, 70,000,000 shares authorized at December 31, 2003 and June 30, 2004; 16,512,885 and 16,951,398 shares issued and outstanding at December 31, 2003 and June 30, 2004,
respectively |                            |                                            | 2                  
|                                       | Additional paid-in capital                                                                                                                                                                                        |                            |                                            | 115,512            
|                                       | Retained earnings                                                                                                                                                                                                 |                            |                                            | 3,357              
|                                       |                                                                                                                                                                                                                   |                            |                                            |                    
|                                       |                                                                                                                                                                                                                   | Total stockholders' equity |                                            |                    
|                                       |                                                                                                                                                                                                                   |                            |                                            |                    
|                                       |                                                                                                                                                                                                                   |                            | Total liabilities and stockholders' equity |                    
|                                       |                                                                                                                                                                                                                   |                            |                                            |                    

See
accompanying notes to condensed consolidated financial statements.

3

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Digital Theater Systems, Inc.        Condensed Consolidated Statements of Operations

|                                                                                                         |                                     | For the Three Months
Ended June 30, |       | For the Six Months
Ended June 30, |       
|-------------------------------------------------------------------------------------------------------- | ----------------------------------- | ----------------------------------- | ----- | --------------------------------- | ------
|
|
|Revenues:                                                                                                |                                     |                                     |       |                                   |       
|                                                                                                         | Technology and film licensing       |                                     | $     | 9,554                             |       
|                                                                                                         | Product sales and other revenues    |                                     |       | 2,147                             |       
|                                                                                                         |                                     |                                     |       |                                   |       
|                                                                                                         |                                     | Total revenues                      |       |                                   | 11,701
|Cost of goods sold:                                                                                      |                                     |                                     |       |                                   |       
|                                                                                                         | Technology and film licensing       |                                     |       | 1,045                             |       
|                                                                                                         | Product sales and other revenues    |                                     |       | 1,744                             |       
|                                                                                                         |                                     |                                     |       |                                   |       
|                                                                                                         |                                     | Total cost of goods sold            |       |                                   | 2,789 
|                                                                                                         |                                     |                                     |       |                                   |       
|Gross profit                                                                                             |                                     |                                     | 8,912 |                                   |       
|Operating expenses:                                                                                      |                                     |                                     |       |                                   |       
|                                                                                                         | Selling, general and administrative |                                     |       | 4,865                             |       
|                                                                                                         | Research and development            |                                     |       | 1,174                             |       
|                                                                                                         |                                     |                                     |       |                                   |       
|                                                                                                         |                                     | Total operating expenses            |       |                                   | 6,039 
|                                                                                                         |                                     |                                     |       |                                   |       
|Income from operations                                                                                   |                                     |                                     | 2,873 |                                   |       
|Interest income, net                                                                                     |                                     |                                     | 10    |                                   |       
|Other income (expense), net                                                                              |                                     |                                     | 3     |                                   |       
|Legal settlement (Note 10)                                                                               |                                     |                                     |      |                                   |       
|                                                                                                         |                                     |                                     |       |                                   |       
|Income before provision for income taxes                                                                 |                                     |                                     | 2,886 |                                   |       
|Provision for income taxes                                                                               |                                     |                                     | 1,041 |                                   |       
|                                                                                                         |                                     |                                     |       |                                   |       
|Net income                                                                                               |                                     |                                     | 1,845 |                                   |       
|Accretion and accrued dividends on preferred stock                                                       |                                     |                                     | (467  | )                                 |       
|                                                                                                         |                                     |                                     |       |                                   |       
|Net income attributable to common stockholders                                                           |                                     | $                                   | 1,378 |                                   | $     
|                                                                                                         |                                     |                                     |       |                                   |       
|Net income attributable to common stockholders per common share:                                         |                                     |                                     |       |                                   |       
|                                                                                                         | Basic                               |                                     | $     | 0.31                              |       
|                                                                                                         |                                     |                                     |       |                                   |       
|                                                                                                         | Diluted                             |                                     | $     | 0.13                              |       
|                                                                                                         |                                     |                                     |       |                                   |       
|Weighted average shares used to compute net income attributable to common stockholders per common share: |                                     |                                     |       |                                   |       
|                                                                                                         | Basic                               |                                     |       | 4,500,885                         |       
|                                                                                                         |                                     |                                     |       |                                   |       
|                                                                                                         | Diluted                             |                                     |       | 10,970,303                        |       
|                                                                                                         |                                     |                                     |       |                                   |       

See
accompanying notes to condensed consolidated financial statements.

4

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Digital Theater Systems, Inc.        Condensed Consolidated Statements of Cash Flows

|                                                                                  |                                                                                    | For the Six Months
Ended June 30,                    |      
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------------- | -----
|
|
|Cash flows from operating activities:                                             |                                                                                    |                                                      |      
|Net income                                                                        |                                                                                    | $                                                    | 3,874
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                                    |                                                      |      
|                                                                                  | Depreciation and amortization                                                      |                                                      |      
|                                                                                  | Stock-based compensation charges                                                   |                                                      |      
|                                                                                  | Allowance for doubtful accounts                                                    |                                                      |      
|                                                                                  | Loss on disposal of property and equipment                                         |                                                      |      
|                                                                                  | Deferred income taxes                                                              |                                                      |      
|                                                                                  | Tax benefit from employee stock plans                                              |                                                      |      
|                                                                                  | Changes in operating assets and liabilities:                                       |                                                      |      
|                                                                                  |                                                                                    | Accounts receivable                                  |      
|                                                                                  |                                                                                    | Inventories                                          |      
|                                                                                  |                                                                                    | Prepaid expenses and other assets                    |      
|                                                                                  |                                                                                    | Accounts payable and accrued expenses                |      
|                                                                                  |                                                                                    | Income taxes                                         |      
|                                                                                  |                                                                                    |                                                      |      
|                                                                                  |                                                                                    | Net cash provided by operating activities            |      
|                                                                                  |                                                                                    |                                                      |      
|Cash flows from investing activities:                                             |                                                                                    |                                                      |      
|                                                                                  | Purchase of investments                                                            |                                                      |      
|                                                                                  | Purchase of property and equipment                                                 |                                                      |      
|                                                                                  | Payment for patents and trademarks in process                                      |                                                      |      
|                                                                                  |                                                                                    |                                                      |      
|                                                                                  |                                                                                    | Net cash used in investing activities                |      
|                                                                                  |                                                                                    |                                                      |      
|Cash flows from financing activities:                                             |                                                                                    |                                                      |      
|                                                                                  | Payment of dividends to preferred stockholders                                     |                                                      |      
|                                                                                  | Follow-on public offering costs                                                    |                                                      |      
|                                                                                  | Proceeds from the issuance of common stock upon exercise of employee stock options |                                                      |      
|                                                                                  | Proceeds from the issuance of common stock upon exercise of warrants               |                                                      |      
|                                                                                  | Proceeds from the issuance of common stock under employee stock purchase plan      |                                                      |      
|                                                                                  |                                                                                    |                                                      |      
|                                                                                  |                                                                                    | Net cash provided by (used in) financing activities  |      
|                                                                                  |                                                                                    |                                                      |      
|                                                                                  |                                                                                    | Net increase (decrease) in cash and cash equivalents |      
|Cash and cash equivalents, beginning of period                                    |                                                                                    |                                                      | 1,907
|                                                                                  |                                                                                    |                                                      |      
|Cash and cash equivalents, end of period                                          |                                                                                    | $                                                    | 3,222
|                                                                                  |                                                                                    |                                                      |      

See
accompanying notes to condensed consolidated financial statements.

5

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DIGITAL THEATER SYSTEMS, INC.        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        (Amounts in thousands, except share and per share data)

Note 1Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Digital Theater Systems, 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 condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation, consisting only of normal and recurring
adjustments. All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto for the year
ended December 31, 2003 filed on Form 10-K filed on March 30, 2004.

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.

Note 2Recent Accounting Pronouncements

In November 2003, the EITF reached a consensus on Issue No. 03-10, "Application of EITF 02-16 by Resellers to Sales
Incentives Offered to Consumers by Manufacturers." EITF No. 03-10 addresses the accounting for manufacturer sales incentives offered directly to consumers, including manufacturer
coupons. EITF No. 03-10 is effective for the first interim period beginning after November 25, 2003. Adoption of the provisions of EITF No. 03-10 did not
have a material impact on the Company's financial position, results of operations, or cash flows for the six months ended June 30, 2004.

Note 3Certain Balance Sheet Items

Inventories consist of the following:

As of
December 31,
2003

As of
June 30,
2004(Unaudited)Raw materials

$
1,370

$
1,830Work in process


8


33Finished goods


6,174


6,844Total inventories

$
7,552

$
8,707


6

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Property
and equipment consist of the following:

As of
December 31,
2003

As of
June 30,
2004(Unaudited)Machinery and equipment

$
2,511

$
2,848Office furniture and fixtures


1,963


2,326Leasehold improvements


2,599


2,7047,073


7,878Less: Accumulated depreciation


(3,981
)

(4,493
)Property and equipment, net

$
3,092

$
3,385


Note 4Bank Line of Credit

The Company replaced its prior working capital credit facility with a new $10,000 facility that matures on June 30, 2005. The bank agreement provides for
working capital financing and is unsecured. The bank agreement requires the Company to comply with certain covenants including a tangible effective net worth of $60,000, increasing by 50% of net
income on an annual basis. The covenants also require the Company to keep $2,000 in cash or securities at the bank.

At
June 30, 2004, there were no balances outstanding under this agreement and there was $10,000 of available borrowings under this credit facility. Future borrowings will bear
interest based on either of the two options the Company selects at the time of advances 1) a rate equal to 2% above the Bank's LIBOR, or 2) a rate equal to the Base Rate as quoted from
the bank less one-half percent. A commitment fee of $10 was paid for this line of credit.

Note 5Income Taxes

For the three months and six months ended June 30, 2004, the Company recorded an income tax provision of $1,740 and $3,658, respectively on
pre-tax income of $4,859 and $10,217, respectively. This resulted in an annualized effective tax rate of 35.8%. For the three months and six months ended June 30, 2003, the Company
recorded an income tax provision of $1,041 and $2,127, respectively on pre-tax income of $2,886 and $6,001, respectively. This resulted in an annualized effective tax rate of 35.4%. These
rates differed from the statutory rates primarily due to state income taxes offset by benefits associated with the foreign rate differentials and research and development credits.

Note 6Commitments and Contingencies

Indemnities, Commitments and Guarantees

In the normal course of business, the Company makes certain indemnities, commitments and guarantees under which the Company may be required to make payments in
relation to certain transactions. These indemnities, commitments and guarantees include, among others, intellectual property indemnities to customers in connection with the sale of products and
licensing of technology, indemnities for liabilities associated with the infringement of other parties' technology based upon the Company's products and technology, guarantees of timely performance of
the Company's obligations, and indemnities to the Company' 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 balance sheets, as future payment is not probable.

7

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Note 7Stock-Based Compensation

The Company accounts for its employee stock option and stock purchase plans in accordance with the provisions of Accounting Principals Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and the related FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." Accordingly,
compensation expense related to employee stock options is recorded if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price.

To
date, options have been granted at exercise prices that equal or exceed the market value of the underlying common stock on the grant date. The following table illustrates the effect
on net income attributable to common stockholders and net income per common share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.

|                                                                         |                                                                                                                    | For the Three
Months Ended
June 30, |   | For the Six
Months Ended
June 30, |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------ | ----------------------------------- | - | --------------------------------- | -
|
|
|Net income attributable to common stockholders:                          |                                                                                                                    |                                     |   |                                   |  
|                                                                         | As reported                                                                                                        |                                     | $ | 1,378                             |  
|                                                                         | Additional stock-based compensation expense determined under the fair value method, net of tax                     |                                     |   | (46                               | )
|                                                                         |                                                                                                                    |                                     |   |                                   |  
|                                                                         | Pro forma                                                                                                          |                                     | $ | 1,332                             |  
|                                                                         |                                                                                                                    |                                     |   |                                   |  
|Net income attributable to common stockholders per common share-basic:   |                                                                                                                    |                                     |   |                                   |  
|                                                                         | As reported                                                                                                        |                                     | $ | 0.31                              |  
|                                                                         | Per share effect of additional stock-based compensation expense determined under the fair value method, net of tax |                                     |   | (0.01                             | )
|                                                                         |                                                                                                                    |                                     |   |                                   |  
|                                                                         | Pro forma                                                                                                          |                                     | $ | 0.30                              |  
|                                                                         |                                                                                                                    |                                     |   |                                   |  
|Net income attributable to common stockholders per common share-diluted: |                                                                                                                    |                                     |   |                                   |  
|                                                                         | As reported                                                                                                        |                                     | $ | 0.13                              |  
|                                                                         | Per share effect of additional stock-based compensation expense determined under the fair value method, net of tax |                                     |   |                                  |  
|                                                                         |                                                                                                                    |                                     |   |                                   |  
|                                                                         | Pro forma                                                                                                          |                                     | $ | 0.13                              |  
|                                                                         |                                                                                                                    |                                     |   |                                   |  

The
Company accounts for stock, stock options and warrants issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF Issue
No. 96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services." Under SFAS No. 123
and EITF Issue No. 96-18, stock option awards issued to non-employees are accounted for at fair value using the Black-Scholes pricing model. Management believes that the
fair value of the stock options is more reliably measured than the fair value of the services received. The fair value of each non-employee equity award is remeasured each period until a
commitment date is reached, which is generally the vesting date. For non-employee equity awards, deferred stock-based compensation is not reflected in stockholders' deficit until a
commitment date is reached. For the three months ended June 30, 2003 and 2004, the Company recorded stock-based compensation expense of $22 and $79, respectively, related to
non-employee equity awards. For the six months ended June 30, 2003 and 2004, the Company recorded stock-based compensation expense of $425 and $218 respectively, related to
non-employee equity awards.

8

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Note 8Operating Segment and Geographic Information

The Company operates its business in two reportable segments: the Theatrical business segment and the Consumer business segment. The Theatrical business segment
provides digital playback systems and cinema processor equipment to movie theaters, and provides film licensing services to film production and distribution companies. The Company's Consumer business
segment licenses audio technology, trademarks and know-how to consumer electronics, personal computer, broadcast and professional audio companies, and sells multi-channel audio content and
products to consumers.

The
Company does not have separately identifiable capital expenditures or long-lived assets related to these two business segments.

The
Company's reportable segments and geographical information for the three and six months ended June 30, 2003 and 2004 are as follows:

RevenuesFor the Three
Months Ended
June 30,

For the Six
Months Ended
June 30,2003

2004

2003

2004(Unaudited)Theatrical business

$
3,930

$
4,503

$
7,410

$
9,303Consumer business


7,771


8,749


16,047


19,546Total revenues

$
11,701

$
13,252

$
23,457

$
28,849Gross ProfitFor the Three
Months Ended
June 30,

For the Six
Months Ended
June 30,2003

2004

2003

2004(Unaudited)Theatrical business

$
1,713

$
1,850

$
3,267

$
4,312Consumer business


7,199


8,481


14,988


18,724Total gross profit

$
8,912

$
10,331

$
18,255

$
23,036Income (Loss) From OperationsFor the Three
Months Ended
June 30,

For the Six
Months Ended
June 30,2003

2004

2003

2004(Unaudited)Theatrical business

$
(833
)
$
(1,729
)
$
(2,025
)
$
(2,806
)Consumer business


3,706


3,694


8,080


9,704Total income from operations

$
2,873

$
1,965

$
6,055

$
6,898


9

---



Revenues by Geographic RegionFor the Three
Months Ended
June 30,

For the Six
Months Ended
June 30,2003

2004

2003

2004(Unaudited)United States

$
3,466

$
4,401

$
6,144

$
8,590International


8,235


8,851


17,313


20,259Total revenues

$
11,701

$
13,252

$
23,457

$
28,849


The
following table sets forth, for the periods indicated, long-lived assets by geographic area in which the Company holds assets at December 31, 2003 and
June 30, 2004:

Long-Lived AssetsAs of
December 31,
2003

As of
June 30,
2004(Unaudited)United States

$
3,150

$
3,227International


366


587Total long-lived assets

$
3,516

$
3,814


10

---



Note 9Net Income Attributable to Common Stockholders Per Common Share

The following table sets forth the computation of basic and diluted net income attributable to common stockholders per common share:

|                                                                         |                                                                       | For the Three Months
Ended June 30,            |      | For the Six Months
Ended June 30,
|------------------------------------------------------------------------ | --------------------------------------------------------------------- | ---------------------------------------------- | ---- | ---------------------------------
|
|
|Basic net income attributable to common stockholders per common share:   |                                                                       |                                                |      |                                  
|                                                                         | Numerator:                                                            |                                                |      |                                  
|                                                                         |                                                                       | Net income                                     |      | $                                
|                                                                         |                                                                       | Preferred stock dividends accrued              |      |                                  
|                                                                         |                                                                       | Accretion on preferred stock                   |      |                                  
|                                                                         |                                                                       |                                                |      |                                  
|                                                                         |                                                                       | Net income attributable to common stockholders |      | $                                
|                                                                         |                                                                       |                                                |      |                                  
|                                                                         | Denominator:                                                          |                                                |      |                                  
|                                                                         |                                                                       | Weighted average common shares outstanding     |      |                                  
|                                                                         |                                                                       |                                                |      |                                  
|                                                                         | Basic net income attributable to common stockholders per common share |                                                | $    | 0.31                             
|                                                                         |                                                                       |                                                |      |                                  
|Diluted net income attributable to common stockholders per common share: |                                                                       |                                                |      |                                  
|                                                                         | Numerator:                                                            |                                                |      |                                  
|                                                                         |                                                                       | Net income                                     |      | $                                
|                                                                         |                                                                       | Preferred stock dividends accrued              |      |                                  
|                                                                         |                                                                       | Accretion on preferred stock                   |      |                                  
|                                                                         |                                                                       |                                                |      |                                  
|                                                                         |                                                                       | Net income attributable to common stockholders |      | $                                
|                                                                         |                                                                       |                                                |      |                                  
|Denominator:                                                             |                                                                       |                                                |      |                                  
|                                                                         | Weighted average shares outstanding                                   |                                                |      | 4,500,885                        
|                                                                         | Effect of dilutive securities:                                        |                                                |      |                                  
|                                                                         |                                                                       | Common stock options                           |      |                                  
|                                                                         |                                                                       | Common stock warrants                          |      |                                  
|                                                                         |                                                                       |                                                |      |                                  
|                                                                         | Diluted shares outstanding                                            |                                                |      | 10,970,303                       
|                                                                         |                                                                       |                                                |      |                                  
|Diluted net income attributable to common stockholders per common share  |                                                                       | $                                              | 0.13 |                                  
|                                                                         |                                                                       |                                                |      |                                  

Note 10Legal Settlement

In May 2004, the Company reached a settlement with Mintek Digital, Inc. ("Mintek") for $3,500 for Trademark Infringement, False Designation of
Origin, Trademark Dilution, and Unfair Competition relating to Mintek's distribution of DVD players bearing the Company's registered trademarks without obtaining a license from the Company. The
Company received $1,000 in June along with $2,500 in irrevocable letters of credit in the Company's favor. The Company recognized $899 in revenue under the settlement for royalties due on units that
could be identified as using the Company's trademark and accounted for the excess $2,601 portion of the settlement as other income. The $2,500 in irrevocable letters of credit is included in accounts
receivable at June 30, 2004. Selling, general and administrative expenses for the three and six months ended June 30, 2004 included approximately $200 and $300, respectively, in legal
fees related to the Mintek case. Legal fees related to Mintek were approximately $200 for 2003.

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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 report and the documents incorporated herein by reference contain forward-looking statements based on our current expectations, estimates and projections
about our industry, beliefs, and certain assumptions made by us. Words such as "believes," "anticipates," "estimates," "expects," "projections," "may," "potential," "plan," "continue" and words of
similar import, constitute "forward-looking statements." The forward-looking statements contained in this report involve known and unknown risks, uncertainties and other factors that may cause our
actual results to be materially different from those expressed or implied by these statements. These factors include those listed under the "Risk Factors" section contained below and in our
Form 10-K filed on March 30, 2004 with the Securities and Exchange Commission, or SEC, and the other documents we file with the SEC, including our most recent reports on
Form 8-K and Form 10-Q. We cannot guarantee future results, levels of activity, performance or achievements. We do not undertake any obligation to revise these
forward-looking statements to reflect future events or circumstances.

You
should read the following discussion of our financial condition and results of operations in conjunction with the Form 10-K filed on March 30, 2004. This
discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result
of certain factors, such as those set forth under "Risk Factors" contained below and in our Form 10-K filed on March 30, 2004.

Overview

We are a leading provider of entertainment technology, historically focused on high-quality digital multi-channel audio technology, products, and
services for entertainment markets worldwide. Multi-channel audio, commonly referred to as surround sound,
provides more than two-channels of audio, allowing the listener to simultaneously hear discrete sounds from multiple speakers. Our DTS digital multi-channel audio technology delivers
compelling surround sound for the motion picture and consumer electronics markets.

We
manage our business through two reportable segmentsour theatrical business and our consumer business. Historically, we have derived a majority of our revenues from the
theatrical business. Beginning in 2001, however, we have derived a majority of our revenues from our consumer business.

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

In
our theatrical business, we derive revenues from sales of our playback equipment and cinema processors to movie theaters and special venues. In addition, we sell encoding and
duplication services to film producers and distributors for the creation of digital multi-channel motion picture soundtracks. We also derive revenues from the sale of systems and encoding services for
pre-show advertising, alternative content, subtitling, captioning, and descriptive narration.

We
present revenues in our consolidated financial statements and in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as derived from
(1) technology and film licensing and (2) product sales and other revenues. Our technology and film licensing revenues are derived from each of our consumer and theatrical business
segments. Revenues from technology licensing in connection with our consumer business segment include revenues derived

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from
licensing our audio technology, trademarks, and know-how to consumer electronics, personal computer, video game and console, digital satellite and cable broadcast, and professional
audio companies as well as to semiconductor manufacturers. Revenues from technology and film licensing in connection with our theatrical business segment include revenues derived from film licensing
and services that we provide to film studios for the production of soundtracks in our digital multi-channel format. Our product sales and other revenues also are derived from each of our consumer and
theatrical business segments. Revenues from product sales and other revenues in connection with our consumer business segment include revenues derived from sales of music titles that we produce in our
digital multi-channel format and sales of our professional audio products and services. Revenues from product sales and other revenues in connection with our theatrical business segment include
revenues derived from sales of our digital playback systems, cinema processor equipment, and systems for subtitling, captioning, and descriptive narration to movie theaters and special venues.

We
actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technology, trademarks, or
know-how without a license or who have under-reported to us the amount of royalties owed under license agreements with us. 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. We cannot predict the amount or timing of such revenues.

Our
cost of goods sold consists primarily of amounts paid for products and materials, salaries and related benefits for production personnel, depreciation of production equipment, and
payments to third parties for licensing technology and copyrighted material.

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

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.

In
our consumer business, we have a licensing team that markets our technology directly to large consumer electronics products manufacturers and semiconductor manufacturers. This team
includes employees located in the United States, China, England, Japan, and Northern Ireland. We sell music content released under our DTS Entertainment label through distributors. In the United
States and Canada, Navarre Corporation is our exclusive distributor of DTS Entertainment label products to major national retail accounts and in Europe, Cadiz Music Limited is our exclusive
distributor of DTS Entertainment label products. We also employ consultants to coordinate sales to independent retailers. We are in the process of establishing distribution channels in other
international territories. We expect that distribution in Asia will be handled through established distributors located in Asia. We also sell this music directly to consumers through an online store
and other web-based retailers. We intend to expand the number of retail outlets that carry our products and broaden our distribution network worldwide.

In
our theatrical business, our post-production department, senior management, and liaison offices market our products and services directly to individual film producers and
distributors worldwide. We sell our digital multi-channel playback systems to movie theaters through a direct sales force and a network of independent dealers. To date, most of our sales and marketing
efforts have been focused in the United States and Canada, Western Europe, and in targeted markets in Asia and Latin America.

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We
have also begun to focus our efforts on pursuing theater companies that have a large concentration of movie theaters in selected foreign countries such as India, China, and in Eastern Europe.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, estimates are evaluated, including those
related to revenue recognition, allowance for doubtful accounts, inventories, deferred taxes, impairment of long-lived assets, product warranty, stock-based compensation, and contingencies
and litigation. These estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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 30, 2004.

Results of Operations



Total revenues for the three months ended June 30, 2004 increased 13% to $13.3 million from $11.7 million for the three months ended
June 30, 2003. The increase in revenues in 2004 resulted from a 12% increase in technology and film licensing revenues to $10.7 million for the three months ended
June 30, 2004 from $9.6 million for the three months ended June 30, 2003 and an 18% increase in our product sales and other revenues to $2.5 million for the three months
ended June 30, 2004 from $2.1 million for the three months ended June 30, 2003. The increase in revenues from technology and film licensing was primarily attributable to continued
growth in consumer electronics licensing, driven by an increase in the number of DVD-based home entertainment systems that incorporate DTS technology, such as audio/video receivers, DVD
players, and home-theater-in-a-box systems, and by revenues recognized as a result of intellectual property compliance and enforcement activities. In
addition, our film licensing revenues increased slightly due to revenues generated from increases in the number of U.S. films released, foreign language dubbed versions of major U.S. films, and
foreign original-version films released with a DTS soundtrack. Shipments of our XD-10 Cinema Media Player contributed to the increase in revenues from product sales quarter over quarter,
offset by a decrease in sales of music titles by our DTS Entertainment label, due to slower than expected market growth of DVD-Audio and multi-channel music.

Revenues
from our consumer business totaled $8.7 million for the three months ended June 30, 2004, an increase of 13% from $7.8 million in the second quarter of the
prior year. The increase in revenues was driven by the growth in consumer electronics technology licensing as mentioned above. Theatrical revenues were $4.5 million for the three months ended
June 30, 2004, up 15% from the same period last year due primarily to growth in product sales, notably the XD-10 Cinema Media Player.

Total
revenues for the six months ended June 30, 2004 increased 23% to $28.8 million from $23.5 million for the six months ended June 30, 2003. The increase
in revenues in 2004 resulted from an 18% increase in technology and film licensing revenues to $23.2 million for the six months ended June 30, 2004 from $19.7 million for the six
months ended June 30, 2003 and a 49% increase in our product sales and other revenues to $5.6 million for the six months ended June 30, 2004 from $3.8 million for the six
months ended June 30, 2003. The increase in revenues from technology and film

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licensing
was primarily attributable to continued growth in consumer electronics licensing, driven by an increase in the number of DVD-based home entertainment systems that incorporate DTS
technology, such as audio/video receivers, DVD players, and home-theater-in-a-box systems, and by revenues recognized as a result of intellectual
property compliance and enforcement activities. In addition, our film licensing revenues increased moderately due to the reasons mentioned above. Shipments of our XD-10 Cinema Media Player
contributed to the increase in revenues from product sales.

Revenues
from our consumer business totaled $19.5 million for the six months ended June 30, 2004, an increase of 22% from $16.0 million for the six months ended
June 30, 2003. The increase in revenues was driven by the growth in consumer electronics technology licensing as mentioned above. Theatrical revenues were $9.3 million for the six months
ended June 30, 2004, up 26% from the same period last year due primarily to growth in product sales, primarily the XD-10 Cinema Media Player.



Consolidated gross profit improved to 78% of revenues for the three months ended June 30, 2004, from 76% for the three months ended June 30, 2003.
The increase is due to an increase in gross profit in product sales and other revenues.

Gross
profit associated with technology and film licensing revenues remained constant at 89% of related revenues for the three months ended June 30, 2004 and 2003. Gross profit
associated with product sales and other revenues improved to 31% of related revenues for the three months ended June 30, 2004 from 19% in the prior year period due primarily to increased
shipment volumes relative to fixed costs.

Gross
profit for our consumer business improved to 97% of related revenues for the three months ended June 30, 2004, from 93% in the prior year period. The increase is due to a
favorable mix of our higher margin technology and film licensing revenues as compared to product sales in our consumer business. Theatrical business gross profit decreased to 41% of related revenues
for the quarter ended June 30, 2004 from 44% in the prior year period due to the write-off of approximately $250,000 in the three months ended June 30, 2004 of obsolete
inventory, primarily related to our older product lines under our normal inventory review procedures.

For
the six months ended June 30, 2004, consolidated gross profit improved to 80% of revenues, compared to 78% for the same period in 2003. Changes in the mix between higher
margin technology and film licensing and lower margin product sales and other revenues resulted in the improved gross margin.

We
expect our consolidated gross profit as a percentage of sales to decrease to between 70% and 75% for the full fiscal year 2004 as we expect that the sales growth rate in our
theatrical business may exceed that of our higher margin consumer business.



Selling, general and administrative expenses increased 40% to $6.8 million for the three months ended June 30, 2004, compared to $4.9 million
in the prior year period. The increase is primarily due to increases in salaries and related costs of $626,000 as we increased headcount to support our growth, and professional services of $841,000
which includes increases in costs associated with our increased intellectual property compliance and enforcement activities, Sarbanes-Oxley related costs and other additional costs associated with
operating as a public company. The quarter to quarter increase also includes increases in advertising and promotion costs related to new product introductions, and insurance costs. Salaries and
related costs include stock-based compensation. Included in professional services for the three months ended June 30, 2004 is approximately $200,000 in legal costs related to our settlement
with Mintek Digital, Inc., or Mintek, which was reached in May 2004.

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Selling,
general and administrative expenses increased 34% to $13.2 million for the six months ended June 30, 2004, compared to $9.9 million in the prior year
period. The increase is primarily due to increases in salaries and related costs of $1.4 million as we increased headcount to support our growth, and professional services of
$1.2 million which includes costs associated with our increased intellectual property compliance and enforcement activities, Sarbanes-Oxley related and other additional costs associated with
operating as a public company. The increase also includes increases in advertising and promotion costs related to new product introductions, and insurance costs. Salaries and related costs include
stock-based compensation, which decreased to $218,000 for the six months ended June 30, 2004 from $425,000 in the prior year period. The prior period primarily consists of a charge of $345,000
related to the issuance of a warrant. Included in professional services for the six months ended June 30, 2004 is approximately $300,000 in legal costs related to the Mintek settlement that was
reached in May 2004.

Costs
of compliance with the Sarbanes-Oxley Act, particularly Section 404 of that Act, are anticipated to cause an estimated increase in administration costs of between $700,000
and $900,000 during 2004, up to half of which may represent recurring costs of compliance. Through the first six months of the year, we have incurred approximately $200,000 in Section 404 compliance
costs.



Research and development expenses increased to $1.6 million for the three months ended June 30, 2004, compared to $1.2 million for the three
months ended June 30, 2003. For the six months ended June 30,
2004, research and development expenses were $2.9 million, up from compared to $2.3 million for the six months ended June 30, 2003. The increase for both periods is primarily due
to increased labor costs associated with new product initiatives and the optimization of our Coherent Acoustics technology for new consumer electronics applications.

We
expect quarterly research and development expenses in 2004 to increase in absolute dollars relative to prior quarters.



Interest income, net, for the three and six months ended June 30, 2004 increased significantly over the same period for the prior year due to increased
investment income relating to proceeds from our initial and follow-on public offerings in 2003.



In May 2004, we reached a settlement with Mintek for $3.5 million for Trademark Infringement, False Designation of Origin, Trademark Dilution, and
Unfair Competition relating to Mintek's distribution of DVD players bearing our registered trademarks without obtaining a license from us. We received $1.0 million in June along with
$2.5 million in irrevocable letters of credit in our favor. We recognized $899,000 in revenue under the settlement agreement for royalties due on known units that could be identified as using
our trademark and accounted for the excess $2.6 million portion of the settlement as other income. The $2.5 million in irrevocable letters of credit is included in accounts receivable at
June 30, 2004. Selling, general and administrative expenses for the three and six months ended June 30, 2004 included approximately $200,000, and $300,000, respectively, in legal fees
related to the Mintek case. Legal fees related to Mintek were approximately $200,000 for 2003.



For the three months and six months ended June 30, 2004, we recorded an income tax provision of $1.7 million and $3.7 million, respectively,
on pre-tax income of $4.9 million and $10.2 million, respectively. This resulted in an annualized effective tax rate of 35.8%. For the three months and six

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months
ended June 30, 2003, we recorded an income tax provision of $1.0 million and $2.1 million, respectively, on pre-tax income of $2.9 million and
$6.0 million, respectively. This resulted in an annualized effective tax rate of 35.4%. These rates differed from the statutory rates primarily due to state income taxes offset by benefits
associated with the foreign rate differentials and research and development credits.

Liquidity and Capital Resources

At June 30, 2004, we had cash, cash equivalents and short-term investments of $92.6 million, compared to $99.4 million at
December 31, 2003.

Net
cash provided by operating activities was $4.8 million for the six months ended June 30, 2004, compared to $3.1 million for the six months ended June 30,
2003. The improvement in cash flows from operations was primarily a result of increased net income generated in the first six months of 2004 relative to the same period in the prior year as well as
the tax benefit from the exercise of employee stock options of $3.4 million. Accounts receivable increased $3.2 million for the six months ended June 30, 2004 due to accruals
related to consumer license fees and the Mintek settlement. Inventory increased $1.2 million for the six months ended June 30, 2004 as a result of inventory purchases related to our new
product offerings.

Net
cash used in investing activities totaled $22.8 million and $449,000 for the six months ended June 30, 2004 and 2003, respectively. The increase in cash used in
investing activities for the six months ended June 30, 2004 is primarily a result of the purchases of investment instruments with maturities greater than 90 days of $22.0 million
and purchases of property and equipment related to the establishment of an office in Japan and internal computer network improvements.

Net
cash provided by financing activities totaled $865,000 for the six months ended June 30, 2004 and net cash used by financing activities was $1.3 million for the six
months ended June 30, 2003. Net cash
provided by financing activities for the six months ended June 30, 2004 primarily consisted of cash received from option exercises and shares issued under the employee stock purchase plan. Net
cash used by financing activities for the six months ended June 30, 2003 consisted of payments of dividends to preferred stockholders. The preferred stock was redeemed in the third quarter of
2003.

We
believe that our cash, cash equivalents, short-term investments, funds available under our existing bank line of credit facility, and cash flows from operations will be
sufficient to satisfy our working capital and capital expenditure requirements for at least the next twelve months. Beyond the next twelve months, additional financing may be required to fund working
capital and capital expenditures. Changes in our operating plans, lower than anticipated revenues, increased expenses, acquisition of companies, products or technologies or other events, including
those described in "Risk Factors" included in our Form 10-K filed on March 30, 2004 and in and other filings may cause us to seek additional debt or equity financing on an
accelerated basis. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and
results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and financial
or operational covenants that restrict our ability to operate our business.

Recently Issued Accounting Standards

In November 2003, the EITF reached a consensus on Issue No. 03-10, "Application of EITF 02-16 by Resellers to Sales
Incentives Offered to Consumers by Manufacturers." EITF No. 03-10 addresses the accounting for manufacturer sales incentives offered directly to consumers, including manufacturer
coupons. EITF No. 03-10 is effective for the first interim period beginning after November 25, 2003. Adoption of the provisions of EITF No. 03-10 did not
have a material impact on our financial position, results of operations, or cash flows for the six months ended June 30, 2004.

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RISK FACTORS

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

Risks Related to Our Business



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:



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



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

In
addition to the competitive advantages described above, Dolby also enjoys other unique competitive strengths relative to us. For example, it introduced multi-channel audio technology
before we did. It has a larger base of installed movie theaters for its cinema playback equipment. Its technology has been incorporated in significantly more DVD-Video films than our
technology. It has also achieved mandatory standard status in a few product categories, including DVD-Video and DVD-Audio Recordable, for its stereo technology and 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 technology to consumer electronics products
manufacturers.

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



Technology standards are important in the audio 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 audio technology to be available in a particular product or medium, or an optional basis, meaning that a particular audio technology may be,
but is not required to be, utilized. For example, Dolby's technology for stereo playback has been selected as a mandatory standard for DVD-Video and DVD-Audio Recordable. Both
Dolby's and our digital multi-channel technology have optional status in the DVD-Video standard.

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 technology has been selected as the sole, mandatory standard for terrestrial digital television broadcasts. As a result, 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 technology may never be
included. 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.

Adoption
of our technology is not mandatory as part of any governmental or industry accepted standards in any specific entertainment medium or format. As such, there can be no assurance
that our technology will continue to be used in current and future applications.

As
new technologies and entertainment mediums emerge, including future generations of DVD technology, new standards relating to these technologies or mediums 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.



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



Our
future success will depend on our ability to enhance our existing technology, products, and services and to develop acceptable new technology, products, and services on a timely
basis. The development of enhanced and new technology, products, and services is a complex and uncertain process requiring high levels of innovation, highly-skilled engineering and development
personnel, and the accurate anticipation of technological and market trends. We may not be able to identify, develop, market, or support new or enhanced technology, products, or services on a timely
basis, if at all. Furthermore, our new technology, products, and services may never gain market acceptance, and we

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may
not be able to respond effectively to evolving consumer demands, technological changes, product announcements by competitors, or emerging industry standards. For example, we may not be able to
effectively address concerns in the film and music industries relating to piracy in our current or future products. Any failure to respond to these changes or concerns would likely prevent our
technology, products, and services from gaining market acceptance or maintaining market share.



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



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



Companies that participate in the digital audio, 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 contests, with or
without merit, could be costly and time consuming to litigate or settle, and could divert management's attention from executing our business plan. In addition, our technology and products may not be
able to withstand any third-party claims or rights against their use. If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in
litigation or in interference or other administrative proceedings, we may need to redesign some of our products to avoid infringing a third party's patent and could be required to temporarily or
permanently discontinue licensing our products.

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We expect to derive a significant percentage of our revenues from the technology, products, and services that we offer to manufacturers of consumer electronics
products. To date, the most significant driver for the use of our technology in the home theater market has been the release of major movie titles with DTS audio soundtracks. We also believe that
demand for our DTS audio technology in emerging markets for multi-channel audio, including homes, cars, personal computers, and video games and consoles, will be based on the number, quality, and
popularity of the audio DVDs, computer software programs, and video games released with DTS audio soundtracks. Although we have existing relations with many leading providers of movie, music,
computer, and video game content, none of our existing contracts 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, audio DVDs, computer software programs, video games, or other entertainment mediums will be released with DTS audio soundtracks. If the amount, variety, and popularity of entertainment content
released with DTS audio soundtracks do not increase, consumer electronics products manufacturers that pay us per-unit licensing fees may discontinue offering DTS playback capabilities in
the consumer electronics products that they sell.



Our DTS-CSS system for subtitles, captions, and descriptive narration for films is a key new product. To date, sales and revenues from this system
have not been significant and we have limited experience to indicate whether or not this system will be widely adopted. Nonetheless, we have anticipated significant future sales of this system and our
revenue and growth projections contemplate that it will generate significant future revenues. If we are unsuccessful in selling our DTS-CSS system, our future revenues will be lower than
expected and we may be required to write-down or reserve against obsolete or excess systems in inventory.



As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the
company's internal controls over financial reporting in their annual reports on Form 10-K that contains an assessment by our management of the effectiveness of internal controls
over financial reporting. In addition, the public accounting firm auditing our financial statements must attest to and report on our management's assessment of the effectiveness of internal controls
over financial reporting. This requirement may apply to our annual report on Form 10-K for the fiscal year ending December 31, 2004. While we are conducting a rigorous review
of our internal controls over financial reporting in order to assure compliance with the Section 404 requirements, our independent auditors may interpret the Section 404 requirements and
the related rules and regulations differently from us, or our independent auditors may not be satisfied with our internal controls over financial reporting or with the level at which these controls
are documented, operated or reviewed. In addition, many uncertainties remain regarding the requirements for auditor attestation, and guidance provided by the public accounting profession has changed
frequently and materially to date. Further, the demand for competent audit resources has grown dramatically as a result of the requirements of Section 404, and such demand may exceed available

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supply.
Finally, in the event we make a significant acquisition, or a series of insignificant acquisitions, we may face significant challenges in implementing the required processes and procedures in
the acquired operations. As a result, our independent auditors may decline or be unable to attest to management's assessment or may issue a qualified report. This could result in an adverse reaction
in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our shares to decline.



Although we have established relations with a number of artists and music labels, we do not have any contractual agreements that require artists or music labels
to provide us with music content to re-mix and release in our proprietary DTS audio format. Music companies may in the future be unwilling to license titles from their music catalogs to
us. In addition, our audio content competes with other multi-channel formats, including Super Audio CD, which is a format developed jointly by Philips and Sony Corporation. As a result, we may have
difficulty in obtaining rights to release a significant amount of audio content, and any content that we do release may not be commercially successful.



The market for consumer electronics products is intensely competitive and price sensitive. Retail prices for consumer electronics products that include our DTS
audio technology, such as DVD players and home theater systems, have decreased significantly and prices may continue to decrease for the foreseeable future. Declining prices for consumer electronics
products could create downward pressure on the licensing fees we currently charge our customers who integrate our technology into the consumer electronics products that they sell and distribute.

Most
of the consumer electronics products that include our audio technology also include Dolby's multi-channel audio. As a result of pricing pressure, consumer electronics products
manufacturers could decide to exclude our DTS audio technology from their products altogether.



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



Although all nine major film producers and distributors are customers of ours, we generally do not have contractual arrangements that require them to use our DTS
audio technology. Our theatrical business depends on our having good relations with these film studios. Deterioration in our relationship with any of these film studios could cause these customers to
stop using our DTS audio technology. Any significant decline in the release of motion pictures with DTS audio soundtracks would decrease

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the
demand for and revenues from the playback products and services that we offer to movie theaters. In addition, other film studios throughout the world generally adopt the technologies used by the
major U.S. film studios. Therefore, if the major U.S. film studios stop using our technology, we would not only lose the per-movie licensing fee we receive from these customers, but may
also lose per-movie licensing fees from other film studios throughout the world.



The movie theater industry may transition from film-based media to electronic-based, or digital, media. If this transition occurs, we may be unable to
meaningfully respond with competitive product offerings. In addition, if the film industry broadly adopts digital cinema, our technology and current product offerings could be rendered obsolete. In
such an event, demand by movie theaters for our playback systems, cinema processors, and systems for subtitling, captioning, and descriptive narration would decline.



Our theatrical business depends in part on the construction of new screens and the renovation of existing theaters that install our DTS playback systems and
cinema processors. In recent years, aggressive building of megaplexes by companies that operate movie theaters has generated significant competition and resulted in an oversupply of screens in some
domestic and international markets. The
resulting oversupply of screens led to significant declines in revenues per screen and, eventually, to an inability by many major film exhibitors to satisfy their financial obligations. Several major
movie theater operators have reorganized through bankruptcy proceedings, and many movie theaters have closed. As a result, our playback systems and cinema processors that we previously sold to movie
theaters that have reorganized and closed have been relocated to other theaters or have been available for resale in the secondary market to movie theaters that might otherwise have purchased these
products directly from us. If movie theater operators decide to close a significant number of screens in the future or cut their capital spending, demand for our playback systems and cinema processors
will decline.



Our success depends, in part, upon the continued availability and contributions of our management team, particularly Jon Kirchner, our President and Chief
Executive Officer, and W. Paul Smith, our Senior Vice President, Research and Development. We also rely on the skills and talents of our engineering and technical personnel because of the complexity
of our products and services. Several of our key engineers have been instrumental in the development of our technology. 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.



Although the first movie with a DTS audio soundtrack was released in 1993, we did not enter the home theater market until 1996, and our technology has only
recently been incorporated into other consumer electronics markets, such as car audio, personal computers, video games and consoles, portable electronics devices, and digital satellite and cable
broadcast products. As a result, the demand for our technology, products, and services and the income potential of these businesses are unproven. In addition, because the market for digital audio
technology is relatively new and rapidly evolving, we have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business
trends, which could harm our business. Before investing in our common stock, you should consider the risks, uncertainties, and difficulties frequently encountered by companies in new and rapidly
evolving markets such as ours. We may not be able to successfully address any or all of these risks.



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



Although we have been in business since 1990, we have only achieved profits from our business operations in the last twelve fiscal quarters. We expect our
operating expenses to increase as we, among other things:



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



We market and sell our products and services outside the United States, and currently have employees located in China, England, Japan, Mexico, Northern Ireland,
and Spain. Many of our customers and licensees are located outside the United States. As a key component of our business

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strategy,
we intend to expand our international sales. We face numerous risks in doing business outside the United States, including:



Such
factors could cause our future international sales to decline.

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

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



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

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

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

In
addition, we have entered into agreements with two companies to serve as our sole distributors for our DTS Entertainment products in the United States and Canada and in Europe,
respectively. We have no direct control over these distributors and any problems with their performance may take time to identify and/or remedy, and any remedial measures that we take may be
unsuccessful. In addition, if either or both of these distributors were to go out of business, as our last distributor did, or otherwise becomes incapable of continuing as our distributor, we could
experience delays in distributing our DTS Entertainment products to the retail market, loss of inventory, and loss of revenue.



A significant percentage of our revenues are generated from our consumer electronics products manufacturer customers who license and incorporate our technology in
their consumer electronics products. Under our existing arrangements, these customers pay us a per-unit licensing fee based on the number of consumer electronics products manufactured that
incorporate our
technology. We rely on our customers to accurately report the number of units manufactured in collecting our license fees, preparing our financial reports, projections, budgets, and directing our
sales and product development efforts. Most of our license agreements permit us to audit our customers, but audits are generally expensive and time consuming 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.



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



We expect to consider opportunities to acquire or make investments in other technologies, products, and businesses that could enhance our technical capabilities,
complement our current products and services, or expand the breadth of our markets. We have limited experience in making acquisitions and/or strategic investments, and therefore our ability as an
organization to make

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acquisitions
or strategic investments is unproven. Acquisitions and strategic investments involve numerous risks, including:



If
we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our
business may be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders would be diluted.



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



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



We have historically experienced moderate seasonality in our business due to our business mix and the nature of our products. In our consumer business, consumer
electronics manufacturing activities are generally lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. Manufacturing output is generally
strongest in the third and fourth quarters as our technology licensees increase manufacturing to prepare for the holiday buying season. Since recognition of revenues in our consumer business generally
lags manufacturing activity by one quarter, our revenues and earnings from the consumer business are generally lowest in the second quarter. Film licensing revenues are generally strongest in the
second and fourth quarters due to the abundance of movies typically released during the summer and year-end holiday seasons. The introduction of new products and inclusion of our
technologies in new and rapidly growing markets can distort the moderate seasonality described above. Our revenues may continue to be subject to seasonal fluctuations in the future. Unanticipated
fluctuations in seasonality could cause us to miss our earnings projections 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 technology,
trademarks, or know-how without a license or who have underreported to us the amount of royalties owed under license agreements with us. As a result of these activities, from time to time,
we 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 recur in future reporting periods. Such fluctuations in our revenues and operating results may cause declines in our stock price.

Risks Related to Our Common Stock



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



In
addition, the stock market in general, and the Nasdaq National 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 of June 30, 2004, we have 16,951,398 shares of common stock outstanding. As a result of our relatively small public float, our common shares may be less
liquid than the common shares 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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Our capital requirements will depend on many factors, including:



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



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



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

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At June 30, 2004, we did not have any
balances outstanding under our bank line of credit arrangement; however, the amount of outstanding debt at any time may fluctuate and we may from time to time be subject to refinancing risk.

Our
interest income is sensitive to changes in the general level of U.S. interest rates, particularly since a significant portion of our investments are and will be in
short-term marketable securities, U.S. government securities and corporate bonds. Due to the nature and maturity of our short-term investments, we have concluded that there is
no material market risk exposure to our principal. The average maturity of our investment portfolio is less than one month. As of June 30, 2004, a 1% change in interest rates throughout a
one-year period would have an annual effect of approximately $1.1 million on our income.

We
derive more than half of our revenues from sales outside the United States, and maintain research, sales, marketing, or business development offices in six countries. 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 limited foreign currency risk on certain revenues and operating expenses such as salaries and overhead costs of our
foreign operations and a small amount of cash maintained by these operations. Revenues denominated in foreign currencies accounted for approximately 13% of total revenues during the six months ended
June 30, 2004. Operating expenses, including cost of sales, for our foreign subsidiaries were approximately $3.0 million for the six months ended June 30, 2004. Based upon the
expenses for the six months ended June 30, 2004, a 1% change in foreign currency rates throughout a one-year period would have an annual effect of approximately $30,000.

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

We
are also affected by exchange rate fluctuations as the financial statements of our foreign subsidiaries are translated into the United States dollar in consolidation.

As
exchange rates vary, these results, when translated, may vary from expectations and could adversely impact overall profitability. During the three and six months ended June 30,
2004 the impact of foreign exchange rate fluctuations related to translation of our foreign subsidiaries' financial statements was not significant.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures.Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, the 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 are adequately designed to ensure that information required to be disclosed by us in
the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms.

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PART II  OTHER INFORMATION

Item 1.Legal Proceedings

None.

Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

On July 15, 2003, we closed the sale of an aggregate of 4,091,410 shares of our Common Stock, $0.0001 par value, in our initial public offering, which
included the sale of 251,410 shares of our Common Stock pursuant to the exercise of the underwriters' overallotment option in the offering. The offering also included the sale by certain of our
stockholders of an aggregate of 324,590 shares of our Common Stock in connection with the exercise by the underwriters of their overallotment option. The managing underwriters in the offering were SG
Cowen Securities Corporation, William Blair & Company, L.L.C., and Thomas Weisel Partners LLC. All of the shares of Common Stock sold in the offering were registered under the 1933 Act on a
Registration Statement on Form S-1 (Reg. No. 333-104761) that was declared effective by the SEC on July 9, 2003 and a Registration Statement filed pursuant
to Rule 462(b) under the Securities Act that was filed on July 10, 2003 (Reg. No. 333-106920). All 4,416,000 shares of Common Stock registered under the Registration
Statement, including shares sold by us and by selling stockholders upon exercise of the overallotment option, were sold at a price per share of $17.00.

The
aggregate price of the offering amount registered on our behalf was $69.6 million. In connection with the offering, we paid an aggregate of $4.9 million in underwriting
discounts and commissions to the underwriters and incurred approximately $1.7 million in other offering expenses. After deducting the underwriting discounts and commissions and offering
expenses, we received net proceeds from the offering of approximately $63.0 million. Subsequent to the offering, we used approximately $22.5 million
of our net proceeds to redeem all outstanding shares of redeemable preferred stock and to pay all accrued but unpaid dividends on such shares through the date of redemption. The remaining proceeds to
us have conformed with our intended use outlined in the prospectus related to the offering. As of June 30, 2004, we have approximately $40.5 million remaining from the proceeds of the
offering.

Item 3.Defaults Upon Senior Securities

None.

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

The Annual Meeting of Stockholders of Digital Theater Systems, Inc. was held on May 19, 2004. The following matters were voted upon and were
approved as set forth below.

The
stockholders elected two Class I directors to hold office until the 2007 Annual Meeting of Stockholders by the following votes:

Number of SharesName of Directors ElectedFor

WithheldDaniel E. Slusser

14,522,645

149,730Joseph A. Fischer

14,561,155

111,220


The
following individuals are continuing directors with terms expiring upon the 2005 Annual Meeting of Stockholders: Joerg D. Agin and Steven M. Friedman

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The
following individuals are continuing directors with terms expiring upon the 2006 Annual Meeting of Stockholders: Jon E. Kirchner, James B. McElwee and Ronald N.
Stone.

The
stockholders ratified PricewaterhouseCoopers LLP as independent auditors of Digital Theater Systems, Inc. by the following vote:

Number of SharesFor

Against

Abstain14,650,315

20,260

1,800


Item 5.Other Information

None.

Item 6.Exhibits and Reports on Form 8-K

(a)Exhibits:

|Exhibit
Number |  | Exhibit Description                                                                                                                                  
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|10.41          |  | Employment Agreement by and between the Registrant and Daniel E. Slusser, dated June 9, 2004                                                         
|10.42          |  | Revolving Credit Agreement between the Registrant and Comerica BankCalifornia, effective June 30, 2004.                                             
|31.1           |  | Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                   
|31.2           |  | Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                   
|32.1           |  | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2           |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)Reports on Form 8-K:

On
May 6, 2004, we filed on Form 8-K a press release announcing our financial results for the first quarter of 2004.

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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.

|                      |  | DIGITAL THEATER SYSTEMS, INC.
|--------------------- |  | -----------------------------
|Date: August 13, 2004 |  | By:                          
|Date: August 13, 2004 |  | By:                          

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