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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from            to


Commission File Number 000-50335



LOGO

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

Delaware(State or Other Jurisdiction of Incorporation or Organization)

77-0467655(I.R.S. Employer Identification Number)


5220 Las Virgenes Road
Calabasas, California 91302(Address, including zip code, of Registrant's principal executive offices)

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



Securities
registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredCommon Stock, $0.0001 par value

NASDAQ Stock Market LLC


Securities
registered pursuant to Section 12(g) of the Act: None



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of June 30, 2009
was approximately $467,619,930 (based upon the closing price for shares of the registrant's Common Stock as reported by the NASDAQ Stock Market LLC for that date). Shares of Common Stock held
by each officer and director have been excluded as such persons may be deemed affiliates. Exclusion of shares held by any person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

As
of February 26, 2010, 17,498,379 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference to the registrant's proxy
statement relating to the annual meeting of stockholders to be held on or about June 4, 2010.



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DTS, INC.  FORM 10-K  For the Fiscal Year Ended December 31, 2009  INDEX



PagePART IItem 1.

Business


1Item 1A.

Risk Factors


17Item 1B.

Unresolved Staff Comments


31Item 2.

Properties


31Item 3.

Legal Proceedings


31Item 4.

Submission of Matters to a Vote of Security Holders


31PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


32Item 6.

Selected Financial Data


35Item 7.

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


37Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


50Item 8.

Financial Statements and Supplementary Data


51Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


95Item 9A.

Controls and Procedures


95Item 9B.

Other Information


96PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


96Item 11.

Executive Compensation


96Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


96Item 13.

Certain Relationships and Related Transactions, and Director Independence


96Item 14.

Principal Accounting Fees and Services


96PART IVItem 15.

Exhibits and Financial Statement Schedules


97SIGNATURES


101


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FORWARD-LOOKING STATEMENTS

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

PART I

Item 1.    Business

Company Overview

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

The
quality of our technology offerings, coupled with our reputation for delivering high quality entertainment experiences to consumers, led the consumer electronics industry to mandate
the use of DTS technology in all Blu-ray Disc players. We believe our mandatory position in this standard provides a significant growth driver for us over the next several years. Our goal
is to become an essential ingredient in high quality entertainment experiences by enabling the creation of compelling content and by incorporating our technology into every device that manages,
controls or delivers high-quality digital entertainment.

We
were founded in 1990 and received a key strategic investment in 1993 from a variety of investors, including Universal City Studios, Inc. The first DTS audio soundtrack was
created for the release of Steven Spielberg's Jurassic Park in 1993. From this initial release, we established a technical and marketing platform for the development of entertainment technology
solutions for the motion picture, home theater, and other consumer markets. In 1996, we launched our consumer technology licensing business, in which we license our technology to consumer electronics
and other product manufacturers. To date, we have entered into licensing agreements with substantially all of the world's major consumer electronics manufacturers. We also license our technology to
many major

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semiconductor
manufacturers. Our technology, trademarks, copyrights and know-how have been incorporated in hundreds of millions of consumer electronics products worldwide.

The
significant growth of our consumer technology licensing business, coupled with our mandatory position in the Blu-ray Disc standard, led us to decide in February 2007 to
exit our cinema and digital image processing businesses. These businesses were sold in two separate transactions during the second quarter of 2008 and were classified as Assets of Discontinued
Operations Held For Sale on our balance sheets and as Discontinued Operations on our statements of operations for all periods presented. Except as otherwise noted, information herein is presented for
the consumer business or continuing operations only.

On
December 31, 2008, we entered into an Asset Purchase Agreement with Neural Audio Corporation, or Neural, and its stockholders providing for the sale to us of substantially all
of Neural's assets used in the conduct of its audio technology business and certain patents and patent applications owned by such stockholders and the assumption by us of certain liabilities of
Neural. The sale was consummated the same day. The acquired business expands our branded technology offerings further into the creation, distribution and playback of music, and broadcast programming,
for the home A/V, automotive and video game markets.

We
develop, market, license and sell our proprietary technology and services for the following consumer markets:



Industry Background

Over the past 20 years, the entertainment industry has shifted to take advantage of many technical trends and innovations
including:



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These
trends and innovations helped create a technical foundation for the widespread adoption of digital multi-channel audio and high definition video for many forms of entertainment.



Movie soundtracks were originally presented in mono, or one-channel, audio. In the mid-1970s, stereo was
introduced. Stereo consists of two channels and presents sound through discrete left and right speakers. Stereo was followed by matrix technology that allowed an inexpensive two-track
system to bring better sound to a large number of movie theaters. However, matrix technology allows only limited audio quality enhancement and channel separation over stereo.

In
the early 1990s, the listening experience of cinema audiences was significantly enhanced through the introduction of digital multi-channel audio technology. Multi-channel audio,
commonly referred to as surround sound, allows listeners to hear discrete sounds simultaneously through more than two speakers. This format combined high-quality audio with full separation
in five channels: left, center, right, left surround, right surround, plus a channel dedicated to low frequency effects known as a subwoofer. This digital discrete surround sound enabled movie
directors and producers to create a more enveloping and realistic entertainment environment. Many filmmakers recognized the ability of multi-channel audio to enhance the entertainment experience and
promoted its widespread adoption. As a result, digital surround sound quickly became the industry standard for feature films and set the stage for the migration of surround sound to the consumer
electronics market, initially for home theater systems.



Home theater systems generally consist of a display, a DVD or Blu-ray Disc player, a digital multi-channel audio/video
receiver, five or more speakers, and a subwoofer. Home-theater-in-a-box systems contain one each of these elements, with the exception of the display,
and are a popular
offering to consumers as an all-in-one home theater package for ease of use and installation.

Consumer
demand for digital multi-channel capable home theater systems has been fueled by:





Blu-ray Disc players, including set-top-box stand-alone players and game consoles, are a
significant driver of our revenues and future growth. Based on the Digital Entertainment Group, or DEG, and other data, we estimate that over 50 million Blu-ray devices, including
stand-alone players and game consoles, have been sold worldwide since their launch in November 2006. There are now approximately 80 different models of Blu-ray Disc playback devices
available in the market at prices as low as $80 in the U.S.

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Blu-ray
Disc annual sales in the U.S. have now reached $1.5 billion dollars, representing 8% of overall home entertainment sales, and an increase of 67% compared to
the previous year. Video Business reported that certain top selling Blu-ray titles outsold their DVD counterparts on Amazon.com for the first time over the U.S.'s "Black Friday" weekend in
2009. There are now more than 2,100 unique Blu-ray titles available in the U.S. market. According to Blu-ray.com, over one thousand of the Blu-ray releases in North
America include a DTS-HD Master Audio soundtrack. We believe that the demand for home entertainment content is an indicator of the expected demand for Blu-ray Disc players,
which drives our revenue.

High
definition content and displays have been an important driver in the proliferation of home theater systems. The Consumer Electronics Association, or CEA, estimates that 63% of U.S.
households now own at least one high definition television and that 86% of digital displays to be sold in 2010 will be high definition.



Digital multi-channel sound is further extending into a growing number of consumer electronics environments, including homes, cars,
personal computers, video games and consoles, mobile phones, portable media devices, digital media players, HD radio receivers, and various forms of broadcast television products. Content providers in
the film, television, music and video game
markets have recognized that a substantial market opportunity exists for digital multi-channel audio entertainment content.

Looking
forward, we expect that the Blu-ray Disc format will continue to drive home entertainment growth in the form of players, game consoles and personal computers.
Blu-ray Disc delivers six times the video resolution of a DVD and is also capable of delivering audio that is a bit-for-bit identical to the studio master.

Car
audio, personal computer, and video game console manufacturers are increasingly incorporating digital multi-channel audio capability into their products. Virtual surround sound
technology is also beginning to be incorporated into portable media playback devices, such as mobile phones and laptop PCs, which allows listeners to enjoy a simulated surround sound experience using
two speakers or headphones. These markets represent significant growth opportunities as content providers and consumers become more familiar with the capability of digital multi-channel audio to
enhance the entertainment experience.

Home
networks, Internet-based content, and digital broadcast products/markets will also represent significant future opportunities for deployment of our technologies and the delivery of
high definition entertainment. Target markets include broadcast hardware, high definition set-top boxes, televisions, and network-enabled media devices.

With
a regulatory demand for broadcasters to adopt digital distribution in the United States and around the globe, we see increasing demand for our broadcast technology solutions that
allow operators to simultaneously interoperate and distribute audio on multiple media formats such as compressed stereo audio on the internet and multi-channel sound to an HDTV audience. Furthermore,
the proliferation of digital media distribution creates new demand for playback enhancement technologies such as digital audio optimization for televisions, portable media devices and PCs alike.

The DTS Solution

In 1996, we introduced our Coherent Acoustics technology to bring advanced digital audio entertainment to the home. Coherent Acoustics
is an audio compression/decompression algorithm, or codec, that enables the encoding and decoding of audio tracks in the DTS digital multi-channel sound format. The design architecture of our
technology allows us to scale or adapt, adding features or performance while maintaining backward compatibility with earlier implementations of the technology.

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The
encoding process reduces the storage space or transmission bandwidth required for the audio information, while maximizing the quality of the sound. The audio information can then be stored on a
digital medium, such as a Blu-ray Disc or DVD, or transmitted over a broadband connection or broadcast signal. The encoded content can be played back on any digital audio electronics
product equipped with a DTS Coherent Acoustics decoder, such as a Blu-ray Disc or DVD based home theater system.

The
performance and flexibility of our Coherent Acoustics technology enables easy implementation in a variety of consumer electronics products. Our core technology has also been
incorporated into sound systems used in homes, cars, personal computers, video game consoles, digital media players/adapters, and digital broadcast products.

The
adoption of our technologies depends on the availability of compelling content, along with the devices required to play it. Accordingly, we provide products and services to motion
picture studios, recording artists, producers, and software developers to facilitate the creation and delivery of audio content in our proprietary digital multi-channel format.

In
2006, we introduced DTS-HD Master Audio, which extends our technology offerings for Blu-ray Disc in two ways. First, our lossless coding extension delivers
audio which is bit-for-bit identical to the original studio master content. Secondly, DTS-HD includes a low bit rate mode, known as DTS Express, that extends our
technology for use in applications where bandwidth and data capacity is much lower than in optical media, such as broadcast and portable devices. Although DTS-HD was first introduced in
Blu-ray Disc players and home theater systems, these new technologies can be used in a wide variety of consumer electronic devices and applications.

In
2008, the first consumer products were introduced using DTS Surround Sensation, our virtual surround sound technology that allows the playback of 5.1 multi-channel content over two
speakers or headphones. Further drawing upon our expertise in surround sound, DTS Surround Sensation contains
significant psycho-acoustic information that alters human audio perception, causing the listener to perceive that sounds are actually occurring outside the boundaries of a two-speaker
system or headphones. This technology also utilizes proprietary algorithms for dialog clarity, soundstage expansion, and bass enhancement to provide listeners with a virtual multi-channel surround
sound experience from only two speakers.

The
DTS Neural technologies and products include audio signal processing and optimization for digital broadcasting such as digital radio and HDTV, as well as surround audio encoding and
decoding technologies for digital radio, television and gaming.

DTS Core Technology Platform

Our Coherent Acoustics audio technology platform is designed to capture, store, and reproduce audio signals. There are several
technical considerations involved in this process, including the frequency of data sampling, the word length, and the bit rate. These factors affect the quality of audio presentation and are commonly
managed through compression techniques.

A
fundamental challenge with digital audio distribution is that capturing analog signal representations in digital form requires a tremendous amount of data. Therefore, the storage and
subsequent transmission of that data presents physical space, efficiency, and economic challenges. We address these challenges by developing coding algorithms and products that reduce the amount of
data required to store, transmit and reproduce the audio, all while maintaining the quality of the audio experience.

The
design, architecture, and implementation of our coding solution is complex. Signal coding requires a thorough and combined understanding of the disciplines of electrical engineering,
computer science, and psychoacoustics, coupled with significant practical experience. One of our key technical

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strengths
has been our ability to develop a system that enables the transparent reproduction of an original audio signal, meaning that the reproduction sounds indistinguishable from its source.

Many
applications for digital multi-channel audio, such as video games, Internet-based content, mobile phones and networks, portable media players and recordable media, have limited
bandwidth, processing and storage capabilities. Our technology architecture is flexible enough to accommodate these needs and optimize quality within the constraints of the application.

We
have designed the following attributes into the basic architecture of our technology:



Technology Products and Services

We provide technology that enables digital multi-channel surround sound for home theater audio, car audio, gaming, personal computer
software and hardware, professional audio, broadcast and other emerging segments of the consumer electronics market. Importantly, DTS technology was selected as a mandatory audio format in the
Blu-ray Disc optical media format. As a result, DTS decoding technology will be utilized in at least two-channel form in any product that incorporates a Blu-ray
Disc disc drive. To date, our decoders have been embedded in hundreds of millions audio/video devices.

The
following table summarizes how each of the proprietary technologies and products we sell relate to the various consumer markets that we serve.

GRAPHIC

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The Coherent Acoustics specification was first presented at the Audio Engineering Society, or AES, conference in 1996. This proprietary
technology specification introduced the concept of a forward looking codec with a "core+extensions architecture" focused on delivering high quality multichannel audio. The specification took into
account the concept that audio trends would demand higher sampling frequencies, greater bit depth and more channels; also that processor speed and media bandwidth would continue to expand in capacity.
The core is a 5.1-channel 44.1 or 48 kHz DTS decoder which was introduced as DTS Digital Surround. This architecture ensures backward compatibility with existing DTS decoders. Extensions
to the core permit additional channels, data for higher sampling rates, and future enhancements. All Coherent Acoustics decoders make use of the core while advanced models make use of the core plus
some or all of the extension capabilities. The products based on the Coherent Acoustics technology specification and the various extensions are outlined below.

GRAPHIC



DTS Digital Surround was the first product based on the Coherent Acoustics technology specification and was the first implementation of
the core outlined above. As the core of the Coherent Acoustics technology specification, DTS Digital Surround supports up to 5.1 channels of audio at up to 48kHz sampling rate and up to 1.5Mbps bit
rate. From a content perspective, DTS Digital Surround is an optional format in the DVD standard and was originally introduced on Laser disc and DTS's music discs (proprietary CDs).



Utilizing the core + extension architecture of Coherent Acoustics, in 2000, DTS expanded on the DTS Digital Surround
offering to support two possible 6.1 channel configurations:



DTS
Neo:6 is also offered as a stand-alone product to convert stereo to 6.1 channels and is an important building block for our other products Surround Sensation and Premium Suite.

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In 2002, DTS developed the next product extension under the Coherent Acoustics technology specification. DTS 96/24 is the only extended
definition format for DVD which adds higher sampling rates (96 kHz) and greater bit resolution (24 bit) for even better sounding audio, particularly with multi-channel music.



The DTS-HD Audio Bundle is made up of a primary decoder, a secondary decoder, and a transcoder. The primary decoder is the
latest instantiation of the Coherent Acoustics technology specification that provides scalable audio formats with constant and variable bit rates as high as 24.5 Mbps for Blu-ray
Disc, higher sampling frequencies up to 192 kHz, greater bit depths, additional channels (7.1 for Blu-ray, many more for other applications), lossless audio capability and includes the
core decoder that is backward compatible with all existing DTS content. The secondary decoder features a new technology format focused on providing high quality in a lower bandwidth environment. The
transcoder consists of a DTS digital surround 1.5 Mbps encoder which re-encodes data from linear PCM (uncompressed audio) to DTS, ensuring backward compatibility to the installed base of
over 80 million AVRs deployed between 1997 and 2008 that have a Sony/Philips Digital Interconnect Format (SPDIF) input. DTS-HD Audio includes four levels of performance based on the
capabilities of the home audio equipment used for playback:











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Over
the next few years we expect to see the DTS-HD Audio Bundle replace stand-alone DTS Digital Surround as the vast majority of AVRs begin to incorporate
DTS-HD technology. Blu-ray drives will also incorporate elements of the DTS-HD Audio Bundle. DTS-HD will represent a large portion of our revenue growth
over the next several years.



In addition to the various formats and technologies that compose the DTS-HD Audio Bundle, there are also the encoding tools
created by DTS for use by content professionals. These content creation products are critical to our successwithout high-quality content in the various DTS formats, the value
of the decoders that produce the vast majority of our revenues would not be realized.

Over
the past few years, we have developed and launched a new set of professional audio products to support the launch of DTS-HD Audio. These products include the
DTS-HD Master Audio Suite (MAS), which is a Mac or PC software suite for encoding, monitoring and editing DTS-HD and standard definition digital audio encodes. We also offer
our DTS Surround Audio Suite (SAS) for Mac or PC for encoding and monitoring standard definition DTS Digital Surround audio encodes. We offer DTS encoding and decoding software licensing for
integration into third party professional audio software products as well as authoring systems integration. MAS and SAS, as well as DTS-licensed professional audio and authoring software
products, are used primarily by audio post-production, optical disc authoring and surround music mastering facilities, enabling them to produce and release audio and audio/video products
containing DTS digital multi-channel soundtracks for content owners. To date, there has been significant uptake of the DTS Master and Surround Audio Suites and they have been deployed to many key post
production sites in the U.S., Europe, and Japan.



DTS Neural Surround technology is an encoder/decoder technology that takes up to 7.1 channels of audio and using advanced techniques,
including a feedback loop for optimal encoder performance, encodes the multi-channel audio to stereo while maintaining the surround queues from the discrete digital multi-channel track. The two
channel stereo audio can then be broadcast or carried on other media that is limited to stereo tracks. In the home, the DTS Neural Surround decoder then decodes the signal, up to 7.1 channels,
providing a surround experience. The DTS Neural Surround decoder is available in home theater, car audio systems and video games.







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Virtual Surround Sound

Since the discrete multi-channel audio experience changed consumer listening habits and expectations, the consumer electronics
marketplace has experienced a growing need for simulated (or virtual) surround sound technology solutions. This has been magnified by the growth of HDTV, the use of personal computers as complete home
entertainment devices, and the
proliferation of higher quality portable electronics. We currently offer the following simulated surround sound technology solutions that satisfy this requirement:







DTS Premium Suite is a bundle of DTS audio technologies for PCs that includes:



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The
DTS Premium Suite is part of a cooperative marketing agreement with Intel, signed February 2009, for the mobile PC platform. Initially, through this arrangement DTS and Intel will
bring a compelling set of audio enhancement technologies that improve audio performance while minimizing energy consumption in mobile PCs.



DTS Symmetry is an advance signal processing technology that accurately detects and regulates the perceived volume of different input
sources.

The
benefit to consumers is maintaining ideal loudness across all content, programs and input sources, which is a growing problem as the wide range of entertainment options accessible to
consumers represents a nearly unlimited selection at various production quality.

In
addition to being a component of Premium Suite, Symmetry is licensed as a stand-alone technology to markets such as home theater AV, display, automotive, portable electronics, and
broadcast.



The high quality and flexibility of our algorithms provides for a variety of potential alternative applications. We are expanding into
new and emerging markets for consumer electronics and entertainment products that incorporate higher-quality digital audio, including:



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DTS
is in a position to aggressively pursue all of these current and future opportunities due to the platform we have built over the course of the last 17 years. This platform of
intellectual property development and protection, brand, customer relationships, and consumer goodwill enables us to actively expand into new markets and product categories to continue to expand the
size and scope of our business.

Intellectual Property

As a provider of high quality branded entertainment technologies to markets worldwide, we believe it is extremely important to protect
our technology through the use of patents, trademarks, copyrights, and trade secrets in many countries.

We
have a substantial base of intellectual property assets, including patents, trademarks, copyrights, and trade secrets. We have many individual patent families resulting in hundreds of
individual patents and patent applications throughout the world. We have hundreds of trademarks and trademark applications pending worldwide with additional marks in the pre-application
phase. We also have a number of federally registered copyrights and maintain a sizeable library of copyrighted software and other technical materials as well as numerous trade secrets. We have
targeted our intellectual property coverage to provide protection in the major manufacturing and commercial markets of the world.

It
is our general practice to file patent applications for our technology in the United States and various foreign countries where our customers manufacture, distribute, or sell licensed
products. We actively pursue new applications to expand our patent portfolio to address new technological innovations. Most of the patents in our patent portfolio have an average life of
20 years from their date of filing. Many of our more substantive patents have expiration dates ranging from 2015 to 2018. These rights primarily cover the process of producing media containing
DTS and digital multi-channel audio as well as the individual finished product. We have multiple patents covering unique aspects and improvements for many of our technologies. We do not believe that
the expiration of any single patent is likely to significantly affect our intellectual property position or our ability to generate licensing revenues.

Our
trademarks consist of many individual word marks, logos, and slogans filed throughout the world. The marks cover our various products, technology, improvements, and features as well
as the services that we provide. Our trademarks are an integral part of our licensing program and, generally, are required to be used on licensed products to identify the existence of the technology,
to provide greater consumer awareness and to advance the sales of the product the trademark is on.

We
have a significant amount of copyright protected materials including software and textual materials. A number of these products have been federally registered

Branding

Since the first DTS audio soundtrack was created for the release of Steven Spielberg's Jurassic Park in 1993, content producers,
electronic manufacturers, and sophisticated audio consumers have recognized the DTS trademark as a symbol of superior multi-channel audio for motion pictures and home theaters.

A
core part of our business strategy is to continue to enhance and build the strength of the DTS brand by encouraging the use of our trademarks throughout the entertainment
industry so that professionals and consumers alike will know that we have helped ensure consistent quality as content moves throughout the entertainment value chain.

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We
actively encourage our content partners such as major motion picture studios, music labels, broadcasters and other digital media distribution partners to place our trademark on their
products in conjunction with the inclusion of our technologies. We also work with all our licensees manufacturing consumer products to display our trademark on all products that incorporate our
technologies.

The
inclusion of the DTS trademark informs audiences and consumers that the content and/or product incorporates our technologies and meets our quality standards, which we believe helps
consumer manufacturers sell their products.

We
believe the strong adoption of DTS as a preferred audio format for Blu-ray and our continued technology innovation will continue to proliferate the DTS trademark into
expanding categories of consumer electronics and in turn grow the positive consumer affiliation with the DTS brand.

To
support this process we work with content partners and consumer manufacturers to provide marketing materials such as printed materials, trailers and other digital media assets to
promote the quality of experience that is associated with the DTS brand.

We
believe that our reputation as a trusted provider of high quality entertainment technologies and the strength of the DTS brand will assists us in expanding use of our existing
technologies in new markets and in commercializing new technologies.

Licensing

We have historically derived the majority of our revenue from licensing our technology for incorporation into home theater products.
DTS-enabled audio decoders are embedded in popular home theater products including audio/video receivers, home-theater-in-a-box systems, and
Blu-ray Disc players. Our technology is also embedded and supported in new and emerging consumer electronics products that use digital multi-channel audio, including home audio systems,
car audio systems, personal computers, video games and consoles, portable electronics devices, televisions, digital media adapters and players, and digital broadcast products.

We
have a licensing team headquartered in Limerick, Ireland that markets our technology directly to large consumer electronics product manufacturers and semiconductor manufacturers. This
team also includes employees located in the United States, China, Hong Kong, Japan, Northern Ireland, South Korea and Taiwan. We believe that by locating staff near the leading consumer electronics
and semiconductor manufacturers, we can enhance our sales and business development efforts.

We
license our technology to consumer electronics product manufacturers primarily through a two step process. First, we license our technology to semiconductor manufacturers who
typically embed our decoding software into their digital signal processor chips. In turn, these semiconductor manufacturers are required to sell DTS-enabled chips only to hardware
manufacturers who have entered into consumer manufacturer licenses with us. Our business model typically provides for us to receive a per-unit royalty for products produced by the consumer
manufacturer licensees that contain our decoding technologies. As part of the licensing terms for both semiconductor and hardware manufacturer licensees, we typically receive fees for access to our
developer kits and for our certification, prior to sale, of the quality and performance of their products. We license on a non-exclusive, worldwide basis. We require that all licensees
have their integrated circuits or hardware devices certified by us prior to distribution. We reserve the right to audit their records and quality standards. Licensees are generally required to display
the appropriate DTS trademark on the products they manufacture.

We
market our digital sound encoding equipment directly to the content providers and audio professionals serving the consumer electronics market. We believe that allowing easy access to
DTS encoders will result in more DTS content, which we believe will drive consumer demand for DTS-enabled electronic products.

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Customers



We have licensed our technologies or our trademarks to substantially all of the major consumer electronics product manufacturers for
use in hundreds of consumer audio products. Collectively, these manufacturers have sold hundreds of millions of DTS-licensed consumer electronics products worldwide. Sony accounted for 15%
of total revenues for the year ended December 31, 2009.



We have licensed to a substantial number of the major semiconductor manufacturers the right to incorporate our technology in their
semiconductors and to sell semiconductors with DTS technology to our hardware manufacturer licensees.



We have sold or provided encoding products to many of the leading home video and music content providers and professional audio
facilities enabling them to create high quality DTS-enabled content. To date, thousands of Blu-ray Disc and DVD titles have been produced with DTS digital multi-channel audio
tracks.

Seasonality of Business

Generally, consumer electronics manufacturing activities are lowest in the first calendar quarter of each year, and increase
progressively throughout the remainder of the year. The third and fourth quarters are typically the strongest in terms manufacturing output as our technology licensees increase their manufacturing
output to prepare for the holiday buying season. Since recognition of revenues in our business generally lags manufacturing activity by one quarter, our revenues and earnings are generally lowest in
the second quarter.

In
general, the introduction and inclusion of DTS technologies in new and rapidly growing markets can have a material effect on quarterly revenues and profits, and can distort the
moderate seasonality described above.

Also,
from time to time, we may recognize royalty revenues that relate to licensing obligations that occurred in 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.

Research and Development

As demonstrated by our portfolio of industry-recognized, advanced technologies, DTS has always had, as its anchor, strong research and
development abilities. The company was founded with key research and development that solved customer problems in a high quality and differentiated manner and we continue to develop new technologies
with that same goal.

As
the company has grown, new technology has been developed internally as well as acquired from outside sources. Acquired technologies, and the talent and knowledge that created it, are
key elements of our research and development base and will continue to be a source of new ideas going forward.

We
have a group of 57 engineers and scientists, including nine PhDs, focused on research and development. This group oversees our product development efforts and is responsible for
implementing our technology into our existing and emerging products. We carry out research and development activities at our corporate headquarters in Calabasas, California and at our facilities in
Bangor, Northern Ireland, Vancouver, Canada, Kirkland, Washington and Scotts Valley, California.

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Our
research and development expenses totaled approximately $9.1 million during 2009, $6.9 million during 2008, and $6.5 million during 2007. We expect that we will
continue to commit significant resources to applications engineering efforts, particularly in support of the new high definition disc standards, and to research and development in the future.

Governmental and Industry Standards

There are a variety of governmental and industry-related organizations that are responsible for adopting system and product standards.
Standards are important in many technology-focused industries as they help to ensure compatibility across a system or series of products. Generally, standards adoption occurs on either a mandatory
basis, requiring the existence of a particular technology or feature, or an optional basis, meaning that a particular technology or feature may be, but is not required to be, utilized.

We
believe the market for audio and audio/video products is very standards driven and our active participation with standards organizations is important as we work to include our
technology in standards or change our status from optional to mandatory, where possible. We believe our standards involvement also provides us early visibility into future opportunities.

We
actively participate in a variety of standards organizations worldwide, including the DVD Forum, Blu-ray Disc Association, Digital Video Broadcast (DVB), American
Television Standards Committee (ATSC), International Engineering Consortium (IEC), Consumer Electronics Assoication (CEA), Audio Engineering Society (AES), Society for Motion Picture and Television
Engineers (SMPTE), Digital Entertainment Content Ecosystem (DECE), Open IPTV Forum (OIPF), Digital Living Network Alliance (DLNA), and Moving Pictures Expert Group (MPEG). We anticipate being involved
in a number of other standards organizations as appropriate to facilitate the adoption and inclusion of our technology.

We
have seven employees and consultants focused on standards activities, including one in Europe, one in Japan, one in South Korea, one in Canada, and three in the United States. We also
employ additional resources as necessary to assist with specific standards-related tasks.

Competition

We face strong competition in the consumer electronics market and expect competition to intensify in the future. Our primary competitor
is Dolby Laboratories, who develops and markets, among other things, digital multi-channel audio products and services. Dolby was founded over 40 years ago and for many years was the only
significant provider of audio technologies. Dolby's long-standing market position, brand, business relationships, and inclusion in various industry standards provide it with a strong
competitive position.

In
addition to Dolby, we also compete in specific product markets with Fraunhofer Institut Integrierte Schaltungen, Koninklijke Philips Electronics N.V., Microsoft Corporation,
Sony Corporation, Thomson, SRS Labs and various consumer electronics product manufacturers. Many of these competitors have longer operating histories and significantly greater resources or greater
name recognition than we do.

We
believe that the principal competitive factors in each of our markets include some or all of the following:



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We
have been successful in penetrating the consumer electronics markets and building and maintaining market share. A substantial portion of Blu-ray Disc titles include DTS
sound tracks. Also, many top selling and premier edition DVDs contain digital multi-channel soundtracks in our format, and a substantial majority of consumer electronics products with digital
multi-channel capability incorporate our technology, trademarks, or know-how. Our success has been due in large part to our ability to position our brand as a premium offering that
contains superior proprietary technology, the quality of our customer service, our inclusion in industry standards, and our industry relationships.

We
believe there are significant barriers to entry in the consumer electronics products market, but we have obtained mandatory status in the Blu-ray Disc format. Also, the
standards relating to DVD are well established and support a limited number of technologies including DTS Coherent Acoustics. Numerous other standards we participate in support a limited number of
technologies including various DTS technologies.

Employees

As of December 31, 2009, we had 203 employees, which includes 57 employees classified on our income statement as research and
development, 5 employees classified in cost of revenue, and 141 classified as selling, general and administrative. Of the 203 total employees, 133 work in the United States and 70 work in our various
international locations, including 33 in Asia and 30 in Europe. None of our employees are subject to a collective bargaining agreement, and we have never experienced a work stoppage. We believe our
relations with our employees are good. Our future success depends on our ability to attract, motivate, and retain highly-qualified technical and management personnel. From time to time, we also employ
independent contractors to support our product development, sales, marketing, business development, and information technology and administration organizations.

Recent Developments

On October 12, 2009, we filed a complaint in the Superior Court of the State of California, County of Los Angeles against
Datasat Digital Entertainment, Inc. ("DDE"), Beaufort International Group Plc ("Beaufort"), and Datasat Communications Limited ("Datasat Communications") (collectively "Defendants")
asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment, and seeking monetary damages of at least $8.75 million related to
the sale of our digital cinema business in May 2008. The sale called for a $6.75 million deferred payment to be made to us in May 2009, as well as potential additional payments based on future
revenue performance milestones. Defendants failed to make the deferred payment when due, and allegedly failed to achieve the performance milestones. On November 30, 2009, Defendants answered to
the complaint and a cross-complaint against us, as well as certain of our executives. The Defendants subsequently amended their cross-complaint to allege fraud, negligence misrepresentation, breach of
contract and related claims in connection with the sale transaction. We dispute these allegations, and we believe that the Defendants' cross-complaint is without merit. The lawsuit is in the early
stages of

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discovery.
No trial date has been set. The Company intends to vigorously prosecute its claims and defenses in the Lawsuit.

Website Access To SEC Filings

We maintain an Internet website atwww.dts.com.We make available free of charge
through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.

Materials
we file with the SEC may be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.govthat contains reports, proxy and information statements, and other
information regarding our Company that we file electronically with the
SEC.

Item 1A.    Risk Factors

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

Risks Related to Our Business

We do not expect sales of DVD based products to sustain their past growth rates. Our business is highly dependent on the growth in Blu-ray Disc products, and we
do not have near-term visibility into the precise timing of this expected growth or how smooth or linear this growth will be. To the extent that sales of DVD based products and home
theater systems level off or decline, consumer adoption of Blu-ray Disc products fails to materialize or does not materialize as quickly or extensively as we expect, or alternative
technologies in which we do not participate replace DVD based products as a dominant medium for consumer video entertainment, our business will be adversely affected.

Past growth in our business has been due in large part to the rapid growth in sales of DVD based products and home theater systems
incorporating our technologies. As the markets for DVD based products mature, we expect sales of these products to decline. To the extent that sales of DVD based products and home theater systems
level off or decline, our business will be adversely affected. Additionally, the release and consumer adoption of Blu-ray Disc players has only just begun to ramp up. A potentially slow
adoption by consumers of Blu-ray Disc players, as well as the inability of DVD based products to sustain their past growth rates, could adversely affect our business, as revenue and
earnings derived from these new players and associated home theater system sales may not fully replace the anticipated decline in revenue and earnings associated with DVD based products and home
theater systems. Even with the resolution of the competing disc format conflict in early 2008, the rate of consumer adoption and ultimate penetration of Blu-ray Disc players is uncertain
and may be slower than past growth rates of DVD based products. In addition, if new technologies are developed for use with DVDs or new technologies, including direct downloads of content, are
developed or deployed that substantially compete with or replace DVDs as a dominant medium for consumer video entertainment, our business, operating results and prospects could be adversely affected.

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Economic downturns could disrupt and materially harm our business.

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

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

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

If we fail to protect our intellectual property rights, our ability to compete could be harmed.

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:



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

Our business and prospects depend on the strength of our brand, and if we do not maintain and strengthen our brand, our business will be materially harmed.

Establishing, maintaining and strengthening our "DTS" brand is critical to our success. Our brand identity is key to maintaining and
expanding our business and entering new markets. Our success depends in large part on our reputation for providing high quality products, services and technologies to the consumer electronics products
industry and the entertainment industry. If we fail to promote and maintain our brand successfully, our business and prospects may suffer. Moreover, we believe that the likelihood that our
technologies will be adopted in industry standards depends, in part, upon the strength of our brand, because professional organizations and industry participants are more likely to incorporate
technologies developed by a well-respected and well-known brand into standards.

We may not be able to evolve our technology, products, and services or develop new technology, products, and services that are acceptable to our customers or the changing
market.

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



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

We may be sued by third parties for alleged infringement of their proprietary rights.

Companies that participate in the digital audio, digital image processing, consumer electronics, and entertainment industries hold a
large number of patents, trademarks, and copyrights, and are frequently involved in litigation based on allegations of patent infringement or other violations of intellectual property rights.
Intellectual property disputes frequently involve highly complex and costly scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and

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

We may be subject to litigation proceedings that could harm our business.

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

We face intense competition. Certain of our competitors have greater brand recognition and resources than we do.

The digital audio, consumer electronics and entertainment markets are intensely competitive, subject to rapid change, and significantly
affected by new product introductions and other market activities of industry participants. Our principal competitor is Dolby Laboratories, Inc., who competes with us in most of our markets. We
also compete with other companies offering digital audio technology incorporated into consumer electronics product and entertainment mediums, including Fraunhofer Institut Integrierte Schaltungen,
Koninklijke Philips Electronics N.V. (Philips), Microsoft Corporation, Sony Corporation, Thomson and SRS Labs, Inc.

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



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

In
addition to the competitive advantages described above, Dolby also enjoys other unique competitive strengths relative to us. For example, it introduced multi-channel audio technology
before we did. Its technology has been incorporated in significantly more DVD based products than our

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technology.
It has also achieved mandatory standard status in product categories that we have not, including DVD based products, for its stereo technology and terrestrial digital television broadcasts
in the United States. As a result of these factors, Dolby has a competitive advantage in selling its digital multi-channel audio technology to consumer electronics products manufacturers.

We have limited control over existing and potential customers' and licensees' decisions to include our technology in their product offerings.

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

If we are unable to maintain and increase the amount of entertainment content released with DTS audio soundtracks, demand for the technology, products, and services that we
offer to consumer electronics product manufacturers may significantly decline.

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

Declining retail prices for consumer electronics products could force us to lower the license or other fees we charge our customers.

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 based products and Blu-ray Disc players and home theater systems, have decreased significantly and we expect prices to continue
to decrease for the foreseeable future. Declining prices for consumer electronics products could create downward pressure on the licensing fees we currently charge our customers who integrate our
technology into the consumer electronics products that they sell and distribute. Most of the consumer electronics products that include our audio technology also include Dolby's multi-channel audio
technology. As a result of pricing pressure, consumer electronics products manufacturers who manufacture products in which our audio technology is not a mandatory standard could decide to exclude our
DTS audio technology from their products altogether.

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Our licensing revenue depends in large part upon semiconductor manufacturers incorporating our technologies into integrated circuits, or ICs, for sale to our consumer
electronics product licensees and if, for any reason, our technologies are not incorporated in these ICs or fewer ICs are sold that incorporate our technologies, our operating results would be
adversely affected.

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

We rely on the accuracy of our customers' manufacturing reports for reporting and collecting our revenues, and if these reports are untimely or incorrect, our revenues could
be delayed or inaccurately reported.

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

We expect our operating expenses to increase in the future, which may impact profitability.

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



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

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We have a limited operating history in certain new and evolving markets.

Our technology has only recently been incorporated into other consumer electronics markets, such as personal computers, video game
consoles, portable electronics devices, and digital satellite and cable broadcast products. More recently, we have entered into the "virtual" surround space with the internal development of technology
that we have branded DTS Surround Sensation. We do not have experience in this specific segment of the market and it is dominated by existing technologies from companies including Dolby
Laboratories, Inc., SRS Labs, Inc. and BBE Sound, Inc. As a result, the demand for our technology, products, and services and the income potential of these businesses are
unproven. In addition, because the market for digital audio technology is relatively new and rapidly evolving, we have limited insight into trends that may emerge and affect our business. We may make
errors in predicting and reacting to relevant business trends, which could harm our business. Before investing in our common stock, you should consider the risks, uncertainties, and difficulties
frequently encountered by companies in new and rapidly evolving markets such as ours. We may not be able to successfully address any or all of these risks.

Our technology and products are complex and may contain errors that could cause us to lose customers, damage our reputation, or incur substantial costs.

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

We cannot be certain of the future effectiveness of our internal control over financial reporting or the impact thereof on our operations or the market price of our common
stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on
Form 10-K our assessment of the effectiveness of our internal control over financial reporting. We cannot assure you that our system of internal control will be effective in the
future as our operations and control environment change. If we cannot adequately maintain the effectiveness of our internal control over financial reporting, our financial reporting may not be timely
and/or accurate. If reporting delays or errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the SEC. Moreover, even if we conclude that our
internal control is effective, our independent registered public accounting firm may disagree. If our independent registered public accounting firm is not satisfied with our internal control over
financial reporting or the level at which our internal control over financial reporting is documented, designed, operated or reviewed, or if the independent registered public accounting firm
interprets the requirements, rules or regulations differently than we do, then it may issue an adverse or qualified opinion. Any of the above outcomes could adversely affect our financial results or
result in a loss of investor confidence in the reliability of our financial information, which could materially and adversely affect the market price of our common stock.

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We are subject to additional risks associated with our international operations.

Our licensing headquarters are located in Limerick, Ireland, and we market and sell our products and services outside the United
States. We currently have employees located in eight countries, and many of our customers and licensees are located outside the United States. As a key component of our business strategy, we intend to
expand our international sales and customer support. For the quarter ended December 31, 2009, over 90% of our revenues were derived internationally. We face numerous risks in doing business
outside the United States, including:



Such
factors could cause our future international sales to decline.

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

Our
international revenue is mostly denominated in U.S. dollars. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our technology, products, and
services more expensive for international customers, which could cause them to decrease their purchases from us. Expenses for our subsidiaries are denominated in their respective local currencies. As
a result, if the U.S. dollar weakens against the local currency, the translation of our foreign-currency-denominated expenses will result in higher operating expense without a corresponding increase
in revenue. Significant fluctuations in the value of the U.S. dollar and foreign currencies could have a material impact on our consolidated financial statements. The main foreign currencies we
encounter in our operations are the Yen, Euro, CAD, RMB and GBP. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

We face risks in expanding our business operations in China.

An important strategy of ours is to expand our business operations in China. However, we may be unsuccessful in implementing this
strategy as planned or at all. Factors that could inhibit our successful expansion into China include its historically poor recognition of intellectual property rights and poor performance in stopping
counterfeiting and piracy activity as well as enforcing judgments. If we are unable to successfully stop unauthorized use of our intellectual property and assure compliance by our

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Chinese
licensees, we could experience increased operational and enforcement costs both inside and outside China.

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

We may experience fluctuations in our operating results.

We have historically experienced moderate seasonality in our business due to our business mix and the nature of our products. Consumer
electronics manufacturing activities are generally lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. Manufacturing output is generally
strongest in the third and fourth quarters as our technology licensees increase manufacturing to prepare for the holiday buying season. Since recognition of revenues generally lags manufacturing
activity by one quarter, our revenues and earnings are generally lowest in the second quarter. The introduction of new products and inclusion of our technologies in new and rapidly growing markets can
distort and amplify the seasonality described above. For example, the introduction of Blu-ray Disc players may result in an overall near-term slowdown in our business as sales
of DVD based products slow in anticipation of purchasing Blu-ray Disc products, but purchases of Blu-ray Disc products are in an early phase market adoption. Our revenues may
continue to be subject to fluctuations, seasonal or otherwise, in the future. Unanticipated fluctuations, whether due to seasonality, economic down turns, product cycles, or otherwise, could cause us
to miss our earnings projections, or could lead to higher than normal variation in short-term earnings, either of which could cause our stock price to decline.

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

Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

Our capital requirements will depend on many factors, including:



In
the future, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all, particularly given the continuing credit crisis and downturn in
the overall

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

Even if our technologies are adopted as an industry standard for a particular market, manufacturers may not widely adopt our technologies.

Even if a standards-setting body mandates our technologies for a particular market, our technologies may not be the sole technologies
adopted for that market as an industry standard. Further, even when inclusion of certain of our technologies is mandated by a particular standard, market participants may choose not to implement or
adopt any of our technologies beyond those required by the mandate. Our revenues and operating results depend on manufacturers choosing to adopt our technologies instead of or along with competitive
technologies that may also be acceptable under industry standards. For example, the continued growth of our revenue from the Blu-ray Disc market depends upon both the continued growth of
the format generally and manufacturers' choosing to incorporate our multi-channel technologies where they are an optional industry standard.

Our licensing of industry standard technologies can be subject to limitations that could adversely affect our business and prospects.

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

Our ability to develop proprietary technology in markets in which "open standards" are adopted may be limited, which could adversely affect our ability to generate revenue.

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

We are dependent on our management team and technical talent.

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



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

A loss of one or more of our key customers or licensees in any of our markets could adversely affect our business.

From time to time, one or a small number of our customers or licensees may represent a significant percentage of our revenue. For
instance, in 2009, one customer accounted for 15% of revenues from our continuing operations. Although we have agreements with many of our customers, these agreements typically do not require any
material minimum purchases or minimum royalty fees and do not prohibit customers from purchasing products and services from competitors. A decision by any of our major customers or licensees not to
use our technologies, or their failure or inability to pay amounts owed to us in a timely manner, or at all, could have a significant adverse effect on our business.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our net income.

We are subject to income taxes in both the United States and foreign jurisdictions. Our effective income tax rates have recently been
and could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, or by
changes in the valuation of our deferred tax assets and liabilities. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business,
there are many transactions and calculations where the ultimate tax determination is uncertain. We may come under audit by tax authorities. For instance, the Internal Revenue Service is examining our
2005 to 2007 federal income tax returns, including certain prior period carryforwards, and the State of California is examining our 2004 and 2005 corporate tax returns. Although we believe our tax
estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Based on the results of
an audit or litigation, a material effect on our income tax provision, net income or cash flows in the period or periods for which that determination is made could result. In addition, changes in tax
rules may adversely affect our future reported financial results or the way we conduct our business. For example, we consider the operating earnings of our foreign subsidiaries to be invested
indefinitely outside the United States. We have not provided for United States federal or foreign withholding taxes that may result on future remittances of undistributed earnings of foreign
subsidiaries. Our future reported financial results may be adversely affected if tax or accounting rules regarding unrepatriated earnings change.

As
part of the 2011 Budget, the Obama administration recently announced several proposals to reform United States tax rules. We are still examining these proposals to determine what, if
any, impact these proposals will have on the Company.

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Current and future governmental and industry standards may significantly limit our business opportunities.

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

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

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

We may not successfully address problems encountered in connection with any acquisitions.

We expect to consider opportunities to acquire or make investments in other technologies, products, and businesses that could enhance
our technical capabilities, complement our current products and services, or expand the breadth of our markets. We have a limited history of acquiring and integrating businesses. Acquisitions and
strategic investments involve numerous risks, including:



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

We may have difficulty managing any growth that we might experience.

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



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

Risks Related to Our Common Stock

We expect that the price of our common stock will fluctuate substantially.

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



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

Shares of our common stock are relatively illiquid.

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

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

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



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

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prevention
of a change of control transaction or changes in our Board could cause the market price of our common stock to decline.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our corporate headquarters and principal office is located in Calabasas, California, where we own real property, which includes an
approximately 89,000 square foot building. We lease smaller facilities in other locations including the United States, Republic of Ireland, Canada, China, Northern Ireland, Japan, Korea and Taiwan. We
believe that our existing space is adequate for our current operations. We believe that suitable replacement and additional space will be available in the future on commercially reasonable terms.

Item 3.    Legal Proceedings

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

On
October 12, 2009, we filed a complaint in the Superior Court of the State of California, County of Los Angeles against Datasat Digital Entertainment, Inc. ("DDE"),
Beaufort International Group Plc ("Beaufort"), and Datasat Communications Limited ("Datasat Communications") (collectively "Defendants") asserting claims for breach of contract, breach of the
implied covenant of good faith and fair dealing, and unjust enrichment, and seeking monetary damages of at least $8.75 million related to the sale of our digital cinema business in May 2008.
The sale called for a $6.75 million deferred payment to be made to us in May 2009, as well as potential additional payments based on future revenue performance milestones. Defendants failed to
make the deferred payment when due, and allegedly failed to achieve the performance milestones. On November 30, 2009, Defendants answered to the complaint and a cross-complaint against us, as
well as certain of our executives. The Defendants subsequently amended their cross-complaint to allege fraud, negligence misrepresentation, breach of contract and related claims in connection with the
sale transaction. We dispute these allegations, and we believe that the Defendants' cross-complaint is without merit. The lawsuit is in the early stages of discovery. No trial date has been set. The
Company intends to vigorously prosecute its claims and defenses in the Lawsuit.

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

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

We did not submit any matters to a vote of security holders during the fourth quarter of the year ended December 31, 2009.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PRICE RANGE OF COMMON STOCK

Our common stock is traded on the Nasdaq Global Select Market under the symbol "DTSI." Prior to July 1, 2006 our common stock
was listed on the Nasdaq National Market since our initial public offering on July 9, 2003. The following table sets forth, for the periods indicated, the high and low sales prices for our
common stock as reported by the Nasdaq Global Select Market:

High

Low2008First Quarter

$
29.19

$
19.98Second Quarter

$
35.99

$
24.13Third Quarter

$
33.87

$
25.95Fourth Quarter

$
28.45

$
12.612009First Quarter

$
24.78

$
13.40Second Quarter

$
28.26

$
21.66Third Quarter

$
28.45

$
24.25Fourth Quarter

$
35.14

$
25.44


As
of January 29, 2010 there were approximately 3,300 stockholders of record of our common stock. We believe that the number of beneficial owners is substantially greater than the
number of record holders because a large portion of our common stock is held through brokerage firms in "street name."

RECENT SALES OF UNREGISTERED SECURITIES

During the fiscal year ended December 31, 2009, we did not issue any securities that were not registered under the Securities
Act of 1933.

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STOCK PERFORMANCE GRAPH

The following graph and table compares the cumulative total stockholder return on our common stock to that of the NASDAQ Market Index
and the Russell 2000® Index for the five fiscal year period ending December 31, 2009, the date of our fiscal year end. The following graph and table assumes that a $100 investment
was made at the close of trading on December 31, 2004 in our common stock and in each index, and that dividends, if any, were reinvested. The stock price performance shown on the graph below
should not be considered indicative of future price performance.

GRAPHIC

December 31,
2004

December 30,
2005

December 29,
2006

December 31,
2007

December 31,
2008

December 31,
2009DTS, Inc.

$
100.00

$
73.52

$
120.17

$
127.02

$
91.16

$
169.95NASDAQ Market Index


100.00


102.20


112.68


124.57


74.71


108.56Russell 2000 Index


100.00


104.55


123.76


121.82


80.66


102.58


DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds to support our
operations and to finance the growth and development of our business. We do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to dividend policy
will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, and other
factors as the Board of Directors may deem relevant.

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ISSUER PURCHASES OF EQUITY SECURITIES

On August 1, 2006, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to
one million shares of our common stock in the open market or in privately negotiated transactions. Through August 13, 2007, all shares of common stock under this authorization were repurchased
for an aggregate cost of $22.7 million.

On
February 21, 2008, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to one million shares of our common stock in the
open market or in privately negotiated transactions. Through November 25, 2008, all shares of common stock under this authorization were repurchased for an aggregate cost of
$18.9 million.

On
November 12, 2009, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to one million shares of our common stock in the
open market or in privately negotiated transactions. During the three months ended December 31, 2009, we repurchased 130,000 under this authorization for an aggregate cost of
$3.9 million.

All
shares repurchased under these authorizations are accounted for as treasury stock.

Stock
repurchase activity during the quarter ended December 31, 2009 was as follows:

Period

Total
Number
of Shares
Purchased

Average
Price Paid
per Share

Total Number
of Shares
Purchased as
Part of Publicly
Announced Plan

Maximum Number
of Shares that May
Yet Be Purchased
Under the PlanOctober 1, 2009 through October 31, 2009











November 1, 2009 through November 30, 2009


99,267
(1)
$
29.94


98,000


902,000December 1, 2009 through December 31, 2009


32,244
(1)
$
29.92


32,000


870,000Total


131,511

$
29.93
(2)

130,000


870,000


Notes: (1)Consists
of shares repurchased in open-market transactions pursuant to an authorization by our Board of Directors that we previously announced.
In November 2009, our Board of Directors authorized us to repurchase up to one million shares of our common stock in the open market or in privately negotiated transactions, depending upon market
conditions and other factors. Also consists of shares repurchased and retired from employees to satisfy statutory withholding requirements upon the vesting of restricted stock.(2)Represents
weighted average price paid per share during the quarter ended December 31, 2009.


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Item 6.    Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

In the table below, we provide you with historical selected consolidated financial data of DTS, Inc. and its subsidiaries. We
derived the following historical data from our audited consolidated financial statements. It is important that you read the selected consolidated financial data set forth below in conjunction with our
consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.

During
the first quarter of 2007, DTS Digital Cinema's assets and liabilities were classified as held for sale and its operations were reported as discontinued operations. As a result,
we reclassified our balance sheets and statements of operations for all periods presented in this report to reflect DTS Digital Cinema as discontinued operations.

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Our
historical results are not necessarily indicative of the operating results that may be expected in the future. We have described various risks and uncertainties that could affect
future operating results under the heading "Risk Factors" included elsewhere in this Form 10-K.

For the Years Ended December 31,2009

2008

2007

2006(4)

2005(Amounts in thousands, except per share amounts)Consolidated Statement of Operations DataRevenue

$
77,722

$
60,238

$
53,073

$
50,039

$
48,180Cost of revenue


1,766


1,179


1,276


2,082


2,573Gross profit


75,956


59,059


51,797


47,957


45,607Operating expenses:Selling, general and administrative


48,717


36,794


33,116


29,803


24,218Research and development


9,087


6,924


6,473


6,861


5,824In-process research and development





1,090
(1)







Restructuring costs











3,758
(5)

Total operating expenses


57,804


44,808


39,589


40,422


30,042Income from operations


18,152


14,251


12,208


7,535


15,565Interest and other income, net


1,063


2,418


2,704


4,954


2,141Income from continuing operations before income taxes


19,215


16,669


14,912


12,489


17,706Provision for income taxes


8,525


7,158


5,310


2,896


5,777Income from continuing operations


10,690


9,511


9,602


9,593


11,929Income (loss) from discontinued operations, net of tax


(88
)

1,856
(2)

(30,041)
(3)

(6,569
)

(4,021)
(6)Net income (loss)

$
10,602

$
11,367

$
(20,439
)
$
3,024

$
7,908Net income (loss) per common share:Basic:Continuing operations

$
0.62

$
0.54

$
0.54

$
0.54

$
0.69Discontinued operations





0.10


(1.69
)

(0.37
)

(0.23
)Net income (loss)

$
0.62

$
0.64

$
(1.15
)
$
0.17

$
0.46Diluted:Continuing operations

$
0.60

$
0.52

$
0.52

$
0.52

$
0.65Discontinued operations





0.11


(1.63
)

(0.36
)

(0.22
)Net income (loss)

$
0.60

$
0.63

$
(1.11
)
$
0.16

$
0.43Weighted average shares used to compute net income (loss) per common share:Basic


17,145


17,641


17,745


17,623


17,321Diluted


17,689


18,145


18,418


18,401


18,310


(1)This
write-off of in-process research and development relates to the business acquisition from Neural Audio Corporation. For
additional information regarding this business combination, refer to Footnote 8 of our consolidated financial statements, "Business Combination."(2)Includes
a $5.0 million pre-tax adjustment to increase the carrying value of assets held for sale to fair value, less costs to sell,
during the first quarter of 2008. Also, includes a pre-tax loss of $2.1 million for the separate sales transactions of our digital images and cinema businesses during


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the
second quarter of 2008. For additional information regarding these sales transactions, refer to Footnote 11 of our consolidated financial statements, "Discontinued Operations." (3)Includes
charge of $19,272, net of $5,381 tax benefit, to reduce the carrying value of the Cinema and Digital Images businesses comprising discontinued
operations to fair value, less costs to sell. For additional information, refer to Footnote 11 of the consolidated financial statements, "Discontinued Operations."(4)Includes
$20, $1,727 and $222 in cost of goods sold, selling, general and administrative and research and development, respectively, due to the adoption of
stock-based compensation guidance on January 1, 2006. For additional information regarding stock-based compensation, refer to Footnote 12 of our consolidated financial statements, "Stock-Based
Compensation."(5)Includes
$3,000 and $758 for the early termination of a business agreement and the write-down of DTS Entertainment inventory and other assets,
respectively.(6)Includes
the results of operations for DTS Digital Images, Inc., which we acquired in January 2005. Also includes $2.3 million for
in-process research and development related to this acquisition.


As of December 31,2009

2008

2007

2006

2005(In thousands)Consolidated Balance Sheet DataCash, cash equivalents, and short-term investments

$
75,351

$
68,023

$
85,402

$
108,760

$
107,578Working capital


83,725


76,773


100,220


120,510


122,763Total assets


154,218


137,678


138,217


168,200


158,254Total long-term liabilities


5,862


3,783


2,716


1,466


1,917Total stockholders' equity


141,824


125,289


120,812


153,816


144,090


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

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

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You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the
notes to those statements included elsewhere in this Form 10-K. All discussions and amounts in Management's Discussion and Analysis, except for Liquidity and Capital Resources, for
all periods presented relate to continuing operations only, unless otherwise noted.

Overview

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

We
derive revenues from licensing our audio technology, trademarks, and know-how under agreements with substantially all of the major consumer audio electronics
manufacturers. Our business model provides for these manufacturers to pay us a per-unit amount for DTS-enabled products that they manufacture.

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

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

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

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

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Executive Summary

Financial Highlights



Trends, Opportunities, and Challenges

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

Because
we are a mandatory technology in the Blu-ray Disc standard, our revenue growth is closely tracking the growth in sales of Blu-ray equipped players, game consoles and PCs.
Further, we believe that this mandatory position in the Blu-ray Disc standard will give us the ability to extend the reach of a broad array of our technologies in several large markets such as
personal computers, in-car entertainment systems, network capable TVs, digital media players, and ultimately the mobile handset market.

There
has been increasing interest in our technologies for applications beyond optical media. We see a growing opportunity to extend our reach into new markets such as the online space
where consumers want a higher quality entertainment experience. For example, we have signed agreements with a number of digital media player and network-connected digital television manufacturers to
incorporate DTS decoders into their products.

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One
of the largest challenges that we face is the growing consumer trend toward open platform, on-line entertainment consumption and the need to constantly and rapidly evolve our
technologies to address the emerging markets. Further, we currently face a challenge regarding our ability to determine the impact of the current global economic downturn on consumer buying patterns.
While we do not have near-term visibility into the timing or extent of an economic recovery, we continue to remain optimistic that our revenues from both Blu-ray enabled products and our newer markets
will continue to grow.

Critical Accounting Policies and Estimates

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

We
believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.





40

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41

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Segment and Geographic Information

Our revenue by geographical area, based on the customer's country of domicile, is as follows (in thousands):

For the Years Ended
December 31,2009

2008

2007United States

$
17,421

$
5,160

$
4,474Japan


34,241


31,535


24,426South Korea


14,414


12,735


14,281Other international


11,646


10,808


9,892Total international


60,301


55,078


48,599Total revenues

$
77,722

$
60,238

$
53,073


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The
following table sets forth, for the periods indicated, long-lived tangible assets by geographic region (in thousands):

As of December 31,2009

2008

2007United States

$
32,494

$
22,461

$
5,291International


1,391


1,317


570Total long-lived tangible assets

$
33,885

$
23,778

$
5,861


Results of Operations

Revenues

Years Ended December 31,

2009 vs. 2008
Change

2008 vs. 2007
Change2009

2008

2007

$

%

$

%($ in thousands)Revenues

$
77,722

$
60,238

$
53,073

$
17,484


29
%
$
7,165


14
%


The
increase in revenues for the year ended December 31, 2009, compared to the same prior year period, was primarily attributable to an $11.8 million increase in royalty
recoveries from intellectual property compliance and enforcement activities. The increase in these recoveries resulted primarily from the settlement of legal matters with Zoran Corporation. Also,
revenues from Blu-ray product markets and broadcast markets increased for the year ended December 31, 2009, compared to the same prior year period. Blu-ray related
revenues comprised 21% and 17% of total revenue for the year ended December 31, 2009 and 2008, respectively. In dollar terms, these royalties were up 57% for the year ended December 31,
2009, compared to the same prior year period. Royalties from broadcast markets comprised 5% of total revenue for the year ended December 31, 2009, primarily as a result of the business that we
acquired from Neural, on December 31, 2008. Partially offsetting these increases are declines in DVD related royalties and the car
audio market, excluding the aforementioned royalty recoveries. We continue to be cautious regarding the outlook for the consumer electronics industry as a whole, and the revenues we derive from that
industry, in light of the turmoil in the global economic environment. However, we expect technology licensing revenues to grow as wider availability of Blu-ray enabled players, PCs and
game consoles, coupled with expected aggressive pricing and promotion of these products, should result in increasing licensing revenues from the Blu-ray format.

Revenues
for the year ended December 31, 2008 increased compared to the year ended December 31, 2007, primarily due to increased Blu-ray related royalties.
These royalties comprised 17% and 8% of total revenue for the years ended December 31, 2008 and 2007, respectively. In dollar terms, these royalties were up nearly 127% for the year ended
December 31, 2008, compared to the same prior year period, as sales of stand-alone Blu-ray players and Blu-ray enabled PCs have begun supplementing the revenues from
game consoles which have for 2007 constituted the majority of Blu-ray product shipments. In addition, revenues from the car audio market increased 28% during the year ended
December 31, 2008, compared to the same prior year period, which included royalty recoveries from intellectual property compliance and enforcement activities in this market. Partially
offsetting our increase in revenues for the year ended December 31, 2008, compared to the same prior year period, was a decrease in revenues from DVD related royalties, which resulted primarily
from a decrease in royalty recoveries from intellectual property compliance and enforcement activities in this market.

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Gross Profit

Years Ended December 31,

Percentage point
change in
gross profit
margin relative
to prior year2009

2008

20072009 vs.
2008

2008 vs.
2007$

%

$

%

$

%($ in thousands)Gross Profit

$
75,956


98
%
$
59,059


98
%
$
51,797


98
%

0
%

0
%


Gross
profit percentage for the years ended December 31, 2009, 2008 and 2007, remained consistent.

Selling, General and Administrative ("SG&A")

Change
relative to
prior yearSG&A
Expenses

Percent of
RevenuesYears Ended December 31,

$

%($ in thousands)2009

$
48,717


63
%
$
11,923


32
%2008

$
36,794


61
%
$
3,678


11
%2007

$
33,116


62
%


The
dollar increase in SG&A expenses for the year ended December 31, 2009, compared to the same prior year period, was primarily due to a $7.3 million increase in
professional fees. This increase resulted primarily from legal fees for the settlement of legal matters with Zoran Corporation. Also, employee related costs, including expanded operations and
stock-based compensation, increased $2.7 million for the year ended December 31, 2009, compared to the same prior year period. Other increases for the year ended December 31,
2009, compared to the same prior year period, include travel related expenses for increased sales activities and expanding operations, occupancy costs for expanded operations and advertising expenses.

SG&A
expenses, in dollars, increased for the year ended December 31, 2008, compared to the year ended December 31, 2007, primarily due to a $2.9 million increase in
employee related costs, including a $1.2 million increase in stock-based compensation expense related to additional employee equity grants since the prior year period and additional costs
associated with increased headcount for expanded foreign operations. In addition, advertising expenses increased $0.6 million for the year ended December 31, 2008, compared to the same
prior year period, primarily due to newer technology initiatives and international expansion.

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

Research and Development ("R&D")

Change
relative to
prior yearR&D
Expenses

Percent of
RevenuesYears Ended December 31,

$

%($ in thousands)2009

$
9,087


12
%
$
2,163


31
%2008

$
6,924


11
%
$
451


7
%2007

$
6,473


12
%


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The
dollar increase in R&D expenses for the year ended December 31, 2009, compared to the same prior year period, is primarily due to a $1.4 million increase in employee
related costs, including expanded operations and stock-based compensation. Other increases for the year ended December 31, 2009, compared to the same prior year period, include occupancy costs
for expanded operations and
amortization associated with intangibles from the business that we acquired from Neural on December 31, 2008. We intend to continue to invest in R&D to support our broadening product
development agenda and ongoing support of the rollout of the Blu-ray Disc format.

R&D
expenses increased for the year ended December 31, 2008, compared to the year ended December 31, 2007, primarily due to a $0.4 million increase in employee
related costs for an expanded workforce to support our broadening product development agenda and ongoing support of the rollout of Blu-ray Disc.

In-Process Research and Development

In-process research and development of $1.1 million for the year ended December 31, 2008, relates to
development projects that had not reached technological feasibility, were of no future alternative use and which were expensed upon consummation of the acquisition of assets used in the conduct of
Neural's audio technology business by us and the assumption by us of certain liabilities of Neural. Developed technology and in-process research and development were identified and valued
through extensive interviews, analysis of data provided by Neural concerning development projects, their stage of development, the time and resources needed to complete them, if applicable, and their
expected income generating ability and associated risks. Where development projects had reached technological feasibility, they were classified as developed technology and the value assigned to
developed technology was capitalized. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in
valuing acquired in-process research and development. Key assumptions for in-process research and development included a discount rate of 55% and estimates of revenue growth,
cost of sales, operating expenses and taxes.

There
were no in-process research and development expenses for the years ended December 31, 2009 and 2007.

Interest and Other Income, Net

Years Ended December 31,

2009 vs. 2008
Change

2008 vs. 2007
Change2009

2008

2007

$

%

$

%($ in thousands)Interest and other income, net

$
1,063

$
2,418

$
2,704

$
(1,355
)

(56
)%
$
(286
)

(11
)%


The
decrease in interest and other income, net, for the year ended December 31, 2009, compared to the same prior year period, is primarily due to the decrease in interest income
resulting from lower average interest rates and investment balances in the current year period. Given the uncertainty in the macro-economic environment and our significant cash outflows in 2009, we
have been investing in shorter-term investments, which generally earn a lower yield. Also contributing to the decrease for the year ended December 31, 2009, compared to the same
prior year period, were the effects of translation for certain foreign subsidiaries to the United States dollar or functional currency.

Interest
income and other income, net, decreased for the year ended December 31, 2008, compared to the year ended December 31, 2007, primarily as a result of the following
offsetting activities. During the current year period, we had lower average invested balances as a result of our stock repurchases during the 2007 and 2008, and the purchase of real property and a
building located thereon in 2008 to be used as our new corporate headquarters later in 2009. We also experienced lower average interest rates as a result of a less favorable interest rate environment.
During the prior year

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period,
a $0.7 million correction reduced interest income in order to correct our accrued interest income balances related to 2005 and 2006.

Income Taxes

Years Ended December 31,2009

2008

2007($ in thousands)Provision for income taxes

$
8,525

$
7,158

$
5,310Effective tax rate


44
%

43
%

36
%


The
effective tax rate for 2009 differed from the U.S. statutory rate of 35% primarily due to state income taxes, the effect of different tax rates in foreign jurisdictions, imputed
interest on inter-company balances and reserves for federal and state audits, partially offset by tax exempt interest and research and development credits. In the first quarter of 2009, the Company's
management identified an adjustment in its reserve for unrecognized tax benefits. This adjustment primarily related to imputed interest on inter-company balances for the years 2003 through 2008, that
was recorded during the quarter. The adjustment has the effect of increasing income tax expense in the quarter by $882. The adjustment has decreased income from continuing operations by $882 and net
income by $882. The Company management determined that the effect on previously filed reports was not material.

The
effective tax rate for 2008 and 2007 differed from the U.S. statutory rate of 35% primarily due to the effect of different tax rates in foreign jurisdictions and reserves for federal
and state audits, partially offset by tax exempt interest and research and development credits. In determining the income tax provision for continuing operations, the continuing operations were
considered a stand-alone entity. The residual amount of tax expense or benefit due to the difference between the income tax provision for the Company as a whole and the income tax provision as
calculated for continuing operations was recorded in discontinued operations.

Our
rates have historically differed from statutory rates due to varying foreign tax rates, tax exempt interest, and research and development credits.

Results of Discontinued Operations

Years Ended December 31,

2009 vs. 2008
Change

2008 vs. 2007
Change2009

2008

2007

$

%

$

%($ in thousands)Discontinued operations, net

$
(88
)
$
1,856

$
(30,041
)
$
(1,944
)

(105
)%
$
31,897


(106
)%


Our
digital images and cinema businesses were sold in two separate transactions on April 4, 2008 and May 9, 2008, respectively. Proceeds from these sales were
$7.5 million and $3.3 million, respectively. The net assets held for sale of these businesses have been eliminated from our balance sheet as of the respective sale dates, and as a result
of these transactions and in conjunction with the previous carrying value adjustments, we realized a pre-tax loss of $2.1 million during this period. This pre-tax loss
results primarily from settlement and severance obligations of ours and working capital adjustments that were determined subsequent to the closing of the sale of the digital cinema business, in
addition to losses from operations during the partial quarterly period from April 1, 2008 through the closing of the sale.

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The loss from discontinued operations for the year ended December 31, 2009, resulted primarily from legal fees associated with the Company's efforts to
collect certain contingent consideration from the buyer of the cinema business.

The
results of discontinued operations for the year ended December 31, 2007, includes a charge of $24.7 million to reduce the carrying value of the assets held for sale to
fair value, less costs to sell.

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

Liquidity and Capital Resources, Continuing and Discontinued Operations

At December 31, 2009, we had cash, cash equivalents, and short-term investments of $75.4 million, compared to
$68.0 million at December 31, 2008. Due to auction failures in the auction rate security markets, we classified our auction rate security holdings of $2.3 million as
long-term investments on the consolidated balance sheet as of December 31, 2009. Once it is determined that the auction markets have recovered, we will reclassify our remaining
auction rate security holdings back to short-term investments. For additional information, see the "Auction Rate Securities" discussion below.

Net
cash provided by operating activities was $21.9 million and $20.0 million for the years ended December 31, 2009 and 2008, respectively. Cash used in operating
activities was $2.1 million for the year ended December 31, 2007. Cash flows from operating activities consisted of net income adjusted for certain non-cash items, including
stock-based compensation, depreciation and amortization, and the effect of changes in working capital and other operating activities. The operating cash flows for the years ended December 31,
2009 and 2008, remained fairly consistent. However, the operating cash flows for the year ended December 31, 2008, included the non-cash negative effect of $2.9 million for
the adjustment to carrying value of assets held for sale, net of the loss on sale of assets held for sale. The increase in operating cash flows during the year ended December 31, 2008, compared
to the same prior year period, results largely from income from operations and the increase in collections of accounts receivable. Net cash provided by operating activities during the year ended
December 31, 2008 was also impacted by the reduction of working capital as a result of the sales of the digital images and digital cinema businesses during the second quarter of 2008. During
the year ended December 31, 2007, an increase in accrued licensing revenues from Blu-ray Disc and other next generation based products resulted in a decrease in cash flows from
accounts receivable for this period. We first began to receive licensing revenues from next generation based products during the first quarter of 2007.

We
typically use cash in investing activities primarily to purchase office equipment, fixtures, computer hardware and software, engineering and manufacturing test and certification
equipment, for business and technology acquisitions, for securing patent and trademark protection for our proprietary technology and brand name, and to purchase short-term and
long-term investments such as bank certificates of deposit and municipal bonds. Cash used in investing activities totaled $5.8 million and $18.5 million for the years ended
December 31, 2009 and 2008, respectively. Cash provided by investing activities totaled $38.1 million for the year ended December 31, 2007. Cash used in investing activities for
the year ended December 31, 2009 and 2008 consists primarily of capital expenditures associated with the purchase of certain real property and a building located thereon, which has been used as
our new corporate headquarters since November 2009. For additional information, see the "Property Acquisition" discussion below. The primary source of investing cash flow for the year ended
December 31, 2007 was proceeds from sales and maturities of our investments, net of purchases.

For
the year ended December 31, 2009, cash provided by financing activities was $0.4 million, and primarily consisted of proceeds from the issuance of common stock under
our stock-based compensation plans, including related tax benefits, partially offset by treasury stock purchases. For the

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years
ended December 31, 2008 and 2007, cash used in financing activities was $11.7 million and $ 17.3 million, respectively, and primarily consisted of treasury stock
purchases partially offset by proceeds from the issuance of common stock under our stock-based compensation plans, including related tax benefits.



In November 2009, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to one
million shares of our common stock in the open market or in privately negotiated transactions. During the fourth quarter of 2009, we repurchased 0.1 million shares of our common stock under
this authorization for an aggregate of $3.9 million. All shares repurchased under this authorization are accounted for as treasury stock.



On August 28, 2008, we entered into a Purchase and Sale Agreement, pursuant to which we agreed to purchase, subject to the terms
of the Purchase and Sale Agreement, certain real property in Calabasas, California and an approximately 89,000 square foot building and certain furniture, fixtures, equipment and other personal
property located on that property, which shall be used as our new corporate headquarters later in 2009. On November 7, 2008, we purchased this real and personal property for an aggregate
purchase price of $15.6 million. As of November 2009, we have begun to use this property as our new Corporate Headquarters. To date, we have incurred $12.1 million in capitalized
build-out costs for this new location.



On December 31, 2008, we entered into an Asset Purchase Agreement with Neural and its stockholders providing for the sale to us
of substantially all of Neural's assets used in the conduct of its audio technology business and certain patents and patent applications owned by such stockholders and the assumption by us of certain
liabilities of Neural. The sale was consummated the same day. Pursuant to the terms of this agreement, we paid cash consideration of approximately $7.5 million at closing and could pay up to an
additional $7.5 million in additional cash consideration over the next five years ($1.5 million per year) based on performance of certain of the acquired assets.

On
July 21, 2009, we entered into entered into a Settlement Agreement with Neural and its stockholders providing that $0.5 million be paid to the Company, as the working
capital conveyed to the Company was less than the threshold required by the Asset Purchase Agreement.

On
November 30, 2009, we entered into an Earnout Buyout And Escrow Release Agreement (the "Buyout and Release Agreement") with Neural and its stockholders providing that the we
buyout all contingent consideration obligations for $0.5 million, as it was independently concluded by both parties to be in their respective best interests. The Buyout and Release Agreement
also provided that the cash consideration paid at closing that remained in escrow be remitted to the Seller as soon as possible.



As of December 31, 2009, we held approximately $2.3 million in auction rate securities. The auction rate securities held
at December 31, 2009 are tax-exempt municipal bonds issued by governmental entities located within the United States that are insured and have a AAA rating.

On
October 24, 2008, we accepted an offer from UBS AG, or UBS, to liquidate our auction rate securities held in UBS accounts on February 13, 2008. The terms or rights of
the UBS offer were publicly filed in a prospectus, dated October 7, 2008. As of December 31, 2009, we owned $2.3 million par value of these securities. From January 2, 2009
and ending January 4, 2011, we have the right, but

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not
the obligation, to sell, at par, these auction rate securities to UBS, and such transaction would be initiated by UBS. Prior to January 4, 2011, we will continue to earn and receive all
interest that is
payable for these auction rate securities. Furthermore, prior to January 4, 2011, UBS, at its sole discretion, may sell, or otherwise dispose of, and/or enter orders in the auctions process
with respect to these securities on our behalf so long as we receive par value for the auction rate securities sold. UBS has also agreed to use its best efforts to facilitate issuer redemptions and/or
to resolve the liquidity concerns of holders of their auction rate securities through restructurings and other means. In addition, UBS has agreed to provide "no net cost" loans to holders of the
illiquid securities that are subject to bank repurchase, thereby providing us with short-term liquidity on our auction rate securities portfolio at no additional cost to us. As a result of
this arrangement with UBS, we believe par value or cost is a reasonable approximation of fair value.

Due
to our belief that it may take until January 2011 to liquidate these securities, our auction rate security instruments have been classified as long-term investments on
the consolidated balance sheet as of December 31, 2009.

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

We
believe that our cash, cash equivalents, short-term investments, and cash flows from operations will be sufficient to satisfy our working capital and capital expenditure
requirements for at least the next twelve months. Changes in our operating plans including lower than anticipated revenues, increased expenses, acquisition of companies, products or technologies or
other events, including those described in "Risk Factors" included elsewhere herein and in other filings may cause us to seek additional debt or equity financing on an accelerated basis. Financing may
not be available on acceptable terms, or at all, particularly given the continuing crisis in the financial markets, 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.

Contractual Obligations and Commitments

Future payments due under non-cancelable lease obligations and commitments at December 31, 2009 are described below
(in thousands):

2010

2011

2012

2013

2014

2015 and
thereafter

TotalOperating leases

$
824

$
638

$
514

$
511

$
491

$
1,962

$
4,940


Purchase
orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such
purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are typically based on our
current needs and are typically fulfilled by our vendors within short time horizons.

As
of December 31, 2009, our total amount of unrecognized tax benefits was $5.6 million and is considered a long-term obligation. We are currently unable to
make reasonably reliable estimates of the periods of cash settlements associated with these obligations.

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Recently Issued Accounting Standards

Refer to the "Recent Accounting Pronouncements" discussion at Footnote 2 of the consolidated financial statements, "Significant
Accounting Policies."

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates.

Our
interest income is sensitive to changes in the general level of U.S. interest rates, particularly since a significant portion of our investments are and will be in
short-term and long-term marketable securities, U.S. government securities and corporate bonds. Due to the nature and maturity of our short-term investments, we
have concluded that there is no material market risk exposure to our principal at December 31, 2009. Based on current cash, cash equivalents and short-term investment balances and
expected operating cash flows, we do not anticipate a lack of liquidity associated with our auction rate security instruments to adversely affect our ability to conduct business, and we believe that
we have the ability and intent to hold these securities throughout the estimated recovery period. In the event that we are unable to sell the underlying securities at or above our carrying value,
these securities may not provide us a liquid source of cash. The estimated average maturity of our investment portfolio is less than one year. As of December 31, 2009, a one percentage point
change in interest rates throughout a one-year period would have an annual effect of approximately $0.8 million on our income before income taxes.

During
the year ended December 31, 2009, we derived over 77% of our revenues from sales outside the United States, and maintain research, sales, marketing, or business development
offices in seven foreign 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 4% of total revenues during 2009. Operating expenses, including cost of sales, for our foreign subsidiaries were approximately
$12.9 million in 2009. Based upon the expenses for 2009, a 1% change in foreign currency rates throughout a one-year period would not have a significant impact on our operating
income.

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

We
are also affected by exchange rate fluctuations as the financial statements of our foreign subsidiaries are translated into the United States dollar in consolidation. As exchange
rates vary, these results, when translated, may vary from expectations and could adversely or positively impact overall profitability. During 2009, the impact of foreign exchange rate fluctuations
related to translation of our foreign subsidiaries' financial statements was immaterial to comprehensive income.

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Item 8.    Financial Statements and Supplementary Data

DTS, INC.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Consolidated Financial Statements:Reports of Independent Registered Public Accounting Firms


52Consolidated Balance Sheets as of December 31, 2009 and 2008


55Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007


56Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009, 2008 and 2007


57Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007


58Notes to Consolidated Financial Statements


59Financial Statement Schedule:Schedule IIValuation and Qualifying Accounts for the years ended December 31, 2009, 2008 and
2007


94


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and Stockholders
DTS, Inc.

We
have audited the accompanying balance sheets of DTS, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the two years in the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DTS, Inc. as of December 31,
2009 and 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted
in the United States of America.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DTS, Inc.'s internal control over financial reporting as
of December 31, 2009, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 3, 2010 expressed an unqualified opinion.

/s/
GRANT THORNTON LLP
San Diego, California
March 3, 2010

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING

Board
of Directors and Stockholders
DTS, Inc.

We
have audited DTS, Inc. internal control over financial reporting as of December 31, 2009, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). DTS, Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on DTS, Inc's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, DTS Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated
Frameworkissued by COSO.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of DTS, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of
the two years in the period ended December 31, 2009 and our report dated March 3, 2010 expressed an unqualified opinion.

/s/
GRANT THORNTON LLP
San Diego, California
March 3, 2010

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Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Shareholders of DTS, Inc.:

In
our opinion, the consolidated statement of operations, stockholders' equity and cash flows for the year ended December 31, 2007 present fairly, in all material respects, the
results of operations and cash flows of DTS, Inc. and its subsidiaries for the year ended December 31, 2007, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule for the year ended December 31, 2007 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Los Angeles, California
February 29, 2008

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DTS, INC.        CONSOLIDATED BALANCE SHEETS

As of December 31,2009

2008(Amounts in thousands,
except per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
42,222

$
25,658Short-term investments


33,129


42,365Accounts receivable, net of allowance for doubtful accounts of $229 and $64 at December 31, 2009 and 2008, respectively


5,731


8,835Deferred income taxes


4,945


4,644Prepaid expenses and other current assets


1,617


1,410Income taxes receivable, net


2,613


2,467Total current assets


90,257


85,379Property and equipment, net


33,885


23,778Intangible assets, net


6,565


7,557Goodwill


1,257


972Deferred income taxes


13,152


13,145Long-term investments


8,515


6,347Other assets


587


500Total assets

$
154,218

$
137,678LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
826

$
1,448Accrued expenses and other liabilities


5,706


7,158Total current liabilities


6,532


8,606Other long-term liabilities


5,862


3,783Commitments and contingencies (Note 10)Stockholders' equity:Preferred stock$0.0001 par value, 5,000 shares authorized at December 31, 2009 and 2008; no shares issued and outstanding





Common stock$0.0001 par value, 70,000 shares authorized at December 31, 2009 and 2008; 19,652 and 19,290 shares issued at December 31,
2009 and 2008, respectively; 17,522 and 17,290 shares outstanding at December 31, 2009 and 2008, respectively


2


2Additional paid-in capital


161,710


151,894Treasury stock, at cost2,130 and 2,000 at December 31, 2009 and 2008, respectively


(45,498
)

(41,608
)Accumulated other comprehensive income


362


355Retained earnings


25,248


14,646Total stockholders' equity


141,824


125,289Total liabilities and stockholders' equity

$
154,218

$
137,678


See
accompanying notes to consolidated financial statements.

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DTS, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31,2009

2008

2007(Amounts in thousands,
except per share amounts)Revenue

$
77,722

$
60,238

$
53,073Cost of revenue


1,766


1,179


1,276Gross profit


75,956


59,059


51,797Operating expenses:Selling, general and administrative


48,717


36,794


33,116Research and development


9,087


6,924


6,473In-process research and development





1,090


Total operating expenses


57,804


44,808


39,589Income from operations


18,152


14,251


12,208Interest and other income, net


1,063


2,418


2,704Income from continuing operations before income taxes


19,215


16,669


14,912Provision for income taxes


8,525


7,158


5,310Income from continuing operations


10,690


9,511


9,602Income (loss) from discontinued operations, net of tax


(88
)

1,856


(30,041
)Net income (loss)

$
10,602

$
11,367

$
(20,439
)Net income (loss) per common share:Basic:Continuing operations

$
0.62

$
0.54

$
0.54Discontinued operations





0.10


(1.69
)Net income (loss)

$
0.62

$
0.64

$
(1.15
)Diluted:Continuing operations

$
0.60

$
0.52

$
0.52Discontinued operations





0.11


(1.63
)Net income (loss)

$
0.60

$
0.63

$
(1.11
)Weighted average shares used to compute net income (loss) per common share:Basic


17,145


17,641


17,745Diluted


17,689


18,145


18,418


See
accompanying notes to consolidated financial statements.

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DTS, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock





Accumulated
Other
Comprehensive
IncomeAdditional
Paid-in
Capital

Treasury
Stock

Retained
Earnings

Total
Stockholders'
EquityShares

AmountBalance at December 31, 2006


18,024

$
2

$
129,549

$


$


$
24,265

$
153,816Adjustment due to adoption of uncertain tax position guidance

















(547
)

(547
)Exercise of warrants


4

















Exercise of options and related tax benefit of $84


471





4,605











4,605Issuance of common stock under employee stock purchase plan


80





1,085











1,085Restricted stock award grants, net of forfeitures and shares withheld for taxes


90





(244
)










(244
)Stock-based compensation charge








5,013











5,013Stock repurchases


(1,000
)







(22,670
)







(22,670
)Comprehensive income (loss):Net loss

















(20,439
)

(20,439
)Other comprehensive income














193





193Total comprehensive loss




















(20,246
)Balance at December 31, 2007


17,669


2


140,008


(22,670
)

193


3,279


120,812Exercise of options and related tax benefit of $206


456





7,185











7,185Issuance of common stock under employee stock purchase plan


37





641











641Restricted stock award grants, net of forfeitures and shares withheld for taxes


128





(595
)










(595
)Stock-based compensation charge








4,655











4,655Stock repurchases


(1,000
)







(18,938
)







(18,938
)Comprehensive income:Net income

















11,367


11,367Other comprehensive income














162





162Total comprehensive income




















11,529Balance at December 31, 2008


17,290


2


151,894


(41,608
)

355


14,646


125,289Exercise of options and related tax benefit of $491


184





3,578











3,578Issuance of common stock under employee stock purchase plan


69





956











956Restricted stock award grants, net of forfeitures and shares withheld for taxes


109





(368
)










(368
)Stock-based compensation charge








5,650











5,650Stock repurchases


(130
)







(3,890
)







(3,890
)Comprehensive income:Net income

















10,602


10,602Other comprehensive income














7





7Total comprehensive income




















10,609Balance at December 31, 2009


17,522

$
2

$
161,710

$
(45,498
)
$
362

$
25,248

$
141,824


See accompanying notes to consolidated financial statements.

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DTS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,2009

2008

2007(Amounts in thousands)Cash flows from operating activities:Net income (loss)

$
10,602

$
11,367

$
(20,439
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


3,828


2,672


2,923Adjustment to carrying value of assets held for sale





(4,963
)

24,653Loss on sale of assets held for sale





2,099


Stock-based compensation charges


5,650


4,655


5,013Deferred income taxes


(308
)

(429
)

(9,876
)In-process research and development





1,090


Tax benefits from stock-based awards


491


206


84Excess tax benefits from stock-based awards


(640
)

(204
)

(45
)Other


214


226


1,789Changes in operating assets and liabilities:Accounts receivable


2,786


3,950


(8,270
)Prepaid expenses and other assets


(299
)

(684
)

(519
)Accounts payable, accrued expenses and other liabilities


(282
)

392


2,479Income taxes receivable


(146
)

(332
)

109Net cash provided by (used in) operating activities


21,896


20,045


(2,099
)Cash flows from investing activities:Purchases of investments:Held-to-maturity


(45,143
)

(59,149
)

(27,284
)Available for sale





(12,909
)

(21,800
)Maturities of held-to-maturity investments


49,261


36,050


36,573Sales of available for sale investments


2,950


37,175


57,000Proceeds from the sale of assets held for sale, net





8,578


Cash paid for business and technology acquisitions, net


(330
)

(7,726
)

(1,226
)Purchase of property and equipment


(12,173
)

(19,969
)

(4,778
)Payment for patents and trademarks in process


(322
)

(584
)

(364
)Net cash provided by (used in) investing activities


(5,757
)

(18,534
)

38,121Cash flows from financing activities:Proceeds from the issuance of common stock under stock-based compensation plans


4,043


7,620


5,606Repurchase and retirement of common stock for restricted stock award withholdings


(368
)

(595
)

(244
)Excess tax benefits from stock-based awards


640


204


45Purchase of treasury stock


(3,890
)

(18,938
)

(22,670
)Net cash provided by (used in) financing activities


425


(11,709
)

(17,263
)Net change in cash and cash equivalents of discontinued operations





333


2,372Net increase (decrease) in cash and cash equivalents


16,564


(9,865
)

21,131Cash and cash equivalents, beginning of the year


25,658


35,523


14,392Cash and cash equivalents, end of the year

$
42,222

$
25,658

$
35,523Supplemental disclosure of cash flow information:Cash paid for interest

$


$


$
40Cash paid for income taxes

$
2,028

$
167

$
251


See accompanying notes to consolidated financial statements.

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

Note 1The Company

DTS, Inc. (the "Company") is a leading provider of high quality branded entertainment technologies, which are incorporated into an array of entertainment products by hundreds of
licensee customers around the world. The Company's core DTS digital multi-channel audio technology enables the delivery and playback of compelling surround sound and is currently used in a broad group
of product applications, including audio/video receivers, DVD players, Blu-ray Disc players, personal computers, car audio products, video game consoles, network capable televisions,
digital media players and home theater systems. In addition, the Company provides products and services to studios, radio and television broadcasters, game developers and other content creators to
facilitate the inclusion of compelling, realistic DTS-encoded soundtracks in movies, music, and broadcast entertainment content.

The
Company commenced operations in 1990 as Digital Theater Systems Corporation ("DTS Corp"). In 1993, DTS Corp became the general partner of Digital Theater Systems, L.P.,
a Delaware limited partnership ("the Partnership"). In 1994, the Partnership formed DTS Technology, LLC ("DTS Technology") to develop audio technologies for the consumer
electronics and other markets. On October 24, 1997, the Company completed a reorganization and tax-free exchange with the predecessor entities and was incorporated in Delaware. The
reorganization and formation of the
Company was accounted for as a transaction by entities under common control and was effected by each of the former stockholders and owners of DTS Corp, the Partnership and DTS Technology receiving an
ownership interest in the Company, represented by shares of common stock and warrants to acquire shares of common stock, substantially equivalent to their previous interests in DTS Corp, the
Partnership and DTS Technology. On July 9, 2003, the Company completed its initial public offering for the sale of 4,091 shares of common stock at a price to the public of $17.00 per share. All
of the shares of common stock sold in the offering were registered under the Securities Act of 1933, as amended (the "Securities Act") on a Registration Statement on Form S-1 (Reg.
No. 333-104761) that was declared effective by the Securities and Exchange Commission (the "SEC") on July 9, 2003 and a Registration Statement filed pursuant to
Rule 426(b) under the Securities Act that was filed on July 9, 2003 (Reg. No. 333-106920). In May 2005, the Company changed its name from Digital Theater
Systems, Inc. to DTS, Inc.

In
January 2007, the Company combined its cinema and digital Images businesses into a single business known as "DTS Digital Cinema." In February 2007, the Company's Board of Directors
approved a plan to sell DTS Digital Cinema to enable the Company to focus exclusively on licensing branded entertainment technology to the large and evolving audio, game console, personal computer,
portable, broadcast, and other markets. During the second quarter of 2008, the Company sold its cinema and digital images businesses in two separate transactions. For additional information, refer to
Footnotes 2 and 11 of the consolidated financial statements, "Significant Accounting Policies" and "Discontinued Operations", respectively.

On
December 31, 2008, the Company entered into an Asset Purchase Agreement with Neural Audio Corporation ("Neural") and its stockholders providing for the sale to the Company of
substantially all of Neural's assets used in the conduct of its audio technology business and certain patents and patent applications owned by such stockholders and the assumption by the Company of
certain liabilities of Neural. The sale was consummated the same day. For additional information, refer to Footnote 8 of the consolidated financial statements, "Business Combination."

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies



The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in
the United States of America ("GAAP") and pursuant to the rules and regulations of the SEC. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated.



During the first quarter of 2007, DTS Digital Cinema's assets and liabilities were classified as held for sale and its operations were
reported as discontinued operations. As a result, in 2007, the Company has reclassified its balance sheets and statements of operations for all periods presented in this report to reflect DTS Digital
Cinema as discontinued operations. In the statements of cash flows, the cash flows of discontinued operations are not separately classified or aggregated, and are reported in the respective categories
with those of continuing operations.

Assets
that were classified as held for sale were measured at the lower of their carrying amount or fair value less cost to sell and were not depreciated (amortized) while classified as
held for sale. Fair value of assets held for sale was based on estimates of future cash flows, which may have included expected proceeds to be received or the present value of estimated future cash
flows. Costs to sell were the direct incremental costs estimated to transact a sale. A loss was recognized for any initial or subsequent
write-down to fair value less cost to sell. A gain was recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously
recognized. For additional information, refer to Footnote 11 of the consolidated financial statements, "Discontinued Operations."

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



The preparation of financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates and assumptions, including those related to revenue
recognition, adequacy of allowance for doubtful accounts, valuation of long-lived assets, stock-based compensation and income taxes. The Company bases its estimates on historical and
anticipated results, trends and on various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for
making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty.
Actual results could differ from those estimates.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)



Certain prior period amounts have been reclassified to conform to current year presentation.



The Company considers all short-term highly liquid investments with an original maturity of three months or less, when
acquired, to be cash equivalents. Cash and cash equivalents consist of funds held in general checking accounts, money market accounts, bank certificates of deposit, municipal securities and United
States government and agency securities. Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value.



The Company considers, at the time that they are purchased, investments with maturities greater than three months, but less than one
year, to be short-term investments. Investments that have maturities of more than one year are classified as long-term investments. Investments classified as
available-for-sale are reported at fair value with unrealized gains or losses reported, net of tax, in accumulated other comprehensive income. Investments in debt securities
classified as held-to-maturity, consistent with the Company's intent, are reported at cost. All income generated from those investments are recorded to interest and other
income, net.

The
Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. Factors considered in determining whether a loss is temporary
include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to
hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Credit losses and other-than-temporary impairments declines in fair
value that are not expected to recover are charged to interest and other income, net.



The Company markets its products and services to consumer electronics product manufacturers in the United States and internationally.
Although the Company is generally subject to the financial well being of the consumer electronics industry, management does not believe that the Company is subject to significant credit risk with
respect to trade accounts receivable. Additionally, the Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses which, when realized, have generally been within the range of management's expectations.

Two
customers accounted for 15% and 13%, respectively, of revenues for the year ended December 31, 2009. One customer accounted for 19% of revenues for the year ended
December 31, 2008. Two customers accounted for 17% and 15%, respectively, of revenues for the year ended December 31, 2007. Two customers accounted for 26% and 10%, respectively, of
accounts receivable at December 31, 2009. Three customers accounted for 25%, 20% and 15%, respectively, of accounts receivable at December 31, 2008.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)

The
Company deposits its cash and cash equivalents in accounts with major financial institutions. At times, such U.S. investments may be in excess of federally insured limits. The
Company invests its short-term investments in accounts with major financial institutions, investment grade municipal securities and United States agency securities. The Company has not
incurred any significant losses on its investments.



The Company continually monitors customer payments and maintains a reserve for estimated losses resulting from its customers' inability
to make required payments. In determining the reserve, the Company evaluates the collectibility of its accounts receivable based upon a variety of factors. In cases where the Company becomes aware of
circumstances that may impair a specific customer's ability to meet its financial obligations, the Company records a specific allowance against amounts due. For all other customers, the Company
recognizes allowances for doubtful accounts based on its historical write-off experience in conjunction with the length of time the receivables are past due, customer creditworthiness,
geographic risk and the current business environment. Actual future losses from uncollectible accounts may differ from the Company's estimates.



Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the
straight-line method over the related assets' estimated useful lives, generally as follows:

Machinery and equipment

2 to 5 yearsSoftware

2 to 7 yearsOffice furniture and fixtures

3 to 7 yearsLeasehold improvements

Lesser of useful life or related lease termBuilding and improvements

Up to 35 years


Expenditures
that materially increase asset life are capitalized, while ordinary maintenance and repairs are expensed as incurred.



The Company capitalizes the costs of purchased software licenses, consulting costs and payroll-related costs incurred in developing or
implementing internal use computer software. These costs are included in property and equipment, net on the accompanying consolidated balance sheets. Costs incurred during the preliminary project and
post-implementation stages are charged to expense. The Company's capitalized software costs are amortized on a straight-line basis over the estimated useful life of the
software upon being placed in service, generally two to seven years.



The Company periodically assesses potential impairments to its long-lived assets in accordance with GAAP, which requires,
among other things, that an entity perform an impairment review whenever

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)

events
or changes in circumstances indicate that the carrying value may not be fully recoverable. Factors considered by the Company include, but are not limited to: significant underperformance
relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business; and
significant negative industry or economic trends. When the Company determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more
of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected
future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which
the carrying amount of the asset exceeds the fair market value of the asset, based on the fair market value if available, or discounted cash flows. To date, there has been no impairment of
long-lived assets for continuing operations.



The Company accounts for goodwill in accordance with GAAP which, among other things, establishes standards for goodwill acquired in a
business combination, eliminates the amortization of goodwill and requires the carrying value of goodwill and certain non-amortizing intangibles to be evaluated for impairment on an annual
basis. The Company considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test, as it operates as a
single reporting unit. If the carrying value of the assets and liabilities, including goodwill, were to exceed the Company's estimation of the fair value, the Company would record an impairment charge
in an amount equal to the excess of the carrying value of goodwill over the implied fair value of the goodwill. The Company performs an evaluation of goodwill as of October 31 of each year,
absent any indicators of earlier impairment, to ensure that impairment charges, if applicable, are reflected in our financial results before December 31 of each year. To date, there has been no
impairment of goodwill for continuing operations.

The
Company accounts for intangible assets in accordance with GAAP, which requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed
for impairment whenever events or changes in circumstances indicate an asset's carrying value may not be recoverable.
Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is
not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. The Company's intangible assets principally consist of acquired
technology and developed patents and trademarks, which are being amortized over their respective lives. To date, there has been no impairment of intangible assets for continuing operations.

Costs
incurred in securing patents and trademarks and protecting the Company's proprietary technology and brand name are capitalized. Patent and trademark costs are amortized over their
estimated useful lives, typically ten years and five years, respectively. The amortization period commences when the patent or trademark is issued.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)



For business combinations consummated prior to January 1, 2009, the Company used the purchase method of accounting, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." Accordingly, the assets and liabilities of the acquired entities were recorded at their
estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible
assets.

The
purchase price allocation process requires an analysis of the fair values of the assets acquired and the liabilities assumed. When a business combination agreement provides for an
adjustment to the cost of the combination contingent on future events, the Company includes that adjustment in the cost of the combination when the contingent consideration is determinable beyond a
reasonable doubt and can be reliably estimated and should not otherwise be expensed according to the provisions of SFAS No. 141. The results of operations of the acquired business are
included in the Company's consolidated financial statements from the respective date of acquisition.

For
additional information, refer to Footnote 8 of the consolidated financial statements, "Business Combination."

During
2009, the Company did not engage in any business combinations.



The Company recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services have been
rendered, the buyer's price is fixed or determinable and collection is reasonably assured.

Revenue
from licensing audio technology, trademarks and know-how is generated from licensing agreements with consumer electronics product manufacturers that pay a
per-unit license fee for products manufactured under those license agreements. Licensees generally report manufacturing information within 30 to 60 days after the end of the quarter
in which such activity takes place. Consequently, the Company recognizes revenue from these licensing agreements on a three-month lag basis, generally in the quarter following the quarter of
manufacture, provided amounts are fixed or determinable and collection is reasonably assured, since the Company cannot reliably estimate the amount of revenue earned prior to the receipt of such
reports. Use of this lag method allows for the receipt of licensee royalty reports prior to the recognition of revenue. Also, the Company is responsible for the licensing and enforcement of its
patented technologies and pursues third parties that are utilizing its intellectual property without a license or who have under-reported the amount of royalties owed under a license agreement with
it. As a result of these activities, from time to time, the Company may recognize royalty revenues that relate to infringements that occurred in 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. Differences between amounts initially recognized and amounts subsequently audited or
reported as an adjustment to those amounts due from licensees, will be recognized in the period such adjustment is determined or contracted, as appropriate.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)

Revenue
from the sale of multi-channel audio content is recorded upon delivery to retail accounts or end customers, assuming title and risk of loss has transferred to the customer,
prices are fixed or determinable, no significant Company obligations remain and collection of the related receivable is reasonably assured. The Company's shipping terms are customarily FOB shipping
point with title transfer and risk of loss transferring to the customer upon shipment.

Management
provides for returns on product sales based on historical experience and adjusts such reserves as considered necessary.

The
Company recognizes revenue net of unamortized discounts based on imputed interest for the time value of money when the payment terms extend beyond one year. The related accounts
receivable, net of unamortized discount, is classified as short or long-term, as appropriate, and the unamortized discount is recognized as interest income at a constant rate over the
duration of the payment terms.

Licensing
revenue is recognized gross of withholding taxes that are remitted by the Company's licensees directly to their local tax authorities. For the years ended December 31,
2009, 2008 and 2007, withholding taxes were $4,029, $3,491 and $2,061, respectively.



The Company conducts its R&D internally and expenses are comprised of the following types of costs incurred in performing research and
development activities: salaries and benefits, allocated overhead, contract services, consultants and other outside costs. In accordance with GAAP, all R&D costs are expensed as incurred.



For business combinations consummated prior to January 1, 2009, the value assigned to acquired in-process research
and development was determined by identifying specific acquired in-process research and development projects that would be continued and for which the fair value is estimable with
reasonable reliability. Upon consummation of a business combination, acquired in-process research and development is expensed where (i) technological feasibility has not been
established at the acquisition date and (ii) there is no alternative future use.

For
additional information, refer to Footnote 8 of the consolidated financial statements, "Business Combination."

During
2009, the Company did not engage in any business combinations.



The functional currency of one of the Company's wholly-owned subsidiaries is the currency of the primary economic environment in which
it operates. The assets and liabilities of this wholly-owned subsidiary are translated at the prevailing rate of exchange at the balance sheet date, while the results of operations are translated at
the average exchange rate in effect for the period. The translation adjustments resulting from translating the functional currency into United States dollars have been deferred as a component of
accumulated other comprehensive income in stockholders' equity.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)

The
functional currency of the Company's other wholly-owned subsidiaries is the United States dollar and accordingly, nonmonetary balance sheet accounts are remeasured with the
appropriate historical rates. All other balance sheet accounts are translated at the prevailing rate of exchange at the balance sheet date, while the results of operations are translated at the
average exchange rate in effect for the period. The gains and losses resulting from this remeasurement and translation are reflected in the determination of net income.

To
date, annual foreign currency translation adjustments, gains and losses have not been significant.



The Company accounts for comprehensive income (loss) in accordance with GAAP, and comprehensive income (loss), as defined, includes all
changes in stockholders' equity during a period from non-owner sources. To date, accumulated comprehensive income is comprised mostly of foreign currency translation.



Advertising and promotional costs are expensed as incurred and amounted to $2,744, $2,266 and $1,697 for the years ended
December 31, 2009, 2008 and 2007, respectively.



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



The Company issues restricted stock awards as part of its equity incentive plans. For a majority of the restricted stock awards
granted, the number of shares released on the date the restricted stock awards vest is net of the statutory withholding requirements that the Company pays to the appropriate taxing authorities on
behalf of its employees. The shares repurchased to satisfy the statutory withholding requirements are immediately retired.



The Company utilizes the asset and liability method of accounting for income taxes. Under this method, the deferred tax assets and
liabilities are measured each year based on the difference between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. Additionally, a valuation
allowance is recorded for that portion of deferred tax assets for which it is more likely than not that the assets will not be realized. In assessing the need for a valuation

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)

allowance,
the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and
recent financial performance. The deferred tax provision is the result of changes in the deferred tax assets and liabilities. The Company recognizes interest and penalties related to income taxes in
the provision for income taxes.



The carrying amount of cash, cash equivalents, short-term investments, accounts receivable, accounts payable and accrued
liabilities approximates fair value due to the short-term nature of these instruments.



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



Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") 105, "Generally Accepted Accounting Principles." ASC 105 establishes theFASB Accounting Standards Codification(the "Codification") as the
source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and
interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature
not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of SFASs, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it
will issue Accounting Standards Updates ("ASUs"). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information
about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification. As the
Codification was not intended to change or alter existing GAAP, it does not have a material impact on the Company's consolidated financial statements.

Effective
April 1, 2009, the Company adopted the FASB ASC 825-10-65, "Financial InstrumentsOverallTransition and Open Effective
Date Information." ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments in interim financial statements as well as in
annual financial statements and also amends ASC 270-10 to require those disclosures in all interim financial statements. The adoption of ASC 825-10-65 did not have
a material impact on the Company's consolidated financial statements.

Effective
April 1, 2009, the Company adopted FASB ASC 820-10-65, "Fair Value Measurements and DisclosuresOverallTransition and
Open Effective Date Information." ASC 820-10-65 provides

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)

additional
guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased, and it includes guidance on identifying circumstances that
indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not have a material impact on the Company's consolidated financial statements.

Effective
April 1, 2009, the Company adopted FASB ASC 320-10-65, "Investments-Debt and Equity
SecuritiesOverallTransition and Open Effective Date Information." ASC
320-10-65 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. ASC 320-10-65 does not amend existing
recognition and measurement guidance related to other-than-temporary impairments of equity securities. The adoption of ASC 320-10-65 did not have a
material impact on the Company's consolidated financial statements.

In
April 2009, the FASB issued updated guidance related to business combinations, which is included in the FASB ASC 805-20, "Business CombinationsIdentifiable
Assets and Liabilities, and any Noncontrolling Interest." ASC 805-20 amends the provisions in ASC 805 for the initial recognition and measurement, subsequent measurement and accounting,
and disclosures for assets and liabilities arising from contingencies in business combinations. In circumstances where the acquisition-date fair value for a contingency cannot be
determined during the measurement period and it is concluded that it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated, a contingency
is recognized as of the acquisition date based on the estimated amount. ASC 805-20 is effective for contingent assets and contingent liabilities acquired in business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of the Company's adoption of
ASC 805-20 will depend upon the nature, terms and magnitude of acquired contingencies associated with future business combinations, if any.

Effective
April 1, 2009, the Company adopted FASB ASC 855, "Subsequent Events." ASC 855 was issued in order to establish principles and requirements for reviewing and reporting
subsequent events and requires disclosure of the date through which subsequent events are evaluated and whether the date corresponds with the time at which the financial statements were available for
issue (as defined) or were issued. In February 2010, the FASB issued ASU 2010-09, "Subsequent Events." ASU 2010-09 was issued to amend ASC 855 to remove the requirement for SEC
filers to disclose the date through which an entity has evaluated subsequent events. This change is intended to alleviate potential conflicts with current SEC guidance. For the Company, the provisions
of ASU 2010-09 are effective upon issuance. The adoption of ASC 855 and ASU 2010-09 did not have a material impact on the Company's consolidated financial statements.

In
December 2009, the FASB issued ASU 2009-17, "Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities," which codifies
SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)," issued in June 2009. ASU 2009-17 will amend certain provisions of ASC 810 related to the consolidation of
variable interest entities ("VIE"). ASU 2009-17 will replace the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a
VIE with an approach focused on identifying which enterprise has the power to direct the activities of the VIE that most significantly impact the VIE's

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 2Significant Accounting Policies (Continued)

economic
performance and the obligation to absorb the losses of the VIE or right to receive benefits from the VIE that could potentially be significant to the VIE. ASU 2009-17 will also
require ongoing reassessments of whether an enterprise is the primary beneficiary. ASU 2009-17 will be effective for the first annual and interim reporting periods beginning after
November 15, 2009. The Company is currently evaluating the future impact of this new accounting update on its consolidated financial statements.

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

In
January 2010, the FASB issued ASU 2010-6, "Fair Value Measurements and Disclosures: Improving Disclosures About Fair Value Measurements," which requires entities to make
new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on
purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-6 is effective for annual reporting periods
beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The Company is currently
evaluating the future impact of this new accounting update on its consolidated financial statements.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 3Cash and Investments

Cash and investments consist of the following:

As of December 31,2009

2008Cash and cash equivalents:Cash

$
28,424

$
10,801Money market accounts


13,293


12,101Certificates of deposit





2,756Municipal securities


255


United States government and agency securities


250


Total cash and cash equivalents

$
42,222

$
25,658Short-term investments:Available-for-sale securities:Municipal securities

$


$
2,950Held-to-maturity securities:Certificates of deposit


2,470


4,772Commercial paper


5,303


3,980United States government and agency securities


15,245


7,070Municipal securities


10,111


23,593Total short-term investments

$
33,129

$
42,365Long-term investments:Available-for-sale securities:Municipal securities

$
2,250

$
2,250Held-to-maturity securities:Certificates of deposit


1,248


Commercial paper


3,720


Municipal securities


1,297


4,097Total long-term investments

$
8,515

$
6,347


The
Company had no material gross realized or unrealized holding gains or losses from its investments in securities classified as available-for-sale or
held-to-maturity for the years ended December 31, 2009, 2008 and 2007.

Investments
in auction rate securities are classified as available-for-sale. For additional information, refer to Footnote 4 of the consolidated financial
statements, "Fair Value Measurements."

In
the first quarter of 2007, the Company's management identified an error in its accrued interest income balances related to 2005 and 2006 that was corrected during the first quarter of
2007. The correction had the effect of reducing short-term investments and decreasing interest income by $660. The correction decreased 2007 income from continuing operations before income
taxes by $660 and income from continuing operations by $500. Although this correction was an out-of-period adjustment, the Company's management determined that the effect on
previously filed reports was not material.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 3Cash and Investments (Continued)

The
contractual maturities of investments at December 31, 2009 are as follows:

Available-for-sale securities:Due after ten years

$
2,250Held-to-maturity securities:Due within one year


33,129Due after one year through five years


6,26539,394Total investments

$
41,644


Note 4Fair Value Measurements

As of December 31, 2009 and 2008, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These financial assets are the
Company's auction rate security instruments, which are classified as available-for-sale investments. The auction rate securities held at December 31, 2009 and 2008 are
tax-exempt municipal bonds issued by governmental entities located within the United States that are insured and have a AAA rating.

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

On
October 24, 2008, the Company accepted an offer from UBS AG ("UBS") to liquidate its auction rate securities held in UBS accounts on February 13, 2008. The terms or
rights of the UBS offer were publicly filed in a prospectus, dated October 7, 2008. As of December 31, 2009 and 2008, the Company owned $2,250 and $5,200, respectively, par value of
these securities. From January 2, 2009 and ending January 4, 2011, the Company has the right, but not the obligation, to sell, at par, these auction rate securities to UBS, and such a
transaction would be initiated by UBS. Prior to January 4, 2011, the Company will continue to earn and receive all interest that is payable for these auction rate securities. Furthermore, prior
to January 4, 2011, UBS, at its sole discretion, may sell, or otherwise dispose of, and/or enter orders in the auctions process with respect to these securities on the Company's behalf so long
as it receives par value for the auction rate securities sold. UBS has also agreed to use its best efforts to facilitate issuer redemptions and/or to resolve the liquidity concerns of holders of their
auction rate securities through restructurings and other means. In addition, UBS has agreed to provide "no net cost" loans to holders of the illiquid securities that are subject to bank repurchase,
thereby providing the Company with short-term liquidity on its auction rate securities portfolio at no additional cost. As a result of this arrangement with UBS, the Company believes that
it has Level 2 inputs within the fair value hierarchy as of December 31, 2009 and 2008, and par value or cost is a reasonable approximation of fair value.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 4Fair Value Measurements (Continued)

Due
to the Company's belief that it may take until January 2011 to liquidate the remaining securities, its auction rate security instruments have been classified as long-term
investments on the consolidated balance sheet as of December 31, 2009 and 2008.

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

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

Fair Value Measurements at
Reporting Date UsingAuction Rate Securities

Total

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

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)As of December 31, 2009

$
2,250

$


$
2,250

$
As of December 31, 2008

$
5,200

$


$
5,200

$



Note 5Property and Equipment

Property and equipment consist of the following:

As of December 31,2009

2008Land(1)

$
6,600

$
6,600Building and improvements(1)


19,946


10,704Machinery and equipment


2,647


1,796Office furniture and fixtures


5,300


4,841Leasehold improvements


1,156


3,554Software


5,608


5,18441,257


32,679Less: Accumulated depreciation


(7,372
)

(8,901
)Property and equipment, net

$
33,885

$
23,778


(1)On
November 7, 2008, the Company purchased certain real property in Calabasas for an aggregate purchase price of $15,640. This property includes an
approximately 89,000 square foot building, and beginning in November 2009, the Company is using this building as its new corporate headquarters. Also, depreciation expense for this building and
related improvements have begun as of November 2009.


Depreciation
expense was $2,281, $2,042 and $1,931 for the years ended December 31, 2009, 2008 and 2007, respectively.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 6Goodwill and Intangibles

In the year ended December 31, 2008, the Company added $972 to goodwill in connection with the business acquisition from Neural. As a result of purchase price adjustments during
2009, the goodwill
from this business acquisition was $1,257 at December 31, 2009. For additional information, refer to Footnote 8 of the consolidated financial statements, "Business Combination."

Included
in cost of revenue were $1,031, $362 and $175 of amortization relating to existing technologies for the years ended December 31, 2009, 2008 and 2007, respectively.
Included in operating expenses were $516, $268 and $354 of amortization relating to existing technologies, patents and trademarks for the years ended December 31, 2009, 2008 and 2007,
respectively. The following table summarizes the weighted average lives and the carrying values of the Company's acquired intangible and other intangible assets by category:

As of December 31, 2009

As of December 31, 2008Weighted
Average
Life
(Years)Gross
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Amount

Accumulated
Amortization

Net
Carrying
AmountAcquired intangible assets:Existing technology


6

$
6,276

$
(2,367
)
$
3,909

$
6,027

$
(1,332
)
$
4,695Customer relationships


7


1,050


(150
)

900


1,050





1,050Non-compete


3


515


(172
)

343


515





515Tradename


3


190


(63
)

127


190





1908,031


(2,752
)

5,279


7,782


(1,332
)

6,450Other intangible assets:Patents


10


1,502


(557
)

945


1,261


(475
)

786Trademarks


5


469


(128
)

341


421


(100
)

3211,971


(685
)

1,286


1,682


(575
)

1,107Total intangible assets




$
10,002

$
(3,437
)
$
6,565

$
9,464

$
(1,907
)
$
7,557


The
Company expects the future amortization of intangible assets held at December 31, 2009 to be as follows:

Years Ending December 31,

Estimated
Amortization
Expense2010

$
1,5462011


1,4162012


1,0862013


9082014


8592015 and thereafter


750Total

$
6,565


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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 7Accrued Expenses and Other Current Liabilities

Accrued expenses consist of the following:

As of
December 31,2009

2008Accrued payroll and related benefits

$
3,969

$
4,482Production advance


383


385Other


1,354


2,291Total accrued expenses

$
5,706

$
7,158


Note 8Business Combination

On December 31, 2008, the Company and its wholly-owned subsidiaries, DTS Washington LLC and DTS (BVI) Limited, entered into an Asset Purchase Agreement (the "Agreement")
with Neural Audio Corporation (the "Seller") and its stockholders providing for the sale of substantially all of the Seller's assets used in the conduct of its audio technology business to the Company
and certain patents and patent applications owned by such stockholders (the "Acquired Assets") and the assumption by the Company of certain liabilities of the Seller. The sale was consummated the same
day. Pursuant to the terms of the Agreement, the Company paid cash consideration of approximately $7,500 at closing and may be obligated to pay up to an additional $7,500 in additional cash
consideration over the next five years based on performance of certain of the Acquired Assets. The Agreement contains customary representations, warranties and covenants.

On
July 21, 2009, the Company and its wholly-owned subsidiaries, DTS Washington LLC and DTS (BVI) Limited, entered into a Settlement Agreement (the "Settlement Agreement")
with the Seller and its stockholders providing that $450 be paid to the Company, as the working capital conveyed to the Company was less than the threshold required by the Agreement. The $450
settlement reduced goodwill accordingly.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 8Business Combination (Continued)

On
November 30, 2009, the Company and its wholly-owned subsidiaries, DTS Washington LLC and DTS (BVI) Limited, entered into an Earnout Buyout And Escrow Release Agreement
(the "Buyout and Release Agreement") with the Seller and its stockholders providing that the Company buyout all contingent consideration obligations for $500, as it was independently concluded by both
parties to be in their respective best interests. This $500 payment increased goodwill accordingly. The Buyout and Release Agreement also provided that the cash consideration paid at closing that
remained in escrow be remitted to the Seller as soon as possible.

The
total purchase price for the acquisition of the Acquired Assets and the assumption by the Company of certain liabilities of the Seller is as follows:

Cash

$
7,550Direct acquisition costs


222Total estimated purchase price

$
7,772


This
acquisition was accounted for as a purchase business combination in accordance with SFAS No. 141. Under the purchase method of accounting, the total purchase price is
allocated to the acquired business' net tangible and intangible assets based on their estimated fair value as of the date of completion of the acquisition. Based on the purchase price and the
valuation, the purchase price allocation is as follows:

Accounts receivable

$
127Prepaid assets


5Tangible assets


180Other assets


9Amortizable intangible assets:Existing technology


3,600Customer relationships


1,050Non-compete


515Tradename


190IPR&D


1,090Goodwill


1,257Total assets acquired


8,023Liabilities assumed:Accounts payable


217Accrued liabilities


34Total liabilities assumed


251Total purchase price

$
7,772


A
final estimate of $5,355 has been allocated to amortizable intangible assets consisting of existing technology, customer relationships, non-compete and tradename.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 8Business Combination (Continued)

A
final estimate of $1,257 has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair market value of the net tangible and amortizable intangible
assets acquired. Goodwill will not be amortized, and it will be tested for impairment at least annually. The goodwill estimate increased $285 during the twelve months ended December 31, 2009 as
a result of the aforementioned Settlement and Buyout and Release Agreements, net of additional information relating to the fair value of certain assets and liabilities and the aforementioned
additional direct acquisition costs.

The
purchase price and the valuation of the net assets acquired have been finalized as of December 31, 2009 or one year from the date of acquisition.

IPR&D,
relating to development projects which had not reached technological feasibility and that were of no future alternative use, was expensed upon consummation of the acquisition.
Other identifiable intangible assets are being amortized over the following estimated economic useful lives:

Estimated Useful
Life (Years)Existing technology


7Customer relationships


7Non-compete


3Tradename


3


Developed
technology and IPR&D were identified and valued through extensive interviews, analysis of data provided by Neural concerning development projects, their stage of development,
the time and resources needed to complete them, if applicable, and their expected income generating ability and associated risks. Where development projects had reached technological feasibility, they
were classified as developed technology and the value assigned to developed technology was capitalized. The income approach, which includes an analysis of the cash flows and risks associated with
achieving such cash flows, was the primary technique utilized in valuing acquired IPR&D. Key assumptions for IPR&D included a discount rate of 55% and estimates of revenue growth, cost of sales,
operating expenses and taxes.

Note 9Commitments and Contingencies

Office facilities and certain office equipment are leased under operating leases expiring in various years through 2029. Some leases contain renewal options and escalation clauses
including increases in

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 9Commitments and Contingencies (Continued)

annual
rents based upon increases in the consumer price index. Minimum future rental payments under non-cancelable operating leases, net of sublease income, are as follows:

Years Ending December 31,2010

$
8242011


6382012


5142013


5112014


4912015 and thereafter


1,962$
4,940


Rent
expense amounted to $1,436, $1,145 and $1,046 for the years ended December 31, 2009, 2008 and 2007, respectively.

During
its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain
transactions. Those indemnities include intellectual property indemnities to the Company's customers in connection with the sale of its products and the licensing of its technology, indemnities for
liabilities associated with the infringement of other parties' technology based upon the Company's products and technology, and indemnities to directors and officers of the Company to the maximum
extent permitted under the laws of the State of Delaware. 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. To date, the Company has not been required to make
any payments and has not recorded any liability for these indemnities, commitments and guarantees in the accompanying balance sheets. The Company does, however, accrue for losses for any known
contingent liability, including those that may arise from indemnification provisions, when future payment is probable.

In
the normal course of business, the Company is subject to certain claims and litigation, including unasserted claims. The Company is of the opinion that, based on information presently
available, the outcome of any such legal matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 10Income Taxes

United States and foreign income (loss) before taxes and details of the provision for income taxes are as follows:

Years Ended December 31,2009

2008

2007United States

$
2,579

$
2,734

$
14,512Foreign


16,636


13,935


400Income before income taxes

$
19,215

$
16,669

$
14,912Current:Federal

$
999

$
1,012

$
1,305State


1,268


143


2Foreign


6,567


4,608


2,329Total current


8,834


5,763


3,636Deferred:Federal


(48
)

1,801


1,476State


(26
)

(633
)

416Foreign


(235
)

227


(218
)Total deferred


(309
)

1,395


1,674Provision for income taxes

$
8,525

$
7,158

$
5,310


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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 10Income Taxes (Continued)

The
components of temporary differences that gave rise to deferred income tax are as follows:

As of December 31,2009

2008Deferred tax assets:Accrued revenues

$
1,384

$
950Net operating loss carryforwards


6,121


8,056Capital loss carryforwards


537


511Inventory


196


341Credit carryforwards


5,344


4,980Deferred revenue





23Stock-based compensation


3,630


2,568Accruals, reserves and other


1,930


824Acquired intangibles


593


437Total gross deferred tax assets


19,735


18,690Valuation allowance


(537
)

(511
)Total deferred tax assets


19,198


18,179Deferred tax liabilities:Depreciation and amortization


1,101


390Deferred tax assets, net

$
18,097

$
17,789Current deferred tax assets

$
4,945

$
4,644Non-current deferred tax assets (liabilities), net


13,152


13,145Deferred tax assets, net

$
18,097

$
17,789


Other
than the valuation allowance for a capital loss carryforward, there was no valuation allowance for deferred tax assets of $18,097 and $17,789 at December 31, 2009 and 2008,
respectively, based on
management's assessment of the Company's ability to utilize these deferred tax assets. Realization of the net deferred tax assets is dependent on the Company generating sufficient taxable income in
the future. Although realization is not assured, the Company believes it is more likely than not that the deferred tax assets will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the future if estimates of future taxable income are reduced.

At
December 31, 2009, the Company had approximately $39,254 in tax loss carryforwards. These tax loss carryforwards consist of federal and state net operating losses of $28,272
and $10,982, respectively, and begin to expire in 2027 and 2017, respectively. Included in these tax loss carryforwards are stock-based compensation deductions that, when fully utilized, reduce cash
income taxes and will result in a financial statement income tax benefit of $4,535. The future income tax benefit, if realized, will be recorded to additional paid-in capital. The Company
follows the with-and-without approach for determining when the stock-based compensation deductions are considered realized. At December 31, 2009, the Company had foreign
tax credit carryforwards of $3,692, which begin to expire in 2015, and research and development and other credits of $1,652, which begin to expire in 2023.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 10Income Taxes (Continued)

The
income tax provision excludes the current year income tax deductions related to the issuance of common stock from the exercise of stock options for which no compensation expense was
recorded for accounting purposes or for which the income tax deduction exceeded the expense recorded for accounting purposes.

The
provision for income taxes differs from the amount obtained by applying the federal statutory income tax rate to income before provision for income taxes as follows:

Years Ended
December 31,2009

2008

2007Statutory federal rate


35.0
%

35.0
%

35.0
%State income taxes, net


3.1


3.3


2.8Effect of varying foreign rates


(2.0
)

(1.0
)

10.0Extraterritorial income exclusion








(6.6
)Tax exempt interest


(0.7
)

(3.7
)

(6.4
)Equity based compensation expense


1.6


1.8


2.3Research and development credits


(1.0
)

(0.4
)

(2.5
)Unrecognized tax benefits


9.4


6.9


Other


(1.0
)

1.0


1.0Effective tax rate


44.4
%

42.9
%

35.6
%


The
Company had not provided for United States income taxes or foreign withholding taxes in its effective tax rate on approximately $29,115 of undistributed earnings from its foreign
subsidiaries as of December 31, 2009. The Company intends to reinvest these earnings indefinitely in operations outside of the United States.

For
the tax year ended December 31, 2007, the Company was entitled to a reduced tax rate of 18% on income in China based on achieving "high-tech" status. As a result
of changes in Chinese corporate income tax laws effective January 1, 2008, the Company is subject to a corporate income tax rate of 25% for 2008 and 2009. The tax holiday and reduced rate
resulted in a reduction to income taxes of $39 for the year ended December 31, 2007.

Effective
January 1, 2007, the Company adopted guidance related to uncertain tax positions. The Company has also applied certain guidance to clarify when a tax position has been
settled. Upon adoption of the guidance related to uncertain tax positions, the Company recognized a $547 increase in tax reserves, which was accounted for as a reduction of $547 in the beginning
retained earnings.

Other
long-term liabilities at December 31, 2009 and 2008, includes unrecognized tax benefits of $5,578 and $3,477, respectively, for both domestic and foreign issues.
The net increase of $2,101 was due primarily for uncertainties relating to the Company's imputed interest on inter-company balances, transfer pricing with its foreign licensing subsidiaries and the
California franchise tax sourcing methodology. The Company believes that its accruals for uncertain tax positions are adequate for all open years, based on the assessment of many factors including
past experience and interpretations of tax law applied to the facts of each matter. Inherent uncertainties exist in estimating accruals for

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 10Income Taxes (Continued)

uncertain
tax positions due to the progress of income tax audits and changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems.

In
the first quarter of 2009, the Company's management identified an adjustment in its reserve for unrecognized tax benefits. This adjustment primarily related to imputed interest on
inter-company balances for the years 2003 through 2008, that was recorded during the quarter. The adjustment had the effect of increasing income tax expense in the quarter by $882. The adjustment has
decreased income from continuing operations by $882 and net income by $882. The Company's management determined that the effect on previously filed reports was not material.

Upon
the Company's adoption of guidance related to uncertain tax positions during the first quarter of 2007, its liability for uncertain tax positions was $1,392, which was recorded in
other long-term liabilities. At December 31, 2009 and 2008, the Company's liability for uncertain tax positions increased to $5,578 and $3,477, respectively, which was recorded in
other long-term liabilities. This amount consists of $5,523 and $3,468, respectively, for unrecognized tax benefits and $55 and $9, respectively, for accruals related to the payment of
interest. The increase in unrecognized tax benefits during the year ended December 31, 2009 was primarily attributable to uncertain tax positions relating to the Company's imputed interest on
inter-company balances, transfer pricing positions taken with respect to the Company's foreign subsidiaries and the California franchise tax sourcing methodology. These unrecognized tax benefits would
affect the Company's effective tax rate if recognized. At the end of 2009, there was an immaterial liability for uncertain tax positions for the possible payment of interest and penalties. The Company
is under audit by tax authorities. While the Company believes that it has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than our accrued
position. Accordingly, the Company's provision on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying
matters are settled or otherwise resolved. As of December 31, 2009, the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase
or decrease within the next twelve months.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 10Income Taxes (Continued)

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the years ended December 31, 2007, 2008 and 2009.

Unrecognized
Tax BenefitsBalance at January 1, 2007

$
1,392Additions for tax positions of prior years


390Additions for tax positions of the current year


592Settlements


(227
)Balance at December 31, 2007


2,147Additions for tax positions of prior years


1,153Additions for tax positions of the current year


228Settlements


(60
)Balance at December 31, 2008


3,468Additions for tax positions of prior years


1,314Additions for tax positions of the current year


741Balance at December 31, 2009

$
5,523


The
Company may, from time to time, be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the
Company's financial results.

The
Company, or one of its subsidiaries, files income tax returns in the U.S. and other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal
income tax examinations by tax authorities for the years prior to 2004. The Internal Revenue Service is examining the Company's 2005 through 2007 federal income tax returns. However, the scope also
includes certain prior period carryforwards. In addition, the California Franchise Tax Board is conducting a state tax examination for the years 2004 and 2005. Judgment is required in determining the
consolidated provision for income taxes as the Company considers its worldwide taxable earnings and the impact of the audit process conducted by various tax authorities. The final outcome of these
audits by foreign jurisdictions, the Internal Revenue Service and various state governments could differ materially from that which is reflected in the Consolidated Financial Statements.

Note 11Discontinued Operations

On April 4, 2008, the Company, DTS Digital Images, Inc., a wholly-owned subsidiary of the Company ("DI"), and Reliance Big Entertainment Private Limited ("Reliance"),
entered into a Stock Purchase Agreement providing for the sale of DI by the Company to Reliance. The sale was consummated the same day. Pursuant to the terms of the Stock Purchase Agreement, the
Company received cash consideration of approximately $7,500. The Agreement contains customary representations, warranties and covenants. As a result of this transaction and in conjunction with the
previous carrying value adjustments, the Company realized a pre-tax gain of $21 during the three months ended June 30, 2008, reported in income from discontinued operations, net of
tax. During a transition period from the sale date and ending prior to June 30, 2008, the Company provided certain

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 11Discontinued Operations (Continued)

transition
services to Reliance related to DI. The Company has concluded that the direct cash flows resulting from these transition services were not material, and the Company did not have any
continuing ownership interest or other influence over DI during this period.

On
May 9, 2008, the Company, Beaufort California, Inc. ("Beaufort") and Beaufort International Group Plc. entered into an Asset Purchase Agreement (the "DC
Agreement") providing for the sale of substantially all of the Company's assets used predominantly in the conduct of its digital cinema business ("DC business") to Beaufort and the assumption by
Beaufort of certain liabilities of the DC business. The sale was consummated the same day. Pursuant to the terms of the DC Agreement, the Company received cash consideration of approximately
$3,250 upon the closing of this sale, and it could receive an additional $11,750 in additional consideration. For the purposes of measuring the pre-tax loss on this sale, the Company has
not attributed any fair value to the additional consideration. As a result of this transaction and in conjunction with the previous carrying value adjustments, the Company realized a
pre-tax loss of $2,120 during the three months ended June 30, 2008, reported in income from discontinued operations, net of tax. This pre-tax loss results primarily from
settlement and severance obligations of the Company and working capital adjustments that were determined subsequent to the closing of this sale, in addition to losses from operations during the period
from April 1, 2008 through the closing of this sale. Continuing cash flows from discontinued operations subsequent to June 30, 2008, resulted from certain income tax adjustments, the
resolution of certain estimated costs associated with the sale and other
expenses. As further relevant information becomes available relating to the contingent consideration or further obligations of the Company, if any, additional adjustments and expenses may be recorded
through discontinued operations in future periods.

In
presenting discontinued operations, general corporate overhead expenses that have been allocated historically to DTS Digital Cinema for segment presentation purposes are not included
in discontinued operations. The following table presents revenue and expense information for the discontinued operations of DTS Digital Cinema for the years ended December 31, 2009, 2008 and
2007.

For the Years Ended
December 31,2009

2008

2007Revenue

$


$
6,214

$
21,583Pre-tax loss


(141
)(1)

(768
)(2)

(41,662
)(4)Income tax benefit


(53
)

(2,624
)(3)

(11,621
)Income (loss) from discontinued operations, net of tax

$
(88
)
$
1,856

$
(30,041
)


(1)The
loss from discontinued operations resulted primarily from legal fees associated with the Company's efforts to collect certain amounts due and contingent
consideration from Beaufort.


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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 11Discontinued Operations (Continued)

(2)Includes
a pre-tax loss of $2,099 from the sales of the DI and DC businesses. Also includes a carrying value write up of $4,963 to increase the
carrying value of the assets held for sale to fair value less costs to sell. For additional information, see the "Adjustment to Carrying Value of Assets Held for Sale" discussion below.(3)Includes
the correction of prior period errors that the Company determined were not material to the prior or current year financial statements. For
additional information, see the "Correction of Error" discussion below.(4)Includes
charge of $24,653 to reduce the carrying value of the assets held for sale to fair value less costs to sell. For additional information, see the
"Adjustment to Carrying Value of Assets Held for Sale" discussion below.


For
the year ended December 31, 2008 and 2007, $287 and $3,191, respectively, of depreciation and amortization was not expensed due to the cessation of such expenses upon DTS
Digital Cinema being classified as held for sale.



As a part of the Company's quarterly reassessment of the carrying value of the assets of its cinema and digital images businesses at
December 31, 2007, it had determined that several factors had converged to cause deterioration in the fair value of these assets and accordingly, the Company reduced the carrying value of these
assets held for sale to fair value, less costs to sell. The Company's estimate of fair value reflected expected proceeds to be realized from potential buyers in a future sale, which it believed was
the current market value of these assets. In the fourth quarter of 2007, the Company recognized a charge of $24,653, before any related tax effect, to reflect these assets at their fair value, less
costs to sell. This charge was recorded in the results of discontinued operations, and it reduced the carrying values of goodwill, intangible assets and fixed assets by $3,585, $16,381 and $4,687,
respectively.

Assets
held for sale with a carrying amount of $5,387 were written up to their fair value of $10,750, less costs to sell of $400 (or $10,350), resulting in an adjustment to carrying
value of assets held for sale of $4,963, which was included in the results of discontinued operations for the three months ended
March 31, 2008. The Company's estimate of fair value reflected expected proceeds to be realized from potential buyers in a future sale, which it believed was the current market value of these
assets.



In the second quarter of 2008, errors were identified in the Company's income tax provision and benefit related to discontinued
operations for the quarters ended December 31, 2007 and March 31, 2008, respectively. These errors were related to the tax effects of the adjustments to the carrying value of assets of
discontinued operations held for sale and were recognized in discontinued operations for those periods. These errors were corrected during the second quarter of 2008, the period in which the errors
were identified and these assets were disposed. The correction of these errors had no effect on results of continuing operations in any reporting period.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 11Discontinued Operations (Continued)

The
error originating in the fourth quarter of 2007 had the effect of increasing the 2007 loss from discontinued operations and net loss and understating short-term deferred
tax assets by $1,800. The error overstated the basic and diluted loss from discontinued operations and net loss per share by $0.10. The errors and their correction are solely the result of the
originations and reversals of deferred tax differences. The Company concluded that the errors were not material to the consolidated financial statements for 2007 and are not material to the results
for the full year 2008, and as such, corrected these errors in the second quarter of 2008. The impact for the full year 2008 was to increase income from discontinued operations and net income by
$1,800.

Note 12Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with GAAP and SEC guidance which requires the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors in the financial statements.

The
Company's stock-based compensation cost and related income tax benefit for the years ended December 31, 2009, 2008 and 2007 were as follows:

For the Years Ended
December 31,2009

2008

2007Stock-based compensation cost:Cost of revenue

$
19

$
12

$
23Selling, general and administrative


4,831


3,760


2,592Research and development


800


569


485Total continuing operations


5,650


4,341


3,100Discontinued operations





314


1,913Total stock-based compensation cost

$
5,650

$
4,655

$
5,013Income tax benefit

$
2,302

$
1,897

$
2,043




In 1997, the Company adopted a stock option plan (the "1997 Plan") for eligible employees, directors and consultants. In 2002, the
Company adopted a stock option plan (the "2002 Plan") for management and certain key employees. Options granted under the plans may be incentive stock options intended to satisfy the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder, or non-qualified options. Options generally become exercisable over a
four-year period and expire in ten years. The total number of shares of common stock that may be issued under both plans amounted to a maximum of 2,071. Options granted prior to 2002 were
granted at exercise prices equal to the preferred stock financing prices, which were in excess of the estimated fair value of the underlying common stock.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 12Stock-Based Compensation (Continued)

In
April 2003, the Company adopted the 2003 Equity Incentive Plan (the "2003 Plan") under which an additional 929 shares were authorized for future issuances of common stock.
Additionally, the shares available for issuances of common stock options under the 1997 and 2002 Plans were transferred to the 2003 Plan for future issuances of common stock options. The 2003 Plan
contains a provision (the "Evergreen Provision") for an automatic increase in the number of shares available for grant starting January 1, 2004 and each January thereafter until and including
January 1, 2013, subject to certain limitations, by a number of shares equal to the lesser of: (i) four percent of the number of shares issued and outstanding on the immediately
preceding December 31, (ii) 1,500 shares, or (iii) a number of shares set by the Board of Directors.



The fair value of each employee option grant is estimated on the date of the grant using the Black-Scholes option pricing model with
the following weighted average key assumptions:

Years Ended
December 31,2009

2008

2007Risk free interest rate


1.6
%

1.9
%

4.7
%Expected lives (years)


3.7


3.8


5.6Dividend yield


0
%

0
%

0
%Expected volatility


50
%

45
%

56
%


The
dividend yield was not calculated because the Company does not currently expect to pay a dividend. The expected life of the options granted was derived from the historical activity
of the Company's options and represented the period of time that options granted were expected to be outstanding. During 2007, expected volatility was based on a blend of the historical volatility of
the Company's common stock and publicly traded peer companies, and beginning in 2008, expected volatility was based on the historical volatility of the Company's common stock. The
risk-free interest rate was the average interest rates of U.S. government bonds of comparable term to the options on the dates of the option grants.

During
2007, the Company's estimate of certain assumptions for input into the Black-Scholes option pricing model considered certain actuarial calculations. These considerations were
determined appropriate for this period due to the Company's limited history as a publicly traded company and its limited relevant historical information to support the expected sale and exercise
behavior of its employees who had been granted options. Beginning in 2008 and in conformity with GAAP and SEC guidance, the Company began estimating certain assumptions for input into the
Black-Scholes model without certain actuarial calculations. The Company also began to estimate the expected term and volatility assumptions based upon the historical behavior of its employees and its
own historical stock price activity, respectively. The Company believes that these changes in accounting estimates provide a better estimate of future option and stock price activity patterns. The
impact of these changes in accounting estimates are reductions in the expected term and volatility assumptions for input into the Black-Scholes option pricing model. The Company will continue to
review its estimates and assumptions in conformity with GAAP and SEC guidance. Changes in the Company's estimate of the

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 12Stock-Based Compensation (Continued)

assumptions
for input into the Black-Scholes option pricing model could result in material increases or decreases in stock-based compensation costs.

There
were 510, 381 and 152 options granted during the year ended December 31, 2009, 2008 and 2007, respectively. The weighted-average grant-date fair value of options
granted during the year ended December 31, 2009, 2008 and 2007 was $6.64, $8.26 and $13.08, respectively. Compensation expense for stock options was $2,859, $2,544 and $2,859 for the years
ended December 31, 2009, 2008 and 2007, respectively.

The
following table summarizes information about stock option activity during the year ended December 31, 2009:

Options
Outstanding

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Life (Years)

Aggregate
Intrinsic
ValueOptions outstanding at December 31, 2008


1,684

$
18.36Granted


510


16.92Exercised


(184
)

16.81Expired or cancelled


(13
)

19.44Options outstanding at December 31, 2009


1,997

$
18.13


6.58

$
32,105Options exercisable at December 31, 2009


1,144

$
17.59


5.11

$
19,022


The
aggregate intrinsic value of options exercised during the year ended December 31, 2009, 2008 and 2007 was $2,510, $7,038 and $7,654, respectively. As of December 31,
2009, total remaining unearned compensation related to unvested stock options was approximately $4,435, which will be amortized over the weighted-average remaining service period of 1.3 years.

In
accordance with the Evergreen Provision in the 2003 Plan and as approved by the Board of Directors, effective January 1, 2009, the number of shares reserved under the 2003 Plan
was increased by 375 shares.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 12Stock-Based Compensation (Continued)



Compensation expense on shares of restricted stock was $2,350, $1,832 and $1,436 for the years ended December 31, 2009, 2008 and
2007. The following table summarizes information about restricted stock activity during the year ended December 31, 2009:

Number of Shares

Weighted-
Average
Grant-Date
Fair ValueUnvested stock at December 31, 2008


240

$
22.99Granted


140


17.70Vested


(75
)

23.78Forfeited


(10
)

22.38Unvested stock at December 31, 2009


295

$
20.29


As
of December 31, 2009, total remaining unearned compensation related to restricted stock was $3,973, which will be amortized over the weighted-average remaining service period
of 1.3 years.



On April 17, 2003, the Company adopted the 2003 Employee Stock Purchase Plan and the 2003 Foreign Subsidiary Employee Stock
Purchase Plan ("ESPP"), under which, subject to certain limitations, the initial aggregate number of shares of stock that may be issued is 500, with a provision (the "Evergreen Provision") that
provides for an automatic increase in the number of shares available for issuance on January 1, 2004 and each January 1 thereafter until and including January 1, 2013 by the
lesser of: (i) 500 shares, (ii) one percent of the number of shares of all classes of common stock of the Company outstanding on that date, or (iii) a lesser amount determined by
the
Board of Directors. Under the ESPP, shares are only issued during the second and fourth quarter of each year. The values were estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted average key assumptions:

Years Ended
December 31,2009

2008

2007Risk free interest rate


1.0
%

1.9
%

4.5
%Expected lives (years)


1.2


0.7


1.6Dividend yield


0
%

0
%

0
%Expected volatility


64
%

57
%

63
%


The
dividend yield was not calculated because the Company does not currently expect to pay a dividend. The expected life represented the service period. During 2007, expected volatility
was based on a blend of the historical volatility of the Company's common stock and publicly traded peer companies, and beginning in 2008, expected volatility was based on the historical volatility of
the Company's common stock. The reason for this change is consistent with the previous discussion

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 12Stock-Based Compensation (Continued)

regarding
the assumptions used to estimate the fair value of stock options. The risk-free interest rate was the average interest rates of U.S. government bonds of comparable term to the
service period.

Compensation
expense under the ESPP was $441, $278 and $579 for the years ended December 31, 2009, 2008 and 2007, respectively.



The Company grants options to purchase shares of common stock to non-employee consultants. Additionally the terms of the
plan allow employees who are terminated, but have continuing service obligations to the Company to continue vesting in their equity awards. The total stock-based compensation cost that has been
recognized in the Consolidated Statements of Operations was $0, $1 and $139 for the years ended December 31, 2009, 2008 and 2007, respectively, was recorded to selling, general and
administrative expenses, and discontinued operations. Stock-based compensation cost recorded to selling, general and administrative expenses for the years ended December 31, 2009, 2008 and 2007
was $0, $1 and $89, respectively. Stock-based compensation cost recorded to discontinued operations for the years ended December 31, 2009, 2008 and 2007 was $0, $0, and $50, respectively.

Note 13Defined Contribution Plan

The Company has savings and investment plans, including a savings plan that qualifies as a defined contribution plan under Section 401(k) of the Internal Revenue Code, that allow
eligible employees to allocate up to 15% of salary through payroll deductions. Substantially all full-time employees on the payroll of the Company are eligible to participate in the plans.
Prior to 2004, the Company matched up to 50% of the employee's contributions up to 6% of salary. Effective beginning in 2004, the Company matches 50% of the first 4% of salary contributed to the plan
and up to 6% of salary if certain financial targets are met. For the years ended December 31, 2009, 2008 and 2007, the costs of these matching payments were $206, $224 and $279, respectively.

Note 14Stock Repurchase Plans

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

In
February 2008, the Company's Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 1,000 shares of the Company's common stock in the
open market or in privately negotiated transactions. During the third and fourth quarters of 2008, the Company repurchased all shares of common stock under this authorization for an aggregate of
$18,938.

In
November 2009, the Company's Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 1,000 shares of the Company's common stock in the
open market or in privately negotiated transactions. During the fourth quarter of 2009, the Company repurchased 130 shares of common stock under this authorization for an aggregate of $3,890.

89

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 14Stock Repurchase Plans (Continued)

All
shares repurchased under these authorizations are accounted for as treasury stock.

Note 15Operating Segment and Geographic Information

The Company's revenue by geographical area, based on the customer's country of domicile, for the years ended December 31, 2009, 2008 and 2007 was as follows:

For the Years Ended
December 31,2009

2008

2007United States

$
17,421

$
5,160

$
4,474Japan


34,241


31,535


24,426South Korea


14,414


12,735


14,281Other international


11,646


10,808


9,892Total international


60,301


55,078


48,599Total revenues

$
77,722

$
60,238

$
53,073


The
following table sets forth, for the periods indicated, long-lived tangible assets by geographic region:

As of December 31,2009

2008United States

$
32,494

$
22,461International


1,391


1,317Total long-lived tangible assets

$
33,885

$
23,778


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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 16Net Income Per Share

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

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

For the Years Ended December 31,2009

2008

2007Basic net income (loss) per common share:Numerator:Income from continuing operations

$
10,690

$
9,511

$
9,602Income (loss) from discontinued operations


(88
)

1,856


(30,041
)Net income (loss)

$
10,602

$
11,367

$
(20,439
)Denominator:Weighted average common shares outstanding


17,145


17,641


17,745Continuing operations

$
0.62

$
0.54

$
0.54Discontinued operations





0.10


(1.69
)Basic net income (loss) per common share

$
0.62

$
0.64

$
(1.15
)Diluted net income (loss) per common share:Numerator:Income from continuing operations

$
10,690

$
9,511

$
9,602Income (loss) from discontinued operations


(88
)

1,856


(30,041
)Net income (loss)

$
10,602

$
11,367

$
(20,439
)Denominator:Weighted average shares outstanding


17,145


17,641


17,745Effect of dilutive securities:Common stock options


448


442


611Restricted stock


88


60


51Common stock warrants








3ESPP


8


2


8Diluted shares outstanding


17,689


18,145


18,418Continuing operations

$
0.60

$
0.52

$
0.52Discontinued operations





0.11


(1.63
)Diluted net income (loss) per common share

$
0.60

$
0.63

$
(1.11
)


For
the years ended December 31, 2009, 2008 and 2007, 631, 528 and 166 shares, respectively, of the Company's stock options and restricted stock were excluded from the calculation
of diluted earnings per share because their inclusion would have been anti-dilutive.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 17Selected Quarterly Data (Unaudited)

For the Quarter EndedMar. 31,

June 30,

Sep. 30,

Dec. 31,2009Revenues

$
17,262

$
24,165
(2)
$
15,078

$
21,217Gross profit

$
16,817

$
23,716

$
14,630

$
20,793Income from continuing operations

$
190

$
3,626

$
1,969

$
4,905Income (loss) from discontinued operations, net of tax


(3
)

4


(24
)

(65
)Net loss

$
187

$
3,630

$
1,945

$
4,840Net income per common share:Basic:Continuing operations

$
0.01

$
0.21

$
0.11

$
0.29Discontinued operations











(0.01
)Net income

$
0.01

$
0.21

$
0.11

$
0.28Diluted:Continuing operations

$
0.01

$
0.21

$
0.11

$
0.27Discontinued operations











Net income

$
0.01

$
0.21

$
0.11

$
0.272008Revenues

$
15,210

$
12,829

$
13,943

$
18,256Gross profit

$
14,916

$
12,515

$
13,621

$
18,007Income from continuing operations

$
3,251

$
1,374

$
2,009

$
2,877Income (loss) from discontinued operations, net of tax


(1,934
)(1)

3,639
(3)

17


134Net loss

$
1,317

$
5,013

$
2,026

$
3,011Net income (loss) per common share:Basic:Continuing operations

$
0.19

$
0.08

$
0.11

$
0.17Discontinued operations


(0.11
)

0.20





Net income

$
0.08

$
0.28

$
0.11

$
0.17Diluted:Continuing operations

$
0.18

$
0.07

$
0.11

$
0.16Discontinued operations


(0.11
)

0.20





0.01Net income

$
0.07

$
0.27

$
0.11

$
0.17


(1)Includes
a $4,963 pre-tax adjustment to increase the carrying value of assets held for sale to fair value, less costs to sell, during the first
quarter of 2008. For additional information regarding these sales transactions, refer to Footnote 11 of our consolidated financial statements, "Discontinued Operations."


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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 17Selected Quarterly Data (Unaudited) (Continued)

(2)Includes
$12,959 of royalty recoveries from intellectual property compliance and enforcement activities.(3)Includes
a pre-tax loss of $2,099 for the separate sales transactions of our digital images and cinema businesses during the second quarter of
2008. For additional information regarding these sales transactions, refer to Footnote 11 of our consolidated financial statements, "Discontinued Operations."


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DTS, INC.

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS  (Amounts in thousands)

For the Years Ended December 31,

Balance at
Beginning
of Year

Charged to
Costs and
Expenses

Deductions
From
Reserves

Balance at
End of YearAllowance for doubtful accounts:(1)2009

$
64

$
170

$
5

$
2292008


81


15


32


642007


48


75


42


81


(1)The
additions to the allowance for doubtful accounts represent the estimates of our bad debt expense based upon the factors for which we evaluate the
collectability of our accounts receivable. Deductions are the actual write-offs of the receivables.


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Table of Contents

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Disclosure Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of December 31, 2009.

Management's Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Exchange Act Rules 13a-15(f) or 15d-15(f). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles.

The
Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's financial
statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The
Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's internal control over
financial reporting as of December 31, 2009, based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission inInternal
ControlIntegrated Framework.

Based
on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2009.

Grant
Thornton LLP, the Company's independent registered public accounting firm, has issued an attestation report on the Company's internal control over financial reporting as
stated in their report which appears herein in Item 8.

Changes in Internal Control Over Financial Reporting

There has not been any change in the Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

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Table of Contents

Item 9B.    Other Information

None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The information concerning our executive officers to be included under the caption "Executive Officers and Significant Employees" in
our proxy statement relating to our 2010 annual meeting of stockholders to be filed by us with the Securities and Exchange Commission no later than 120 days after the close of our fiscal year
ended December 31, 2009 (the "Proxy Statement") is incorporated herein by reference.

The
information concerning our directors to be included in our Proxy Statement under the caption "Item 1Election of Directors" is incorporated herein by reference.

The
information to be included in the Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference.

The
information concerning our code of ethics and code of conduct to be included in the Proxy Statement under the caption "Governance of the Company" is incorporated herein by reference.

Item 11.    Executive Compensation

The information to be included in the Proxy Statement under the captions "Executive Compensation," "Compensation Discussion and
Analysis," "Compensation of Directors" and "Report of Compensation Committee" is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information to be included in the Proxy Statement under the captions "Equity Compensation Plan Information" and "Security Ownership
of Certain Beneficial Owners and Management" is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

Information concerning certain relationships and related transactions will be included in the Proxy Statement under the caption
"Certain Relationships and Related Transactions" and is incorporated herein by reference. Information concerning director independence will be included in the Proxy Statement under the caption
"Governance of the Company" and is incorporated herein by reference.

Item 14.    Principal Accountant Fees and Services

Information concerning principal accounting fees and services will be included in the Proxy Statement under the caption
"Item 2Ratification of Independent Registered Public Accountants" and is incorporated herein by reference.

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Table of Contents

PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)(1) and (2)  Financial Statements and Schedules

The information required by this Item is included in Item 8 of Part II of this report.

(a)(3)  Exhibits

See Item 15 (b) below.

(b)   Exhibits:

Exhibit Number

Description2.1

Agreement and Plan of Merger, dated as of January 3, 2005 by and among the Registrant, LIVE Acquisition Corp., Lowry Digital Images, Inc., John Lowry, as Stockholder Representative, and the Stockholders listed
therein(1)2.2

Stock Purchase Agreement among the Registrant, DTS Digital Images, Inc., and Reliance Big Entertainment Private Limited, dated April 4, 2008(2)2.3

Asset Purchase Agreement among the Registrant, Beaufort California, Inc., and Beaufort International Group, Inc., dated May 9, 2008(3)2.4

Asset Purchase Agreement among the Registrant, DTS Washington LLC, DTS (BVI) Limited, Neural Audio Corporation, Robert W. Reams, Paul T. Hubert, Robert D. Golden and Robert A. Koester, dated December 31,
 20083.1

Restated Bylaws(4)3.2

Restated Certificate of Incorporation, as amended by Certificate of Amendment dated May 20, 2005(5)4.1

Specimen Common Stock Certificate(6)4.2

Registration Rights Agreement, dated as of January 3, 2005 by and among the Registrant and John Lowry, as Stockholder Representative(1)10.1

1997 Stock Option Plan(7)*10.2

Form of Incentive Stock Option Agreement for grants under the 1997 Stock Option Plan(7)*10.3

Form of Nonqualified Stock Option Agreement for grants under the 1997 Stock Option Plan(7)*10.4

2002 Stock Option Plan(7)*10.5

Form of Incentive Stock Option Agreement for grants under the 2002 Stock Option Plan(7)*10.6

Form of Non-qualified Stock Option Agreement for grants under the 2002 Stock Option Plan(7)*10.7

2003 Equity Incentive Plan, as amended on May 9, 2005, May 15, 2008 and February 19, 2009(8)*10.8

Form of Grant of Stock Option under 2003 Equity Incentive Plan(6)*10.9

Form of Option Exercise and Stock Purchase Agreement under 2003 Equity Incentive Plan(6)*


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Table of Contents

Exhibit Number

Description10.10

Form of Restricted Stock Grant Notice under 2003 Equity Incentive Plan(6)*10.11

Form of Restricted Stock Grant Notice and Restricted Stock Agreement under 2003 Equity Incentive Plan (for annual non-employee director grants)(9)*10.12

Form of Restricted Stock Grant Notice and Restricted Stock Agreement under 2003 Equity Incentive Plan (for employee and consultant grants)(9)*10.13

2003 Employee Stock Purchase Plan(6)*10.14

2003 Foreign Subsidiary Employee Stock Purchase Plan(6)*10.15

Description of acceleration of vesting of certain unvested stock options(10)*10.16

Employment Agreement by and between the Registrant and Jon Kirchner, dated September 30, 2002(7)*10.17

Amendment to Employment Agreement by and between the Registrant and Jon Kirchner, effective as of December 17, 2008(8)*10.18

Employment Agreement by and between the Registrant and William Paul Smith, dated November 1, 2002(7)*10.19

Second Amendment to Service Agreement between the Registrant and William Paul Smith, dated June 3, 2005(5)*10.20

Employment Agreement by and between the Registrant and Melvin Flanigan, effective as of May 20, 2005(5)*10.21

Amendment to Employment Agreement by and between the Registrant and Melvin Flanigan, effective as of December 17, 2008(8)*10.22

Employment Agreement by and between the Registrant and Blake Welcher, effective as of May 20, 2005(5)*10.23

Amendment to Employment Agreement by and between the Registrant and Blake Welcher, effective as of December 17, 2008(8)*10.24

Employment Agreement by and between the Registrant and Brian Towne, effective as of May 20, 2005(5)*10.25

Amendment to Employment Agreement by and between the Registrant and Brian Towne, effective as of December 17, 2008(8)*10.26

Employment Agreement by and between the Registrant and Brian Towne, executed May 8, 2009, effective as of April 14, 2009(11)*10.27

Employment Agreement by and between the Registrant and Patrick Watson, effective as of May 20, 2005(5)*10.28

Amendment to Employment Agreement by and between the Registrant and Patrick Watson, effective as of December 17, 2008(8)*10.29

Employment Agreement by and between the Registrant and Sharon Faltemier, dated as of June 28, 2006(12)*10.30

Amendment to Employment Agreement by and between the Registrant and Sharon Faltemier, effective as of December 17, 2008(8)*


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Table of Contents

Exhibit Number

Description10.31

Employment Agreement by and between the Registrant and Daniel E. Slusser, executed as of January 22, 2008, effective May 31, 2007(13)*10.32

Amendment to Employment Agreement by and between the Registrant and Daniel E. Slusser, effective as of December 17, 2008(8)*10.33

Employment Agreement by and between the Registrant and Daniel E. Slusser, executed March 23, 2009, effective as of January 1, 2009(11)*10.34

Form of Indemnification Agreement between the Registrant and its directors(7)10.35

Form of Indemnification Agreement between the Registrant and its officers(7)10.36

Revolving Credit Agreement between the Registrant and Comerica BankCalifornia, effective June 30, 2004(14)10.37

Loan Extension Agreement and Modification to Loan Documents between the Registrant and Comerica Bank, effective July 7, 2005(15)10.38

Loan Extension Agreement and Modification to Loan Documents between the Registrant and Comerica Bank, effective June 12, 2006(12)10.39

Purchase and Sale Agreement, dated August 28, 2008, and First Amendment to Purchase and Sale Agreement, dated October 13, 2008, between DTS, Inc. and Countrywide Home Loans, Inc.(16)10.40

Amendment to Employment Agreement by and between the Registrant and Daniel E. Slusser, effective as of February 9, 2010*21.1

List of all subsidiaries of the Registrant23.1

Consent of Grant Thornton LLP, independent registered public accounting firm23.2

Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended32.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 135032.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 1350


*Indicates
management contract, arrangement or compensatory plan.Certain
confidential portions of this exhibit were omitted by means of redacting a portion of the text. This exhibit has been filed separately
with the Secretary of the Securities and Exchange Commission without such redactions pursuant to the Registrant's related application requesting confidential treatment under Rule 406 under the
Securities Act of 1933, as amended.This
certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any
general incorporation language in such filing.


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Table of Contents

(1)Incorporated
by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on January 6,
2005 (SEC file number 000-50335-05515080).(2)Incorporated
by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on April 10,
2008 (SEC file number 000-50335-08750521).(3)Incorporated
by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on May 15, 2008
(SEC file number 000-50335-08836240).(4)Incorporated
by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on November 19,
2008 (SEC file number 000-50335-081200177).(5)Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (SEC file
number 000-50335-051003863).(6)Incorporated
by reference to the Registrant's Amendment No. 1 to Form S-1 Registration Statement on June 5, 2003 (SEC file
number 333-104761-03734287).(7)Incorporated
by reference to the Registrant's Form S-1 Registration Statement on April 25, 2003 (SEC file
number 333-104761-03665001).(8)Incorporated
by reference to the Registrant's Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 6, 2009 (SEC file number 000-50335-09662980).(9)Incorporated
by reference to the Registrant's Report on Form 10-Q filed with the Securities and Exchange Commission on August 9,
2006 (SEC file number 000-50335-061017963).(10)Incorporated
by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on
November 23, 2005 (SEC file number 000-50335-051222387).(11)Incorporated
by reference to the Registrant's Report on Form 10-Q filed with the Securities and Exchange Commission on May 11,
2009 (SEC file number 000-50335-09815716).(12)Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006 (SEC file
number 000-50335-07700129).(13)Incorporated
by reference to the Registrant's Report on Form 8-K filed with the Securities and Exchange Commission on January 24,
2008 (SEC file number 000-50335-08546816).(14)Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (SEC file
number 000-50335-04975317).(15)Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005 (SEC file
number 000-50335-06691413).(16)Incorporated
by reference to the Registrant's Report on Form 10-Q filed with the Securities and Exchange Commission on
November 10, 2008 (SEC file number 000-50335-081176147).


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on this 3rd day of March, 2010.

DTS,INC.By:

/s/ JON E. KIRCHNER Jon E. Kirchner Chairman and Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature

Title(s)

Date/s/ JON E. KIRCHNER Jon E. Kirchner

Chairman, Chief Executive Officer, and Director (principal executive officer)

March 3, 2010/s/ MELVIN L. FLANIGAN Melvin L. Flanigan

Executive Vice President, Finance and Chief Financial Officer (principal financial and accounting officer)

March 3, 2010/s/ JOERG D. AGIN Joerg D. Agin

Director

March 3, 2010/s/ L. GREGORY BALLARD L. Gregory Ballard

Director

March 3, 2010/s/ C. ANN BUSBY C. Ann Busby

Director

March 3, 2010Bradford D. Duea

Director/s/ JOSEPH A. FISCHER Joseph A. Fischer

Director

March 3, 2010/s/ V. SUE MOLINA V. Sue Molina

Director

March 3, 2010/s/ DANIEL E. SLUSSER Daniel E. Slusser

Director

March 3, 2010/s/ RONALD N. STONE Ronald N. Stone

Director

March 3, 2010


101

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