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, 2010ORo

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



GRAPHIC

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

Delaware(State or Other Jurisdiction of Incorporation or Organization)

77-0467655(I.R.S. Employer Identification 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. ý

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, 2010
was approximately $556,787,461 (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 25, 2011, 17,337,978 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 May 12, 2011.



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DTS, INC.  FORM 10-K  For the Fiscal Year Ended December 31, 2010  INDEX



PagePART IItem 1.

Business

1Item 1A.

Risk Factors

15Item 1B.

Unresolved Staff Comments

29Item 2.

Properties

29Item 3.

Legal Proceedings

29Item 4.

(Removed and Reserved)

29PART IIItem 5.

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

30Item 6.

Selected Financial Data

33Item 7.

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

35Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

45Item 8.

Financial Statements and Supplementary Data

47Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

84Item 9A.

Controls and Procedures

84Item 9B.

Other Information

84PART IIIItem 10.

Directors, Executive Officers and Corporate Governance

85Item 11.

Executive Compensation

85Item 12.

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

85Item 13.

Certain Relationships and Related Transactions, and Director
Independence

85Item 14.

Principal Accounting Fees and Services

85PART IVItem 15.

Exhibits and Financial Statement Schedules

86SIGNATURES

90


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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 audio technologies enable the delivery and playback of clear, compelling high-definition 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 or DMPs, set-top-boxes or STBs, mobile phones and home theater systems. In addition, we provide products and services to
motion picture studios, radio and television broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded soundtracks in
movies, sporting events, television shows and music content. We also provide a suite of audio processing technologies designed to enhance the entertainment experience from products subject to physical
limitations, such as TVs, PCs and smartphones.

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 plays back, 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

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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
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 consolidated balance sheets and as Discontinued Operations on our consolidated statements of income 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 and certain liabilities. 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, copyrights, trademarks and services for the following consumer markets:



Industry Background

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.

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



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.



Home theater systems generally consist of a display, a Blu-ray Disc or DVD player, a digital multi-channel audio/video
receiver with full separation in five discrete channels: left, center, right, left surround, right surround, plus a channel dedicated to low frequency effects known as 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 information from the Digital Entertainment Group, or DEG, and other data, we estimate that over 75 million Blu-ray
devices, including stand-alone players and game consoles, have been sold worldwide since their launch in November 2006. In the U.S. alone,

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Blu-ray
household penetration has reached 24% in 2010, up from 15% in 2009. According to NPD, a market research company, Blu-ray players set sales records in the U.S. during
the 2010 Black Friday weekend period, up more than 50% from the same period in 2009. Almost all Blu-ray players are now network-enabled and a number of models are Wi-Fi
embedded and 3D-capable. According to NPD, Profile 2.0 BD Live network compliant Blu-ray players in the United States have grown in volume from 13% of units sold in 2008 to 98% in 2010. In
a recent study by Parks Associates, a market research company, one-fifth (20%) of broadband households indicated their Blu-ray player was their means of delivering internet
video to the TV. At retail, Blu-ray players are now mainstream and competitively priced for mass market accessibility.

In
comparing Blu-ray to DVD, the build-up is consistent. During the first five years, the Blu-ray adoption curve is consistent with that of DVD, with
both reaching 30 million households by year five. In fact, we estimate that worldwide Blu-ray annual unit shipments will eclipse DVD within three years. Aiding in the growth and
adoption of Blu-ray is the decreasing cost of Blu-ray movies relative to DVD movies. According to Screen Digest, in 2008, the average price for a Blu-ray and DVD
movie was $28 and $14, respectively, and in 2011, the average price for a Blu-ray and DVD movie is $20 and $12, respectively.

Blu-ray
Disc annual sales in the U.S. have now reached $2.3 billion dollars, representing 12% of overall home entertainment sales, an increase of 40% compared to the
previous year. Year-end numbers for 2010 show that Blu-ray movie sales grew by 75% with 170 million sold to consumers. There are now more than 3,500 unique
Blu-ray titles available in the U.S. market. According to Blu-ray.com, over two thousand of the Blu-ray releases in North America include a DTS-HD
Master Audio soundtrack. In fact, according to Nielsen, a market research company, 85% of the top 100 Blu-ray titles sold in 2010 were encoded with DTS-HD Master Audio.



Digital multi-channel sound is further extending into a growing number of consumer electronics environments, including homes, cars,
personal computers, video game consoles, mobile phones, portable media devices, digital media players, 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.

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 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. Furthermore, the proliferation of digital media distribution creates new demand for playback enhancement technologies for
televisions, PCs, mobile phones and portable media players alike.

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

Responding
to consumer demand, consumer electronics beyond the traditional PC have added networking features to support the shift to cloud-based content. This adoption of network support
in mainstream consumer electronics products (Blu-ray players, TVs, game consoles, mobile phones, etc.) has facilitated the consumer demand to be able to use content in multiple formats, on
multiple devices, and in multiple locations. This requirement for broad content portability and support opens up many large, new markets to new media formats, such as digital multi-channel audio, that
had not been previously supported. The fundamental structure of the content ecosystem has changed to a focus on portability and ease-of-use and this has substantially expanded
the demand for digital media format technologies, such as those provided by DTS.

As
part of the home theater evolution, the increase of on-line video content has driven growth in network-enabled devices. Internet-enabled televisions and
Blu-ray players bring internet content and services to a variety of consumer electronic devices. Along with numerous high-definition televisions, or HDTV, features,
internet-connected TVs will offer consumers a variety of content options at increasingly affordable prices. While reaching nearly 20% today, it is anticipated by 2014 that nearly half of digital
displays shipped in 2014 will feature internet connectivity.

DTS Technology Markets, Products and Services

We provide technology that enables distribution of high-quality sound and audio processing for the following key markets:
home AV, automotive, personal computer, broadcast, mobile electronics, professional content and other emerging consumer electronics markets. Importantly, DTS technology was selected by the consumer
electronics industry 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 audio technologies have been embedded in hundreds of millions audio/video devices.



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The DTS Solutions

We provide a range of audio technologies focused around the reproduction and enhancement of high-quality audio. The company
launched its surround sound format technology for the consumer market in 1996 and has continued to develop technology, providing solutions for Blu-ray, DVD, broadcast, and digital media
delivery. In 2008, we expanded our offering by moving into the audio processing market to provide technology and solutions for enhancing audio playback in a wide variety of devices and environments.
Today, we have a complete range of audio playback solutions for media and consumer electronics providers, and we continue to expand through on-going research and development, as well as
business and technology acquisitions.



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 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

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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 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.

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



DTS Digital Surround.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. Utilizing the core + extension architecture of Coherent Acoustics, we
expanded on the DTS Digital Surround offering to support 6.1 channels which adds a center back channel for added realism for discrete 6.1 surround sound on DVD. We also developed the only extended
definition format for DVD that adds higher sampling rates (96 kHz) and greater bit resolution (24 bit) for even better sounding audio, particularly with multi-channel music.

DTS-HD.DTS-HD is the latest extension to our DTS format technology and is made up of several format profiles and a
transcoder. The main profile 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 is backward compatible with all existing DTS content. The transcoder consists of a DTS encoder which re-encodes audio data to DTS Digital Surround at 1.5 Mbps, ensuring
transparent backward compatibility to DTS decoders that have a Sony/Philips Digital Interconnect Format (SPDIF) input. DTS-HD Audio allows various levels of performance based on the
capabilities of the home audio equipment used for playback:

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GRAPHIC

DTS Neural Surround.DTS Neural Surround technology is an encoder/decoder technology that takes up to 7.1 channels of audio and using
advanced
techniques, 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 sound experience. DTS Neural Surround is
widely deployed to enhance legacy stereo content for surround sound distribution for HDTV and is an effective method of surround audio encoding and decoding that seamlessly integrates surround sound
in a stereo signal without use of a separate data stream.



Since the discrete multi-channel audio experience and the use of PCs and mobile electronics have changed consumer listening habits and
expectations, the consumer electronics marketplace has experienced a growing need for audio processing 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, including smartphones. We currently offer audio processing solutions that balance loudness levels
between diverse multimedia sources, maximize acoustic power beyond the volume limits of products due to small size and speaker location and enhance the quality of compressed audio, improve the input
and playback of speech, and connect any audio stream from the PC to a home theater system, and deliver virtual surround sound effects from two speakers or headphones.



As we have developed more audio technologies, we now deliver complete audio solution sets to various markets. DTS Premium Suite and DTS
Surround Sensation UltraPC are examples of these complete audio solution sets that are combinations of our audio format and audio processing technologies. The DTS Premium Suite is part of a
cooperative marketing agreement with Intel, signed in February of 2009, for the mobile PC platform. Through this arrangement, DTS and Intel bring a compelling set of audio enhancement technologies
that improve audio performance while minimizing energy consumption in mobile PCs. For example, we partnered with Onkyo to include DTS Premium Suite and with Fujitsu to include DTS Surround Sensation
UltraPC into a wide range of their mobile and all-in-one PCs.

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

GRAPHIC

Research and Development

As demonstrated by our portfolio of industry-recognized, advanced technologies, we are centered on strong research and development
abilities. We were founded with key research and development that solved customer problems with high-quality and differentiated solutions, and we continue to develop new technologies with
that same goal in mind.

As
the company has grown, new technologies have not only been developed internally, but also 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 63 engineers and scientists, including 14 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, Kirkland, Washington, Scotts Valley, California and, recently, in Singapore.

Our
research and development expenses totaled approximately $12.1 million during 2010, $9.1 million during 2009 and $6.9 million during 2008. We expect that we will
continue to commit significant resources to applications engineering efforts, particularly in support of our expansion across a wide variety of digital audio content and playback devices, and to
research and development in the future.

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Intellectual Property

We have developed and maintain a sizeable library of copyrighted software and other technical materials, both printed and digitized, as
well as numerous trade secrets. We also have many individual patent families resulting in hundreds of individual patents and patent applications throughout the world.

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
copyrights, trademarks, patents, and trade secrets in many countries. We have targeted our intellectual property coverage to provide protection in the major manufacturing and commercial markets of the
world.

Our
audio technologies are embodied in the form of proprietary software to which we retain the copyrights. Accordingly, copyrights are an important component of our intellectual
property.

Our
trademarks consist of many individual word marks, logos, and slogans registered and in use 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 technology
in the device, to provide greater consumer awareness and to advance the sales of the licensed products bearing the trademarks. In addition to over one hundred trademark registrations, we also have
numerous trademark applications pending worldwide, with additional marks in the pre-application phase.

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. A number of our patents have expiration dates ranging from 2015 to 2027. The patents that expire sooner 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.

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.

Governmental
standards are often operated by non-governmental organizations in cooperation with regional regulatory bodies. These organizations adopt standards by validating
and publishing industry standards that are appropriate for various regions and technical requirements. The standards of this nature that we participate in include European Technical Standards
Institute (ETSI) which is an affiliated European Standards Organization under the European Union, International Electrotechnical Commission (IEC), and the Moving Pictures Expert Group (MPEG) which is
a joint working group under the IEC and International Organization of Standards (ISO).

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The
majority of standards we actively participate in are produced by industry-related organizations. These bodies adopt standards based on industry evaluations and discussions across
effected constituencies finalizing with consensus voting as to the best solution around which to standardize. The industry standards we participate include the Alliance for Telecommunications Industry
Solutions (ATIS), American Television Standards Committee (ATSC), Audio Engineering Society (AES), Blu-ray Disc Association (BDA), Consumer Electronics Association (CEA), Digital
Entertainment Content Ecosystem (DECE), Digital Living Network Alliance (DLNA), Digital Video Broadcast (DVB), DVD Forum, The Khronos Group, Open IPTV Forum (OIPF), Society of Cable Telecommunications
Engineers (SCTE), and Society for Motion Picture and Television Engineers (SMPTE).

Some
standards bodies are now considering "open standards" that require all technologies included in the standard are based upon non-proprietary and intellectual-property
"free" technology platforms in which no company maintains ownership over the dominant technologies. We are actively engaging these bodies to determine how we may participate and the potential impact
on our business model and future go to market strategies.

We
anticipate being involved in a number of other standards organizations as appropriate to facilitate the adoption and inclusion of our technology.

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 they are delivering and enjoying a high-quality entertainment experience.

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 brand into
expanding categories of consumer electronics and in turn grow the positive consumer affiliation with the DTS brand. To accelerate this process we work with content partners and consumer manufacturers
to provide marketing programs that associate the DTS brand with exciting and engaging entertainment experience with great DTS sound.

The
foundation of our marketing strategy is to build strong affinity for the DTS brand with consumers so that the DTS brand becomes a catalyst in expanding use of our existing
technologies in new markets and in commercializing new technologies to existing markets.

Licensing

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 customer focused employees located in the United States, China, Hong Kong, Japan, the United Kingdom, 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

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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.

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 and Samsung
accounted for 17% and 15%, respectively, of total revenues for the year ended December 31, 2010.



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.

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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, Technicolor, 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:



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
soundtracks. 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, 2010, we had 228 employees, which includes 63 employees classified on our income statement as research and
development and 165 classified as selling, general and administrative. Of the 228 total employees, 150 work in the United States and 78 work in our various international locations, including 40 in
Asia and 31 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

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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.

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.

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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 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.

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



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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.

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

Except for Blu-ray products, where our technology is mandatory, we are dependent on our customers and
licenseesincluding consumer electronics product manufacturers, semiconductor manufacturers, producers and distributors of content for music, videos, and gamesto incorporate
our 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. Furthermore, the decision by a party dominant in the entertainment value chain to provide audio technology at very low or no cost could impact a licensee's decision to use our
technology. Our customers, licensees and other manufacturers might not utilize our technology or services in the future.

If we are unable to maintain a sufficient 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, video game consoles, digital media players and mobile handsets
will be based on the number, quality, and popularity of the Blu-ray Disc titles, computer software programs, and video games either released with DTS audio soundtracks or capable of being
coded and played in DTS format. Although we have existing relationships with many leading providers of movie, music, computer, and video game content, we generally do not have contracts that require
these parties to develop and release content with DTS audio soundtracks. In addition, we may not be successful in maintaining existing relationships or developing relationships with other existing
providers or new market entrants that provide content. As a result, we cannot assure you that a significant amount of content in movies, Blu-ray Disc titles, computer software programs,
video games, or other entertainment mediums will be released with DTS audio soundtracks. If the amount, variety, and popularity of entertainment content released with DTS audio soundtracks do not
increase, consumer electronics products manufacturers that pay us per-unit licensing fees may discontinue offering DTS playback capabilities in the consumer electronics products that they
sell.

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The online content delivery market could impact our ability to grow.

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

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

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 free of charge and often on an "open source" basis. These standards are a relatively recent and limited occurrence and have primarily been focused on markets and
regions traditionally adverse to the notion of intellectual property ownership and the associated royalties. Examples would include the personal computer, or PC, market, and regions including China.
If the concept of "open standards" gains industry momentum in the future, the use of open standards may reduce our opportunity to generate revenue, as open standards technologies are based upon
non-proprietary technology platforms in which no one company maintains ownership over the dominant technologies.

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

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:



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

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.

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 carry forwards, 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.

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 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

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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 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:



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

Our 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 may be sued by third parties for alleged infringement of their proprietary rights, and we may be subject to litigation proceedings that could harm our business.

Companies that participate in the digital audio, digital image processing, consumer electronics, and entertainment industries hold a
large number of patents, trademarks, and copyrights, and are frequently involved in litigation based on allegations of patent infringement or other violations of intellectual property rights.
Intellectual property disputes frequently involve highly complex and costly scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and
uncertainty. Accordingly, intellectual property disputes, with or without merit, could be costly and time

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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.

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

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.

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 2010, two customers accounted for 17% and 15%, respectively, of revenues from our continuing operations. Although we have agreements with many of our customers, these agreements typically
do not require any material minimum purchases or minimum royalty fees and do not prohibit customers from purchasing products and services from competitors. A decision by any of our major customers or
licensees not to use our technologies, or their failure or inability to pay amounts owed to us in a timely manner, or at all, could have a significant adverse effect on our business.

We face intense competition. Certain of our competitors have greater 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.

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

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

Our technology has only recently been incorporated into certain markets, such as digital media players, televisions, personal
computers, digital satellite and cable broadcast products, portable electronics devices and mobile handsets. We do not have the same experience in these markets as in our traditional consumer
electronics business, nor do we have as much operating history as companies, such as Dolby Laboratories, Inc., SRS Labs, Inc. and BBE Sound, Inc. As a result, the demand for our
technology, products, and services and the income potential of these businesses is unproven. In addition, because our participation in these markets is relatively new and rapidly evolving,
we may have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business. Before
investing in our common stock, you should consider the risks, uncertainties, and difficulties frequently encountered by companies in new and rapidly evolving markets such as ours. We may not be able
to successfully address any or all of these risks.

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 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

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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.

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

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.

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 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

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products
and services, or expand the breadth of our markets. We have a limited history of acquiring and integrating businesses. Acquisitions and strategic investments involve numerous risks,
including:



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

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. During the year ended December 31, 2010, nearly 90% of our revenues were derived internationally. We face numerous risks in doing business
outside the United States, including:



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Such
factors could cause our future international sales to decline.

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

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

We expect our operating expenses to increase 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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Compliance with changing securities laws, regulations and financial reporting standards will increase our costs and pose challenges for our management team.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank
Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated thereunder have created uncertainty for public companies and significantly
increased the costs and risks associated with operating as a publicly traded company in the United States. Our management team will need to devote significant time and financial resources to comply
with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue
generating activities to compliance activities. Furthermore, with such uncertainties, we cannot assure you that our system of internal control will be effective or satisfactory to our independent
registered public accounting firm. As a result, our financial reporting may not be timely and/or accurate and we may be issued an adverse or qualified opinion by our independent registered public
accounting firm. If reporting delays or errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the SEC, and could adversely affect our financial
results or result in a loss of investor confidence in the reliability of our financial information, which could materially and adversely affect the market price of our common stock.

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

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

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 we believe means that we treat similarly situated licensees similarly. In these situations, we may be required to
limit the royalty rates we charge for these technologies, which could adversely affect our business. Furthermore, we may have limited control over whom we license such technologies to, and may be
unable to restrict many terms of the license. From time to time, we may be subject to claims that our licenses of our industry standard technologies may not conform to the requirements of the
standards-setting body. Claimants in such cases could seek to restrict or change our licensing practices or our ability to license our technologies in ways that could
injure our reputation and otherwise materially and adversely affect our business, operating results and prospects.

We 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

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rapidly
growing markets can distort and amplify the seasonality described above. Our revenues may continue to be subject to fluctuations, seasonal or otherwise, in the future. Unanticipated
fluctuations, whether due to seasonality, economic downturns, product cycles, or otherwise, could cause us to miss our earnings projections, or could lead to higher than normal variation in
short-term earnings, either of which could cause our stock price to decline.

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 royalty recoveries and expenditures,
as applicable, may cause revenues to be higher than expected, or net profit to be lower than expected, during a particular reporting period and may not recur in future reporting periods. Such
fluctuations in our revenues and operating results may cause declines in our stock price.

The licensing of patents constitutes a significant source of our revenue. If we do not replace expiring patents with new patents or proprietary technologies, our revenue
could decline.

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

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

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Risks Related to Our Common Stock

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, and could delay or impede a merger, tender offer, or proxy contest
involving our company. Any delay or prevention of a change of control transaction or changes in our Board could cause the market price of our common stock to decline.

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.

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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, the United Kingdom, 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
June 22, 2010 we entered into a Settlement Agreement and Release (the "Settlement Agreement") with Datasat Digital Entertainment, Inc., Beaufort International
Group Plc and Datasat Communications Limited (collectively the "Datasat Parties"), relating to a October 12, 2009 complaint that we filed in the Superior Court of the State of
California, County of Los Angeles against the Datasat Parties asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment related to
the sale of our digital cinema business in May 2008. Pursuant to the Settlement Agreement, the Datasat Parties paid the Company a total of $2.0 million in 2010. There are no further pending
matters between the Company and the Datasat Parties.

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.    (Removed and Reserved)

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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

Low2009First Quarter

$
24.78

$
13.40Second Quarter

$
28.26

$
21.66Third Quarter

$
28.45

$
24.25Fourth Quarter

$
35.14

$
25.442010First Quarter

$
36.18

$
25.95Second Quarter

$
35.59

$
31.03Third Quarter

$
41.49

$
31.48Fourth Quarter

$
49.96

$
37.37


As
of January 26, 2011 there were approximately 4,100 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, 2010, 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, 2010, 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, 2005 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,
2005

December 30,
2006

December 29,
2007

December 31,
2008

December 31,
2009

December 31,
2010DTS, Inc.

$
100.00

$
163.45

$
172.77

$
123.99

$
231.15

$
331.42NASDAQ Market Index


100.00


110.25


121.88


73.10


106.22


125.36Russell 2000 Index


100.00


118.37


116.51


77.15


98.11


124.46


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. Through November 18, 2010, all shares of common stock under this authorization were repurchased for an aggregate cost of
$33.3 million.

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

Stock
repurchase activity during the quarter ended December 31, 2010 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, 2010 through October 31, 2010











24,846November 1, 2010 through November 30, 2010


26,269
(1)
$
42.94


24,846


December 1, 2010 through December 31, 2010


5,216
(2)
$
49.05





Total


31,485

$
43.95
(3)

24,846





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 effectively retired from employees to satisfy statutory withholding requirements upon the vesting of restricted stock.(2)Consists
of shares repurchased and effectively retired from employees to satisfy statutory withholding requirements upon the vesting of restricted stock.(3)Represents
weighted average price paid per share during the quarter ended December 31, 2010.


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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 income 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 31,2010

2009

2008

2007

2006(5)(Amounts in thousands, except per share amounts)Consolidated Statement of Operations DataRevenue

$
87,096

$
77,722

$
60,238

$
53,073

$
50,039Cost of revenue


1,583


1,766


1,179


1,276


2,082Gross profit


85,513


75,956


59,059


51,797


47,957Operating expenses:Selling, general and administrative


49,035


48,717


36,794


33,116


29,803Research and development


12,075


9,087


6,924


6,473


6,861In-process research and development








1,090
(2)




Restructuring costs














3,758
(6)Total operating expenses


61,110


57,804


44,808


39,589


40,422Operating income


24,403


18,152


14,251


12,208


7,535Interest and other income, net


418


1,063


2,418


2,704


4,954Income from continuing operations before income taxes


24,821


19,215


16,669


14,912


12,489Provision for income taxes


9,781


8,525


7,158


5,310


2,896Income from continuing operations


15,040


10,690


9,511


9,602


9,593Income (loss) from discontinued operations, net of tax


1,001
(1)

(88
)

1,856
(3)

(30,041
)(4)

(6,569
)Net income (loss)

$
16,041

$
10,602

$
11,367

$
(20,439
)
$
3,024Net income (loss) per common share:Basic:Continuing operations

$
0.88

$
0.62

$
0.54

$
0.54

$
0.54Discontinued operations


0.06





0.10


(1.69
)

(0.37
)Net income (loss)

$
0.94

$
0.62

$
0.64

$
(1.15
)
$
0.17Diluted:Continuing operations

$
0.84

$
0.60

$
0.52

$
0.52

$
0.52Discontinued operations


0.06





0.11


(1.63
)

(0.36
)Net income (loss)

$
0.90

$
0.60

$
0.63

$
(1.11
)
$
0.16Weighted average shares used to compute net income (loss) per common share:Basic


17,041


17,145


17,641


17,745


17,623Diluted


17,805


17,689


18,145


18,418


18,401


(1)Includes
proceeds from a settlement and release agreement. For additional information regarding, refer to Footnote 11 of our consolidated financial
statements, "Discontinued Operations."(2)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."


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(3)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. Also, 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."(4)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.(5)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."(6)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.


As of December 31,2010

2009

2008

2007

2006(In thousands)Consolidated Balance Sheet DataCash, cash equivalents, and short-term investments

$
96,131

$
75,351

$
68,023

$
85,402

$
108,760Working capital


95,394


83,725


76,773


100,220


120,510Total assets


172,295


154,218


137,678


138,217


168,200Total long-term liabilities


8,596


5,862


3,783


2,716


1,466Total stockholders' equity


147,568


141,824


125,289


120,812


153,816


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.

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

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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 audio technologies enable the delivery and playback of clear, compelling high-definition audio 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, set-top-boxes or STBs, mobile phones and home theater systems. In addition, we provide products and services to
motion picture studios, radio and television broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded soundtracks in
movies, sporting events, television shows and music content. We also provide a suite of audio processing technologies designed to enhance the entertainment experience from products subject to physical
limitations, such as TVs, PCs and smartphones.

We
derive revenues from licensing our audio 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.

Generally,
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, video game console and mobile handset markets as well. We have seen the acceleration of the market for high-definition televisions drive demand for Blu-ray Disc
players and advanced home theater systems. Consumers are more broadly embracing the Blu-ray technology as prices decline and content availability increases, and as customers realize the
value of the advanced features that Blu-ray provides, such as the ability to connect to the internet and ultimately playback 3-D content.

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

One
of the largest challenges that we face is the growing consumer trend toward open platform, on-line entertainment consumption and the need to constantly and rapidly evolve
our technologies to address the emerging markets. We believe that although the trend has begun, any transition to such open platform, on-line entertainment will take many years. Further,
we believe that this trend demands that playback devices be capable of processing content originating in any form, whether disk-based or on-line, which creates a substantial
opportunity for our technologies to extend into network connected products that may not have an optical drive. During the transition period, we expect that both optical media and on-line
entertainment formats will continue to thrive.

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Further,
we currently face a challenge regarding our ability to determine the impact of the recent global economic downturn on consumer buying patterns. While we do not have 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 generally accepted accounting principles in the United States, or GAAP, and pursuant to the rules and regulations of the SEC. The preparation of
our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, estimates and judgments are evaluated, including those related to revenue recognition, allowance for doubtful accounts, impairment of
long-lived assets, stock-based compensation, and income taxes. These estimates and judgments are based on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, which form the basis for 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.





38

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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 31,2010

2009

2008U.S.

$
9,805

$
17,421

$
5,160Japan


41,392


34,241


31,535South Korea


21,148


14,414


12,735Other international


14,751


11,646


10,808Total international


77,291


60,301


55,078Total revenues

$
87,096

$
77,722

$
60,238


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

As of December 31,2010

2009

2008U.S.

$
32,207

$
32,494

$
22,461International


1,431


1,391


1,317Total long-lived tangible assets

$
33,638

$
33,885

$
23,778


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Results of Operations

Revenues

Years Ended December 31,

2010 vs. 2009
Change

2009 vs. 2008
Change2010

2009

2008

$

%

$

%($ in thousands)Revenues

$
87,096

$
77,722

$
60,238

$
9,374


12
%
$
17,484


29
%


Revenues
for the year ended December 31, 2010, compared to the same prior year period, included a $13.6 million decrease in royalties recovered through intellectual
property compliance and enforcement activities, which we characterize as "royalty recoveries." Revenues for the year ended December 31, 2009, compared to the same prior year period, included an
$11.8 million increase in royalty recoveries. These changes in royalty recoveries related primarily to the settlement of legal matters with Zoran Corporation in 2009. Royalty recoveries may
cause revenues to be higher than expected during a particular period and may not occur in subsequent periods. Therefore, unless otherwise noted, the impact of royalty recoveries has been excluded from
our revenue discussions in order to provide a more meaningful and comparable analysis.

The
increase in revenues for the year ended December 31, 2010, compared to the same prior year period, was largely attributable to continued growth in Blu-ray related
royalties and royalties from network connected markets, which includes televisions and digital media players. Blu-ray related royalties comprised over 30% and 25% of revenue for the years
ended December 31, 2010 and 2009, respectively. In dollar terms, these royalties were up 71% for the year ended December 31, 2010, compared to the same prior year period. Royalties from
network connected markets comprised over 10% and less than 5% of revenue for the years ended December 31, 2010 and 2009, respectively. The growth in network connected markets results from a
growing consumer interest in consumer electronic products that access on-line content. Royalties from the car market also increased for the year ended December 31, 2010, compared to
the same prior year period, due to some improvement in the auto industry and continued expansion of our technology into new car models. 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 recent turmoil in the global economic environment. However, we expect technology licensing
revenues to grow as wider availability of Blu-ray enabled players, PCs and game consoles, coupled with expected aggressive pricing and promotion of these products by retailers and consumer
electronics product manufacturers, should result in increasing licensing revenues from the Blu-ray format.

The
increase in revenues for the year ended December 31, 2009, compared to the same prior year period, was primarily attributable to growth in royalties from the
Blu-ray product and broadcast markets. Blu-ray related royalties comprised over 25% and 15% of total revenue for the years 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 over 5% and
less than 1% of revenue for the years ended December 31, 2009 and 2008, respectively, primarily as a result of the business that we acquired from Neural Audio Corporation, or Neural, on
December 31, 2008. Partially offsetting these increases were declines in DVD related royalties and the car audio market.

Gross Profit

Years Ended December 31,

Percentage point change
in gross profit margin
relative to prior year2010

2009

20082010 vs. 2009

2009 vs. 2008$

%

$

%

$

%($ in thousands)Gross Profit

$
85,513


98
%
$
75,956


98
%
$
59,059


98
%

0
%

0
%


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Gross
profit percentage for the years ended December 31, 2010, 2009 and 2008, remained consistent.

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

Change relative to prior yearSG&A
Expenses

Percent of
RevenuesYears Ended December 31,

$

%($ in thousands)2010

$
49,035


56
%
$
318


1
%2009

$
48,717


63
%
$
11,923


32
%2008

$
36,794


61
%


The
increase in SG&A expenses for the year ended December 31, 2010, compared to the same prior year period, was minor. However, this increase reflected several partially
offsetting activities. The $6.1 million increase in employee related costs resulted primarily from expanded operations resulting from increased headcount as we expand to address a number of new
markets and stock-based compensation. The $1.8 million increase in advertising and travel resulted primarily from increased tradeshow and sales activities. The $1.2 million increase in
depreciation resulted primarily from our new corporate headquarters, as of November 2009. Partially offsetting these increases was an $8.5 million decrease in professional fees, which resulted
largely from the Zoran litigation matters in the prior year period.

The
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, included travel related expenses for increased sales activities and expanding operations, occupancy costs for expanded operations and advertising expenses.

Research and Development ("R&D")

Change relative to prior yearR&D Expenses

Percent of RevenuesYears Ended December 31,

$

%($ in thousands)2010

$
12,075


14
%
$
2,988


33
%2009

$
9,087


12
%
$
2,163


31
%2008

$
6,924


11
%


The
increase in R&D expenses for the year ended December 31, 2010, compared to the same prior year period, was primarily due to a $2.9 million increase in employee related
costs resulting from expanded operations and severance costs for certain operations that were identified for wind down.

The
increase in R&D expenses for the year ended December 31, 2009, compared to the same prior year period, was 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, included occupancy costs for
expanded operations and amortization associated with intangibles from the business that we acquired from Neural on December 31, 2008.

In-Process Research and Development ("IPR&D")

There were no IPR&D expenses for the years ended December 31, 2010 and 2009.

IPR&D
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

42

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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 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.

Interest and Other Income, Net

Years Ended December 31,

2010 vs. 2009
Change

2009 vs. 2008
Change2010

2009

2008

$

%

$

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

$
418

$
1,063

$
2,418

$
(645
)

(61
)%
$
(1,355
)

(56
)%


The
decreases in interest and other income, net, for the years ended December 31, 2010 and 2009, compared to the same prior year periods, was primarily due to the decrease in
interest income resulting from lower average interest rates and investment balances in 2010 and 2009. 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 decreases for the years ended December 31, 2010 and 2009, compared
to the same prior year periods, were the effects of translation for certain foreign subsidiaries to the U.S. dollar or functional currency.

Income Taxes

Years Ended December 31,2010

2009

2008($ in thousands)Provision for income taxes

$
9,781

$
8,525

$
7,158Effective tax rate


39
%

44
%

43
%


The
effective tax rate for 2010 differed from the U.S. statutory rate of 35% primarily due to state income taxes, an increase in the reserve for uncertain tax positions and
non-deductible stock-based compensation, partially offset by the effect of different tax rates in foreign jurisdictions and R&D credits.

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 an increase in the reserves for uncertain tax positions, partially offset by tax exempt interest and R&D credits.

The
effective tax rate for 2008 differed from the U.S. statutory rate of 35% primarily due to the effect of different tax rates in foreign jurisdictions and an increase in the reserve
for uncertain tax positions, partially offset by tax exempt interest and R&D 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.

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Results of Discontinued Operations

Years Ended December 31,

2010 vs. 2009
Change

2009 vs. 2008
Change2010

2009

2008

$

%

$

%($ in thousands)Discontinued operations, net

$
1,001

$
(88
)
$
1,856

$
1,089


(1,238
)%
$
(1,944
)

(105
)%


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. 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.

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

The
income from discontinued operations for the year ended December 31, 2010, resulted primarily from a $2.0 million settlement and release agreement with the buyer of the
cinema business. For additional information, refer to Footnote 11 of the consolidated financial statements, "Discontinued Operations."

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, 2010, we had cash, cash equivalents, and short-term investments of $96.1 million, compared to
$75.4 million at December 31, 2009.

Net
cash provided by operating activities was $39.0 million, $21.9 million and $20.0 million for the years ended December 31, 2010, 2009 and 2008,
respectively. Cash flows from operating activities consisted of net income adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, and the
effect of changes in working capital and other operating activities. The operating cash flows for the year ended December 31, 2010 were largely impacted by income from operations, including
certain adjustments for non-cash items. These cash flows were also impacted by increase in deferred revenue arising primarily from payments for licensing audio technology received in
advance of the culmination of the earnings process. Also impacting these cash flows was the timing of payment for certain liabilities, including employee related costs, and an increase in our
liabilities for uncertain tax positions. The total operating cash flows for the years ended December 31, 2009 and 2008, remained fairly consistent.

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 $21.6 million, $5.8 million and $18.5 million
for the years ended December 31, 2010, 2009 and 2008, respectively. Cash used in investing activities for the year ended December 31, 2010, were primarily impacted by investment
purchases, net of maturities and sales. Further, we are in the process
of acquiring certain intangible assets, and a final payment of $1.2 million is due at the in service date for these assets. Cash used in investing activities for the years ended
December 31, 2009 and 2008, consisted 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.

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For
the years ended December 31, 2010 and 2008, cash used in financing activities was $17.9 million and $11.7 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. 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.



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. Through November 18, 2010, all shares of common stock under this authorization were repurchased
for an aggregate cost of $33.3 million.

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, 2010 are described below
(in thousands):

2011

2012

2013

2014

2015

2016 and
thereafter

TotalOperating leases

$
1,099

$
795

$
752

$
462

$
226

$
1,640

$
4,974


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, 2010, our total amount of unrecognized tax benefits was $7.3 million and is considered a long-term obligation. We are currently unable to
make reasonably reliable estimates of the periods of cash settlements associated with these obligations.

Recently Issued Accounting Standards

Refer to 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

45

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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, 2010. The estimated average maturity of our investment portfolio is less than one year. As of December 31, 2010, a one percentage point change in
interest rates throughout a one-year period would have an annual effect of approximately $1.0 million on our income before income taxes.

During
the year ended December 31, 2010, we derived nearly 90% of our revenues from sales outside the U.S., 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 2010. Operating expenses, including cost of sales, for our foreign subsidiaries were approximately $16.5 million in 2010. Based upon these expenses for
2010, a 10% or greater change in foreign currency rates throughout a one-year period could have a material impact on our operating income.

Our
international business is subject to risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations
and restrictions, and foreign exchange rate volatility when compared to the U.S. 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 U.S. dollar in consolidation. As exchange rates vary,
these results, when translated, may vary from expectations and could adversely or positively impact overall profitability. During 2010, 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 Firm

48Consolidated Balance Sheets as of December 31, 2010 and 2009

50Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008

51Consolidated Statements of Stockholders' Equity for the years ended December 31, 2010, 2009 and 2008

52Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

53Notes to Consolidated Financial Statements

54Financial Statement Schedule:Schedule IIValuation and Qualifying Accounts for the years ended December 31, 2010, 2009 and
2008

83


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and Stockholders
DTS, Inc.

We
have audited the accompanying consolidated balance sheets of DTS, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits of the basic financial statements included the financial statement schedule listed in the
index appearing under Item 15(a)(2). 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 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,
2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

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, 2010, 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, 2011 expressed an unqualified opinion.

/s/
GRANT THORNTON LLP
San Diego, California
March 3, 2011

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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.'s internal control over financial reporting as of December 31, 2010, based on criteria established inInternal
ControlIntegrated Framework issued 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 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, 2010, based on criteria established
inInternal 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, 2010 and 2009, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report
dated March 3, 2011 expressed an unqualified opinion.

/s/
GRANT THORNTON LLP
San Diego, California
March 3, 2011

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DTS, INC.        CONSOLIDATED BALANCE SHEETS

As of December 31,2010

2009(Amounts in thousands,
except per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
41,744

$
42,222Short-term investments


54,387


33,129Accounts receivable, net of allowance for doubtful accounts of $226 and $229 at December 31, 2010 and 2009, respectively


6,078


5,731Deferred income taxes


5,551


4,945Prepaid expenses and other current assets


1,666


1,617Income taxes receivable, net


2,099


2,613Total current assets


111,525


90,257Property and equipment, net


33,638


33,885Intangible assets, net


7,525


6,565Goodwill


1,257


1,257Deferred income taxes


12,192


13,152Long-term investments


5,313


8,515Other assets


845


587Total assets

$
172,295

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

$
774

$
826Accrued expenses


9,659


5,663Deferred revenue


5,698


43Total current liabilities


16,131


6,532Other long-term liabilities


8,596


5,862Commitments and contingencies (Note 9)Stockholders' equity:Preferred stock$0.0001 par value, 5,000 shares authorized at December 31, 2010 and 2009; no shares issued and outstanding





Common stock$0.0001 par value, 70,000 shares authorized at December 31, 2010 and 2009; 20,325 and 19,652 shares issued at December 31, 2010
and 2009, respectively; 17,325 and 17,522 shares outstanding at December 31, 2010 and 2009, respectively


3


2Additional paid-in capital


180,708


161,710Treasury stock, at cost3,000 and 2,130 at December 31, 2010 and 2009, respectively


(74,923
)

(45,498
)Accumulated other comprehensive income


491


362Retained earnings


41,289


25,248Total stockholders' equity


147,568


141,824Total liabilities and stockholders' equity

$
172,295

$
154,218


See
accompanying notes to consolidated financial statements.

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DTS, INC.        CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31,2010

2009

2008(Amounts in thousands,
except per share amounts)Revenue

$
87,096

$
77,722

$
60,238Cost of revenue


1,583


1,766


1,179Gross profit


85,513


75,956


59,059Operating expenses:Selling, general and administrative


49,035


48,717


36,794Research and development


12,075


9,087


6,924In-process research and development








1,090Total operating expenses


61,110


57,804


44,808Operating income


24,403


18,152


14,251Interest and other income, net


418


1,063


2,418Income from continuing operations before income taxes


24,821


19,215


16,669Provision for income taxes


9,781


8,525


7,158Income from continuing operations


15,040


10,690


9,511Income (loss) from discontinued operations, net of tax


1,001


(88
)

1,856Net income

$
16,041

$
10,602

$
11,367Net income per common share:Basic:Continuing operations

$
0.88

$
0.62

$
0.54Discontinued operations


0.06





0.10Net income

$
0.94

$
0.62

$
0.64Diluted:Continuing operations

$
0.84

$
0.60

$
0.52Discontinued operations


0.06





0.11Net income

$
0.90

$
0.60

$
0.63Weighted average shares used to compute net income per common share:Basic


17,041


17,145


17,641Diluted


17,805


17,689


18,145


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

Amount(Amounts in thousands)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


141,824Exercise of options and related tax benefit of $628


628





11,607











11,607Issuance of common stock under employee stock purchase plan


82


1


1,198











1,199Restricted stock award forfeitures and shares withheld for taxes


(39
)




(1,132
)










(1,132
)Restricted stock unit vesting


2

















Stock-based compensation charge








7,325











7,325Stock repurchases


(870
)







(29,425
)







(29,425
)Comprehensive income:Net income

















16,041


16,041Other comprehensive income














129





129Total comprehensive income




















16,170Balance at December 31, 2010


17,325

$
3

$
180,708

$
(74,923
)
$
491

$
41,289

$
147,568


See accompanying notes to consolidated financial statements.

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DTS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,2010

2009

2008(Amounts in thousands)Cash flows from operating activities:Net income

$
16,041

$
10,602

$
11,367Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


4,881


3,828


2,672Adjustment to carrying value of assets held for sale








(4,963
)Loss (gain) on sale of assets from discontinued operations


(2,000
)




2,099Stock-based compensation charges


7,325


5,650


4,655Deferred income taxes


354


(308
)

(429
)In-process research and development








1,090Tax benefits from stock-based awards


628


491


206Excess tax benefits from stock-based awards


(508
)

(640
)

(204
)Other


163


214


226Changes in operating assets and liabilities:Accounts receivable


(347
)

2,786


3,950Prepaid expenses and other assets


(307
)

(299
)

(684
)Accounts payable, accrued expenses and other liabilities


5,646


(267
)

(87
)Deferred revenue


6,615


(15
)

479Income taxes receivable


514


(146
)

(332
)Net cash provided by operating activities


39,005


21,896


20,045Cash flows from investing activities:Purchases of investments:Held-to-maturity


(69,143
)

(45,143
)

(59,149
)Available for sale








(12,909
)Maturities of held-to-maturity investments


48,837


49,261


36,050Sales of available for sale investments


2,250


2,950


37,175Proceeds from the sale of assets from discontinued operations


2,000





8,578Cash paid for business and technology acquisitions, net





(330
)

(7,726
)Purchase of property and equipment


(3,172
)

(12,173
)

(19,969
)Purchase of intangible assets


(2,384
)

(322
)

(584
)Net cash used in investing activities


(21,612
)

(5,757
)

(18,534
)Cash flows from financing activities:Proceeds from the issuance of common stock under stock-based compensation plans


12,178


4,043


7,620Repurchase of common stock for restricted stock withholdings


(1,132
)

(368
)

(595
)Excess tax benefits from stock-based awards


508


640


204Purchase of treasury stock


(29,425
)

(3,890
)

(18,938
)Net cash provided by (used in) financing activities


(17,871
)

425


(11,709
)Net change in cash and cash equivalents of discontinued operations








333Net increase (decrease) in cash and cash equivalents


(478
)

16,564


(9,865
)Cash and cash equivalents, beginning of the year


42,222


25,658


35,523Cash and cash equivalents, end of the year

$
41,744

$
42,222

$
25,658Supplemental disclosure of cash flow information:Cash paid for income taxes

$
1,903

$
2,028

$
167


See accompanying notes to consolidated financial statements.

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Table of Contents



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 audio technologies enable the delivery and playback of clear, compelling high-definition audio 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, set-top-boxes, mobile phones and home theater systems. In addition, the Company provides products and services to motion picture
studios, radio and television broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded soundtracks in movies, sporting
events, television shows and music content. The Company also provides a suite of audio processing technologies designed to enhance the entertainment experience from products subject to physical
limitations, such as TVs, PCs and smartphones.

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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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 reclassified its balance sheets and statements of income 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, municipal securities and United States ("U.S.") 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, if any, reported, net of tax, in accumulated other comprehensive income. Investments in debt
securities classified as held-to-maturity, consistent with the Company's intent and ability to hold, are reported at amortized cost. All income generated and realized gains or
losses from 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 U.S. 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 17% and 15%, respectively, of revenues for the year ended December 31, 2010. 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. The revenue from the customer accounting for 13% of revenues for the year
ended December 31, 2009 is the only activity within this discussion that resulted from a non-recurring intellectual property compliance or enforcement activity. For additional
information, see the "Revenue Recognition" significant accounting policy below.

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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)

Four
customers accounted for 27%, 17%, 13% and 11%, respectively, of accounts receivable at December 31, 2010. Two customers accounted for 26% and 10%, respectively, of accounts
receivable at December 31, 2009.

The
Company deposits its cash and cash equivalents in accounts with major financial institutions worldwide. At times, such deposits may be in excess of insured limits. The Company's
investment accounts are with major financial institutions and include investment grade municipal securities and U.S. 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.

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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 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 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

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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)

estimated
useful lives, typically ten years and five years, respectively. The amortization period commences when the patent or trademark is issued.



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
2010 and 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

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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)

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.

Deferred
revenues arise primarily from payments for licensing audio technology received in advance of the culmination of the earnings process. Deferred revenues expected to be recognized
within the next twelve months are classified within current liabilities. Deferred revenues will be recognized as revenue in future periods when the applicable revenue recognition criteria are met.

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,
2010, 2009 and 2008, withholding taxes were $5,305, $4,029 and $3,491, 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 IPR&D was determined by
identifying specific acquired IPR&D projects that would be continued and for which the fair value is estimable with reasonable reliability. Upon consummation of a business combination, acquired IPR&D
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
2010 and 2009, the Company did not engage in any business combinations.

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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 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 U.S. dollars have been deferred as a component of accumulated
other comprehensive income in stockholders' equity.

The
functional currency of the Company's other wholly-owned subsidiaries is the U.S. 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 in accordance with GAAP, and comprehensive income, 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 $3,678, $2,744 and $2,266 for the years ended
December 31, 2010, 2009 and 2008, 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 and units, as part of its equity incentive plans. For a majority of the restricted stock
granted, the number of shares released on the date the restricted stock vest is net of the statutory withholding requirements that the Company pays to the appropriate taxing

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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)

authorities
on behalf of its employees. The shares repurchased to satisfy the statutory withholding requirements are immediately and effectively 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 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.



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

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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)

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

Note 3Cash and Investments

Cash and investments consist of the following:

As of December 31,2010

2009Cash and cash equivalents:Cash

$
14,840

$
28,424Money market accounts


17,846


13,293U.S. government and agency securities


5,553


250Municipal securities


3,505


255Total cash and cash equivalents

$
41,744

$
42,222Short-term investments:Held-to-maturity securities:Certificates of deposit

$
2,018

$
2,470Commercial paper


5,648


5,303U.S. government and agency securities


34,084


15,245Municipal securities


12,637


10,111Total short-term investments

$
54,387

$
33,129Long-term investments:Available-for-sale securities:Municipal securities

$


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


104


1,248Commercial paper





3,720U.S. government and agency securities


5,051


Municipal securities


158


1,297Total long-term investments

$
5,313

$
8,515


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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 3Cash and Investments (Continued)

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, 2010, 2009 and 2008.

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."

The
contractual maturities of investments at December 31, 2010 are as follows:

Held-to-maturity securities:Due within one year

$
54,387Due after one year through five years


5,313Total investments

$
59,700


Note 4Fair Value Measurements

During the second quarter of 2010, the Company's remaining auction rate securities were all redeemed at par. As of December 31, 2009, the Company held certain financial assets
that were required to be measured at fair value on a recurring basis. These financial assets were the Company's auction rate security instruments, which were classified as
available-for-sale investments. The auction rate securities held at December 31, 2009 were tax-exempt municipal bonds issued by governmental entities located
within the U.S. that are insured and had a AAA rating.

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, the Company owned $2,250 par value of these securities. From
January 2, 2009 and ending January 4, 2011, the Company had 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 continued to earn and receive all interest that was 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 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 agreed to provide "no net cost" loans to holders of the illiquid
securities that were 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 had Level 2 inputs within the fair value hierarchy as of December 31, 2009, and par value or cost was a reasonable approximation of
fair value.

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

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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)

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

$



Note 5Property and Equipment

Property and equipment consist of the following:

As of December 31,2010

2009Land

$
6,600

$
6,600Building and improvements(1)


21,057


19,946Machinery and equipment


2,854


2,647Office furniture and fixtures


5,045


5,300Leasehold improvements


1,527


1,156Software


5,647


5,60842,730


41,257Less: Accumulated depreciation


(9,092
)

(7,372
)Property and equipment, net

$
33,638

$
33,885


(1)Beginning
in November 2009, the Company is using this building as its new corporate headquarters. Also, depreciation expense for this building and related
improvements began as of November 2009.


Depreciation
expense was $3,468, $2,281 and $2,042 for the years ended December 31, 2010, 2009 and 2008, respectively.

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 $841, $1,031 and $362 of amortization relating to existing technologies for the years ended December 31, 2010, 2009 and 2008, respectively.
Included in operating expenses were $572, $516 and $268 of amortization relating to existing technologies, patents and trademarks for the years ended December 31, 2010, 2009 and 2008,
respectively. The following table

65

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 6Goodwill and Intangibles (Continued)

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, 2010

As of December 31, 2009Weighted
Average
Life
(Years)Gross
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Amount

Accumulated
Amortization

Net
Carrying
AmountAcquired intangible assets:Existing technology


6

$
6,276

$
(3,228
)
$
3,048

$
6,276

$
(2,367
)
$
3,909Contractual rights(1)


5


2,000





2,000








Customer relationships


7


1,050


(300
)

750


1,050


(150
)

900Non-compete


3


515


(343
)

172


515


(172
)

343Tradename


3


190


(127
)

63


190


(63
)

127$
10,031

$
(3,998
)
$
6,033

$
8,031

$
(2,752
)
$
5,279Other intangible assets:Patents


10


1,836


(684
)

1,152


1,502


(557
)

945Trademarks


5


508


(168
)

340


469


(128
)

3412,344


(852
)

1,492


1,971


(685
)

1,286Total intangible assets




$
12,375

$
(4,850
)
$
7,525

$
10,002

$
(3,437
)
$
6,565


(1)Amortization
will begin upon the in service date, which is expected to occur in 2011. A final payment of $1,200 is due at the in service date.


The
Company expects the future amortization of intangible assets held at December 31, 2010 to be as follows:

Years Ending December 31,

Estimated
Amortization
Expense2011

$
1,7592012


1,5522013


1,3702014


1,3162015


1,3002016 and thereafter


228Total

$
7,525


66

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 7Accrued Expenses

Accrued expenses consist of the following:

As of December 31,2010

2009Accrued payroll and related benefits

$
7,264

$
3,969Production advance


382


383Other


2,013


1,311Total accrued expenses

$
9,659

$
5,663


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.

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.

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

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 8Business Combination (Continued)

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.

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.

68

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 8Business Combination (Continued)

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 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 31,2011

$
1,0992012


7952013


7522014


4622015


2262016 and thereafter


1,640$
4,974


Rent
expense amounted to $931, $1,436 and $1,145 for the years ended December 31, 2010, 2009 and 2008, 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,

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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)

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.

Note 10Income Taxes

U.S. and foreign income (loss) before taxes and details of the provision for income taxes are as follows:

Years Ended December 31,2010

2009

2008U.S.

$
1,385

$
2,579

$
2,734Foreign


23,436


16,636


13,935Income before income taxes

$
24,821

$
19,215

$
16,669Current:Federal

$
(152
)
$
999

$
1,012State


1,753


1,268


143Foreign


7,825


6,567


4,608Total current


9,426


8,834


5,763Deferred:Federal


1,121


(48
)

1,801State


(251
)

(26
)

(633
)Foreign


(515
)

(235
)

227Total deferred


355


(309
)

1,395Provision for income taxes

$
9,781

$
8,525

$
7,158


70

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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 31,2010

2009Deferred tax assets:Accrued revenues

$
966

$
1,384Net operating loss carryforwards


3,641


6,121Capital loss carryforwards


536


537Inventory


22


196Credit carryforwards


5,599


5,344Deferred Revenue


385


Stock-based compensation


4,147


3,630Accruals, reserves and other


3,396


1,930Acquired intangibles


746


593Total gross deferred tax assets


19,438


19,735Valuation allowance


(996
)

(537
)Total deferred tax assets


18,442


19,198Deferred tax liabilities:Depreciation and amortization


699


1,101Deferred tax assets, net

$
17,743

$
18,097Current deferred tax assets

$
5,551

$
4,945Non-current deferred tax assets, net


12,192


13,152Deferred tax assets, net

$
17,743

$
18,097


Other
than the valuation allowances for a U.S. capital loss carryforward and a foreign net operating loss carryforward, there was no valuation allowance for deferred tax assets, net, of
$17,743 and $18,097 at December 31, 2010 and 2009, 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, 2010, the Company had approximately $41,408 in tax loss carryforwards. These tax loss carryforwards consist of federal and state net operating losses of $30,426
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 $8,230. 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,

71

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 10Income Taxes (Continued)

2010,
the Company had foreign tax credit carryforwards of $3,892, which begin to expire in 2015, and R&D and other credits of $1,707, which begin to expire in 2023.

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 31,2010

2009

2008Statutory federal rate


35.0
%

35.0
%

35.0
%State income taxes, net


3.3


3.1


3.3Effect of varying foreign rates


(4.8
)

(2.0
)

(1.0
)Tax exempt interest


(0.1
)

(0.7
)

(3.7
)Equity based compensation expense


2.2


1.6


1.8Research and development credits


(0.8
)

(1.0
)

(0.4
)Unrecognized tax benefits


4.8


9.4


6.9Other


(0.2
)

(1.0
)

1.0Effective tax rate


39.4
%

44.4
%

42.9
%


The
Company had not provided for U.S. income taxes or foreign withholding taxes in its effective tax rate on approximately $49,605 of undistributed earnings from its foreign subsidiaries
as of December 31, 2010. The Company intends to reinvest these earnings indefinitely in operations outside of the U.S.

At
December 31, 2010 and 2009, the Company's liability for uncertain tax positions increased to $7,271 and $5,578, respectively, which was recorded in other long-term
liabilities. This amount consists of $7,205 and $5,523, respectively, for unrecognized tax benefits and $66 and $55, respectively, for accruals related to the payment of interest. The increase in
unrecognized tax benefits during the year ended December 31, 2010 was primarily attributable to uncertain tax positions relating to the Company's eligibility for the extraterritorial income
exclusion, 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. The Company believes that it has adequately provided for all tax positions based on its assessment of many factors, including past experience and
interpretations of tax law applied to the facts of each matter. However, due to inherent uncertainties in estimating accruals for uncertain tax positions, amounts asserted by tax authorities could be
greater or less than the amounts accrued by the Company. 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, 2010, 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, 2008, 2009 and 2010.

Unrecognized Tax BenefitsBalance at January 1, 2008

$
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


5,523Additions for tax positions of prior years


335Additions for tax positions of the current year


1,347Balance at December 31, 2010

$
7,205


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 ("IRS") 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 tax
audits by any foreign jurisdictions, the IRS 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 transition services to Reliance related to DI. The Company has concluded that
the direct cash flows

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 11Discontinued Operations (Continued)

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.

The
Company entered into a Settlement Agreement and Release (the "Settlement and Release Agreement"), dated June 22, 2010, with Datasat Digital Entertainment, Inc.,
Beaufort International Group Plc and Datasat Communications Limited (collectively the "Datasat Parties"), providing that the Datasat Parties pay the Company $2,000 and pursuant to which the
Datasat Parties are released from the obligation to pay the Company any further consideration associated with the purchase of its digital cinema business on May 9, 2008. The Settlement and
Release Agreement requires that an initial payment of $1,000 ("Initial Payment") be paid to the Company on June 25, 2010, and the final payment of $1,000 ("Final Payment") be paid to the
Company on July 23, 2010. Both of the Initial and Final Payments were received in accordance with the terms of the Settlement and Release Agreement. For additional information, refer to
Part I Item 3, "Legal Proceedings," in this report.

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 11Discontinued Operations (Continued)

The following table presents revenue and expense information for the discontinued operations of DTS Digital Cinema for the years ended December 31, 2010, 2009 and 2008.

For the Years Ended December 31,2010

2009

2008Revenue

$


$


$
6,214Pre-tax income (loss)


1,623
(1)

(141
)(2)

(768
)(3)Income tax provision (benefit)


622


(53
)

(2,624
)(4)Income (loss) from discontinued operations, net of tax

$
1,001

$
(88
)
$
1,856


(1)Includes
proceeds from the aforementioned Settlement and Release Agreement.(2)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.(3)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.(4)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.




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.

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.

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 12Stock-Based Compensation (Continued)

The
Company's stock-based compensation cost and related income tax benefit for the years ended December 31, 2010, 2009 and 2008 were as follows:

For the Years Ended December 31,2010

2009

2008Stock-based compensation cost:Cost of revenue

$
10

$
19

$
12Selling, general and administrative


5,791


4,831


3,760Research and development


1,524


800


569Total continuing operations


7,325


5,650


4,341Discontinued operations








314Total stock-based compensation cost

$
7,325

$
5,650

$
4,655Income tax benefit

$
2,985

$
2,302

$
1,897




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 ("IRC") 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.

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.

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 12Stock-Based Compensation (Continued)



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 31,2010

2009

2008Risk free interest rate


1.9
%

1.6
%

1.9
%Expected lives (years)


3.9


3.7


3.8Dividend yield


0
%

0
%

0
%Expected volatility


50
%

50
%

45
%


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. The 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.

There
were 457, 510 and 381 options granted during the year ended December 31, 2010, 2009 and 2008, respectively. The weighted-average grant-date fair value of options
granted during the year ended December 31, 2010, 2009 and 2008 was $11.28, $6.64 and $8.26, respectively. Compensation expense for stock options was $3,498, $2,859 and $2,544 for the years
ended December 31, 2010, 2009 and 2008, respectively.

The
following table summarizes information about stock option activity during the year ended December 31, 2010:

Options
Outstanding

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Life (Years)

Aggregate
Intrinsic
ValueOptions outstanding at December 31, 2009


1,997

$
18.13Granted


457


28.07Exercised


(628
)

17.42Expired or cancelled


(9
)

20.85Options outstanding at December 31, 2010


1,817

$
20.87


6.93

$
51,202Options exercisable at December 31, 2010


911

$
18.96


5.47

$
27,423


The
aggregate intrinsic value of options exercised during the year ended December 31, 2010, 2009 and 2008 was $13,689, $2,510 and $7,038, respectively. As of December 31,
2010, total remaining unearned compensation related to unvested stock options was approximately $6,023, which will be amortized over the weighted-average remaining service period of 1.3 years.

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 12Stock-Based Compensation (Continued)

In
accordance with the Evergreen Provision in the 2003 Plan and as approved by the Board of Directors, effective January 1, 2010, the number of shares reserved under the 2003 Plan
was increased by 695 shares.



Compensation expense on shares of restricted stock, awards and units, was $3,242, $2,350 and $1,832 for the years ended
December 31, 2010, 2009 and 2008. The following table summarizes information about restricted stock activity during the year ended December 31, 2010:

Number of
Shares

Weighted-
Average
Grant-Date
Fair ValueUnvested stock at December 31, 2009


295

$
20.29Granted


149


28.94Vested


(128
)

20.98Forfeited


(8
)

25.44Unvested stock at December 31, 2010


308

$
24.06


As
of December 31, 2010, total remaining unearned compensation related to restricted stock was $4,852, which will be amortized over the weighted-average remaining service period
of 1.2 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 31,2010

2009

2008Risk free interest rate


0.8
%

1.0
%

1.9
%Expected lives (years)


1.5


1.2


0.7Dividend yield


0
%

0
%

0
%Expected volatility


47
%

64
%

57
%


The
dividend yield was not calculated because the Company does not currently expect to pay a dividend. The expected life represented the service period. The expected volatility was based
on the

78

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Table of Contents

DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 12Stock-Based Compensation (Continued)

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 service period.

Compensation
expense under the ESPP was $585, $441 and $278 for the years ended December 31, 2010, 2009 and 2008, 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 income was $0, $0 and $1 for the years ended December 31, 2010, 2009 and 2008, respectively, and was recorded to selling, general and administrative
expenses.

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 IRC. Prior to 2010, the Company
allowed eligible employees to allocate up to 15% of salary through payroll deductions. Effective beginning in 2010, the Company allows eligible employees to allocate up to 100% of their annual
compensation or 20% of their annual compensation, if considered highly compensated under Section 401(k) of the IRC, up to the annual maximum described under Section 401(k) of the IRC
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. Effective beginning 2010, the Company adopted a Roth 401(k) option and it matches 100% of the first 4% of salary contributed to the plan and may match up to 6% of salary if certain
financial targets are met. For the years ended December 31, 2010, 2009 and 2008, the costs of these matching payments were $493, $206 and $224, 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

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 14Stock Repurchase Plans (Continued)

market
or in privately negotiated transactions. Through the fourth quarter of 2010, the Company repurchased all shares of common stock under this authorization for an aggregate of $33,315.

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

Note 15Geographic Information

The Company's revenue by geographical area, based on the customer's country of domicile, for the years ended December 31, 2010, 2009 and 2008 was as follows:

For the Years Ended December 31,2010

2009

2008U.S.

$
9,805

$
17,421

$
5,160Japan


41,392


34,241


31,535South Korea


21,148


14,414


12,735Other international


14,751


11,646


10,808Total international


77,291


60,301


55,078Total revenues

$
87,096

$
77,722

$
60,238


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

As of December 31,2010

2009U.S.

$
32,207

$
32,494International


1,431


1,391Total long-lived tangible assets

$
33,638

$
33,885


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 outstanding stock options, unvested restricted stock, and the
ESPP using the "treasury stock" method.

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DTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except per share data)

Note 16Net Income Per Share (Continued)

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

For the Years Ended December 31,2010

2009

2008Basic net income per common share:Numerator:Income from continuing operations

$
15,040

$
10,690

$
9,511Income (loss) from discontinued operations


1,001


(88
)

1,856Net income

$
16,041

$
10,602

$
11,367Denominator:Weighted average common shares outstanding


17,041


17,145


17,641Continuing operations

$
0.88

$
0.62

$
0.54Discontinued operations


0.06





0.10Basic net income per common share

$
0.94

$
0.62

$
0.64Diluted net income per common share:Numerator:Income from continuing operations

$
15,040

$
10,690

$
9,511Income (loss) from discontinued operations


1,001


(88
)

1,856Net income

$
16,041

$
10,602

$
11,367Denominator:Weighted average shares outstanding


17,041


17,145


17,641Effect of dilutive securities:Common stock options


620


448


442Restricted stock


128


88


60ESPP


16


8


2Diluted shares outstanding


17,805


17,689


18,145Continuing operations

$
0.84

$
0.60

$
0.52Discontinued operations


0.06





0.11Diluted net income per common share

$
0.90

$
0.60

$
0.63


For
the years ended December 31, 2010, 2009 and 2008, 260, 631 and 528 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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Table of Contents

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. 31,2010Revenues

$
21,736

$
17,460

$
21,041

$
26,859Gross profit

$
21,286

$
17,000

$
20,720

$
26,507Income from continuing operations

$
3,920

$
1,556

$
3,417

$
6,147Income (loss) from discontinued operations, net of tax


(170
)

1,173
(1)

(9
)

7Net income

$
3,750

$
2,729

$
3,408

$
6,154Net income (loss) per common share:Basic:Continuing operations

$
0.23

$
0.09

$
0.20

$
0.36Discontinued operations


(0.01
)

0.07





Net income

$
0.22

$
0.16

$
0.20

$
0.36Diluted:Continuing operations

$
0.22

$
0.09

$
0.19

$
0.34Discontinued operations


(0.01
)

0.06





Net income

$
0.21

$
0.15

$
0.19

$
0.342009Revenues

$
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 income

$
187

$
3,630

$
1,945

$
4,840Net income (loss) 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

$
0.27


---

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Table of Contents



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)2010

$
229

$


$
3

$
2262009


64


170


5


2292008


81


15


32


64


---

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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, 2010.

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, 2010, 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, 2010.

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, 2010 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

Item 9B.    Other Information

None.

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Table of Contents

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 2011 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, 2010 (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

Stock Purchase Agreement among the Registrant, DTS Digital Images, Inc., and Reliance Big Entertainment Private Limited, dated April 4, 2008(1)2.2

Asset Purchase Agreement among the Registrant, Beaufort California, Inc., and Beaufort International Group, Inc., dated May 9, 2008(2)2.3

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(3)3.2

Restated Certificate of Incorporation, as amended by Amendment dated May 20, 2005(4)4.1

Specimen Common Stock Certificate(5)10.1

1997 Stock Option Plan(6)*10.2

Form of Incentive Stock Option Agreement for grants under the 1997 Stock Option Plan(6)*10.3

Form of Nonqualified Stock Option Agreement for grants under the 1997 Stock Option Plan(6)*10.4

2002 Stock Option Plan(6)*10.5

Form of Incentive Stock Option Agreement for grants under the 2002 Stock Option Plan(6)*10.6

Form of Non-qualified Stock Option Agreement for grants under the 2002 Stock Option Plan(6)*10.7

2003 Equity Incentive Plan, as amended on May 9, 2005, May 15, 2008, February 19, 2009, February 15, 2010, June 3, 2010 and October 8, 2010(7)*10.8

Form of Grant of Stock Option under 2003 Equity Incentive Plan(5)*10.9

Form of Option Exercise and Stock Purchase Agreement under 2003 Equity Incentive Plan(5)*10.10

Form of Restricted Stock Grant Notice under 2003 Equity Incentive Plan(5)*10.11

Form of Restricted Stock Grant Notice and Restricted Stock Agreement under 2003 Equity Incentive Plan (for annual non-employee director grants)(8)*10.12

Form of Restricted Stock Grant Notice and Restricted Stock Agreement under 2003 Equity Incentive Plan (for employee and consultant grants)(8)*


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Table of Contents

Exhibit
Number

Description10.13

Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under 2003 Equity Incentive Plan(9)*10.14

2003 Employee Stock Purchase Plan(5)*10.15

2003 Foreign Subsidiary Employee Stock Purchase Plan(5)*10.16

Description of acceleration of vesting of certain unvested stock options(10)*10.17

Executive Employment Agreement by and between the Registrant and Jon Kirchner, dated February 17, 2011(11)*10.18

Employment Agreement by and between the Registrant and William Paul Smith, dated November 1, 2002(6)*10.19

Second Amendment to Service Agreement between the Registrant and William Paul Smith, dated June 3, 2005(4)*10.20

Employment Agreement by and between the Registrant and Melvin Flanigan, effective as of May 20, 2005(4)*10.21

Amendment to Employment Agreement by and between the Registrant and Melvin Flanigan, effective as of December 17, 2008(12)*10.22

Employment Agreement by and between the Registrant and Blake Welcher, effective as of May 20, 2005(4)*10.23

Amendment to Employment Agreement by and between the Registrant and Blake Welcher, effective as of December 17, 2008(12)*10.24

Employment Agreement by and between the Registrant and Brian D. Towne, effective as of May 20, 2005(4)*10.25

Amendment to Employment Agreement by and between the Registrant and Brian D. Towne, effective as of December 17, 2008(12)*10.26

Employment Agreement by and between the Registrant and Brian D. Towne, executed May 8, 2009, effective as of April 14, 2009(13)*10.27

Amendment to Employment Agreement by and between the Registrant and Brian D. Towne, effective as of June 28, 2010 (14)*10.28

Employment Agreement by and between the Registrant and Frederick L. Kitson, executed on March 3, 2010 and effective as of February 26, 2010(9)*10.29

Employment Agreement by and between the Registrant and Patrick Watson, effective as of May 20, 2005(4)*10.30

Amendment to Employment Agreement by and between the Registrant and Patrick Watson, effective as of December 17, 2008(12)*10.31

Employment Agreement by and between the Registrant and Sharon Faltemier, dated as of June 28, 2006(15)*10.32

Amendment to Employment Agreement by and between the Registrant and Sharon Faltemier, effective as of December 17, 2008(12)*10.33

Employment Agreement between the Registrant and Daniel E. Slusser, executed as of January 22, 2008, effective May 31, 2007(16)*


87

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Table of Contents

Exhibit
Number

Description10.34

Amendment to Employment Agreement by and between the Registrant and Daniel E. Slusser, effective as of December 17, 2008(12)*10.35

Employment Agreement by and between the Registrant and Daniel E. Slusser, executed March 23, 2009, effective as of January 1, 2009(13)*10.36

Amendment to Employment Agreement by and between the Registrant and Daniel E. Slusser, effective as of February 9, 2010(17)*10.37

Form of Indemnification Agreement between the Registrant and its directors(6)10.38

Form of Indemnification Agreement between the Registrant and its officers(6)10.39

Revolving Credit Agreement between the Registrant and Comerica BankCalifornia, effective June 30, 2004(18)10.40

Loan Extension Agreement and Modification to Loan Documents between the Registrant and Comerica Bank, effective July 7, 2005(19)10.41

Loan Extension Agreement and Modification to Loan Documents between the Registrant and Comerica Bank, effective June 12, 2006(15)10.42

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.(20)21.1

List of all subsidiaries of the Registrant23.1

Consent of Grant Thornton 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


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Table of Contents

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, 2011.

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, 2011/s/ MELVIN L. FLANIGAN Melvin L. Flanigan

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

March 3, 2011/s/ JOERG D. AGIN Joerg D. Agin

Lead Independent Director

March 3, 2011/s/ CRAIG S. ANDREWS Craig S. Andrews

Director

March 3, 2011/s/ L. GREGORY BALLARD L. Gregory Ballard

Director

March 3, 2011/s/ C. ANN BUSBY C. Ann Busby

Director

March 3, 2011/s/ BRADFORD D. DUEA Bradford D. Duea

Director

March 3, 2011/s/ V. SUE MOLINA V. Sue Molina

Director

March 3, 2011/s/ RONALD N. STONE Ronald N. Stone

Director

March 3, 2011


90

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