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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2010**

 

**Commission File Number: 0-21123**

 

**SRS LABS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**             | ** ** | **33-0714264**                       |
|--------------------------|------------|--------------------------------------|
| (State of incorporation) |       | (I.R.S. Employer Identification No.) |

 

| **2909 Daimler Street, Santa Ana, California** | ** ** | **92705**  |
|------------------------------------------------|------------|------------|
| (Address of principal executive offices)       |       | (Zip Code) |

 

**(949) 442-1070**

(Registrant’s telephone number, including area code)

 

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

 

| **Title of each class**   | ** ** | **Name of each exchange on which registered** |
|------------------------------------------|------------|-----------------------------------------------------------------------------|
| Common Stock, Par Value $0.001 Per Share |       | The NASDAQ Stock Market LLC                                            |
|                                     |       | (NASDAQ Global Market)                                                      |

 

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 x

 

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 x

 

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 x 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 (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

| Large accelerated filer o                |   | Accelerated filer x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

As of June 30, 2010, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was approximately $108,889,731 (computed using the closing price of $9.15 per share of common stock on such date, as reported by The NASDAQ Stock Market). Shares of the registrant’s common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

 

As of February 2, 2011, 14,862,325 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held in 2011 are incorporated by reference in Part III of this Form 10-K.

 

 

 

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**SRS LABS, INC.**

**Annual Report on Form 10-K**

**Table of Contents**

 
| ** **    | ** ** | ** **                                                                                                            | ** ** | **Page** |
|---------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|----------|
|          | ** ** | **PART I**                                                                                                       |       |     |
| Item 1.  |       | Business                                                                                                              |       | 3        |
| Item 1A. |       | Risk Factors                                                                                                          |       | 10       |
| Item 1B. |       | Unresolved Staff   Comments                                                                                           |       | 14       |
| Item 2.  |       | Properties                                                                                                            |       | 14       |
| Item 3.  |       | Legal Proceedings                                                                                                     |       | 14       |
| Item 4.  |       | Removed and Reserved                                                                                                  |       | 15       |
|          | ** ** | **PART II**                                                                                                      |       |     |
| Item 5.  |       | Market for   Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases   of Equity Securities |       | 15       |
| Item 6.  |       | Selected Financial   Data                                                                                             |       | 17       |
| Item 7.  |       | Management’s   Discussion and Analysis of Financial Condition and Results of Operations                          |       | 18       |
| Item 7A. |       | Quantitative   and Qualitative Disclosures About Market Risk                                                          |       | 24       |
| Item 8.  |       | Financial   Statements and Supplementary Data                                                                         |       | 25       |
| Item 9.  |       | Changes In and   Disagreements with Accountants on Accounting and Financial Disclosures                               |       | 25       |
| Item 9A. |       | Controls and   Procedures                                                                                             |       | 25       |
| Item 9B. |       | Other Information                                                                                                     |       | 26       |
|          | ** ** | **PART III**                                                                                                     |       |     |
| Item 10. |       | Directors,   Executive Officers and Corporate Governance                                                              |       | 26       |
| Item 11. |       | Executive   Compensation                                                                                              |       | 26       |
| Item 12. |       | Security   Ownership of Certain Beneficial Owners and Management and Related   Stockholders Matters                   |       | 26       |
| Item 13. |       | Certain   Relationships and Related Transactions, and Director Independence                                           |       | 26       |
| Item 14. |       | Principal   Accounting Fees and Services                                                                              |       | 26       |
|          | ** ** | **PART IV**                                                                                                      |       |     |
| Item 15. |       | Exhibits and   Financial Statement Schedule                                                                           |       | 27       |
| Signatures    |       |                                                                                                                  |       | 31       |

 

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As used herein, the “Company,” “SRS Labs,” “SRS,” “we,” “us,” or “our” means SRS Labs, Inc., its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen Representative Office of SRS Labs, Inc., Shanghai Representative Office of SRS Labs, Inc, and SRS Labs Japan, KK. Circle Surround®, Circle Surround IITM, CS AutoTM, SRS CS Auto DXTM, Circle Surround AutomotiveTM, Circle Surround Automotive DXTM and SRS 5.1 Surround SoundTM, SRS WOW®, SRS WOW XTTM, SRS WOW HDTM, SRS TruBass®, SRS FOCUS®, SRS HeadphoneTM, SRS Dialog ClarityTM, SRS TruSurround®, SRS TruSurround XTTM, TruSurround HDTM, SRS 3D®, SRS AutoTM, VIPTM, TruSurround HD4TM, CircleCinemaTM, iWOWTM, SRS Headphone 360TM, SRS Premium SoundTM, SRS TruChatTM, SRS TruGamingTM, SRS TruMediaTM, SRS TruToolsTM, SRS TruVoiceTM, TruVolumeTM, TruThunderTM, SRS TruSpeakTM, Cinema SoundTM, SRS Noise ReductionTM, SRS Audio Sandbox®, SRS Headphone Pro® , MyVolumeTM, SRS HD Audio LabTM, SRS SoundTM, SRS StudioSoundTM, SRS StudioSound HDTM, SRS TheaterSoundTM, SRS TRuEQTM and TruCircleTM are our U.S. trademarks. All other trademarks and trade names appearing are the property of their respective owners.

 

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Some of the statements in this Annual Report on Form 10-K contain forward-looking statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events, which involve risks and uncertainties. All statements other than statements of historical facts included in this Annual Report, including statements relating to expectation of future financial performance and capital requirements, continued growth, changes in economic conditions or capital markets, changes in customer usage patterns and preferences and the impact of recent accounting pronouncements, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Annual Report involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed in this Annual Report, including, but not limited to, those listed under “Risk Factors” in Item 1A.

 

**PART I**

 

**Item 1.****  ****Business**

 

**Overview**

 

We are the recognized global leader in the practical application of psychoacoustics*,* the science behind how the human ear operates, and in the post processing segment of the market for audio delivery.  Our award-winning audio enhancement technologies and solutions dramatically restore audio and voice to its natural state, the way it was originally recorded, in both dimension and clarity, thus providing a superior consumer experience for a wide variety of consumer electronic (“CE”) devices such as televisions, personal computers and mobile phones.

 

Our mission is to be the dominant worldwide provider of audio and voice solutions that allow consumers to effortlessly experience rich, natural sound, the way their ears were meant to hear it.

 

Our operations are conducted through SRS Labs, Inc., the parent company, and its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen Representative Office of SRS Labs, Inc. (a Chinese company), Shanghai Representative Office of SRS Labs, Inc. (a Chinese company) and SRS Labs Japan, KK (a Japanese company). Our business is focused on developing and licensing audio, voice and surround sound technology solutions to many of the world’s leading original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), software providers and semiconductor companies.  We also sell and market stand-alone software and hardware products through the Internet.

 

Further financial information regarding mix of revenues by market sectors, geographic areas and customer concentration is included in this Annual Report on Form 10-K under “Item 8. Financial Statements and Supplemental Data” and in Notes 1 and 7 to the Notes to Consolidated Financial Statements. We also refer you to “Item 1A. Risk Factors” for a discussion of certain risks relating to our business.

 

We were incorporated in the State of California on June 23, 1993 and reincorporated in the State of Delaware on June 28, 1996. Our executive offices are located at 2909 Daimler Street, Santa Ana, California 92705. Our telephone number is (949) 442-1070.

 

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**Our Products and Technologies**

 

Our licensing business is focused on developing and marketing audio rendering, voice and surround sound technologies and solutions to OEMs, ODMs, semiconductor manufacturers, and software providers in the home entertainment, personal computers, personal telecommunications, automotive, portable media devices and broadcast markets. Our portfolio of licensable technologies includes a wide range of advanced technologies and proprietary techniques for the processing and delivery of audio, voice and surround sound, including the following:

 

·      *Surround Sound*— Our surround sound technologies include SRS TruSurround XT, TruSurround HD, TruSurround HD4, Circle Surround, Circle Surround II, Circle Surround Automotive, Circle Surround Automotive DX and SRS 5.1 Surround Sound, featuring the CircleSurround engine, for streaming content in surround.  Circle Surround, is a complete encoding and decoding format. Circle Surround *encoding* enables the distribution of up to 6.1 channels of audio over existing two-channel carriers such as digital media files, standard definition and high-definition television, FM radio and CDs. Circle Surround *decoding* decodes Circle Surround encoded material for multi-channel playback or creates up to 6.1 channels of audio from older formats of material, including mono, stereo, 4-channel surround or other matrix surround formats.

 

·      *Audio Rendering*— Our audio rendering technologies optimize device audio output and enable the presentation of 3D and multichannel audio content over two speakers. These technologies include the ability to render 5.1 multichannel content over two speakers, to create a wider sound stage for more natural audio, to improve the perceived bass response in small speakers, to dynamically position audio sources in a virtual 3D space using headphones, and to reposition the audio image for non-optimally placed speakers. Our audio rendering technologies include SRS WOW, SRS WOW XT, SRS WOW HD, SRS 3D Sound, SRS TruBass, SRS FOCUS, SRS TruGaming (Xspace 3D), SRS Headphone, SRS DialogClarity, SRS CircleCinema 3D, and SRS TruVolume. TruVolume is the de facto industry standard for volume leveling in the TV and set-top-box applications, effectively eliminating the volume fluctuations between programming and commercials as well as during channel changing.

 

·      *Voice Processing*—Our TruVoice (also known as VIP and VIP+) and SRS Noise Reduction technologies dramatically reduce noise to produce a much clearer and crisper dialog over wireless communication devices and improve the intelligibility of the human voice in a variety of listening situations, including high ambient background environments. Our Max-V voice and audio enhancement technology drastically increases the capabilities of built-in speakers in devices in delivering higher volume while limiting adverse effects such as clipping and distortion.

 

·      *Solution**Suites*— Our solution suites combine several of our technologies in order to deliver a comprehensive, easier to deploy package of post processing audio enhancement products. Solution suites also enable us to impact the performance of the OEM products by employing multiple technologies and techniques to enhance and control the overall audio fidelity and performance of the product. Our solution suites include SRS Premium Sound, SRS Premium Sound HD, SRS Premium Sound 3D, SRS TheaterSound 3D, SRS Premium Voice, and SRS Premium Voice Pro for personal computers, SRS TruMedia, SRS TruMedia HD, SRS TruVoice, and SRS TruTools for mobile phones, and SRS StudioSound HD and SRS TheaterSound for home entertainment products among others.

 

Our portfolio of technologies and solution suites addresses a broad spectrum of product applications within the vertical markets that we have targeted. Our technologies may be implemented in a variety of methods, including discrete analog components, chip modules, analog semiconductors, digital signal processors (“DSPs”) and software. These various implementation options offer customers flexibility when incorporating our technologies into products.

 

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**Our Customers and Markets**

 

We license our technologies both in the United States and internationally. The following table presents our revenue by geographic area. Licensing-related revenue is summarized based on the location of the licensee’s corporate headquarters. For standalone software and hardware product and online sales, revenue is allocated to the United States. In 2008, the Greater China region was broken down into the China and Asia Pacific region. The China region includes all licensees with their corporate headquarters located in mainland China.  The Asia Pacific region includes all licensees with their corporate headquarters located in Taiwan and Hong Kong. 

 
| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                    | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** | **2008** | ** ** | **%** | ** ** |
| ***Geographic Area Revenue:*** |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Korea                               |       | $                                           | 13,691,746 |   | 44 | % | $ | 11,551,403 |   | 46 | % | $ | 9,624,459 |   | 52 | % |
| United States                       |       | 7,465,114                                   |       | 24 |   | 6,440,033 |   | 26 |   | 1,744,502 |   | 10 |   |
| Japan                               |       | 4,930,915                                   |       | 16 |   | 4,375,139 |   | 17 |   | 5,357,286 |   | 29 |   |
| Asia Pacific                        |       | 2,482,756                                   |       | 8 |   | 647,220 |   | 3 |   | 430,598 |   | 2 |   |
| China                               |       | 2,033,444                                   |       | 6 |   | 1,548,496 |   | 6 |   | 838,754 |   | 5 |   |
| Europe                              |       | 616,414                                     |       | 2 |   | 402,286 |   | 2 |   | 337,079 |   | 2 |   |
| Total                               |       | $                                           | 31,220,389 |   | 100 | % | $ | 24,964,577 |   | 100 | % | $ | 18,332,678 |   | 100 | % |

 

Through our licensing business, we market our portfolio of technologies and solution suites to the following markets: home entertainment, personal computers, personal telecommunications, automotive and portable media devices. Our license agreements typically have multi-year or automatic renewal terms, and either require: (a) per-unit royalty payments for all products implementing our technologies and/or solutions; (b) fixed annual or quarterly royalty payments; or (c) a minimum fixed annual or quarterly royalty payment, which allows the licensee to ship up to a predetermined number of units during the specified time period with additional per-unit royalty payments thereafter. The license agreements also generally specify the use of our trademarks and logos on the product, within the packaging and in the user’s manual, and require our review and approval of the product to guarantee the quality of the technology implementation and the correct usage of our logos and trademarks. We believe these terms ensure the quality and consistency of the technology and elevate the awareness of the SRS brand in the marketplace. We also sell some of our products and solutions via the Internet.  Revenues associated with those sales are recognized upon shipment and have not historically been material.

 

The following chart shows the percentage of our licensing revenue we received in 2010 and 2009 from each of these markets.

 
| **2010** | **2009** |
|----------|----------|
|     |     |
|          |          |

 

Long-lived tangible assets, net of accumulated depreciation, by geographic region were as follows:

 
| ** **             | ** ** | **Years Ended December 31,** | ** ** |
|------------------------|------------|---------------------------------------------|------------|
| ** **             | ** ** | **2010**                                    | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** |
| ***Geographic Area:*** |       |                                        |       |   |   |   |   |   |   |
| United States          |       | $                                           | 593,010    |   | 88 | % | $ | 539,937 |   | 90 | % |
| International          |       | 79,210                                      |       | 12 |   | 59,857 |   | 10 |   |
| Total                  |       | $                                           | 672,220    |   | 100 | % | $ | 599,794 |   | 100 | % |

 

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**Home Entertainment**

 

Home entertainment products currently represent the largest market for our technologies and have, in recent years, been the largest revenue contributor. Manufacturers in this market utilize our technologies and solutions to improve functionality and product performance and/or to differentiate their products from their competitors.  In many instances, manufacturers license multiple technologies from us for multiple product lines and divisions. Product categories within this market include televisions (such as LCD and plasma televisions) and set-top boxes (“STBs”).

 

*Televisions.*  Our audio technologies and solution suites are widely used by television manufacturers as a solution to audio challenges that manufacturers encounter in today’s flat panel television designs and/or as a differentiating feature. As television makers continue to migrate to models with thinner digital displays, they are finding that they have less room for speakers, which may compromise the overall audio quality of the television. We provide manufacturers with patented solutions for accurately presenting surround sound, improving bass response, increasing dialog clarity, improving volume consistencies among channels and programming, and creating a more natural sound stage. These solutions improve the audio quality of the television set without the expense of additional hardware or designing for larger speakers.  Our technologies suited for televisions are currently licensed by companies such as, Samsung, VIZIO, LG, Sharp, and Funai.

 

*Set-top Boxes.*  Although STBs receive and present surround sound content, they are typically connected to televisions with two-channel speakers. Our TruVolume technology serves as our lead technology in the STB category as it creates a level volume user experience to offset level fluctuations during channel changes, changes among different input devices and changes between the program and commercial. Additionally, our SRS surround sound technology creates a surround sound experience over any existing two-speaker system, including the internal speakers of a television. This technology also creates a virtual surround experience from stereo material.   Our technologies suited for STBs are currently licensed by companies such as EchoStar and Numericable.

 

**Personal Computers**

 

Personal computers (“PCs”), especially mobile PCs such as laptops, notebooks and the new genre of Ultra Mobile Devices (also known as net books and tablets) have become very popular as more users utilize their PCs as their main entertainment device at home or on the go. At home, PCs are often used as media hubs. PC users can enjoy and manage collections of music and movies, along with downloaded and recorded television programming. This content is now being distributed through the home using networked media adapter products. Throughout these systems, there is a need for optimizing playback on the computer speakers, presenting a closer assimilation to a typical home theater experience, including transmitting surround sound around the home and enjoying content playback on headphones. On the go, users have to rely on the audio output capabilities of their PCs which are often inadequate given the inherent challenges in today’s tiny PC enclosures. We believe our technology solutions are well positioned to fill the need to deliver better sound, with deeper bass, clarity and volume.  Our SRS Premium Sound and SRS Premium Voice suites (and related suites) address many of the usage cases above, overcoming related challenges and limitations.  Our technologies suited for PCs are currently licensed by companies such as Dell, Hewlett Packard, LG, Samsung, and AsusTek.

 

**Personal Telecommunications**

 

We provide the personal telecommunications market (mobile phones) with both voice and audio rendering technologies and solution suites. Given the growth of smart and featured phones, more mobile phones are incorporating advanced audio and multimedia features and functionality at a rapid pace. New services include digital music downloads, streaming audio and video content, gaming, and television viewing. Our solutions are focused on the specific needs in the mobile market which have not previously been addressed. For example, our technologies deliver upon needs like voice intelligibility in noisy environments, louder speaker performance, clarity of dialog in video content, poor bass-response of small speakers, hampered stereo imaging in narrowly spaced speakers, and 3D positioning audio for interactive gaming. We believe we can leverage our strong presence in the home entertainment market and our suite of voice technologies to provide good opportunities for growth in the personal telecommunications market.  Our technologies are licensed by telecommunications companies such as Samsung, HTC, and NEC.

 

**Automotive**

 

We have invested in research to create solutions specific to the needs of the automotive market. Within vehicles, audio and video content is played from multiple sources and then presented on both speakers and headphones. Stereo content from sources like CDs, MP3 players, mobile television and radio needs to be presented on multiple speakers in the car, some of which may not be optimally placed and may not have strong bass response. Surround sound content from DVDs, radio and downloaded music needs to be rendered on both car speakers and on rear-seat headphones with a maximum sweet spot. Our automotive solutions such as SRS CS Auto, SRS CS Auto DX, SRS Focus and SRS TruSurround XT address these needs and provide manufacturers in this segment with a fully tunable solution. Our technologies are currently licensed by companies such as Fujitsu-ten, Panasonic, Clarion and Kenwood and used on automobiles manufactured by companies such as Toyota, Subaru, Nissan, and Honda.

 

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**Portable Media**

 

MP3 (audio) and MP4 (audio and video) players and other portable media players enable consumers to enjoy audio and video content while on the go. The audio contents are stored in a compressed industry standard MP3 audio standard. As such, when the content is decoded and played back through miniature earphones, the audio generally suffers a loss of quality. Our technologies, such as SRS WOW and SRS WOW HD, are capable of improving the audio quality during playback. Our TruMedia suite of technologies also enable rendering of surround sound through earphones or using external speakers when playing back surround sound encoded contents often used along with contemporary video contents. The small footprint of these devices limits speaker size and speaker spacing. Our solutions enable vendors of these devices to increase the quality of their audio output without significantly increasing hardware component costs.

 

**Customer Concentration**

 

For fiscal year 2010, 2009, and 2008, Samsung and its affiliates accounted for approximately 38%, 39%, and 42%, respectively, of our consolidated revenues.  Given the significant amount of revenues derived from Samsung, the loss of that customer or the uncollectibility of related receivables could have a material adverse effect on our consolidated financial condition and consolidated results of operations.

 

**Our Strategy**

 

Our sales strategy is to identify high-growth markets, develop needed technology solutions and features, and work with software and semiconductor platform partners to make these technologies widely available and easy to implement by OEMs and ODMs. We believe that we will continue to strengthen our market position as the leader in audio and voice technologies by employing the strategy of providing a stream of patented audio and voice technologies, penetrating new licensing accounts, expanding relationships with existing licensees, creating a broad platform of software and semiconductor partners, and developing strong awareness of the SRS brand.

 

The mission of our licensing platform efforts is to achieve broad coverage for our technology solutions within all of our targeted product markets in order to expand sales and licensing opportunities. By developing strong relationships with leading software and semiconductor companies, we believe our audio technologies and solution suites can be delivered to customers worldwide across high growth and high volume product applications.

 

We work together with our platform partners (leading semiconductor manufacturers and middleware or firmware software providers) to provide our mutual customers with the technology that best fits their needs. We also together solicit other new customers to consider using the platform. Many times, a platform will become enabled with our technology due to customer requests.

 

As a technology licensing company, the strength of our brand is an important asset. Since brand recognition drives licensing sales, we have invested in strategies designed to increase consumer awareness of SRS Labs with the ultimate goal of establishing our brand with both product manufacturers and consumers around the world as a recognized symbol for high-quality audio. The six primary vehicles that we use to further the proliferation of our brand are: (a) placement of the SRS logo by OEMs on products and in co-marketing programs; (b) public relations and new media outreach programs; c) online branding programs; (d) print and online advertising; (e) participation in and/or sponsorship of industry events such as tradeshows and (f) use, and recognition of use, of SRS technology by content aggregators and broadcast professionals.

 

*OEM Marketing Programs.*  In the majority of products that use SRS technologies, our logo is either prominently displayed on the product itself or, in the case of software products and mobile phones, featured in the graphical user interface. We believe this logo exposure is a key tool in reaching consumers worldwide. In addition, we work with our OEM customers as they prepare for launching new products that feature SRS technologies by supplying complete SRS corporate and technology tool kits with a wide array of material, including SRS logos, illustrations, technology explanations and suggested demonstration material.

 

*Public Relations (“PR”) and New Media Outreach Programs.*We believe in the endorsement power of opinion leaders and expert groups in the CE and IT industries. As such, we have an active and expanding PR program, both online and in print, to promote SRS technologies and solutions found in our own products or products of OEMs that feature SRS technologies and solutions. Similarly, we have found the viral nature of the new media very effective in promoting our brand and innovations and therefore, have recently focused on multiple programs to systematically reach and work with bloggers and relevant social networks.

 

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*Online Branding Programs.*  Online exposure has also been an important part of our branding strategy. One benefit of our relationship with Microsoft is that the SRS logo displayed in the audio control panel of Microsoft’s Windows Media Player links to an SRS technology page. As a result, we have received significant traffic and opportunities to create brand awareness with consumers and educate consumers on the benefits of our technology. Our online efforts also include the direct sale of the iWOW family of products including plug-in software for both the PC and Mac platforms, as well as a unique adapter for the Apple iPod. Revenue from the sale of these products has not been significant historically, but we believe these products gives us a valuable demonstration platform to showcase our audio technologies.

 

*Print & Online Advertising.*We regularly advertise in print and online publications to take our branding and product messages directly to both consumers as well as industry groups. As such, we advertise in print and online in consumer, trade and engineering publications including Home Theater Magazine, Sound & Vision, TWICE, EE Times and other similar periodicals.

 

*Participation in and/or Sponsorship of Industry Events.*We participate in several trade and industry events each year to promote our brand and our technology solutions. We also sponsor events related to our strategic segments by providing both financial resources to the event organizers and offering our insight into the forces that drive the CE industry through speaking engagements and participation in discussion panels. Some of the popular events SRS participates or sponsors include the Consumer Electronics Show (CES), the Mobile World Congress, DisplaySearch, CTIA, and CEATEC in Japan.

 

*Use of SRS Technology by Content Aggregators and Broadcast Professionals.*  We develop, license and sell professional hardware and software products to enable content companies, broadcasters and music publishers to encode their material using our Circle Surround technology. When Circle Surround is professionally used, the SRS and Circle Surround logos are often displayed within the content itself or, on the packaging material and, in the case of radio, an announcement is made that the broadcast is being delivered in SRS Circle Surround. We have concentrated on three key sectors in the professional audio market: television, radio and music; and we have developed a line of hardware and software products to address these sectors. These products are sold directly to professional customers and are also available from selected dealers and distributors servicing the professional audio and broadcast markets. We did not generate significant revenue from the sale of professional hardware equipment in 2010; however, we believe that such sales facilitate the licensing of our technology to OEMs that benefit from enhanced audio transmissions. For streaming media and digital downloads, we rely on SRS 5.1 Surround Sound.  Surround Sound allows content creators and content aggregators to create (encode) content in 5.1 surround and allow that content to seamlessly transmit to users via streaming over the web for playback in 5.1 surround through media players.

 

**Sales and Marketing**

 

We have two primary types of revenue agreements with our licensees—direct and non-direct. Under a non-direct agreement, royalty revenue may be collected by our platform partner, who include and enable our technology within their solution, at the time the chip is sold to an OEM or ODM. The platform partner remits the royalty to us on behalf of the licensee. Most often, however, we license our technologies to OEMs and ODMs under direct agreements and collect revenue directly from them. These licensing arrangements with OEMs or ODMs authorize them to design, build and sell products containing our technology. Under this licensing approach, the licensees are free to choose a semiconductor solution from the platform partner that best suits their technical and cost requirements. We receive royalties directly from the licensed OEM or ODM for the use of our technologies in licensed products manufactured and/or shipped by the OEM or ODM. Many major OEMs have licenses or purchase products manufactured by a licensed ODM for the use of one or more of our technologies and for the use and display of our trademarks.

 

Our process for selecting particular platform partners for distributing our technologies is based on several criteria including: (a) segment leadership—we target platform partners that hold preeminent positions in market segments characterized by high growth, volume and/or margins; (b) volume—we seek platforms that will maximize exposure of our technologies to a large number of potential OEMs; (c) synergy—we seek platforms which serve to position our technologies with compatible and additive technologies for integrated delivery; and (d) convergence potential—we target arrangements that will enable us to establish a presence on platforms that intersect several functional features.

 

To implement our licensing sales strategy within our identified markets, we have established a direct sales force and an international network of independent sales agents. In the United States, China and Japan, we employ a direct sales force to market our portfolio of audio and voice technologies to the OEM community. Internationally, we maintain offices in Japan, Taiwan, China, and Korea and use a network of independent sales agents to support our multi-national OEM customers.  We actively promote the use of our trademarks and logos and require customers to prominently display the appropriate SRS technology or solution logos on products and packaging and in advertising. We plan to continue to work closely with our licensees to enhance their success in selling finished products and semiconductor products that incorporate our technologies through a variety of licensee support programs. These programs include engineering support, sales training, tradeshow support, publicity and media relations programs, customized marketing materials, advertising, and support at speaking engagements and industry conferences, as well as, conducting in-person technology demonstrations or presentations for the press and other companies to promote our technologies and products.

 

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We also regularly participate in tradeshows and conferences to increase awareness of who we are and what we do and to market our technologies and products. We work closely with our licensees and platform partners to actively explore additional opportunities to place our technologies in new products and/or markets.

 

**Research and Development**

 

We license our products in markets that are characterized by rapidly changing technology and continuous improvements in products and services. Our research and development expenditures in 2010, 2009 and 2008 were $8,060,246, $5,721,195, and $3,942,635, respectively. These expenses generally consist of salaries and related costs of employees and consultants engaged in ongoing research, design and development activities and costs for engineering materials and supplies.

 

As of December 31, 2010, we had 46 employees in our research and development group, representing 43% of our total employees. Our software, hardware and application engineers generally focus on developing intellectual property, technology solutions and consumer products.  Engineers are based in our offices throughout the world and support our licensing business.

 

**Competition**

 

Competition in the audio, voice and surround sound technology licensing business includes other licensing companies who offer competing technologies as well as the internal engineering departments of our current or prospective licensees and platform providers, who may develop audio technologies for use in their own products.

 

In the field of audio improvement, we compete directly with other audio providers, including Dolby and DTS. Additionally, some of our OEM customers maintain or are developing their own audio improvement technologies. Because our audio technologies work with any existing recorded material, whether mono, stereo or surround sound, most of our audio technologies can be used either as an alternative or as a complement to most competing audio technologies.

 

Many of our competitors have, or may have, substantially greater resources than us to devote to advancing their existing technologies and developing and marketing new products and technologies. We believe that we compete based primarily on the quality, efficiency, and performance of our proprietary technologies, brand name awareness, the ease, customization capabilities, and cost of implementing our technologies, the ability to meet OEMs’ needs to differentiate their products, and the strength of our licensee relationships. We believe we compete favorably based on these factors; however, we cannot guarantee that we will continue to be competitive with the existing or future products or technologies of our competitors.

 

**Intellectual Property Rights and Proprietary Information**

 

We operate in industries where innovation, investment in new ideas and protection of intellectual property rights are important for success. We rely on a variety of intellectual property protections for our products and services, including patent, copyright, trademark and trade secret laws and contractual obligations. We pursue a policy of enforcing such rights. We cannot guarantee, however, that our intellectual property rights will adequately protect our competitive position or that competitors will not be able to produce non-infringing competitive products or services. We cannot guarantee that third parties will not assert infringement claims against us, or that if required to obtain any third party licenses as a result of an infringement dispute, we will be able to obtain such licenses.

 

In order to protect the underlying technology concepts, we have filed and/or obtained patents for all of our marketed technologies including technologies marketed under the following trademarks: TruSurround XT, TruSurround HD, TheaterSound, StudioSound, Circle Surround, WOW, Premium Sound, Premium Voice, TruVoice, TruMedia, and TruVolume. In addition, we hold numerous issued patents and patents pending for speaker and other acoustic reproduction technologies. We pursue a general practice of filing patent applications for our technologies in the United States and various foreign countries where our licensees manufacture, distribute or sell licensed products. We continue to update and add new applications to our patent portfolio to address changing worldwide market conditions and our new technological innovations. The range of expiration dates for our patents extend between the years 2011 to 2020. We have multiple patents covering unique aspects and improvements for many of our technologies. Accordingly, the expiration of any single patent should not significantly affect our intellectual property position or the ability to generate licensing revenue.

 

We also routinely file U.S. federal and foreign trademark applications for the various word names and logos used to market our technology solutions to licensees and the general public. The duration of the U.S. and foreign registered trademarks can typically be maintained indefinitely, provided that proper maintenance fees are paid and the trademarks are continually used or licensed by us.

 

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**Seasonality**

 

Due to the dependence on the consumer electronics market, we generally experience seasonal fluctuation in sales and earnings. In particular, we believe that our business experiences seasonality relating to the holiday season, resulting in higher revenues in the fourth and first quarters. As we have moved toward diversifying our key market segments in the consumer electronics industry, we expect our business to be less seasonal.

 

**Employees**

 

As of December 31, 2010, we employed 106 persons, including 12 in finance and administration, 46 in research and development, engineering and product development, and 48 in sales and marketing. None of our employees are covered by a collective bargaining agreement or are presently represented by a labor union. We have not experienced a work stoppage and believe we have good relations with our employees.  In addition to our direct hire employees, as of December 31, 2010, we had consulting agreements that provide to us 4 full time consultants in research and development and 10 consultants in sales and marketing, all of whom are located outside of the United States.

 

**Available Information**

 

Our Internet address is *www.srslabs.com*. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, are available free of charge on our website as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations section of our website. Additionally, the Company’s Code of Ethics and Committee Charters are available on our website.  The information found on, or accessible through, our website is not incorporated by reference into and is not part of this or any other report we file with or furnish to the SEC.

 

**Item 1A.**** ****Risk Factors**

 

You should carefully consider the risk factors described below, as well as the other information included in this Annual Report on Form 10-K, prior to making a decision to invest in our securities. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known or that we currently believe to be less significant may also adversely affect us.

 

***We are exposed to risks in our licensing business related to product and customer concentration.***

 

Currently, we generate a majority of our revenue in the home entertainment market, principally through the inclusion of SRS technology inside flat panel LCD and plasma televisions. We expect that the consumer home entertainment market will continue to account for a significant portion of our licensing revenues for the foreseeable future. Consumer spending on home entertainment products is subject to significant fluctuations, and there is significant price competition for such products. Retail prices for certain consumer electronics products that include our audio technology have decreased significantly, and we expect that this trend will continue for the foreseeable future. In addition, from time to time, certain of our OEM and semiconductor manufacturer customers may account for a significant portion of our revenues. For example, for the year ended December 31, 2010, Samsung accounted for approximately 38% of our consolidated revenues. These manufacturers could develop their own technologies or decide to exclude our audio rendering technology from their products altogether in an effort to reduce cost, our revenues and profitability could be adversely impacted.  For example, during 2007, we were informed by Sony that they were no longer using our technology in the majority of their televisions.  The loss of any key customer in the future could have a material adverse affect on our financial condition and results of operations.

 

***General economic conditions may reduce our revenues and harm our business.***

 

Our business is exposed to adverse changes in general economic conditions, because products that incorporate our technologies are entertainment-oriented and generally discretionary goods. The current slowdown or decline in U.S. and foreign economic growth has adversely affected consumer confidence, disposable income and spending. As a result, sales by our licensees of consumer electronics and other products incorporating our technologies may not grow as rapidly as in prior periods or may even decrease, which could adversely affect our licensing revenue.

 

***Our business is highly dependent on the consumer electronics market, which is characterized by short product life cycles, fluctuations in demand and seasonality, declining retail prices and is subject to risks related to product transitions.***

 

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The consumer electronics market is characterized by intense competition, rapidly evolving technology, and ever-changing consumer preferences. These factors result in the frequent introduction of new products, short product life cycles and significant price competition. As a result, we may need to develop new products or technologies to integrate with the new products and technologies developed by our customers. If we are unable to develop the necessary technologies to meet the changing needs of our customers or provide such technologies at competitive prices, our customers may reduce their use of our technologies and our revenues may decline. In addition, the dynamic nature of this market limits our ability and the ability of our customers to accurately forecast quarterly and annual sales. If we, or our customers, are unable to adequately manage product transitions, our business and results of operations could be negatively affected.

 

***We depend on the sale by our licensees of products that incorporate our technologies, and a reduction in those sales would adversely affect our licensing revenue.***

 

We derive most of our revenue from the licensing of our technologies to consumer electronics product manufacturers. We do not manufacture consumer electronics products ourselves and our licensing revenue is dependent on sales by our licensees of products that incorporate our technologies. We cannot control these manufacturers’ product development or commercialization efforts or predict their success. In addition, our license agreements, which typically require manufacturers of consumer electronics products and media software vendors to pay us a specified royalty for every electronics product shipped that incorporates our technologies, do not require these manufacturers to include our technologies in any specific number or percentage of units, and only a few of these agreements guarantee us a minimum aggregate licensing fee. Accordingly, if our licensees sell fewer products incorporating our technologies, decline to actively market products incorporating our technologies or otherwise face significant economic difficulties, our revenue will decline. Changes in consumer tastes or trends, changes in industry standards or adverse changes in business and economic conditions may also adversely affect our licensing revenue.

 

***Pricing pressures on the consumer electronics product manufacturers, who incorporate our technologies into their products, could limit the licensing fees we charge for our technologies, which could reduce our revenues.***

 

The markets for the consumer electronics products in which our technologies are incorporated are intensely competitive and price sensitive. Retail prices for consumer electronics products that include our technologies have decreased significantly, and we expect prices to continue to decrease for the foreseeable future. In response, manufacturers have sought to reduce their product costs, which can result in downward pressure on the licensing fees we charge our customers who incorporate our technologies into their products. Alternatively, our customers may seek to eliminate our technologies in their products in favor of internally developed technologies. A decline in the licensing fees we charge could materially and adversely affect our operating results.

 

***We face intense competition from companies with greater brand recognition and resources.***

 

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

 

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

 

·                  greater name recognition;

 

·                  a longer operating history;

 

·                  more developed distribution channels and deeper relationships with consumer electronics products designers and manufacturers;

 

·                  a more extensive customer base;

 

·                  broader product and service offerings;

 

·                  greater resources for competitive activities, such as research and development, strategic acquisitions, alliances, joint ventures, sales and marketing, and lobbying industry and government standards; and

 

·                  more technicians and engineers.

 

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

 

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***Inaccurate licensee royalty reporting and unauthorized use of our intellectual property could materially adversely affect our operating results.***

 

Our licensing revenue is generated primarily from consumer electronics product manufacturers who license our technologies and incorporate them in their products. Under a significant percentage of our existing arrangements, these licensees typically pay us a specified royalty for every product they ship that incorporates our technologies. We rely on our licensees to accurately report the number of units shipped that incorporate our technologies. We calculate our license fees, prepare our financial reports, projections and budgets, and direct our sales and product development efforts based on these reports we receive from our licensees. However, it can be difficult for us to independently determine whether or not our licensees are reporting shipments accurately. This is especially true with respect to software incorporating our technologies because software can be copied relatively easily and we often do not have easy ways to determine how many copies have been made. Most of our license agreements permit us to audit our licensees’ records, but audits are generally expensive and time consuming and initiating audits could harm our customer relationships. We expect that we will continue to be subject to understatement and non-reporting of royalty bearing revenues by licensees, which could adversely affect our operating results. Conversely, to the extent that our licensees overstate the number of products incorporating our technologies, negative corrections could result in reductions of royalty revenue in subsequent periods. Some of our licensees may begin to more closely scrutinize their past licensing statements which may result in an increased receipt of negative corrective statements.

 

We also may experience problems with non-licensee consumer electronics product manufacturers and media software vendors, particularly in emerging economies, incorporating our technologies or incorporating our technologies and trademarks into their products without our authorization and without paying us any licensing fees. This unauthorized use of our intellectual property could adversely affect our operating results.

 

***Our business and future prospects depend upon the strength of our brand. Awareness of our brand depends to a significant extent upon decisions by our customers to display our trademarks on their products, and if our customers do not display our trademarks on their products, our ability to increase our brand awareness may be harmed.***

 

Because we engage in relatively little direct brand advertising, the promotion of our brand depends upon consumer electronics industry participants displaying our trademarks on their products that incorporate our technologies.  Although we do generally require our customers to place our brand on their products, some are not required to do so. Maintaining the SRS brand and our position as an industry standard is critical to maintaining and expanding our licensing revenues and entering into new or broadening existing licensing relationships.  If our customers choose for any reason not to display our trademarks on their products, our ability to maintain or increase our brand awareness may be harmed, which would have an adverse effect on our business and prospects. In addition, if we fail to maintain high quality standards for our products, or the products that incorporate our technologies through the quality control evaluation process that we require of our licensees, the strength of our brand could be adversely affected.

 

***Licensee products that incorporate our technologies, from time to time, experience quality problems that could damage our brand, decrease revenues and increase operating expenses.***

 

Licensee products that incorporate our technologies often are complex and sometimes contain undetected software or hardware errors, particularly when first introduced or when new versions are released. In addition, those products are often combined with, or incorporated into, products from other companies, sometimes making it difficult to identify the source of a problem. Any negative publicity or negative impact relating to these product problems (even if unrelated to our technologies) could adversely affect the perception of our brand. In addition, these errors could result in loss of, or delay in, market acceptance of those products or our technologies, or cause delays in delivering them and meeting customer demands, any of which could reduce our revenue and raise significant customer relations issues. Although we generally attempt to contractually limit our liability for our licensees’ defective products, we may elect to help reengineer those products, which could increase our expenses and adversely affect our operating results.

 

***We are subject to risks associated with substantial international operations.***

 

We conduct sales and customer support operations in a number of countries throughout the world that require refinement to adapt to the changing market conditions on a regional basis. In addition, many of our significant customers are headquartered in the Asia region, particularly Korea and Japan. Approximately 74%, 72% and 88% of our revenues were derived from customers with headquarters located in the Asia markets during the years ended December 31, 2010, 2009 and 2008, respectively. We expect to continue to derive a significant portion of our revenues from sales to customers in these markets for the foreseeable future. Also, a substantial number of products incorporating our technologies are manufactured, assembled and tested by third parties in Asia. As a result, we are subject to a number of risks of conducting business outside of the United States, any of which could have a material adverse impact on our business and results of operations, including:

 

·             global economic downturn;

 

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·             political, social and economic instability and the risk of war, terrorist activities or other international incidents in Asia and elsewhere abroad;

 

·      currency fluctuations;

 

·                  difficulties and costs of staffing and managing foreign operations;

 

·                  unexpected changes in, or impositions of, government requirements;

 

·                  adverse changes in tariffs and other protectionist laws and business practices that favor local competitors;

 

·                  potentially longer payment cycles and greater difficulty in collecting receivables from foreign entities;

 

·                  the burdens of complying with a variety of non-U.S. laws and reduced protection of our intellectual property in some countries;

 

·                  potentially adverse tax consequences and the complexities of foreign value added tax systems; and

 

·                  other factors beyond our control, including natural disasters and major health concerns.

 

***Our technologies have a long and unpredictable sales cycle, which can result in uncertainty and delays in generating additional revenues.***

 

Historically, because of the complexity of our technologies, it can take a significant amount of time and effort to explain the benefits of our technologies to potential new customers and to negotiate a sale. For example, it typically takes six to nine months after our first contact with a prospective customer before we start licensing our technology to that customer and another six to nine months to begin generating revenues. In addition, purchases of our products are usually made in connection with new design starts by our customers, the timing of which is outside of our control. Accordingly, we may be unable to predict accurately the timing of any significant future sales of our products. We may also spend substantial time and management attention on potential license agreements that are not consummated, or in which the consumer electronic product ultimately does not sell in large quantities, thereby foregoing other higher revenue opportunities.

 

***If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our competitors and be unable to operate our business profitably.***

 

Our ability to compete may be affected by our ability to protect our proprietary information. We have filed numerous U.S. and foreign patent applications and to date have a number of issued U.S. and foreign patents covering various aspects of our technologies. We cannot guarantee that the steps taken by us to protect our intellectual property will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the U.S. It is possible that third parties may assert claims or initiate litigation against us or our customers with respect to existing or future products. In addition, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights. Litigation in the technology industry is common.  Claims and litigation brought against us or initiated by us could be costly and time consuming and could divert our management from our business. The outcome of any litigation is uncertain and could require us to pay significant damages or could prevent us from licensing some or all of our technologies, which could significantly harm our business and results of operations.

 

***If we lose the services of our key personnel, or if we are unable to attract and retain other key personnel, we may not be able to manage our operations or meet our growth objectives.***

 

Our future success depends to a large extent upon the continued service of key personnel, including engineering, sales and administrative staff. We anticipate that any future growth will require us to recruit and hire a number of new personnel in engineering, operations, finance, sales and marketing. Competition for such personnel can be intense, and it is possible that we may not be able to recruit and retain necessary personnel to operate our business and support future growth.

 

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***The market price of our common stock is volatile and your investment in our common stock could suffer a decline in value.***

 

The trading price of our common stock has been, and will likely continue to be, subject to wide fluctuations in response to quarterly variations in our operating results, announcements of new products or technological innovations by us or our competitors, strategic alliances between us and third parties, general market fluctuations and other events and factors. Changes in earnings estimates made by brokerage firms and industry analysts relating to the markets in which we do business, or relating to us specifically, have in the past resulted in, and could in the future result in, an immediate and adverse effect on the market price of the common stock. Even though our stock is quoted on The NASDAQ Global Market, our stock has had and may continue to have low trading volume and high volatility. The historically low trading volume of our stock makes it more likely that a severe fluctuation in volume, either up or down, will significantly impact the stock price. Because of the relatively low trading volume of our stock, our stockholders may have difficulty selling our common stock. In addition, the stock market in general, and The NASDAQ Global Market and the market for technology and small market cap 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.

 

***Our certificate of incorporation and bylaws as well as Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock.***

 

Our certificate of incorporation, our bylaws and Delaware law contain provisions that might enable our management to discourage, delay or prevent a change in control. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock.

 

**Item 1B.  Unresolved Staff Comments.**

 

None.

 

**Item 2.  Properties**

 

Our worldwide headquarters are located in Santa Ana, California, in a 23,400 square foot facility consisting of office and warehouse space. The lease for the facility expires in May 2013.  We lease this facility from Daimler Commerce Partners, L.P., the general partner of which is Conifer Investments, Inc. (“Conifer”). The sole shareholders of Conifer are Thomas C.K. Yuen, our Chairman, Chief Executive Officer and President, and his spouse, Misako Yuen, as co-trustees of the Thomas Yuen Family Trust. Mr. and Mrs. Yuen also serve as the executive officers of Conifer. Mr. and Mrs. Yuen, as co-trustees of the trust, beneficially own a significant amount of our outstanding shares of common stock. We paid the Daimler Commerce Partners rent of $238,680, $238,680 and $235,170, in 2010, 2009 and 2008, respectively. We believe the terms and conditions of the lease are competitive based on a review of similar properties in the area with similar terms and conditions.

 

We entered into two new leases in 2010 for our international operations in Shanghai, China, and Taipei, Taiwan.  The leases for our offices in Shanghai and Taiwan expire in December 2014 and April 2011, respectively.  Additionally, we lease space in Shenzhen, China and Tokyo, Japan.  In total, we paid rent of $442,080, $426,651 and $294,702 during 2010, 2009 and 2008, respectively, for all of our facilities.  In February 2011 we entered into a new lease with Daimler Commerce Partners, L.P. to expand our worldwide headquarters.  The lease is for a term of 5 years and is for a 11,700 square foot facility, consisting of office space.

 

**Item 3.  Legal Proceedings**

 

On June 8, 2007, we sent a letter to Sony Corporation (“Sony”) relating to the possible infringement of several SRS patents by Sony’s S-Force technology.  Sony responded to the letter by filing a Complaint for Declaratory Relief in the U.S. District Court in the Southern District of New York on July 6, 2007.  Effective September 9, 2010, we entered into a Settlement Agreement (the “Agreement”) with Sony relating to the SRS patents at issue (“Licensed Patents”).  Pursuant to the Agreement, in exchange for the payment of $900,000, SRS agreed to grant to Sony and its subsidiaries a non-transferable, non-assignable, irrevocable, non-exclusive, fully paid-up worldwide license to the Licensed Patents with respect to Sony’s and/or its subsidiaries’ products incorporating any proprietary audio technology designed by Sony and/or its subsidiaries prior to the date of the Agreement or within three years after the date of the Agreement, including modifications, derivations or enhancements thereof.  The Agreement is intended to resolve all disputes between the parties based upon the Licensed Patents and includes a release by SRS of Sony and its subsidiaries from any and all claims under the Licensed Patents with respect to the Licensed Products.  The Company recognized the settlement amount in September 2010.

 

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From time to time, we may be involved in litigation matters and disputes arising in the normal course of business. Any such matters and disputes could be costly and time consuming, subject us to damages or equitable remedies, and divert our management and key personnel from our business operations.

 

**Item 4.  Removed and Reserved**

 

**PART II**

 

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

 

**Market for Common Stock**

 

Our common stock trades on The NASDAQ Global Market under the symbol “SRSL”. The table below reflects the high and low sales prices of our common stock as reported by The NASDAQ Stock Market for the periods indicated.

 
| ** **           | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|----------|------------|---------|------------|
| **Fiscal Year 2010** |       |     |       |    |       |
| First Quarter        |       | $        | 9.95       |    | $          | 6.75 |   |
| Second Quarter       |       | $        | 10.05      |    | $          | 8.50 |   |
| Third Quarter        |       | $        | 10.43      |    | $          | 8.51 |   |
| Fourth Quarter       |       | $        | 9.79       |    | $          | 8.12 |   |
|                 |       |     |       |    |       |
| **Fiscal Year 2009** |       |     |       |    |       |
| First Quarter        |       | $        | 5.59       |    | $          | 4.27 |   |
| Second Quarter       |       | $        | 7.08       |    | $          | 4.93 |   |
| Third Quarter        |       | $        | 7.74       |    | $          | 6.10 |   |
| Fourth Quarter       |       | $        | 7.49       |    | $          | 6.34 |   |

 

At February 2, 2011, the closing sale price of our common stock was $10.56 per share.

 

**Holders**

 

At February 2, 2011, there were 393 stockholders of record.

 

**Dividend Policy**

 

We have never paid cash dividends on our common stock. We currently intend to retain our available funds for future growth and, therefore, we do not anticipate paying any dividends in the foreseeable future.

 

**Securities Authorized for Issuance Under Equity Compensation Plans**

 

The following equity compensation plans have been approved by our stockholders: the SRS Labs, Inc. Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan (the “1993 Plan”), the SRS Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan (the “1996 Plan”), the SRS Labs, Inc. Amended and Restated 1996 Non-employee Directors’ Stock Option Plan (the “Non-employee Directors Plan”) and the SRS Labs, Inc. 2006 Stock Incentive Plan (the “2006 Plan”). A description of the material features of each of these plans is included in Note 6 to the Notes to Consolidated Financial Statements under the caption “Stock Award/Option Plans/Warrants.” The 1993 Plan expired on December 10, 2003 and no options or other rights to acquire equity are outstanding under that plan. On June 22, 2006, our stockholders voted to approve the 2006 Plan and to discontinue the issuance of any awards under the 1996 Plan. We do not have any equity compensation plans other than those approved by our stockholders. The following table sets forth information regarding the number of shares of our common stock that may be issued pursuant to our equity compensation plans or arrangements as of December 31, 2010.

 

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**Equity Compensation Plan Information**

 
| ** **                                                    | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                        | ** ** | **(c)**                                                                                                                                                                                                            | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                        | ** ** | **Number of securities   to be issued upon   exercise of   outstanding options,   warrants and rights** | ** ** | **Weighted-average   exercise price of   outstanding options,   warrants and rights** | ** ** | **Number of securities remaining   available for future issuance   under equity compensation plans   (excluding securities   reflected in column(a))** | ** ** |
| Equity compensation plans approved   by security holders |       | 4,643,393                                                                                                                                            | (1)        | $                                                                                                              | 6.68       |                                                                                                                                                                                                               | 972,871    | (2) |
|                                                               |            |                                                                                                                                                      |            |                                                                                                                |            |                                                                                                                                                                                                                    |            |  |

 

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(1)                                  Represents shares of common stock that may be issued pursuant to outstanding options granted under the following plans: 1,055,561 shares under the 1996 Plan, 157,500 shares under the Non-employee Directors Plan and 3,430,332 shares under the 2006 Plan.

 

(2)                                  Represents shares of common stock that may be issued pursuant to future grants under the following plans: 265,000 shares under the Non-employee Directors Plan and 707,871 shares under the 2006 Plan.

 

**Stock Price Performance Graph**

 

The following graph illustrates a comparison of the total return of our common stock with the total return for the S & P Smallcap 600 Index and a peer group selected by us for the five year period ended December 31, 2010. The peer group was limited to publicly traded companies in the audio enhancements and technology business and consisted of the following companies: Dolby, DTS and QSound.  The comparison assumes $100 was invested on December 31, 2005 in our common stock and in each of the indices shown and assumes that all of the dividends were reinvested.

 

The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock. This graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liabilities under the Securities Act of 1933, as amended, or the Exchange Act.

 

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among SRS Labs, Inc., The S&P Smallcap 600 Index

And A Peer Group

 

 

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* $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 

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**Item 6.  Selected Financial Data**

 

The following selected financial information as of and for the dates and periods indicated have been derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K and our consolidated financial statements and related notes included elsewhere in this Report.

 
| ** **                                                                               | ** ** | **Years Ended December 31,**                       | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2010**                                                          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                               | ** ** | **(In thousands except per share data)** | ** ** |
| **Consolidated Statement of   Operations Data:**                                         |       |                                                              |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                 |       | $                                                                 | 31,220     |   | $ | 24,965 |   | $ | 18,333 |   | $ | 18,852 |   | $ | 18,547 |   |
| Cost of sales                                                                            |       | 350                                                               |       | 286 |   | 144 |   | 164 |   | 171 |   |
| Gross profit                                                                             |       | 30,870                                                            |       | 24,679 |   | 18,189 |   | 18,688 |   | 18,376 |   |
| Operating expenses:                                                                      |       |                                                              |       |   |   |   |   |   |   |   |   |
| Sales and marketing                                                                      |       | 13,471                                                            |       | 11,415 |   | 9,220 |   | 6,718 |   | 7,345 |   |
| Research and development                                                                 |       | 8,060                                                             |       | 5,721 |   | 3,943 |   | 3,107 |   | 2,573 |   |
| General and administrative                                                               |       | 6,526                                                             |       | 5,657 |   | 5,913 |   | 5,444 |   | 5,660 |   |
| Total operating expenses                                                                 |       | 28,057                                                            |       | 22,793 |   | 19,076 |   | 15,269 |   | 15,578 |   |
| Operating income (loss)                                                                  |       | 2,813                                                             |       | 1,886 |   | (887 | ) | 3,419 |   | 2,798 |   |
| Other income                                                                             |       | 245                                                               |       | 348 |   | 1,275 |   | 2,041 |   | 1,136 |   |
| Income from continuing operations before income   taxes                                  |       | 3,058                                                             |       | 2,234 |   | 388 |   | 5,460 |   | 3,934 |   |
| Income taxes                                                                             |       | 52                                                                |       | 98 |   | 117 |   | 46 |   | 868 |   |
| Income from continuing operations                                                        |       | 3,006                                                             |       | 2,136 |   | 271 |   | 5,414 |   | 3,066 |   |
| Discontinued operations:                                                                 |       |                                                              |       |   |   |   |   |   |   |   |   |
| Income from discontinued operations, net of   income taxes                          |       | —                                                            |       | — |   | — |   | — |   | 1,017 |   |
| Gain on disposal of discontinued operations                                              |       | —                                                            |       | — |   | — |   | — |   | 625 |   |
| Income from discontinued operations                                                      |       | —                                                            |       | — |   | — |   | — |   | 1,642 |   |
| Net income                                                                               |       | $                                                                 | 3,006      |   | $ | 2,136 |   | $ | 271 |   | $ | 5,414 |   | $ | 4,708 |   |
| Income from continuing operations per   common share:                               |       |                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                                    |       | $                                                                 | 0.20       |   | $ | 0.15 |   | $ | 0.02 |   | $ | 0.34 |   | $ | 0.21 |   |
| Diluted                                                                                  |       | $                                                                 | 0.19       |   | $ | 0.14 |   | $ | 0.02 |   | $ | 0.32 |   | $ | 0.20 |   |
| Income from discontinued operations   per common share:                             |       |                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                                    |       | $                                                                 | 0.00       |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.11 |   |
| Diluted                                                                                  |       | $                                                                 | 0.00       |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.11 |   |
| Net income per common share:                                                             |       |                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                                    |       | $                                                                 | 0.20       |   | $ | 0.15 |   | $ | 0.02 |   | $ | 0.34 |   | $ | 0.31 |   |
| Diluted                                                                                  |       | $                                                                 | 0.19       |   | $ | 0.14 |   | $ | 0.02 |   | $ | 0.32 |   | $ | 0.30 |   |
| Weighted average number of common shares used in   the calculation of per share amounts: |       |                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                                    |       | 14,671                                                            |       | 14,460 |   | 15,589 |   | 16,154 |   | 14,956 |   |
| Diluted                                                                                  |       | 15,602                                                            |       | 14,813 |   | 15,842 |   | 16,990 |   | 15,466 |   |
| **Consolidated Balance Sheet   Data:**                                                   |       |                                                              |       |   |   |   |   |   |   |   |   |
| Working capital                                                                          |       | $                                                                 | 29,439     |   | $ | 38,923 |   | $ | 37,519 |   | $ | 39,272 |   | $ | 34,697 |   |
| Total assets                                                                             |       | 57,346                                                            |       | 51,749 |   | 46,882 |   | 51,383 |   | 45,049 |   |
| Stockholders’ equity                                                                |       | 54,794                                                            |       | 48,394 |   | 43,769 |   | 49,007 |   | 42,744 |   |

 

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

 

**Overview**

 

We are the recognized global leader in the practical application of psychoacoustics*,* the science behind how the human ear operates, and in the post processing segment of the market for audio delivery.  Our award-winning audio enhancement technologies and solutions dramatically restore audio and voice to its natural state, the way it was originally recorded, in both dimension and clarity, thus providing a superior consumer experience for a wide variety of CE devices such as televisions, personal computers and mobile phones.

 

Our mission is to be the dominant worldwide provider of audio and voice solutions that allow consumers to effortlessly experience rich, natural sound, the way their ears were meant to hear it.  In 2009 and 2010, licensing revenue from the home entertainment market represented 68% and 64%, respectively, of our total revenues in such periods.  In the home entertainment market, our technologies have achieved broad market acceptance in the television sector.  We plan to continue to leverage our success in the television sector to expand our audio technologies into a variety of other consumer electronic devices, including PCs, mobile phones, portable media devices and automotive audio systems, but our technologies to date have only been incorporated in products representing only a small portion of the total consumer electronics market opportunity.  The consumer electronics market in general is characterized by rapid technological changes, short product life cycles, seasonality, significant price erosion and competition, any of which may impede our ability to gain broad market acceptance for our technologies in other consumer electronic markets.  Nonetheless, we plan to continue to seek other opportunities where we can continue to leverage our core technologies and expertise.  If we are able to successfully gain broad market share for our technologies in any other market, it could significantly improve our revenues and brand name recognition.

 

Our operations are conducted through SRS Labs, Inc., the parent company, and its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen Representative Office of SRS Labs, Inc. (a Chinese company) Shanghai Representative Office of SRS Labs, Inc (a Chinese company) and SRS Labs Japan, KK (a Japanese company). Our business is focused on developing and licensing audio, voice and surround sound technology solutions to many of the world’s leading OEMs, software providers and semiconductor companies, and limited sales and marketing of standalone software and hardware products through the Internet.

 

**Critical Accounting Policies**

 

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

 

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates.

 

The following represents a summary of our critical accounting policies, defined as those policies that we believe are:  (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the matters that are inherently uncertain. Our most critical accounting estimates include revenue recognition; valuation of accounts receivable, which impacts operating expenses; valuation of intangibles and long lived assets, which primarily impacts operating expenses when we impair assets or accelerate their depreciation; recognition and measurement of current and deferred income tax assets and liabilities, which impacts our tax provision; and share-based compensation, which impacts operating expenses. We discuss each of these policies below, as well as the estimates and judgments involved. We also have other policies that we consider key accounting policies; however, these policies do not meet the definition of critical accounting estimates, because they do not generally require us to make estimates or judgments that are difficult or subjective.

 

*Revenue Recognition*

 

Our license agreements typically have multi-year or automatic renewal terms, and either require: (a) per-unit royalty payments for all products implementing our technologies and/or solutions; (b) fixed annual or quarterly royalty payments; or (c) a minimum fixed annual or quarterly royalty payment, which allows the licensee to ship up to a pre-determined number of units during the specified time period, with additional per-unit royalty payments thereafter.  Royalties for per-unit arrangements are reported in the quarter following shipment of the consumer electronics device and are therefore recognized by us one quarter following shipment by the OEM.  Revenues associated with fixed royalty payments are recognized ratably over the term of the agreement.  We also sell some of our products and solutions via the Internet.  Revenues associated with those sales are recognized upon shipment and are not material.

 

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*Accounts Receivable*

 

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history, the customer’s current credit worthiness and various other factors, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain allowances for doubtful accounts based upon specific customer circumstances, current economic trends, historical experience and the age of past due receivables. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Unanticipated changes in the liquidity or financial position of our customers may require additional provisions for doubtful accounts.

 

*Intangible Assets and Impairment of Long-Lived Assets*

 

Costs paid by the Company related to the establishment and purchase of patents, primarily legal costs, are capitalized and amortized, depending on the estimated life of the technology patented. These assets are being amortized over ten years. The Company evaluates the recoverability of long-lived assets with finite lives. The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. Based upon the most recent assessment as of December 31, 2010, the Company has determined there was no impairment in the value of long-lived assets.

 

*Income Taxes*

 

In preparing our consolidated financial statements, we estimate our income taxes in each of the countries in which we operate. The process used to make these estimates includes an assessment of the current tax expense, the results from tax examinations and the effects of temporary differences resulting from the different treatment of transactions for tax and financial accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. The Company accounts for deferred income taxes utilizing an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the financial statements and the tax bases of assets and liabilities, as measured by current enacted tax rates. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. We evaluate the realizability of our deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. At December 31, 2010, we had net deferred tax assets primarily resulting from temporary differences between the book and tax bases of assets and liabilities, and loss and credit carry forwards. We continue to provide a valuation allowance on our deferred tax assets based on an assessment of the likelihood of their realization. In reaching our conclusion, we evaluated certain relevant criteria including deferred tax liabilities that can be used to offset deferred tax assets, estimates of future taxable income of appropriate character within the carry-forward period available under the tax laws, and tax planning strategies. Our judgments regarding future taxable income may change due to market conditions, changes in U.S. or international tax laws, the Company’s business and results of operations, and other factors. These changes, if any, may require material adjustments to these deferred tax assets, resulting either in a tax benefit, if it is estimated that future taxable income is likely, or a reduction in the value of the deferred tax assets, if it is determined that their value is impaired, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.

 

Our income tax provision is based on calculations and assumptions that will be subject to examination by the taxing authorities in the jurisdictions in which we operate.  Tax law and rate changes are reflected in the income tax provision in the period in which such changes are enacted.

 

*Share-Based Compensation*

 

The Company accounts for share-based compensation awards using the fair-value method and records such expense in the consolidated financial statements over the requisite service period. In 2010, 2009, and 2008, we recorded share-based compensation expense of $2,253,730, $1,956,057, and $1,777,468, respectively.

 

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To determine the expected term of our employee stock options granted in fiscal year 2010, we examined the historical term for our stock options and those of our peers. To determine the risk-free interest rate, we utilized an average interest rate based on U.S. Treasury instruments whose term was consistent with the expected term of our awards. To determine the expected stock price volatility, we examined the historical volatilities for our common stock and those of our peers. See Note 6 (“Stockholders’ Equity and Share-Based Compensation”) of our Notes to Consolidated Financial Statements for further discussion.

 

**Results of Operations**

 

The following table sets forth certain consolidated operating data as a percentage of revenues for the years ended December 31, 2010, 2009 and 2008:

 

**Percentage of Total Revenue**

** **
| ** **                 | ** ** | **Years Ended   December 31,** | ** ** |
|----------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                   |       | 100                                      | %          | 100 | % | 100 | % |
| Cost of sales              |       | 1                                        |       | 1 |   | 1 |   |
| Gross margin               |       | 99                                       |       | 99 |   | 99 |   |
| Operating expenses:        |       |                                     |       |   |   |   |   |
| Sales and marketing        |       | 43                                       |       | 46 |   | 50 |   |
| Research and development   |       | 26                                       |       | 23 |   | 22 |   |
| General and administrative |       | 21                                       |       | 22 |   | 32 |   |
| Total operating expenses   |       | 90                                       |       | 91 |   | 104 |   |
| Operating income (loss)    |       | 9                                        |       | 8 |   | (5 | ) |
| Other income               |       | 1                                        |       | 1 |   | 7 |   |
| Income before income taxes |       | 10                                       |       | 9 |   | 2 |   |
| Income taxes               |       | 0                                        |       | 0 |   | 1 |   |
| Net income                 |       | 10                                       | %          | 9 | % | 1 | % |

 

**Year Ended December 31, 2010 Compared to Year Ended December 31, 2009**

 

*Revenues*

 

Total revenues for the year ended December 31, 2010 were $31,220,389 compared to $24,964,577 in the year ended December 31, 2009, an increase of $6,255,812 or 25%. This increase was primarily attributable to increases in royalties related to higher unit sales of televisions, personal computers, automotives, and mobile devices containing our technologies by our licensees. In the home entertainment segment, royalty revenues increased $3,096,266 from 2009 primarily from royalties related to sales of flat panel televisions and monitors.  The revenue growth was primarily due to volume increases from certain existing licensees such as Samsung, increased demand for flat panel televisions and, to a lesser extent, due to new license agreements with Top Victory and LG.  The increase in revenues in 2010 was offset by a decrease in set top box revenues in the current year.  Included in the home entertainment market revenue was a $900,000 settlement payment received from Sony in 2010.  Additionally, we recognized approximately $987,000 of previously under reported royalties in 2010 compared to $1,200,000 of royalties recovered in 2009 from certain customers in the home entertainment market.  The increase in revenues in the personal computer market from 2009 to 2010 was $1,901,910.   This increase was primarily due to increased volume from our existing customers, including Dell and AsusTek and revenues generated from Elitegroup Computer Systems, a new licensee. Revenues in the automotive market increased by $974,153 in 2010 as compared to 2009 primarily due to higher revenues due to volume increases from our Japanese customers who provide line install, dealer option and aftermarket automotive audio systems to many of the significant Japanese automotive manufacturers.  In the personal telecommunications market, revenues increased $418,785 from 2009 to 2010.  This increase was primarily due to increased royalties from higher volumes from Samsung.  Revenues in the portable media devices market decreased by $160,301 in 2010 as compared to 2009 due to decreased volumes from MP3/MP4 players.  Overall, we have not experienced a material change in our per unit license rates in the current periods other than volume pricing discounts provided pursuant to existing contractual obligations.

 

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The following table represents our mix of licensing revenues by market source:

 
| ** **                                                 | ** ** | **Years Ended   December 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                 | ** ** | **2010**                                 | ** ** | **2009** | ** ** |
| Home entertainment (TV, set-top box)                       |       | 64                                       | %          | 68 | % |
| PC (software, hardware)                                    |       | 16                                       |       | 12 |   |
| Personal telecommunications (mobile phone, PDA)            |       | 10                                       |       | 11 |   |
| Automotive                                                 |       | 7                                        |       | 5 |   |
| Portable media devices (digital media player,   headphone) |       | 3                                        |       | 4 |   |
|                                                       |       | 100                                      | %          | 100 | % |

 

*Sales and Marketing*

 

Sales expenses consist primarily of employee salaries, sales consultants’ fees and related expenses, commissions, training, and travel and entertainment expenses.  Marketing expenses consist primarily of employee salaries and related expenses, market research, advertising and co-marketing, and costs associated with brand building activities.  Sales and marketing expenses were $13,470,852 for 2010, as compared to $11,415,115 for 2009. Overall sales and marketing expenses were $2,055,737, or 18%, higher in 2010.  This increase was primarily attributable to higher payroll and related costs associated with increasing the size of our sales and marketing staff by approximately 26% in 2010.  In addition to increasing the sales and marketing personnel, we have also increased our branding efforts by creating new marketing assets, through both direct and co-marketing activities, and increased our participation in trade show activities.  We recorded $703,875 in share-based compensation expense for sales and marketing personnel during 2010 as compared to $511,301 in 2009. As a percentage of total revenues, sales and marketing expenses decreased from 46% for 2009 to 43% for 2010.

 

*Research and Development*

 

Research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities, customer support, technology porting activities, and costs for engineering materials and supplies. Research and development expenses were $8,060,246 for 2010, as compared to $5,721,195 for 2009. The overall increase in research and development expenses of $2,339,051, or 41%, was primarily attributable to increasing the size of our research and development staff by approximately 24% in 2010 due to the expansion of our Shanghai engineering facility and increase in worldwide field application engineers and quality assurance personnel. The increase is also attributable to the creation of the state-of-the-art Advanced Rendering Lab, which has been exclusively designed and constructed to accelerate research and development of object-oriented multi-dimensional audio technologies beyond the existing channel-based alternatives.  In addition, the Company founded the 3D Audio Alliance (3DAA), which is a new, industry alliance committed to the development of open, royalty-free standards for the transmission of 3D audio.  We recorded $551,934 in share-based compensation expense for engineering personnel during 2010 as compared to $457,464 in 2009.  As a percentage of total revenues, research and development expenses increased from 23% for 2009 to 26% for 2010.

 

*General and Administrative*

 

General and administrative expenses consist primarily of employee-related expenses, legal costs associated with the administration of intellectual property, facilities costs, insurance, legal and accounting professional fees related to public company reporting and compliance, and depreciation and amortization. General and administrative expenses were $6,526,171 for 2010 as compared to $5,656,616 for 2009. The overall increase of $869,555 or 15%, was primarily attributable to an increase in professional fees, increase in royalty compliance review fees, increase in payroll fees due to  the addition of a new hire, and depreciation and amortization expenses as we continue to expand our operations.  We recorded $997,920 in stock-based compensation expense during 2010 as compared to $987,292 in 2009. As a percentage of total revenues, general and administrative expenses decreased from 22% for 2009 to 21% for 2010.

 

*Other Income*

 

Other income, which primarily consists of interest income, was $245,127 for 2010, compared to $347,528 for 2009, a decrease of $102,401, or 29%.  Our goal during 2010 was to focus on asset protection of our cash, and as such we invested our cash in low-risk, high liquidity investments such as fully insured certificates of deposits and assets backed by the United States Treasury.  We continue to monitor our cash assets to maximize our interest income while maintaining an acceptable level of risk.  During 2010 and 2009, the Company did not incur any losses related to our cash and investments.

 

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*Provision for Income Taxes*

 

The income tax provision for 2010 was $52,153 compared to $98,006 for 2009, representing a decrease of $45,853, or 47%. The current and prior year provision consists primarily of estimated taxes payable to the state of California and estimated taxes payable to Japan and China.

 

We had federal and state net operating loss carryforwards at December 31, 2010 of $4,456,821 and $5,598,943, respectively. The net operating loss carryforwards begin to expire in 2014 and should continue through 2027. In addition, we had federal foreign tax credit carryforwards of approximately $10,270,431 at December 31, 2010, which begin to expire in 2014, and federal and state tax capital loss carryforwards of approximately $16,219,585, which begin to expire in 2011. As of December 31, 2010, we continued to have a valuation allowance of $12,605,203 against our deferred tax assets, which was established primarily due to our cumulative losses in recent years and was based on our assessment of our future ability to realize certain deferred tax assets.

 

**Year Ended December 31, 2009 Compared to Year Ended December 31, 2008**

 

*Revenues*

 

Total revenues for the year ended December 31, 2009 were $24,964,577 compared to $18,332,678 in the year ended December 31, 2008, an increase of $6,631,899 or 36%. This increase was primarily attributable to increases in royalties related to higher volume sales of televisions, set-top-boxes, personal computers and mobile devices containing our technologies by our licensees. In the home entertainment segment, royalty revenues increased $4,227,065 from fiscal year 2008 to fiscal 2009, of which $3,375,008 resulted from royalties related to sales of flat panel televisions and monitors.  We noted increases in royalty revenues from several of our largest television customers; including Samsung and Vizio, as well as increases in revenues related China based OEMs.  Revenues related to set-top boxes increased by $852,057 from 2008 to 2009, primarily due to our agreement with EchoStar, which we entered into in March 2009.  Revenue growth in the home entertainment segment during 2009 was also positively impacted by our royalty compliance program, through which we were able to identify and collect approximately $1,200,000 of previously under reported royalties in 2009.  The increase in revenues in the personal computer market from 2008 to 2009 was $2,040,992.   We noted increased revenues from many of our licensees, including Hewlett Packard, Dell, AsusTek, and BenQ among others.  In the personal telecommunications segment, revenues increased $1,270,997 from 2008 to 2009.  This increase was primarily due to increased revenues related to higher volumes from Samsung Mobile.  Revenues in the automotive market decreased by $293,484 in 2009 as compared to 2008 primarily due to the global decrease of new car sales.  Revenues in the portable media devices market decreased by $553,672 in 2009 as compared to 2008 due to decreased volumes from MP3/MP4 players.

 

The following table represents our mix of licensing revenues by market source:

 
| ** **                                                 | ** ** | **Years Ended   December 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Home entertainment (TV, set-top box)                       |       | 68                                       | %          | 69 | % |
| PC (software, hardware)                                    |       | 12                                       |       | 5 |   |
| Personal telecommunications (mobile phone, PDA)            |       | 11                                       |       | 9 |   |
| Automotive                                                 |       | 5                                        |       | 8 |   |
| Portable media devices (digital media player,   headphone) |       | 4                                        |       | 9 |   |
|                                                       |       | 100                                      | %          | 100 | % |

 

*Sales and Marketing*

 

Sales and marketing expenses were $11,415,115 for 2009, as compared to $9,220,098 for 2008. Overall sales and marketing expenses were $2,195,017, or 24%, higher in 2009.  This increase was primarily attributable to higher payroll and related costs associated with increasing the size of our sales and marketing staff by approximately 21% in 2009.  In addition to increasing the sales and marketing personnel, we have also increased our branding efforts by creating new marketing assets, through both direct and co-marketing activities, and increased our participation in trade show activities.  We recorded $511,301 in share-based compensation expense for sales and marketing personnel during 2009 as compared to $458,610 in 2008. As a percentage of total revenues, sales and marketing expenses decreased from 50% for 2008 to 46% for 2009.

 

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*Research and Development*

 

Research and development expenses were $5,721,195 for 2009, as compared to $3,942,635 for 2008. The overall increase in research and development expenses of $1,778,560, or 45%, was primarily attributable to increasing the size of our research and development staff by approximately 41% in 2009. We recorded $457,464 in share-based compensation expense for engineering personnel during 2009 as compared to $399,630 in 2008.  As a percentage of total revenues, research and development expenses increased from 22% for 2008 to 23% for 2009.

 

*General and Administrative*

 

General and administrative expenses were $5,656,616 for 2009 as compared to $5,913,081 for 2008. The overall decrease $256,456, or 4%, was primarily attributable to a decrease in professional fees and expenses of $166,000, associated with our Dutch Auction repurchase program, which was terminated in September 2008.  We recorded $987,292 in stock-based compensation expense during 2009 as compared to $919,228 in 2008. As a percentage of total revenues, general and administrative expenses decreased from 32% for 2008 to 22% for 2009.

 

*Other Income*

 

Other income, which primarily consists of interest income, was $347,528 for 2009, compared to $1,275,047 for 2008, a decrease of $927,519, or 73%.  Our goal during 2009 was to ensure asset protection of our cash, and as such we invested our cash in low-risk, high liquidity investments such as fully insured certificates of deposits and assets backed by the United States Treasury.  During 2009 and 2008, the company did not incur any losses related to our cash and investments.

 

*Provision for Income Taxes*

 

The income tax provision for 2009 was $98,006 compared to $117,543 for 2008, representing a decrease of $19,537, or 17%. The current and prior year provision consists primarily of estimated taxes payable to the state of California.

 

**Selected Quarterly Operating Results**

 

The following table sets forth certain quarterly summary consolidated financial data for the eight quarters in the period ended December 31, 2010. The quarterly information is based upon financial statements prepared by us on a basis consistent with our audited consolidated financial statements and, in management’s opinion, includes all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the information for the periods presented. This information should be read in conjunction with our audited consolidated financial statements and notes thereto appearing elsewhere in this Report. Our quarterly operating results have varied significantly in the past and are expected to vary significantly in the future. Due to rounding differences, the quarters in a given year may not add precisely to the annual numbers for that year.

 
| ** **                          | ** ** | **Three Months Ended**                                     | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Mar 31,   2010**                                              | ** ** | **June 30,   2010** | ** ** | **Sep 30,   2010** | ** ** | **Dec 31,   2010** | ** ** | **Mar 31,   2009** | ** ** | **June 30,   2009** | ** ** | **Sep 30,   2009** | ** ** | **Dec 31,   2009** | ** ** |
| ** **                          | ** ** | **(In thousands except per share amounts)** | ** ** |
| Revenues                            |       | $                                                                    | 8,385      |   | $ | 7,161 |   | $ | 8,609 |   | $ | 7,065 |   | $ | 5,704 |   | $ | 5,055 |   | $ | 7,230 |   | $ | 6,975 |   |
| Gross profit                        |       | 8,321                                                                |       | 7,061 |   | 8,545 |   | 6,944 |   | 5,632 |   | 4,993 |   | 7,162 |   | 6,891 |   |
| Operating expenses                  |       | 6,876                                                                |       | 6,479 |   | 7,220 |   | 7,482 |   | 5,346 |   | 5,275 |   | 5,745 |   | 6,427 |   |
| Net income (loss)                   |       | $                                                                    | 1,466      |   | $ | 630 |   | $ | 1,340 |   | $ | (431 | ) | $ | 386 |   | $ | (198 | ) | $ | 1,475 |   | $ | 473 |   |
| Net income (loss) per common share: |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                               |       | $                                                                    | 0.10       |   | $ | 0.04 |   | $ | 0.09 |   | $ | (0.03 | ) | $ | 0.03 |   | $ | (0.01 | ) | $ | 0.10 |   | $ | 0.03 |   |
| Diluted                             |       | $                                                                    | 0.10       |   | $ | 0.04 |   | $ | 0.09 |   | $ | (0.03 | ) | $ | 0.03 |   | $ | (0.01 | ) | $ | 0.10 |   | $ | 0.03 |   |

 

**Liquidity and Capital Resources**

 

At December 31, 2010, cash and cash equivalents, and short and long-term investments were $43,053,827 compared to $41,489,164 as of December 31, 2009, an increase of $1,564,663. Our cash and cash equivalents were $10,697,827 as of December 31, 2010, a decrease of $17,290,337 from cash and cash equivalents of $27,988,164 held at December 31, 2009. The decrease in cash and cash equivalents in the current year was primarily a result of the purchase of short and long-term investments, partially offset by positive cash flow generated by operating activities.  Cash and cash equivalents generally consist of cash, certificates of deposits, and money market funds with original maturities of three months or less. The money market funds are primarily invested in US government obligations.  The cash and certificates of deposit are FDIC insured. As of December 31, 2010, we held $19,033,000 in short-term investments and $13,323,000 in long-term investments.  Short-term investments generally consist of certificates of deposit and treasury bills.  Long-term investments generally consist of certificates of deposit with maturities ranging from 18 months to 24 months.  In fiscal years 2010, 2009 and 2008, our operations were funded primarily from cash generated from operating activities.

 

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Net cash provided by operating activities was $1,522,995 and $2,776,720 for 2010 and 2009, respectively. The $1,253,725 decrease in net cash provided by operating activities in 2010, compared to 2009, was primarily a result of an increase in accounts receivable balance, from $179,114 during the year ended December 31, 2009 to $1,191,847 for the year ended December 31, 2010, largely due to an increase in revenue, as well as timing of cash receipts.  In addition, our net deferred tax asset increased by $806,156.  Offsetting the decrease in net cash provided by operating activities was the decrease in change of accrued liabilities of $724,544, and the increase in net income of $870,843.

 

Net cash used in investing activities was $19,952,386 and $6,920,993 in 2010 and 2009, respectively. The $13,031,393 increase in cash used in investing activities in 2010, compared to 2009, was primarily due to the purchase of $40,822,000 in short and long-term investments.  Offsetting the purchases was $21,967,000 in short and long-term investment proceeds.

 

Net cash provided by financing activities was $1,139,054 and $533,350 in 2010 and 2009, respectively.  The $605,704 increase in net cash provided by financing activities in fiscal year 2010, compared to fiscal year 2009, was a result of proceeds from exercise of stock options.

 

We believe our existing cash, cash equivalents, short and long-term investment balances together with cash generated from operating activities will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and the continuing market acceptance of our products.

 

**Contractual Cash Obligations and Contingent Liabilities and Commitments**

 

We have contractual obligations and commitments with regards to operating lease arrangements. The following table quantifies our expected contractual obligations and commitments subsequent to December 31, 2010:

 
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **More than   3 years** | ** ** |
| Operating lease obligations      |       | $                                         | 1,152,730  |   | $ | 459,259 |   | $ | 693,471 |   | $ | — |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

**Recent Accounting Pronouncements**

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us January 1, 2011.  Other than requiring additional disclosures, adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.

 

In February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, which amends subsequent event disclosure requirements for SEC filers. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This ASU was effective upon issuance and adoption did not result in a material impact on our consolidated financial position, results or operations or cash flows.

 

**Item 7A.  Quantitative and Qualitative Disclosures About Market Risk**

 

Our exposure to market risk includes changes in interest rates, which relates primarily to our invested balances of cash, cash equivalents and investments. Our investment policy specifies excess funds are to be invested in a manner that preserves capital, provides liquidity and generates the highest available after-tax return. To limit exposure to market risk, we place our cash in banks, cash equivalents in certificates of deposits with original maturities of three months or less and money market funds, which are

 

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primarily invested in US government obligations.  Short-term investments consist of certificates of deposits and treasury bills with original maturities ranging from 6 to 12 months.  Long-term investments consist of certificates of deposits and treasury bills with maturities ranging from 18 to 24 months.  We do not invest in any derivative instruments. All cash, cash equivalents and investments are carried at fair value, which approximates cost.  We limit our exposure to foreign currency risk by generally requiring our licensees to pay us royalties in U.S. Dollars.  Substantially all of our royalties in 2010 were paid in U.S. Dollars.  Payments to vendors and employees are generally denominated in either U.S. Dollars or the local currency.  Total payments to vendors and employees in local currencies have historically been immaterial to the Company’s total operating expenses.

 

**Item 8.  Financial Statements and Supplementary Data**

 

The financial statement information, including the Report of Independent Registered Public Accounting Firm, required by this Item 8 is set forth on pages 32 to 48 of this Annual Report on Form 10-K and is hereby incorporated into this Item 8 by reference. The quarterly financial information required by this Item 8 is set forth in Item 7 of this Annual Report on Form 10-K and is hereby incorporated into this Item 8 by reference.

 

**Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures**

 

None.

 

**Item 9A.   Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures*

 

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Subject to the limitations noted above, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective to meet the objective for which they were designed and operate at the reasonable assurance level.

 

*Management’s Report on Internal Control over Financial Reporting*

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act. 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, and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our 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.

 

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its report, *Internal**Control-Integrated Framework*. Based on this assessment and those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2010.

 

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*Attestation Report of Independent Registered Public Accounting Firm*

 

Our internal control over financial reporting has been audited by Squar, Milner, Peterson, Miranda & Williamson, LLP, an independent registered public accounting firm, as stated in their report, which is included herein on page 33.

 

*Changes in Internal Controls*

 

There have been no changes in our internal controls over financial reporting that occurred during our fourth quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

**Item 9B.  Other Information**

 

None.

 

**PART III**

 

**Item 10.  Directors, Executive Officers and Corporate Governance**

 

The information set forth under the captions “Election of Directors,” “Information About the Board of Directors and Committees of the Board,” “Executive Officers” and “Transactions with Management and Others—Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for the Company’s Annual Meeting of Stockholders to be held in 2010 (the “Proxy Statement”) is incorporated herein by reference. The Proxy Statement will be filed with the SEC no later than 120 days after the end of fiscal year 2009.

 

**Item 11.  Executive Compensation**

 

Except as specifically provided, the information set forth under the captions “Executive Compensation” and “Information About the Board of Directors and Committees of the Board—Compensation of Directors” in the Proxy Statement is incorporated herein by reference.

 

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

 

Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

 

Information regarding equity compensation plans required by this Item 12 is included in Item 5 of Part II of this Annual Report on Form 10-K and is incorporated into this Item by reference.

 

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

 

The information set forth under the captions “Transactions with Management and Others” and “Information About the Board of Directors and Committees of the Board” in the Proxy Statement is incorporated herein by reference.

 

**Item 14.  Principal Accounting Fees and Services**

 

Information regarding principal accounting fees and services is incorporated by reference to the information set forth under the caption “Relationship of the Company with Independent Registered Public Accounting Firm” in the Proxy Statement.

 

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**PART IV**

 

**Item 15.  Exhibits and Financial Statement Schedule**

 

**(1)****                                ****Financial Statements**

 
| ** **                                                                                                                                       | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting   Firm—Squar, Milner, Peterson, Miranda & Williamson, LLP                  |       | 32       |
| Consolidated   Balance Sheets as of December 31, 2010 and 2009                                                                              |       | 33       |
| Consolidated Statements of Operations for the years   ended December 31, 2010, 2009 and 2008                                                |       | 34       |
| Consolidated Statements of Stockholders’ Equity and   Comprehensive Income for the years ended December 31, 2010,   2009 and 2008 |       | 35       |
| Consolidated Statements of Cash Flows for the years   ended December 31, 2010, 2009 and 2008                                                |       | 36       |
| Notes to Consolidated Financial Statements                                                                                                       |       | 37       |

 

**(2)****                                ****Financial Statement Schedule**

 
| ** **                                                                                                                         | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Schedule II—Valuation   and Qualifying Accounts and Reserves for the years ended December 31,   2010, 2009 and 2008 |       | 47       |

 

The financial statement schedule included on page 47 to this Annual Report on Form 10-K and in Part II, Item 8 herein is filed as part of this Annual Report on Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or related notes.

 

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**(3)****                                ****Exhibits**

 

The exhibits listed below are hereby filed with the SEC as part of this Annual Report on Form 10-K. We will furnish a copy of any exhibit upon request, but a reasonable fee will be charged to cover our expenses in furnishing such exhibit.

** **
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1                  |       | Certificate   of Incorporation of the Company, previously filed with the SEC as   Exhibit 3.1 to the Company’s Registration Statement on Form SB-2,   specifically included in Amendment No. 1 to such Registration Statement   filed with the SEC on July 3, 1996 (File No. 333-4974-LA) (the   “Registration Statement Amendment No. 1”), which is incorporated herein   by reference.                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2                  |       | Bylaws   of the Company, previously filed with the SEC as Exhibit 3.1 to the   Company’s Quarterly Report on Form 10-Q for the period ended   September 30, 1999, filed with the SEC on November 12, 1999, which   is incorporated herein by reference.                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                 | ** ** | **Material   Contracts Relating to Management Compensation Plans or Arrangements**                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1                 |       | Employment Agreement dated July 1, 1996,   between the Company and Thomas C.K. Yuen, previously filed with the SEC as   Exhibit 10.8 to the Registration Statement Amendment No. 1, which   is incorporated herein by reference.                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2                 |       | Amendment to Employment Agreement dated as of   March 14, 1997, between the Company and Thomas C.K. Yuen, previously   filed with the SEC as Exhibit 10.2 to the Company’s Annual Report on   Form 10-KSB for the fiscal year ended December 31, 1996, filed with   the SEC on March 31, 1997 (the “1996 Annual Report”), which is   incorporated herein by reference.                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3                 |       | Employment Agreement dated July 1, 1996,   between the Company and Alan D. Kraemer, previously filed with the SEC as   Exhibit 10.11 to the Registration Statement Amendment No. 1, which   is incorporated herein by reference.                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4                 |       | SRS Labs, Inc. Amended and Restated 1996   Non-employee Directors Stock Option Plan, as amended, previously filed with   the SEC as Appendix B to the Company’s Definitive Proxy Statement dated   and filed with the SEC on April 30, 2003, which is incorporated herein   by reference.                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5                 |       | Form of Indemnification Agreement (entered into   with David Dukes, Thomas C.K. Yuen, Winston E. Hickman, Carol L. Miltner, Sam   Yau, Alan D. Kraemer, Jeff Klaas, Sarah Yang, and Allen Gharapetian),   previously filed with the SEC as Exhibit 99.1 to the Company’s Current   Report on Form 8-K filed with the SEC on August 13, 2010, which is   incorporated herein by reference.                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6                 |       | Non-employee Director Compensation Policy adopted by   the Company’s Board of Directors on January 28, 2005, previously filed   with the SEC as Exhibit 10.1 to the Company’s Current Report on   Form 8-K filed with the SEC on February 3, 2005, which is   incorporated herein by reference.                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7                 |       | Form of Non-Employee Director Stock Option   Agreement under the SRS Labs, Inc. Amended and Restated 1996   Non-Employee Directors’ Stock Option Plan (Initial Appointment), previously   filed with the SEC as Exhibit 10.2 to the Company’s Current Report on   Form 8-K filed with the SEC on February 3, 2005, which is   incorporated herein by reference.                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8                 |       | Form of Non-Employee Director Stock Option   Agreement under the SRS Labs, Inc. Amended and Restated 1996   Non-Employee Directors’ Stock Option Plan (Re-Election), previously filed   with the SEC as Exhibit 10.3 to the Company’s Current Report on   Form 8-K filed with the SEC on February 3, 2005, which is   incorporated herein by reference.                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9                 |       | Form of Non-Employee Director Stock Option   Agreement under the SRS Labs, Inc. Amended and Restated 1996 Long-Term   Incentive Plan, previously filed with the SEC as Exhibit 10.4 to the   Company’s Current Report on Form 8-K filed with the SEC on   February 3, 2005, which is incorporated herein by reference.                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10                |       | Form of Nonqualified Stock Option Agreement   under the SRS Labs, Inc. Amended and Restated 1996 Long-Term Incentive   Plan dated March 29, 2005 (Current participants under this plan include   the following officers: Thomas C.K. Yuen, Ulrich E. Gottschling, Sarah Yang   and Alan D. Kraemer), previously filed with the SEC as Exhibit 10.1 to   the Company’s Current Report Form 8-K filed with the SEC on   April 4, 2005, which is incorporated herein by reference. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11                |       | SRS Labs, Inc. Amended and Restated Change in   Control Protection Plan approved August 3, 2009, previously filed with   the SEC as Exhibit 10.1 to the Company’s Quarterly Report on   Form 10-Q filed with the SEC on August 6, 2009, which is   incorporated herein by reference.                                                                                                                                                                                                 |

 

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| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12                |       | Form of   Participation Agreement under the SRS Labs, Inc. Amended and Restated   Change in Control Protection Plan for Selected Executive Officers (Current   participants under this plan include the following officers: Thomas C.K.   Yuen, Ulrich E. Gottschling, Sarah Yang, Jeff Klaas and Alan D. Kraemer)   previously filed with the SEC as Exhibit 10.2 to the Company’s Quarterly   Report on Form 10-Q filed with the SEC on August 6, 2009, which is   incorporated herein by reference. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13                |       | SRS   Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan, as   amended, approved April 27, 2005, previously filed with the SEC as   Exhibit 10.5 to the Form 8-K filed with the SEC on May 3,   2005, which is incorporated herein by reference.                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.14                |       | Offer   Letter dated April 22, 2008 by and between the Company and Jeff Klaas,   previously filed with the SEC as Exhibit 10.15 to the Company’s Annual   Report on Form 10-K for the fiscal period ended December 31, 2008,   filed with the SEC on February 24, 2009 which is incorporated herein by   reference.                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.15                |       | Employment   Letter Agreement dated December 21, 2005 by and between the Company and   Ulrich E. Gottschling, previously filed with the SEC as Exhibit 99.1 to   the Company’s Current Report on Form 8-K filed with the SEC on   December 29, 2005, which is incorporated herein by reference.                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.16                |       | Form of   Nonqualified Stock Option Agreement under the SRS Labs, Inc. 1996   Amended and Restated Long-Term Incentive Plan, as amended, previously filed   with the SEC as Exhibit 99.8 to the Company’s Current Report on   Form 8-K filed with the SEC on January 18, 2006, which is   incorporated herein by reference.                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.17                |       | SRS   Labs, Inc. Profit Sharing and Bonus Plan, as amended on June 20,   2007, previously filed with the SEC as Exhibit 10.1 to the Company’s   Current Report on Form 8-K filed with the SEC on June 25, 2007,   which is incorporated herein by reference.                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.18                |       | SRS   Labs, Inc. 2006 Stock Incentive Plan, as amended on December 17,   2007, previously filed with the SEC as Exhibit 10.1 to the Company’s   Current Report on Form 8-K filed with the SEC on December 21, 2007,   which is incorporated herein by reference.                                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.19                |       | Form of   Stock Option Award Agreement under the SRS Labs, Inc. 2006 Stock   Incentive Plan, previously filed with the SEC as Exhibit 10.9 to the   Company’s Quarterly Report on Form 10-Q, Amendment No. 1, filed   with the SEC on September 22, 2006, which is incorporated herein by   reference.                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.20                |       | Form of   Restricted Share Award Agreement under the SRS Labs, Inc. 2006 Stock   Incentive Plan, previously filed with the SEC as Exhibit 10.10 to the   Company’s Quarterly Report on Form 10-Q, Amendment No. 1, filed   with the SEC on September 22, 2006, which is incorporated herein by   reference.                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.21                |       | Form of   Restricted Share Unit Award Agreement under the SRS Labs, Inc. 2006   Stock Incentive Plan, previously filed with the SEC as Exhibit 10.11 to   the Company’s Quarterly Report on Form 10-Q, Amendment No. 1, filed   with the SEC on September 22, 2006, which is incorporated herein by   reference.                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.22                |       | Form of   SAR Award Agreement under the SRS Labs, Inc. 2006 Stock Incentive Plan,   previously filed with the SEC as Exhibit 10.12 to Amendment No. 1   to the Company’s Quarterly Report on Form 10-Q, Amendment No. 1,   filed with the SEC on September 22, 2006, which is incorporated herein   by reference.                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.23                |       | SRS   Labs, Inc. Patent Reward Program, previously filed as Exhibit 10.2   to the Company’s Form 8-K filed with the SEC on June 28, 2006,   which is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **           | ** ** | **Other Material Contracts**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.24                |       | Industrial   Real Estate Lease dated May 27, 2008, between the Company and Daimler   Commerce Partners, L.P., previously filed with the SEC as   Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the   fiscal period ended December 31, 2008, filed with the SEC on   February 24, 2009 which is incorporated herein by reference.                                                                                                                                                  |

 

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| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25                |       | Stock   Divestment Agreement dated July 1, 1996, between the Company, Thomas   C.K. Yuen, Stephen V. Sedmak and Walter W. Cruttenden III, previously filed   with the SEC as Exhibit 10.17 to the Company’s Registration Statement on   Form SB-2, specifically included in Amendment No. 2 to such   Registration Statement file with the SEC on August 2, 1996 (File   No. 333-4974-LA), which is incorporated herein by reference. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.26                |       | Revolving   Credit Agreement effective June 30, 2010, and related documents and   agreements, by and between SRS Labs, Inc. and U.S. Bank N.A., previously   filed with the SEC as Exhibit 10.1 to the Company’s Current Report on   Form 8-K, filed with the SEC on August 18, 2010 which is incorporated   herein by reference.                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.27                |       | Settlement   Agreement effective September 9, 2010 by and between SRS Labs, Inc.   and Sony Corporation, previously filed with the SEC as Exhibit 10.1 to   the Company’s Current Report on Form 8-K, filed with the SEC on   September 13, 2010 which is incorporated herein by reference.                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.28                |       | Standard   Industrial/Commercial Multi-tenant Lease dated February 7, 2011, by and   between SRS Labs, Inc. and Daimler Commerce Partners, L.P.                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **           | ** ** | **Other Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21                   |       | Subsidiaries   of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1                 |       | Consent   of Independent Registered Public Accounting Firm, Squar, Milner, Peterson,   Miranda & Williamson, LLP, dated February 22, 2010.                                                                                                                                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1                 |       | Certification   of the Chief Executive Officer of SRS Labs, Inc., pursuant to Section 302   of the Sarbanes- Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2                 |       | Certification   of the Chief Financial Officer of SRS Labs, Inc., pursuant to   Section 302 of the Sarbanes- Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1                 |       | Certification   of Chief Executive Officer of SRS Labs, Inc., pursuant to 18 U.S.C.   Section 1350, as adopted pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2                 |       | Certification   of Chief Financial Officer of SRS Labs, Inc., pursuant to 18 U.S.C.   Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley   Act of 2002.                                                                                                                                                                                                                                                                               |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                            | SRS   Labs, Inc. |
|---------------------------------|-----------------------|
|                            |                  |   |
|                            |                  |   |
| Dated:   February 22, 2011 | By:                   | /S/ THOMAS C.K. YUEN |
| * *                        | * *              | *Chairman of the Board 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.

 
| **Name**               | ** ** | **Capacity**                                          | ** ** | **Date**               |
|------------------------|------------|-------------------------------------------------------|------------|------------------------|
| ** **             | ** ** | ** **                                            | ** ** | ** **             |
| /s/ THOMAS C.K. YUEN   |       | Director,   Chairman of the Board and Chief Executive |       | February 22, 2011 |
| Thomas C.K. Yuen       |       | Officer   (Principal Executive Officer)               |       |                   |
|                   |       |                                                  |       |                   |
| /s/ ULRICH GOTTSCHLING |       | Chief   Financial Officer (Principal Financial and    |       | February 22, 2011 |
| Ulrich Gottschling     |       | Accounting   Officer)                                 |       |                   |
|                   |       |                                                  |       |                   |
| /s/ DAVID R. DUKES     |       | Director                                              |       | February 22, 2011 |
| David R. Dukes         |       |                                                  |       |                   |
|                   |       |                                                  |       |                   |
| /s/ WINSTON E. HICKMAN |       | Director                                              |       | February 22, 2011 |
| Winston E. Hickman     |       |                                                  |       |                   |
|                   |       |                                                  |       |                   |
| /s/ CAROL L. MILTNER   |       | Director                                              |       | February 22, 2011 |
| Carol L. Miltner       |       |                                                  |       |                   |
|                   |       |                                                  |       |                   |
| /s/ SAM YAU            |       | Director                                              |       | February 22, 2011 |
| Sam Yau                |       |                                                  |       |                   |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders

SRS Labs, Inc.

Santa Ana, California

 

We have audited the accompanying consolidated balance sheets of SRS Labs, Inc. and Subsidiaries (collectively the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. We also have audited the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our audit also included the financial statement schedule listed in Item 15(2) herein. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Controls over Financial Reporting.  Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

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 (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) 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 (c) 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SRS Labs, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their 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 Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Also, in our opinion, the aforementioned financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the financial information set forth therein.

 
| /s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP |   |
|----------------------------------------------------------------------|--------|
| Squar, Milner, Peterson, Miranda & Williamson, LLP     |   |

 

Newport Beach, California

February 22, 2011

 

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**SRS LABS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                     | ** ** | **December 31,   2010** | ** ** | **December 31,   2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                     |       |                         |       |                         |       |
| **Current Assets**                                                                                                                                                             |       |                         |       |                         |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                            | 10,697,827 |                         | $          | 27,988,164 |   |
| Accounts receivable, net                                                                                                                                                       |       | 1,191,847                    |       | 179,114                      |       |
| Prepaid expenses and other current assets                                                                                                                                      |       | 1,069,900                    |       | 1,147,151                    |       |
| Short-term investments                                                                                                                                                         |       | 19,033,000                   |       | 12,963,000                   |       |
| **Total Current Assets**                                                                                                                                                       |       | 31,992,574                   |       | 42,277,429                   |       |
|                                                                                                                                                                           |       |                         |       |                         |       |
| Long-term investments                                                                                                                                                          |       | 13,323,000                   |       | 538,000                      |       |
| Property and equipment, net                                                                                                                                                    |       | 672,220                      |       | 599,794                      |       |
| Intangible assets, net                                                                                                                                                         |       | 2,761,432                    |       | 2,702,160                    |       |
| Deferred income taxes, net                                                                                                                                                     |       | 8,597,619                    |       | 5,631,442                    |       |
| **Total Assets**                                                                                                                                                               |       | $                            | 57,346,845 |                         | $          | 51,748,825 |   |
| **LIABILITIES AND   STOCKHOLDERS’ EQUITY**                                                                                                                                |       |                         |       |                         |       |
|                                                                                                                                                                           |       |                         |       |                         |       |
| **Current Liabilities**                                                                                                                                                        |       |                         |       |                         |       |
| Accounts payable                                                                                                                                                               |       | $                            | 516,470    |                         | $          | 583,157 |   |
| Accrued liabilities                                                                                                                                                            |       | 1,434,970                    |       | 1,577,891                    |       |
| Deferred revenue                                                                                                                                                               |       | 601,825                      |       | 1,193,454                    |       |
| **Total Current Liabilities**                                                                                                                                                  |       | 2,553,265                    |       | 3,354,502                    |       |
|                                                                                                                                                                           |       |                         |       |                         |       |
| Commitments and contingencies (Note 4)                                                                                                                                    |       |                         |       |                         |       |
|                                                                                                                                                                           |       |                         |       |                         |       |
| **Stockholders’ Equity**                                                                                                                                                  |       |                         |       |                         |       |
| Preferred stock—$0.001 par value; 2,000,000 shares   authorized; no shares issued and outstanding                                                                         |       | —                       |       | —                       |       |
| Common stock—$0.001 par value; 56,000,000 shares   authorized; 14,807,070 and 14,563,715 shares issued and outstanding at   December 31, 2010 and 2009, respectively |       | 14,808                       |       | 14,565                       |       |
| Additional paid-in capital                                                                                                                                                     |       | 68,520,878                   |       | 65,128,337                   |       |
| Accumulated deficit                                                                                                                                                            |       | (13,742,106                  | )          | (16,748,579                  | )          |
| **Total Stockholders’ Equity**                                                                                                                                            |       | 54,793,580                   |       | 48,394,323                   |       |
| **Total Liabilities and   Stockholders’ Equity**                                                                                                                          |       | $                            | 57,346,845 |                         | $          | 51,748,825 |   |

 

See accompanying notes to the consolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                     |       | $                                           | 31,220,389 |   | $ | 24,964,577 |   | $ | 18,332,678 |   |
| Cost of sales                                                |       | 349,621                                     |       | 285,543 |   | 143,481 |   |
| Gross profit                                                 |       | 30,870,768                                  |       | 24,679,034 |   | 18,189,197 |   |
| Operating expenses:                                          |       |                                        |       |   |   |   |   |
| Sales and marketing                                          |       | 13,470,852                                  |       | 11,415,115 |   | 9,220,098 |   |
| Research and development                                     |       | 8,060,246                                   |       | 5,721,195 |   | 3,942,635 |   |
| General and administrative                                   |       | 6,526,171                                   |       | 5,656,616 |   | 5,913,081 |   |
| Total operating expenses                                     |       | 28,057,269                                  |       | 22,792,926 |   | 19,075,814 |   |
| Operating income (loss)                                      |       | 2,813,499                                   |       | 1,886,108 |   | (886,617 | ) |
| Other income                                                 |       | 245,127                                     |       | 347,528 |   | 1,275,047 |   |
| Income before income taxes                                   |       | 3,058,626                                   |       | 2,233,636 |   | 388,430 |   |
| Income taxes                                                 |       | 52,153                                      |       | 98,006 |   | 117,543 |   |
| Net income                                                   |       | $                                           | 3,006,473  |   | $ | 2,135,630 |   | $ | 270,887 |   |
| Net income per common share:                                 |       |                                        |       |   |   |   |   |
| Basic                                                        |       | $                                           | 0.20       |   | $ | 0.15 |   | $ | 0.02 |   |
| Diluted                                                      |       | $                                           | 0.19       |   | $ | 0.14 |   | $ | 0.02 |   |
| Weighted average shares used in the per share   calculation: |       |                                        |       |   |   |   |   |
| Basic                                                        |       | 14,670,751                                  |       | 14,460,490 |   | 15,588,815 |   |
| Diluted                                                      |       | 15,602,051                                  |       | 14,813,372 |   | 15,842,336 |   |

 

See accompanying notes to consolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

**AND COMPREHENSIVE INCOME**

 
| ** **                                                           | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **   | ** ** | ** ** | ** **  | ** **        | ** ** | ** ** | ** ** |       |
|----------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|--------------|------------|------------|-------------|-------------------|------------|------------|------------|------------|
| ** **                                                           | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**              | ** ** | ** **   | ** ** | ** ** | ** **  | ** **        | ** ** | ** ** | ** ** |       |
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Accumulated**        | ** ** | **Treasury** | ** ** | ** ** | ** **  | **Comprehensive** | ** ** |       |
| ** **                                                           | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Deficit**  | ** ** | **Stock**  | ** **  | **Total**         | ** ** | **Income** | ** ** |       |
|                                                                 |       |                  |       |        |       |              |       |                   |       |         |       |       |        |              |       |       |       |       |
| BALANCE,   December 31, 2007                               |       | 15,778,715            |       | 16,947      |       | 74,143,772        |       | (48,125                | )          | (19,155,096  | )          | (5,950,181 | )           | 49,007,317        |       | 5,639,605  |       |       |
| Proceeds   from exercise of stock options                       |       | 116,847               |       | 117         |       | 329,051           |       | —                 |       | —       |       | —     |        | 329,168           |       |       |       |       |
| Purchase   of treasury stock                                         |       | (1,476,144            | )          | —      |       | —            |       | —                 |       | —       |       | (7,663,679 | )           | (7,663,679        | )          |       |       |       |
| Cancellation   of treasury stock                                     |       | —                |       | (2,644      | )          | (13,611,216       | )          | —                 |       | —       |       | 13,613,860 |        | —            |       |       |       |       |
| Share-based   compensation                                           |       | —                |       | —      |       | 1,777,468         |       | —                 |       | —       |       | —     |        | 1,777,468         |       |       |       |       |
| Unrealized   gain on investments available for sale, net of tax |       | —                |       | —      |       | —            |       | 48,125                 |       | —       |       | —     |        | 48,125            |       | 48,125     |       |       |
| Net   income                                                         |       | —                |       | —      |       | —            |       | —                 |       | 270,887      |       | —     |        | 270,887           |       | 270,887    |       |       |
| BALANCE,   December 31, 2008                               |       | 14,419,418            |       | 14,420      |       | 62,639,075        |       | —                 |       | (18,884,209  | )          | —     |        | 43,769,286        |       | 319,012    |       |       |
| Proceeds   from exercise of stock options                       |       | 144,297               |       | 145         |       | 533,205           |       | —                 |       | —       |       | —     |        | 533,350           |       |       |       |       |
| Share-based   compensation                                           |       | —                |       | —      |       | 1,956,057         |       | —                 |       | —       |       | —     |        | 1,956,057         |       |       |       |       |
| Net   income                                                         |       | —                |       | —      |       | —            |       | —                 |       | 2,135,630    |       | —     |        | 2,135,630         |       | 2,135,630  |       |       |
| BALANCE,   December 31, 2009                               |       | 14, 563,715           |       | 14,565      |       | 65,128,337        |       | —                 |       | (16,748,579  | )          | —     |        | 48,394,323        |       | 2,135,630  |       |       |
| Proceeds   from exercise of stock options                       |       | 243,355               |       | 243         |       | 1,138,811         |       | —                 |       | —       |       | —     |        | 1,139,054         |       |       |       |       |
| Share-based   compensation                                           |       | —                |       | —      |       | 2,253,730         |       | —                 |       | —       |       | —     |        | 2,253,730         |       |       |       |       |
| Net   income                                                         |       | —                |       | —      |       | —            |       | —                 |       | 3,006,473    |       | —     |        | 3,006,473         |       | 3,006,473  |       |       |
| BALANCE,   December 31, 2010                               |       | 14,807,070            |       | $           | 14,808     |              | $          | 68,520,878             |       | —       |       | $          | (13,742,106 | )                 | —     |       | $          | 54,793,580 |   | $ | 3,006,473 |   |
|                                                                      |            |                       |            |             |            |                   |            |                        |            |              |            |            |             |                   |            |            |            |            |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                          | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Cash Flows from Operating   Activities:**                                         |       |                                        |       |   |   |   |   |
| Net income                                                                          |       | $                                           | 3,006,473  |   | $ | 2,135,630 |   | $ | 270,887 |   |
| Adjustments to reconcile net income to net cash   provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                       |       | 953,188                                     |       | 704,718 |   | 660,954 |   |
| Provision for doubtful accounts                                                     |       | —                                      |       | 47,527 |   | 11,190 |   |
| Deferred taxes                                                                      |       | (2,966,177                                  | )          | (2,160,021 | ) | (1,695,219 | ) |
| Share-based compensation                                                            |       | 2,253,730                                   |       | 1,956,057 |   | 1,777,468 |   |
| Loss on disposition of furniture, fixtures and   equipment                          |       | —                                      |       | 14,818 |   | — |   |
| Write-off of intangible assets                                                      |       | 12,500                                      |       | 13,149 |   | 42,569 |   |
| Changes in operating assets and liabilities:                                        |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                 |       | (1,012,733                                  | )          | 106,070 |   | 794,524 |   |
| Prepaid expenses and other current assets                                           |       | 77,250                                      |       | (283,056 | ) | 29,293 |   |
| Accounts payable                                                                    |       | (66,687                                     | )          | 268,775 |   | (214,681 | ) |
| Accrued liabilities                                                                 |       | (142,920                                    | )          | 581,623 |   | 306,960 |   |
| Deferred revenue                                                                    |       | (591,629                                    | )          | (608,570 | ) | 645,188 |   |
| Net cash provided by operating activities                                           |       | 1,522,995                                   |       | 2,776,720 |   | 2,629,133 |   |
| **Cash Flows from Investing   Activities:**                                         |       |                                        |       |   |   |   |   |
| Proceeds from sale of investments available for   sale                              |       | —                                      |       | — |   | 5,500,000 |   |
| Purchase of short and long-term investments                                         |       | (40,822,000                                 | )          | (5,665,000 | ) | (7,836,000 | ) |
| Proceeds from short and long-term investments                                       |       | 21,967,000                                  |       | — |   | — |   |
| Purchase of property and equipment                                                  |       | (363,957                                    | )          | (417,191 | ) | (302,602 | ) |
| Expenditures related to intangible assets                                           |       | (733,429                                    | )          | (856,402 | ) | (672,224 | ) |
| Proceeds from sale of property and equipment                                        |       | —                                      |       | 17,600 |   | — |   |
| Net cash used in investing activities                                               |       | (19,952,386                                 | )          | (6,920,993 | ) | (3,310,826 | ) |
| **Cash Flows from Financing   Activities:**                                         |       |                                        |       |   |   |   |   |
| Purchase of treasury stock                                                          |       | —                                      |       | — |   | (7,663,679 | ) |
| Proceeds from exercise of stock options                                             |       | 1,139,054                                   |       | 533,350 |   | 329,168 |   |
| Net cash provided by (used in) financing   activities                               |       | 1,139,054                                   |       | 533,350 |   | (7,334,511 | ) |
| **Net Decrease in Cash and Cash   Equivalents**                                     |       | (17,290,337                                 | )          | (3,610,923 | ) | (8,016,204 | ) |
| **Cash and Cash Equivalents,   Beginning of Year**                                  |       | 27,988,164                                  |       | 31,599,087 |   | 39,615,291 |   |
| **Cash and Cash Equivalents, End   of Year**                                        |       | $                                           | 10,697,827 |   | $ | 27,988,164 |   | $ | 31,599,087 |   |
| **Supplemental Disclosures of   Cash Flow Information:**                            |       |                                        |       |   |   |   |   |
| Cash paid during the year for:                                                      |       |                                        |       |   |   |   |   |   |   |   |
| Income taxes                                                                        |       | $                                           | 2,840,844  |   | $ | 2,203,771 |   | $ | 2,377,114 |   |
| **Supplemental Disclosure of   Non-Cash Investing/Financing Activities:**           |       |                                        |       |   |   |   |   |
| Unrealized gain on investments, net                                                 |       | $                                           | —     |   | $ | — |   | $ | 48,125 |   |
| Retirement of treasury stock                                                        |       | $                                           | —     |   | $ | — |   | $ | 13,613,860 |   |

 

See accompanying notes to consolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Organization and Significant Accounting Policies**

 

*Organization*

 

SRS Labs, Inc. (collectively with its subsidiaries, the “Company,” “SRS Labs,” “SRS”, “us”, “we” or “our”) is the recognized global leader in the practical application of psychoacoustics*,* the science behind how the human ear operates, and in the post processing portion of the market for audio delivery.  Our award-winning audio enhancement technologies and solutions dramatically restore audio and voice to its natural state, the way it was originally recorded, in both dimension and clarity, thus providing a superior consumer experience for a wide variety of consumer electronic devices such as televisions, personal computers and mobile phones.

 

Our operations are conducted through SRS Labs, Inc., the parent company, and its wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen Representative Office of SRS Labs, Inc. (a Chinese company), Shanghai Representative Office of SRS Labs, Inc. (a Chinese company) and SRS Labs Japan, KK (a Japanese company). Our business is focused on developing and licensing audio, voice and surround sound technology solutions to many of the world’s leading original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), software providers and semiconductor companies, and limited sales and marketing of stand-alone software and hardware products through the Internet.

 

*Basis of Presentation*

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the Company and its wholly-owned subsidiaries after elimination of all intercompany accounts and transactions.  Certain amounts in the notes to the consolidated financial statements have been reclassified in order to conform to the current year presentation.

 

*Use of Estimates*

 

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported revenues and expenses during the reporting periods. Some of the estimates needed to be made by management include the allowance for doubtful accounts, estimated useful lives of property and equipment and intangible assets, valuation of equity instruments associated with share-based compensation and the valuation allowance for the Company’s deferred tax asset. Actual results could materially differ from these estimates.

 

*Cash and Cash Equivalent; Short-term and Long-term Investments*

 

Cash and cash equivalents generally consist of cash, certificates of deposit, and money market funds with original maturities of three months or less.  The money market funds are primarily invested in U.S. government obligations.  Short-term investments consist of certificates of deposit and U.S. treasury bills that mature in 2011. Long-term investments consist of certificates of deposits that mature in 2011.  Investments are held at cost and the Company intends to hold them until maturity.

 

*Accounts Receivable and Allowance for Doubtful Accounts*

 

The Company makes periodic evaluations of the creditworthiness of its customers and manages its exposure to losses from bad debts by limiting the amount of credit extended whenever deemed necessary and generally does not require collateral.  The Company maintains an allowance for estimated uncollectible accounts receivable, as appropriate, and such losses have historically been minimal and within management’s expectations.

 

*Property and Equipment*

 

Property and equipment are stated at cost, net of accumulated depreciation and amortization. The cost of additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation and amortization are calculated using the straight-line method, which amortizes cost over the lesser of the estimated useful lives of the respective assets or the term of the related lease. Useful lives range from two to five years.

 

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*Intangible Assets*

 

Costs paid by the Company related to the establishment, transfer and purchase of patents and other intangibles, primarily legal costs, are capitalized and amortized, depending on the estimated useful life of the technology patented. These assets are being amortized using the straight line method over three to ten years.

 

*Impairment of Long-Lived Assets*

 

The Company evaluates the recoverability of long-lived assets with finite lives.  The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is deemed not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. Based upon the most recent assessment as of December 31, 2010, management has determined there was no impairment in the carrying value of long-lived assets.

 

*Revenue Recognition*

 

Our license agreements typically have multi-year or automatic renewal terms, and either require: a) per-unit royalty payments for all products implementing our technologies and/or solutions; b) fixed annual or quarterly royalty payments; or c) a minimum fixed annual or quarterly royalty payment, which allow the licensee to ship up to a pre-determined number of units during the specified time period, with additional per-unit royalty payments thereafter.  Royalties for per-unit arrangements are reported in the quarter following shipment of the consumer electronics device and are therefore recognized by us generally one quarter following shipment by the OEM.  Revenues associated with fixed royalty payments are generally recognized ratably over the term of the agreement.  We also sell some of our products and solutions via the Internet.  Revenues associated with those sales are recognized upon shipment and are not material.

 

*Research and Development*

 

Research and development expenses include costs and expenses associated with the development of our design methodology and the design and development of new products, including initial nonrecurring engineering and product verification charges. Research and development is expensed as incurred.

 

*Income Taxes*

 

Deferred taxes on income result from temporary differences between the reporting of income for financial statement and tax reporting purposes. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or all of the deferred tax asset will not be realized.

 

We provide tax contingencies, if any, for federal, state, local and international exposures relating to potential audits, tax planning initiatives and compliance responsibilities.  The development of these reserves requires judgments about tax issues, potential outcomes and timing.  Although the outcome of these tax matters is uncertain, in management’s opinion adequate provisions for income taxes have been made for potential liabilities emanating from these reviews.  If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations.  The Company is not currently under examination by any taxing authority.

 

*Income Per Common Share*

 

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each year. Diluted net income per common share reflects the maximum dilution, based on the average price of our common stock each period and is computed similar to basic income per share except that the denominator is increased to include the number of additional shares that would have been outstanding if potentially dilutive stock options had been exercised.

 

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Basic and diluted net income per share for the years ended December 31, 2010, 2009 and 2008 are as follows:

 
| ** **                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| BASIC EPS                                                 |       |                                        |       |   |   |   |   |
| Numerator:                                                |       |                                        |       |   |   |   |   |
| Net income                                                |       | $                                           | 3,006,473  |   | $ | 2,135,630 |   | $ | 270,887 |   |
| Denominator: Weighted average common shares   outstanding |       | 14,670,751                                  |       | 14,460,490 |   | 15,588,815 |   |
| Net income per share                                      |       | $                                           | 0.20       |   | $ | 0.15 |   | $ | 0.02 |   |
| DILUTED EPS                                               |       |                                        |       |   |   |   |   |
| Numerator:                                                |       |                                        |       |   |   |   |   |
| Net income                                                |       | $                                           | 3,006,473  |   | $ | 2,135,630 |   | $ | 270,887 |   |
| Denominator: Weighted average common shares   outstanding |       | 14,670,751                                  |       | 14,460,490 |   | 15,588,815 |   |
| Common equivalent shares outstanding: Dilutive   options  |       | 931,300                                     |       | 352,882 |   | 253,521 |   |
| Total diluted common shares                               |       | 15,602,051                                  |       | 14,813,372 |   | 15,842,336 |   |
| Net income per share                                      |       | $                                           | 0.19       |   | $ | 0.14 |   | $ | 0.02 |   |

 

There were options outstanding at December 31, 2010, 2009 and 2008 to purchase 2,045,710, 2,311,784, and 2,201,570 shares of the Company’s common stock, respectively, which were not included above because they would be anti-dilutive.

 

*Share-Based Compensation*

 

The Company measures all employee stock-based compensation awards using a fair-value method and recording of such expense in the consolidated financial statements over the requisite service period. We recorded stock-based compensation expense of $2,253,730, $1,956,057, and $1,777,468 in 2010, 2009, and 2008, respectively. See Note 6.

 

*Fair Value of Financial Instruments*

 

Effective January 1, 2008, the Company measures the fair value of applicable financial and non-financial assets based on the following levels of inputs.

 

**·**                 *Level 1 inputs:* Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

·                  *Level 2 inputs:* Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

·                  *Level 3 inputs:* Level 3 inputs are unobservable and should be used to measure fair value to the extent that observable inputs are not available.

 

The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

 

Financial assets carried at fair value as of December 31, 2010 are classified below:

 
| ** **         | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|--------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money market funds |       | $                | 8,400,000  |             | $          | —           |       | $         | —     |   | $ | 8,400,000 |   |
| Total              |       | $                | 8,400,000  |             | $          | —           |       | $         | —     |   | $ | 8,400,000 |   |

 

Financial assets carried at fair value as of December 31, 2009 are classified below:

 
| ** **         | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|--------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money market funds |       | $                | 27,988,164 |             | $          | —           |       | $         | —     |   | $ | 27,988,164 |   |
| Total              |       | $                | 27,988,164 |             | $          | —           |       | $         | —     |   | $ | 27,988,164 |   |

 

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*Customer Concentration*

 

For fiscal year 2010, 2009, and 2008, Samsung accounted for approximately 38%, 39%, and 42%, respectively, of our consolidated revenues.  Given the significant amount of revenues derived from Samsung, the loss of that customer or the uncollectibility of related receivables could have a material adverse effect on our consolidated financial condition and consolidated results of operations.

 

*Concentrations of Credit Risk*

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash equivalents, investments and accounts receivable. Due to the relative short nature of such investments, the carrying amount approximates fair value. The Company places its cash in banks and its cash equivalents in certificates of deposit and money market funds at certain financial institutions and such balances are in excess of amounts insured by federal agencies. The Company does not believe that it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. The Company performs periodic evaluations of the relative credit standing of these financial institutions.  The Company has not experienced any significant losses on its cash equivalents or investments.

 

The Company’s accounts receivable are derived from sales to OEMs, original design manufacturers (“ODMs”) and platform partners primarily in Asia, North America and Europe. Customers’ headquarters geographically located in the Asia Pacific markets accounted for approximately 74%, 72% and 88%, of the Company’s revenues in 2010, 2009 and 2008, respectively, and are expected to continue to account for a substantial percentage of revenues in the future.

 

*Recent Accounting Pronouncements*

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us January 1, 2011.  Other than requiring additional disclosures, adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.

 

In February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, which amends subsequent event disclosure requirements for SEC filers. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This ASU was effective upon issuance and adoption did not result in a material impact on our consolidated financial position, results or operations or cash flows.

 

**2. Property and Equipment**

 

Property and equipment, net, consist of the following:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Property and equipment                         |       | $                     | 677,715    |   | $ | 540,934 |   |
| Computer equipment                             |       | 686,164               |       | 588,346 |   |
| Leasehold improvements                         |       | 502,234               |       | 379,495 |   |
|                                           |       | 1,866,113             |       | 1,508,775 |   |
| Less accumulated depreciation and amortization |       | (1,193,893            | )          | (908,981 | ) |
|                                           |       | $                     | 672,220    |   | $ | 599,794 |   |

 

Depreciation and amortization expense for property and equipment totaling $291,531, $208,901 and $188,407 for the years ended December 31, 2010, 2009 and 2008, respectively, is reflected in general and administrative expenses.

 

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**3. Intangible Assets**

 

Intangible assets, net consist of the following:

 
| ** **                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Patents                                                      |       | $                     | 4,467,541  |   | $ | 4,100,363 |   |
| Accumulated amortization                                     |       | (2,399,801            | )          | (2,072,763 | ) |
| Patents, net                                                 |       | 2,067,740             |       | 2,027,600 |   |
| Other intangibles:                                           |       |                  |       |   |   |
| License agreements acquired in purchase of   SRSWOWcast      |       | 640,071               |       | 640,071 |   |
| Capitalized software and hardware for several   technologies |       | 1,038,084             |       | 851,508 |   |
| Total other intangibles                                      |       | 1,678,155             |       | 1,491,579 |   |
| Accumulated amortization, other intangibles                  |       | (984,463              | )          | (817,019 | ) |
| Other intangibles, net                                       |       | 693,692               |       | 674,560 |   |
| Intangible assets, net                                       |       | $                     | 2,761,432  |   | $ | 2,702,160 |   |

 

Amortization periods range from three to ten years depending on the estimated useful life of the asset. Amortization expense consists of the following:

 
| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Patents                                                      |       | $                                           | 327,050    |   | $ | 287,232 |   | $ | 284,244 |   |
| Other intangibles:                                           |       |                                        |       |   |   |   |   |
| License agreements acquired in purchase of   SRSWOWcast      |       | 64,007                                      |       | 64,007 |   | 64,007 |   |
| Capitalized software and hardware for several   technologies |       | 283,111                                     |       | 144,579 |   | 124,296 |   |
| Total intangible amortization expense                        |       | $                                           | 674,168    |   | $ | 495,818 |   | $ | 472,547 |   |

 

As of December 31, 2010, the weighted average remaining useful life of the Company’s patents and intangible assets was approximately 6 years. The following table shows the estimated amortization expense for those assets for each of the five succeeding fiscal years and thereafter.

 
| **Years Ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2011                                         |       | $          | 648,032    |   |
| 2012                                         |       | 576,858    |       |
| 2013                                         |       | 400,530    |       |
| 2014                                         |       | 316,420    |       |
| 2015                                         |       | 251,205    |       |
| Thereafter                                   |       | 568,387    |       |
| Total                                        |       | $          | 2,761,432  |   |

 

**4. Commitments and Contingencies**

 

*Leases*

 

The Company leases office space and certain equipment under non-cancelable operating leases expiring through 2014. The Company leases its corporate office and storage facilities located in Santa Ana, California, under a lease agreement with Daimler Commerce Partners, L.P., a partnership that is affiliated with a principal stockholder, who is also an executive officer and a director, of the Company through May 2013.  We paid rent of $238,680, $238,680 and $235,170 in 2010, 2009, and 2008, respectively, under this lease agreement.

 

We entered into two new leases in 2010 for our international operations in Shanghai, China, and Taipei, Taiwan.  The leases for our offices in Shanghai and Taiwan expire in December 2014 and April 2011, respectively.  Additionally, we lease space in Shenzhen, China and Tokyo, Japan.  In total, we paid rent of $442,080, $426,651 and $294,702 during 2010, 2009 and 2008, respectively, for all of our facilities.

 

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The Company entered into a new lease with Daimler Commerce Partners, L.P. to expand our worldwide headquarters located in Santa Ana, California.  This facility is an 11,700 square foot facility consisting of office and warehouse space.  The new lease is for a term of 5 years commencing on the date of occupancy.  We believe that our current facilities are adequate to support our current requirements.

 

Future annual minimum lease payments under non-cancelable operating leases for the remaining periods at December 31, 2010 are as follows:

 
| **Years Ending December 31,** | ** ** | **Facility** | ** ** | **Office   Equipment** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|--------------|------------|------------------------|------------|-----------|------------|
| 2011                                         |       | $            | 438,326    |                   | $          | 20,933    |       | $ | 459,259 |   |
| 2012                                         |       | 373,946      |       | 18,863                 |       | 392,809   |       |
| 2013                                         |       | 201,262      |       | 15,719                 |       | 216,981   |       |
| 2014                                         |       | 83,681       |       | —                 |       | 83,681    |       |
| 2015                                         |       | —       |       | —                 |       | —    |       |
| Total                                        |       | $            | 1,097,215  |                   | $          | 55,515    |       | $ | 1,152,730 |   |

 

*Litigation*

 

On June 8, 2007, we sent a letter to Sony Corporation (“Sony”) relating to the possible infringement of several SRS patents by Sony’s S-Force technology.  Sony responded to the letter by filing a Complaint for Declaratory Relief in the U.S. District Court in the Southern District of New York on July 6, 2007. Effective September 9, 2010, we entered into a Settlement Agreement (the “Agreement”) with Sony relating to the SRS patents at issue (“Licensed Patents”).  Pursuant to the Agreement, in exchange for the payment of $900,000, SRS agreed to grant to Sony and its subsidiaries a non-transferable, non-assignable, irrevocable, non-exclusive, fully paid-up worldwide license to the Licensed Patents with respect to Sony’s and/or its subsidiaries’ products incorporating any proprietary audio technology designed by Sony and/or its subsidiaries prior to the date of the Agreement or within three years after the date of the Agreement, including modifications, derivations or enhancements thereof.  The Agreement is intended to resolve all disputes between the parties based upon the Licensed Patents and includes a release by SRS of Sony and its subsidiaries from any and all claims under the Licensed Patents with respect to the Licensed Products.  The Company recognized the settlement amount in September 2010.

 

From time to time, we may be involved in litigation matters and disputes arising in the normal course of business. Any such matters and disputes could be costly and time consuming, subject us to damages or equitable remedies, and divert our management and key personnel from our business operations.

 

*Indemnifications*

 

The Company enters into standard license agreements in its ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to the Company’s products. These agreements generally have perpetual terms. The maximum amount of indemnification the Company could be required to make under these agreements is generally limited to the license fees received by the Company. The Company estimates the fair value of its indemnification obligation as insignificant, based upon its history of litigation concerning product and patent infringement claims. Accordingly, the Company has no liabilities recorded for indemnification under these agreements as of December 31, 2010 and 2009.

 

The Company has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors’ and officers’ insurance policy that reduces its exposure and enables the Company to recover a portion of any future amounts paid. As a result of the insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Currently, the Company has no liabilities recorded for these agreements as of December 31, 2010 and 2009.

 

*Warranties*

 

The Company offers its customers a warranty that its software products will substantially conform to their functional specifications. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of December 31, 2010 and 2009.

 

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*Employment Contracts*

 

The Company has employment agreements with its Chief Executive Officer and one other employee (collectively “Agreements”). Each of the Agreements was entered into for an initial term that has since expired and all are now automatically renewed annually on various anniversary dates. Under the terms of each of the Agreements, the Company may be obligated to pay a severance payment ranging from one to two years of the respective employee’s base salary, depending on the date of termination, if the employee is terminated by the Company without cause.

 

*Amended and Restated Change in Control Plan*

 

The Compensation Committee of the Board, the sponsor of the Company’s Amended and Restated Change in Control Protection Plan (the “Change in Control Plan”), has designated certain of its executive officers as participants in the Change in Control Plan. The Change in Control Plan generally provides that if a participant’s employment is terminated without cause or if the participant resigns for good reason during a two-year period following a change in control, as defined in the Change in Control Plan, the participant will be entitled to receive a severance payment. Under the Change in Control Plan, the size of the severance payment that would be due to a participant upon the occurrence of a covered termination ranges from to one to two times the participant’s average taxable income during the five years preceding the change in control, depending on the participant’s position with the Company. The Change in Control Plan also provides that the Company will pay a participant’s COBRA premiums for a period of 18 months following a covered termination.

 

**5. Income Taxes**

 

The components of income from continuing operations before income taxes are as follows:

 
| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| United States |       | $                                          | 3,058,626  |   | $ | 2,233,636 |   | $ | 388,430 |   |
|               |            |                                            |            |  |  |  |  |  |  |  |

 

All licensing agreements are entered into between SRS Labs, Inc. and the licensee.  Some of our licensees are located in foreign countries and, accordingly, they may be obligated to withhold foreign taxes based upon local and country requirements of the taxing authority.  However, for our income tax purposes, all income is deemed to be sourced in the United States, regardless of the location of the licensee.

 

The provision for income taxes on continuing operations consists of the following:

 
| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Current:                           |       |                                       |       |   |   |   |   |
| Federal                            |       | $                                          | —     |   | $ | — |   | $ | — |   |
| State                              |       | 41,195                                     |       | 98,006 |   | 144,923 |   |
| Foreign                            |       | 2,977,135                                  |       | 2,160,021 |   | 1,667,839 |   |
| Total                              |       | 3,018,330                                  |       | 2,258,027 |   | 1,812,762 |   |
| Deferred:                          |       |                                       |       |   |   |   |   |
| Federal                            |       | (2,258,217                                 | )          | (1,528,883 | ) | (1,704,301 | ) |
| State                              |       | —                                     |       | — |   | — |   |
| Foreign                            |       | —                                     |       | — |   | — |   |
| Change in valuation allowance, net |       | (707,960                                   | )          | (631,138 | ) | 9,082 |   |
| Total                              |       | (2,966,177                                 | )          | (2,160,021 | ) | (1,695,219 | ) |
| Total income tax provision         |       | $                                          | 52,153     |   | $ | 98,006 |   | $ | 117,543 |   |

 

The reconciliation of the income tax expense computed at U.S. federal statutory rates to the provision for income taxes is as follows:
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2010**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Tax at U.S. federal statutory rates        |       | $                                          | 1,039,284  |   | $ | 759,436 |   | $ | 179,821 |   |
| State income taxes, net of federal benefit |       | 1,600                                      |       | 130,320 |   | 30,857 |   |
| Nondeductible expenses                     |       | 55,448                                     |       | 39,433 |   | 32,692 |   |
| Change in valuation allowance, net         |       | (707,960                                   | )          | (631,138 | ) | 9,082 |   |
| Research and development credit            |       | (332,317                                   | )          | (199,984 | ) | (131,768 | ) |
| Foreign tax rate differential and other    |       | (3,902                                     | )          | (61 | ) | (3,141 | ) |
| Total income tax expense                   |       | $                                          | 52,153     |   | $ | 98,006 |   | $ | 117,543 |   |

 

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Deferred tax assets:             |       |                  |       |   |   |
| Depreciation and amortization    |       | $                     | 650,942    |   | $ | 504,561 |   |
| Accruals                         |       | 416,531               |       | 663,537 |   |
| Net operating loss carryforwards |       | —                |       | 16,492 |   |
| Tax credit carryforwards         |       | 10,765,835            |       | 8,871,580 |   |
| Capital loss carryforwards       |       | 6,460,261             |       | 6,460,261 |   |
| Other                            |       | 2,909,253             |       | 2,428,174 |   |
| Valuation allowance              |       | (12,605,203           | )          | (13,313,163 | ) |
| Total net deferred tax assets    |       | $                     | 8,597,619  |   | $ | 5,631,442 |   |

 

The Company has federal and state net operating loss carryforwards at December 31, 2010 of $4,456,821 and $5,598,943, respectively. Such net operating losses relate to excess tax benefits and have not been recognized.  These net operating loss carryforwards will begin to expire in 2014 and will continue to expire through 2027. The Company also has federal and state research credits of approximately $1,354,401 and $532,976, respectively, which will begin to expire in 2011 and will continue to expire through 2030 for federal and carryforward indefinitely for state purposes. In addition, the Company has federal foreign tax credit carryforwards of $10,270,431 at December 31, 2010, which will begin to expire in 2014 and will continue to expire through 2020. The Company also has federal and state capital loss carryforwards at December 31, 2009 of $16,219,585, which will expire in 2011.

 

As of December 31, 2010, a valuation allowance of $12,605,203 has been provided based on the Company’s assessment of the future realizability of deferred tax assets. The valuation allowance on deferred tax assets relates to future deductible temporary differences, capital loss carryforwards, foreign tax credit carryforwards, research and development credit carryforwards, and net operating loss carryforwards for which the Company has concluded it is more likely than not that these items will not be realized in the ordinary course of operations. Management periodically evaluates the recoverability of the deferred tax assets and recognizes the tax benefit only as reassessment demonstrates they are realizable. At such time it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance is adjusted. This assessment is based on projections of future taxable income, which is impacted in future periods by income before taxes and stock option exercises. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future earnings are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable temporary differences.

 

The use of loss carryforwards and tax credit carry forwards may become limited in the event of an ownership change as defined under Internal Revenue Code section 382. The Company commissioned a section 382 study in 2008, which confirmed that there have been no ownership changes through 2007.  As of December 31, 2010 the Company has not completed a section 382 study to determine if there were ownership changes for the tax years ended 2008, 2009 and 2010.  Further, due to a change in California tax law in fiscal year 2008, net operating loss carryforwards may not be used in 2008, 2009, 2010 and 2011, and research and development credits were limited to fifty percent of the Company’s net tax in 2008 and 2009.

 

The Company determined at the beginning of fiscal year 2007 that it did not have any unrecorded tax contingencies and therefore a roll forward of the tax contingency reserve that reconciles the beginning and ending balance of the reserve was not necessary as there was no tax contingency reserve. The Company will recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2010, the Company has not recognized liabilities for penalty and interest as the Company does not have liability for unrecognized tax benefits. The tax years 2006 through 2009 remain open to examination by the major taxing jurisdictions.

 

Revenue is recognized gross of foreign withholding taxes that are remitted by our licensees directly to foreign tax authorities. Withholding taxes were $2.9 million, $2.2 million and $1.7 million in 2010, 2009 and 2008, respectively.

 

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** **

**6. Stockholders’ Equity and Share-Based Compensation**

 

*Stock Award/Option Plans/Warrants*

 

In July 1996, the Board adopted and the Company’s stockholders approved the 1996 Long-Term Incentive Plan (as amended and restated, the “1996 Plan”), for which 1,000,000 shares of the Company’s common stock were initially reserved for issuance to officers, employees and consultants of the Company. The number of shares reserved for issuance under the 1996 Plan was increased in June 1997, June 1998, June 2000 and June 2003 by 1,000,000, 2,500,000, 2,500,000 and 1,500,000 shares, respectively.  The Compensation Committee or, in the absence of a Compensation Committee, the Board, as a whole, has been appointed to administer the 1996 Plan. Options issued under the 1996 Plan vest in the manner prescribed by the Compensation Committee or the Board, as applicable. As of December 31, 2010, options to purchase 1,055,561 shares of the Company’s common stock were outstanding under the 1996 Plan. No additional options have been, or will be, granted under the 1996 Plan since the date of stockholder approval of the 2006 Plan (defined below).

 

In July 1996, the Board adopted and the Company’s stockholders approved the 1996 Non-employee Directors Stock Option Plan (the “Non-employee Directors Plan”), a non-discretionary formula plan for which 120,000 shares of the Company’s common stock were reserved for issuance to the Company’s non-employee directors. A committee consisting of all directors who are not eligible to participate in the Non-employee Directors Plan administers the Non-employee Directors Plan. With the exception of the initial option granted to a non-employee director, which vests immediately, options granted under the Non-employee Directors Plan vest over a three-year period, the first installment vesting on the date of grant. In June 1999, the Company’s stockholders approved the Amended and Restated 1996 Non-employee Directors’ Stock Option Plan (the “Amended Non-employee Directors Plan”). Among the changes set forth in the Amended Non-employee Directors Plan was to increase by 130,000 the number of shares of common stock that may be issued under the plan. In June 2001, the Board adopted and the Company’s stockholders approved an amendment to the Amended Non-employee Directors Plan to increase the number of shares reserved for issuance under the plan by 250,000. As of December 31, 2010, options to purchase 157,500 shares of common stock were outstanding under the Amended Non-employee Directors Plan. There are 265,000 shares of common stock available for grant under the Non-employee Directors Plan as of December 31, 2010.

 

On June 22, 2006, the Board adopted and the Company’s stockholders approved the 2006 Stock Incentive Plan (the “2006 Plan”), for which 1,500,000 shares of the Company’s common stock were initially reserved for issuance under the plan. Either the Board or a committee appointed by the Board (the “Committee”) will administer the 2006 Plan. The Compensation Committee is currently acting as the Committee for purposes of the 2006 Plan. Under the 2006 Plan, the Committee may grant options that are intended to qualify as incentive stock options. Additionally, the Committee may also grant share appreciation rights, restricted shares, restricted share units, unrestricted shares, deferred share units, and performance awards. The vesting period is dependent on the type of award granted and may be determined by the Committee. In June 2008, the Board adopted and the Company’s stockholders approved an amendment to the 2006 Plan to increase the number of shares reserved for issuance under the plan by 1,750,000. In June 2009, the Board adopted and the Company’s stockholders approved an amendment to the 2006 Plan to increase the number of shares reserved for issuance under the plan by 1,000,000. As of December 31, 2010, options to purchase 3,430,332 shares of common stock were outstanding under the 2006 Plan. There are 707,871 shares of common stock available for grant under the 2006 Plan as of December 31, 2010.

 

*Share-Based Compensation*

 

We account for stock-based compensation by measuring all employee stock-based compensation awards using a fair-value method and record such expense in the consolidated financial statements over the requisite service period.  Although share appreciation rights, restricted shares, unrestricted shares, deferred share units and performance awards may be granted under our incentive plans, the Committee has only historically granted stock options.  Accordingly, the information set forth below relates solely to stock options.

 

Total compensation cost recognized in 2010, 2009, and 2008 is as follows:

 
| ** **                         | ** ** | **Years Ended   December 31,** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales and marketing                |       | $                                        | 703,876    |   | 511,301 |   | 458,610 |   |
| Research and development           |       | 551,934                                  |       | 457,464 |   | 399,630 |   |
| General and administrative         |       | 997,920                                  |       | 987,292 |   | 919,228 |   |
| Total compensation cost recognized |       | 2,253,730                                |       | 1,956,057 |   | 1,777,468 |   |
|                                    |            |                                          |            |  |  |  |  |  |

 

Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Option awards generally have a term of 10 years and vest and become exercisable over a four-year service period.

 

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The fair value of each share-based award is estimated on the grant date using the Black-Scholes-Merton (“BSM”) option-pricing model. Expected volatilities are based on the historical volatility of the Company’s stock price. The expected term for options granted in 2010, 2009, and 2008 was calculated based upon the historical term of the Company’s option grants and review of the terms of the Company’s peers.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury interest rates in effect at the time of grant. The fair value of options granted was estimated using the following weighted-average assumptions:

 
| ** **               | ** ** | **Years Ended   December 31,** | ** ** |
|--------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **2010**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Expected term (in years) |       | 3.80                                     |       | 4.23 |   | 4.67 |   |
| Expected volatility      |       | 49                                       | %          | 54 | % | 56 | % |
| Risk-free interest rate  |       | 1.09                                     | %          | 1.96 | % | 3.4 | % |
| Dividend yield           |       | 0.00                                     | %          | 0.00 | % | 0.00 | % |

 

The following table summarizes the weighted-average fair value of stock options granted and the total intrinsic value of stock options exercised during the years ended December 31, 2010, 2009 and 2008:

 
| ** **                                   | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted-average fair value at date of grant |       | $                                           | 3.40       |   | $ | 2.86 |   | $ | 2.80 |   |
| Intrinsic value of options exercised         |       | $                                           | 1,104,364  |   | $ | 464,136 |   | $ | 192,314 |   |

 

A summary of option activity under the stock option plans and changes during the year ended December 31, 2010 is presented below:

 
| ** **                                  | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** | ** **                                            | ** ** |
|---------------------------------------------|------------|------------|------------|----------------------|------------|-------------------------------------------------------|------------|
| ** **                                  | ** ** | **Shares** | ** ** | **Exercise   Price** | ** ** | **Remaining   Contractual   Term (in Yrs)** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
| Outstanding, January 1, 2010           |       | 3,948,378  |       | $                    | 6.05       |                                                  |       |   |   |   |
| Granted                                     |       | 1,032,720  |       | 8.90                 |       |                                                  |       |   |   |
| Cancelled/Forfeited                         |       | (94,350    | )          | 9.55                 |       |                                                  |       |   |   |
| Exercised                                   |       | (243,355   | )          | 4.68                 |       |                                                  |       |   |   |
| Outstanding, December 31, 2010         |       | 4,643,393  |       | $                    | 6.68       |                                                  | 7.05       |   | $ | 10,390,675 |   |
| Options exercisable, December 31, 2010 |       | 2,488,943  |       | $                    | 5.94       |                                                  | 5.36       |   | $ | 7,484,420 |   |

 

A summary of the activity of the Company’s non-vested shares during the year ended December 31, 2010 is presented below:

 
| ** **                        | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **                              | ** ** | **Remaining**           | ** ** |
|-----------------------------------|------------|------------|------------|---------------------------------------|------------|-----------------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Weighted-Average**                  | ** ** | **Unrecognized**                        | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Grant Date   Fair Value** | ** ** | **Remaining   Years to Vest** | ** ** | **Compensation   Cost** | ** ** |
| Nonvested, January 1, 2010   |       | 1,959,904  |       | $                                     | 2.96       |                                    |       |                    |       |   |
| Granted                           |       | 1,032,720  |       | 3.40                                  |       |                                    |       |                    |       |
| Vested                            |       | (775,824   | )          | 3.12                                  |       |                                    |       |                    |       |
| Forfeited                         |       | (62,350    | )          | 2.81                                  |       |                                    |       |                    |       |
| Nonvested, December 31, 2010 |       | 2,154,450  |       | $                                     | 3.12       |                                    | 4.08       |                    | $          | 4,037,146 |   |
|                                   |            |            |            |                                       |            |                                         |            |                         |            |  |  |

 

The following table summarizes information concerning currently outstanding and exercisable options and warrants at December 31, 2010.

 
| **Range of Exercise Prices** | ** ** | **Number of   Options   Outstanding** | ** ** | **Weighted   Average   Remaining   Contractual Life   (in Years)** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Exercisable   As of   12/31/2010** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------|------------|
| $1.91—$3.80                            |       | 323,464                                    |       | 1.18                                                                         |       | $                                            | 2.82       |                                      | 323,464    |                                         | $          | 2.82 |   |
| $3.81—$5.70                            |       | 1,257,382                                  |       | 6.64                                                                         |       | 4.90                                         |       | 824,176                                   |       | 4.91                                         |       |
| $5.71—$7.60                            |       | 1,634,317                                  |       | 7.08                                                                         |       | 6.65                                         |       | 946,387                                   |       | 6.35                                         |       |
| $7.61—$9.50                            |       | 1,281,730                                  |       | 8.95                                                                         |       | 9.02                                         |       | 274,916                                   |       | 9.29                                         |       |
| $9.51—$11.40                           |       | 146,500                                    |       | 6.69                                                                         |       | 10.54                                        |       | 120,000                                   |       | 10.62                                        |       |
|                                        |       | 4,643,393                                  |       | 7.05                                                                         |       | $                                            | 6.68       |                                      | 2,488,943  |                                         | $          | 5.94 |   |

 

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**7. Segment Information**

 

The Company’s revenue is solely derived from licensing related revenue. The following schedule presents the Company’s revenue by geographic area. For product sales, revenue is allocated based on the country to which product was shipped. Licensing-related revenue is summarized based on the location of the licensee’s corporate headquarters. For product and online sales, revenue is allocated to the United States region.  In 2008, the Greater China region was broken down into the China and Asia Pacific region. The China region includes all licensees with their corporate headquarters located in mainland China.  The Asia Pacific region includes all licensees with their corporate headquarters located in Taiwan and Hong Kong.

 
| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                    | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** | **2008** | ** ** | **%** | ** ** |
| ***Geographic Area Revenue:*** |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Korea                               |       | $                                           | 13,691,746 |   | 44 | % | $ | 11,551,403 |   | 46 | % | $ | 9,624,459 |   | 52 | % |
| United States                       |       | 7,465,114                                   |       | 24 |   | 6,440,033 |   | 26 |   | 1,744,502 |   | 10 |   |
| Japan                               |       | 4,930,915                                   |       | 16 |   | 4,375,139 |   | 17 |   | 5,357,286 |   | 29 |   |
| Asia Pacific                        |       | 2,482,756                                   |       | 8 |   | 647,220 |   | 3 |   | 430,598 |   | 2 |   |
| China                               |       | 2,033,444                                   |       | 6 |   | 1,548,496 |   | 6 |   | 838,754 |   | 5 |   |
| Europe                              |       | 616,414                                     |       | 2 |   | 402,286 |   | 2 |   | 337,079 |   | 2 |   |
| Total                               |       | $                                           | 31,220,389 |   | 100 | % | $ | 24,964,577 |   | 100 | % | $ | 18,332,678 |   | 100 | % |

 

**8. Revolving Line of Credit**

 

On August 12, 2010, we entered into a Revolving Credit Agreement (collectively with the Revolving Credit Note and related documents, the “Loan Documents”) with U.S. Bank N.A. (the “Bank”).  The Loan Documents provide the Company with a $5.0 million revolving line of credit, which is available until June 30, 2011, to be used for working capital purposes.  Interest on borrowed amounts under the revolving line of credit is payable monthly at one of the following rates selected by the Company (and upon notice to the Bank as required by the Loan Documents):  (i) the prime rate announced by the Bank from time to time minus 1.00% or (ii) 2.00% plus the 1, 2, 3, 6 or 12 month LIBOR rate quoted by the Bank or any successor thereto.  The revolving credit agreement contains various covenants, the more significant of which require us to maintain a minimum fixed charge coverage ratio and certain levels of liquid assets. We were in compliance with all of the Bank’s covenants as of December 31, 2010. In addition, the Company is obligated to pay an unused line fee of 0.25% per annum, payable quarterly in arrears, applied to the unused portion of the revolving line of credit.  As of December 31, 2010, the Company has not borrowed from the revolving line of credit.

 

**9. Employee Benefit Plan**

 

The Company’s employees based in the United States may participate in a salary deferral plan (the “401(k) Plan”), pursuant to which eligible employees can contribute up to 75% of their eligible compensation. The Company also may contribute on a discretionary basis. The Company’s matching contribution vests ratably over a four year period. During the years ended December 31, 2010, 2009 and 2008, the Company contributed approximately $197,513, $153,141 and $121,723, respectively, to the 401(k) Plan.

 

**SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

 
| ** **                                 | ** ** | **Balance at   Beginning   of Period** | ** ** | **Additions   Charged to   Expense** | ** ** | **Deductions** | ** ** | **Balance   at End   of Period** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------|------------|----------------|------------|--------------------------------------------|------------|
| For the year ended December 31, 2010: |       |                                             |       |                                      |       |           |       |                                       |       |
| Allowance for doubtful accounts            |       | $                                                | 47,527     |                                      | $          | —         |       | $                                          | 840        |   | $ | 46,687 |   |
| For the year ended December 31, 2009: |       |                                             |       |                                      |       |           |       |                                       |       |
| Allowance for doubtful accounts            |       | $                                                | —     |                                      | $          | 60,000         |       | $                                          | 12,473     |   | $ | 47,527 |   |
| For the year ended December 31, 2008: |       |                                             |       |                                      |       |           |       |                                       |       |
| Allowance for doubtful accounts            |       | $                                                | 72,714     |                                      | $          | 11,189         |       | $                                          | 83,903     |   | $ | — |   |

 

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**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Certificate   of Incorporation of the Company, previously filed with the SEC as   Exhibit 3.1 to the Company’s Registration Statement on Form SB-2,   specifically included in Amendment No. 1 to such Registration Statement   filed with the SEC on July 3, 1996 (File No. 333-4974-LA) (the   “Registration Statement Amendment No. 1”), which is incorporated herein   by reference.                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2                  |       | Bylaws   of the Company, previously filed with the SEC as Exhibit 3.1 to the   Company’s Quarterly Report on Form 10-Q for the period ended   September 30, 1999, filed with the SEC on November 12, 1999, which   is incorporated herein by reference.                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **           | ** ** | **Material Contracts Relating to Management   Compensation Plans or Arrangements**                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1                 |       | Employment   Agreement dated July 1, 1996, between the Company and Thomas C.K. Yuen,   previously filed with the SEC as Exhibit 10.8 to the Registration   Statement Amendment No. 1, which is incorporated herein by reference.                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2                 |       | Amendment   to Employment Agreement dated as of March 14, 1997, between the Company   and Thomas C.K. Yuen, previously filed with the SEC as Exhibit 10.2 to   the Company’s Annual Report on Form 10-KSB for the fiscal year ended   December 31, 1996, filed with the SEC on March 31, 1997 (the “1996   Annual Report”), which is incorporated herein by reference.                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.3                 |       | Employment   Agreement dated July 1, 1996, between the Company and Alan D. Kraemer,   previously filed with the SEC as Exhibit 10.11 to the Registration   Statement Amendment No. 1, which is incorporated herein by reference.                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4                 |       | SRS   Labs, Inc. Amended and Restated 1996 Non-employee Directors Stock Option   Plan, as amended, previously filed with the SEC as Appendix B to the   Company’s Definitive Proxy Statement dated and filed with the SEC on   April 30, 2003, which is incorporated herein by reference.                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.5                 |       | Form of   Indemnification Agreement (entered into with David Dukes, Thomas C.K. Yuen,   Winston E. Hickman, Carol L. Miltner, Sam Yau, Alan D. Kraemer, Jeff Klaas,   Sarah Yang, and Allen Gharapetian), previously filed with the SEC as   Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with   the SEC on August 13, 2010, which is incorporated herein by reference.                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.6                 |       | Non-employee   Director Compensation Policy adopted by the Company’s Board of Directors on   January 28, 2005, previously filed with the SEC as Exhibit 10.1 to   the Company’s Current Report on Form 8-K filed with the SEC on   February 3, 2005, which is incorporated herein by reference.                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7                 |       | Form of   Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.   Amended and Restated 1996 Non-Employee Directors’ Stock Option Plan (Initial   Appointment), previously filed with the SEC as Exhibit 10.2 to the   Company’s Current Report on Form 8-K filed with the SEC on   February 3, 2005, which is incorporated herein by reference.                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8                 |       | Form of   Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.   Amended and Restated 1996 Non-Employee Directors’ Stock Option Plan   (Re-Election), previously filed with the SEC as Exhibit 10.3 to the   Company’s Current Report on Form 8-K filed with the SEC on   February 3, 2005, which is incorporated herein by reference.                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9                 |       | Form of   Non-Employee Director Stock Option Agreement under the SRS Labs, Inc.   Amended and Restated 1996 Long-Term Incentive Plan, previously filed with the   SEC as Exhibit 10.4 to the Company’s Current Report on Form 8-K   filed with the SEC on February 3, 2005, which is incorporated herein by   reference.                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10                |       | Form of Nonqualified Stock Option Agreement under the SRS   Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan dated   March 29, 2005 (Current participants under this plan include the   following officers: Thomas C.K. Yuen, Ulrich E. Gottschling, Sarah Yang and   Alan D. Kraemer), previously filed with the SEC as Exhibit 10.1 to the   Company’s Current Report Form 8-K filed with the SEC on April 4,   2005, which is incorporated herein by reference. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11                |       | SRS   Labs, Inc. Amended and Restated Change in Control Protection Plan   approved August 3, 2009, previously filed with the SEC as   Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed   with the SEC on August 6, 2009, which is incorporated herein by   reference.                                                                                                                                                                                               |

 

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| **E****xhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12                    |       | Form of   Participation Agreement under the SRS Labs, Inc. Amended and Restated   Change in Control Protection Plan for Selected Executive Officers (Current   participants under this plan include the following officers: Thomas C.K.   Yuen, Ulrich E. Gottschling, Sarah Yang, Jeff Klaas and Alan D. Kraemer)   previously filed with the SEC as Exhibit 10.2 to the Company’s Quarterly   Report on Form 10-Q filed with the SEC on August 6, 2009, which is   incorporated herein by reference. |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13                    |       | SRS   Labs, Inc. Amended and Restated 1996 Long-Term Incentive Plan, as   amended, approved April 27, 2005, previously filed with the SEC as   Exhibit 10.5 to the Form 8-K filed with the SEC on May 3,   2005, which is incorporated herein by reference.                                                                                                                                                                                                                                                 |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.14                    |       | Offer   Letter dated April 22, 2008 by and between the Company and Jeff Klaas,   previously filed with the SEC as Exhibit 10.15 to the Company’s Annual   Report on Form 10-K for the fiscal period ended December 31, 2008,   filed with the SEC on February 24, 2009 which is incorporated herein by   reference.                                                                                                                                                                                    |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.15                    |       | Employment   Letter Agreement dated December 21, 2005 by and between the Company and   Ulrich E. Gottschling, previously filed with the SEC as Exhibit 99.1 to   the Company’s Current Report on Form 8-K filed with the SEC on   December 29, 2005, which is incorporated herein by reference.                                                                                                                                                                                                             |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.16                    |       | Form of   Nonqualified Stock Option Agreement under the SRS Labs, Inc. 1996   Amended and Restated Long-Term Incentive Plan, as amended, previously filed   with the SEC as Exhibit 99.8 to the Company’s Current Report on   Form 8-K filed with the SEC on January 18, 2006, which is   incorporated herein by reference.                                                                                                                                                                            |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.17                    |       | SRS   Labs, Inc. Profit Sharing and Bonus Plan, as amended on June 20,   2007, previously filed with the SEC as Exhibit 10.1 to the Company’s   Current Report on Form 8-K filed with the SEC on June 25, 2007, which   is incorporated herein by reference.                                                                                                                                                                                                                                           |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.18                    |       | SRS   Labs, Inc. 2006 Stock Incentive Plan, as amended on December 17,   2007, previously filed with the SEC as Exhibit 10.1 to the Company’s   Current Report on Form 8-K filed with the SEC on December 21, 2007,   which is incorporated herein by reference.                                                                                                                                                                                                                                       |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.19                    |       | Form of   Stock Option Award Agreement under the SRS Labs, Inc. 2006 Stock   Incentive Plan, previously filed with the SEC as Exhibit 10.9 to the   Company’s Quarterly Report on Form 10-Q, Amendment No. 1, filed   with the SEC on September 22, 2006, which is incorporated herein by   reference.                                                                                                                                                                                            |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.20                    |       | Form of   Restricted Share Award Agreement under the SRS Labs, Inc. 2006 Stock   Incentive Plan, previously filed with the SEC as Exhibit 10.10 to the   Company’s Quarterly Report on Form 10-Q, Amendment No. 1, filed   with the SEC on September 22, 2006, which is incorporated herein by   reference.                                                                                                                                                                                       |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.21                    |       | Form of   Restricted Share Unit Award Agreement under the SRS Labs, Inc. 2006   Stock Incentive Plan, previously filed with the SEC as Exhibit 10.11 to   the Company’s Quarterly Report on Form 10-Q, Amendment No. 1, filed   with the SEC on September 22, 2006, which is incorporated herein by   reference.                                                                                                                                                                                  |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.22                    |       | Form of   SAR Award Agreement under the SRS Labs, Inc. 2006 Stock Incentive Plan,   previously filed with the SEC as Exhibit 10.12 to Amendment No. 1   to the Company’s Quarterly Report on Form 10-Q, Amendment No. 1,   filed with the SEC on September 22, 2006, which is incorporated herein   by reference.                                                                                                                                                                            |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.23                    |       | SRS   Labs, Inc. Patent Reward Program, previously filed as Exhibit 10.2   to the Company’s Form 8-K filed with the SEC on June 28, 2006,   which is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                      |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **               | ** ** | **Other Material Contracts**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **               | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.24                    |       | Industrial   Real Estate Lease dated May 27, 2008, between the Company and Daimler   Commerce Partners, L.P., previously filed with the SEC as   Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the   fiscal period ended December 31, 2008, filed with the SEC on February 24,   2009 which is incorporated herein by reference.                                                                                                                                                  |
|                     |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.25                    |       | Stock   Divestment Agreement dated July 1, 1996, between the Company, Thomas   C.K. Yuen, Stephen V. Sedmak and Walter W. Cruttenden III, previously filed   with the SEC as Exhibit 10.17 to the Company’s Registration Statement on   Form SB-2, specifically included in Amendment No. 2 to such   Registration Statement file with the SEC on August 2, 1996 (File   No. 333-4974-LA), which is incorporated herein by reference.                                                             |

 

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| **Exhibit      Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.26                   |       | Revolving   Credit Agreement [effective June 30, 2010 / entered into on   August 12, 2010], and related documents and agreements, by and between   SRS Labs, Inc. and U.S. Bank N.A., previously filed with the SEC as   Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed   with the SEC on August 18, 2010 which is incorporated herein by   reference. |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.27                   |       | Settlement   Agreement effective September 9, 2010 by and between SRS Labs, Inc.   and Sony Corporation, previously filed with the SEC as Exhibit 10.1 to   the Company’s Current Report on Form 8-K, filed with the SEC on   September 13, 2010 which is incorporated herein by reference.                                                                                  |
| 10.28                   |       | Standard   Industrial/Commercial Multi-tenant Lease dated February 7, 2011, by and   between SRS Labs, Inc. and Daimler Commerce Partners, L.P.                                                                                                                                                                                                                                                  |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** **              | ** ** | **Other Exhibits**                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **              | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                 |
| 21                      |       | Subsidiaries   of the Company.                                                                                                                                                                                                                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 23.1                    |       | Consent   of Independent Registered Public Accounting Firm, Squar, Milner, Peterson,   Miranda & Williamson, LLP, dated February 22, 2010.                                                                                                                                                                                                                                              |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1                    |       | Certification   of the Chief Executive Officer of SRS Labs, Inc., pursuant to   Section 302 of the Sarbanes- Oxley Act of 2002.                                                                                                                                                                                                                                                                  |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2                    |       | Certification   of the Chief Financial Officer of SRS Labs, Inc., pursuant to   Section 302 of the Sarbanes- Oxley Act of 2002.                                                                                                                                                                                                                                                                  |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1                    |       | Certification   of Chief Executive Officer of SRS Labs, Inc., pursuant to 18 U.S.C.   Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley   Act of 2002.                                                                                                                                                                                                                 |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.2                    |       | Certification   of Chief Financial Officer of SRS Labs, Inc., pursuant to 18 U.S.C.   Section 1350, as adopted pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |

 

50

----