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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2010**

 

**OR**

** **

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

 

**For the transition period         to        **

 

**CommissionFile Number 0-21123**

 

 

**SRS LABS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **33-0714264**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate website, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

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

 

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

 

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

 

Asof October 29, 2010, 14,744,441 of the issuer’s common stock, par value$.001 per share, were outstanding.

 

 

 

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**SRS LABS, INC.**

 

**Quarterly Report on Form 10-Q**

**For the Three and Nine Months Ended September 30,2010**

**Index**

 
| **PART I-FINANCIAL INFORMATION** | ** **                                                                                                                        |
|---------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                               | Financial  Statements                                                                                                             | 4 |
|                                  | Condensed Consolidated Balance Sheets as of  September 30, 2010 (Unaudited) and December 31, 2009                       | 4 |
|                                  | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2010 and 2009 (Unaudited) | 5 |
|                                  | Condensed Consolidated Statements of Stockholders’  Equity for the nine months ended September 30, 2010 (Unaudited)     | 6 |
|                                  | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2010 and 2009 (Unaudited)           | 7 |
|                                  | Notes to the Condensed Consolidated Financial  Statements (Unaudited)                                                             | 8 |
| Item 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       | 12 |
| Item 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                                                       | 16 |
| Item 4.                               | Controls and  Procedures                                                                                                          | 16 |
| **PART II-OTHER  INFORMATION**   | ** **                                                                                                                        |
| Item 1.                               | Legal Proceedings                                                                                                                 | 16 |
| Item 1A.                              | Risk Factors                                                                                                                      | 16 |
| Item 6.                               | Exhibits                                                                                                                          | 21 |
|                                  |                                                                                                                              |
| SIGNATURES                            | 22                                                                                                                                |

 

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** **

**FORWARD-LOOKING INFORMATION**

 

Asused herein, the “Company,” “SRS Labs,” “SRS,” “we,” “us,” or “our” means SRSLabs, Inc., the parent company, and its wholly-owned subsidiaries,SRSWOWcast.com, Inc., Shenzhen Representative Office of SRSLabs, Inc. (a Chinese company), Shanghai Representative Office of SRSLabs, Inc. (a Chinese company) and SRS Labs Japan, KK (a Japanesecompany).

 

ThisQuarterly Report on Form 10-Q contains forward-looking statementsregarding our assumptions, projections, expectations, targets, intentions orbeliefs about future events. All statements other than statements of historicalfacts included in this Quarterly Report, including, but not limited to, thoserelating to our future operating results, profitability, growth and capitalrequirements, our investment and expansion plans, changes in our competitiveposition, the outcome of certain disputes, changes in economic conditions orcapital markets and changes in customer usage patterns and preferences, areforward-looking statements. In some cases, you can identify forward-lookingstatements by terms such as may, will, should, could, expect, plan, intend,forecast, anticipate, believe, estimate, predict, potential, likely or similarexpressions or variations of these terms. The forward-looking statementscontained in this Quarterly 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 fromany future results, levels of activity, performance or achievements expressedor implied by these statements. Factors that might cause actual events orresults to differ materially from those indicated by these forward-lookingstatements may include the matters listed in Part II, Item 1A, “RiskFactors” of this Quarterly Report, including, but not limited to, the loss ofany significant customer; the acceptance of new SRS Labs products andtechnologies; our ability to increase our brand awareness and enter into new orexpanded license arrangements; the impact of competitive products and pricing;general economic and business conditions that may adversely impact sales of consumerproducts incorporating our technologies or that otherwise may impact ouroperating results and future performance; the timely development and release oftechnologies by the Company; and other factors identified from time to time inour filings with the Securities and Exchange Commission (“SEC”).

 

Any forward-looking statement speaks only as of thedate on which such statement is made, and, except as required by law, weundertake no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which such statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for management to predict all such factors.

 

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**PART I — FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 

**SRSLABS, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                      | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                      |       |                         |       |                        |       |
| **Current Assets**                                                                                                                                                                              |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                       |       | $                            | 16,385,081 |                        | $          | 27,988,164 |   |
| Accounts receivable, net                                                                                                                                                                        |       | 2,091,474                    |       | 179,114                     |       |
| Prepaid expenses and other current assets                                                                                                                                                       |       | 1,122,492                    |       | 1,147,151                   |       |
| Short-term investments                                                                                                                                                                          |       | 12,191,000                   |       | 12,963,000                  |       |
| **Total Current Assets**                                                                                                                                                                        |       | 31,790,047                   |       | 42,277,429                  |       |
|                                                                                                                                                                                            |       |                         |       |                        |       |
| Long-term investments                                                                                                                                                                           |       | 14,261,000                   |       | 538,000                     |       |
| Property and equipment, net                                                                                                                                                                     |       | 724,769                      |       | 599,794                     |       |
| Intangible assets, net                                                                                                                                                                          |       | 2,877,244                    |       | 2,702,160                   |       |
| Deferred income taxes, net                                                                                                                                                                      |       | 7,826,153                    |       | 5,631,442                   |       |
| **Total Assets**                                                                                                                                                                                |       | $                            | 57,479,213 |                        | $          | 51,748,825 |   |
| ** **                                                                                                                                                                                      |       |                         |       |                        |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                                  |       |                         |       |                        |       |
|                                                                                                                                                                                            |       |                         |       |                        |       |
| **Current Liabilities**                                                                                                                                                                         |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                |       | $                            | 655,374    |                        | $          | 583,157 |   |
| Accrued liabilities                                                                                                                                                                             |       | 1,634,032                    |       | 1,577,891                   |       |
| Deferred revenue                                                                                                                                                                                |       | 798,305                      |       | 1,193,454                   |       |
| **Total Current Liabilities**                                                                                                                                                                   |       | $                            | 3,087,711  |                        | $          | 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; 14,744,441 and 14,563,715 shares issued and outstanding at  September 30, 2010 and December 31, 2009, respectively |       | 14,745                       |       | 14,565                      |       |
| Additional paid-in capital                                                                                                                                                                      |       | 67,687,825                   |       | 65,128,337                  |       |
| Accumulated deficit                                                                                                                                                                             |       | (13,311,068                  | )          | (16,748,579                 | )          |
| **Total Stockholders’ Equity**                                                                                                                                                             |       | 54,391,502                   |       | 48,394,323                  |       |
| **Total Liabilities and  Stockholders’ Equity**                                                                                                                                            |       | $                            | 57,479,213 |                        | $          | 51,748,825 |   |

 

See accompanying notes to the condensed consolidated financialstatements

 

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**SRS LABS, INC. ANDSUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
| ** **                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                            |       | $                                                    | 8,609,140  |                                                | $          | 7,230,118 |   | $ | 24,155,562 |   | $ | 17,989,657 |   |
| Cost of sales                                                       |       | 63,965                                               |       | 67,858                                              |       | 228,320 |   | 202,032 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Gross profit                                                        |       | 8,545,175                                            |       | 7,162,260                                           |       | 23,927,242 |   | 17,787,625 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Operating expenses:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Sales and marketing                                                 |       | 3,387,781                                            |       | 2,852,165                                           |       | 10,029,468 |   | 8,089,263 |   |
| Research and development                                            |       | 2,031,511                                            |       | 1,481,555                                           |       | 5,747,623 |   | 4,059,132 |   |
| General and administrative                                          |       | 1,800,624                                            |       | 1,411,162                                           |       | 4,797,755 |   | 4,217,046 |   |
| Total operating expenses                                            |       | 7,219,916                                            |       | 5,744,882                                           |       | 20,574,846 |   | 16,365,441 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Operating income                                                    |       | 1,325,259                                            |       | 1,417,378                                           |       | 3,352,396 |   | 1,422,184 |   |
| Other income, net                                                   |       | 78,042                                               |       | 82,724                                              |       | 179,544 |   | 279,543 |   |
| Income before income taxes                                          |       | 1,403,301                                            |       | 1,500,102                                           |       | 3,531,940 |   | 1,701,727 |   |
| Income taxes                                                        |       | 62,966                                               |       | 25,088                                              |       | 94,429 |   | 39,163 |   |
| Net income                                                          |       | $                                                    | 1,340,335  |                                                | 1,475,014  |   | $ | 3,437,511 |   | $ | 1,662,564 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Net income per common share:                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                               |       | $                                                    | 0.09       |                                                | $          | 0.10 |   | $ | 0.23 |   | $ | 0.12 |   |
| Diluted                                                             |       | $                                                    | 0.09       |                                                | $          | 0.10 |   | $ | 0.22 |   | $ | 0.11 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average common shares used in the per  share calculations: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                               |       | 14,705,275                                           |       | 14,627,089                                          |       | 14,638,748 |   | 14,439,228 |   |
| Diluted                                                             |       | 15,745,667                                           |       | 15,184,824                                          |       | 15,579,175 |   | 14,762,281 |   |

 

See accompanying notes to the condensed consolidated financialstatements

 

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**SRS LABS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

** **
| ** **                              | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                              | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| BALANCE, December 31, 2009         |       | 14,563,715            |       | $                       | 14,565     |            | $          | 65,128,337  |       | $ | (16,748,579 | ) | $ | 48,394,323 |   |
| Proceeds from exercise of stock options |       | 180,726               |       | 180                     |       | 885,330         |       | —      |       | 885,510 |   |
| Share-based compensation                |       | —                |       | —                  |       | 1,674,158       |       | —      |       | 1,674,158 |   |
| Net income                              |       | —                |       | —                  |       | —          |       | 3,437,511   |       | 3,437,511 |   |
|                                    |       |                  |       |                    |       |            |       |        |       |   |   |
| BALANCE, September 30, 2010        |       | 14,744,441            |       | $                       | 14,745     |            | $          | 67,687,825  |       | $ | (13,311,068 | ) | $ | 54,391,502 |   |

 

See accompanying notes to the condensed consolidated financialstatements

 

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**SRS LABS, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| **Cash Flows from Operating Activities:**                                          |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 3,437,511  |   | $ | 1,662,564 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                      |       | 694,891                                             |       | 511,560 |   |
| Provision for doubtful accounts                                                    |       | —                                              |       | 60,000 |   |
| Deferred taxes                                                                     |       | (2,194,711                                          | )          | (1,540,021 | ) |
| Share-based compensation                                                           |       | 1,674,158                                           |       | 1,430,339 |   |
| Loss on disposition of property and equipment                                      |       | —                                              |       | 14,626 |   |
| Write-off of intangible assets                                                     |       | —                                              |       | 5,528 |   |
| Changes in operating assets and liabilities:                                       |       |                                                |       |   |   |
| Accounts receivable                                                                |       | (1,912,360                                          | )          | (742,204 | ) |
| Prepaid expenses and other current assets                                          |       | 24,659                                              |       | (317,094 | ) |
| Accounts payable                                                                   |       | 72,217                                              |       | 239,091 |   |
| Accrued liabilities                                                                |       | 56,141                                              |       | 400,293 |   |
| Deferred revenue                                                                   |       | (395,149                                            | )          | (340,969 | ) |
| Net cash provided by operating activities                                          |       | 1,457,357                                           |       | 1,383,713 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash Flows from Investing  Activities:**                                         |       |                                                |       |   |   |
| Purchase of short-term and long-term investments                                   |       | (15,822,000                                         | )          | (5,665,000 | ) |
| Proceeds from sale of short-term investments                                       |       | 2,871,000                                           |       | — |   |
| Proceeds from sale of property and equipment                                       |       | —                                              |       | 17,600 |   |
| Purchase of property and equipment                                                 |       | (336,643                                            | )          | (235,856 | ) |
| Expenditures related to intangible assets                                          |       | (658,307                                            | )          | (535,515 | ) |
| Net cash used in investing activities                                              |       | (13,945,950                                         | )          | (6,418,771 | ) |
|                                                                               |       |                                                |       |   |   |
| **Cash Flows from Financing Activities:**                                          |       |                                                |       |   |   |
| Proceeds from exercise of stock options                                            |       | 885,510                                             |       | 229,940 |   |
| Net cash provided by financing activities                                          |       | 885,510                                             |       | 229,940 |   |
|                                                                               |       |                                                |       |   |   |
| **Net Decrease in Cash and Cash  Equivalents**                                     |       | (11,603,083                                         | )          | (4,805,118 | ) |
| **Cash and Cash Equivalents,  Beginning of Period**                                |       | 27,988,164                                          |       | 31,599,087 |   |
| **Cash and Cash Equivalents, End  of Period**                                      |       | $                                                   | 16,385,081 |   | $ | 26,793,969 |   |
|                                                                               |       |                                                |       |   |   |
| **Supplemental Disclosure of Cash  Flow Information:**                             |       |                                                |       |   |   |
| Cash paid during the period for:                                                   |       |                                                |       |   |   |
| Income taxes                                                                       |       | $                                                   | 2,164,050  |   | $ | 1,539,570 |   |

 

See accompanying notes to the condensed consolidated financialstatements

 

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**SRS LABS, INC.AND SUBSIDIARIES****NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

**1.             Basis ofPresentation and Summary of Significant Accounting Policies and Estimates**

 

Asused herein, the  “Company,” “SRS Labs,” “SRS,”“we,” “us,” or “our” means SRS Labs, Inc., the parent company, and itswholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen RepresentativeOffice of SRS Labs, Inc. (a Chinese company), Shanghai RepresentativeOffice of SRS Labs, Inc. (a Chinese company) and SRS Labs Japan, KK (aJapanese company).  The accompanyingunaudited condensed consolidated financial statements have been prepared by theCompany in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”) for interim financial information and therules and regulations of the SEC for interim reporting. In the opinion ofmanagement, all adjustments (which include normal recurring adjustments)considered necessary for a fair presentation of our financial position andresults of operations have been included.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with GAAP have been condensed or omitted pursuant to SECrules and regulations for presentation of interim financial information.Therefore, the unaudited condensed interim consolidated financial statementsshould be read in conjunction with the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2009. Current and future financialstatements may not be directly comparable to the Company’s historical financialstatements. The results of operations for the interim period are notnecessarily indicative of the results to be expected for any other interimperiod or for the full year.  Amountsrelated to disclosure of December 31, 2009 balances within these condensedconsolidated financial statements were derived from the audited consolidatedfinancial statements for the year ended December 31, 2009.

 

**Estimates**

 

Thepreparation of financial statements in accordance with GAAP requires managementto make use of certain estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reported periods. We base our estimates onhistorical experience and on various other assumptions that we believe are reasonableunder the circumstances, the results of which form the basis for makingjudgments about carrying values of assets and liabilities that are not readilyapparent from other sources.  By theirnature, estimates are subject to an inherent degree of uncertainty.  Actual results could differ materially fromthose estimates. See the audited consolidated financial statements and notesthereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2009 for an additional discussion of the significantaccounting policies and estimates used in the preparation of our financialstatements.

 

**Cash and Cash Equivalents**

 

Cashand cash equivalents include short-term, highly liquid investments that arereadily convertible to known amounts of cash and are so near maturity that theypresent insignificant risk of changes in value because of interest rates. Cashand cash equivalents generally consist of cash, money market funds andinstruments with original maturities of three months or less when purchased.  The Company places its cash in banks and itscash and cash equivalents and money market funds at certain financialinstitutions in excess of amounts insured by federal agencies.  The Company does not believe that it issubject to any unusual financial risk beyond the normal risk associated withcommercial banking relationships.  TheCompany performs periodic evaluations of the relative credit standing of thesefinancial institutions.  The Company hasnot experienced any losses on its cash and cash equivalents.

 

**Short-term and Long-term Investments**

 

Short-terminvestments consist of certificates of deposit and U.S. treasury bills thatmature within one year.  Long-terminvestments consist of certificates of deposit with maturities ranging fromeighteen to twenty-four months.  All ofthe certificates of deposit are fully FDIC insured. The Company has notexperienced any losses on its short and long-term investments.

 

**RevenueRecognition**

 

Ourrevenues consist primarily of royalties generated from the license of SRS Labs’audio and voice technologies.  Our license agreements typically havemulti-year or automatic renewal terms, and either require: (a) per-unitroyalty payments for all products implementing our technologies and/orsolutions; (b) fixed annual or quarterly royalty payments; or (c) aminimum fixed annual or quarterly royalty payment, which allows the licensee toship up to a pre-determined number of units during the specified time period,with additional per-unit royalty payments thereafter.  The majority of ourlicense agreements are per-unit royalty arrangements, which are generallyreported by the licensee in the quarter following shipment of the consumerelectronics devices and are therefore typically recognized by us followingshipment of the devices by the original equipment manufacturer (“OEM”).  

 

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Revenuesassociated with fixed royalty payments are recognized ratably over the term ofthe license agreement.  We also sell some of our products and solutionsvia the Internet.  Revenues associated with those sales are recognizedupon shipment and were not material in the three and nine month periods endedSeptember 30, 2010 or 2009. The Company may offer customer support orlicense support programs in the form of assisting the licensee withimplementing the Company’s technology into the manufactured products of thelicensee to ensure that the licensee receives the maximum benefit from theCompany’s technology.  Such customer support is not contractually mandatedand is generally provided on a discretionary basis to assist the customer andto improve customer relations.  Such customer support generally does notextend past the time in which the licensed technology is placed in service orimplemented in any given device by the licensee.  In this regard, anysupport services occur during a finite period prior to the sale or revenuerecognition.

 

**CustomerConcentrations**

 

Forthe three months ended September 30, 2010 and 2009, one customer, Samsung,accounted for approximately 33% and 32%, respectively, of our revenues.  For the nine months ended September 30,2010 and 2009, one customer, Samsung, accounted for approximately 37% and 38%,respectively, of our revenues.  Therevenue from Samsung is derived from multiple technology license agreementswith various divisions of Samsung.

 

**Reclassifications**

 

Certainamounts in the prior year financial statements have been reclassified toconform to the current presentation.

 

**IncomeTaxes**

 

TheCompany currently has net operating loss carryforwards and tax credits tooffset income taxes.  As a result of theCalifornia extension of  the suspensionof the use of net operating loss carryforwards to offset state income taxes,the Company has recognized additional state income tax in the currentperiod.    Due to our licensees beinglocated in foreign countries, they may be obligated to withhold foreign taxesbased upon local and country requirements of the taxing authority.  Refer to our Annual Report on Form 10-Kfor the year ended December 31, 2009 for additional disclosure in thisregard.

 

**2.             Intangible Assets**

 

Intangibleassets consist of the following:

 
| ** **               | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Patents                  |       | $                            | 4,393,715  |                        | $          | 4,100,363 |   |
| Accumulated amortization |       | (2,314,597                   | )          | (2,072,763                  | )          |
| Patents, net             |       | 2,079,118                    |       | 2,027,600                   |       |
| Other intangibles        |       | 1,856,532                    |       | 1,491,579                   |       |
| Accumulated amortization |       | (1,058,406                   | )          | (817,019                    | )          |
| Other intangibles, net   |       | 798,126                      |       | 674,560                     |       |
| Intangible assets, net   |       | $                            | 2,877,244  |                        | $          | 2,702,160 |   |

 

Amortizationexpense associated with our intangibles was $181,070 and $125,958 in the threemonths ended September 30, 2010 and 2009, respectively, and $483,233 and$365,134 in the nine months ended September 30, 2010 and 2009,respectively.  Amortization expense isincluded in general and administrative expenses in the accompanying condensedconsolidated statements of operations.

 

**3.**             **Net Income Per CommonShare**

 

Basicnet income per common share is computed by dividing net income or lossavailable to common stockholders by the weighted average number of commonshares outstanding during each year. Diluted net income per common sharereflects the maximum dilution, based on the average price of the Company’scommon stock during each period, and is computed similar to basic net incomeper common share except that the denominator is increased to include the numberof additional shares that would have been outstanding if potentially dilutivestock options and warrants had been exercised.

 

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Basicand diluted net income per share are as follows:

 
| ** **                                               | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                               | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **                                               | ** ** | **2010**                                | ** ** | **2009**                               | ** ** | **2010** | ** ** | **2009** | ** ** |
| BASIC EPS                                                |       |                                    |       |                                   |       |   |   |   |   |
| Net income                                               |       | $                                       | 1,340,335  |                                   | $          | 1,475,014 |   | $ | 3,437,511 |   | $ | 1,662,564 |   |
| Denominator: weighted average common shares  outstanding |       | 14,705,275                              |       | 14,627,089                             |       | 14,638,748 |   | 14,439,228 |   |
| Net income per share                                     |       | $                                       | 0.09       |                                   | $          | 0.10 |   | $ | 0.23 |   | $ | 0.12 |   |
|                                                     |       |                                    |       |                                   |       |   |   |   |   |
| DILUTED EPS                                              |       |                                    |       |                                   |       |   |   |   |   |
| Net income                                               |       | $                                       | 1,340,335  |                                   | $          | 1,475,014 |   | $ | 3,437,511 |   | $ | 1,662,564 |   |
| Denominator: weighted average common shares  outstanding |       | 14,705,275                              |       | 14,627,089                             |       | 14,638,748 |   | 14,439,228 |   |
| Common equivalent shares outstanding:                    |       |                                    |       |                                   |       |   |   |   |   |
| Options                                                  |       | 1,040,392                               |       | 557,735                                |       | 940,427 |   | 323,052 |   |
| Total diluted shares                                     |       | 15,745,667                              |       | 15,184,824                             |       | 15,579,175 |   | 14,762,281 |   |
| Net income per share                                     |       | $                                       | 0.09       |                                   | $          | 0.10 |   | $ | 0.22 |   | $ | 0.11 |   |

 

Forthe three months ended September 30, 2010 and 2009, there were outstandingoptions to purchase an aggregate of 1,335,940 and 976,507 shares, respectively,of the Company’s common stock, respectively, that were not included in thetable above because they would be anti-dilutive.  For the nine months ended September 30,2010 and 2009, there were outstanding options to purchase an aggregate of1,373,640 and 2,352,137 shares, respectively, of the Company’s common stockthat were not included in the table above because they would be anti-dilutive.

 

**4.**             **Commitments andContingencies**

 

On June 8, 2007, we sent aletter to Sony Corporation (“Sony”) relating to the possible infringement ofseveral SRS patents by Sony’s S-Force technology. Sony responded to the letterby filing a Complaint for Declaratory Relief in the U.S. District Court in theSouthern District of New York on July 6, 2007. In November 2007, Sonyand SRS entered into a standstill agreement for the purpose of conductingdiscussions towards an amicable resolution of the dispute, and the Complaintfor Declaratory Relief was dismissed.  Effective September 9,2010, we entered into a Settlement Agreement (the “Agreement”) with Sonyrelating to the SRS patents at issue (“Licensed Patents”).  Pursuant tothe Agreement, in exchange for the payment of $900,000, SRS agreed to grant toSony and its subsidiaries a non-transferable, non-assignable, irrevocable,non-exclusive, fully paid-up worldwide license to the Licensed Patents withrespect to  Sony’s and/or its subsidiaries’ products incorporating anyproprietary audio technology designed by Sony and/or its subsidiaries prior tothe date of the Agreement or within three years after the date of theAgreement, including modifications, derivations or enhancements thereof.. The Agreement is intended to resolve all disputes between the parties basedupon the Licensed Patents and includes a release by SRS of Sony and itssubsidiaries from any and all claims under the Licensed Patents with respect tothe Licensed Products.  The Companyrecognized all of the settlement amount in the three months ended September 30,2010.

 

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

 

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**5.             SegmentInformation**

 

TheCompany operates in one reportable segment as disclosed in our Annual Report onForm 10-K for the year ended December 31, 2009.  The following schedule presents theCompany’s revenue by geographic area. Licensing-related revenue is summarized based on the location of thelicensee’s corporate headquarters.  Forproduct and online sales, revenue is allocated to the United States.  The China region includes all licensees withtheir corporate headquarters located in mainland China.  The Asia Pacific region includes alllicensees with their corporate headquarters located in Taiwan and Hong Kong.Substantially all of the Company’s revenues during the three and nine monthsended September 30, 2010 and 2009 were denominated in U.S. Dollars.

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2010**                                             | ** ** | **%**                                               | ** ** | **2009** | ** ** | **%** | ** ** | **2010** | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** |
| **Geographic Area Revenue:** |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Korea                        |       | $                                                    | 3,535,925  |                                                | 41         | % | $ | 2,759,986 |   | 38 | % | $ | 10,566,589 |   | 44 | % | $ | 8,314,666 |   | 46 | % |
| United  States               |       | 1,920,158                                            |       | 22                                                  |       | 2,228,614 |   | 31 |   | 5,754,606 |   | 24 |   | 4,242,720 |   | 24 |   |
| Asia  Pacific                |       | 809,185                                              |       | 10                                                  |       | 155,657 |   | 2 |   | 1,752,626 |   | 7 |   | 369,424 |   | 2 |   |
| Japan                        |       | 1,694,454                                            |       | 20                                                  |       | 1,688,919 |   | 24 |   | 4,137,986 |   | 17 |   | 3,607,127 |   | 20 |   |
| China                        |       | 539,146                                              |       | 6                                                   |       | 299,057 |   | 4 |   | 1,478,280 |   | 6 |   | 1,176,148 |   | 6 |   |
| Europe                       |       | 110,272                                              |       | 1                                                   |       | 97,885 |   | 1 |   | 465,475 |   | 2 |   | 279,572 |   | 2 |   |
| Total                        |       | $                                                    | 8,609,140  |                                                | 100        | % | $ | 7,230,118 |   | 100 | % | $ | 24,155,562 |   | 100 | % | $ | 17,989,657 |   | 100 | % |

 

**6.             Fair Value Measurements**

 

The Company measures the fair valueof applicable financial and non-financial assets based on the following levelsof inputs.

 

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

 

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

 

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

 

The hierarchy noted above requires us tominimize the use of unobservable inputs and to use observable market data, ifavailable, when determining fair value. There were no transfers between Level1, Level 2 and/or Level 3 during the three months ended September 30,2010.  Financial assets carried at fairvalue as of September 30, 2010 are classified below:

 
| ** **         | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|--------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
|               |       |             |       |             |       |             |       |      |       |
| Money market funds |       | $                | 15,491,922 |             | $          | —           |       | $         | —     |   | $ | 15,491,922 |   |
|               |       |             |       |             |       |             |       |      |       |
| Total              |       | $                | 15,491,922 |             | $          | —           |       | $         | —     |   | $ | 15,491,922 |   |

 

**7.             Revolving Line of Credit**

 

OnAugust 12, 2010, we entered into a Revolving Credit Agreement(collectively with the Revolving Credit Note and related documents, the “LoanDocuments”) with U.S. Bank N.A. (the “Bank”).  The Loan Documents providethe Company with a $5.0 million revolving line of credit, which is availableuntil June 30, 2011, to be used for working capital purposes.  Interest on borrowed amounts under therevolving line of credit is payable monthly at one of the following ratesselected by the Company (and upon notice to the Bank as required by the LoanDocuments):  (i) the prime rate announced by the Bank from time totime minus 1.00% or (ii) 2.00% plus the 1, 2, 3, 6 or 12 month LIBOR ratequoted by the Bank or any successor thereto.  The revolving creditagreement contains various covenants, the more significant of which require usto maintain a minimum fixed charge coverage ratio and certain levels of liquidassets. We were in compliance with all of the Bank’s covenants as of September 30,2010. 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 therevolving line of credit.  As of September 30,2010, the Company has not borrowed from the revolving line of credit.

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

Thisinformation should be read in conjunction with the audited consolidated financialstatements and notes thereto and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contained in our Annual Report onForm 10-K for the year ended December 31, 2009, and the unauditedcondensed interim consolidated financial statements and notes thereto includedin this Quarterly Report.

 

**Overview**

 

Weare the recognized global leader in the practical application ofpsychoacoustics*,* the sciencebehind how the human ear operates, and in the post processing segment of the marketfor audio delivery.  Our award-winning audio enhancement technologies andsolutions dramatically restore audio and voice to its natural state, the way itwas originally recorded, in both dimension and clarity, thus providing asuperior consumer experience for a wide variety of consumer electronic devicessuch as televisions, personal computers and mobile phones.

 

Ouroperations are conducted through SRS Labs, Inc., the parent company, andits wholly-owned subsidiaries, SRSWOWcast.com, Inc., Shenzhen RepresentativeOffice of SRS Labs, Inc., Shanghai Representative Office of SRSLabs, Inc. and SRS Labs Japan, KK. Our business is focused on developingand licensing audio, voice and surround sound technology solutions to many ofthe world’s leading OEMs, software providers and semiconductor companies, andlimited sales and marketing of standalone software and hardware productsthrough the Internet.

 

Duringthe three months ended September 30, 2010 and 2009, licensing revenuesfrom the home entertainment market represented 66% and 70%, respectively, ofour total revenues in such periods.  Inthe home entertainment market, our technologies have achieved broad marketacceptance in the television sector.  Weplan to continue to leverage our success in the television sector to expand ouraudio technologies into a variety of other consumer electronics devices,including PCs, mobile phones, portable media devices and automotive audiosystems, but our technologies to date have only been incorporated in products representingonly a small portion of the total market opportunity.  The consumer electronics market in general ischaracterized by rapid technological changes, short product life cycles,seasonality, significant price erosion and competition, any of which may impedeour ability to gain broad market acceptance for our technologies in otherconsumer electronics devices. Nonetheless, we plan to continue to seek other opportunities where wecan continue to leverage our core technologies and expertise.  If we are able to successfully gain broadmarket share for our technologies in any other market, it could significantlyimprove our revenues and brand name recognition.

 

**CriticalAccounting Policies**

 

Our critical accountingpolicies have been disclosed in our Form 10-K for the year ended December 31,2009. Our discussion and analysis ofour results of operations and liquidity and capital resources are based on ourunaudited consolidated financial statements for the three and nine months endedSeptember 30, 2010 and 2009, which have been prepared in accordance withGAAP.

 

The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, anddisclosure of contingent assets and liabilities. We base our estimates onhistorical and anticipated results and trends and on various other assumptionsthat we believe are reasonable under the circumstances, including assumptionsas to future events. These estimates form the basis for making judgments aboutthe carrying value of assets and liabilities that are not readily apparent fromother sources. By their nature, estimates are subject to an inherent degree ofuncertainty. Actual results may materially differ from our estimates.

 

**Results of Operations**

 

***Three Months Ended September 30, 2010 Compared to Three MonthsEnded September 30, 2009***

 

*Revenues*

 

Ourrevenues consist primarily of royalties generated from the license of SRS Labs’audio and voice technologies.  Ourlicense agreements typically have multi-year or automatic renewal terms, andeither require: (a) per-unit royalty payments for all productsimplementing our technologies and/or solutions; (b) fixed annual orquarterly royalty payments; or (c) a minimum fixed annual or quarterlyroyalty payment, which allows the licensee to ship up to a pre-determinednumber of units during the specified time period, with additional per-unitroyalty payments thereafter.  Themajority of our license agreements are per-unit royalty arrangements, which aregenerally reported by the licensee in the quarter following shipment of theconsumer electronics devices and are therefore typically recognized by usfollowing shipment of the devices by the OEM. Revenues associated with fixed royalty payments are recognized ratablyover the term of the license agreement. We also sell some of our products and solutions via the

 

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Internet.  Revenues associated with those sales arerecognized upon shipment and were not material in the three and nine monthperiods ended September 30, 2010 or 2009. We may offer customer support orlicense support programs in the form of assisting the licensee withimplementing our technology into the manufactured products of the licensee toensure that the licensee receives the maximum benefit from our technology.  Such customer support is not contractuallymandated and generally provided on a discretionary basis to assist the customerand improve customer relations.  Suchcustomer support generally does not extend past the time in which the licensedtechnology is placed in service or implemented in any given device by thelicensee.   In this regard, any supportservices are not contractual and occur during a finite period prior to the saleor revenue recognition.

 

Ourrevenues were $8,609,140 for the three months ended September 30, 2010,compared to $7,230,118 for the three months ended September 30, 2009, anincrease of $1,379,022 or 19%.  Revenuesfrom the home entertainment market increased by $631,764 in the currentquarter.  Within this market, revenues fromtelevisions increased by $781,397 mainly due to increased royalties due tovolume increases from existing licensees such as Samsung, due to increaseddemand for flat panel televisions and, to a lesser extent, due to a new licenseagreement with Top Victory.  This wasoffset by a decrease in set top box revenues. Included in home entertainment market revenue for the three months endedSeptember 30, 2010 is $900,000 settlement payment pursuant to the Agreementwith Sony described in Note 4 of Notes to Unaudited Condensed ConsolidatedFinancial Statements.  Additionally, werecognized approximately $299,715 and $950,000 of previously under reportedroyalties in the three months ended September 30, 2010 and 2009, respectively,from certain customers in the home entertainment market segment. In thepersonal computer market, our total revenues increased by $353,745 in thecurrent quarter, primarily due to revenues generated from Elitegroup ComputerSystems, a new licensee, and increased revenues due to increased volume fromour existing customers, including AsusTek. In the automotive market, revenues increased by $324,401 in the currentquarter primarily due to higher revenues from our Japanese customers who provideline install, dealer option and aftermarket automotive audio systems to many ofthe significant Japanese automotive manufacturers.  Revenues in the personal telecommunicationsmarket increased by $137,447 in the current quarter primarily due to new licensees.  Revenues in the portable media devices marketdecreased by $93,335 primarily due to decreased revenues from MP3 players.  Overall, we have not experienced a materialchange in our per unit license rates in the current periods other than volumepricing discounts provided pursuant to existing contractual obligations.

 

Thefollowing table presents our licensing revenues mix by market:

 
| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Home entertainment (TV, set top box)                      |       | 66                                                   | %          | 70 | % |
| PC (software, hardware)                                   |       | 15                                                   |       | 12 |   |
| Personal telecommunications (mobile phone, PDA)           |       | 10                                                   |       | 10 |   |
| Automotive                                                |       | 7                                                    |       | 4 |   |
| Portable media  devices (digital media player, headphone) |       | 2                                                    |       | 4 |   |

 

*Salesand Marketing*

 

Salesand marketing expenses consist primarily of employee salaries and benefits,sales consultants’ fees and related expenses, sales commissions, tradeshowcosts and costs associated with branding activities. Sales and marketingexpenses were $3,387,781 for the three months ended September 30, 2010,compared to $2,852,165 for the same prior year period, an increase of $535,616or 19%.  This increase was primarilyrelated to payroll and related costs associated with the addition of eightsales and marketing personnel since September 30, 2009 and to a lesserextent due to increased commission and bonuses largely related to increasedrevenue in the current quarter.  Includedin sales and marketing expenses is share-based compensation expense of $167,069and $134,804 for the three months ended September 30, 2010 and 2009,respectively.  We expect that sales andmarketing expenses will continue to increase as we hire additional sales andmarketing personnel to penetrate target markets and key regions in order togain broad market share for our technologies and as we plan to continue toincrease our marketing efforts to cultivate and elevate the SRS brandglobally.  As a percentage of totalrevenues, sales and marketing expenses remained consistent at 39% for the quarter endedSeptember 30, 2009 and for the same period this year.

 

*Researchand Development*

 

Researchand development expenses consist primarily of salaries and related costs ofemployees engaged in ongoing research, design and development activities andcosts for engineering materials and supplies, and consulting fees. Research anddevelopment expenses were $2,031,511 for the three months endedSeptember 30, 2010, compared to $1,481,555 for the same prior year period,an increase of $549,956 or 37%.  Thisincrease was primarily attributable to an increase in payroll and related costsassociated with hiring twelve additional engineers since September 30,2009.  Included in research anddevelopment expenses is share-based compensation expense of $132,165 and$114,949 for the three months ended September 30, 2010 and 2009,respectively.  

 

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Weexpect that research and development expenses will continue to increase in 2010as we plan to continue to add to our research and development team in order tosupport our global licensees and continue to develop new leading audiotechnologies. As a percentage of total revenues, research and developmentexpenses increased from 20% for the quarter ended September 30, 2009 to24% for the same period this year.

 

*Generaland Administrative*

 

Generaland administrative (“G&A”) expenses consist primarily of employee-relatedexpenses, attorneys’ fees, accounting fees, depreciation of the Company’sassets, patent amortization, and other professional fees. G&A expenses were$1,800,624 for the three months ended September 30, 2010, compared to$1,411,162 for the same prior year period, an increase of $389,462 or 28%. Included in G&A expenses was share-based compensation expense of$248,003 and $233,224 for the three months ended September 30, 2010 and2009, respectively.  As a percentage oftotal revenues, G&A expenses increased from 20% for the quarter ended September 30, 2009 to 21% for the same period this year.

 

*OtherIncome, Net*

 

Other income, net consistsprimarily of interest income. Other income, net was $78,042 for the threemonths ended September 30, 2010, compared to $82,724 for the same prioryear period, a decrease of $4,682 or 6%. Our investment focus continues to be on asset protection of our cash,and as such we have primarily invested our cash in low-risk, high liquidityinvestments such as fully insured certificates of deposits and assets backed bythe United States Treasury.  We continueto monitor our cash assets to maximize our interest income while maintaining anacceptable level of risk.  The Companydid not realize any losses on its investments in the current or prior yearperiods.

 

*IncomeTaxes*

 

 Income tax expense for the three months endedSeptember 30, 2010 was $62,966, compared to $25,088 for the same prioryear period.  The income tax provisionconsisted primarily of taxes paid on licensing revenues in the current quarterthat were sourced from countries requiring foreign tax withholdings,principally Korea.  We reduced our taxprovision and our valuation allowance on our deferred tax assets by $710,000and $521,690 for the three months ended September 30, 2010 and 2009,respectively, based on our assessment of the future estimated realization ofsuch assets.

 

***Nine Months Ended September 30, 2010 Compared to Nine Months EndedSeptember 30, 2009***

* *

*Revenues*

 

Ourrevenues were $24,155,562 for the nine months ended September 30, 2010,compared to $17,989,657 for the nine months ended September 30, 2009, anincrease of $6,165,906 or 34%.  In ourhome entertainment market, our total revenues increased by $3,087,715 in thenine months ended September 30, 2010. Within this market, flat panel television revenue increased by$3,072,397 mainly due to increased shipments by Samsung and to a lesser extentincreased shipments by other existing customers.  Included in home entertainment market revenuefor the nine months ended September 30, 2010 is $900,000 from the SettlementAgreement with Sony.  Additionally, werecognized approximately $970,133 and $1,415,626 of previously under reportedroyalties in the three months ended September 30, 2010 and 2009, respectively,from customers in the home entertainment market segment.  Our revenues from the personal computermarket increased by $1,958,118, primarily due to increased volume shipmentsfrom our existing customers, such as AsusTek. In the automotive market, revenues increased by $847,597 primarily dueto higher revenues from increased volume from our Japanese customers who provideline install, dealer option and aftermarket automotive audio systems to many ofthe significant Japanese automotive manufacturers.  Our revenues in the personaltelecommunications market increased by $355,234 in the current period due toincreased revenues from new licensees. Revenues in the portable media devices market decreased by $107,758primarily due to decreased revenues from MP3 players offset by increasedrevenues from docking stations.

 

Thefollowing table presents our licensing revenues mix by market:

 
| ** **                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| Home entertainment (TV, set top box)                      |       | 64                                                  | %          | 69 | % |
| PC (software, hardware)                                   |       | 16                                                  |       | 10 |   |
| Personal telecommunications (mobile phone, PDA)           |       | 10                                                  |       | 12 |   |
| Automotive                                                |       | 7                                                   |       | 5 |   |
| Portable media  devices (digital media player, headphone) |       | 3                                                   |       | 4 |   |

 

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*Salesand Marketing*

 

Salesand marketing expenses were $10,029,468 for the nine months ended September 30,2010, compared to $8,089,263 in the same prior year period, an increase of$1,940,205 or 24%.  This increase wasprimarily attributable to an increase in payroll and commissions and relatedcosts, such as payroll taxes, benefits and recruitment associated with theaddition of eight sales and marketing personnel since September 30, 2009.  We also increased participation and promotionat several trade shows, which resulted in an increase in such expenses ofapproximately $250,000 in the nine months ended September 30, 2010.  Included in sales and marketing expenses isshare-based compensation expense of $512,858 and $381,721 for the nine monthsended September 30, 2010 and 2009, respectively.  As a percentage of total revenues, sales andmarketing expenses decreased from 45% for the nine months ended September 30,2009 to 42% for the same period this year.

 

*Researchand Development*

 

Researchand development expenses were $5,747,623 for the nine months ended September30, 2010, compared to $4,059,132 for the same prior year period, an increase of$1,688,491 or 42%.  This increase wasprimarily attributable to an increase in payroll and related costs associatedwith hiring twelve additional engineers since September 30, 2009.  Included in research and development expensesis share-based compensation expense of $416,911 and $333,768 for the ninemonths ended September 30, 2010 and 2009, respectively.  As a percentage of total revenues, researchand development expenses increased from 23% for the nine months ended September30, 2009 to 24% for the same period this year.

* *

*Generaland Administrative*

 

G&Aexpenses were $4,797,755 for the nine months ended September 30, 2010, comparedto $4,217,046 for the same prior year period, an increase of $580,709 or 14%. Included in G&A expenses isshare-based compensation expense of $744,389 and $714,851 for the nine monthsended September 30, 2010 and 2009, respectively.  As a percentage of total revenues, G&A expensesdecreased from 23% for the ninemonths ended September 30, 2009 to 20%for the same period this year.

* *

*OtherIncome, Net*

 

Other income, net was$179,544 for the nine months ended September 30, 2010, compared to $279,543 forthe same prior year period, a decrease of $99,999 or 36%. This decrease wasprimarily attributable to lower interest rates on the Company’s investments inthe current period.

* *

*IncomeTaxes*

 

Income tax expense was $94,429and $39,163 for the nine months ended September 30, 2010 and 2009,respectively. The income tax provision consisted primarily of taxes paid onlicensing revenues in the current quarter that were sourced from countriesrequiring foreign tax withholdings, principally Korea.  We reduced our tax provision and ourvaluation allowance on our deferred tax assets by $2,194,711 and $1,540,021 forthe nine months ended September 30, 2010 and 2009, respectively, based on ourassessment of the future estimated realization of such assets.

 

**Liquidity and Capital Resources**

 

Our principal source of liquidity to fund ongoing operations atSeptember 30, 2010 consisted of cash, cash equivalents and short-andlong-term investments of $42,837,081.  AtSeptember 30, 2010, we had cash and cash equivalents of $16,385,081,short-term investments of $12,191,000 and long-term investments of$14,261,000.  Cash and cash equivalentsgenerally consist of cash and money market funds with original maturities ofthree months or less. The money market funds are primarily invested in U.S.government obligations.  Short-terminvestments consist of certificates of deposit and treasury bills with originalmaturities ranging from 6 to 12 months. Long-term investments consist of certificates of deposit with maturitiesranging from 18 to 24 months.  The cashand certificates of deposit are FDIC insured. The Company has not experienced any losses on its cash and cashequivalents or its short and long-term investments in the current period.

 

Netcash provided by operating activities was $1,457,357 and $1,383,713 for thenine months ended September 30, 2010 and 2009, respectively.  The increase in our cash flows from operatingactivities was primarily the result of net income of $3,437,511 during the ninemonths ended September 30, 2010, compared to net income of $1,662,564 duringthe nine months ended September 30, 2009. This was offset by changes in our operating assets and liabilitiesspecifically, an increase in our accounts receivable of $1,912,360 during thenine months ended September 30, 2010 compared to an increase of $742,204during the nine months ended September 30, 2009.  The increase in accounts receivable duringthe nine months ended September 30, 2010 was primarily due to timing ofpayments and increased revenues in the current quarter from new and existinglicensees, as well as the settlement payment due from Sony pursuant to theAgreement described in Note 4 of Notes to Unaudited Condensed ConsolidatedFinancial Statements.

 

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Netcash used in investing activities was $13,945,950and $6,418,771 during the nine months ended September 30, 2010 and2009, respectively.  The increase in cashused by investing activities during the nine months ended September 30, 2010was attributable primarily to the purchase of short and long-term investmentsin the current period.  The Companyexpects to continue to primarily invest in certificates of deposit withmaturities ranging from 6 to 24 months.

 

Webelieve our existing cash, cash equivalents, and short and long-term investmentbalances together with cash generated from operating activities, will besufficient to meet our anticipated cash needs for at least the next twelvemonths.  Our future capital requirementswill depend on many factors, including our level of revenues, the timing andextent of spending to support product development efforts, the impact of existingadverse economic conditions, the expansion of sales and marketing activities,the timing of introductions of new products, continuing market acceptance ofour products, and potential acquisitions of businesses or technologies.

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risk**

 

Exceptas follows, there have been no material changes to the information called forby this Item 3 from the disclosures set forth in Part II, Item 7A in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009. As of September 30, 2010, the Company had $24.5 million in short andlong-term investments held in certificates of deposit (“CDs”), all of which arefederally insured.  The CDs had statedinterest rates when purchased, and we plan to hold the CDs to maturity.  As of September 30, 2010, the Company has$16.4 million in cash and cash equivalents, primarily held in money marketfunds, which are invested in U.S. government obligations, such as U.S.treasuries and $2.0 million held in treasury bills.  We have not realized any losses on any of ourinvestments in the current or prior year periods. We believe that we havelimited our exposure to interest rate risk as a result of investing in onlyfederally insured CDs and U.S. government obligations.  Because of the conservative nature of theseinvestments, interest rate fluctuations and exposure to interest rate risk hasbeen minimal and immaterial.

 

**Item 4. Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures.***Our Chief Executive Officer and President and our Chief FinancialOfficer have evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15 (e) and 15d-15 (e) underthe Securities Exchange Act of 1934, as amended) as of the end of the periodcovered by this Quarterly Report on Form 10-Q and, based on thisevaluation, have concluded that our disclosure controls and procedures areeffective.

 

*Changes in Internal Controls.***There have beenno changes in our internal controls over financial reporting that occurredduring our third quarter ended September 30, 2010 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

**PART II****—****OTHER INFORMATION**

 

**Item 1.  LegalProceedings**

 

The information set forthunder Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements,included in Part I, Item 1 of this report, is incorporated herein byreference.  For an additional discussionof certain risks associated with legal proceedings, see Part II, Item 1A. “RiskFactors.”

 

**Item 1A. Risk Factors**

 

You should carefully consider the risk factorsdescribed below, as well as the other information included in this QuarterlyReport on Form 10-Q, and in our other filings with the SEC, prior tomaking a decision to invest in our securities. The risks and uncertaintiesdescribed below are not the only ones facing our company. Additional risks anduncertainties not presently known or that we currently believe to be lesssignificant may also adversely affect us.

 

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

 

Currently, we generate a majority of our revenue in the homeentertainment market, principally through the inclusion of SRS technologyinside flat panel LCD and plasma televisions. We expect that the consumer homeentertainment market will continue to account for a significant portion of ourlicensing revenues for the foreseeable future. Consumer spending on homeentertainment products is subject to significant fluctuations, and there issignificant price competition for such products. Retail prices for certainconsumer electronics products that include our audio technology have decreasedsignificantly, and we expect that this trend will continue for the foreseeablefuture. In addition, from time to time, certain of our OEM and semiconductormanufacturer customers may account for a significant portion of our revenues.For the nine months ended September 30, 2010 and 2009, Samsung accountedfor approximately 37% and 38%, respectively, of our consolidated revenues. Ourtechnology license agreements with Samsung and most of our other manufacturersdo not obligate them to incorporate our technologies into any of their productsor to continue to do business with us.  As a result, Samsung or the othermanufacturers could develop their own technologies, use a competitor’s 

 

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technologiesor decide to exclude our audio rendering technology from their productsaltogether in an effort to reduce cost, any of which could adversely impact ourrevenues and profitability.  For example,during 2007, we were informed by Sony that they were no longer using ourtechnology in the majority of their televisions.  The loss of any key customer in the futurecould have a material adverse affect on our financial condition and results ofoperations.

 

***General economic conditions mayreduce our revenues and harm our business.***

 

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

 

***Our business is highly dependent onthe consumer electronics market, which is characterized by short product lifecycles, fluctuations in demand, seasonality and declining retail prices and issubject to risks related to product transitions.***

 

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

 

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

 

We derive most of our revenue fromthe licensing of our technologies to consumer electronics product manufacturers.We do not manufacture consumer electronics products ourselves and our licensingrevenue is dependent on sales by our licensees of products that incorporate ourtechnologies. We cannot control these manufacturers’ product development orcommercialization efforts or predict their success. In addition, our licenseagreements, which typically require manufacturers of consumer electronicsproducts and media software vendors to pay us a specified royalty for everyelectronics product shipped that incorporates our technologies, do not requirethese manufacturers to include our technologies in any specific number orpercentage of units, and only a few of these agreements guarantee us a minimumaggregate licensing fee. Accordingly, if our licensees sell fewer productsincorporating our technologies, decline to actively market productsincorporating our technologies or otherwise face significant economicdifficulties, our revenue will decline. Changes in consumer tastes or trends,changes in industry standards or adverse changes in business and economicconditions may also adversely affect our licensing revenue.

 

***Pricing pressures on the consumerelectronics product manufacturers, who incorporate our technologies into theirproducts, could limit the licensing fees we charge for our technologies, whichcould reduce our revenues.***

 

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

 

***We may pursue acquisitions in the future,which could result in integration and assimilation challenges, be expensive anddilutive to existing stockholders, result in unanticipated accounting chargesand expenses, or otherwise adversely affect our results of operations.***

 

Wemay in the future pursue acquisitions of businesses, assets or technologies toenhance our technological capabilities, to complement our existing productofferings or to improve our market position. We may not be able to identify orconsummate future acquisitions or realize the desired benefit from theseacquisitions.  We face several challenges in the integration ofacquisitions that could disrupt our ongoing business and distract ourmanagement team, including the inability to successfully integrate the acquiredtechnologies, the management team of the acquired company or diverse corporatecultures.  Acquisitions may also require us to enter into a geographic marketor business segment in which we have little or no prior experience. Thesechallenges could disrupt our ongoing business, distract our management andemployees, harm our reputation or relationship with our customers and increaseour expenses. These challenges are magnified as the size of the acquisitionincreases. Acquisitions can also result in increased dilution to our existingstockholders or increased debt or contingent liabilities, adverse taxconsequences, additional stock-based compensation expense, and otherunanticipated costs and charges.  In addition, we may record goodwill andother purchased intangible assets in connection with an acquisition and mayincur impairment charges in the future.

 

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

 

The digital audio, consumer electronics and entertainment markets areintensely competitive, subject to rapid change, and significantly affected bynew product introductions and other market activities of industry participants

 

Certain of our current and potential competitors enjoy notablecompetitive advantages, including:

 

·                  greater name recognition;

 

·                  a longer operating history;

 

·                  more developed distributionchannels and deeper relationships with consumer electronics products designersand manufacturers;

 

·                  a more extensive customerbase;

 

·                  broader product and serviceofferings;

 

·                  greater resources forcompetitive activities, such as research and development, strategicacquisitions, alliances, joint ventures, sales and marketing, and lobbyingindustry and government standards; and

 

·                  more technicians andengineers.

 

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

 

***Inaccurate licensee royaltyreporting and unauthorized use of our intellectual property could materiallyadversely affect our operating results.***

 

Our licensing revenue is generatedprimarily from consumer electronics product manufacturers who license ourtechnologies and incorporate them in their products. Under a significantpercentage of our existing arrangements, these licensees typically pay us aspecified royalty for every product they ship that incorporates ourtechnologies. We rely on our licensees to accurately report the number of unitsshipped that incorporate our technologies. We calculate our license fees,prepare our financial reports, projections and budgets, and direct our salesand product development efforts based on these reports we receive from ourlicensees. However, it can be difficult for us to independently determinewhether or not our licensees are reporting shipments accurately. This isespecially true with respect to software incorporating our technologies becausesoftware can be copied relatively easily and we often do not have easy ways todetermine how many copies have been made. Most of our license agreements permitus to audit our licensees’ records, but audits are generally expensive and timeconsuming and initiating audits could harm our customer relationships. Weexpect that we will continue to be subject to understatement and non-reportingof royalty bearing revenues by licensees, which could adversely affect ouroperating results. Conversely, to the extent that our licensees overstate thenumber of products incorporating our technologies, negative corrections couldresult in reductions of royalty revenue in subsequent periods. Some of ourlicensees may begin to more closely scrutinize their past licensing statementswhich may result in an increased receipt of negative corrective statements.

 

We also may experience problemswith non-licensee consumer electronics product manufacturers and media softwarevendors, particularly in emerging economies, incorporating our technologies orincorporating our technologies and trademarks into their products without ourauthorization and without paying us any licensing fees. This unauthorized useof our intellectual property could adversely affect our operating results.

 

***Our business and future prospectsdepend upon the strength of our brand. Awareness of our brand depends to asignificant extent upon decisions by our customers to display our trademarks ontheir products, and if our customers do not display our trademarks on theirproducts, our ability to increase our brand awareness may be harmed.***

 

Because we engage in relativelylittle direct brand advertising, the promotion of our brand depends uponconsumer electronics industry participants displaying our trademarks on theirproducts that incorporate our technologies. Although we do generally require our customers to place our brand ontheir products, some are not required to do so. Maintaining the SRS brand andour position as an industry standard is critical to maintaining and expandingour licensing revenues and entering into new or broadening existing licensingrelationships.  If our customers choosefor any reason not to display our trademarks on their products, our ability tomaintain or increase our brand awareness may be harmed, which would have anadverse effect on our business and prospects. In addition, if we fail tomaintain high quality standards for our products, or the products thatincorporate our technologies through the quality control evaluation processthat we require of our licensees, the strength of our brand could be adverselyaffected.

 

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***Licenseeproducts that incorporate our technologies, from time to time, experiencequality problems that could damage our brand, decrease revenues and increaseoperating expenses.***

 

Licensee products that incorporateour technologies often are complex and sometimes contain undetected software orhardware errors, particularly when first introduced or when new versions arereleased. In addition, those products are often combined with, or incorporatedinto, products from other companies, sometimes making it difficult to identifythe source of a problem. Any negative publicity or negative impact relating tothese product problems (even if unrelated to our technologies) could adverselyaffect the perception of our brand. In addition, these errors could result inloss of, or delay in, market acceptance of those products or our technologies,or cause delays in delivering them and meeting customer demands, any of whichcould reduce our revenue and raise significant customer relations issues.Although we generally attempt to contractually limit our liability for ourlicensees’ 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 associatedwith substantial international operations.***

 

We conduct sales and customer support operations in a number ofcountries throughout the world that require refinement to adapt to the changingmarket conditions on a regional basis. In addition, many of our significantcustomers are headquartered in Asia, particularly Korea and Japan.Approximately 72%, 88% and 90% of our revenues during the years ended December31, 2009, 2008, and 2007, respectively, were derived from customers withheadquarters located in Asia. We expect to continue to derive a significantportion of our revenues from sales to customers in these regions for the foreseeablefuture. Also, a substantial number of products incorporating our technologiesare 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 theUnited States, any of which could have a material adverse impact on ourbusiness and results of operations, including:

 

·                  global economic downturn;

 

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

 

·      currencyfluctuations;

 

·                  difficulties and costs ofstaffing and managing foreign operations;

 

·                  unexpected changes in, orimpositions of, government requirements;

 

·                  adverse changes in tariffsand other protectionist laws and business practices that favor localcompetitors;

 

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

 

·                  the burdens of complyingwith a variety of non-U.S. laws and reduced protection of our intellectualproperty in some countries;

 

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

 

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

 

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

 

Historically, because of the complexity of our technologies, it cantake a significant amount of time and effort to explain the benefits of our technologiesto potential new customers and to negotiate a sale. For example, it typicallytakes six to nine months after our first contact with a prospective customerbefore we start licensing our technology to that customer and another six tonine months to begin generating revenues. In addition, purchases of ourproducts are usually made in connection with new design starts by ourcustomers, the timing of which is outside of our control. Accordingly, we maybe unable to predict accurately the timing of any significant future sales ofour products. We may also spend substantial time and management attention onpotential license agreements that are not consummated, or in which the consumerelectronic product ultimately does not sell in large quantities, therebyforegoing other higher revenue opportunities.

 

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***If our patents and otherintellectual property rights do not adequately protect our products, we maylose market share to our competitors and be unable to operate our businessprofitably.***

 

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

 

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

 

Our future success depends to a large extent upon the continued serviceof key personnel, including engineering, sales and administrative staff. Weanticipate that any future growth will require us to recruit and hire a numberof new personnel in engineering, operations, finance, sales and marketing.Competition for such personnel can be intense, and it is possible that we maynot be able to recruit and retain necessary personnel to operate our businessand support future growth.

 

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

 

The trading price of our common stock has been, and will likelycontinue to be, subject to wide fluctuations in response to quarterly variationsin our operating results, announcements of new products or technologicalinnovations by us or our competitors, strategic alliances between us and thirdparties, general market fluctuations and other events and factors. Changes inearnings estimates made by brokerage firms and industry analysts relating tothe markets in which we do business, or relating to us specifically, have inthe past resulted in, and could in the future result in, an immediate andadverse effect on the market price of the common stock. Even though our stockis listed on The NASDAQ Global Market, our stock has had and may continue tohave low trading volume and high volatility. The historically low tradingvolume 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 therelatively low trading volume of our stock, our stockholders may havedifficulty selling our common stock. In addition, the stock market in general,and The NASDAQ Global Market and the market for technology and small market capcompanies in particular, has experienced extreme price and volume fluctuationsthat have often been unrelated or disproportionate to the operating performanceof those companies. Further, the market prices of securities of technologycompanies have been particularly volatile. These broad market and industryfactors may materially harm the market price of our common stock, regardless ofour operating performance.

 

***Our certificate of incorporation andbylaws as well as Delaware law contain provisions that could discouragetransactions resulting in a change in control, which may negatively affect themarket price of our common stock.***

 

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

 

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**Item 6.  Exhibits**

 

Theexhibits listed below are hereby filed with the SEC as part of this report.

 
| **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), 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.                                                                                     |
| 31.1                |       | Certification  of Chief Executive Officer of SRS Labs, Inc., pursuant to  Rule 13a-14 of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 31.2                |       | Certification  of Chief Financial Officer of SRS Labs, Inc., pursuant to Rule 13a-14  of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 32.1                |       | Certification  of Chief Executive Officer of SRS Labs, Inc., pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                               |
| 32.2                |       | Certification  of Chief Financial Officer of SRS Labs, Inc., pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                               |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                               | SRS  LABS, INC., a Delaware corporation       |
|------------------------------------|----------------------------------------------------|
|                               |                                               |
| Date:  November  4, 2010 | By:                                                | /S/  THOMAS C.K. YUEN |
|                               | Thomas  C.K. Yuen                                  |
|                               | Chairman  of the Board and Chief Executive Officer |
|                               | (Principal  Executive Officer)                     |
| ** **                         | ** **                                         |
| ** **                         | ** **                                         |
| Date:  November  4, 2010 | By:                                                | /S/  ULRICH GOTTSCHLING |
|                               | Ulrich  Gottschling                                |
|                               | Chief  Financial Officer                           |
|                               | (Principal  Financial and Accounting Officer)      |

 

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**EXHIBIT INDEX**

 

Theexhibits listed below are hereby filed with the SEC as part of this Report.

 
| **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), 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.                                                                                     |
| 31.1                |       | Certification  of Chief Executive Officer of SRS Labs, Inc., pursuant to  Rule 13a-14 of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 31.2                |       | Certification  of Chief Financial Officer of SRS Labs, Inc., pursuant to  Rule 13a-14 of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 32.1                |       | Certification  of Chief Executive Officer of SRS Labs, Inc., pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                               |
| 32.2                |       | Certification  of Chief Financial Officer of SRS Labs, Inc., pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                               |

 

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