**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**
| **(Mark One)**                                    |
|---------------------------------------------------|
| **x**                                             | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                        | ** ** |
| **For the  quarterly period ended June 30, 2007** |
| ** **                                        | ** ** |
| **OR**                                            |
| ** **                                        | ** ** |
| **o**                                             | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period          to**

**CommissionFile Number 0-21123**

**SRS LABS, INC.**

(Exactname of registrant as specified in its charter)

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

 

**2909Daimler Street, Santa Ana, California 92705**

(Address of principalexecutive offices) (Zip Code)

**(949) 442-1070**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

Large acceleratedfiler  o                   Acceleratedfiler  o             Non-accelerated filer  x  

 

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

As of July 20, 2007,16,941,610 of the issuer’s common stock, par value $.001 per share, wereoutstanding; of this amount, 674,098 shares of the common stock were held as treasuryshares.

 

----

**SRS LABS, INC.**

**Quarterly Report on Form 10-Q**

**For the Three and Six Months Ended June 30, 2007**

**Index**
| **PART I-FINANCIAL INFORMATION** | ** ** | ** **                                                                                                                                   |
|----------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                          |       | Financial Statements                                                                                                                         |   |   |
|                             |       | Condensed Consolidated  Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006                                            |   |   |
|                             |       | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2007 and 2006 (Unaudited)                      |   |   |
|                             |       | Condensed  Consolidated Statements of Stockholders’ Equity and Comprehensive Income for  the six months ended June 30, 2007 (Unaudited) |   |   |
|                             |       | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2007  and 2006 (Unaudited)                                |   |   |
|                             |       | Notes to  the Condensed Consolidated Financial Statements (Unaudited)                                                                        |   |   |
| Item 2.                          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                  |   |   |
| Item 3.                          |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                  |   |   |
| Item 4.                          |       | Controls and  Procedures                                                                                                                     |   |   |
| **PART II-OTHER  INFORMATION**   | ** ** | ** **                                                                                                                                   |
| Item 4.                          |       | Submission  of Matters to a Vote of Security Holders                                                                                         |   |   |
| Item  6.                         |       | Exhibits                                                                                                                                     |   |   |
|                             |       |                                                                                                                                         |   |   |
| SIGNATURES                       |       |                                                                                                                                         |

 

2

----

**FORWARD-LOOKINGINFORMATION**

Asused herein, the “Company,” “SRS Labs,” “SRS,” “we,” “us,” or “our” means SRSLabs, Inc., its wholly-owned subsidiary SRSWOWcast.com, Inc. and, forthe applicable periods, its former subsidiary ValenceTech Limited (collectivelywith its direct and indirect wholly-owned subsidiaries, “Valence”) and theformer joint venture with Coming Home Studios LLC, CHS/SRS LLC.

Some of the statements inthis Quarterly Report on Form 10-Q contain forward-looking statementsregarding our assumptions, projections, expectations, targets, intentions orbeliefs about future events, which involve risks and uncertainties. Allstatements other than statements of historical facts included in this QuarterlyReport relating to expectation of future financial performance, continuedgrowth, changes in economic conditions or capital markets and changes incustomer usage patterns and preferences, are forward-looking statements. Insome cases, you can identify forward-looking statements by terms such as may,will, should, expect, plan, intend, forecast, anticipate, believe, estimate,predict, potential, continue or the negative of these terms or other comparableterminology. The forward-looking statements contained in this Quarterly Reportinvolve known and unknown risks, uncertainties and situations thatmay cause our or our industry’s actual results, level of activity,performance or achievements to be materially different from any future results,levels of activity, performance or achievements expressed or implied by thesestatements. Factors that might cause actual events or results to differmaterially from those indicated by these forward-looking statementsmay include the matters listed in our most recently filed Annual Report onForm 10-K and elsewhere in this Quarterly Report, including, but notlimited to, the loss of any one significant customer; the acceptance of new SRSLabs products and technologies; the import of competitive products and pricing;the timely development and release of technologies by the Company; generalbusiness and economic conditions, especially in Asia; product and customerconcentration in our business; our high dependence on the consumer electronicsmarket, which is characterized by short product life cycles, fluctuations indemand and seasonality; the risk of widespread illness; our dependence ongrowth in emerging markets; the length and unpredictable nature of our salescycle; our ability to protect our products through patents and otherintellectual property rights; our dependence on key personnel; the volatilityof the price of our common stock; provisions that could discourage transactionsresulting in a change in control contained in our certificate of incorporationand bylaws as well as Delaware law; competition we face from companies withgreater brand recognition and resources; pricing pressures on the consumerelectronics product manufacturers; adverse state, federal or foreignlegislation or regulation or adverse determinations by regulators; and otherfactors identified from time to time in our filings with the Securities andExchange Commission.

Any forward-lookingstatement speaks only as of the date on which such statement is made, and,except as required by law, we undertake no obligation to update anyforward-looking statement to reflect events or circumstances after the date onwhich such statement is made or to reflect the occurrence of unanticipatedevents. New factors emerge from time to time, and it is not possible formanagement to predict all such factors.

3

----

**PART I — FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**SRSLABS, INC. AND SUBSIDIARY****CONDENSEDCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                                              | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                              | ** ** | **(unaudited)**             | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                                                                              |       |                        |       |                            |       |
| **Current  Assets**                                                                                                                                                                                                     |       |                        |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                                               |       | $                           | 38,616,425 |                            | $          | 35,011,425 |   |
| Accounts receivable, net                                                                                                                                                                                                |       | 1,571,063                   |       | 1,180,879                       |       |
| Prepaid expenses and other current assets                                                                                                                                                                               |       | 576,033                     |       | 808,940                         |       |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| **Total Current Assets**                                                                                                                                                                                                |       | 40,763,521                  |       | 37,001,244                      |       |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| Investments available for sale                                                                                                                                                                                          |       | 5,230,170                   |       | 5,226,705                       |       |
| Property and equipment, net                                                                                                                                                                                             |       | 352,069                     |       | 389,667                         |       |
| Intangible assets, net                                                                                                                                                                                                  |       | 2,226,092                   |       | 2,045,139                       |       |
| Deferred income taxes, net                                                                                                                                                                                              |       | 958,327                     |       | 386,412                         |       |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| **Total Assets**                                                                                                                                                                                                        |       | $                           | 49,530,179 |                            | $          | 45,049,167 |   |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                           |       |                        |       |                            |       |
| **Current  Liabilities**                                                                                                                                                                                                |       |                        |       |                            |       |
| Accounts payable                                                                                                                                                                                                        |       | $                           | 371,613    |                            | $          | 609,899 |   |
| Accrued liabilities                                                                                                                                                                                                     |       | 936,102                     |       | 1,295,236                       |       |
| Deferred revenue                                                                                                                                                                                                        |       | 106,852                     |       | 399,565                         |       |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| **Total Current Liabilities**                                                                                                                                                                                           |       | 1,414,567                   |       | 2,304,700                       |       |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| **Commitments  and contingencies**(Note 6)                                                                                                                                                                              |       |                        |       |                            |       |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| **Stockholders’  Equity**                                                                                                                                                                                          |       |                        |       |                            |       |
| Preferred  stock—$.001 par value; 2,000,000 shares authorized; no shares issued or  outstanding                                                                                                                    |       | —                      |       | —                          |       |
| Common  stock—$.001 par value; 56,000,000 shares authorized; 16,941,610 and  16,561,036 shares issued; and 16,267,512 and 15,886,938 shares outstanding at  June 30, 2007 and December 31, 2006, respectively |       | 16,943                      |       | 16,562                          |       |
| Additional paid-in capital                                                                                                                                                                                              |       | 73,240,360                  |       | 70,574,176                      |       |
| Accumulated other comprehensive loss                                                                                                                                                                                    |       | (269,830                    | )          | (273,295                        | )          |
| Accumulated deficit                                                                                                                                                                                                     |       | (21,868,416                 | )          | (24,569,531                     | )          |
| Treasury stock at cost, 674,098 shares at June 30,  2007 and December 31, 2006                                                                                                                                     |       | (3,003,445                  | )          | (3,003,445                      | )          |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| **Total Stockholders’ Equity**                                                                                                                                                                                     |       | 48,115,612                  |       | 42,744,467                      |       |
|                                                                                                                                                                                                                    |       |                        |       |                            |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                                                                    |       | $                           | 49,530,179 |                            | $          | 45,049,167 |   |

 

See accompanying notes tothe condensed consolidated financial statements

4

----

**SRS LABS, INC. AND SUBSIDIARY****CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                       | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                         |       | $                                | 4,694,852  |                           | $          | 4,259,839 |   | $ | 9,767,255 |   | $ | 8,595,507 |   |
| Cost of sales                                                                    |       | 40,522                           |       | 35,293                         |       | 79,062 |   | 83,105 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Gross margin                                                                     |       | 4,654,330                        |       | 4,224,546                      |       | 9,688,193 |   | 8,512,402 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                                             |       |                             |       |                           |       |   |   |   |   |
| Sales and marketing                                                              |       | 1,767,717                        |       | 1,885,416                      |       | 3,644,010 |   | 3,750,785 |   |
| Research and development                                                         |       | 814,595                          |       | 631,739                        |       | 1,676,220 |   | 1,286,028 |   |
| General and administrative                                                       |       | 1,292,181                        |       | 1,357,789                      |       | 2,669,608 |   | 2,994,997 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Total operating expenses                                                         |       | 3,874,493                        |       | 3,874,944                      |       | 7,989,838 |   | 8,031,810 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Operating income                                                                 |       | 779,837                          |       | 349,602                        |       | 1,698,355 |   | 480,592 |   |
| Interest income                                                                  |       | 508,964                          |       | 224,005                        |       | 1,002,760 |   | 403,718 |   |
| Income from  continuing operations before income taxes                           |       | 1,288,801                        |       | 573,607                        |       | 2,701,115 |   | 884,310 |   |
| Income taxes                                                                     |       | —                           |       | 167,745                        |       | — |   | 327,168 |   |
| Income from  continuing operations                                               |       | 1,288,801                        |       | 405,862                        |       | 2,701,115 |   | 557,142 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Discontinued operations  (Note 7):                                               |       |                             |       |                           |       |   |   |   |   |
| Income from discontinued operations, net of income  taxes                        |       | —                           |       | 152,261                        |       | — |   | 163,556 |   |
| Gain on disposal                                                                 |       | —                           |       | 371,295                        |       | — |   | 371,295 |   |
| Income from  discontinued operations                                             |       | —                           |       | 523,556                        |       | — |   | 534,851 |   |
| Net income                                                                       |       | $                                | 1,288,801  |                           | $          | 929,418 |   | $ | 2,701,115 |   | $ | 1,091,993 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Income from  continuing operations per common share:                             |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                            |       | $                                | 0.08       |                           | $          | 0.03 |   | $ | 0.17 |   | $ | 0.04 |   |
| Diluted                                                                          |       | $                                | 0.08       |                           | $          | 0.02 |   | $ | 0.16 |   | $ | 0.03 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Income from  discontinued operations per common share:                           |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                            |       | $                                | 0.00       |                           | $          | 0.04 |   | $ | 0.00 |   | $ | 0.04 |   |
| Diluted                                                                          |       | $                                | 0.00       |                           | $          | 0.03 |   | $ | 0.00 |   | $ | 0.03 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Net income per  common share:                                                    |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                            |       | $                                | 0.08       |                           | $          | 0.06 |   | $ | 0.17 |   | $ | 0.08 |   |
| Diluted                                                                          |       | $                                | 0.08       |                           | $          | 0.06 |   | $ | 0.16 |   | $ | 0.07 |   |
|                                                                             |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares used in the calculation of net income per common share: |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                            |       | 16,202,909                       |       | 14,622,210                     |       | 16,106,312 |   | 14,523,459 |   |
| Diluted                                                                          |       | 16,652,184                       |       | 16,334,105                     |       | 16,448,156 |   | 16,206,277 |   |

 

See accompanying notes tothe condensed consolidated financial statements

5

----

**SRS LABS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (Unaudited)**
| ** **                                                     | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | ** ** | ** ** | **Comprehensive  Income  for the Period** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------------------|------------|-----------------|------------|--------------|------------|------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Loss**        | ** ** | **Deficit**  | ** ** | **Stock**  | ** ** | **Total**                                           | ** ** | **Ended** | ** ** |
| BALANCE,  December 31, 2006                               |       | 15,886,938            |       | $                       | 16,562     |                                  | $          | 70,574,176      |       | $            | (273,295   | )          | $          | (24,569,531                                         | )          | $ | (3,003,445 | ) | $ | 42,744,467 |   |   |   |
| Proceeds from  exercise of stock options                       |       | 380,574               |       | 381                     |       | 1,815,174                             |       | —          |       | —       |       | —     |       | 1,815,555                                           |       |   |   |
| Stock based  compensation                                      |       | —                |       | —                  |       | 851,010                               |       | —          |       | —       |       | —     |       | 851,010                                             |       |   |   |
| Unrealized gain  on investments available for sale, net of tax |       | —                |       | —                  |       | —                                |       | 3,465           |       | —       |       | —     |       | 3,465                                               |       | 3,465 |   |
| Net income                                                     |       | —                |       | —                  |       | —                                |       | —          |       | 2,701,115    |       | —     |       | 2,701,115                                           |       | 2,701,115 |   |
|                                                           |       |                  |       |                    |       |                                  |       |            |       |         |       |       |       |                                                |       |   |   |
| BALANCE,  June 30, 2007                                        |       | 16,267,512            |       | $                       | 16,943     |                                  | $          | 73,240,360      |       | $            | (269,830   | )          | $          | (21,868,416                                         | )          | $ | (3,003,445 | ) | $ | 48,115,612 |   | $ | 2,704,580 |   |
|                                                                |            |                       |            |                         |            |                                       |            |                 |            |              |            |            |            |                                                     |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to the condensed consolidatedfinancial statements

6

----

**SRS LABS, INC. AND SUBSIDIARY****CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Cash Flows from Operating  Activities:**                                                                 |       |                                          |       |   |   |
| Net income                                                                                                 |       | $                                             | 2,701,115  |   | $ | 1,091,993 |   |
| Adjustments to  reconcile income from continuing operations to net cash provided by operating  activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                                             |       | 371,319                                       |       | 355,866 |   |
| Provision for  doubtful accounts                                                                           |       | 68,234                                        |       | (7,532 | ) |
| Deferred taxes                                                                                             |       | (571,915                                      | )          | (6,026 | ) |
| Accretion of  discount on investments available for sale                                                   |       | —                                        |       | (1,059 | ) |
| Stock-based  compensation expense                                                                          |       | 851,010                                       |       | 687,400 |   |
| Loss on  disposition of property and equipment                                                             |       | —                                        |       | 1,582 |   |
| Changes in  operating assets and liabilities:                                                              |       |                                          |       |   |   |
| Accounts  receivable                                                                                       |       | (458,418                                      | )          | 440,715 |   |
| Prepaid expenses  and other current assets                                                                 |       | 232,907                                       |       | 91,171 |   |
| Accounts payable                                                                                           |       | (238,286                                      | )          | 157,094 |   |
| Accrued  liabilities                                                                                       |       | (359,134                                      | )          | 51,058 |   |
| Deferred revenue                                                                                           |       | (292,713                                      | )          | (427,382 | ) |
| Net cash used in  operating activities of discontinued operations                                          |       | —                                        |       | (663,149 | ) |
| Net cash  provided by operating activities                                                                 |       | 2,304,119                                     |       | 1,771,731 |   |
|                                                                                                       |       |                                          |       |   |   |
| **Cash Flows from Investing  Activities:**                                                                 |       |                                          |       |   |   |
| Purchase of property  and equipment                                                                        |       | (70,225                                       | )          | (183,330 | ) |
| Expenditures related to  intangible assets                                                                 |       | (444,449                                      | )          | (327,806 | ) |
| Net cash used in  investing activities of discontinued operations                                          |       | —                                        |       | (159,913 | ) |
| Net cash used in  investing activities                                                                     |       | (514,674                                      | )          | (671,049 | ) |
|                                                                                                       |       |                                          |       |   |   |
| **Cash Flows from Financing  Activities:**                                                                 |       |                                          |       |   |   |
| Proceeds from exercise  of stock options                                                                   |       | 1,815,555                                     |       | 2,218,930 |   |
| Net cash  provided by financing activities                                                                 |       | 1,815,555                                     |       | 2,218,930 |   |
| ** **                                                                                                 |       |                                          |       |   |   |
| **Net Increase in Cash and Cash  Equivalents**                                                             |       | 3,605,000                                     |       | 3,319,612 |   |
| **Cash and Cash Equivalents,  Beginning of Period**                                                        |       | 35,011,425                                    |       | 8,752,339 |   |
| **Cash and Cash Equivalents, End  of Period**                                                              |       | $                                             | 38,616,425 |   | $ | 12,071,951 |   |
|                                                                                                       |       |                                          |       |   |   |
| **Supplemental Disclosure of Cash  Flow Information:**                                                     |       |                                          |       |   |   |
| Cash paid during  the period for:                                                                          |       |                                          |       |   |   |
| Income taxes                                                                                               |       | $                                             | 571,915    |   | $ | 311,102 |   |
| **Supplemental Disclosure of  Non-Cash Investing Activities:**                                             |       |                                          |       |   |   |
| Unrealized gain (loss)  on investments, net                                                                |       | $                                             | 3,465      |   | $ | (10,025 | ) |

 

See accompanying notes tothe condensed consolidated financial statements

7

----

**SRSLABS, INC. AND SUBSIDIARY****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 SRSLabs, Inc., its wholly-owned subsidiary SRSWOWcast.com, Inc. and, forthe applicable periods, its former subsidiary ValenceTech Limited (collectivelywith its direct and indirect wholly-owned subsidiaries, “Valence”) and theformer joint venture with Coming Home Studios LLC, CHS/SRS LLC.  The accompanying unaudited condensedconsolidated financial statements have been prepared by the Company inconformity with accounting principles generally accepted in the United Statesof America (“generally accepted accounting principles”) for interim financialinformation and the rules and regulations of the U.S. Securities and ExchangeCommission (“SEC”) for interim reporting. In the opinion of management, alladjustments (which include only normal recurring adjustments) considerednecessary for a fair presentation of our financial position and results ofoperations have been included. Certain amounts included in the accompanying priorperiods’ consolidated financial statements have been reclassified to conform tothe current period presentation. All inter-company accounts and transactionshave been eliminated.

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to SEC rules and regulations for presentation ofinterim financial information. Therefore, the condensed interim consolidatedfinancial statements should be read in conjunction with the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006. Current andfuture financial statements may not be directly comparable to the Company’shistorical financial statements. The results of operations for the interimperiod are not necessarily indicative of the results to be expected for anyother interim period or for the full year.

OnFebruary 23, 2006, the Board of Directors of the Company (the “Board ofDirectors” or the “Board”) approved a plan to sell Valence in order to focusincreased management attention and financial resources on its licensingbusiness.  Additionally, onFebruary 23, 2006, the Board authorized management to take all reasonablesteps to divest the Company’s entire equity interest in the CHS/SRS LLC jointventure (the “Joint Venture”).  As aresult of the Company’s decisions to sell Valence and its entire equityinterest in CHS/SRS LLC, the Company has accounted for Valence and CHS/SRS LLCas discontinued operations in the accompanying condensed consolidated financialstatements beginning in the first fiscal quarter of 2006.  The Company sold Valence in September 2006and its entire equity interest in CHS/SRS LLC in June 2006.   See Note 7.

**Estimates**

Thepreparation of financial statements in accordance with generally acceptedaccounting principles requires management to make use of certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported periods. We base our estimates on historical experience and on variousother assumptions that we believe are reasonable under the circumstances, theresults of which form the basis for making judgments about carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults could differ materially from those estimates. See the audited consolidatedfinancial statements and notes thereto included in our Annual Report on Form10-K for the year ended December 31, 2006 for an additional discussion ofthe significant accounting policies and estimates used in the preparation ofour financial statements.

**Cash and Cash Equivalents**

Cash and cash equivalents are short-term, highlyliquid investments that are readily convertible to known amounts of cash andare so near maturity that they present insignificant risk of changes in valuebecause of interest rates.  Cash and cashequivalents generally consist of cash, money market funds and instruments withoriginal maturities of three months or less. Also included in cash equivalentsare debt instruments, which the Company expects to hold three months or less.

8

----

**CustomerConcentrations**

For the three months endedJune 30, 2007, two customers, Samsung and Sony, accounted for approximately 25%and 12%, of the licensing revenue.  Forthe same period in the prior year, Samsung and Sony accounted for approximately12% and 13% of the licensing revenue. For the six months ended June 30, 2007, Samsung and Sony accounted forapproximately 24% and 12% of the licensing revenue.  For the same period in the prior year,Samsung and Sony accounted for approximately 15% and 14% of the licensingrevenue.  Included in the three and sixmonths ended June 30, 2007, is revenue of $100,540 from Sony related to priorperiod royalties.  During April 2007, wewere informed by Sony it has begun to sell televisions with their owninternally created audio enhancement technology.  It is anticipated that this will negativelyimpact our revenues beginning in the third quarter 2007.

**2.**                                      **Stock-Based Compensation**

Weaccount for stock-based compensation under the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), *Share-BasedPayment* (“SFAS 123R”). SFAS 123R requires measurement of allemployee stock-based awards using a fair-value method and recording of relatedcompensation expense in the consolidated financial statements over therequisite service period. Further, as required under SFAS 123R, we estimateforfeitures for share based awards that are not expected to vest.  For the three months ended June 30, 2007, werecorded stock-based compensation expense of $424,168 under the fair-valueprovisions of SFAS 123R, compared to $344,020 in the same period in the prioryear.  For the six months ended June 30,2007, we recorded stock-based compensation expense of $851,010 under thefair-value provisions of SFAS 123R, compared to $687,400 for the same period inthe prior year.

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

Thefair value of each share-based award is estimated on the grant date using theBlack-Scholes-Merton (“BSM”) option-pricing formula and straight-lineamortization of compensation expense over the requisite service period of thegrant. Expected volatilities are based on the historical volatility of theCompany’s stock price. The risk-free rate for periods within the contractuallife of the option is based on the U.S. Treasury interest rates in effect atthe time of grant. The fair value of options granted was estimated using thefollowing weighted-average assumptions:
| ** **                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected term  (in years) |       | 6.25                             |       | 6.25                           |       | 6.25 |   | 6.25 |   |
| Expected  volatility      |       | 56                               | %          | 56                             | %          | 56 | % | 57 | % |
| Risk-free  interest rate  |       | 4.8                              | %          | 5.0                            | %          | 4.8 | % | 4.9 | % |
| Dividend yield            |       | 0.00                             | %          | 0.00                           | %          | 0.00 | % | 0.00 | % |

 

Totalcompensation cost recognized are as follows:
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                     | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Continuing  Operations:                                        |       |                             |       |                           |       |   |   |   |   |
| Sales and marketing                                            |       | $                                | 128,693    |                           | $          | 136,459 |   | $ | 270,493 |   | $ | 298,512 |   |
| Research and development                                       |       | 114,461                          |       | 75,174                         |       | 216,186 |   | 202,161 |   |
| General and administrative                                     |       | 181,014                          |       | 132,387                        |       | 364,331 |   | 186,727 |   |
| Total  compensation cost recognized in continuing operations   |       | 424,168                          |       | 344,020                        |       | 851,010 |   | 687,400 |   |
|                                                           |       |                             |       |                           |       |   |   |   |   |
| Total  compensation cost recognized in discontinued operations |       | —                           |       | 44,785                         |       | — |   | 101,143 |   |
| Total compensation cost  recognized                            |       | $                                | 424,168    |                           | $          | 388,805 |   | $ | 851,010 |   | $ | 788,543 |   |

 

9

----

**3.****                                     ****Intangible Assets**

Intangibleassets consist of the following:
| ** **                                                  | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Patents                                                     |       | $                       | 3,095,348  |                        | $          | 2,715,250 |   |
| Accumulated  amortization                                   |       | (1,466,344              | )          | (1,326,836                  | )          |
| Patents, net                                                |       | 1,629,004               |       | 1,388,414                   |       |
| Other  intangibles:                                         |       |                    |       |                        |       |
| License agreements acquired in purchase of  SRSWOWcast      |       | 640,071                 |       | 640,071                     |       |
| Poly Planar purchased technology for speaker  products      |       | 120,000                 |       | 120,000                     |       |
| Capitalized software and hardware for several  technologies |       | 723,292                 |       | 658,942                     |       |
| Total of other intangibles                                  |       | 1,483,363               |       | 1,419,013                   |       |
| Accumulated  amortization, other intangibles                |       | (886,275                | )          | (762,288                    | )          |
| Other  intangibles, net                                     |       | 597,088                 |       | 656,725                     |       |
| Intangible assets, net                                      |       | $                       | 2,226,092  |                        | $          | 2,045,139 |   |

 

Amortizationperiods range from three to ten years depending on the estimated useful life ofthe asset. Amortization expense consists of the following:
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30** | ** ** |     |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------|------------|----------|
| ** **                                             | ** ** | **2007**                                        | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |   |
| Patents                                                |       | $                                               | 72,597     |                                         | $          | 60,411   |   | $ | 139,508 |   | $ | 118,079 |   |
| Other  intangibles:                                    |       |                                            |       |                                         |       |     |   |   |   |
| License agreements acquired in purchase of  SRSWOWcast |       | 16,002                                          |       | 16,002                                       |       | 32,004   |   | 32,003 |   |
| Capitalized software and hardware                      |       | 44,282                                          |       | 44,518                                       |       | 91,983   |   | 85,208 |   |
| Total intangible  amortization expense                 |       | $                                               | 132,881    |                                         | $          | 120,931  |   | $ | 263,495 |   | $ | 235,290 |   |

 

As of June 30, 2007, the weighted average useful lifeof the Company’s patents and intangible assets is approximately 6.6 years.The following table shows the estimated amortization expense for those assetsfor the remaining six months of the current fiscal year and each of the foursucceeding fiscal years and thereafter:
| Years Ending December 31, | ** ** | **Estimated Expense** | ** ** |
|------------------------------------------|------------|----------------------------|------------|
| 2007                                     |       | $                          | 253,685    |   |
| 2008                                     |       | 390,418                    |       |
| 2009                                     |       | 292,199                    |       |
| 2010                                     |       | 267,702                    |       |
| 2011                                     |       | 258,298                    |       |
| Thereafter                               |       | 763,790                    |       |
| Total                                    |       | $                          | 2,226,092  |   |

 

**4.**                                      **Investments Available forSale**

The Company has classifiedits investments as available for sale in accordance with SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.The following table summarizes the Company’s short-term investments andinvestment securities available for sale:
| ** **           | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Cost                 |       | $                           | 5,500,000  |                            | $          | 5,500,000 |   |
| Unrealized loss      |       | (269,830                    | )          | (273,295                        | )          |
| Estimated fair value |       | $                           | 5,230,170  |                            | $          | 5,226,705 |   |

 

Thecontractual maturities of investments are shown below. Actual maturities maydiffer from contractual maturities.
|                                                 | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Cost**                    | ** ** | **Estimated  Fair Value**  | ** ** | **Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. Government  securities available for sale: |       |                        |       |                            |       |   |   |   |   |
| Due in one year or less                         |       | $                           | —     |                            | $          | — |   | $ | — |   | $ | — |   |
| Due in one to five years                        |       | 5,500,000                   |       | 5,230,170                       |       | 5,500,000 |   | 5,226,705 |   |
|                                            |       | $                           | 5,500,000  |                            | $          | 5,230,170 |   | $ | 5,500,000 |   | $ | 5,226,705 |   |

 

10

----

**5.**                                      **Net Income Per Common Share**

The Company applies SFASNo. 128, *Earnings per Share* (“SFAS 128”),which requires the disclosure of basic and diluted net income per share for allcurrent and prior periods. Basic net income per common share is computed bydividing net income available to common stockholders by the weighted averagenumber of common shares outstanding during each year. Diluted net income percommon share reflects the maximum dilution, based on the average price of theCompany’s common stock during each period, and is computed similar to basicincome per share except that the denominator is increased to include the numberof additional shares that would have been outstanding if potentially dilutivestock options had been exercised and were dilutive.

Basicand diluted net income per share computed in accordance with SFAS 128 forthe three and six months ended June 30, are as follows:
| ** **                                                  | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                  | ** ** | **2007**                                | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| BASIC EPS                                                   |       |                                    |       |                                  |       |   |   |   |   |
| Income from continuing operations                           |       | $                                       | 1,288,801  |                                  | $          | 405,862 |   | $ | 2,701,115 |   | $ | 557,142 |   |
| Income from discontinued operations                         |       | —                                  |       | 523,556                               |       | — |   | 534,851 |   |
| Net income                                                  |       | $                                       | 1,288,801  |                                  | $          | 929,418 |   | $ | 2,701,115 |   | $ | 1,091,993 |   |
| Denominator: weighted average common shares  outstanding    |       | 16,202,909                              |       | 14,662,210                            |       | 16,106,312 |   | 14,523,459 |   |
| Income per share  from continuing operations—basic     |       | $                                       | 0.08       |                                  | $          | 0.03 |   | $ | 0.17 |   | $ | 0.04 |   |
| Income per share  from discontinued operations—basic   |       | $                                       | 0.00       |                                  | $          | 0.04 |   | $ | 0.00 |   | $ | 0.04 |   |
| Net income per  share—basic                            |       | $                                       | 0.08       |                                  | $          | 0.06 |   | $ | 0.17 |   | $ | 0.08 |   |
|                                                        |       |                                    |       |                                  |       |   |   |   |   |
| DILUTED EPS                                                 |       |                                    |       |                                  |       |   |   |   |   |
| Income from continuing operations                           |       | $                                       | 1,288,801  |                                  | $          | 405,862 |   | $ | 2,701,115 |   | $ | 557,142 |   |
| Income from discontinued operations                         |       | —                                  |       | 523,556                               |       | — |   | 534,851 |   |
| Net income                                                  |       | $                                       | 1,288,801  |                                  | $          | 929,418 |   | $ | 2,701,115 |   | $ | 1,091,993 |   |
| Denominator: weighted average common shares  outstanding    |       | 16,202,909                              |       | 14,662,210                            |       | 16,106,312 |   | 14,523,459 |   |
| Common equivalent shares outstanding:                       |       |                                    |       |                                  |       |   |   |   |   |
| Options                                                     |       | 449,275                                 |       | 1,711,895                             |       | 341,844 |   | 1,682,818 |   |
| Total diluted shares                                        |       | 16,652,184                              |       | 16,334,105                            |       | 16,448,156 |   | 16,206,277 |   |
| Income per share  from continuing operations—diluted   |       | $                                       | 0.08       |                                  | $          | 0.02 |   | $ | 0.16 |   | $ | 0.03 |   |
| Income per share  from discontinued operations—diluted |       | $                                       | 0.00       |                                  | $          | 0.03 |   | $ | 0.00 |   | $ | 0.03 |   |
| Net income per  share—diluted                          |       | $                                       | 0.08       |                                  | $          | 0.06 |   | $ | 0.16 |   | $ | 0.07 |   |

 

There were outstandingoptions to purchase an aggregate of 530,670 and 1,614,619 shares of the Company’scommon stock for the three and six months ended June 30, 2007 and 2006,respectively, that were not included in the table above because they would beanti-dilutive.

**6.**                                      **Commitments andContingencies**

The Company is subject tolegal proceedings and claims that arise in the normal course of business. Whilethe outcome of these proceedings and claims cannot be presently predicted,management does not believe that the outcome of any of these matters will havea material adverse effect on the Company’s consolidated financial position orresults of operations.  The Companyconducts royalty audits as part of its intellectual property monitoringpolicy.  The Company has a royalty auditthat is currently open with one of its customers.  The outcome of the royalty audit cannot bepredicted with certainty at this time.

11

----

**7.**                                      **Discontinued Operations**

On February 23, 2006, the Board approved a planto sell Valence in order to focus increased management attention and financialresources on its licensing business.  OnJuly 14, 2006, we entered into a definitive Sale and Purchase Agreement tosell Valence to Noblehigh Enterprises Inc. (“Noblehigh”). Noblehigh is owned byWillas Array Electronics (Holding) Limited as well as certain members ofmanagement of Valence.  The saletransaction was completed on September 29, 2006.

The sale to Noblehigh was effected through twosimultaneous transactions: (1) the repurchase by Valence of approximately74% of the outstanding shares of Valence from SRS using its existing cash and(2) the purchase by Noblehigh of the remaining outstanding shares ofValence from SRS for $4.3 million. The sale resulted in a gain on the disposalof discontinued operations of $237,625.

Additionally, on February 23, 2006, the Boardauthorized management to take all reasonable steps to divest the Company’sentire equity interest in the Joint Venture. On June 30, 2006, we completed the sale of our interest in theJoint Venture to Coming Home Studios LLC in exchange for $200,000, the rights toall cash assets of the Joint Venture, and a promissory note in the amount of$175,000.  The sale of our interest inthe Joint Venture resulted in a gain on the sale of $387,021. As of June 30,2007, the outstanding principal balance due on the note is $159,724 plusaccrued interest.   Any amounts relatedto the promissory note and accrued interest thereon will be recorded at thetime the cash is received by us.

As a result of our decision to sell Valence and ourentire equity interest in the Joint Venture in February 2006, we accounted forValence and the Joint Venture as discontinued operations beginning in the firstfiscal quarter of 2006.

Income from discontinuedoperations for the three and six months ended June 30, 2006 consisted of directrevenues and direct expenses of Valence and CHS/SRS LLC. General corporateoverhead costs have not been allocated to discontinued operations.  A summary of the operating results of Valenceand the Joint Venture included in discontinued operations in the accompanyingcondensed consolidated statements of operations is as follows:
|                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| **Valence:**                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| Revenues.                                      | ** ** | $                                | 2,228,826  |                           | $          | 4,370,534 |   |
| Cost of sales                                  |       | 1,001,262                        |       | 2,069,746                      |       |
| Gross margin                                   |       | 1,227,564                        |       | 2,300,788                      |       |
| Total operating expenses                       |       | 1,081,015                        |       | 2,210,163                      |       |
| Income from  operations                        |       | 146,549                          |       | 90,625                         |       |
| Other income,  net                             |       | 3,678                            |       | 7,863                          |       |
| Income before  income tax (benefit) expense    |       | 150,227                          |       | 98,488                         |       |
| Income tax  (benefit) expense                  |       | (385                             | )          | 30,696                         |       |
| **Net  income from Valence**                   |       | 150,612                          |       | 67,792                         |       |
| **Net  income from CHS/SRS LLC**               |       | 1,649                            |       | 95,764                         |       |
| **Gain on  sale of CHS/SRS LLC**               |       | 371,295                          |       | 371,295                        |       |
| **Total income from discontinued  operations** |       | $                                | 523,556    |                           | $          | 534,851 |   |

 

**8.****                                     ****Segment Information**

The Company previouslyoperated in two business segments — semiconductors and licensing.  However, as a result of the Board’s decisionon February 23, 2006 to sell Valence, the semiconductor business, theCompany now has continuing operations in only one business segment, licensing.  Our revenue from continuing operations issolely derived from licensing related revenue.

12

----

The followingschedule presents the Company’s revenue from continuing operations bygeographic area. Licensing-related revenue is allocated based on the locationof the licensee’s corporate headquarters. The Americas region includes North,Central and South Americas.
| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                        | ** ** | **%**                                         | ** ** | **2006** | ** ** | **%** | ** ** | **2007** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** |
| **Geographic  Area Revenue:** | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Japan                         |       | $                                               | 1,974,305  |                                          | 42         |   | $ | 1,883,315 |   | 44 |   | $ | 4,338,814 |   | 44 |   | $ | 3,911,095 |   | 45 |   |
| Korea                         |       | 1,770,091                                       |       | 38                                            |       | 1,208,108 |   | 28 |   | 3,558,011 |   | 37 |   | 2,384,609 |   | 28 |   |
| Americas                      |       | 494,595                                         |       | 11                                            |       | 336,081 |   | 8 |   | 996,480 |   | 10 |   | 806,520 |   | 9 |   |
| China                         |       | 442,884                                         |       | 9                                             |       | 806,806 |   | 19 |   | 850,328 |   | 9 |   | 1,425,828 |   | 17 |   |
| Europe                        |       | 12,977                                          |       | —                                        |       | 25,529 |   | 1 |   | 23,622 |   | — |   | 67,455 |   | 1 |   |
| Total                         |       | $                                               | 4,694,852  |                                          | 100        |   | $ | 4,259,839 |   | 100 |   | $ | 9,767,255 |   | 100 |   | $ | 8,595,507 |   | 100 |   |

 

**9.**                                      **Recent AccountingPronouncements**

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes*. FIN 48 is aninterpretation of FASB Statement No. 109, *Accountingfor Income Taxes*, and it seeks to reduce the diversity in practiceassociated with certain aspects of measurement and recognition in accountingfor income taxes. FIN 48 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition that an entity takes or expects to take in a tax return. Additionally,FIN 48 provides guidance on de-recognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition.  Under FIN 48, an entity may only recognize orcontinue to recognize tax positions that meet a “more likely than not”threshold. We adopted FIN 48 on January 1, 2007.  As a result of adoption of FIN 48, werecognized no liability for unrecognized income tax benefits. Additionally, werecognized no interest and penalties related to uncertain tax positions and asof the three and six months ended June 30, 2007, we have no accrued interestrelated to uncertain tax positions. The tax years 2003-2006 remain open toexamination by the major taxing jurisdictions.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *FairValue Measurements*(“SFAS No. 157”). The purpose of SFASNo. 157 is to define fair value, establish a framework for measuring fairvalue and enhance disclosures about fair value measurements. The measurementand disclosure requirements are effective for periods beginning afterNovember 15, 2007. We do not expect the adoption of SFAS No. 157 willhave a material effect on our consolidated financial position or results ofoperations.

In February 2007, the FASB issued Statement No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*(“SFAS159”).  SFAS 159 permits entities tochoose to measure financial assets and liabilities (except for those that arespecifically scoped out of the Statement) at fair value. The election tomeasure a financial asset or liability at fair value can be made on aninstrument-by-instrument basis and is irrevocable. The difference betweencarrying value and fair value at the election date is recorded as a transitionadjustment to opening retained earnings. Subsequent changes in fair value arerecognized in earnings. The effective date for this Statement is as of thebeginning of an entity’s first fiscal year that begins after November 15, 2007.The Company will adopt SFAS 159, effective January 1, 2008. The Company doesnot expect the adoption of SFAS 159 to have a material impact on ourconsolidated financial position or consolidated results of operations.

13

----

**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

This information should beread in conjunction with the audited consolidated financial statements andnotes thereto and Management’s Discussion and Analysis of Financial Conditionand Results of Operations contained in the Company’s Annual Report onForm 10-K for the year ended December 31, 2006, and the unauditedcondensed interim consolidated financial statements and notes thereto includedin this Quarterly Report.

**Overview**

SRS Labs is a leading developer and provider of audioand voice technology solutions for the home entertainment, portable mediadevice, personal telecommunications, personal computer, automotive, andbroadcast markets. Prior to September 29, 2006, the Company was also adeveloper and provider of application specific integrated circuits and standardintegrated circuits through its formerly wholly-owned subsidiary, Valence TechLimited.

***Licensing******  ***

Our operations are conducted through SRSLabs, Inc., the parent company, and its wholly-owned subsidiary,SRSWOWcast.com, Inc. Our business is focused on developing and licensingaudio, voice and surround sound technology solutions to many of the world’sleading original equipment manufacturers, or OEMs, software providers andsemiconductor companies, and licensing and marketing hardware and softwareproducts for the Internet and professional audio markets.

A focus of the Company at this time is protection ofSRS’s patents and enforcement of its royalty program. We believe that theproactive enforcement and administration of these programs will help us toidentify improper or unauthorized usage of our intellectual properties, as wellas to ensure the accurate and timely royalty reporting by our licensees.   While there could be a short-term negativeimpact in terms of increased expenses or decreased revenue, we believe thatthis strategy will have positive long-term results and will lead to evenstronger relationships with our customers.

***Discontinued Operations***

*Valence:*   Through SRS Labs, Inc.’s formerlywholly-owned subsidiary, ValenceTech Limited, we operated a fablesssemiconductor business which developed, designed and marketed standard andcustom analog integrated circuits, digital signal processors, and mixed signalintegrated circuits primarily to OEMs and original design manufacturers, in theAsia Pacific region.

On February 23, 2006, our Board approved a planto sell Valence in order to focus management’s attention and financialresources on our licensing business. On July 14, 2006, we entered into adefinitive Sale and Purchase Agreement to sell Valence to Noblehigh EnterprisesInc. Noblehigh is owned by Willas Array Electronics (Holding) Limited as wellas certain members of management of Valence. The sale transaction was completed on September 29, 2006 andaccordingly the results of the operations of Valence are included asdiscontinued operations in the accompanying condensed consolidated statement ofoperations beginning in the first quarter of 2006.

*CHS/SRS LLC:**  *InSeptember 2004, we entered into a strategic alliance with Coming HomeStudios LLC, or CHS,  to use and promoteSRS Labs’ technologies, to promote CHS productions and to promote each company’srespective brands. In connection with the strategic alliance, SRS and CHSestablished a Joint Venture, CHS/SRS LLC, to produce and distribute nineconcert videos featuring our Circle Surround technology. On February 23,2006, our Board authorized management to take all reasonable steps to divestour entire equity interest in the Joint Venture. On June 30, 2006, wecompleted the sale of our interest in the Joint Venture to CHS.   Accordingly the results of operations ofCHS/SRS LLC are included as discontinued operations in the accompanyingcondensed consolidated statement of operations beginning in the first quarterof 2006.

#### **Critical Accounting Policies**

Our discussion and analysis of our results of operations andliquidity and capital resources are based on our consolidated financialstatements which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.

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

14

----

**Resultsof Continuing Operations**

**Three Months Ended June 30, 2007Compared to Three Months Ended June 30, 2006**

*Revenues*

Licensing revenues consistprimarily of royalties generated from the license of SRS Labs’ audio and voicetechnologies.  License and royaltyagreements generally provide for the license of technologies for a fee based onthe number of units distributed by the licensee.  However, we have in the past and may again inthe future, enter into a license agreement for a one-time fee or an annual fixedfee amount. Also included in licensing revenue are revenues generated from thesale of hardware and software applications into the personal computer (“PC”)and broadcast audio markets.

Licensing revenues were$4,694,852 for the three months ended June 30, 2007, compared to $4,259,839 forthe three months ended June 30, 2006, an increase of $435,013, or 10%.  The increase in licensing revenues wasprimarily attributable to our strong sales in flat panel televisions andmonitors in the Home Entertainment market, which grew by $1,046,225, or60%.  As noted earlier in this report, wehave been informed by Sony, one of our largest licensees, that it has begun todistribute televisions that include internally developed audio technology,rather than technology licensed from us. It is anticipated that this willnegatively impact our revenues beginning in the third quarter of 2007.  Additionally, we experienced an increase inroyalties from our PC market segment of $36,213, or 8%, due to increases insoftware downloads.  During April 2007,we were informed that one of our licensees has elected to eliminate ourtechnology from its personal computers during 2007.  There was no material impact of this event onrevenues for the three months ended June 30, 2007.  However, we expect revenues from thiscustomer to decrease in future periods. Such customer accounted for $235,145 of revenues during the three monthsended June 30, 2007.  Revenues in ourPortable Media Devices decreased $397,370, or 50%, for the three months endedJune 30, 2007, compared to the same period in the prior year, primarily due tothe loss of one customer in the third quarter of 2006. The followingtable presents our licensing revenues mix by market:
|                                                           | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Home  Entertainment (TV, Set Top Box, A/V Receiver, DVD)  |       | 68                                                  | %          | 53 | % |
| PC (Software,  Hardware)                                  |       | 10                                                  | %          | 10 | % |
| Portable Media  Devices (Digital Media Player, Headphone) |       | 9                                                   | %          | 19 | % |
| Personal  Telecommunications (Mobile Phone, PDA)          |       | 7                                                   | %          | 11 | % |
| Automotive                                                |       | 6                                                   | %          | 7 | % |

 

*Sales andMarketing*

Sales and marketing expenses consist primarily ofemployee salaries, sales consultants’ fees and related expenses, salescommissions and product promotion costs. Sales and marketing expenses were$1,767,717 for the three months ended June 30, 2007, compared to $1,885,416 forthe same prior year period, a decrease of $117,699, or 6%.  This decrease is primarily attributable todecreased marketing head count and related expenses.   Included in sales and marketing expenses isstock based compensation expense of $128,693 and $136,459 for the three monthsended June 30, 2007 and 2006, respectively. As a percentage of total revenues, sales and marketing expensesdecreased from 44% for the three months ended June 30, 2006 to 38% for the same period this year.

*Research and Development*

Research anddevelopment expenses consist of salaries and related costs of employees engagedin ongoing research, design and development activities and costs forengineering materials and supplies. Research and development expenses were$814,595 for the three months ended June 30, 2007, compared to $631,739 for thesame prior year period, an increase of $182,856, or 29%.  This increase is attributable to an increasein head count and payroll related costs. Included in research and developmentexpenses is stock based compensation expense of $114,461 and $75,174 for thethree months ended June 30, 2007 and 2006, respectively.  As a percentage of total revenues, researchand development expenses increased from 15%for the three months ended June 30, 2006 to 17% for the same period this year.

15

----

*General and Administrative*

General and administrative (“G&A”) expensesconsist primarily of employee-related expenses, legal costs associated with theadministration of intellectual property and other professional fees. G&Aexpenses were $1,292,181 for the three months ended June 30, 2007, compared to$1,357,789 for the same prior year period, a decrease of $65,608, or 5%. The decrease is primarilyattributable to decreased accounting and legal fees, partially offset by anincrease in stock based compensation expense of $48,627.  Included in general and administrativeexpenses is stock based compensation expense of $181,014 and $132,387 for thethree months ended June 30, 2007 and 2006, respectively.  As a percentage of total revenues, G&Aexpenses decreased from 32% forthe quarter ended June 30, 2006 to 28%for the same period this year.

*Interest Income*

Interest income was $508,964 for the three monthsended June 30, 2007, compared to $224,005 for the same prior year period, anincrease of $284,959, or 127%. This increase is primarily attributable tohigher interest rates earned on larger cash balances invested.

*Provision for Income Taxes*

The income tax expense forthe three months ended June 30, 2007 was $0, compared to a tax expense of $167,745 forthe same prior year period.  The prioryear provision consists primarily of taxes paid on licensing revenues sourcedfrom countries requiring foreign tax withholdings, principally Korea.  We reduced our current quarter tax provisionand our valuation allowance on our deferred tax assets by $258,856 based on ourassessment of the future realizability of certain deferred tax assets.

*Discontinued Operations*

As aresult of our February 2006 decisions to sell Valence and our entire equityinterest in CHS/SRS LLC, we have accounted for the semiconductor businesssegment and CHS/SRS LLC as discontinued operations in the accompanyingcondensed consolidated financial statements beginning in the first fiscalquarter of 2006.  The Company soldValence in September 2006 and its entire equity interest in CHS/SRS LLC in June2006.

Income from discontinuedoperations consists of direct revenues and direct expenses of Valence andCHS/SRS LLC. General corporate overhead costs have not been allocated todiscontinued operations.  A summary ofthe operating results of Valence and the Joint Venture included in discontinuedoperations in the accompanying condensed consolidated statements of operationfor the three months ended June 30, 2007 is as follows:
|                                                | ** ** | **Three Months  Ended** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **June 30, 2006**  | ** ** |
| **Valence:**                                   | ** ** | ** **                   | ** ** |   |
| Revenues.                                      |       | $                            | 2,228,826  |   |   |
| Cost of sales                                  |       | 1,001,262                    |       |   |
| Gross margin                                   |       | 1,227,564                    |       |   |
| Total operating  expenses                      |       | 1,081,015                    |       |   |
| Income from  operations                        |       | 146,549                      |       |   |
| Other income,  net                             |       | 3,678                        |       |   |
| Income before  income benefit                  |       | 150,227                      |       |   |
| Income tax  benefit                            |       | (385                         | )          |   |
| **Net  income from Valence**                   |       | 150,612                      |       |   |
| **Net  income from CHS/SRS LLC**               |       | 1,649                        |       |   |
| **Gain on  sale of CHS/SRS LLC**               |       | 371,295                      |       |   |
| **Total income from discontinued  operations** |       | $                            | 523,556    |   |   |

 

16

----

**Six Months Ended June 30, 2007Compared to Six Months Ended June 30, 2006**

*Revenues*

Licensing revenues consistprimarily of royalties generated from the license of our audio and voicetechnologies.  License and royaltyagreements generally provide for the license of technologies for a fee based onthe number of units distributed by the licensee.  However, we have entered into in the past,and may again enter into in the future, a license agreement for a one-time feeor an annual fixed fee amount. Also included in licensing revenue are revenuesgenerated from the sale of hardware and software applications into the PC andbroadcast audio markets.

Licensing revenues were$9,767,255 for the six months ended June 30, 2007, compared to $8,595,507 forthe six months ended June 30, 2006, an increase of $1,171,748, or 14%.  The increase in licensing revenues wasprimarily attributable to our strong sales in flat panel televisions and monitorsin our Home Entertainment market, which grew by $2,159,178, or 61%. As notedearlier in this report, we have been informed by Sony, one of our largestlicensees, that it has begun to distribute televisions that include internallydeveloped audio technology, rather than technology licensed from us. It isanticipated that this will negatively impact our revenues beginning in thethird quarter of 2007.  Additionally, weexperienced an increase in royalties in the automotive market of $166,195, or32%, and an increase in revenue from our PC market segment of $197,805, or 24%,due to increases in software downloads. During April 2007, we were informed that one of our licensees haselected to eliminate our technology from its personal computers during 2007.  This did not have a material impact on ourrevenues for the six months ending June 30, 2007, however, we expect revenuesfrom this customer to decrease in future periods.   Such customer accounted for $519,384 ofrevenues during the six months ended June 30, 2007.  Revenues in our Portable Media Devicesdecreased $858,388, or 52%, for the six months ended June 30, 2007, compared tothe same period in the prior year, primarily due to the loss of one customer inthe third quarter of 2006.  Thefollowing table presents our licensing revenues mix by market:
|                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Home  Entertainment (TV, Set Top Box, A/V Receiver, DVD)  |       | 67                                                | %          | 54 | % |
| PC (Software,  Hardware)                                  |       | 11                                                | %          | 10 | % |
| Portable Media  Devices (Digital Media Player, Headphone) |       | 8                                                 | %          | 19 | % |
| Personal  Telecommunications (Mobile Phone, PDA)          |       | 7                                                 | %          | 11 | % |
| Automotive                                                |       | 7                                                 | %          | 6 | % |

 

*Sales andMarketing*

Sales and marketing expenses consist primarily ofemployee salaries, sales consultants’ fees and related expenses, salescommissions and product promotion costs. Sales and marketing expenses were$3,644,010 for the six months ended June 30, 2007, compared to $3,750,785 forthe same prior year period, a decrease of $106,775, or 3%.  This decrease is primarily attributable to decreasedmarketing head count and related expenses, offset by increased headcount insales and higher accrued commissions due to the achievement of higher revenuesin the current year.   Included in salesand marketing expenses is stock based compensation expense of $270,493 and$298,512 for the six months ended June 30, 2007 and 2006, respectively.  As a percentage of total revenues, sales andmarketing expenses decreased from 44% for the six months ended June 30, 2006 to 37% for the same period this year.

*Research and Development*

Research and developmentexpenses consist of salaries and related costs of employees engaged in ongoingresearch, design and development activities and costs for engineering materialsand supplies. Research and development expenses were $1,676,220 for the sixmonths ended June 30, 2007, compared to $1,286,028 for the same prior yearperiod, an increase of $390,192, or 30%. This increase is attributable to an increase in head count and payrollrelated costs. Included in research and development expenses is stock based compensationexpense of $216,186 and $202,161 for the six months ended June 30, 2007 and2006, respectively.  As a percentage oftotal revenues, research and development expenses increased from 15% for the six months ended June 30,2006 to 17% for the same period this year.

17

----

*General and Administrative*

General and administrative (“G&A”) expensesconsist primarily of employee-related expenses, legal costs associated with theadministration of intellectual property and other professional fees. G&Aexpenses were $2,669,608 for the six months ended June 30, 2007, compared to$2,994,997 for the same prior year period, a decrease of $325,389, or 11%. The decrease is primarilyattributable to decreased accounting and legal fees and a decrease in costsassociated with the Company’s separation from its former Chief FinancialOfficer in the first quarter of 2006, partially offset by an increase in stockbased compensation expense of $177,604. Included in general and administrative expenses is stock basedcompensation expense of $364,331 and $186,727 for the six months ended June 30,2007 and 2006, respectively.  As apercentage of total revenues, G&A expenses decreased from 35% for the six months ended June 30,2006 to 27% for the same periodthis year.

*Interest Income*

Interest income was $1,002,760 for the six monthsended June 30, 2007, compared to $403,718 for the same prior year period, anincrease of $599,042, or 148%. This increase is primarily attributable tohigher interest rates earned on larger cash balances invested.

*Provision for Income Taxes*

The income tax expense forthe six months ended June 30, 2007 was $0, compared to a tax expense of $327,168 for the same prior yearperiod.  The prior year provisionconsists primarily of taxes paid on licensing revenues sourced from countriesrequiring foreign tax withholdings, principally Korea.  We reduced our current quarter tax provisionand our valuation allowance on our deferred tax assets by $571,915 based on ourassessment of the future realizability of certain deferred tax assets.

*Discontinued Operations*

As aresult of our February 2006 decisions to sell Valence and our entire equityinterest in CHS/SRS LLC, we have accounted for the semiconductor businesssegment and CHS/SRS LLC as discontinued operations in the accompanyingcondensed consolidated financial statements beginning in the first fiscalquarter of 2006.  The Company soldValence in September 2006 and its entire equity interest in CHS/SRS LLC in June2006.

Income from discontinuedoperations consists of direct revenues and direct expenses of Valence andCHS/SRS LLC. General corporate overhead costs have not been allocated todiscontinued operations.  A summary ofthe operating results of Valence and the Joint Venture included in discontinuedoperations in the accompanying condensed consolidated statements of operationfor the six months ended June 30, 2007 is as follows:
|                                                | ** ** | **Six Months  Ended**  | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **June 30, 2006** | ** ** |
| **Valence:**                                   | ** ** | ** **                  | ** ** |
| Revenues.                                      |       | $                           | 4,370,534  |   |
| Cost of sales                                  |       | 2,069,746                   |       |
| Gross margin                                   |       | 2,300,788                   |       |
| Total operating  expenses                      |       | 2,210,163                   |       |
| Income from  operations                        |       | 90,625                      |       |
| Other income,  net                             |       | 7,863                       |       |
| Income before  income tax expense              |       | 98,488                      |       |
| Income tax  expense                            |       | 30,696                      |       |
| **Net  income from Valence**                   |       | 67,792                      |       |
| **Net  income from CHS/SRS LLC**               |       | 95,764                      |       |
| **Gain on  sale of CHS/SRS LLC**               |       | 371,295                     |       |
| **Total income from discontinued  operations** |       | $                           | 534,851    |   |

 

18

----

**Liquidity and Capital Resources**

Our principal source of liquidity to fundongoing operations at June 30, 2007 consisted of cash, cash equivalents andlong-term investments of $43,846,595. At June 30, 2007, we had cash and cashequivalents of $38,616,425 and long-term investments of $5,230,170. Cash andcash equivalents are short-term highly liquid investments that are readilyconvertible to known amounts of cash and are so near maturity that they presentinsignificant risk of changes in value because of interest rates.  Cash and cash equivalents generally consistof cash, money market funds and instruments with original maturities of threemonths or less. Also included in cash equivalents are debt instruments, whichthe Company expects to hold three months or less.  Investments consist of U.S. governmentsecurities rated AAA.

Net cash provided by operating activities was$2,304,119 and $1,771,731 during the six months ended June 30, 2007 andJune 30, 2006, respectively. The $532,388 increase in net cash provided byoperating activities for the six months ended June 30, 2007, compared to thesame period in the prior year, was primarily a result of an increase of $1,609,122in net income for the six months ended June 30, 2007. Offsetting the increase,accounts receivable rose by $458,418 during the six months ended June 30, 2007compared to the same period in the prior year, primarily due to one significantcustomer reporting royalties and remitting payment later than in priorperiods.  Additionally, accounts payableand accrued liabilities decreased $238,286 and $359,134, respectively, duringthe six months ended June 30, 2007 as compared to the same period in the prioryear.  The changes in liability accountsgenerally relate to the timing of payments to vendors and changes in accruedcommissions and amounts due to employees under the 2007 Bonus and ProfitSharing Plan.

Our net cash used in investing activities was$514,674 and $671,049 during thesix months ended June 30, 2007 and June 30, 2006, respectively. The decrease innet cash used in investing activities was attributable primarily to the Companynot having any cash outflow related to discontinued operations during the sixmonths ended June 30, 2007, as the discontinued operations were sold in thesecond and third fiscal quarters of 2006. During the six months ended June 30, 2006, the net cash used ininvesting activities of discontinued operations was $159,913.

Our net cash provided by financing activities from continuing operations was $1,815,555 and $2,218,930 during the six months ended June 30, 2007 and June 30, 2006, respectively. The decrease in net cash provided by financing activities was attributable to a decrease in stock option exercises.

We expect expendituresrelated to patents and intangible assets to increase in the future consistentwith the growth in our licensing business, as we continue to invest in thedevelopment of new technologies.

Based on current plans and business conditions, weexpect that our cash, cash equivalents and investments together with anyamounts generated from operations will be sufficient to meet our cashrequirements for the next twelve months. However, there can be no assurancethat we will not be required to seek other financing sooner or that suchfinancing, if required, will be available on terms satisfactory to us.

Our operations and financial results are subject tovarious risks and uncertainties that could adversely affect our business,financial condition, results of operations and trading price of our commonstock. Please refer to Item 1A, “Risk Factors” in our annual report on Form10-K for fiscal year 2006 for information concerning these and otheruncertainties that could negatively impact us.

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

There have been no material changes to the informationcalled for by this Item 3 from the disclosures set forth in Part II, Item 7Ain the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

**Item4.  Controls and Procedures**

*Evaluation of DisclosureControls and Procedures.**  *Our Chief Executive Officer and President and ourChief Financial Officer have evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15 (e) and15d-15 (e) under the Securities Exchange Act of 1934, as amended) asof the end of the period covered by this Quarterly Report on Form 10-Qand, based on this evaluation, have concluded that our disclosure controls andprocedures are effective.

19

----

*Changes in InternalControls.**  *Therehave been no changes in our internal controls over financial reporting thatoccurred during our second quarter ended June 30, 2007 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

**PART II: OTHER INFORMATION**

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

The Annual Meetingof Stockholders of SRS Labs, Inc. was held on June 20, 2007 for the purpose of(a) electing one Class II director to the Board of Directors and (b) voting ona proposal to ratify the appointment of Squar, Milner, Peterson, Miranda &Williamson, LLP as independent auditors for the fiscal year ending December 31,2007.

David Dukes waselected to serve as a Class II director of the Company for a three-year termexpiring at the 2010 Annual Meeting of Stockholders.  Winston Hickman and Carol Miltner continuedas Class I Directors.  Tom Yuen and SamYau continued as Class III Directors.  Thetabulation of the votes cast for the election of David Dukes was as follows:
| Nominee     | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------|------------|--------------------|------------|-------------------------|------------|
| David Dukes |       | 10,395,990         |       | 5,477,270               |       |

 

The proposal toratify the appointment of Squar, Milner, Peterson, Miranda & Williamson,LLP as independent auditors for the fiscal year ending December 31, 2007 wasapproved.  The tabulation of votes was asfollows:
| Votes For | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|----------------|------------|------------------------|------------|-----------------|------------|---------------------------|------------|
| 15,817,220     |       | 14,120                 |       | 41,920          |       | 0                         |       |

 

**Item 6. Exhibits**

The exhibits listed below are hereby filed with theU.S. Securities and Exchange Commission (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 quarter  ended September 30, 1999, filed with the SEC on November 12, 1999, which is  incorporated herein by reference.                                                                               |
| 10.1            |       | Amendment of 2007 Profit Sharing and Bonus Plan, as  approved on June 20, 2007, previously filed with the SEC on the Company’s  Current Report on Form 8-K filed with the SEC on June 25, 2007,  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.                                                                                                                                                                                                           |

 

20

----

**SIGNATURES**

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.
|                                  | SRS LABS, INC., a Delaware corporation       |
|----------------------------------|---------------------------------------------------|
|                             |                                              |   |
| Date:  August  6, 2007 | By:                                               | /S/ THOMAS C.K.  YUEN |
|                             | Thomas C.K. Yuen                                  |
|                             | Chairman of the Board and Chief Executive Officer |
|                             | (Principal Executive Officer)                     |
| ** **                       | ** **                                        | ** ** |
| ** **                       | ** **                                        | ** ** |
| Date:  August  6, 2007 | By:                                               | /S/ ULRICH  GOTTSCHLING |
|                             | Ulrich Gottschling                                |
|                             | Chief Financial Officer                           |
|                             | (Principal Financial and Accounting Officer)      |
|                                  |                                                   |  |  |

 

21

----

**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.                                                                                |
| 10.1            |       | Amendment of 2007 Profit Sharing and Bonus Plan, as  approved on June 20, 2007, previously filed with the SEC on the Company’s  Current Report on Form 8-K filed with the SEC on June 25, 2007,  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.                                                                                                                                                                                                           |

 

22

----