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** **

 

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**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, 2008**                             |
| ** **                                                                         |
| **OR**                                                                             |
| ** **                                                                         |
| **o**                                                                              | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                         | ** **                                                                                               |
| **For the  transition period          to** |
| ** **                                                                         | ** **                                                                                               |
| **Commission  File Number 0-21123**                                                |

 

**SRS LABS, INC.**

(Exact name ofregistrant 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 principal executive offices) (ZipCode)

 

**(949) 442-1070**

(Registrant’s telephone number, includingarea code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(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 checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

Asof July 28, 2008, 15,776,115 of the issuer’s common stock, par value $.001per share, were outstanding.

 

 

 

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**SRS LABS, INC.**

 

**QuarterlyReport on Form 10-Q**

**For theThree and Six Months Ended June 30, 2008**

**Index**

 
| **PART I-FINANCIAL  INFORMATION** |
|----------------------------------------|
| Item 1.                                |   | Financial  Statements |
|                                   |   | Condensed Consolidated Balance Sheets as of  June 30, 2008 (Unaudited) and December 31, 2007 |
|                                   |   | Condensed Consolidated Statements of Operations for  the three and six months ended June 30, 2008 and 2007 (Unaudited) |
|                                   |   | Condensed Consolidated Statements of Stockholders’  Equity and Comprehensive Income for the six months ended June 30, 2008  (Unaudited) |
|                                   |   | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2008 and 2007 (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 1A.                               |   | Risk Factors |
| Item 2.                                |   | Unregistered  Sales of Equity Securities and Use of Proceeds |
| Item 4.                                |   | Submission  of Matters to a Vote of Security Holders |
| Item  6.                               |   | Exhibits |
|                                   |   |   |
| SIGNATURES                             |

 

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**FORWARD-LOOKINGINFORMATION**

 

Asused herein, the “Company,” “SRS Labs,” “SRS,” “we,” “us,” or “our” means SRSLabs, Inc. and its wholly-owned subsidiary SRSWOWcast.com, Inc.

 

Some of the statements in this Quarterly Report on Form 10-Qcontain forward-looking statements regarding our assumptions, projections,expectations, targets, intentions or beliefs about future events, which involverisks and uncertainties. All statements other than statements of historicalfacts included in this Quarterly Report relating to expectation of futurefinancial performance, continued growth, changes in economic conditions orcapital markets and changes in customer usage patterns and preferences, and ourpotential stock repurchases are forward-looking statements. In some cases, youcan 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, performanceor achievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by these statements.Factors that might cause actual events or results to differ materially fromthose indicated by these forward-looking statements may include thematters listed in our most recently filed Annual Report on Form 10-K andelsewhere in this Quarterly Report on Form 10-Q, 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 customer concentrationin our business; our high dependence on the consumer electronics market, whichis characterized by short product life cycles, fluctuations in demand andseasonality; the risk of widespread illness; our dependence on growth inemerging markets; the length and unpredictable nature of our sales cycle; ourability to protect our products through patents and other intellectual propertyrights; our dependence on key personnel; the volatility of the price of ourcommon stock; provisions that could discourage transactions resulting in achange in control contained in our certificate of incorporation and bylaws aswell as Delaware law; competition we face from companies with greater brandrecognition and resources; pricing pressures on the consumer electronicsproduct manufacturers; and other factors identified from time to time in ourfilings with the Securities and Exchange Commission.

 

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

 

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**PART I — FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**SRSLABS, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                   | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                   | ** ** | **(unaudited)**             | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                                                                                   |       |                        |       |                            |       |
| **Current  Assets**                                                                                                                                                                                                          |       |                        |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                                   |       | $                           | 42,332,790 |                            | $          | 39,615,291 |   |
| Accounts  receivable, net                                                                                                                                                                                                    |       | 419,808                     |       | 1,138,425                       |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                   |       | 790,393                     |       | 893,388                         |       |
| Short-term  investments                                                                                                                                                                                                      |       | 4,984,000                   |       | —                          |       |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| **Total  Current Assets**                                                                                                                                                                                                    |       | 48,526,991                  |       | 41,647,104                      |       |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| Investments  available for sale                                                                                                                                                                                              |       | —                      |       | 5,451,875                       |       |
| Property and  equipment, net                                                                                                                                                                                                 |       | 342,443                     |       | 309,727                         |       |
| Intangible  assets, net                                                                                                                                                                                                      |       | 2,271,816                   |       | 2,197,616                       |       |
| Deferred income  taxes, net                                                                                                                                                                                                  |       | 2,601,131                   |       | 1,776,202                       |       |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| **Total  Assets**                                                                                                                                                                                                            |       | $                           | 53,742,381 |                            | $          | 51,382,524 |   |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                |       |                        |       |                            |       |
| **Current  Liabilities**                                                                                                                                                                                                     |       |                        |       |                            |       |
| Accounts payable                                                                                                                                                                                                             |       | $                           | 591,826    |                            | $          | 529,063 |   |
| Accrued  liabilities                                                                                                                                                                                                         |       | 794,779                     |       | 689,308                         |       |
| Deferred revenue                                                                                                                                                                                                             |       | 2,012,476                   |       | 1,156,836                       |       |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| **Total  Current Liabilities**                                                                                                                                                                                               |       | 3,399,081                   |       | 2,375,207                       |       |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| **Commitments  and Contingencies**(Note 4)                                                                                                                                                                                   |       |                        |       |                            |       |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| **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; 15,790,315 and  16,946,377 shares issued; and 15,776,115 and 15,778,715 shares outstanding at  June 30, 2008 and December 31, 2007, respectively |       | 15,791                      |       | 16,947                          |       |
| Additional  paid-in capital                                                                                                                                                                                                  |       | 69,130,329                  |       | 74,143,772                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                        |       | —                      |       | (48,125                         | )          |
| Accumulated  deficit                                                                                                                                                                                                         |       | (18,705,216                 | )          | (19,155,096                     | )          |
| Treasury stock  at cost, 14,200 and 1,167,662 shares at June 30, 2008 and  December 31, 2007, respectively                                                                                                         |       | (97,604                     | )          | (5,950,181                      | )          |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| **Total  Stockholders’ Equity**                                                                                                                                                                                         |       | 50,343,300                  |       | 49,007,317                      |       |
|                                                                                                                                                                                                                         |       |                        |       |                            |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                                                                         |       | $                           | 53,742,381 |                            | $          | 51,382,524 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                   | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                     |       | $                                | 4,178,144  |                           | $          | 4,694,852 |   | $ | 9,119,132 |   | $ | 9,767,255 |   |
| Cost of sales                                                |       | 40,370                           |       | 40,522                         |       | 66,319 |   | 79,062 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                                 |       | 4,137,774                        |       | 4,654,330                      |       | 9,052,813 |   | 9,688,193 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                         |       |                             |       |                           |       |   |   |   |   |
| Sales and  marketing                                         |       | 2,483,915                        |       | 1,767,717                      |       | 4,627,537 |   | 3,644,010 |   |
| Research and  development                                    |       | 852,771                          |       | 814,595                        |       | 1,779,533 |   | 1,676,220 |   |
| General and  administrative                                  |       | 1,527,597                        |       | 1,292,181                      |       | 2,965,955 |   | 2,669,608 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Total operating  expenses                                    |       | 4,864,283                        |       | 3,874,493                      |       | 9,373,025 |   | 7,989,838 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Operating (loss)  income                                     |       | (726,509                         | )          | 779,837                        |       | (320,212 | ) | 1,698,355 |   |
| Other income,  net                                           |       | 333,363                          |       | 508,964                        |       | 783,324 |   | 1,002,760 |   |
| (Loss) income  before income taxes                           |       | (393,146                         | )          | 1,288,801                      |       | 463,112 |   | 2,701,115 |   |
| Income taxes                                                 |       | 15,326                           |       | —                         |       | 13,232 |   | — |   |
| Net (loss)  income                                           |       | (408,472                         | )          | 1,288,801                      |       | 449,880 |   | 2,701,115 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Net (loss)  income per common share:                         |       |                             |       |                           |       |   |   |   |   |
| Basic                                                        |       | $                                | (0.03      | )                              | $          | 0.08 |   | $ | 0.03 |   | $ | 0.17 |   |
| Diluted                                                      |       | $                                | (0.03      | )                              | $          | 0.08 |   | $ | 0.03 |   | $ | 0.16 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares used in the per share calculations: |       |                             |       |                           |       |   |   |   |   |
| Basic                                                        |       | 15,777,795                       |       | 16,202,909                     |       | 15,777,991 |   | 16,106,312 |   |
| Diluted                                                      |       | 15,777,795                       |       | 16,652,184                     |       | 16,280,923 |   | 16,448,156 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY AND**

**COMPREHENSIVE 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, 2007                               |   | 15,778,715            |       | $                       | 16,947     |                                  | $          | 74,143,772      |       | $            | (48,125    | )          | $          | (19,155,096                                         | )          | $ | (5,950,181 | ) | $ | 49,007,317 |   |   |   |
| Proceeds from  exercise of stock options                       |   | 16,600                |       | 17                      |       | 42,772                                |       | —          |       | —       |       | —     |       | 42,789                                              |       |   |   |
| Purchase of  treasury stock                                    |   | (19,200               | )          | —                  |       | —                                |       | —          |       | —       |       | (122,053   | )          | (122,053                                            | )          |   |   |
| Cancellation of  treasury stock                                |   | —                |       | (1,173                  | )          | (5,973,457                            | )          | —          |       | —       |       | 5,974,630  |       | —                                              |       |   |   |
| Stock based  compensation                                      |   | —                |       | —                  |       | 917,242                               |       | —          |       | —       |       | —     |       | 917,242                                             |       |   |   |
| Unrealized gain  on investments available for sale, net of tax |   | —                |       | —                  |       | —                                |       | 48,125          |       | —       |       | —     |       | 48,125                                              |       | 48,125 |   |
| Net income                                                     |   | —                |       | —                  |       | —                                |       | —          |       | 449,880      |       | —     |       | 449,880                                             |       | 449,880 |   |
|                                                           |   |                  |       |                    |       |                                  |       |            |       |         |       |       |       |                                                |       |   |   |
| BALANCE,  June 30, 2008                                   |   | 15,776,115            |       | $                       | 15,791     |                                  | $          | 69,130,329      |       | $            | —     |       | $          | (18,705,216                                         | )          | $ | (97,604 | ) | $ | 50,343,300 |   | $ | 498,005 |   |
|                                                                |        |                       |            |                         |            |                                       |            |                 |            |              |            |            |            |                                                     |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to the condensed consolidated financialstatements

 

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**SRS LABS, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| **Cash  Flows from Operating Activities:**                                         |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 449,880    |   | $ | 2,701,115 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                     |       | 347,947                                       |       | 371,319 |   |
| Provision for  doubtful accounts                                                   |       | 7,470                                         |       | 68,234 |   |
| Deferred taxes                                                                     |       | (824,929                                      | )          | (571,915 | ) |
| Stock-based  compensation expense                                                  |       | 917,242                                       |       | 851,010 |   |
| Changes in  operating assets and liabilities:                                      |       |                                          |       |   |   |
| Accounts  receivable                                                               |       | 711,147                                       |       | (458,418 | ) |
| Prepaid expenses  and other current assets                                         |       | 102,995                                       |       | 232,907 |   |
| Accounts payable                                                                   |       | 62,763                                        |       | (238,286 | ) |
| Accrued  liabilities                                                               |       | 105,471                                       |       | (359,134 | ) |
| Deferred revenue                                                                   |       | 855,640                                       |       | (292,713 | ) |
| Net cash  provided by operating activities                                         |       | 2,735,626                                     |       | 2,304,119 |   |
|                                                                               |       |                                          |       |   |   |
| **Cash  Flows from Investing Activities:**                                         |       |                                          |       |   |   |
| Purchase of  property and equipment                                                |       | (128,180                                      | )          | (70,225 | ) |
| Purchase of  investments                                                           |       | (4,984,000                                    | )          | — |   |
| Proceeds from  sale of investments                                                 |       | 5,500,000                                     |       | — |   |
| Expenditures  related to intangible assets                                         |       | (326,683                                      | )          | (444,449 | ) |
| Net cash  provided by (used in) investing activities                               |       | 61,137                                        |       | (514,674 | ) |
|                                                                               |       |                                          |       |   |   |
| **Cash  Flows from Financing Activities:**                                         |       |                                          |       |   |   |
| Proceeds from  exercise of stock options                                           |       | 42,789                                        |       | 1,815,555 |   |
| Purchase of  treasury stock                                                        |       | (122,053                                      | )          | — |   |
| Net cash (used  in) provided by financing activities                               |       | (79,264                                       | )          | 1,815,555 |   |
|                                                                               |       |                                          |       |   |   |
| **Net  Increase in Cash and Cash Equivalents**                                     |       | 2,717,499                                     |       | 3,605,000 |   |
| **Cash  and Cash Equivalents, Beginning of Period**                                |       | 39,615,291                                    |       | 35,011,425 |   |
| **Cash  and Cash Equivalents, End of Period**                                      |       | $                                             | 42,332,790 |   | $ | 38,616,425 |   |
|                                                                               |       |                                          |       |   |   |
| **Supplemental  Disclosure of Cash Flow Information:**                             |       |                                          |       |   |   |
| Cash paid during  the period for:                                                  |       |                                          |       |   |   |
| Income taxes                                                                       |       | $                                             | 783,846    |   | $ | 571,915 |   |
| **Supplemental  Disclosure of Non-Cash Investing Activities:**                     |       |                                          |       |   |   |
| Unrealized gain  on investments                                                    |       | $                                             | 48,125     |   | $ | 3,465 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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**SRS LABS, INC. AND SUBSIDIARY**

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

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

 

As used herein, the “Company,”“SRS Labs,” “SRS,” “we,” “us,” or “our” means SRS Labs, Inc. and itswholly-owned subsidiary SRSWOWcast.com, Inc.  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” or “GAAP”) for interimfinancial information and the rules and regulations of the U.S. Securitiesand Exchange Commission (“SEC”) for interim reporting. In the opinion ofmanagement, all adjustments (which include only normal recurring adjustments)considered necessary for a fair presentation of our financial position andresults of operations have been included.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to SEC rules and regulations for presentation of interimfinancial information. Therefore, the condensed interim consolidated financialstatements should be read in conjunction with the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007. Current and future financialstatements may not be directly comparable to the Company’s historical financialstatements. The results of operations for the interim period are notnecessarily indicative of the results to be expected for any other interimperiod or for the full year.  Amountsrelated to disclosure of December 31, 2007 balances within these condensedconsolidated financial statements were derived from the audited 2007consolidated financial statements.

 

**Estimates**

 

The preparation offinancial statements in accordance with generally accepted accountingprinciples requires management to make use of certain estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reported periods. Webase our estimates on historical experience and on various other assumptionsthat we believe are reasonable under the circumstances, the results of whichform the basis for making judgments about carrying values of assets andliabilities that are not readily apparent from other sources.  By their nature, estimates are subject to aninherent degree of uncertainty.  Actualresults could differ materially from those estimates. See the auditedconsolidated financial statements and notes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2007 for anadditional discussion of the significant accounting policies and estimates usedin the preparation of our financial statements.

 

**Cash and Cash Equivalents**

 

Cashand cash 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 cashequivalents generally consist of cash, money market funds and instruments withoriginal maturities of three months or less when purchased.  The Company places its cash in banks and itscash and cash equivalents in commercial paper and money market funds at certainfinancial institutions in excess of amounts insured by federal agencies.  The Company does not believe that it issubject to any  unusual financial riskbeyond the normal risk associated with commercial banking relationships.  The Company performs periodic evaluations ofthe relative credit standing of these financial institutions.  The Company has not experienced anysignificant losses on its cash equivalents or investments.

 

**CustomerConcentrations**

 

Our revenue is primarilyderived from licensing.  For the threemonths ended June 30, 2008, Samsung accounted for approximately 38% of thelicensing revenue.  For the same periodin the prior year, Samsung and Sony accounted for approximately 25% and 12%,respectively, of the licensing revenue. For the six months ended June 30, 2008, Samsung accounted forapproximately 40% of the licensing revenue. For the same period in the prior year, Samsung and Sony accounted forapproximately 24% and 12%, respectively, of the licensing revenue.

 

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**IncomeTaxes**

 

The Company has net operating loss carryforwards tooffset income taxes. Consequently, no provision is reflected in theaccompanying interim financial statements. Refer to our Annual Report on Form 10-K for additional disclosure.

 

**2.****                                     ****Intangible Assets**

 

Intangible assets consistof the following:

 
| ** **                                                  | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Patents                                                     |       | $                       | 3,537,118  |                        | $          | 3,315,343 |   |
| Accumulated  amortization                                   |       | (1,767,194              | )          | (1,622,954                  | )          |
| Patents, net                                                |       | 1,769,924               |       | 1,692,389                   |       |
| Other  intangibles:                                         |       |                    |       |                        |       |
| License  agreements acquired in purchase of SRSWOWcast      |       | 640,071                 |       | 640,071                     |       |
| Capitalized  software and hardware for several technologies |       | 555,106                 |       | 663,310                     |       |
| Total of other  intangibles                                 |       | 1,195,177               |       | 1,303,381                   |       |
| Accumulated  amortization, other intangibles                |       | (693,285                | )          | (798,154                    | )          |
| Other  intangibles, net                                     |       | 501,892                 |       | 505,227                     |       |
| Intangible  assets, net                                     |       | $                       | 2,271,816  |                        | $          | 2,197,616 |   |

 

Amortization periodsrange from three to ten years depending on the estimated useful life of theasset. Amortization expense consists of the following:

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Patents                                                |       | $                                               | 74,511     |                                          | $          | 72,597 |   | $ | 154,939 |   | $ | 139,508 |   |
| Other intangibles:                                     |       |                                            |       |                                          |       |   |   |   |   |
| License  agreements acquired in purchase of SRSWOWcast |       | 16,002                                          |       | 16,002                                        |       | 32,003 |   | 32,004 |   |
| Capitalized  software and hardware                     |       | 30,894                                          |       | 44,282                                        |       | 60,631 |   | 91,983 |   |
| Total intangible  amortization expense                 |       | $                                               | 121,407    |                                          | $          | 132,881 |   | $ | 247,573 |   | $ | 263,495 |   |

 

As of June 30,2008, the weighted average useful life of the Company’s patents and intangibleassets was approximately 6.75 years. The following table shows theestimated amortization expense for those assets for the remaining six months ofthe current fiscal year and each of the four succeeding fiscal years andthereafter:

 
| **Years Ending December 31,** | ** ** | **Estimated Expense** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| 2008                                         |       | $                          | 226,226    |   |
| 2009                                         |       | 384,038                    |       |
| 2010                                         |       | 347,349                    |       |
| 2011                                         |       | 315,609                    |       |
| 2012                                         |       | 292,273                    |       |
| Thereafter                                   |       | 706,321                    |       |
| Total                                        |       | $                          | 2,271,816  |   |

 

**3.**                                      **Net Income Per Common Share**

 

The Company applies Statement of FinancialAccounting Standards (“SFAS”) No. 128, *Earnings per Share*(“SFAS No. 128”), which requires the disclosure of basic and diluted netincome or loss per share for all current and prior periods. Basic net income orloss per common share is computed by dividing net income or loss available tocommon stockholders by the weighted average number of common shares outstandingduring each year. Diluted net income or loss per common share reflects themaximum dilution, based on the average price of the Company’s common stockduring each period, and is computed similar to basic income or loss per shareexcept that the denominator is increased to include the number of additionalshares that would have been outstanding if potentially dilutive stock optionsand warrants had been exercised.

 

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Basic and diluted net income per share computed inaccordance with SFAS No. 128 for the three and six months ended June 30,2008 and 2007 are as follows:

 
| ** **                                               | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
|                                                     |       | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
|                                                     |       | **2008**                                | ** ** | **2007**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| BASIC EPS                                                |       |                                    |       |                                  |       |   |   |   |   |
| Net (loss)  income                                       |       | $                                       | (408,472   | )                                     | $          | 1,288,801 |   | $ | 449,880 |   | $ | 2,701,115 |   |
| Denominator:  weighted average common shares outstanding |       | 15,777,795                              |       | 16,202,909                            |       | 15,777,991 |   | 16,106,312 |   |
| Net (loss)  income per share—basic                  |       | $                                       | (0.03      | )                                     | $          | 0.08 |   | $ | 0.03 |   | $ | 0.17 |   |
|                                                     |       |                                    |       |                                  |       |   |   |   |   |
| DILUTED EPS                                              |       |                                    |       |                                  |       |   |   |   |   |
| (Loss) income                                            |       | $                                       | (408,472   | )                                     | $          | 1,288,801 |   | $ | 449,880 |   | $ | 2,701,115 |   |
| Denominator:  weighted average common shares outstanding |       | 15,777,795                              |       | 16,202,909                            |       | 15,777,991 |   | 16,106,312 |   |
| Common equivalent  shares outstanding:                   |       |                                    |       |                                  |       |   |   |   |   |
| Options                                                  |       | —                                  |       | 449,275                               |       | 502,932 |   | 341,844 |   |
| Total diluted  shares                                    |       | 15,777,795                              |       | 16,652,184                            |       | 16,280,923 |   | 16,448,156 |   |
| Net (loss)  income per share—diluted                |       | $                                       | (0.03      | )                                     | $          | 0.08 |   | $ | 0.03 |   | $ | 0.16 |   |

 

Therewere outstanding options to purchase an aggregate of 3,069,248 and 1,937,419shares of the Company’s common stock for the three months and six months ended June 30,2008, that were not included in the table above because they would beanti-dilutive. There wereoutstanding options to purchase an aggregate of 530,670 shares of the Company’scommon stock for the three and six months ended June 30, 2007,that werenot included in the table above because they would be anti-dilutive.

 

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

 

The Company is subject to legal proceedings andclaims that arise in the normal course of business. While the outcome of theseproceedings and claims cannot be predicted with certainty, management does notbelieve that the outcome of any of these matters will have a material adverseeffect on the Company’s consolidated financial position or results ofoperations.

 

**5.****                                     ****Segment Information**

 

The Company operates in one reportable segment asdisclosed in our Annual Report on Form 10-K.  The following schedule presents the Company’srevenue by geographic area. Revenue is summarized based on the location of thelicensee’s corporate headquarters. The Americas region includes North, Centraland South Americas.

 
| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                        | ** ** | **%**                                         | ** ** | **2007** | ** ** | **%** | ** ** | **2008** | ** ** | **%** | ** ** | **2007** | ** ** | **%** | ** ** |
| **Geographic  Area Revenue:** |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Korea                         |       | $                                               | 2,136,306  |                                          | 51         |   | $ | 1,770,091 |   | 38 |   | $ | 4,659,761 |   | 51 |   | $ | 3,558,011 |   | 37 |   |
| Japan                         |       | 1,323,778                                       |       | 32                                            |       | 1,974,305 |   | 42 |   | 3,019,431 |   | 33 |   | 4,338,814 |   | 44 |   |
| Americas                      |       | 435,199                                         |       | 11                                            |       | 494,595 |   | 11 |   | 793,482 |   | 9 |   | 996,480 |   | 10 |   |
| China                         |       | 225,750                                         |       | 5                                             |       | 442,884 |   | 9 |   | 502,061 |   | 5 |   | 850,328 |   | 9 |   |
| Europe                        |       | 57,111                                          |       | 1                                             |       | 12,977 |   | — |   | 144,397 |   | 2 |   | 23,622 |   | — |   |
| Total                         |       | $                                               | 4,178,144  |                                          | 100        |   | $ | 4,694,852 |   | 100 |   | $ | 9,119,132 |   | 100 |   | $ | 9,767,255 |   | 100 |   |

 

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**6.**                                      **Recent AccountingPronouncements**

 

In May 2008, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 162, *Hierarchy of Generally Accepted Accounting Principles* (“SFASNo. 162”). This statement is intended to improve financial reporting byidentifying a consistent framework, or hierarchy, for selecting accountingprinciples to be used in preparing financial statements of nongovernmentalentities that are presented in conformity with GAAP. This statement will beeffective 60 days following the SEC’s approval of the Public Company AccountingOversight Board amendment to AU Section 411, *The Meaningof Present Fairly in Conformity with Generally Accepted Accounting Principles*.The Company does not expect that the adoption of SFAS No. 162 will have amaterial impact on its financial statements.

 

In December 2007,FASB issued SFAS No. 141 (revised 2007), *BusinessCombinations* (“SFAS No. 141(R)”), which replaces SFAS No. 141.SFAS No. 141(R) retains the purchase method of accounting foracquisitions, but requires a number of changes, including changes in the wayassets and liabilities are recognized in the purchase accounting. It alsochanges the recognition of assets acquired and liabilities assumed arising fromcontingencies, requires the capitalization of in-process research anddevelopment at fair value, and requires the expensing of acquisition-relatedcosts as incurred. SFAS No. 141(R) is effective for us beginning January 1,2009 and will apply prospectively to business combinations completed on orafter that date. We do not presently expect the adoption of SFAS No. 141 (R) willhave a material effect on our consolidated financial position or results ofoperations.

 

In December 2007,the FASB also issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB 51*(“SFAS No. 160”), which changes the accounting and reporting for minorityinterests. Minority interests will be recharacterized as noncontrollinginterests and will be reported as a component of equity separate from theparent’s equity, and purchases or sales of equity interests that do not resultin a change in control will be accounted for as equity transactions. Inaddition, net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement and, upona loss of control, the interest sold, as well as any interest retained, will berecorded at fair value with any gain or loss recognized in earnings. SFAS No. 160is effective for us beginning January 1, 2009 and will applyprospectively, except for the presentation and disclosure requirements, whichwill apply retrospectively. We do not expect the adoption of SFAS No. 160will have a material effect on our consolidated financial position or resultsof operations.

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities* (“SFAS No. 159”).SFAS No. 159 permits entities to choose to measure financial assets andliabilities (except for those that are specifically scoped out of thestatement) at fair value. The election to measure a financial asset orliability at fair value can be made on an instrument-by-instrument basis and isirrevocable. The difference between carrying value and fair value at theelection date is recorded as a transition adjustment to opening retainedearnings. Subsequent changes in fair value are recognized in earnings. Theeffective date for this statement is as of the beginning of an entity’s firstfiscal year that begins after November 15, 2007. Accordingly, we adoptedSFAS No. 159 effective January 1, 2008. The adoption of SFAS No. 159did not have a material impact on our consolidated financial position orconsolidated results of operations.

 

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS No. 157”). The purpose of SFAS No. 157is to define fair value, establish a framework for measuring fair value andenhance disclosures about fair value measurements. The measurement anddisclosure requirements became effective for us beginning January 1,2008.  The adoption of SFAS No. 157did not have a material effect on our consolidated financial position orresults of operations.

 

**7.**                                      **Share Repurchase Program**

 

On May 19,2008, the Company’s Board of Directors approved a stock repurchaseprogram.  Under the stock repurchase program, the Company was seeking toacquire up to $10.0 million of the Company’s outstanding common stock for aperiod from May 20, 2008 to November 19, 2008.   During the second fiscal quarter, theCompany repurchased a total of 14,200 shares of the Company’s outstandingcommon stock. The Company has suspended this repurchase program and announcedits intention to conduct a “Dutch auction” tender offer in August 2008,pursuant to which the Company may purchase its common stock with an aggregatepurchase price of up to $10.0 million. There is no guarantee that this tenderoffer will be completed and any such tender offer will be subject to the termsand conditions described in the offer to purchase and related materials thatthe Company intends to file with the SEC.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

This information should be read in conjunction withthe audited consolidated financial statements and notes thereto and Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in our Annual Report on Form 10-K for the year ended December 31,2007, and the unaudited condensed interim consolidated financial statements andnotes thereto included in this Quarterly Report.

 

**Overview**

** **

We area leading developer and provider of audio and voice technology solutions forthe home entertainment, portable media device, personal telecommunications,personal computer, automotive, and broadcast markets.  Our operations are conducted through SRS Labs, Inc.,the parent company, and its wholly-owned subsidiary, SRSWOWcast.com, Inc.Our business is focused on developing and licensing audio, voice and surroundsound technology solutions to many of the world’s leading original equipmentmanufacturers, or OEMs, software providers and semiconductor companies, andlicensing and marketing hardware and software products for the the PC and broadcast audio markets.

 

#### **Critical Accounting Policies**

####  

Our discussion and analysis of our resultsof operations and liquidity and capital resources are based on our consolidatedfinancial statements which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.

 

Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and disclosure of contingent assets and liabilities. We base ourestimates on historical and anticipated results and trends and on various otherassumptions that we believe are reasonable under the circumstances, including assumptionsas to future events. These estimates form the basis for making judgments aboutthe carrying value of assets and liabilities that are not readily apparent fromother sources. By their nature, estimates are subject to an inherent degree ofuncertainty. Actual results may materially differ from our estimates.

 

Referto the Company’s Annual Report on Form 10-K for the year ended December 31,2007 for a discussion of critical accounting policies which include revenuerecognition, valuation of accounts receivable, valuation of intangible assetsand capitalization of software, recognition and measurement of current anddeferred income tax assets and liabilities, and stock-based compensation.  During the six months ended June 30,2008, there were no material changes to these policies.

 

**Results of Operations**

 

***Three Months Ended June 30, 2008Compared to Three Months Ended June 30, 2007***

 

*Revenues*

 

Our revenues consist primarily of royaltiesgenerated from the license of SRS Labs’ audio and voice technologies.  License and royalty agreements generallyprovide for the license of technologies for a fee based on the number of unitsdistributed by the licensee.  However, wehave in the past and may again in the future, enter into a license agreementfor a one-time fee. Also included in licensing revenue are revenues generatedfrom the sale of hardware and software applications into the PC and broadcastaudio markets.

 

The following table presents our licensing revenuesmix by market:

 
| ** **                                                | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Home  Entertainment (TV, Set Top Box, A/V Receiver, DVD)  |       | 65                                                  | %          | 68 | % |
| Portable Media Devices (Digital Media Player,  Headphone) |       | 11                                                  | %          | 9 | % |
| Automotive                                                |       | 9                                                   | %          | 6 | % |
| Personal  Telecommunications (Mobile Phone, PDA)          |       | 9                                                   | %          | 7 | % |
| PC (Software,  Hardware)                                  |       | 6                                                   | %          | 10 | % |

 

Our revenues were $4,178,144 for the three months ended June 30,2008, compared to $4,694,852 for the three months ended June 30, 2007, adecrease of $516,708 or 11%.  Revenues inour Home Entertainment market decreased by 

 

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$457,266or 14%, primarily due to decreased revenues associated with flat paneltelevisions and Set-Top Box revenues of $329,861 and $98,502,respectively.  Revenues associated withadvanced displays, which is comprised of LCD and Plasma flat panel televisionsand monitors and projection televisions, decreased by $329,861 or 12% primarilydue to decreased revenue from Sony and Toshiba, offset by increased revenuefrom Samsung.  Revenues in the PC marketdecreased by $223,402 or 48% due to the loss in 2007 of our major customer inthis market.  Significant revenues werereceived from this customer through the second quarter of 2007 and significantlydecreased thereafter.  Therefore, weexpect that the negative trend related to this customer will cease after thisquarter.  Revenues in the Automotivemarket increased $55,749 or 19% due to increase revenues from several customersin Japan who provide line install, dealer option and after market automotiveaudio systems to many of the significant Japanese automotivemanufacturers.  Revenues in the portablemedia devices increased by $49,556 or 12% primarily due to an increase inrevenue from Samsung Techwin due to the release of new models.

 

*Sales andMarketing*

 

Salesand marketing expenses consist primarily of employee salaries, salesconsultants’ fees and related expenses, sales commissions and product promotioncosts. Sales and marketing expenses were $2,483,915 for the three months ended June 30,2008, compared to $1,767,717 for the same prior year period, an increase of$716,198 or 41%.  This increase isprimarily attributable to the hiring of eight additional sales and marketingpersonnel and due to increased branding efforts.   Included in sales and marketing expenses isstock based compensation expense of $127,962 and $128,693 for the three monthsended June 30, 2008 and 2007, respectively.  We expect that sales and marketing expenseswill continue to increase as we hire additional sales personnel to penetratetarget markets and key regions and as we continue to increase our marketingefforts to cultivate and elevate the SRS brand globally.  As a percentage of total revenues, sales andmarketing expenses increased from 38% for the three months ended June 30,2007 to 59% for the same periodthis year.

 

*Researchand 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$852,771 for the three months ended June 30, 2008, compared to $814,595for the same prior year period, an increase of $38,176 or 5%.  This increase is attributable to hiring twoadditional engineers at the end of the current quarter and increased travel tosupport our global licensees.  Includedin research and development expenses is stock based compensation expense of$85,324 and $114,461 for the three months ended June 30, 2008 and 2007,respectively.  We expect that researchand development expenses will continue to increase as we seek to accelerate theimplementation of our technology with a greater number of customers and devices. As a percentage of total revenues,research and development expenses increased from 17% for the three months ended June 30, 2007 to 20% for thesame period this year.

 

*Generaland Administrative*

 

Generaland administrative (“G&A”) expenses consist primarily of employee-relatedexpenses, legal costs associated with the administration of intellectualproperty and other professional fees. G&A expenses were $1,527,597 for thethree months ended June 30, 2008, compared to $1,292,181 for the sameprior year period, an increase of $235,416 or 18%. The increase is primarily attributable to an increase inaccounting, legal and other professional fees. Included in general and administrative expenses is stock basedcompensation expense of $200,812 and $181,014 for the three months ended June 30,2008 and 2007, respectively.  As apercentage of total revenues, G&A expenses increased  from 28%for the quarter ended June 30, 2007 to 37% for the same period this year.

 

*InterestIncome*

 

Interestincome was $333,363 for the three months ended June 30, 2008, compared to$508,964 for the same prior year period, a decrease of $175,601, or 35%. Thisdecrease is primarily attributable to lower interest rates earned on cashbalances invested.

 

*Provisionfor Income Taxes*

 

Theincome tax expense for the three months ended June 30, 2008 was $15,326, compared to a tax expense of $0 for thesame prior year period.  The prior yearprovision consists primarily of taxes paid on licensing revenues sourced fromcountries requiring foreign tax withholdings, principally Korea.  We reduced our current quarter tax provisionand our valuation allowance on our deferred tax assets by $361,855 and $258,856for the three months ended June 30, 2008 and 2007, respectively, based onour assessment of the future estimated realization of such assets.

 

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**Six Months Ended June 30, 2008 Compared to SixMonths Ended June 30, 2007**

 

*Revenues*

 

Licensing revenues consist primarily of royaltiesgenerated from the license of our audio and voice technologies.  License and royalty agreements generallyprovide for the license of technologies for a fee based on the number of units distributedby the licensee.  However, we haveentered into in the past, and may again enter into in the future, a licenseagreement for a one-time fee or an annual fixed fee amount. Also included inlicensing revenue are revenues generated from the sale of hardware and softwareapplications into the PC and broadcast audio markets.

 

Thefollowing table presents our licensing revenues mix by market:

 
| ** **                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Home  Entertainment (TV, Set Top Box, A/V Receiver, DVD)  |       | 71                                                | %          | 67 | % |
| Portable Media Devices (Digital Media Player,  Headphone) |       | 9                                                 | %          | 8 | % |
| Automotive                                                |       | 8                                                 | %          | 7 | % |
| Personal  Telecommunications (Mobile Phone, PDA)          |       | 7                                                 | %          | 7 | % |
| PC (Software,  Hardware)                                  |       | 5                                                 | %          | 11 | % |

 

Licensing revenues were $9,119,132 for the sixmonths ended June 30, 2008, compared to $9,767,255 for the six monthsended June 30, 2007, a decrease of $648,123 or 7%.  The decrease in licensing revenues wasprimarily attributable to a decrease in PC revenue of $578,065 or 56% due tothe loss of our major customer in this market. This customer contributed$519,384 in revenue during the first six months of 2007.  There were no significant amounts of revenuederived from this customer after the second fiscal quarter of 2007.   Revenue from Personal Telecommunicationsdecreased $90,101 or 12% during the six months ended June 30, 2008, ascompared to the same period in the prior year, due to lower volume shipments byNEC in the first quarter of 2008.  Revenue from the Home Entertainment market remained flat year over year.  Sales in flat panel televisions and monitorsin our Home Entertainment market grew by $224,515 or 4%.  Offsetting the increase in flat paneltelevisions is a decrease in Set-Top Box and CRT revenue of $207,387 and$75,647, respectively.

 

*Sales andMarketing*

 

Salesand marketing expenses consist primarily of employee salaries, salesconsultants’ fees and related expenses, sales commissions and product promotioncosts. Sales and marketing expenses were $4,627,537 for the six months ended June 30,2008, compared to $3,644,010 for the same prior year period, an increase of$983,527 or 27%.  This increase isprimarily attributable to payroll and related costs associated with hiring anadditional eight sales and marketing personnel in the first half of 2008.   Included in sales and marketing expenses isstock based compensation expense of $269,856 and $270,493 for the six monthsended June 30, 2008 and 2007, respectively.  As a percentage of total revenues, sales andmarketing expenses increased from 37% for the six months ended June 30,2007 to 51% for the same periodthis year.

 

*Researchand Development*

 

Research anddevelopment expenses consist of salaries and related costs of employees engagedin ongoing research, design and development activities and costs for engineeringmaterials and supplies. Research and development expenses were $1,779,533 forthe six months ended June 30, 2008, compared to $1,676,220 for the sameprior year period, an increase of $103,313 or 6%.  This increase is attributable to an increasein head count and payroll related costs. Included in research and developmentexpenses is stock based compensation expense of $208,950 and $216,186 for thesix months ended June 30, 2008 and 2007, respectively.  As a percentage of total revenues, researchand development expenses increased from 17%for the six months ended June 30, 2007 to 20% for the same period thisyear.

 

*Generaland Administrative*

 

G&Aexpenses consist primarily of employee-related expenses, legal costs associatedwith the administration of intellectual property and other professional fees.G&A expenses were $2,965,955 for the six months ended June 30, 2008,compared to $2,669,608 for the same prior year period, an increase $296,347 or11%. The increase is primarily attributable to an increase in professionalfees, associated with legal, accounting and corporate matters, and an increasein stock based compensation expense. Included in general and administrative expenses is stock basedcompensation expense of $438,436 and $364,331 for the six months ended June 30,2008 and 2007, respectively.  As apercentage of total revenues, G&A expenses increased from 27% for the six months ended June 30,2007 to 33% for the same periodthis year.

 

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*InterestIncome*

 

Interestincome was $783,324 for the six months ended June 30, 2008, compared to$1,002,760 for the same prior year period, a decrease of $219,436 or 22%. Thisdecrease is primarily attributable to lower interest rates earned on cashbalances invested.

 

*Provisionfor Income Taxes*

 

The income tax expense for the six months ended June 30,2008 was $13,232,compared to tax expense of $0 for the same prior year period.  The prior year provision consists primarilyof taxes paid on licensing revenues sourced from countries requiring foreigntax withholdings, principally Korea.  Wereduced our current period tax provision and our valuation allowance on ourdeferred tax assets by $824,929 and $571,915 for the six months ended June 30,2008 and 2007, respectively, based on our assessment of the future estimatedrealization of such assets.

 

**Liquidity and Capital Resources**

 

Our principal source of liquidity to fund ongoingoperations at June 30, 2008 consisted of cash, cash equivalents andshort-term investments of $47,316,790. At June 30, 2008, we had cash and cash equivalents of $42,332,790and short-term investments of $4,984,000. Cash and cash equivalents are short-termhighly liquid investments that are readily convertible to known amounts of cashand are so near maturity that they present insignificant risk of changes invalue because of interest rates.  Cashand cash equivalents generally consist of cash, money market funds andinstruments with original maturities of three months or less. Short terminvestments consist of certificates of deposit with original maturities of sixmonths.

 

Net cash provided by operating activities was$2,735,626 and $2,304,119 during the six months ended June 30, 2008 and June 30,2007, respectively. The $431,507 increase in net cash provided by operatingactivities for the six months ended June 30, 2008, compared to the sameperiod in the prior year, was primarily a result of an increase of $855,640 indeferred revenue for the six months ended June 30, 2008 compared to adecrease of $292,713 during the six months ended June 30, 2008.   The increase in deferred revenue during thesix months ended June 30, 2008 was primarily due to the Company enteringinto a multi-year license agreement with LG Electronics in October 2007for the use of our existing technology for television and monitors through December 2010.  We received the final lump sum payment underthis agreement in the six months ended June 30, 2008.  Additionally, accounts receivable decreasedby $711,147 during the six months ended June 30, 2008 compared to anincrease of $458,418 in the same period in the prior year, due to timing ofbilling and cash receipts.  Additionally,accounts payable and accrued liabilities increased $62,763 and $105,471,respectively, during the six months ended June 30, 2008 as compared todecreasing $238,286 and $359,134, respectively, in 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 our Profit Sharing and BonusPlan.  Offsetting the increases inworking capital, net income for the six months ended June 30, 2008decreased $2,251,235 from the same period in the prior year.

 

Our net cash provided by investing activitieswas $61,137 during the sixmonths ended June 30, 2008, and net cash used by investing activities was$514,674 during the six months ended June 30, 2007. The increase in netcash provided by investing activities was attributable primarily to the receiptof $5,500,000 from the sale of investments during the six months ended June 30,2008.  Offsetting this increase, theCompany purchased short-term investments during the six months ended June 30,2008 totaling $4,984,000.

 

Our net cash used in financing activities was $79,264 during the six months ended June 30, 2008, and net cash provided by financing activities was $1,815,555 during the six months ended June 30, 2007. The decrease in net cash provided by financing activities was primarily attributable to a decrease in stock option exercises.  The Company expects to continue to use a portion of its cash to purchase treasury stock under the stock repurchase program announced in May 2008.

 

Basedon current plans and business conditions, we expect that our cash, cashequivalents and investments together with any amounts generated from operationswill be sufficient to meet our cash requirements for the next twelve months.However, we cannot guarantee that we will not be required to seek otherfinancing sooner or that such financing, if required, will be available onterms satisfactory to us.

 

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Ouroperations and financial results are subject to various risks and uncertaintiesthat could adversely affect our business, financial condition, results ofoperations and trading price of our common stock. Please refer to Item 1A, “RiskFactors” in our annual report on Form 10-K for fiscal year 2007 forinformation concerning these and other uncertainties that could negativelyimpact us.

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

Therehave been no material changes to the information called for by this Item 3 fromthe disclosures set forth in Part II, Item 7A in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**Item 4.  Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures.***Our Chief Executive Officer and Presidentand our Chief Financial Officer have evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e)under the Securities Exchange Act of 1934, as amended) as of the end of theperiod covered by this Quarterly Report on Form 10-Q and, based on thisevaluation, have concluded that our disclosure controls and procedures areeffective.

 

*Changesin Internal Controls.***There have been no changes in our internal controls over financialreporting that occurred during our second quarter ended June 30, 2008 thathave materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

**PART II:OTHER INFORMATION**

 

**Item 1A.  RiskFactors**

** **

*You should carefully consider the risk factorsdescribed below, as well as the other information included in this Report,prior to making a decision to invest in our securities. The risks anduncertainties described below are not the only ones facing our company.Additional risks and uncertainties not presently known or that we currentlybelieve to be less significant may also adversely affect us.*

 

***Ourbusiness and future prospects depend on the strength of our brand and ourcontinued recognition as an industry standard in our existing or futuremarkets.  If we do not maintain andstrengthen our brand, our business will be materially harmed.***

** **

Maintaining and strengthening the “SRS” brand and ourposition as an industry standard is critical to maintaining and expanding ourlicensing revenues and licensing relationships, as well as to our ability toenter into new markets for our technologies. Our continued success depends, in part, on our reputation for providinghigh quality technologies across a wide range of consumer products, includinghome electronics, personal computing devices, automotive entertainment systems,cell phones, PDAs and PCs.  If we fail topromote, maintain and expand the SRS brand successfully, our business andfuture prospects will suffer. Maintaining and strengthening our brand will depend heavily on ourability to continue to develop innovative technologies for the entertainmentindustry and to continue to provide high quality technologies, which we may notdo successfully. Moreover, we believe that the likelihood that our technologieswill be adopted as industry standards in other markets and for variousapplications depends, in large part, upon the strength of our brand, becauseprofessional organizations and industry participants are more likely to accept,as an industry standard, technologies developed by a well-respected andwell-known brand.  If our technologiesare not recognized as industry standards in existing or future markets, ourability to enter into new licensing arrangements or expand our revenues will beadversely affected.

 

***We areexposed to risks in our licensing business related to product and customerconcentration***.

** **

Currently, we generate a majority of our revenue inthe home theater market, principally through the inclusion of SRS technologyinside LCD and Plasma televisions, and set-top boxes. We expect that theconsumer home entertainment market will continue to account for a significantportion of our licensing revenues for the foreseeable future. While consumerspending in general on consumer electronic products has increased, retailprices for certain consumer electronics products that include our audiotechnology have decreased significantly. We expect that this trend willcontinue for the foreseeable future. In addition, from time to time, certain ofour OEM and semiconductor manufacturer customers may account for a significantportion of our revenues. For example, for the year ended December 31,2007, Samsung accounted for approximately 28% of our consolidated revenues.These manufacturers could develop their own technologies or decide to excludeour audio rendering technology from their products altogether in an effort toreduce costs. The loss of any key customer could have a material adverse affecton our financial condition and results of operations.

 

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*** ***

***We depend on the sale by our licensees of productsthat incorporate our technologies, and a reduction in those sales wouldadversely affect our licensing revenue.***

** **

We derive most of our revenue from the licensing ofour technologies to manufacturers of consumer electronics products. We do notmanufacture consumer electronics products ourselves and our licensing revenueis dependent on sales by our licensees of products that incorporate ourtechnologies and the ability of such licensees to achieve broad marketacceptance for such products. We cannot control these manufacturers’ productdevelopment or commercialization efforts or predict their success. In addition,our license agreements, which typically require manufacturers of consumerelectronics products to pay us a specified royalty for products shipped thatincorporate our technologies, do not require these manufacturers to include ourtechnologies in any specific number or percentage of units. Accordingly, if ourlicensees sell fewer products incorporating our technologies, decline to marketproducts incorporating our technologies, or otherwise face significant economicdifficulties, our revenue will decline. Lower sales of products incorporatingour technologies could occur for a number of reasons including, but not limitedto, new product introductions and technological advancements, the existence ofcompeting products, changes in consumer tastes or trends, or changes inindustry standards, as well as increased market saturation for the productsincorporating our technologies or alternate consumer entertainment options, anyof which could adversely impact our business.

 

***Our business is highly dependent on the consumerelectronics market, which is characterized by short product life cycles,fluctuations in demand and seasonality, and is subject to risks related toproduct transitions and supply of other components.***

** **

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

 

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

** **

The markets for the consumer electronics products inwhich our technologies are incorporated are intensely competitive and pricesensitive. Retail prices for consumer electronics products that include ourtechnologies, have decreased significantly, and we expect prices to continue todecrease for the foreseeable future. In response, manufacturers have sought toreduce their product costs, which can result in downward pressure on thelicensing fees we charge our customers who incorporate our technologies intotheir products. Alternatively, our customers may seek to eliminate ourtechnologies in their products in favor of internally developed 

 

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technologies. A declinein the licensing fees we charge could materially and adversely affect ouroperating results.

 

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

** **

The digital audio, consumer electronics andentertainment markets are intensely competitive, subject to rapid change, andsignificantly affected by new product introductions and other market activitiesof industry participants

 

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

 

·                  greater name recognition;

 

·                  a longer operating history;

 

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

 

·                  a more extensive customer base;

 

·                  broader product and service offerings;

 

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

 

·                  more technicians and engineers.

 

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

 

***We are subject to risks associated with substantialinternational operations.***

** **

We conduct sales and customer support operations in anumber of countries throughout the world that require refinement to adapt tothe changing market conditions on a regional basis. In addition, many of oursignificant customers are headquartered in the Asia Pacific region,particularly Japan and Korea. Approximately 90%, 91% and 84% of our revenueswere derived from customers with headquarters located in the Asia Pacificmarkets during the years ended December 31, 2007, 2006 and 2005,respectively. We expect to continue to derive a significant portion of ourrevenues from sales to customers in these markets for the foreseeable future.Also, a substantial number of products incorporating our technologies aremanufactured, assembled and tested by third parties in Asia. As a result, weare subject to a number of risks of conducting business outside of the UnitedStates, any of which could have a material adverse impact on our business andresults of operations, including:

 

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

 

·                  difficulties and costs of staffing and managing foreign operations;

 

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

 

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

 

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

 

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

 

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

 

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

 

***General economic or market conditions may reduceour revenues and harm our business.***

** **

Our business is particularly exposed to adversechanges in general economic and market conditions, because products thatincorporate our technologies are entertainment oriented and often luxury goods.A slowdown or decline in U.S. or foreign economic growth may adversely affectconsumer confidence, disposable income or retail spending in general. As a result,sales by our licensees of consumer electronics and other products incorporatingour technologies may not grow as rapidly as in prior periods or may evendecrease if the current economic downturn continues or worsens, which couldadversely affect our licensing revenue.

 

***If the sale of consumer electronics productsincorporating our technologies does not grow in emerging markets, our abilityto increase our licensing revenue may be limited.***

** **

We also expect that growth in our licensing revenuewill depend, in part, upon the growth of sales of consumer electronics productsincorporating our technologies in other countries, including China and India,as consumers in these markets have more disposable income and are increasinglypurchasing entertainment products with surround sound capabilities. Thesecountries have rapidly expanding and growing economies that are less maturethan economies of other regions in which we derive significant portions of ourrevenue. Because of this, changes to employment patterns, currency fluctuationsand political uncertainties could impact our ability to grow our licensingrevenue in these regions.

** **

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** **

***We have a long and unpredictable sales cycle, whichcan result in uncertainty and delays in generating additional revenues.***

** **

Historically, because of the complexity of ourtechnologies, it can take a significant amount of time and effort to explainthe benefits of our technologies to potential new customers and to negotiate asale. For example, it typically takes six to nine months after our firstcontact with a prospective customer before we start licensing our technology tothat customer. In addition, purchases of our products are usually made inconnection with new design starts by our customers, the timing of which isoutside of our control. Accordingly, we may be unable to predict accurately thetiming of any significant future sales of our products. We may also spendsubstantial time and management attention on potential license agreements thatare not consummated, or in which the consumer electronic product ultimatelydoes not sell in large quantities, thereby foregoing other higher revenueopportunities.

 

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

** **

Our ability to compete may be affected by our abilityto protect our proprietary information. We have filed numerous U.S. and foreignpatent applications and to date have a number of issued U.S. and foreignpatents covering various aspects of our technologies. We cannot guarantee thatthe steps taken by us to protect our intellectual property will be adequate toprevent misappropriation of our technology or that our competitors will notindependently develop technologies that are substantially equivalent orsuperior to our technology. In addition, the laws of certain foreign countriesmay not protect our intellectual property rights to the same extent as do thelaws of the U.S. Litigation in the consumer electronics markets is common. Itis possible that third parties may assert claims or initiate litigation againstus or our customers with respect to existing or future products. In addition,we may initiate claims or litigation against third parties for infringement ofour proprietary rights or to determine the scope and validity of ourproprietary rights. Claims and litigation brought against us or initiated by uscould be costly and time consuming and could divert our management from ourbusiness. The outcome of any such pending or future litigation is uncertain,and could require us to pay significant damages or could prevent us fromlicensing some or all of our technologies, of which could significantly harmour business and results of operations.

 

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

** **

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

** **

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** **

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

** **

The trading price of our common stock has been, andwill likely continue to be, subject to wide fluctuations in response toquarterly variations in our operating results, announcements of new products ortechnological innovations by us or our competitors, strategic alliances betweenus and third parties, general market fluctuations and other events and factors.Changes in earnings estimates made by brokerage firms and industry analystsrelating to the markets in which we do business, or relating to usspecifically, have in the past resulted in, and could in the future result in,an immediate and adverse effect on the market price of the common stock. Eventhough our stock is quoted on the NASDAQ Global Market, our stock has had andmay continue to have low trading volume and high volatility. The historicallylow trading volume of our stock makes it more likely that a severe fluctuationin volume, either up or down, will significantly impact the stock price.Because of the relatively low trading volume of our stock, our stockholders mayhave difficulty selling our common stock.

 

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

** **

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

 

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds**

 

On May 19, 2008, theCompany’s Board of Directors approved a stock repurchase program.  Underthe stock repurchase program, the Company may acquire up to $10.0 million ofthe Company’s outstanding common stock for a period from May 20, 2008 toNovember 19, 2008.  Purchases may be made from time to time in theopen market, in block purchases or in privately negotiated transactions,depending on market conditions, share price and other factors.  All repurchased shares are reflected astreasury stock in the accompanying consolidated balance sheets. The followingtable details our common stock repurchases for the three months endedJune 30, 2008:

 

**IssuerPurchases of Equity Securities**

 
| **Period**              | ** ** | **Total Number of  Shares (or Units)  Purchased** | ** ** | **Average Price Paid  per Share (or Unit)** | ** ** | **Total Number of  Shares (or Units)  Purchased as Part  of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares (or Units)  that May Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April   1-30, 2008 |       | —                                                                |       | $                                                                    | —     |                                                                                                                                              | —     | ** **                                                                                                                                                                                     | $          | — | ** ** |
| May  1-31,  2008   |       | —                                                                | ** ** | $                                                                    | —     |                                                                                                                                              | —     | ** **                                                                                                                                                                                     | $          | 10,000,000 | ** ** |
| June 1-30,  2008   |       | 14,200                                                                | ** ** | $                                                                    | 6.87       |                                                                                                                                              | 14,200     | ** **                                                                                                                                                                                     | $          | 9,902,396 | ** ** |

 

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

 

The Annual Meeting ofStockholders of SRS Labs, Inc. was held on June 18, 2008 for thepurpose of (a) electing two Class III directors to the Board ofDirectors, (b) voting on a proposal on an amendment to the SRSLabs, Inc. 2006 Stock Incentive Plan to increase the number of shares ofcommon stock available for issuance thereunder by 1,750,000 and (c) votingon a proposal to ratify the appointment of Squar, Milner, Peterson,Miranda & Williamson, LLP as independent auditors for the fiscal yearending December 31, 2008.

 

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Sam Yau and Thomas C.K.Yuen were elected to serve as Class III directors of the Company for athree-year term expiring at the 2011 Annual Meeting of Stockholders.  Winston Hickman and Carol Miltner continuedas Class I Directors.  David Dukescontinued as a Class II Director. The tabulation of the votes cast for the election of Sam Yau and ThomasC.K. Yuen were as follows:

 
| **Nominee**      | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|------------------|------------|--------------------|------------|-------------------------|------------|
| Sam Yau          |       | 14,481,392         |       | 899,313                 |       |
| Thomas C.K. Yuen |       | 13,952,165         |       | 1,428,540               |       |

 

The proposal to approvean amendment to the SRS Labs, Inc. 2006 Stock Incentive Plan to increasethe number of shares of common stock available for issuance thereunder by1,750,000 was approved.  The tabulation ofvotes was as follows:

 
| **Votes For** | ** ** | **Votes Against &  Abstentions** | ** ** |
|--------------------|------------|------------------------------------------------|------------|
| 8,245,226          |       | 2,318,622                                      |       |

 

The proposal to ratifythe appointment of Squar, Milner, Peterson, Miranda & Williamson, LLPas independent auditors for the fiscal year ending December 31, 2008 wasapproved.  The tabulation of votes was asfollows:

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|--------------------|------------|------------------------|------------|-----------------|------------|---------------------------|------------|
| 15,299,781         |       | 56,131                 |       | 24,792          |       | 0                         |       |

 

**Item 6.Exhibits**

 

The exhibits listed beloware hereby filed with the SEC as part of this Report.

 
| Exhibit   Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                 |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Certificate of Incorporation of the Company,  previously filed with the SEC as Exhibit 3.1 to the Company’s  Registration Statement on Form SB-2, specifically included in Amendment  No. 1 to such Registration Statement filed with the SEC on July 3,  1996 (File No. 333-4974-LA), which is incorporated herein by reference. |
| 3.2              |       | Bylaws of the Company, previously filed with the SEC  as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for  the period ended September 30, 1999, filed with the SEC on  November 12, 1999, which is incorporated herein by reference.                                                                                     |
| 31.1             |       | Certification of Chief Executive Officer of SRS  Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 31.2             |       | Certification of Chief Financial Officer of SRS  Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 32.1             |       | Certification of Chief Executive Officer of SRS  Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                              |
| 32.2             |       | Certification of Chief Financial Officer of SRS  Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                              |

 

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**SIGNATURES**

 

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

 

 
|                                      | SRS LABS, INC., a Delaware corporation       |
|--------------------------------------|---------------------------------------------------|
|                                 |                                              |   |
| Date:  August 7, 2008 | By:                                               | /S/ THOMAS C.K.  YUEN |
|                                 | Thomas C.K. Yuen                                  |   |
|                                 | Chairman of the Board and Chief Executive Officer |
|                                 | (Principal Executive Officer)                     |   |
| ** **                           | ** **                                        | ** ** |
| ** **                           | ** **                                        | ** ** |
| Date:  August 7, 2008 | By:                                               | /S/ ULRICH  GOTTSCHLING |
|                                 | Ulrich Gottschling                                |   |
|                                 | Chief Financial Officer                           |   |
|                                 | (Principal Financial and Accounting Officer)      |
|                                      |                                                   |  |  |  |

 

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**EXHIBIT INDEX**

 
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                 |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Certificate of Incorporation of the Company,  previously filed with the SEC as Exhibit 3.1 to the Company’s  Registration Statement on Form SB-2, specifically included in Amendment  No. 1 to such Registration Statement filed with the SEC on July 3,  1996 (File No. 333-4974-LA), which is incorporated herein by reference. |
| 3.2             |       | Bylaws of the Company, previously filed with the SEC  as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for  the period ended September 30, 1999, filed with the SEC on  November 12, 1999, which is incorporated herein by reference.                                                                                     |
| 31.1            |       | Certification of Chief Executive Officer of SRS  Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 31.2            |       | Certification of Chief Financial Officer of SRS  Labs, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act.                                                                                                                                                                                                                                  |
| 32.1            |       | Certification of Chief Executive Officer of SRS  Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                              |
| 32.2            |       | Certification of Chief Financial Officer of SRS  Labs, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                              |

 

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