**Exhibit99.1**

** **

**SRS Labs, Inc.**

**Profit Sharing and Bonus Plan**

**(Adopted by the SRS Labs, Inc.Board of Directors on May 10, 2006)**

 

This profit sharing and bonus plan shall be known as the SRS Labs, Inc.Profit Sharing and Bonus Plan (the “Plan”). The Plan is intended to qualify as a compensation or bonus plan that isexempt from the application of the Employee Retirement Income Security Act of1974, as amended, by reason of Section 3 of such Act.

 
| **1.** | **Applicability Period** |
|--------|--------------------------|
|   |                     |

The Plan applies to the fiscal year of SRS labs, Inc. (the “Company”)ending December 31, 2006 and to future fiscal years until the Plan isterminated pursuant to Section 11 below.

 
| **2.** | **Components of the Plan** |
|--------|----------------------------|
|   |                       |

The Plan has two components: Profit Sharing and Bonus.

 
| **3.** | **Eligibility** |
|--------|-----------------|
|   |            |   |
|        |                 |  |  |

All full-time, regular employees of the Company and its subsidiariesare eligible to participate in the Plan. Consultants, part-time employees, temporary employees and non-employeedirectors are not eligible to participate in any part of the Plan.   A full time regular employee is defined asone who regularly works an average of 32 hours weekly.

 
| **4.** | **Profit-Sharing Awards** |
|--------|---------------------------|
|   |                      |

4.1           **Eligibility forProfit-Sharing Awards.** Alleligible employees who were employed by the Company or its subsidiaries fromthe first day of any fiscal quarter in which the Company reports net incomethrough the date the Company files its Quarterly Report on Form 10-Q with theSecurities and Exchange Commission (the “SEC”) for that quarter or, withrespect to the fourth quarter, the date the Company files with the SEC itsAnnual Report on Form 10-K for the fiscal year, will be entitled to aprofit-sharing payment determined in accordance with Sections 4.2 and 4.3 ofthe Plan.

 

4.2             **Aggregate Profit-Sharing Awards. **For each fiscal quarter, the Company shall allocate 5% of theCompany’s net income for the quarter for profit sharing payments (subject tothe discretion of the Board of Directors to change this percentage, at any timeand from time to time, for future fiscal years through a resolution adoptedeither before the next fiscal year begins or within the first three monthsthereafter).  Net income as definedthroughout this Plan shall exclude FAS 123 charges.

 

4.3             **Allocation and Distribution of Profit-Sharing Awards.**Theprofit sharing payments for a given fiscal quarter shall be allocated to theeligible employees entitled thereto under Section 4.1 pro rata in proportion totheir respective base salaries.

 

 

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| **5.** | **Quarterly Bonus Awards** |
|--------|----------------------------|
|   |                       |

5.1           **Eligibilityfor Quarterly Bonuses.**  All eligible employees who wereemployed by the Company from the first day of a fiscal quarter (other than thefourth fiscal quarter) for which the Company achieved at least 80% of theCompany’s net income target for the quarter established by the Company’s Boardof Directors through the date the Company files its Quarterly Report on Form10-Q with the SEC for that quarter will be entitled to a quarterly bonuspayment.

 

5.2           **AggregateBonus Pool. **For each of thefirst three fiscal quarters, the aggregate bonus pool shall be determined asfollows:  using the table below, take theapplicable “% of Net Income Achieved” (actual net income for the applicablequarter divided by target net income for such quarter, rounded down to thenearest whole percentage) then calculate the product of the corresponding “Award%” multiplied by an amount equal to 8% of the Company’s net income for theapplicable quarter (subject to the discretion of the Board of Directors tochange this percentage at any time and from time to time, effective for futurefiscal years through a resolution adopted either before the next fiscal yearbegins or within the first three months thereafter).

 
| **% of Net Income Achieved** | ** ** | **Award %** |
|------------------------------|------------|-------------|
| <80%                      |       | 0%          |
| 80%                          |       | 25%         |
| 90%                          |       | 50%         |
| 91%                          |       | 55%         |
| 92%                          |       | 60%         |
| 93%                          |       | 65%         |
| 94%                          |       | 70%         |
| 95%                          |       | 75%         |
| 96%                          |       | 80%         |
| 97%                          |       | 85%         |
| 98%                          |       | 90%         |
| 99%                          |       | 95%         |
| 100%                         |       | 100%        |

 

5.3           **Allocationand Distribution of Quarterly Bonuses. **Theaggregate quarterly bonus payments determined in accordance with Section 5.2will be allocated and distributed to eligible employees in accordance withSection 7 of the Plan.

 
| **6.** | **Annual Bonus Awards** |
|--------|-------------------------|
|   |                    |

6.1           **Eligibilityfor Annual Bonuses.** Alleligible employees who were employed by the Company from the first day of thefourth fiscal quarter through the date the Company files its Annual Report onForm 10-K with the SEC for the fiscal year will be entitled to an annual bonuspayment if the Company achieved at least 80% of the Company’s net income targetfor the fiscal year established by the Company’s Board of Directors.

 

 

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6.2           **Aggregate Bonus Pool. **Theaggregate bonus pool for annual bonuses shall be determined as follows:  using the table below, take the applicable “%of Net Income Achieved” (actual net income for the fiscal year divided bytarget net income for the fiscal year, rounded down to the nearest wholepercentage) then calculate the product of the corresponding “Award %”multiplied by an amount equal to the sum of (a) 10% of the Company’s net incomefor the fourth quarter plus (b) 2% of the Company’s net income for each of thefirst three fiscal quarters (subject to the discretion of the Board ofDirectors to change these percentages, at any time and from time to time, forfuture fiscal years through a resolution adopted either before the next fiscalyear begins or within the first three months thereafter).

 
| **% of Net Income Achieved** | ** ** | **Award %** |
|------------------------------|------------|-------------|
| <80%                      |       | 0%          |
| 80%                          |       | 25%         |
| 90%                          |       | 50%         |
| 91%                          |       | 55%         |
| 92%                          |       | 60%         |
| 93%                          |       | 65%         |
| 94%                          |       | 70%         |
| 95%                          |       | 75%         |
| 96%                          |       | 80%         |
| 97%                          |       | 85%         |
| 98%                          |       | 90%         |
| 99%                          |       | 95%         |
| 100%                         |       | 100%        |
| 110%                         |       | 120%        |
| 125%                         |       | 150%        |

 

6.3           **Allocationand Distribution of Annual Bonuses. **Theaggregate annual bonus payments determined in accordance with Section 6.2 willbe allocated and distributed to eligible employees in accordance with Section 7of the Plan; provided, however, that (a) the annual bonus paid toany eligible employee who was not a full-time, regular employee of the Companyor one of its subsidiaries for the entire fiscal year as determined by Section7.2 shall be reduced pro rata based upon the number of calendar days that theemployee was a full-time, regular employee of the Company or one of itssubsidiaries during the fiscal year; and (b) any portion of the annual bonuspool not distributed to eligible employees pursuant to clause (a) shall bere-allocated to all eligible employees (whether employed for the entire fiscalyear or a portion thereof) as follows: each eligible employee shall be entitledto a percentage of the total amount to be re-allocated determined by dividing(1) the number of days the eligible employee was employed as a full-time regularemployee during the fiscal year multiplied by the eligible employee’s basesalary by (2) the total base salaries for all eligible employees multiplied by365.

 

 

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| **7.** | **Bonus Distribution** |
|--------|------------------------|
|   |                   |

7.1           **Allocationto Bonus Pools. **After thetotal amount of quarterly or annual bonuses payable for a quarter or the fiscalyear has been determined in accordance with Paragraphs 5 or 6, the total amountshall be divided into three distribution pools:

 

                7.1.1 — **Broad-Based Employee Pool**— 50% of thetotal amount of the applicable bonus payable shall be allocated to aBroad-Based Employee Pool.

 

7.1.2 — **ExecutiveStaff Pool —**42.5% of the total amount of applicable bonus payableshall be allocated into an Executive Staff Pool.

 

                7.1.3 — **Discretionary Pool**— 7.5% of the totalamount of applicable bonus payable shall be allocated into a DiscretionaryPool.

 

7.2           **Distributionof Bonus Pools**.  Quarterly andannual bonus payments shall be allocated to individual employees entitledthereto under Sections 5 or 6 out of the applicable bonus pools as follows:

 

                7.2.1 — **Broad-Based Employee Pool**— The Broad-BasedEmployee Pool shall be distributed to eligible employees other than ExecutiveStaff (as defined in Section 7.2.2). This pool shall be paid out to eligible employees  pro rata in proportion to their respectivebase salaries in effect on the payment date.

 

7.2.2 — **ExecutiveStaff Pool — **The Executive Staff Pool shall bedistributed to eligible members of the Executive Staff pro rata in proportionto their respective base salaries in effect on the payment date.   The “Executive Staff” is defined as theChief Executive Officer, Chief Financial Officer, all vice presidents and anyother person identified by the Chief Executive Officer as part of the ExecutiveStaff.

 

                7.3 — **Discretionary Pool**— The Discretionary Poolshall be distributed to eligible employees other than the Executive Staff andemployees who are paid part of their compensation in the form of commissions insuch manner and amounts as determined by the Company’s Chief ExecutiveOfficer.  The Chief Executive Officershall have discretion to use any or all of the Discretionary Pool to rewardselected employees (other than the Executive Staff) who exhibit exemplaryperformance during the applicable period (*e.g.,* thefirst, second or third quarter, respectively, and for the final DiscretionaryPool distribution, the fourth quarter or the fiscal year).  The Chief Executive Officer has no obligationto use any of this pool for a given period if, in the Chief Executive Officer’sdiscretion, there has been no exemplary performance.  Any amount not used with respect to a periodcarries over into the next period.  Anyamount not used with respect to any quarter or the full fiscal year shall nolonger be subject to this Plan.

 

 

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| **8.** | **Timing of Payments** |
|--------|------------------------|
|   |                   |

Immediately after the Company files its Form 10-Q or 10-K, asapplicable, (a) the Company’s Chief Financial Officer shall calculate theamounts, if any, to be paid to eligible employees under the Plan asProfit-Sharing Awards and/or as bonuses from the Broad-Based Employee Pool andthe Executive Staff Pool, and (b) the Company’s Chief Executive Officer shalldetermine the amounts, if any, to be paid to eligible employees under the Planas bonuses from the Discretionary Pool; provided, however, thatno bonuses from the Discretionary Pool to the Company’s Executive Staff shallbe paid without the prior approval of the Compensation Committee of the Company’sBoard of Directors.  The Company shallinclude payments to which an eligible employee is entitled under the Plan insuch employee’s first regular payroll check following determination of theamounts to which the employee is entitled.

 
| **9.** | **Corporate  Transactions and Change in Control** |
|--------|---------------------------------------------------|
|   |                                              |

9.1           **Effect ofChange in Control. **Theobligations of the Plan shall be binding on any employer that acquires, througha stock purchase or merger, or through an asset purchase, or otherwise, part orall of the Company following a Change in Control.

 

9.2           **Definitionof Change in Control. **As usedin this Plan, the term “Change inControl” shall mean the occurrence of any of the following events:

 

**(a)          **The Company is merged, consolidated orreorganized into or with another corporation or other legal person and as aresult of such merger, consolidation or reorganization less than a majority ofthe combined voting power of the then outstanding securities of suchcorporation or person immediately after such transaction are held in theaggregate by the holders of Voting Stock (as that term is defined in subsection(c) hereof) of the Company immediately prior to such transaction;

**(b)          **The Company sells all or substantiallyall of its assets to any other corporation or other legal person, less than amajority of the combined voting power of the then-outstanding voting securitiesof which are held directly or indirectly in the aggregate by the holders ofVoting Stock of the Corporation immediately prior to such sale;

**(c)          **Any person (as the term “person” is usedin Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934(the “Exchange Act”) has become the beneficial owner (as the term “beneficialowner” is defined under Rule 13d-3 or any successor rule or regulationpromulgated under the Exchange Act) of securities representing more than 50% ofthe combined voting power of the then-outstanding securities of theCompany entitled to vote generally in the election of directors of the Company(“Voting Stock”);

**(d)          **The Company files a report or proxystatement with the Securities and Exchange Commission pursuant to the ExchangeAct disclosing in, or in response to,

 

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Form 8-K or Schedule 14A (or any successor schedule,form or report or item therein) that a Change in Control of the Company hasoccurred;

**(e)          **Notwithstanding the foregoing provisionsof (i) subsections (c) or (d) hereof, a “Change in Control” shall not bedeemed to have occurred for purposes of this Plan solely because the Company,an entity in which the Company directly or indirectly beneficially owns 50% ormore of the voting securities of such entity (an “Affiliate”), any Company-sponsoredemployee stock ownership plan or any other employee benefit plan of the Companyeither files or becomes obligated to file a report or a proxy statement underor in response to Schedule 13D, Schedule 14D-1, Form 8-K orSchedule 14A (or any successor schedule, form or report or item therein) underthe Exchange Act, disclosing beneficial ownership by it of shares of votingsecurities of the Company, whether in excess of 50% or otherwise, or becausethe Company reports that a Change in Control of the Company has or may haveoccurred or will or may occur in the future by reason of such beneficialownership or (ii) subsection (c) hereof, a “Change in Control” shall notbe deemed to have occurred for purposes of this Plan solely because a personwho is a holder of five percent (5%) or more of the Voting Stock and who alsois an officer and director of the Company on the initial effective date of thisPlan acquires more than 50% of the Voting Stock.

**(f)           **Notwithstanding the foregoing provisionsof subsections (a) and (b) hereof, a “Change in Control” shall not be deemed tohave occurred for purposes of this Plan solely because the Company engages inan internal reorganization, which may include a transfer of assets to one ormore Affiliates, providedthat such transaction has been approvedby at least two-thirds of the Directors of the Company and as a result ofsuch transaction or transactions, at least 80% of the combined voting power ofthe then-outstanding securities of the Company or its successor are heldin the aggregate by the holders of Voting Stock immediately prior to suchtransactions.
| **10.** | **Source  of Payments** |
|---------|-------------------------|
|    |                    |

All payments under the Plan will be paid in cash from the generalconsolidated funds of the Company.  Noseparate fund will be established.

 
| **11.** | **Amendment  or Termination** |
|---------|-------------------------------|
|    |                          |

The Plan may be amended, modified, suspended or terminated by the Boardof Directors of the Company at any time and without notice to or the consent ofany participant in the Plan.

 
| **12.** | **Severability** |
|---------|------------------|
|    |             |

If any term or condition of the Plan shall be invalid or unenforceable,the remainder of the Plan shall not be affected thereby and shall continue ineffect and application to the fullest extent permitted by law.

 

 

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| **13.** | **No  Employment Rights** |
|---------|---------------------------|
|    |                      |

Neither the establishment nor the terms of the Plan shall be held orconstrued to confer upon any employee the right to a continuation of employmentby the Company, nor constitute a contract of employment, express or implied.  Subject to any applicable employmentagreement, the Company reserves the right to dismiss or otherwise deal with anyemployee, including eligible employees, to the same extent as though the Planhad not been adopted.  Nothing in thePlan is intended to alter the “AT-WILL” status of eligible employees, it beingunderstood that, except to the extent otherwise expressly set forth to thecontrary in a written employment agreement, the employment of any employee canbe terminated at any time by either the Company or the employee with or withoutnotice, with or without cause.

 
| **14.** | **Transferability  of Rights** |
|---------|--------------------------------|
|    |                           |

The Company shall have the right to transfer its obligations under thePlan, with respect to one or more eligible employees, to any person, includingany purchaser of all or any part of the Company’s business.  No eligible employee or spouse shall have anyright to commute, encumber, transfer or otherwise dispose of or alienate anypresent or future right or expectancy which the eligible employee may have atany time to receive payments of benefits hereunder, which benefits and therights thereto are expressly declared to be nonassignable and nontransferable,except to the extent required by law. Any attempt by a Participant to transfer or assign a benefit or anyrights granted hereunder shall (after consideration of such facts as theCompany deems pertinent) be grounds for terminating any rights of the eligibleemployee to any portion of the Plan benefits not previously paid.

 
| **15.** | **Governing  Law** |
|---------|--------------------|
|    |               |

The Plan shall be construed, administered and enforced according to thelaws of the State of California.

 
| **16.** | **Administration** |
|---------|--------------------|
|    |               |

The Compensation Committee of the Company’s Board of Directors shalladminister the Plan in accordance with its terms.  The Compensation Committee shall have thediscretion to interpret or construe the terms of this Plan and to make anyfindings of fact needed in the administration of this Plan.  The Compensation Committee’s interpretationand construction of any provision of the Plan shall be final, binding andconclusive.

 

 

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