**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 thequarterly period ended March 31, 2008**

** **

**OR**

** **

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

 

**For thetransition period         to        **

** **

# **CommissionFile Number 0-21123**

 

**SRS LABS, INC.**

(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 check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

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

 

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

 

As of April 30, 2008, 16,946,377 of the issuer’scommon stock, par value $.001 per share, were outstanding; of this amount,1,172,662 shares of the common stock were held as treasury shares.

 

 

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**SRS LABS, INC.**

 

**QuarterlyReport on Form 10-Q**

**For theThree Months Ended March 31, 2008**

**Index**

 
| ** **                                    | **Page No.** |
|-----------------------------------------------|--------------|
| **PART I — FINANCIAL  INFORMATION** | 4            |
| Item 1.                                       |         | Financial Statements | 4 |
|                                          |         | Condensed Consolidated  Balance Sheets as of March 31, 2008 (Unaudited) and December 31,  2007 | 4 |
|                                          |         | Condensed Consolidated  Statements of Operations for the three months ended March 31, 2008 and  2007 (Unaudited) | 5 |
|                                          |         | Condensed Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the three  months ended March 31, 2008 (Unaudited) | 6 |
|                                          |         | Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2008 and  2007 (Unaudited) | 7 |
|                                          |         | Notes to the  Condensed Consolidated Financial Statements (Unaudited) | 8 |
| Item 2.                                       |         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| Item 3.                                       |         | Quantitative  and Qualitative Disclosures About Market Risk | 14 |
| Item 4.                                       |         | Controls and  Procedures | 14 |
| **PART II — OTHER  INFORMATION**    | 15           |
| Item  6.                                      |         | Exhibits | 15 |
|                                          |         |   |   |
| SIGNATURES                                    | 16           |

 

2

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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, areforward-looking statements. In some cases, you can identify forward-lookingstatements by terms such as may, will, should, expect, plan, intend, forecast,anticipate, believe, estimate, predict, potential, continue or the negative ofthese terms or other comparable terminology. The forward-looking statementscontained in this Quarterly Report involve known and unknown risks,uncertainties and situations that may cause our or our industry’s actualresults, level of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by these statements. Factors that might causeactual events or results to differ materially from those indicated by theseforward-looking statements may include the matters listed in our mostrecently filed Annual Report on Form 10-K and elsewhere in this QuarterlyReport on Form 10-Q, including, but not limited to, the loss of any onesignificant customer; the acceptance of new SRS Labs products and technologies;the import of competitive products and pricing; the timely development andrelease of technologies by the Company; general business and economicconditions, especially in Asia; product and customer concentration in ourbusiness; our high dependence on the consumer electronics market, which ischaracterized 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.

 

3

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**PART I — FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

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

 
| ** **                                                                                                                                                                                                     | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **(unaudited)**              | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| **Current Assets**                                                                                                                                                                                             |       |                         |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                     |       | $                            | 47,687,989 |                            | $          | 39,615,291 |   |
| Accounts  receivable, net                                                                                                                                                                                      |       | 384,485                      |       | 1,138,425                       |       |
| Prepaid expenses  and other current assets                                                                                                                                                                     |       | 1,010,355                    |       | 893,388                         |       |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| **Total  Current Assets**                                                                                                                                                                                      |       | 49,082,829                   |       | 41,647,104                      |       |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| Investments  available for sale                                                                                                                                                                                |       | —                       |       | 5,451,875                       |       |
| Property and equipment,  net                                                                                                                                                                                   |       | 351,726                      |       | 309,727                         |       |
| Intangible  assets, net                                                                                                                                                                                        |       | 2,280,932                    |       | 2,197,616                       |       |
| Deferred income  taxes, net                                                                                                                                                                                    |       | 2,239,276                    |       | 1,776,202                       |       |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| **Total  Assets**                                                                                                                                                                                              |       | $                            | 53,954,763 |                            | $          | 51,382,524 |   |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| **Current Liabilities**                                                                                                                                                                                        |       |                         |       |                            |       |
| Accounts payable                                                                                                                                                                                               |       | $                            | 453,247    |                            | $          | 529,063 |   |
| Accrued  liabilities                                                                                                                                                                                           |       | 796,977                      |       | 689,308                         |       |
| Deferred revenue                                                                                                                                                                                               |       | 2,312,050                    |       | 1,156,836                       |       |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| **Total  Current Liabilities**                                                                                                                                                                                 |       | 3,562,274                    |       | 2,375,207                       |       |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| **Commitments and contingencies (Note 5)**                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                      | ** ** |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| **Stockholders’ Equity**                                                                                                                                                                                  |       |                         |       |                            |       |
| Preferred  stock—$.001 par value; 2,000,000 shares authorized; no shares issued or  outstanding                                                                                                           |       | —                       |       | —                          |       |
| Common  stock—$.001 par value; 56,000,000 shares authorized; 16,946,377 shares  issued; and 15,773,715 and 15,778,715 shares outstanding at March 31,  2008 and December 31, 2007, respectively |       | 16,947                       |       | 16,947                          |       |
| Additional  paid-in capital                                                                                                                                                                                    |       | 74,646,916                   |       | 74,143,772                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                                          |       | —                       |       | (48,125                         | )          |
| Accumulated  deficit                                                                                                                                                                                           |       | (18,296,744                  | )          | (19,155,096                     | )          |
| Treasury stock  at cost, 1,172,662 and 1,167,662 shares at March 31, 2008 and  December 31, 2007, respectively                                                                                       |       | (5,974,630                   | )          | (5,950,181                      | )          |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| **Total  Stockholders’ Equity**                                                                                                                                                                           |       | 50,392,489                   |       | 49,007,317                      |       |
|                                                                                                                                                                                                           |       |                         |       |                            |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                                                           |       | $                            | 53,954,763 |                            | $          | 51,382,524 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

4

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**SRS LABS, INC. AND SUBSIDIARY****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Revenues                                                    |       | $                                                | 4,940,988  |   | $ | 5,072,403 |   |
| Cost of sales                                               |       | 25,949                                           |       | 38,540 |   |
|                                                        |       |                                             |       |   |   |
| Gross profit                                                |       | 4,915,039                                        |       | 5,033,863 |   |
|                                                        |       |                                             |       |   |   |
| Operating expenses:                                         |       |                                             |       |   |   |
| Sales and  marketing                                        |       | 2,143,622                                        |       | 1,876,293 |   |
| Research and  development                                   |       | 926,762                                          |       | 861,625 |   |
| General and  administrative                                 |       | 1,438,358                                        |       | 1,377,427 |   |
|                                                        |       |                                             |       |   |   |
| Total operating  expenses                                   |       | 4,508,742                                        |       | 4,115,345 |   |
|                                                        |       |                                             |       |   |   |
| Operating income                                            |       | 406,297                                          |       | 918,518 |   |
| Other income, net                                           |       | 449,961                                          |       | 493,796 |   |
| Income before income taxes                                  |       | 856,258                                          |       | 1,412,314 |   |
| Income taxes                                                |       | (2,094                                           | )          | — |   |
| Net income                                                  |       | $                                                | 858,352    |   | $ | 1,412,314 |   |
|                                                        |       |                                             |       |   |   |
| Net income per common share:                                |       |                                             |       |   |   |
| Basic                                                       |       | $                                                | 0.05       |   | $ | 0.09 |   |
| Diluted                                                     |       | $                                                | 0.05       |   | $ | 0.08 |   |
|                                                        |       |                                             |       |   |   |
| Weighted average shares used in the per share  calculation: |       |                                             |       |   |   |
| Basic                                                       |       | 15,778,188                                       |       | 15,992,704 |   |
| Diluted                                                     |       | 16,305,095                                       |       | 17,081,524 |   |

 

 Seeaccompanying notes to the condensed consolidated financial statements

 

5

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**SRS LABS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (Unaudited)**

 
| ** **                                                     | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**    | ** ** | **Treasury** | ** ** | ** ** | ** ** | **Comprehensive** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------------------|------------|--------------------|------------|--------------|------------|------------|------------|-------------------|------------|
| ** **                                                     | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Income  (Loss)** | ** ** | **Deficit**  | ** ** | **Stock**  | ** ** | **Total**         | ** ** | **Income** | ** ** |
| BALANCE,  December 31, 2007                               |       | 15,778,715            |       | $                       | 16,947     |                                  | $          | 74,143,772         |       | $            | (48,125    | )          | $          | (19,155,096       | )          | $ | (5,950,181 | ) | $ | 49,007,317 |   |   |   |
| Purchase of  treasury stock                                    |       | (5,000                | )          |                    |       |                                  |       |               |       |         |       | (24,449    | )          | (24,449           | )          |   |   |
| Stock-based  compensation                                      |       | —                |       | —                  |       | 503,144                               |       | —             |       | —       |       | —     |       | 503,144           |       |   |   |
| Unrealized gain  on investments available for sale, net of tax |       | —                |       | —                  |       | —                                |       | 48,125             |       | —       |       | —     |       | 48,125            |       | 48,125 |   |
| Net income                                                     |       | —                |       | —                  |       | —                                |       | —             |       | 858,352      |       | —     |       | 858,352           |       | 858,352 |   |
|                                                           |       |                  |       |                    |       |                                  |       |               |       |         |       |       |       |              |       |   |   |
| BALANCE,  March 31, 2008                                  |       | 15,773,715            |       | $                       | 16,947     |                                  | $          | 74,646,916         |       | $            | —     |       | $          | (18,296,744       | )          | $ | (5,974,630 | ) | $ | 50,392,489 |   | $ | 906,477 |   |
|                                                                |            |                       |            |                         |            |                                       |            |                    |            |              |            |            |            |                   |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to the condensed consolidated financialstatements

 

6

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

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Cash Flows from Operating Activities:**                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                | 858,352    |   | $ | 1,412,314 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                                     |       | 174,839                                          |       | 184,049 |   |
| Provision for  doubtful accounts                                                   |       | —                                           |       | 20,927 |   |
| Deferred taxes                                                                     |       | (463,074                                         | )          | (313,060 | ) |
| Stock-based  compensation expense                                                  |       | 503,144                                          |       | 426,842 |   |
| Changes in  operating assets and liabilities:                                      |       |                                             |       |   |   |
| Accounts  receivable                                                               |       | 753,940                                          |       | 246,072 |   |
| Prepaid expenses  and other current assets                                         |       | (116,967                                         | )          | 183,556 |   |
| Accounts payable                                                                   |       | (75,816                                          | )          | (377,614 | ) |
| Accrued  liabilities                                                               |       | 107,669                                          |       | (442,816 | ) |
| Deferred revenue                                                                   |       | 1,155,214                                        |       | (154,565 | ) |
| Net cash  provided by operating activities                                         |       | 2,897,301                                        |       | 1,185,705 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash Flows from Investing Activities:**                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Proceeds from sale of investments                                                  |       | 5,500,000                                        |       | — |   |
| Purchase of property and equipment                                                 |       | (90,672                                          | )          | (31,410 | ) |
| Expenditures related to intangible assets                                          |       | (209,482                                         | )          | (156,721 | ) |
| Net cash  provided by (used in) investing activities                               |       | 5,199,846                                        |       | (188,131 | ) |
|                                                                               |       |                                             |       |   |   |
| **Cash Flows from Financing Activities:**                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Proceeds from exercise of stock options                                            |       | —                                           |       | 1,104,601 |   |
| Purchase of treasury stock                                                         |       | (24,449                                          | )          | — |   |
| Net cash (used  in) provided by financing activities                               |       | (24,449                                          | )          | 1,104,601 |   |
|                                                                               |       |                                             |       |   |   |
| **Net Increase in Cash and Cash Equivalents**                                      |       | 8,072,698                                        |       | 2,102,175 |   |
| **Cash and Cash Equivalents, Beginning of Period**                                 |       | 39,615,291                                       |       | 35,011,425 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash and Cash Equivalents, End of Period**                                       |       | $                                                | 47,687,989 |   | $ | 37,113,600 |   |
|                                                                               |       |                                             |       |   |   |
| **Supplemental Disclosure of Cash Flow  Information:**                             | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cash paid during  the period for:                                                  |       |                                             |       |   |   |
| Income taxes                                                                       |       | $                                                | 411,748    |   | $ | 277,041 |   |
| **Supplemental Disclosure of Non-Cash Investing  Activities:**                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Unrealized gain  on investments, net                                               |       | $                                                | 48,125     |   | $ | 44,715 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

7

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**SRS LABS, INC. AND SUBSIDIARY****NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**1.****                                     ****Basis of Presentationand 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”) for interim financialinformation and the rules and regulations of the U.S. Securities andExchange 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.

 

**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.

 

**CustomerConcentrations**

 

Our revenue is solely derived from licensing.  For the three months ended March 31,2008, one customer, Samsung, accounted for approximately 42% of ourrevenue.  For the same period in theprior year, two customers, Samsung and Sony, accounted for approximately 23%and 12%, respectively, of our revenue.

 

**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.

 

8

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

 

Intangible assets consistof the following:

 
| ** **                                                  | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Patents                                                     |       | $                        | 3,447,651  |                        | $          | 3,315,343 |   |
| Accumulated amortization                                    |       | (1,703,382               | )          | (1,622,954                  | )          |
| Patents, net                                                |       | 1,744,269                |       | 1,692,389                   |       |
| Other intangibles:                                          |       |                     |       |                        |       |
| License  agreements acquired in purchase of SRSWOWcast      |       | 640,071                  |       | 640,071                     |       |
| Capitalized  software and hardware for several technologies |       | 740,484                  |       | 663,310                     |       |
| Total of other  intangibles                                 |       | 1,380,555                |       | 1,303,381                   |       |
| Accumulated amortization, other intangibles                 |       | (843,892                 | )          | (798,154                    | )          |
| Other intangibles, net                                      |       | 536,663                  |       | 505,227                     |       |
| Intangible assets, net                                      |       | $                        | 2,280,932  |                        | $          | 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  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Patents                                                     |       | $                                                | 80,428     |   | $ | 66,911 |   |
| Other intangibles:                                          |       |                                             |       |   |   |
| License  agreements acquired in purchase of SRSWOWcast      |       | 16,002                                           |       | 16,002 |   |
| Capitalized  software and hardware for several technologies |       | 29,736                                           |       | 47,701 |   |
| Total intangible amortization expense                       |       | $                                                | 126,166    |   | $ | 130,614 |   |

 

As of March 31,2008, the weighted average useful life of the Company’s patents and intangibleassets was approximately 6.7 years. The following table shows theestimated amortization expense for those assets for the remaining nine monthsof the current fiscal year and each of the four succeeding fiscal years andthereafter:

 

| **Years Ending December 31,** | ** ** | **Estimated Expense** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| 2008                                         |       | $                          | 443,008    |   |
| 2009                                         |       | 367,190                    |       |
| 2010                                         |       | 330,769                    |       |
| 2011                                         |       | 291,739                    |       |
| 2012                                         |       | 273,876                    |       |
| Thereafter                                   |       | 574,350                    |       |
| Total                                        |       | $                          | 2,280,932  |   |

 

**3.****                                     ****Investments Available for Sale**

 

At December 31, 2007, the Company hasclassified its investments as available for sale in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*.  In March 2008, the investment availablefor sale was called by the bond issuer prior to its stated maturity date.  The proceeds from the sale were$5,500,000.  The proceeds were immediatelyinvested in a money market fund and are included in cash equivalents as of March 31,2008.  There was no realized gain or lossrecognized on the transaction.

 

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**4.****                                     ****Net Income Per Common Share**

 

The Company applies SFAS No. 128, *Earnings per Share* (“SFAS 128”), which requires thedisclosure of basic and diluted net income or loss per share for all currentand prior periods. Basic net income or loss per common share is computed bydividing net income or loss available to common stockholders by the weightedaverage number of common shares outstanding during each year. Diluted netincome or loss per common share reflects the maximum dilution, based on theaverage price of the Company’s common stock during each period, and is computedsimilar to basic income or loss per share except that the denominator isincreased to include the number of additional shares that would have beenoutstanding if potentially dilutive stock options and warrants had beenexercised.

 

              Basic and diluted net income per share computed in accordance withSFAS 128 are as follows:

 

| ** **                                               | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| BASIC EPS                                                |       |                                                               |       |   |   |
| Net income                                               |       | $                                                                  | 858,352    |   | $ | 1,412,314 |   |
| Denominator:  weighted average common shares outstanding |       | 15,778,188                                                         |       | 15,992,704 |   |
| Net income per share                                     |       | $                                                                  | 0.05       |   | $ | 0.09 |   |
|                                                     |       |                                                               |       |   |   |
| DILUTED EPS                                              |       |                                                               |       |   |   |
| Net income                                               |       | $                                                                  | 858,352    |   | $ | 1,412,314 |   |
| Denominator:  weighted average common shares outstanding |       | 15,778,188                                                         |       | 15,992,704 |   |
| Common  equivalent shares outstanding:                   |       |                                                               |       |   |   |
| Options                                                  |       | 526,908                                                            |       | 1,088,820 |   |
| Total diluted  shares                                    |       | 16,305,096                                                         |       | 17,081,524 |   |
| Net income per share                                     |       | $                                                                  | 0.05       |   | $ | 0.08 |   |

 

There were outstanding options to purchase anaggregate of 2,086,098 and 392,420 shares of the Company’s common stock for thequarters ended March 31, 2008 and 2007, respectively, that were notincluded in the table above because they would be anti-dilutive.

 

**5.****                                     ****Commitments and Contingencies**

 

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.

 

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**6.****                                     ****Segment Information**

 

The Company operates in one reportable segment asdisclosed in our Annual Report on Form 10-K.  The following schedule presents theCompany’s revenue by geographic area. Revenue is summarized based on thelocation of the licensee’s corporate headquarters. The Americas region includesNorth, Central and South Americas.

 

| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                         | ** ** | **%** | ** ** | **2007** | ** ** | **%** | ** ** |
| **Geographic Area Revenue:** | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Korea                        |       | $                                                | 2,523,455  |   | 51 | % | $ | 1,787,920 |   | 35 | % |
| Japan                        |       | 1,695,653                                        |       | 34 | % | 2,364,509 |   | 46 | % |
| Americas                     |       | 358,282                                          |       | 7 | % | 501,885 |   | 10 | % |
| China                        |       | 276,312                                          |       | 6 | % | 407,444 |   | 8 | % |
| Europe                       |       | 87,286                                           |       | 2 | % | 10,645 |   | 1 | % |
|                         |       |                                             |       |   |   |   |   |   |   |
| Total                        |       | $                                                | 4,940,988  |   | 100 | % | $ | 5,072,403 |   | 100 | % |

 

**7.****                                     ****Recent Accounting Pronouncements**

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(revised 2007), *Business Combinations*(“SFAS No. 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) retainsthe purchase method of accounting for acquisitions, but requires a number ofchanges, including changes in the way assets and liabilities are recognized inthe purchase accounting. It also changes the recognition of assets acquired andliabilities assumed arising from contingencies, requires the capitalization ofin-process research and development at fair value, and requires the expensingof acquisition-related costs as incurred. SFAS No. 141(R) iseffective for us beginning January 1, 2009 and will apply prospectively tobusiness combinations completed on or after that date. We do not expect theadoption of SFAS No. 141 (R) will have a material effect on ourconsolidated financial position or results of operations.

 

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 be includedin consolidated net income on the face of the income statement and, upon a lossof 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.

 

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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 are a leading developer and provider of audio andvoice technology solutions for the home entertainment, portable media device,personal telecommunications, personal computer, automotive, and broadcastmarkets.  Our operations are conductedthrough SRS Labs, Inc., the parent company, and its wholly-ownedsubsidiary, SRSWOWcast.com, Inc. Our business is focused on developing andlicensing audio, voice and surround sound technology solutions to many of theworld’s leading original equipment manufacturers, or OEMs, software providersand semiconductor companies, and licensing and marketing hardware and softwareproducts for the Internet and professional audio markets.

 

#### **Critical Accounting Policies**

####  

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

 

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, includingassumptions as to future events. These estimates form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. By their nature, estimates are subject toan inherent degree of uncertainty. Actual results may materially differ fromour estimates.

 

**Results of Operations**

 

***Three Months Ended March 31, 2008Compared to Three Months Ended March 31, 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.

 

Our revenues were $4,940,988 for the three months ended March 31,2008, compared to $5,072,403 for the three months ended March 31, 2007, adecrease of $131,415 or 3%.  Revenues inour Home Entertainment market grew by $393,456 or 11.8%, primarily due toincreased revenues associated with flat panel televisions, offset by decreasedrevenues associated with CRT and Set-Top Box revenues.  Revenues associated with advanced displays,which is comprised of LCD and Plasma flat panel televisions and monitors andprojection televisions, grew by $554,376 or 19% primarily due to increasedrevenues from Samsung offset by decreased revenue from Sony.  Revenues in each of our other four marketsdecreased, as follows.  Revenues in thePC market decreased by $354,664 or 62% due to the loss in 2007 of our majorcustomer in this market.  Significantrevenues were received from this customer through the second quarter of 2007and therefore we expect that the negative trend related to this customer willcontinue through the second quarter of this fiscal year.  Revenues in personal telecommunicationsdecreased by $113,756 or 29% due to lower unit volume shipments by asignificant customer in the Japan market, partially offset by increasedrevenues from a significant customer in the United States market.

 

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The following table presents our licensing revenuesmix by market:

 

| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Home Entertainment (TV, Set Top Box, A/V Receiver,  DVD)  |       | 76                                                   | %          | 66 | % |
| Portable Media Devices (Digital Media Player,  Headphone) |       | 7                                                    | %          | 8 | % |
| Automotive                                                |       | 7                                                    | %          | 7 | % |
| Personal Telecommunications (Mobile phone, PDA)           |       | 6                                                    | %          | 8 | % |
| PC (Software, Hardware)                                   |       | 4                                                    | %          | 11 | % |

 

*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 $2,143,622 for the three months ended March 31,2008, compared to $1,876,293 for the same prior year period, an increase of$267,329 or 14%.  This increase isprimarily attributable to a 25% increase in sales and marketing personnel.  In February 2008, we hired a VicePresident of Marketing, who will be a key leader in driving the Company’smarketing efforts to cultivate and elevate the SRS brand globally.  We also spent additional marketing andadvertising dollars at the Consumer Electronics Show in January 2008 toelevate brand awareness.  Included insales and marketing expenses is stock based compensation expense of $141,894and $141,800 for the three months ended March 31, 2008 and 2007,respectively.  In 2008, we expect tocontinue to invest in our sales and marketing activities, particularly byhiring additional sales and marketing personnel and increasing our brandingefforts. As a percentage of total revenues, sales and marketing expensesincreased from 37% for thequarter ended March 31, 2007 to 43%for the same period this year.

 

*Researchand Development*

 

Research and developmentexpenses consist of salaries and related costs of employees engaged in ongoingresearch, design and development activities and costs for engineering materialsand supplies. Research and development expenses were $926,762 for the threemonths ended March 31, 2008, compared to $861,625 for the same prior yearperiod, an increase of $65,137 or 8%. This increase is primarily attributable to a 7% increase in head countand payroll related costs and an increase in travel to support our globallicensees.  Included in research anddevelopment expenses is stock based compensation expense of $123,626 and$101,725 for the three months ended March 31, 2008 and 2007,respectively.  We expect that researchand development expenses will continue to increase in 2008 as we continue toexpand our intellectual property portfolio, which we believe is critical to ourbusiness, and as we seek to accelerate the implementation of our technologywith a greater number of customers and devices. As a percentage of total revenues,research and development expenses increased from 17% for the quarter ended March 31,2007 to 19% for the same 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 $1,438,358 for thethree months ended March 31, 2008, compared to $1,377,427 for the sameprior year period, an increase of $60,931 or 4%. The increase is primarily attributable to an increase in stockbased compensation expense of $54,307. Included in general and administrative expenses is stock basedcompensation expense of $237,624 and $183,317 for the three months ended March 31,2008 and 2007, respectively.  As apercentage of total revenues, G&A expenses increased from 27% for the quarter ended March 31,2007 to 29% for the same periodthis year.

 

*OtherIncome, Net*

 

Otherincome, net consists primarily of interest income. Other income, net was$449,961 for the three months ended March 31, 2008, compared to $493,796for the same prior year period, a decrease of $43,835 or 9%. This decrease isprimarily attributable to lower interest rates earned on cash balancesinvested.

 

*Provisionfor Income Taxes*

 

Theincome tax benefit for the three months ended March 31, 2008 was $2,094, compared to income taxes of $0 for the same prior year period.  The provision consists primarily of taxespaid on licensing revenues sourced from countries requiring foreign taxwithholdings, principally Korea.  Wereduced our tax provision and our valuation allowance on our deferred taxassets by $463,074 and $313,060 for the three months ended March 31, 2008and 2007, respectively, based on our assessment of the future realizability.

 

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**Liquidity and Capital Resources**

 

Our principal source of liquidity to fundongoing operations at March 31, 2008 consisted of cash and cashequivalents of $47,687,989. Cash and cash equivalents generally consist ofcash, money market funds and other money market instruments with originalmaturities of three months or less.

 

Net cash provided by operating activities was$2,897,301 and $1,185,705 during the three months ended March 31, 2008 andMarch 31, 2007, respectively.  Theincrease in our operating cash flows is primarily the result of an increase inour deferred revenue of $1,155,214 during the three months ended March 31,2008 compared to a decrease of $154,565 during the three months ended March 31,2007.  The increase in deferred revenueduring the three months ended March 31, 2008 was primarily due to theCompany entering into 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 three months ended March 31, 2008.  Additionally, accounts receivable decreased$753,940 compared to $246,072 during the three months ended March 31, 2008and 2007, respectively, due to timing of billing and cash receipts.  Accounts payable and accrued liabilities intotal increased $31,853 and decreased $820,430 during the three months ended March 31,2008 and 2007, respectively.  The changesin liability accounts generally relate to the timing of payments to vendors andchanges in accrued commissions and amounts due to employees under our ProfitSharing and Bonus Plan.

 

Net cash provided by investing activities was $5,199,846 during the three months ended March 31, 2008, and net cash used in investing activities during the same period in the prior year was $188,131.  The increase in net cash used by investing activities was attributable primarily to the proceeds received from the sale of available-for-sale securities.

 

Our net cash used in financing activities was $24,449 during the three months ended March 31, 2008, and net cash provided by financing activities during the same period in the prior year was $1,104,601. The decrease in net cash provided by financing activities was mainly attributable to the absence of any stock option exercises during the three months ended March 31, 2008.

 

We expect expenditures related to patents andintangible assets to increase in the future consistent with the growth in ourlicensing business, as we continue to invest in the development of newtechnologies.

 

Basedon current plans and business conditions, we expect that our cash and cashequivalents together with any amounts generated from operations will besufficient to meet our cash requirements for the next twelve months. However,we cannot guarantee that we will not be required to seek other financing sooneror that such financing, if required, will be available on terms satisfactory tous.

 

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) and15d-15 (e) under the Securities Exchange Act of 1934, as amended) as ofthe end of the period covered by this Quarterly Report on Form 10-Q and,based on this evaluation, have concluded that our disclosure controls andprocedures are effective.

 

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*Changesin Internal Controls.***There have been no changes in our internal controls over financialreporting that occurred during our first quarter ended March 31, 2008 thathave materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

**PART II:OTHER INFORMATION**

 

**Item 6.Exhibits**

 

Theexhibits listed below are hereby filed with the U.S. Securities and ExchangeCommission (the “SEC”) as part of this Report.

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Certificate of Incorporation of the Company,  previously filed with the SEC as Exhibit 3.1 to the Company’s  Registration Statement on Form SB-2, specifically included in Amendment  No. 1 to such Registration Statement filed with the SEC on July 3,  1996 (File No. 333-4974-LA), which is incorporated herein by reference.                                                 |
| 3.2                 |       | Bylaws of the Company, previously filed with the SEC  as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for  the period ended September 30, 1999, filed with the SEC on  November 12, 1999, which is incorporated herein by reference.                                                                                                                                     |
| 10.1                |       | Salary adjustment for Alan Kraemer, Executive Vice  President, Chief Technology Officer, Ulrich Gottschling, Chief Financial  Officer, and Sarah Yang, Vice President, Software Engineering, as approved on  January 2, 2008, previously filed with the SEC on the Company’s Current  Report on Form 8-K filed with the SEC on January 7, 2008, 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**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

|                               |   | SRS  LABS, INC., a Delaware corporation       |
|------------------------------------|--------|----------------------------------------------------|
|                               |   |                                               |
| Date:  May 8,  2008 |   | By:                                                | /S/ THOMAS C.K.  YUEN |
|                               |   | Thomas C.K. Yuen                                   |
|                               |   | Chairman of the  Board and Chief Executive Officer |
|                               |   | (Principal  Executive Officer)                     |
|                               |   |                                               |   |
|                               |   |                                               |   |
| Date:  May 8,  2008 |   | By:                                                | /S/ ULRICH  GOTTSCHLING |
|                               |   | Ulrich Gottschling                                 |
|                               |   | Chief Financial Officer                            |
|                               |   | (Principal Financial and Accounting Officer)       |

 

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**EXHIBIT INDEX**

 

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.                                                                                                                                     |
| 10.1                |       | Salary adjustment for Alan Kraemer, Executive Vice  President, Chief Technology Officer, Ulrich Gottschling, Chief Financial  Officer, and Sarah Yang, Vice President, Software Engineering, as approved on  January 2, 2008, previously filed with the SEC on the Company’s Current  Report on Form 8-K filed with the SEC on January 7, 2008, 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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