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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                                                                                                                    | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                               | ** **                                                                                               |
| **For the  quarterly period ended September 30, 2009**                                                                              |
| ** **                                                                                                                               | ** **                                                                                               |
| **OR**                                                                                                                                   |
| ** **                                                                                                                               | ** **                                                                                               |
| **o**                                                                                                                                    | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                               | ** **                                                                                               |
| **For the  transition period          to         ** |

 

# **Commission File Number 0-21123**

#  

 

**SRS LABS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

(Address of principal executive offices) (ZipCode)

 

**(949) 442-1070**

(Registrant’s telephone number, includingarea code)

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of 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) |   |                              |

 

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

 

Asof October 30, 2009, 14,476,094 of the issuer’s common stock, par value$.001 per share, were outstanding.

 

 

 

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**SRS LABS, INC.**

 

**QuarterlyReport on Form 10-Q**

**For theThree and Nine Months Ended September 30, 2009**

**Index**

 
| **PART I-FINANCIAL  INFORMATION** |                                                                                                                                         |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                | Financial  Statements                                                                                                                        | 4 |
|                                   | Condensed  Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and  December 31, 2008                                 | 4 |
|                                   | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2009 and 2008 (Unaudited) | 5 |
|                                   | Condensed  Consolidated Statement of Stockholders’ Equity for the nine months ended  September 30, 2009 (Unaudited)                | 6 |
|                                   | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2009 and 2008 (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                                                  | 11 |
| Item  3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                                                                  | 15 |
| Item  4.                               | Controls  and Procedures                                                                                                                     | 15 |
| **PART II-OTHER  INFORMATION**    |                                                                                                                                         |
| Item 1.                                | Legal  Proceedings                                                                                                                           | 15 |
| Item 1A.                               | Risk Factors                                                                                                                                 | 15 |
| Item 6.                                | Exhibits                                                                                                                                     | 20 |
| SIGNATURES                             |                                                                                                                                         | 21 |

 

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**FORWARD-LOOKINGINFORMATION**

 

As used herein, the “Company,” “SRS Labs,” “SRS,” “we,”“us,” or “our” means SRS Labs, Inc., its wholly-owned Delaware subsidiary,SRSWOWcast.com, Inc. and its wholly-owned Chinese subsidiary, ShenzhenRepresentative Office of SRS Labs, Inc.

 

This Quarterly Report on Form 10-Qcontains forward-looking statements regarding our assumptions, projections,expectations, targets, intentions or beliefs about future events. Allstatements other than statements of historical facts included in this QuarterlyReport relating to our future operating results, profitability, growth andcapital requirements, our investment and expansion plans, changes in ourcompetitive position, the outcome of certain disputes, changes in economicconditions or capital markets and changes in customer usage patterns andpreferences, are forward-looking statements. In some cases, you can identifyforward-looking statements by terms such as may, will, should, could, expect,plan, intend, forecast, anticipate, believe, estimate, predict, potential,likely or similar expressions or variations of these terms. The forward-lookingstatements contained 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 or achievementsexpressed or implied by these statements. Factors that might cause actualevents or results to differ materially from those indicated by theseforward-looking statements may include the matters listed in Part II,Item 1A, “Risk Factors” of this Quarterly Report, including, but not limitedto, the loss of any significant customer; the acceptance of new SRS Labsproducts and technologies; our ability to increase our brand awareness andenter into new or expanded license arrangements; the impact of competitiveproducts and pricing; general economic and business conditions that mayadversely impact sales of consumer products incorporating our technologies orthat otherwise may impact our operating results and future performance; thetimely development and release of technologies by the Company; and otherfactors identified from time to time in our filings with the Securities andExchange Commission (“SEC”).

 

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

 

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**PART I — FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 

**SRSLABS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                | ** ** | **(unaudited)**                  | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                                                                |       |                             |       |                            |       |
| **Current Assets**                                                                                                                                                                                        |       |                             |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                                 |       | $                                | 26,793,969 |                            | $          | 31,599,087 |   |
| Accounts receivable, net                                                                                                                                                                                  |       | 1,014,915                        |       | 332,711                         |       |
| Prepaid expenses and other  current assets                                                                                                                                                                |       | 1,181,189                        |       | 864,095                         |       |
| Short-term investments                                                                                                                                                                                    |       | 13,501,000                       |       | 7,836,000                       |       |
| **Total Current Assets**                                                                                                                                                                                  |       | 42,491,073                       |       | 40,631,893                      |       |
|                                                                                                                                                                                                      |       |                             |       |                            |       |
| Property and equipment,  net                                                                                                                                                                              |       | 481,125                          |       | 423,921                         |       |
| Intangible assets, net                                                                                                                                                                                    |       | 2,519,578                        |       | 2,354,725                       |       |
| Deferred income taxes, net                                                                                                                                                                                |       | 5,011,442                        |       | 3,471,421                       |       |
| **Total Assets**                                                                                                                                                                                          |       | $                                | 50,503,218 |                            | $          | 46,881,960 |   |
|                                                                                                                                                                                                      |       |                             |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                             |       |                             |       |                            |       |
| **Current Liabilities**                                                                                                                                                                                   |       |                             |       |                            |       |
| Accounts payable                                                                                                                                                                                          |       | $                                | 553,473    |                            | $          | 314,382 |   |
| Accrued liabilities                                                                                                                                                                                       |       | 1,396,561                        |       | 996,268                         |       |
| Deferred revenue                                                                                                                                                                                          |       | 1,461,055                        |       | 1,802,024                       |       |
| **Total Current Liabilities**                                                                                                                                                                             |       | 3,411,089                        |       | 3,112,674                       |       |
|                                                                                                                                                                                                      |       |                             |       |                            |       |
| **Commitments and Contingencies  (Note 4)**                                                                                                                                                               |       |                             |       |                            |       |
|                                                                                                                                                                                                      |       |                             |       |                            |       |
| **Stockholders’ Equity**                                                                                                                                                                             |       |                             |       |                            |       |
| Preferred stock—$.001 par  value; 2,000,000 shares authorized; no shares issued or outstanding                                                                                                       |       | —                           |       | —                          |       |
| Common stock—$.001 par  value; 56,000,000 shares authorized; 14,476,094 and 14,419,418 shares  issued and outstanding at September 30, 2009 and December 31,  2008, respectively |       | 14,477                           |       | 14,420                          |       |
| Additional paid-in capital                                                                                                                                                                                |       | 64,299,297                       |       | 62,639,075                      |       |
| Accumulated deficit                                                                                                                                                                                       |       | (17,221,645                      | )          | (18,884,209                     | )          |
| **Total Stockholders’ Equity**                                                                                                                                                                       |       | 47,092,129                       |       | 43,769,286                      |       |
| **Total Liabilities and  Stockholders’ Equity**                                                                                                                                                      |       | $                                | 50,503,218 |                            | $          | 46,881,960 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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**SRS LABS, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                   | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                   | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                     |       | $                                | 7,230,118  |                            | $          | 4,319,433 |   | $ | 17,989,657 |   | $ | 13,438,565 |   |
| Cost of sales                                                |       | 67,858                           |       | 22,107                          |       | 202,032 |   | 88,426 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                 |       | 7,162,260                        |       | 4,297,326                       |       | 17,787,625 |   | 13,350,139 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                          |       |                             |       |                            |       |   |   |   |   |
| Sales and marketing                                          |       | 2,852,165                        |       | 2,399,362                       |       | 8,089,263 |   | 6,946,502 |   |
| Research and development                                     |       | 1,481,555                        |       | 999,969                         |       | 4,059,132 |   | 2,859,899 |   |
| General and administrative                                   |       | 1,411,162                        |       | 1,524,529                       |       | 4,217,046 |   | 4,490,484 |   |
| Total operating expenses                                     |       | 5,744,882                        |       | 4,923,860                       |       | 16,365,441 |   | 14,296,885 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Operating income (loss)                                      |       | 1,417,378                        |       | (626,534                        | )          | 1,422,184 |   | (946,746 | ) |
| Other income, net                                            |       | 82,724                           |       | 310,219                         |       | 279,543 |   | 1,093,543 |   |
| Income (loss) before  income taxes                           |       | 1,500,102                        |       | (316,315                        | )          | 1,701,727 |   | 146,797 |   |
| Income taxes                                                 |       | 25,088                           |       | —                          |       | 39,163 |   | 13,232 |   |
| Net income (loss)                                            |       | $                                | 1,475,014  |                            | $          | (316,315 | ) | $ | 1,662,564 |   | $ | 133,565 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) per  common share:                         |       |                             |       |                            |       |   |   |   |   |
| Basic                                                        |       | $                                | 0.10       |                            | $          | (0.02 | ) | $ | 0.12 |   | $ | 0.01 |   |
| Diluted                                                      |       | $                                | 0.10       |                            | $          | (0.02 | ) | $ | 0.11 |   | $ | 0.01 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares  used in the per share calculations: |       |                             |       |                            |       |   |   |   |   |
| Basic                                                        |       | 14,627,089                       |       | 15,779,486                      |       | 14,439,228 |   | 15,778,493 |   |
| Diluted                                                      |       | 15,184,824                       |       | 15,779,486                      |       | 14,762,281 |   | 16,249,158 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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** **

**SRS LABS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

** **
| ** **                               | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                               | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| BALANCE, December 31,  2008         |       | 14,419,418            |       | $                       | 14,420     |            | $          | 62,639,075  |       | $ | (18,884,209 | ) | $ | 43,769,286 |   |
| Proceeds from exercise of  stock options |       | 56,676                |       | 57                      |       | 229,883         |       | —      |       | 229,940 |   |
| Share-based compensation                 |       | —                |       | —                  |       | 1,430,339       |       | —      |       | 1,430,339 |   |
| Net income                               |       | —                |       | —                  |       | —          |       | 1,662,564   |       | 1,662,564 |   |
|                                     |       |                  |       |                    |       |            |       |        |       |   |   |
| BALANCE,  September 30, 2009        |       | 14,476,094            |       | $                       | 14,477     |            | $          | 64,299,297  |       | $ | (17,221,645 | ) | $ | 47,092,129 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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** **

**SRS LABS, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| **Cash Flows from Operating  Activities:**                                         |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 1,662,564  |   | $ | 133,565 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation and  amortization                                                     |       | 511,560                                             |       | 504,407 |   |
| Provision for doubtful  accounts                                                   |       | 60,000                                              |       | 7,470 |   |
| Deferred income taxes                                                              |       | (1,540,021                                          | )          | (1,210,219 | ) |
| Share-based compensation                                                           |       | 1,430,339                                           |       | 1,342,433 |   |
| Loss on disposition of  property and equipment                                     |       | 14,626                                              |       | — |   |
| Write-off of intangible  assets                                                    |       | 5,528                                               |       | — |   |
| Changes in operating  assets and liabilities:                                      |       |                                                |       |   |   |
| Accounts receivable                                                                |       | (742,204                                            | )          | 561,452 |   |
| Prepaid expenses and other  current assets                                         |       | (317,094                                            | )          | 60,288 |   |
| Accounts payable                                                                   |       | 239,091                                             |       | 17,849 |   |
| Accrued liabilities                                                                |       | 400,293                                             |       | 270,440 |   |
| Deferred revenue                                                                   |       | (340,969                                            | )          | 646,163 |   |
| Net cash provided by  operating activities                                         |       | 1,383,713                                           |       | 2,333,848 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash Flows from Investing  Activities:**                                         |       |                                                |       |   |   |
| Purchase of investments                                                            |       | (5,665,000                                          | )          | (4,984,000 | ) |
| Proceeds from sale of  investments                                                 |       | —                                              |       | 5,500,000 |   |
| Proceeds from sale of  property and equipment                                      |       | 17,600                                              |       | — |   |
| Purchase of property and  equipment                                                |       | (235,856                                            | )          | (191,921 | ) |
| Expenditures related to  intangible assets                                         |       | (535,515                                            | )          | (487,346 | ) |
| Net cash used in investing  activities                                             |       | (6,418,771                                          | )          | (163,267 | ) |
|                                                                               |       |                                                |       |   |   |
| **Cash Flows from Financing  Activities:**                                         |       |                                                |       |   |   |
| Proceeds from exercise of  stock options                                           |       | 229,940                                             |       | 69,672 |   |
| Purchase of treasury stock                                                         |       | —                                              |       | (122,053 | ) |
| Net cash provided by (used  in) financing activities                               |       | 229,940                                             |       | (52,381 | ) |
|                                                                               |       |                                                |       |   |   |
| **Net (Decrease) Increase in Cash  and Cash Equivalents**                          |       | (4,805,118                                          | )          | 2,118,200 |   |
| **Cash and Cash Equivalents,  Beginning of Period**                                |       | 31,599,087                                          |       | 39,615,291 |   |
| **Cash and Cash Equivalents, End  of Period**                                      |       | $                                                   | 26,793,969 |   | $ | 41,733,491 |   |
|                                                                               |       |                                                |       |   |   |
| **Supplemental Disclosure of Cash  Flow Information:**                             |       |                                                |       |   |   |
| Cash paid during the  period for:                                                  |       |                                                |       |   |   |
| Income taxes                                                                       |       | $                                                   | 1,539,570  |   | $ | 772,530 |   |
| **Supplemental Disclosure of  Non-Cash Activities:**                               |       |                                                |       |   |   |
| Unrealized gain on  investments                                                    |       | $                                                   | —     |   | $ | 48,125 |   |
| Retirement of treasury  stock                                                      |       | $                                                   | —     |   | $ | 5,974,630 |   |

 

See accompanying notes to the condensedconsolidated financial statements

 

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**SRS LABS,INC. AND SUBSIDIARIES**

**NOTES TO THE CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**1.****                                     ****Basis of Presentation and Summary of Significant Accounting Policies andEstimates**

 

As used herein, the “Company,” “SRS Labs,” “SRS,” “we,”“us,” or “our” means SRS Labs, Inc., its wholly-owned Delaware subsidiary,SRSWOWcast.com, Inc., and its wholly-owned Chinese subsidiary, ShenzhenRepresentative Office of SRS Labs, Inc. The accompanying unaudited condensed consolidated financial statementshave been prepared by the Company in conformity with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interimfinancial information and the rules and regulations of the SEC for interimreporting. In the opinion of management, all adjustments (which include normalrecurring adjustments) considered necessary for a fair presentation of ourfinancial position and results of operations have been included.  Certain prior year amounts have beenreclassified to current year presentation.

 

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with GAAP havebeen condensed or omitted pursuant to SEC rules and regulations forpresentation of interim financial information. Therefore, the condensed interimconsolidated financial statements should be read in conjunction with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2008.Current and future financial statements may not be directly comparable to theCompany’s historical financial statements. The results of operations for theinterim period are not necessarily indicative of the results to be expected forany other interim period or for the full year. Amounts related to disclosure of December 31, 2008 balances withinthese condensed consolidated financial statements were derived from the auditedconsolidated financial statements for the year ended December 31, 2008.

 

We evaluated our subsequent events through November 2,2009, which is the date the financial statements were issued.

 

**Estimates**

 

The preparation of financial statements inaccordance with GAAP requires management to make use of certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported periods. We base our estimates on historical experience and on variousother assumptions that we believe are reasonable under the circumstances, theresults of which form the basis for making judgments about carrying values ofassets and liabilities that are not readily apparent from other sources.  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, 2008 for anadditional discussion of the significant accounting policies and estimates usedin the preparation of our financial statements.

 

**Cash and Cash Equivalents**

 

Cash and cash equivalents include short-term, highlyliquid investments that are readily convertible to known amounts of cash andare so near maturity that they present insignificant risk of changes in valuebecause of interest rates. Cash and cash equivalents generally consist of cash,money market funds and instruments with original maturities of three months orless.  The Company places its cash inbanks and in money market funds at certain financial institutions in excess ofamounts insured by federal agencies.  TheCompany does not believe that it is subject to any unusual financial riskbeyond the normal risk associated with commercial banking relationships.  The Company performs periodic evaluations ofthe relative credit standing of these financial institutions.  The Company has not historically experiencedany losses on its cash and cash equivalents.

 

**Short-term Investments**

 

Short-term investments consist of certificates ofdeposit with original maturities ranging from six to twelve months.  The Company has not historically experiencedany losses on its short-term investments.

 

**Customer Concentrations**

 

For the three monthsended September 30, 2009 and 2008, one customer, Samsung Electronics Co.,Ltd. (“Samsung”), accounted for approximately 32% and 40%, respectively, of ourrevenue.  For the nine months ended September 30,2009 and 2008, one customer, Samsung, accounted for approximately 38% and 40%,respectively, of our revenue.

 

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** **

**Income Taxes**

 

The Company currently hasnet operating loss carryforwards to offset income taxes. Consequently, nosignificant provision is reflected in the accompanying interim consolidatedfinancial statements.  Refer to our AnnualReport on Form 10-K for the year ended December 31, 2008 foradditional disclosure in this regard.

 

**2.****                                      IntangibleAssets**

 

Intangible assets consist of the following:

 
| ** **                                                  | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Patents                                                     |       | $                            | 3,994,900  |                        | $          | 3,618,338 |   |
| Accumulated amortization                                    |       | (1,996,081                   | )          | (1,785,531                  | )          |
| Patents, net                                                |       | 1,998,819                    |       | 1,832,807                   |       |
| Other intangibles:                                          |       |                         |       |                        |       |
| License agreements  acquired in purchase of SRSWOWcast      |       | 640,071                      |       | 640,071                     |       |
| Capitalized software and  hardware for several technologies |       | 684,654                      |       | 582,800                     |       |
| Total of other intangibles                                  |       | 1,324,725                    |       | 1,222,871                   |       |
| Accumulated amortization,  other intangibles                |       | (803,966                     | )          | (700,953                    | )          |
| Other intangibles, net                                      |       | 520,759                      |       | 521,918                     |       |
| Intangible assets, net                                      |       | $                            | 2,519,578  |                        | $          | 2,354,725 |   |

 

Amortization expense associated with our intangibleswas $125,958 and $110,837 in the three months ended September 30, 2009 and2008, respectively, and $365,134 and $358,410 in the nine months ended September 30,2009 and 2008, respectively. Amortization expense is included in general and administrative expensesin the accompanying condensed consolidated statements of operations.

 

**3.**                                      **Net IncomePer Common Share**

 

Basic net income or loss per common share iscomputed by dividing net income or loss available to common stockholders by theweighted average number of common shares outstanding during each period.Diluted net income or loss per common share reflects the maximum dilution,based on the average price of the Company’s common stock during each period,and is computed similar to basic income or loss per share except that thedenominator is increased to include the number of additional shares that wouldhave been outstanding if potentially dilutive stock options and warrants hadbeen exercised.

 

Basic and diluted net income per share are as follows:

 
| ** **                                               | ** ** | **For the Three Months** | ** ** | **For the Nine Months** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                               | ** ** | **Ended September 30,**       | ** ** | **Ended September 30,**      | ** ** |
| ** **                                               | ** ** | **2009**                                | ** ** | **2008**                               | ** ** | **2009** | ** ** | **2008** | ** ** |
| BASIC EPS                                                |       |                                    |       |                                   |       |   |   |   |   |
| Net income (loss)                                        |       | $                                       | 1,475,014  |                                   | $          | (316,315 | ) | $ | 1,662,564 |   | $ | 133,565 |   |
| Denominator: weighted  average common shares outstanding |       | 14,627,089                              |       | 15,779,486                             |       | 14,439,228 |   | 15,778,493 |   |
| Net income (loss) per  share                             |       | $                                       | 0.10       |                                   | $          | (0.02 | ) | $ | 0.12 |   | $ | 0.01 |   |
|                                                     |       |                                    |       |                                   |       |   |   |   |   |
| DILUTED EPS                                              |       |                                    |       |                                   |       |   |   |   |   |
| Net income (loss)                                        |       | $                                       | 1,475,014  |                                   | $          | (316,315 | ) | $ | 1,662,564 |   | $ | 133,565 |   |
| Denominator: weighted average  common shares outstanding |       | 14,627,089                              |       | 15,779,486                             |       | 14,439,228 |   | 15,778,493 |   |
| Common equivalent shares  outstanding:                   |       |                                    |       |                                   |       |   |   |   |   |
| Options                                                  |       | 557,735                                 |       | —                                 |       | 323,052 |   | 470,665 |   |
| Total diluted shares                                     |       | 15,184,824                              |       | 15,779,486                             |       | 14,762,281 |   | 16,249,158 |   |
| Net income (loss) per  share diluted                     |       | $                                       | 0.10       |                                   | $          | (0.02 | ) | $ | 0.11 |   | $ | 0.01 |   |

 

There were outstanding options to purchase anaggregate of 976,507 and 2,943,708 shares of the Company’s common stock for thethree months ended September 30, 2009 and 2008, respectively, that werenot included in the table above because they would be anti-dilutive.  There were outstanding options to purchase anaggregate of 2,352,137 and 2,164,455 shares of the Company’s common stock forthe nine months ended September 30, 2009 and 2008, respectively, that werenot included in the table above because they would be anti-dilutive.

 

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**4.**                                      **Commitmentsand Contingencies**

 

On September 8, 2007, the Company sent a letterto Sony Corporation (“Sony”) relating to the possible infringement of severalSRS patents by Sony’s S-Force technology. Sony responded to the letter byfiling a Complaint for Declaratory Relief in the U.S. District Court in theSouthern District of New York on July 6, 2007. In November 2007, Sonyand SRS entered into a standstill agreement for the purpose of conductingdiscussions towards an amicable resolution of the dispute, and the Complaintfor Declaratory Relief was dismissed.  While the standstill agreementhas expired, the parties continue to negotiate regarding this matter.  In October 2008,an independent third party hired by us to evaluate the Sony S-Force technologyinformed SRS that they had completed their evaluation based on the informationprovided by Sony.  Based on their study, they confirmed SRS’ positionthat the S-Force technology infringes our patents.  The basis forthis infringement position has been provided to Sony for their review.  Sonyhas not agreed with the position of the independent third party.

 

The Company has in place a monitoring program toevaluate the integrity of royalty reporting by licensees. Royalty audits areconducted at the Company’s discretion pursuant to the license agreements.Successful efforts may from time to time reveal underreporting of royalties andsuch events may be material to results of operations.

 

From time to time, we may be involved in otherlitigation matters and disputes arising in the normal course of business. Anysuch matters and disputes could be costly and time consuming, subject us todamages or equitable remedies, and divert our management and key personnel fromour business operations.

 

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

 

The Company operates inone reportable segment as disclosed in our Annual Report on Form 10-K forthe year ended December 31, 2008. The following schedule presents the Company’s revenue by geographicarea.  Licensing-related revenue issummarized based on the location of the licensee’s corporate headquarters.  For product and online sales, revenue isallocated to the Americas.  The Americasregion includes North, Central and South America.  Starting in 2008, the Greater China regionwas broken down into the China and Asia Pacific region.  The China region includes all licensees withtheir corporate headquarters located in mainland China.  The Asia Pacific region includes alllicensees with their corporate headquarters located in Taiwan and Hong Kong.

 
| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                             | ** ** | **%**                                               | ** ** | **2008** | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** | **2008** | ** ** | **%** | ** ** |
| **Geographic Area Revenue:** |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Korea                        |       | $                                                    | 2,759,986  |                                                | 38         | % | $ | 2,210,538 |   | 51 | % | $ | 8,314,666 |   | 46 | % | $ | 6,870,299 |   | 51 | % |
| Americas                     |       | 2,228,614                                            |       | 31                                                  |       | 466,563 |   | 11 |   | 4,242,720 |   | 24 |   | 1,263,691 |   | 9 |   |
| Japan                        |       | 1,688,919                                            |       | 24                                                  |       | 1,207,605 |   | 28 |   | 3,607,127 |   | 20 |   | 4,227,037 |   | 32 |   |
| China                        |       | 299,057                                              |       | 4                                                   |       | 206,740 |   | 5 |   | 1,176,148 |   | 6 |   | 540,921 |   | 4 |   |
| Asia Pacific                 |       | 155,657                                              |       | 2                                                   |       | 139,245 |   | 3 |   | 369,424 |   | 2 |   | 303,477 |   | 2 |   |
| Europe                       |       | 97,885                                               |       | 1                                                   |       | 88,742 |   | 2 |   | 279,572 |   | 2 |   | 233,140 |   | 2 |   |
| Total                        |       | $                                                    | 7,230,118  |                                                | 100        | % | $ | 4,319,433 |   | 100 | % | $ | 17,989,657 |   | 100 | % | $ | 13,438,565 |   | 100 | % |

 

**6.**                                      **RecentAccounting Pronouncements**

 

EffectiveSeptember 2009, the Company revised references to authoritative accountingliterature in accordance with FASB Accounting Standards Codification (the “Codification”).  The Codification became the source ofauthoritative GAAP recognized by the FASB to be applied by nongovernmentalentities.  Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. On the effective date, the Codification superseded all then-existingnon-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included inthe Codification became nonauthoritative.

 

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**7.**                                      **Fair ValueMeasurements**

 

Effective January 1, 2008,the Company measures the fair value of applicable financial and non-financialassets based on the following levels of inputs:

 

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

 

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

 

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

 

The hierarchy noted aboverequires us to minimize the use of unobservable inputs and to use observablemarket data, if available, when determining fair value.

 

Financialassets carried at fair value as of September 30, 2009 are classifiedbelow:

 
| ** **              | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
|-------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| Money market funds      |       | $           | 26,467,227 |        | $          | —      |       | $          | —     |   | $ | 26,467,227 |   |
| Certificates of deposit |       | —      |       | 13,501,000  |       | —      |       | 13,501,000 |       |
| Total                   |       | $           | 26,467,227 |        | $          | 13,501,000  |       | $          | —     |   | $ | 39,968,227 |   |

 

**Item 2.  Management’s Discussionand Analysis of 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 31,2008, and the unaudited condensed interim consolidated financial statements andnotes thereto included in this Quarterly Report.

 

**Overview**

** **

We are the recognizedglobal leader in the practical application of psychoacoustics*,* the science behind how the human earoperates, and in the post processing segment of the market for audiodelivery.  Our award-winning audio enhancement technologies and solutionsdramatically restore audio and voice to its natural state, the way it was originallyrecorded, in both dimension and clarity, thus providing a superior consumerexperience for a wide variety of consumer electronic devices such astelevisions, personal computers and mobile phones.

 

Our business is focusedon developing and licensing audio, voice and surround sound technologysolutions to many of the world’s leading original equipment manufacturers (“OEMs”),software providers and semiconductor companies, and limited sales and marketingof stand alone software and hardware products through the Internet.

 

#### **Critical Accounting Policies**

####  

Our discussion and analysisof our results of operations and liquidity and capital resources are based onour unaudited consolidated financial statements for the three and nine monthsended September 30, 2009 and 2008, which have been prepared in accordancewith GAAP.

 

The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and disclosure of contingent assetsand liabilities. We base our estimates on historical and anticipated resultsand trends and on various other assumptions that we believe are reasonableunder the circumstances, including assumptions as to future events. Theseestimates form the basis for making judgments about the carrying value ofassets and liabilities that are not readily apparent from other sources. Bytheir nature, estimates are subject to an inherent degree of uncertainty.Actual results may materially differ from our estimates.

 

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**Results of Operations**

 

***Three Months Ended September 30, 2009Compared to Three Months Ended September 30, 2008***

 

*Revenues*

 

Our revenues consist primarily of royaltiesgenerated from the license of SRS Labs’ audio and voice technologies.  Our license agreements typically havemulti-year or automatic renewal terms, and either require: (a) per-unitroyalty payments for all products implementing our technologies and/orsolutions; (b) fixed annual or quarterly royalty payments; or (c) aminimum fixed annual or quarterly royalty payment, which allow the licensee toship up to a pre-determined number of units during the specified time period,with additional per-unit royalty payments thereafter.  The majority of our license agreements areper-unit royalty arrangements, which are generally reported by the licensee inthe quarter following shipment of the consumer electronics device and aretherefore are typically recognized by us following shipment by the OEM.  Revenues associated with fixed royaltypayments are recognized ratably over the term of the license agreement.  We also sell some of our products and solutionsvia the Internet.  Revenues associatedwith those sales are recognized upon shipment and were not material in thethree and nine months ended September 30, 2009 or 2008.  The Company may experience fluctuations inrevenue associated with the seasonal nature of the consumer electronicsindustry.

 

Our revenues were $7,230,118for the threemonths ended September 30, 2009, compared to $4,319,433 for the threemonths ended September 30, 2008, an increase of $2,910,685 or 67.4%.  In our home entertainment market, our totalrevenues increased by $2,140,987 in the current quarter as compared to theprior year period. Within this market, revenues related to flat paneltelevisions increased by $1,590,737 mainly due to increased revenue fromcertain existing licensees such as Samsung and revenues from new licensees suchas Vizio, Skyworth and HiSense.  Due to pricing and other competitivefactors, several of our licenses, including Samsung, have asked us torenegotiate our existing licensing agreements with them, which may adverselyimpact our revenues from such customers. The increase in current quarter revenues related to flat paneltelevisions was partially offset by decreased revenue from several accountssuch as Toshiba and Sharp.  Also includedin the current quarter revenue is the recovery of approximately $950,000 ofpreviously under reported royalties, from one OEM as a result of a royaltyaudit.  Revenues generated fromlicensees related to multiple service operator and set top box are part of ourhome entertainment market.  As previouslyannounced, we entered into an agreement with a licensee in this market duringour second fiscal quarter of this year. During the current quarter, we completed delivery of our solutions tothe licensee and we began to recognize revenues under the terms of theagreement.  The agreement stipulatesquarterly royalty payments and may be subject to cancellation from time totime. Consequently, revenue under the agreement is recognized as our solutionsare made available to the licensee’s customers and the cancellation provisionsexpire. We expect that future revenues per quarter from this licensee under theterms of the current agreement will be significantly lower than the amountsrecognized during the current quarter due to the availability of the solutionsto the licensee’s legacy customers. Our revenues in the personaltelecommunications market increased by $387,059 or 120.2% in the currentquarter as compared to the prior year period, primarily due to increasedrevenues from Samsung related to royalties on mobile sales. Our revenues fromthe personal computer market increased by $680,750 or 300.4%, primarily due torevenue generated from several new licensees, including Dell, Hewlett Packardand AsusTek. In the automotive market, revenues decreased by $129,630 or 33.1%primarily due to decreased revenues from our Japanese customers as the resultof decreased auto sales in general. Revenues in the portable media devices market decreased by $143,480 or33.7 % primarily due to decreased revenues from MP3 players, cameras anddocking stations.

 

The following table presents our licensing revenuesmix by market:

 
| ** **                                               | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                 | ** ** | **2008** | ** ** |
| Home entertainment (TV,  set top box)                    |       | 70                                                       | %          | 68 | % |
| Personal  telecommunications (mobile phone, PDA)         |       | 10                                                       |       | 8 |   |
| PC (software, hardware)                                  |       | 12                                                       |       | 5 |   |
| Portable media devices (digital media player, headphone) |       | 4                                                        |       | 10 |   |
| Automotive                                               |       | 4                                                        |       | 9 |   |

 

*Sales and Marketing*

 

Sales expenses consist primarily of employeesalaries, sales consultants’ fees and related expenses, sales commissions,sales training, and travel and entertainment expenses.  Marketing expenses consist primarily ofemployee salaries and related expenses, market research, advertising and co-marketing,and costs associated with branding activities. Sales and marketing expenseswere $2,852,165 for the three months ended September 30, 2009, compared to$2,399,362 for the same prior year period, an increase of $452,803 or 19%.  This increase was primarily attributable toan increase in payroll and related costs associated with the addition of sevensales and marketing personnel since September 30, 2008, costs associatedwith the timing of the Company’s annual world wide sales meeting and costsassociated with the development of additional branding assets.  Included in sales and marketing expenses isshare-based compensation expense of $134,804 and $111,751 for the three monthsended September 30, 2009 and 2008, respectively.  We expect that sales and marketing expenseswill continue to increase as we plan to hire additional personnel to penetratetarget markets and key regions and we intend to increase our brandawareness.  As a percentage of totalrevenues, sales and marketing expenses decreased from 56% for the quarter ended September 30, 2008 to 39% for thesame period this year.

 

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*Research and Development*

 

Research anddevelopment expenses consist of salaries and related costs of employees engagedin ongoing research, design and development, customer support, technologyporting activities, and costs for engineering materials and supplies. Researchand development expenses were $1,481,555 for the three months ended September 30,2009, compared to $999,969 for the same prior year period, an increase of$481,586 or 48 %.  This increase wasprimarily attributable to an increase in payroll and related costs associatedwith hiring an additional twelve engineers as well as increased customersupport activities.  Included in researchand development expenses is share-based compensation expense of $114,949 and$85,734 for the three months ended September 30, 2009 and 2008,respectively.  We expect that researchand development expenses will continue to increase in the future in absolutedollars as we plan to continue to add to our research and development team inorder to support our global licensees and to accelerate the implementation ofour technology with a greater number of customers and devices. As a percentageof total revenues, research and development expenses decreased from 23% for thequarter ended September 30, 2008 to 20% for the same period this year.

 

*Generaland Administrative*

 

General and administrative (“G&A”) expensesconsist primarily of employee-related expenses, professional fees, facilitiescosts, insurance, public company costs, and depreciation and amortization.G&A expenses were $1,411,162 for the three months ended September 30,2009, compared to $1,524,529 for the same prior year period, a decrease of$113,367 or 7%. The decrease was primarily due to decreased accounting, legaland other professional fees.  During thethird quarter of 2008, the Company incurred approximately $166,000 of expensesin connection with its Dutch Auction tender offer that was terminated andwithdrawn in September 2008. Included in G&A expenses is share-based compensation expense of$233,224 and $227,706 for the three months ended September 30, 2009 and2008, respectively.  As a percentage oftotal revenues, G&A expenses decreased from 35% for the quarter ended September 30, 2008 to 20% for thesame period this year.

 

*OtherIncome, Net*

 

Otherincome, net consists of interest income. Other income, net was $82,724 for thethree months ended September 30, 2009, compared to $310,219 for the sameprior year period, a decrease of $227,495 or 73.3%. This decrease was primarilyattributable to lower interest rates on our investments in the current periodas our investment strategy was primarily focused on asset protection versusyield maximization in the current period.

 

*IncomeTaxes*

 

Income tax expense for the three months ended September 30, 2009was $25,088, compared to$0 in the same prior year period.  Theincome tax provision consists primarily of state income taxes.  We reduced our tax provision and our valuationallowance on our deferred tax assets by $521,690 and $385,290 for the threemonths ended September 30, 2009 and 2008, respectively, based on ourassessment of the future estimated realization of such assets.  We continue to remit foreign taxes fromcustomers located in countries which require statutory tax withholding,including Korea, Taiwan and The People’s Republic of China.  Such amounts are included in deferred taxassets in the accompanying consolidated balance sheets.

 

***Nine Months Ended September 30, 2009Compared to Nine Months Ended September 30, 2008***

 

*Revenues*

 

Our revenues were $17,989,657 for the nine monthsended September 30, 2009, compared to $13,438,565 for the nine monthsended September 30, 2008, an increase of $4,551,092 or 33.9%.  In our home entertainment market, our totalrevenues increased by $2,978,490 in the nine months ended September 30,2009.  Within this market, flat panelrevenue increased by $2,405,969 mainly due to increased revenue from Samsung,Vizio, Skyworth and HiSense, partially offset by decreased revenues fromcertain Japan based television licensees. During the nine months ended September 30, 2009, we recognized andcollected $1,468,546 of previously under-reported royalties, which includedapproximately $950,000 from one OEM recognized during the third quarter of 2009as a result of an audit.  There were nosuch amounts in the nine months ended September 30, 2008.  Our revenues in the personaltelecommunications market increased by $1,189,847 in the current nine monthperiod primarily due to increased revenues from Samsung Mobile and NEC.  Our revenues from the personal computermarket increased by $1,168,659, primarily due to revenue generated from severalnew licensees, including Dell, and Hewlett Packard.  In the automotive market, revenues decreasedby $269,676, which we believe was due to decreased automotive sales worldwide.Revenues in the portable media devices decreased by $456,228 primarily due todecreased revenues from MP3 players, digital cameras, and docking stations.

 

The following table presents our licensing revenuesmix by market:

 
| ** **                                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| Home entertainment (TV,  set top box)                    |       | 69                                                      | %          | 70 | % |
| Personal  telecommunications (mobile phone, PDA)         |       | 12                                                      |       | 7 |   |
| PC (software, hardware)                                  |       | 10                                                      |       | 5 |   |
| Automotive                                               |       | 5                                                       |       | 9 |   |
| Portable media devices (digital media player, headphone) |       | 4                                                       |       | 9 |   |

 

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* *

*Sales and Marketing*

 

Sales and marketing expenseswere $8,089,263 for the nine months ended September 30, 2009, compared to$6,946,502 in the same prior year period, an increase of $1,142,761 or16%.  This increase was primarilyattributable to an increase in payroll and commissions and related costs, suchas payroll taxes, benefits, recruitment, associated with the addition of ninesales and marketing personnel.  Inaddition, we also increased our advertising and branding efforts to increaseour brand awareness.   Included in salesand marketing expenses is share-based compensation expense of $381,721 and$381,607 for the nine months ended September 30, 2009 and 2008,respectively.  As a percentage of totalrevenues, sales and marketing expenses were 52% and 45% for the nine monthsended September 30, 2008 and 2009, respectively.

 

*Researchand Development*

 

Research anddevelopment expenses were $4,059,132 for the nine months ended September 30,2009, compared to $2,859,899 for the same prior year period, an increase of$1,199,233 or 42%. This increase was primarily attributable to an increase inpayroll and related costs associated with hiring an additional 14engineers.  Included in research anddevelopment expenses is share-based compensation expense of $333,768 and$294,684 for the nine months ended September 30, 2009 and 2008,respectively.  As a percentage of totalrevenues, research and development expenses increased from 21% for the ninemonths ended September 30, 2008 to 23% for the same period this year.

 

*Generaland Administrative*

 

G&A expenses were $4,217,046 for the nine monthsended September 30, 2009, compared to $4,490,484 for the same prior yearperiod, a decrease of $273,438 or 6%. The decrease was primarily attributableto a decrease in accounting, legal and other professional fees. Included inG&A expenses is share-based compensation expense of $714,851 and $666,142for the nine months ended September 30, 2009 and 2008, respectively.  As a percentage of total revenues, G&Aexpenses decreased from 33% forthe nine months ended September 30, 2008 to 23% for the same period thisyear.

 

*OtherIncome, Net*

 

Otherincome, net was $279,543 for the nine months ended September 30, 2009,compared to $1,093,543 for the same prior year period, a decrease of $814,000or 74.4%. This decrease was primarily attributable to lower interest rates inthe current period.

 

*IncomeTaxes*

 

Income tax expense was $39,163 and $13,232 for the nine months ended September 30,2009 and 2008, respectively. Theincome tax provision consists primarily of state income taxes.  We reduced our tax provision and ourvaluation allowance on our deferred tax assets by $1,540,021 and $1,210,219 forthe nine months ended September 30, 2009 and 2008, respectively, based onour assessment of the future estimated realization of such assets.  We continue to remit foreign taxes fromcustomers located in countries which require statutory tax withholding,including Korea, Taiwan and The People’s Republic of China.  Such amounts are included in deferred taxassets in the accompanying consolidated balance sheets.

 

**Liquidity and Capital Resources**

 

Our principal source ofliquidity to fund ongoing operations at September 30, 2009 consisted ofcash and cash equivalents and short-term investments of $40,294,969.  At September 30, 2009, we had cash andcash equivalents of $26,793,969 and short-term investments of $13,501,000.  Cash and cash equivalents generally consistof cash, money market funds and certificate of deposit funds with originalmaturities of three months or less. The money market funds are primarilyinvested in US government obligations. The cash and certificates of deposit are FDIC insured.  Short-term investments consist ofcertificates of deposit with original maturities ranging from 6 to 12 months.

 

Net cash provided by operating activities was $1,383,713 and $2,333,848during the nine months ended September 30, 2009 and 2008,respectively.  The decrease in our cashflows from operating activities was primarily the result of changes in ouroperating assets and liabilities and specifically, a decrease in our deferredrevenue of $340,969 during the nine months ended September 30, 2009compared to an increase of $646,163 during the nine months ended September 30,2008.  The decrease in deferred revenueduring the nine months ended September 30, 2009 was primarily due to theCompany recognizing revenue from customers who prepaid us royalties.  During the nine months ended September 30,2008, the Company received the final lump sum payment under the multi-yearlicense agreement with LG Electronics, which caused deferred revenue toincrease.  Additionally, accountsreceivable increased $742,204 during the nine months ended September 30,2009 as compared to decreasing $561,452 during the nine months ended September 30,2008.  The increase in accountsreceivable as of September 30, 2009 was primarily due to increasedrevenues recorded in the current quarter.

 

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Net cash used in investing activities was $6,418,771 during the nine months ended September 30, 2009 and net cash used in investing activities was $163,267 during the same period in the prior year.  Net cash used by investing activities during the nine months ended September 30, 2009 was attributable primarily to the purchase of short-term investments.

 

We believe our existing cash, cash equivalents andshort-term investment balances together with cash generated from operatingactivities, will be sufficient to meet our anticipated cash needs for at leastthe next twelve months.  Our futurecapital requirements will depend on many factors, including our level of revenues,the timing and extent of spending to support product development efforts, theimpact of existing adverse economic conditions, the expansion of sales andmarketing activities, the timing of introductions of new products and thecontinuing market acceptance of our products.

 

Our operations and financial results are subject tovarious risks and uncertainties that could adversely affect our business,financial condition, results of operations and trading price of our commonstock. Please refer to Part II, Item 1A, “Risk Factors” herein for informationconcerning these and other uncertainties that could negatively impact us.

 

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

 

There have been no material changes to theinformation called for by this Item 3 from the disclosures set forth in Part II,Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31,2008.

 

**Item 4.  Controls and Procedures**

 

*Evaluation of 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.

 

*Changes in Internal Controls.***There have been no changes in ourinternal controls over financial reporting that occurred during our third quarterended September 30, 2009 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

**PART II:OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Theinformation set forth under Note 4 of Notes to Unaudited Condensed ConsolidatedFinancial Statements, included in Part I, Item 1 of this Report, isincorporated herein by reference.  For anadditional discussion of certain risks associated with legal proceedings, see Part II,Item 1A, “Risk Factors.”

 

**Item 1A. Risk Factors**

 

Youshould carefully consider the risk factors described below, as well as theother information included in this Quarterly Report on Form 10-Q and inour other filings with the SEC, prior to making a decision to invest in oursecurities. The risks and uncertainties described below are not the only onesfacing our company. Additional risks and uncertainties not presently known tous or that we currently believe to be less significant may also adverselyaffect us.

 

***We are exposed to risks in our licensing business related to productand customer concentration.***

 

Currently,we generate a majority of our revenue in the home entertainment market,principally through the inclusion of SRS technology inside flat panel LED, LCDand plasma televisions. We expect that the consumer home entertainment marketwill continue to account for a significant portion of our licensing revenuesfor the foreseeable future. In addition to significant fluctuations in consumerspending on consumer electronic products, retail prices for certain consumerelectronics products that include our audio technology have decreasedsignificantly. We expect that this trend will continue for the foreseeablefuture. In addition, from time to time, certain of our OEM and semiconductormanufacturer customers may account for a significant portion of our revenues.For example, for the year ended December 31, 2008, Samsung accounted forapproximately 42% of our consolidated revenues. Certain of these manufacturershave attempted to develop and continue to develop their own technologies, whichcould replace our technologies, or they could decide to exclude ourtechnologies from their products altogether in an effort to reduce cost. For example, during 2007, we were informed by Sony that they were no longerusing our technology in the majority of their televisions.  Samsung hasindicated that they are continuing to develop their own sound technologies. Theloss of any key customer could significantly reduce our revenues and could havea material adverse affect on our financial condition and results of operations.

 

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***General economic conditions have adversely affected the sales ofconsumer electronics and other discretionary goods, and may reduce our revenuesand harm our business.***

 

Ourbusiness is exposed to adverse changes in general economic conditions, becauseproducts that incorporate our technologies are entertainment-oriented andgenerally discretionary goods. The current slowdown or decline in U.S. andforeign economic growth has adversely affected consumer confidence, disposableincome and spending. As a result, sales by our licensees of consumerelectronics and other products incorporating our technologies may not grow asrapidly as in prior periods or may even decrease, which could adversely affectour licensing revenue.  Furthermore,deteriorating economic conditions and other factors may result in increasedunder-reporting or non-reporting of royalty bearing revenues by our licenseesas well as increased unauthorized use of our technologies, which couldadversely affect our revenues.

 

***Our business is highly dependent on the consumer electronics market,which is characterized by short product life cycles, rapid technologicalchanges, fluctuations in demand and seasonality, and is subject to risksrelated to product transitions and supply of other components***.

 

Theconsumer electronics market is characterized by intense competition, rapidlyevolving technology, and ever-changing consumer preferences. These factorsresult in the frequent introduction of new products, short product life cyclesand significant price competition. As a result, we may need to develop newproducts or technologies or modify our existing technologies to integrate withthe new products and technologies developed by our customers. We anticipatethat we will continue to expend considerable resources on research and developmentin the future in order to continue to modify our existing technologies andintroduce new products and technologies. If we are unable to develop or modify the necessary technologies to meetthe changing needs of our customers on a timely basis, or at all, or if we areunable to provide such technologies at competitive prices, our customers mayreduce their use of our technologies and our revenues may decline. In addition,the dynamic nature of this market limits our ability and the ability of our customersto accurately forecast quarterly and annual sales. If we, or our customers, areunable to adequately manage product transitions, our business and results ofoperations could be negatively affected.

 

***We depend on the sale by our licensees of products that incorporate ourtechnologies, and a reduction in those sales would adversely affect ourlicensing revenue.***

 

Wederive most of our revenue from the licensing of our technologies to consumerelectronics product manufacturers. We do not manufacture consumer electronicsproducts ourselves, and our licensing revenue is dependent on sales by ourlicensees of products that incorporate our technologies. We cannot controlthese manufacturers’ product development or commercialization efforts orpredict their success. In addition, our license agreements, which typicallyrequire manufacturers of consumer electronics products and media softwarevendors to pay us a specified royalty for every electronics product shippedthat incorporates our technologies, do not require these manufacturers toinclude our technologies in any specific number or percentage of units, andonly a few of these agreements guarantee us a minimum aggregate licensing fee.Accordingly, if our licensees sell fewer products incorporating our technologies,decline to actively market products incorporating our technologies or otherwiseface significant economic difficulties, our revenue will decline. Changes inconsumer tastes or trends, changes in industry standards or adverse changes inbusiness and economic conditions may also adversely affect our licensingrevenue.

 

***Pricing pressures on the consumer electronics product manufacturers,who incorporate our technologies into their products, could limit the licensingfees we charge for our technologies, which could reduce our revenues.***

 

Themarkets for the consumer electronics products in which our technologies areincorporated are intensely competitive and price sensitive. Retail prices forconsumer electronics products that include our technologies have decreasedsignificantly, and we expect prices to continue to decrease for the foreseeablefuture. In response, manufacturers have sought to reduce their product costs,which can result in downward pressure on the licensing fees we charge ourcustomers who incorporate our technologies into their products. Alternatively,our customers may seek to eliminate our technologies in their products in favorof internally developed technologies. A decline in the licensing fees we chargecould materially and adversely affect our operating results.

 

***We face intense competition from companies with greater brandrecognition and resources.***

 

Thedigital audio, consumer electronics and entertainment markets are intenselycompetitive, subject to rapid change, and significantly affected by new productintroductions and other market activities of industry participants.

 

Someof our current and potential competitors enjoy notable competitive advantages,including:

 

·                  Greater name recognition;

 

·                  Larger distribution channels and longstanding relationships with consumer electronics products designers andmanufacturers;

 

·                  A more extensive customer base;

 

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·                  Broader product and service offerings;

 

·                  Greater resources for competitive activities,such as research and development, strategic acquisitions, alliances, jointventures, sales and marketing, and lobbying industry and government standards;and

 

·                  More technicians and engineers.

 

Asa result, these current and potential competitors may be able to respond morequickly and effectively than we can to new or changing opportunities,technologies, standards or customer requirements.

 

Inaddition, decoding and encoding technology offerings of our competitors havebecome industry standards in certain consumer electronic products that mayoffer them a perceived advantage in licensing competitive products.

 

Wemay also experience competition from certain of our customers who decide todevelop their own sound technologies instead of licensing suchtechnologies.  Any increased competitionmay adversely impact our revenues, margins and earnings.

 

***Inaccurate licensee royalty reporting and unauthorized use of ourintellectual property could materially adversely affect our operating results.***

 

Ourlicensing revenue is generated primarily from consumer electronics productmanufacturers who license our technologies and incorporate them in theirproducts. Under a significant percentage of our existing arrangements, theselicensees typically pay us a specified royalty for every product they ship thatincorporates our technologies. We rely on our licensees to accurately reportthe number of units shipped that incorporate our technologies. We calculate ourlicense fees, prepare our financial reports, projections and budgets, anddirect our sales and product development efforts based on these reports wereceive from our licensees. However, it can be difficult for us toindependently determine whether or not our licensees are reporting shipmentsaccurately. This is especially true with respect to software incorporating ourtechnologies because software can be copied relatively easily and we often donot have easy ways to determine how many copies have been made. Most of ourlicense agreements permit us to audit our licensees’ records, but audits aregenerally expensive and time consuming and initiating audits could harm ourcustomer relationships. We expect that we will continue to be subject tounderstatement and non-reporting of royalty bearing revenues by licensees,which could adversely affect our revenues and operating results. Conversely, tothe extent that our licensees overstate the number of products incorporatingour technologies, negative corrections could result in reductions of royaltyrevenue in subsequent periods. Some of our licensees may begin to more closelyscrutinize their past licensing statements, which may result in an increasedreceipt of negative corrective statements

 

Wealso may experience problems with non-licensee consumer electronics productmanufacturers and media software vendors, particularly in emerging economies,incorporating our technologies or incorporating our technologies and trademarksinto their products without our authorization and without paying us anylicensing fees. This unauthorized use of our intellectual property couldadversely affect our operating results.

 

***Our business and future prospects depend upon the strength of ourbrand. If we are not able to maintain and strengthen our brand, our businessmay be adversely affected.***

 

Maintainingthe SRS brand and our position as an industry standard is critical tomaintaining and expanding our licensing revenues and entering into new, orbroadening existing, licensing relationships.  Because we engage inrelatively little direct brand advertising, the promotion of our brand dependsupon consumer electronics industry participants displaying our trademarks ontheir products that incorporate our technologies.  Although we dogenerally require our customers to place our brand on their products, some arenot required to do so.  If our customerschoose for any reason not to display our trademarks on their products, ourability to maintain or increase our brand awareness may be harmed, which wouldhave an adverse effect on our business and prospects. In addition, if we failto maintain high quality standards for our products or the products thatincorporate our technologies, through the quality control evaluation processthat we require of our licensees, the strength of our brand could be adverselyaffected.

 

***Licensee products that incorporate our technologies, from time to time,experience quality problems that could damage our brand, decrease revenues andincrease operating expenses.***

 

Licenseeproducts that incorporate our technologies often are complex and sometimescontain undetected software or hardware errors, particularly when firstintroduced or when new versions are released. In addition, those products areoften combined with, or incorporated into, products from other companies,sometimes making it difficult to identify the source of a problem. Any negativepublicity or negative impact relating to these product problems (even ifunrelated to our technologies) could adversely affect the perception of ourbrand. In addition, these errors could result in loss of, or delay in, marketacceptance of those products or our

 

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technologies,or cause delays in delivering them and meeting customer demands, any of whichcould reduce our revenue and raise significant customer relations issues.Although we generally attempt to contractually limit our liability for ourlicensees’ defective products, we may elect to help reengineer those products,which could increase our expenses and adversely affect our operating results.

 

***We may engage in acquisition activities, which could requiresignificant capital infusions and may result in operating challenges, dilutionto our stockholders and other adverse consequences.***

 

Wemay in the future acquire, or consider the acquisition of, complementary businesses,products and/or technologies. Acquisitions may require significant capitalinfusions and, in general, involve a number of special risks, including, butnot limited to, the following:

 

·                         Potentialdisruption of our ongoing business and the diversion of our resources andmanagement’s attention to acquisition activities and integration challenges;

 

·                        The failure toretain or integrate key acquired personnel;

 

·                        Thedifficulties in integrating the operations, technologies and informationsystems of the acquired companies;

 

·                         Increased coststo integrate and improve managerial, operational, financial and otheradministrative systems and to eliminate duplicative services;

 

·                         The need toimplement or improve internal controls, procedures and policies appropriate fora public company at businesses that prior to the acquisition wereprivately-held or otherwise lacked such adequate controls, procedures orpolicies;

 

·                        Adverse effectson existing business relationships with customers and/or suppliers;

 

·                        Unanticipatedor unknown obligations or liabilities relating to an acquisition;

 

·                         Possiblewrite-offs, impairment charges, compensation charges or other adverse tax oraccounting consequences related to an acquisition; and

 

·                        Integrationchallenges across diverse geographies, cultures, economies or regulatoryenvironments.

 

Ourcompetitors are also soliciting potential acquisition candidates, which couldboth increase the price of any acquisition targets and decrease the number ofattractive available acquisitions.  Wecannot assure you that we will pursue an acquisition or be able to identify orconsummate any acquisition, successfully integrate any acquisition or realizethe benefits anticipated from any acquisition. Future acquisitions may also require us to obtain additional equity ordebt financing, which may not be available on favorable terms, on a timelybasis or at all.

 

***We are subject to risks associated with substantial internationaloperations.***

 

Weconduct sales and customer support operations in a number of countriesthroughout the world that require refinement to adapt to the changing marketconditions on a regional basis. In addition, many of our significant customersare headquartered in the Asia Pacific region, particularly Korea and Japan.Approximately 88%, 90% and 91% of our revenues were derived from customers withheadquarters located in the Asia Pacific markets during the years ended December 31,2008, 2007 and 2006, respectively. We expect to continue to derive asignificant portion of our revenues from sales to customers in these marketsfor the foreseeable future. Also, a substantial number of productsincorporating our technologies are manufactured, assembled and tested by thirdparties in Asia. As a result, we are subject to a number of risks of conductingbusiness outside of the United States, any of which could have a materialadverse impact on our business and results of operations, including:

 

·                  global economic downturn;

 

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

 

·                  currency fluctuations;

 

·                  difficulties and costs of staffing andmanaging foreign operations;

 

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

 

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·                  adverse changes in tariffs and otherprotectionist laws and business practices that favor local competitors;

 

·                  potentially longer payment cycles and greaterdifficulty in collecting receivables from foreign entities;

 

·                  the burdens ofcomplying with a variety of non-U.S. laws and reduced protection of ourintellectual property in some countries;

 

·                  potentially adverse tax consequences and thecomplexities of foreign value added tax systems; and

 

·                  Other factors beyond our control, includingnatural disasters and major health concerns.

 

***We have a long and unpredictable sales cycle, which can result inuncertainty and delays in generating additional revenues.***

 

Historically,because of the complexity of our technologies, it can take a significant amountof time and effort to explain the benefits of our technologies to potential newcustomers and to negotiate a sale. For example, it typically takes three totwelve months after our first contact with a prospective customer before westart licensing our technology to that customer and another three to ninemonths to begin generating revenues. In addition, purchases of our products areusually made in connection with new design starts by our customers, the timingof which is outside of our control. Accordingly, we may be unable to predictaccurately the timing of any significant future sales of our products. We mayalso spend substantial time and management attention on potential licenseagreements that are not consummated, or in which the consumer electronicproduct ultimately does not sell in large quantities, thereby foregoing otherhigher revenue opportunities.

 

***If our patents and other intellectual property rights do not adequatelyprotect our products, we may lose market share to our competitors and be unableto operate our business profitably.***

 

Ourability to compete may be affected by our ability to protect our proprietaryinformation. We have filed numerous U.S. and foreign patent applications and todate have a number of issued U.S. and foreign patents covering various aspectsof our technologies. We cannot guarantee that the steps taken by us to protectour intellectual property will be adequate to prevent misappropriation of ourtechnology or that our competitors will not independently develop technologiesthat are substantially equivalent or superior to our technology. In addition,the laws of certain foreign countries may not protect our intellectual propertyrights to the same extent as do the laws of the U.S. It is possible that thirdparties may assert claims or initiate litigation against us or our customerswith respect to existing or future products. In addition, we may initiateclaims or litigation against third parties for infringement of our proprietaryrights or to determine the scope and validity of our proprietary rights.Litigation in the technology industry is common.  We are currently engaged in a dispute withSony concerning the possible infringement of several SRS patents by Sony’sS-Force technology, but cannot assure you that we will be successful in suchdispute. In addition, such litigation may adversely affect our ability tolicense other technologies to Sony. Claims and litigation brought against us orinitiated by us could be costly and time consuming and could divert ourmanagement from our business. The outcome of any litigation is uncertain andcould require us to pay significant damages or could prevent us from licensingsome or all of our technologies, which could significantly harm our businessand results of operations.  

 

***If we lose the services of our key personnel, or if we are unable toattract and retain other key personnel, we may not be able to manage ouroperations or meet our growth objectives.***

 

Ourfuture success depends to a large extent upon the continued service of keypersonnel, including engineering, sales and administrative staff. We anticipatethat any future growth will require us to recruit and hire a number of newpersonnel in engineering, operations, finance, sales and marketing. Competitionfor such personnel can be intense, and it is possible that we may not be ableto recruit and retain necessary personnel to operate our business and supportfuture growth.  Furthermore, ouragreements with the members of our senior management team allow such persons toterminate their employment with us at any time. The loss of any of our keypersonnel could delay our technology development and could harm our ability toexecute our business plan.

 

***We cannot be certain of the future effectiveness of our internalcontrol over financial reporting or the impact thereof on our operations or themarket price of our common stock.***

 

Pursuantto Section 404 of the Sarbanes-Oxley Act of 2002, we are required toinclude in our annual reports on Form 10-K our assessment of theeffectiveness of our internal control over financial reporting. We cannotassure you that our system of internal control will be effective in the futureas our operations and control environment change. If we cannot adequatelymaintain the effectiveness of our internal control over financial reporting,our financial reporting may not be timely and/or accurate. If reporting delaysor errors actually occur, we could be subject to sanctions or investigation byregulatory authorities, such as the SEC. Moreover, even if we conclude that ourinternal control is effective; our independent registered public accountingfirm may disagree. If our independent registered public accounting firm is notsatisfied with our internal control over financial reporting or the level atwhich our internal control over financial reporting is documented, designed,operated or reviewed, or if the independent registered public accounting firminterprets the requirements, rules or regulations differently than we do,then it may issue an adverse or qualified opinion. Any of the above outcomescould adversely affect our financial results or result in a loss of investorconfidence in the reliability of our financial information, which couldmaterially and adversely affect the market price of our common stock.

 

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

 

Thetrading price of our common stock has been, and will likely continue to be,subject to wide fluctuations in response to quarterly variations in ouroperating results, announcements of new products or technological innovationsby us or our competitors, strategic alliances between us and third parties,general market fluctuations and other events and factors. Changes in earningsestimates made by brokerage firms and industry analysts relating to the marketsin which we do business, or relating to us specifically, have in the pastresulted in, and could in the future result in, an immediate and adverse effecton the market price of the common stock. Even though our stock is quoted on theNASDAQ Global Market, our stock has had and may continue to have low tradingvolume and high volatility. The historically low trading volume of our stockmakes it more likely that a severe fluctuation in volume, either up or down,will significantly impact the stock price. Because of the relatively lowtrading volume of our stock, our stockholders may have difficulty selling ourcommon stock. In addition, the stock market in general, and the NASDAQ GlobalMarket and the market for technology and small market cap companies inparticular, has experienced extreme price and volume fluctuations that haveoften been unrelated or disproportionate to the operating performance of thosecompanies. Further, the market prices of securities of technology companieshave been particularly volatile. These broad market and industry factors maymaterially harm the market price of our common stock, regardless of ouroperating performance.

 

***Our certificate of incorporation and bylaws as well as Delaware lawcontain provisions that could discourage transactions resulting in a change incontrol, which may negatively affect the market price of our common stock.***

 

Ourcertificate of incorporation, our bylaws and Delaware law contain provisionsthat might enable our management to discourage, delay or prevent a change incontrol. In addition, these provisions could limit the price that investorswould be willing to pay in the future for shares of our common stock.

 

**Item 6.  Exhibits**

 

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

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

 

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**SIGNATURES**

 

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:  November 2, 2009 | By:                                               | /S/ THOMAS C.K. YUEN |
|                                   | Thomas C.K. Yuen                                  |
|                                   | Chairman of the Board and Chief Executive Officer |
|                                   | (Principal Executive Officer)                     |
| ** **                             | ** **                                        | ** ** |
| ** **                             | ** **                                        | ** ** |
| Date:  November 2, 2009 | By:                                               | /S/ ULRICH GOTTSCHLING |
|                                   | Ulrich Gottschling                                |
|                                   | Chief Financial Officer                           |
|                                   | (Principal Financial and Accounting Officer)      |

 

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**EXHIBIT INDEX**

 

The exhibits listed below are hereby filed with theSEC as part of this Report.

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

 

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