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                                                                    EXHIBIT 10.7

                             1997 STOCK OPTION PLAN
                                       OF
                          DIGITAL THEATER SYSTEMS, INC.

1.       PURPOSES OF THE PLAN

         The purposes of the 1997 Stock Option Plan (the "Plan") of Digital
Theater Systems, Inc., a Delaware corporation (the "Company"), are to:

                           (a)      Encourage selected employees, directors and
consultants to improve operations and increase profits of the Company;

                           (b)      Encourage selected employees, directors and
consultants to accept or continue employment or association with the Company or
its Affiliates (as defined below); and

                           (c)      Increase the interest of selected employees,
directors and consultants in the Company's welfare through participation in the
growth in value of the common stock of the Company (the "Common Stock").

         Options granted under the Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
"Code"), or "nonqualified options" ("NQOs").

2.       ELIGIBLE PERSONS

         Every person who at the date of grant of an Option is an employee of
the Company or of any Affiliate of the Company is eligible to receive NQOs or
ISOs under the Plan. Every person who at the date of grant is a consultant to,
or non-employee director of, the Company or any Affiliate of the Company is
eligible to receive NQOs under the Plan. The term "Affiliate" as used in the
Plan means a parent or subsidiary corporation as defined in the applicable
provisions (currently Sections 424(e) and (f), respectively) of the Code. The
term "employee" includes an officer or director who is an employee of the
Company. The term "consultant" includes persons employed by, or otherwise
affiliated with, a consultant.

3.       STOCK SUBJECT TO THE PLAN; MAXIMUM NUMBER OF GRANTS

         Subject to the provisions of Section 6.1.1 of the Plan, the total
number of shares of stock which may be issued under Options granted pursuant to
the Plan shall not exceed 1,660,466 shares of Common Stock. The shares covered
by the portion of any grant under the Plan which expires unexercised shall
become available again for grants under the Plan. No eligible person shall be
granted Options during any twelve-month period covering more than 1,660,466
shares. Anything in the Plan to the contrary notwithstanding, no more than
1,107,033 Options may be outstanding at any point in time (provided that the
foregoing restriction shall no longer apply after the first to occur of the
consummation of a primary initial public offering by the Company of its
securities or October __, 1998).

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4.       ADMINISTRATION

                           (a)      The Plan shall be administered by the Board
of Directors of the Company (the "Board") or by a committee (the "Committee") to
which administration of the Plan, or of part of the Plan, is delegated by the
Board (in either case, the "Administrator"). The Board shall appoint and remove
members of the Committee in its discretion in accordance with applicable laws.
If necessary in order to comply with Rule 16b-3 under the Exchange Act and
Section 162(m) of the Code, the Committee shall, in the Board's discretion, be
comprised solely of "non-employee directors" within the meaning of said Rule
16b-3 and "outside directors" within the meaning of Section 162(m) of the Code.
The foregoing notwithstanding, the Administrator may delegate nondiscretionary
administrative duties to such employees of the Company as it deems proper and
the Board, in its absolute discretion, may at any time and from time to time
exercise any and all rights and duties of the Administrator under the Plan.

                           (b)      Subject to the other provisions of the Plan,
the Administrator shall have the authority, in its discretion: (i) to grant
Options; (ii) to determine the fair market value of the Common Stock subject to
Options; (iii) to determine the exercise price of Options granted; (iv) to
determine the persons to whom, and the time or times at which, Options shall be
granted, and the number of shares subject to each Option; (v) to interpret the
Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to
the Plan; (vii) to determine the terms and provisions of each Option granted
(which need not be identical), including but not limited to, the time or times
at which Options shall be exercisable; (viii) with the consent of the optionee,
to modify or amend any Option; (ix) to defer (with the consent of the optionee)
the exercise date of any Option; (x) to authorize any person to execute on
behalf of the Company any instrument evidencing the grant of an Option; and (xi)
to make all other determinations deemed necessary or advisable for the
administration of the Plan. The Administrator may delegate nondiscretionary
administrative duties to such employees of the Company as it deems proper.

                           (c)      All questions of interpretation,
implementation, and application of the Plan shall be determined by the
Administrator. Such determinations shall be final and binding on all persons.

5.       GRANTING OF OPTIONS; OPTION AGREEMENT

                           (a)      No Options shall be granted under the Plan
after 10 years from the date of adoption of the Plan by the Board.

                           (b)      Each Option shall be evidenced by a written
stock option agreement, in form satisfactory to the Administrator, executed by
the Company and the person to whom such Option is granted.

                           (c)      The stock option agreement shall specify
whether each Option it evidences is an NQO or an ISO.

                           (d)      Subject to Section 6.3.3 with respect to
ISOs, the Administrator may approve the grant of Options under the Plan to
persons who are expected to become employees, directors or consultants of the
Company, but are not employees, directors or

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consultants at the date of approval, and the date of approval shall be deemed to
be the date of grant unless otherwise specified by the Administrator.

6.       TERMS AND CONDITIONS OF OPTIONS

         Each Option granted under the Plan shall be subject to the terms and
conditions set forth in Section 6.1. NQOs shall be also subject to the terms and
conditions set forth in Section 6.2, but not those set forth in Section 6.3.
ISOs shall also be subject to the terms and conditions set forth in Section 6.3,
but not those set forth in Section 6.2.

         6.1      Terms and Conditions to Which All Options Are Subject. All
Options granted under the Plan shall be subject to the following terms and
conditions:

                  6.1.1    Changes in Capital Structure. Subject to Section
6.1.2, if the stock of the Company is changed by reason of a stock split,
reverse stock split, stock dividend, or recapitalization, combination or
reclassification, appropriate adjustments shall be made by the Board in (a) the
number and class of shares of stock subject to the Plan and each Option
outstanding under the Plan, and (b) the exercise price of each outstanding
Option; provided, however, that the Company shall not be required to issue
fractional shares as a result of any such adjustments. Each such adjustment
shall be subject to approval by the Board in its sole discretion.

                  6.1.2    Corporate Transactions. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
optionee at least 30 days prior to such proposed action. To the extent not
previously exercised, all Options will terminate immediately prior to the
consummation of such proposed action; provided, however, that the Administrator,
in the exercise of his sole discretion, may permit exercise of any Options prior
to their termination, even if such Options were not otherwise exercisable. In
the event of a merger or consolidation of the Company with or into another
corporation or entity in which the Company does not survive, or in the event of
a sale of all or substantially all of the assets of the Company in which the
shareholders of the Company receive securities of the acquiring entity or an
affiliate thereof, all Options shall be assumed or equivalent options shall be
substituted by the successor corporation (or other entity) or a parent or
subsidiary of such successor corporation (or other entity); provided, however,
that if such successor does not agree to assume the Options or to substitute
equivalent options therefor, the Administrator, in the exercise of its sole
discretion, may permit the exercise of any of the Options prior to consummation
of such event, even if such Options were not otherwise exercisable.

                  6.1.3    Time of Option Exercise. Subject to Section 5 and
Section 6.3.4, Options granted under the Plan shall be exercisable (a)
immediately as of the effective date of the stock option agreement granting the
Option, or (b) in accordance with a schedule as may be set by the Administrator
(in any case, the "Vesting Base Date") and specified in the written stock option
agreement relating to such Option. In any case, no Option shall be exercisable
until a written stock option agreement in form satisfactory to the Company is
executed by the Company and the optionee. Notwithstanding the foregoing, to the
extent required by applicable laws, rules and regulations, the right to exercise
Options granted pursuant to the Plan shall vest at the rate of at least 20% per
year from the date of grant.

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                  6.1.4    Option Grant Date. The date of grant of an Option
under the Plan shall be the date as of which the Administrator approves the
grant.

                  6.1.5    Nontransferability of Option Rights. No Option
granted under the Plan shall be assignable or otherwise transferable by the
optionee except by will or by the laws of descent and distribution. During the
life of the optionee, an Option shall be exercisable only by the optionee.

                  6.1.6    Payment. Except as provided below, payment in full,
in cash, shall be made for all stock purchased at the time written notice of
exercise of an Option is given to the Company, and proceeds of any payment shall
constitute general funds of the Company. The Administrator, in the exercise of
its absolute discretion after considering any tax, accounting and financial
consequences, may authorize any one or more of the following additional methods
of payment:

                           (a)      Acceptance of the optionee's full recourse
promissory note for all or part of the Option price, payable on such terms and
bearing such interest rate as determined by the Administrator (but in no event
less than the minimum interest rate specified under the Code at which no
additional interest would be imputed), which promissory note may be either
secured or unsecured in such manner as the Administrator shall approve
(including, without limitation, by a security interest in the shares of the
Company);

                           (b)      Subject to the discretion of the
Administrator and the terms of the stock option agreement granting the Option,
delivery by the optionee of shares of Common Stock already owned by the optionee
for all or part of the Option price, provided the fair market value (determined
as set forth in Section 6.1.10) of such shares of Common Stock is equal on the
date of exercise to the Option price, or such portion thereof as the optionee is
authorized to pay by delivery of such stock; and

                           (c)      Subject to the discretion of the
Administrator, through the surrender of shares of Common Stock then issuable
upon exercise of the Option, provided the fair market value (determined as set
forth in Section 6.1.10) of such shares of Common Stock is equal on the date of
exercise to the Option price, or such portion thereof as the optionee is
authorized to pay by surrender of such stock.

                           (d)      By means of so-called cashless exercises as
permitted under applicable rules and regulations of the Securities and Exchange
Commission and the Federal Reserve Board.

                  6.1.7    Termination of Employment. If for any reason other
than death or permanent and total disability, an optionee ceases to be employed
by the Company or any of its Affiliates (such event being called a
"Termination"), Options held at the date of Termination (to the extent then
exercisable) may be exercised in whole or in part at any time within three
months of the date of such Termination, or such other period of not less than 30
days after the date of such Termination as is specified in the Option Agreement
or by amendment thereof (but in no event after the Expiration Date); provided,
however, that if such exercise of the Option would result in liability for the
optionee under Section 16(b) of the Exchange Act, then such three-

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month period automatically shall be extended until the tenth day following the
last date upon which optionee has any liability under Section 16(b) (but in no
event after the Expiration Date). If an optionee dies or becomes permanently and
totally disabled (within the meaning of Section 22(e)(3) of the Code) while
employed by the Company or an Affiliate or within the period that the Option
remains exercisable after Termination, Options then held (to the extent then
exercisable) may be exercised, in whole or in part, by the optionee, by the
optionee's personal representative or by the person to whom the Option is
transferred by devise or the laws of descent and distribution, at any time
within six months after the death or six months after the permanent and total
disability of the optionee or any longer period specified in the Option
Agreement (but in no event after the Expiration Date). For purposes of this
Section 6.1.7, "employment" includes service as a director or as a consultant.
For purposes of this Section 6.1.7, an optionee's employment shall not be deemed
to terminate by reason of sick leave, military leave or other leave of absence
approved by the Administrator, if the period of any such leave does not exceed
90 days or, if longer, if the optionee's right to reemployment by the Company or
any Affiliate is guaranteed either contractually or by statute.

                  6.1.8    Withholding and Employment Taxes. At the time of
exercise of an Option and as a condition thereto, or at such other time as the
amount of such obligations becomes determinable (the "Tax Date"), the optionee
shall remit to the Company in cash all applicable federal and state withholding
and employment taxes. Such obligation to remit may be satisfied, if authorized
by the Administrator in its sole discretion, after considering any tax,
accounting and financial consequences, by the optionee's (i) delivery of a
promissory note in the required amount on such terms as the Administrator deems
appropriate, (ii) tendering to the Company previously owned shares of Common
Stock or other securities of the Company with a fair market value equal to the
required amount, or (iii) agreeing to have shares of Common Stock (with a fair
market value equal to the required amount) which are acquired upon exercise of
the Option withheld by the Company.

                  6.1.9    Other Provisions. Each Option granted under the Plan
may contain such other terms, provisions, and conditions not inconsistent with
the Plan as may be determined by the Administrator, and each ISO granted under
the Plan shall include such provisions and conditions as are necessary to
qualify the Option as an "incentive stock option" within the meaning of Section
422 of the Code.

                  6.1.10   Determination of Value. For purposes of the Plan, the
fair market value of Common Stock or other securities of the Company shall be
determined as follows:

                           (a)      If the stock of the Company is regularly
quoted by a recognized securities dealer, and selling prices are reported, its
fair market value shall be the closing price of such stock on the date the value
is to be determined, but if selling prices are not reported, its fair market
value shall be the mean between the high bid and low asked prices for such stock
on the date the value is to be determined (or if there are no quoted prices for
the date of grant, then for the last preceding business day on which there were
quoted prices).

                           (b)      In the absence of an established market for
the stock, the fair market value thereof shall be determined in good faith by
the Administrator, with reference to the Company's net worth, prospective
earning power, dividend-paying capacity, and other

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relevant factors, including the goodwill of the Company, the economic outlook in
the Company's industry, the Company's position in the industry, the Company's
management, and the values of stock of other corporations in the same or a
similar line of business.

                  6.1.11   Option Term. Subject to Section 6.3.4, no Option
shall be exercisable more than 10 years after the date of grant, or such lesser
period of time as is set forth in the stock option agreement (the end of the
maximum exercise period stated in the stock option agreement is referred to in
the Plan as the "Expiration Date").

         6.2      Terms and Conditions to Which Only NQOs Are Subject. Options
granted under the Plan which are designated as NQOs shall be subject to the
additional following terms and conditions:

                  6.2.1    Exercise Price. (a) Except as set forth in Section
6.2.1(b), the exercise price of a NQO shall be not less than 85% of the fair
market value (determined in accordance with Section 6.1.10) of the stock subject
to the option on the date of the grant.

                           (b)      To the extent required by applicable laws,
rules and regulations, the exercise price of a NQO granted to any person who
owns, directly or by attribution under the Code (currently Section 424(d)),
stock possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or of any Affiliate (a "Ten Percent
Shareholder") shall in no event be less than 110% of the fair market value
(determined in accordance with Section 6.1.10) of the stock covered by the
Option at the time the Option is granted.

         6.3      Terms and Conditions to Which Only ISOs Are Subject. Options
granted under the Plan which are designated as ISOs shall be subject to the
following additional terms and conditions:

                  6.3.1    Exercise Price. (a) Except as set forth in Section
6.3.1(b), the exercise price of an ISO shall be determined in accordance with
the applicable provisions of the Code and shall in no event be less than the
fair market value (determined in accordance with Section 6.1.10) of the stock
covered by the Option at the time the Option is granted.

                           (b)      The exercise price of an ISO granted to any
Ten Percent Shareholder shall in no event be less than 110% of the fair market
value (determined in accordance with Section 6.1.10) of the stock covered by the
Option at the time the Option is granted.

                  6.3.2    Disqualifying Dispositions. If stock acquired by
exercise of an ISO granted pursuant to the Plan is disposed of in a
"disqualifying disposition" within the meaning of Section 422 of the Code (a
disposition within two years from the date of grant of the Option or within one
year after the transfer such stock on exercise of the Option), the holder of the
stock immediately before the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such other
information regarding the Option as the Company may reasonably require.

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                  6.3.3    Grant Date. If an ISO is granted in anticipation of
employment as provided in Section 5(d), the Option shall be deemed granted,
without further approval, on the date the grantee assumes the employment
relationship forming the basis for such grant, and, in addition, satisfies all
requirements of the Plan for Options granted on that date.

                  6.3.4    Term. Notwithstanding Section 6.1.11, no ISO granted
to any Ten Percent Shareholder shall be exercisable more than five years after
the date of grant.

7.       MANNER OF EXERCISE

                           (a)      An optionee wishing to exercise an Option
shall give written notice to the Company at its principal executive office, to
the attention of the officer of the Company designated by the Administrator,
accompanied by payment of the exercise price and withholding taxes as provided
in Sections 6.1.6 and 6.1.8. The date the Company receives written notice of an
exercise hereunder accompanied by payment of the exercise price will be
considered as the date such Option was exercised.

                           (b)      Promptly after receipt of written notice of
exercise of an Option and the payments called for by Section 7(a), the Company
shall, without stock issue or transfer taxes to the optionee or other person
entitled to exercise the Option, deliver to the optionee or such other person a
certificate or certificates for the requisite number of shares of stock. An
optionee or permitted transferee of the Option shall not have any privileges as
a shareholder with respect to any shares of stock covered by the Option until
the date of issuance (as evidenced by the appropriate entry on the books of the
Company or a duly authorized transfer agent) of such shares.

8.       EMPLOYMENT OR CONSULTING RELATIONSHIP

         Nothing in the Plan or any Option granted hereunder shall interfere
with or limit in any way the right of the Company or of any of its Affiliates to
terminate any optionee's employment or consulting at any time, nor confer upon
any optionee any right to continue in the employ of, or consult with, the
Company or any of its Affiliates.

9.       CONDITIONS UPON ISSUANCE OF SHARES

         Shares of Common Stock shall not be issued pursuant to the exercise of
an Option unless the exercise of such Option and the issuance and delivery of
such shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended (the
"Securities Act").

10.      NONEXCLUSIVITY OF THE PLAN

         The adoption of the Plan shall not be construed as creating any
limitations on the power of the Company to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options other than under the Plan.

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11.      MARKET STANDOFF

         Each optionee, if so requested by the Company or any representative of
the underwriters in connection with any registration of the offering of any
securities of the Company under the Securities Act, shall not sell or otherwise
transfer any shares of Common Stock acquired upon exercise of Options during the
180-day period following the effective date of a registration statement of the
Company filed under the Securities Act; provided, however, that such restriction
shall apply only to the first registration statement of the Company to become
effective under the Securities Act after the date of adoption of the Plan which
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restriction until the end of such 180-day period.

12.      AMENDMENTS TO PLAN

         The Board may at any time amend, alter, suspend or discontinue the
Plan. Without the consent of an optionee, no amendment, alteration, suspension
or discontinuance may adversely affect outstanding Options except to conform the
Plan and ISOs granted under the Plan to the requirements of federal or other tax
laws relating to incentive stock options. No amendment, alteration, suspension
or discontinuance shall require shareholder approval unless (a) shareholder
approval is required to preserve incentive stock option treatment for federal
income tax purposes or (b) the Board otherwise concludes that shareholder
approval is advisable.

13.      EFFECTIVE DATE OF PLAN; TERMINATION

         The Plan shall become effective upon adoption by the Board provided,
however, that no Option shall be exercisable unless and until written consent of
the shareholders of the Company, or approval of shareholders of the Company
voting at a validly called shareholders' meeting, is obtained within twelve
months after adoption by the Board. If such shareholder approval is not obtained
within such time, Options granted hereunder shall terminate and be of no force
and effect from and after expiration of such twelve-month period. Options may be
granted and exercised under the Plan only after there has been compliance with
all applicable federal and state securities laws. The Plan (but not Options
previously granted under the Plan) shall terminate within ten years from the
date of its adoption by the Board.

14.      REPURCHASE OF STOCK

         Unless otherwise determined by the Administrator at the time of grant,
the shares of Common Stock delivered or to be delivered pursuant to the exercise
of any Option granted under the Plan will be subject to a right of repurchase in
favor of the Company with respect to any optionee who suffers a Termination of
employment. The Company shall exercise its repurchase right by notifying the
optionee in writing within 120 days of such optionee's Termination of the
Company's intention to repurchase the shares and the purchase price thereof
(which shall be the greater of (a) the fair market value of the shares as
determined pursuant to the Plan as of the date of Termination and (b) the
exercise price paid in connection with the shares of common stock). The
Administrator shall include in the stock option agreement granting each Option
such additional provisions to effectuate the foregoing as it deems necessary.
The Company's ability to

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exercise any of the foregoing repurchase rights shall be subject to the approval
of the Board of Directors. All of the foregoing provisions shall terminate upon
the consummation of a primary initial public offering by the Company of its
securities.

15.      DELIVERY OF FINANCIAL STATEMENTS

         To the extent required by applicable laws, rules and regulations, the
Company shall deliver to each optionee financial statements of the Company at
least annually while such optionee holds an outstanding Option.

                                       9<PAGE>

                                                                    EXHIBIT 10.8

                          DIGITAL THEATER SYSTEMS, INC.
                        INCENTIVE STOCK OPTION AGREEMENT

         THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement"), is made as of
28th day of January, 1998 by and between Digital Theater Systems, Inc., a
Delaware corporation (the "Company"), and _________________ ("Optionee").

                                  R E C I T A L

         Pursuant to the 1997 Stock Option Plan (the "Plan") of the Company, the
Board of Directors of the Company or a committee to which administration of the
Plan is delegated by the Board of Directors (in either case, the
"Administrator") has authorized the granting to Optionee of an incentive stock
option to purchase the number of shares of Common Stock of the Company specified
in Paragraph 1 hereof, at the price specified therein, such option to be for the
term and upon the terms and conditions hereinafter stated.

                                A G R E E M E N T

         NOW, THEREFORE, in consideration of the promises and of the
undertakings of the parties hereto contained herein, it is hereby agreed:

         1.       Number of Shares; Option Price. Pursuant to said action of the
Administrator, the Company hereby grants to Optionee the option ("Option") to
purchase, upon and subject to the terms and conditions of the Plan, ____________
shares of Common Stock of the Company ("Shares") at the price of $2.019 per
share.

         2.       Term. This Option shall expire on the day before the tenth
anniversary (fifth anniversary if Optionee owns more than 10% of the voting
stock of the Company or an Affiliate of the Company on the date of this
Agreement) of the date hereof (the "Expiration Date") unless such Option shall
have been terminated prior to that date in accordance with the provisions of the
Plan or this Agreement. The term "Affiliate" and other capitalized terms used
and not otherwise defined herein shall have the meanings set forth in the Plan.

         3.       Shares Subject to Exercise. Shares subject to exercise shall
be 25% of such Shares on and after the first anniversary of the Date hereof, 25%
of such Shares on and after the second anniversary of the Date hereof, 25% of
such Shares on and after the third anniversary of the Date hereof and 25% of
such Shares on and after the fourth anniversary of the Date hereof. All Shares
shall thereafter remain subject to exercise for the term specified in Paragraph
2 hereof, provided that Optionee is then and has continuously been in the employ
of the Company, or its Affiliates, subject, however, to the provisions of
Paragraph 6 hereof.

         4.       Method and Time of Exercise. The Option may be exercised by
written notice delivered to the Company at its principal executive office
stating the number of shares with respect to which the Option is being
exercised, together with:

                  (A)      a check or money order made payable to the Company in
the amount of the exercise price and any withholding tax, as provided under
Paragraph 5 hereof; or

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                  (B)      if expressly authorized in writing by the
Administrator, in its sole discretion, at the time of the Option exercise, the
tender to the Company of shares of the Company's Common Stock owned by Optionee
having a fair market value, as determined by the Administrator, not less than
the exercise price, plus the amount of applicable federal, state and local
withholding taxes; or

                  (C)      if expressly authorized in writing by the
Administrator, in its sole discretion, at the time of the Option exercise, the
Optionee's full recourse promissory note in a form approved by the Company; or

                  (D)      if any other method such as cashless exercise is
expressly authorized in writing by the Administrator, in its sole discretion, at
the time of the Option exercise, the tender of such consideration having a fair
market value, as determined by the Administrator, not less than the exercise
price, plus the amount of applicable federal, state and local withholding taxes.

Not less than 100 shares may be purchased at any one time unless the number
purchased is the total number purchasable under such Option at the time. Only
whole shares may be purchased.

         5.       Tax Withholding. In the event that this Option shall lose its
qualification as an incentive stock option, as a condition to exercise of this
Option, the Company may require Optionee to pay over to the Company all
applicable federal, state and local taxes which the Company is required to
withhold with respect to the exercise of this Option. At the discretion of the
Administrator and upon the request of Optionee, the minimum statutory
withholding tax requirements may be satisfied by the withholding of shares of
Common Stock of the Company otherwise issuable to Optionee upon the exercise of
this Option.

         6.       Exercise on Termination of Employment. If for any reason other
than death, permanent and total disability or retirement past the age of 60,
Optionee ceases to be employed by the Company or any of its Affiliates (such
event being called a "Termination"), this Option (to the extent then
exercisable) may be exercised in whole or in part at any time within three
months of the date of such Termination, but in no event after the Expiration
Date; provided, however, that if such exercise of this Option would result in
liability for Optionee under Section 16(b) of the Securities Exchange Act of
1934, then such three-month period automatically shall be extended until the
tenth day following the last date upon which Optionee has any liability under
Section 16(b), but in no event after the Expiration Date. If Optionee dies or
becomes permanently and totally disabled (as defined in the Plan) while employed
by the Company or an Affiliate or within the period that this Option remains
exercisable after Termination, this Option (to the extent then exercisable) may
be exercised, in whole or in part, by Optionee, by Optionee's personal
representative or by the person to whom this Option is transferred by devise or
the laws of descent and distribution, at any time within six months after the
death or six months after the permanent and total disability of Optionee, but in
no event after the Expiration Date. In the event this Option is treated as a
nonqualified stock option, then and to that extent, "employment" would include
service as a director or as a consultant. For purposes of this Paragraph 6,
Optionee's employment shall not be deemed to terminate by reason of sick leave,
military leave or other leave of absence approved by the Administrator, if the
period of any such leave does not exceed 90 days or, if longer, if Optionee's
right to reemployment by the Company or any Affiliate is guaranteed either
contractually or by statute.

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         7.       Nontransferability. This Option may not be assigned or
transferred except by will or by the laws of descent and distribution, and may
be exercised only by Optionee during his lifetime and after his death, by his
personal representative or by the person entitled thereto under his will or the
laws of intestate succession.

         8.       Optionee Not a Shareholder. Optionee shall have no rights as a
shareholder with respect to the Common Stock of the Company covered by this
Option until the date of issuance of a stock certificate or stock certificates
to him upon exercise of this Option. No adjustment will be made for dividends or
other rights for which the record date is prior to the date such stock
certificate or certificates are issued.

         9.       No Right to Employment. Nothing in the Option granted hereby
shall interfere with or limit in any way the right of the Company or of any of
its Affiliates to terminate Optionee's employment or consulting at any time, nor
confer upon Optionee any right to continue in the employ of, or consult with,
the Company or any of its Affiliates.

         10.      Modification and Termination. The rights of Optionee are
subject to modification and termination in certain events as provided in
Sections 6.1 and 6.3 of the Plan.

         11.      Restrictions on Sale of Shares. Optionee represents and agrees
that, upon his exercise of this Option, in whole or in part, unless there is in
effect at that time under the Securities Act of 1933 a registration statement
relating to the Shares issued to him, he will acquire the Shares issuable upon
exercise of this Option for the purpose of investment and not with a view to
their resale or further distribution, and that upon each exercise thereof he
shall furnish to the Company a written statement to such effect, satisfactory to
the Company in form and substance. Optionee agrees that any certificates issued
upon exercise of this Option may bear a legend indicating that their
transferability is restricted in accordance with applicable state or federal
securities law. Any person or persons entitled to exercise this Option under the
provisions of Paragraph 6 hereof shall, upon each exercise of this Option under
circumstances in which Optionee would be required to furnish such a written
statement, also furnish to the Company a written statement to the same effect,
satisfactory to the Company in form and substance.

         12.      Plan Governs. This Agreement and the Option evidenced hereby
are made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan, as it may be construed
by the Administrator. It is intended that this Option shall qualify as an
incentive stock option as defined by Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and this Agreement shall be construed in a manner
which will enable this Option to be so qualified. Optionee hereby acknowledges
receipt of a copy of the Plan.

         13.      Notices. All notices to the Company shall be addressed to the
Chief Financial Officer at the principal executive office of the Company at
31336 Via Colinas, Suite 101, Westlake Village, California 91362, and all
notices to Optionee shall be addressed to Optionee at the address of Optionee on
file with the Company or its subsidiary, or to such other address as either may
designate to the other in writing. A notice shall be deemed to be duly given if
and when enclosed in a properly addressed sealed envelope deposited, postage
prepaid, with the

                                       3

<PAGE>

United States Postal Service. In lieu of giving notice by mail as aforesaid,
written notices under this Agreement may be given by personal delivery to
Optionee or to the Chief Financial Officer (as the case may be).

         14.      Sale or Other Disposition. Optionee understands and agrees
with the Company that the Shares acquired pursuant to exercise of this Option
shall not be disposed of by Optionee (whether by sale, exchange, gift, or other
form of transfer) other than to a Permitted Transferee (as defined below) or by
will or the laws of descent and distribution, until the consummation of a
primary initial public offering by the Company of its securities. Optionee
further understands that, under current law, beneficial tax treatment resulting
from the exercise of this Option will be available only if certain requirements
of the Code are satisfied, including without limitation, the requirement that no
disposition of Shares acquired pursuant to exercise of this Option be made
within two years from the grant date or within one year after the transfer of
Shares to him or her. If Optionee at any time contemplates the disposition
(whether by sale, exchange, gift, or other form of transfer) of any such Shares,
he or she will first notify the Company in writing of such proposed disposition
and cooperate with the Company in complying with all applicable requirements of
law, which, in the judgment of the Company, must be satisfied prior to such
disposition. In addition to the foregoing, Optionee hereby agrees that before
Optionee disposes (whether by sale, exchange, gift, or otherwise) of any Shares
acquired by exercise of this Option within two years of the grant date or within
one year after the transfer of such Shares to Optionee upon exercise of this
Option, Optionee shall promptly notify the Company in writing of the date and
terms of the proposed disposition and shall provide such other information
regarding the Option as the Company may reasonably require immediately before
such disposition. Said written notice shall state the date of such proposed
disposition, and the type and amount of the consideration to be received for
such Share or Shares by Optionee in connection therewith. In the event of any
such disposition, the Company shall have the right to require Optionee to
immediately pay the Company the amount of taxes (if any) which the Company is
required to withhold under federal and/or state law as a result of the granting
or exercise of the Option and the disposition of the Shares. The terms and
conditions of this Agreement shall be binding on any Permitted Transferee of
this Option or any Shares acquired upon exercise of this Option. "Permitted
Transferee" means Optionee's estate, spouse, heirs, ancestors, lineal
descendants, legatees and legal representatives, the trustee of any bona fide
trust of which one or more of the foregoing are the sole beneficiaries or the
grantors thereof and any person in which any of the foregoing, individually or
collectively, beneficially owns all of the capital stock, provided that in each
such case the transferee enters into an agreement with the Company acknowledging
the Company's repurchase rights under Paragraph 15.

         15.      Repurchase of Stock by Company. In the event of a Termination
of Optionee such that Optionee is no longer a director, officer, employee or
consultant of the Company or any of its Affiliates, the Company shall have the
right, upon such Termination and for a period of 120 days thereafter (the
"Repurchase Period"), to repurchase all or any part of the Shares acquired or to
be acquired by Optionee upon exercise of this Option and held or to be held of
record by Optionee at a price equal to the greater of (A) the fair market value
of the Shares as of the date of Termination and (B) the exercise price paid by
Optionee for such Shares. The Company shall exercise the foregoing repurchase
right by delivering a notice to Optionee during the Repurchase Period indicating
the total number of Shares the Company is repurchasing, together with a check in
an amount equal to the repurchase price per share multiplied by the

                                       4

<PAGE>

number of shares to be repurchased (reduced by the amount of taxes (if any)
which the Company is required to withhold under federal and/or state law with
respect to such Shares). The determination by the Administrator of the
repurchase price shall be conclusive. Upon delivery of such notice and payment
of the repurchase price, Optionee shall promptly surrender the certificate(s)
representing the Shares repurchased by the Company. Whether or not Optionee
surrenders such certificates, upon payment in full by the Company of the
repurchase price for the Shares on or prior to the last day of the Repurchase
Period, all Shares subject to the foregoing repurchase notice shall
automatically be cancelled on the books and records of the Company without any
further action by the Company or Optionee. Stock certificates issued pursuant to
the exercise of this Option shall bear a legend indicating the foregoing right
of the Company to repurchase the Shares held by Optionee which legend shall
state:

         The shares evidenced by this certificate are subject to the right of
         Digital Theater Systems, Inc. (the "Issuer") under certain
         circumstances to repurchase all or any part of such shares upon notice
         by Digital Theater Systems, Inc. to the holder of this certificate as
         set forth in that certain Digital Theater Systems, Inc. Incentive Stock
         Option Agreement, dated as of January 28, 1998, a copy of which is on
         file at the offices of the Issuer.

For purposes of this Paragraph 15, Optionee's employment or service shall not be
deemed to terminate by reason of sick leave, military leave or other leave of
absence approved by the Administrator, if the period of any such leave does not
exceed 90 days or, if longer, if Optionee's right to reemployment by the Company
or any Affiliate is guaranteed either contractually or by statute. All of the
foregoing provisions of this Paragraph 15 shall terminate upon the consummation
of a primary initial public offering by the Company of its securities.

                                       5

<PAGE>

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.

                                           DIGITAL THEATER SYSTEMS, INC.

                                           By: _________________________________
                                               Bill Neighbors
                                               President

                                           OPTIONEE

                                           By: _________________________________
                                               Name:

                                               Address:
                                               ________________________________
                                               ________________________________
                                               ________________________________

                                       6

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