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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 000-50335

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DTS, Inc.
(Exact name of Registrant as specified in its charter)

5220 Las Virgenes Road
Calabasas, California 91302
(Address, including zip code, of Registrant's principal executive offices)

Registrant's telephone number, including area code: (818) 436-1000

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          Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
None

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          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

          The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of June 30, 2009 was approximately $467,619,930 (based upon the closing price for shares of the registrant's Common Stock as reported by the NASDAQ Stock Market LLC for that date). Shares of Common Stock held by each officer and director have been excluded as such persons may be deemed affiliates. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

          As of February 26, 2010, 17,498,379 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference to the registrant's proxy statement relating to the annual meeting of stockholders to be held on or about June 4, 2010.

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DTS, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2009
INDEX

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FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K (including, but not limited to, the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations") and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "believes," "anticipates," "estimates," "expects," "projections," "may," "potential," "plan," "continue" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial performance or position, our business strategy, plans or expectations, and our objectives for future operations, including relating to our products and services. Although forward-looking statements in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements contained herein are inherently subject to risks and uncertainties and our actual results and outcomes may be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the "Risk Factors" section contained in Item 1A below, and elsewhere in this report and in other documents we file with the Securities and Exchange Commission, or SEC. We cannot guarantee future results, levels of activity, performance or achievements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to revise or update these forward-looking statements to reflect future events or circumstances.

PART I

Item 1.    Business

Company Overview

        We are a leading provider of high quality branded entertainment technologies, which are incorporated into an array of entertainment products by hundreds of licensee customers around the world. Our core DTS digital multi-channel audio technology enables the delivery and playback of compelling surround sound and is currently used in a variety of product applications, including audio/video receivers, DVD players, Blu-ray Disc players, personal computers or PCs, car audio products, video game consoles, home theater systems, digital media players or DMPs, set-top-boxes or STBs, and televisions. In addition, we provide products and services to studios, radio and television broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded soundtracks in movies, music, and broadcast entertainment content.

        The quality of our technology offerings, coupled with our reputation for delivering high quality entertainment experiences to consumers, led the consumer electronics industry to mandate the use of DTS technology in all Blu-ray Disc players. We believe our mandatory position in this standard provides a significant growth driver for us over the next several years. Our goal is to become an essential ingredient in high quality entertainment experiences by enabling the creation of compelling content and by incorporating our technology into every device that manages, controls or delivers high-quality digital entertainment.

        We were founded in 1990 and received a key strategic investment in 1993 from a variety of investors, including Universal City Studios, Inc. The first DTS audio soundtrack was created for the release of Steven Spielberg's Jurassic Park in 1993. From this initial release, we established a technical and marketing platform for the development of entertainment technology solutions for the motion picture, home theater, and other consumer markets. In 1996, we launched our consumer technology licensing business, in which we license our technology to consumer electronics and other product manufacturers. To date, we have entered into licensing agreements with substantially all of the world's major consumer electronics manufacturers. We also license our technology to many major

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semiconductor manufacturers. Our technology, trademarks, copyrights and know-how have been incorporated in hundreds of millions of consumer electronics products worldwide.

        The significant growth of our consumer technology licensing business, coupled with our mandatory position in the Blu-ray Disc standard, led us to decide in February 2007 to exit our cinema and digital image processing businesses. These businesses were sold in two separate transactions during the second quarter of 2008 and were classified as Assets of Discontinued Operations Held For Sale on our balance sheets and as Discontinued Operations on our statements of operations for all periods presented. Except as otherwise noted, information herein is presented for the consumer business or continuing operations only.

        On December 31, 2008, we entered into an Asset Purchase Agreement with Neural Audio Corporation, or Neural, and its stockholders providing for the sale to us of substantially all of Neural's assets used in the conduct of its audio technology business and certain patents and patent applications owned by such stockholders and the assumption by us of certain liabilities of Neural. The sale was consummated the same day. The acquired business expands our branded technology offerings further into the creation, distribution and playback of music, and broadcast programming, for the home A/V, automotive and video game markets.

        We develop, market, license and sell our proprietary technology and services for the following consumer markets:

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Home theater and consumer electronics devices such as audio/video receivers, home-theater-in-a-box systems, DVD and Blu-ray Disc players;



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Home media network devices such as digital media players/adapters and network-enabled televisions;



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Car audio and video devices such as in-car infotainment systems (in dash audio, video and navigation);



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Game consoles such as Sony's PS3, which has an internal Blu-ray Disc drive;



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Personal computers, including software applications, PC-based hardware products for home theaters, some of which may use Blu-ray Disc drives;



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Professional audio products for encoding and decoding digital multi-channel content in our proprietary format;



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Audio signal processing software solutions for satellite digital audio radio services;



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Audio encoding and enhancement tools for live sports broadcasting in North America; and



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Emerging markets for digital audio such as mobile phones, other portable media devices, and digital broadcast products/markets.

Industry Background

        Over the past 20 years, the entertainment industry has shifted to take advantage of many technical trends and innovations including:

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the transition from analog to digital content;



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the transition from standard definition to high definition content;



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advancements in digital coding;



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new modes of transmission and significant increases in bandwidth;



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large increases in computing power and storage with corresponding reductions in cost;



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an increase in the types of devices for content playback with matching reductions in cost; and

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the convergence of features and content into devices to create new ways of consuming digital entertainment content.

        These trends and innovations helped create a technical foundation for the widespread adoption of digital multi-channel audio and high definition video for many forms of entertainment.

Adoption and Growth of Digital Multi-Channel Audio in the Motion Picture Industry

        Movie soundtracks were originally presented in mono, or one-channel, audio. In the mid-1970s, stereo was introduced. Stereo consists of two channels and presents sound through discrete left and right speakers. Stereo was followed by matrix technology that allowed an inexpensive two-track system to bring better sound to a large number of movie theaters. However, matrix technology allows only limited audio quality enhancement and channel separation over stereo.

        In the early 1990s, the listening experience of cinema audiences was significantly enhanced through the introduction of digital multi-channel audio technology. Multi-channel audio, commonly referred to as surround sound, allows listeners to hear discrete sounds simultaneously through more than two speakers. This format combined high-quality audio with full separation in five channels: left, center, right, left surround, right surround, plus a channel dedicated to low frequency effects known as a subwoofer. This digital discrete surround sound enabled movie directors and producers to create a more enveloping and realistic entertainment environment. Many filmmakers recognized the ability of multi-channel audio to enhance the entertainment experience and promoted its widespread adoption. As a result, digital surround sound quickly became the industry standard for feature films and set the stage for the migration of surround sound to the consumer electronics market, initially for home theater systems.

Proliferation of Home Theater Systems

        Home theater systems generally consist of a display, a DVD or Blu-ray Disc player, a digital multi-channel audio/video receiver, five or more speakers, and a subwoofer. Home-theater-in-a-box systems contain one each of these elements, with the exception of the display, and are a popular offering to consumers as an all-in-one home theater package for ease of use and installation.

        Consumer demand for digital multi-channel capable home theater systems has been fueled by:

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the digital multi-channel audio experience in movie theaters;



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the widespread availability of DVDs with digital multi-channel soundtracks;



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the proliferation of high definition cable and satellite channels with digital multi-channel audio;



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the rapid expansion and availability of Blu-ray Disc movies and music released with high definition multi-channel soundtracks;



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the wide availability of digital multi-channel audio in advanced game consoles; and



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declining prices for DVD and Blu-ray Disc players, advanced game consoles, high definition audio/video receivers, and home-theater-in-a-box systems.

Proliferation of Blu-ray Disc Systems

        Blu-ray Disc players, including set-top-box stand-alone players and game consoles, are a significant driver of our revenues and future growth. Based on the Digital Entertainment Group, or DEG, and other data, we estimate that over 50 million Blu-ray devices, including stand-alone players and game consoles, have been sold worldwide since their launch in November 2006. There are now approximately 80 different models of Blu-ray Disc playback devices available in the market at prices as low as $80 in the U.S.

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        Blu-ray Disc annual sales in the U.S. have now reached $1.5 billion dollars, representing 8% of overall home entertainment sales, and an increase of 67% compared to the previous year. Video Business reported that certain top selling Blu-ray titles outsold their DVD counterparts on Amazon.com for the first time over the U.S.'s "Black Friday" weekend in 2009. There are now more than 2,100 unique Blu-ray titles available in the U.S. market. According to Blu-ray.com, over one thousand of the Blu-ray releases in North America include a DTS-HD Master Audio soundtrack. We believe that the demand for home entertainment content is an indicator of the expected demand for Blu-ray Disc players, which drives our revenue.

        High definition content and displays have been an important driver in the proliferation of home theater systems. The Consumer Electronics Association, or CEA, estimates that 63% of U.S. households now own at least one high definition television and that 86% of digital displays to be sold in 2010 will be high definition.

Development of Robust New Markets for High Quality Branded Entertainment Technologies

        Digital multi-channel sound is further extending into a growing number of consumer electronics environments, including homes, cars, personal computers, video games and consoles, mobile phones, portable media devices, digital media players, HD radio receivers, and various forms of broadcast television products. Content providers in the film, television, music and video game markets have recognized that a substantial market opportunity exists for digital multi-channel audio entertainment content.

        Looking forward, we expect that the Blu-ray Disc format will continue to drive home entertainment growth in the form of players, game consoles and personal computers. Blu-ray Disc delivers six times the video resolution of a DVD and is also capable of delivering audio that is a bit-for-bit identical to the studio master.

        Car audio, personal computer, and video game console manufacturers are increasingly incorporating digital multi-channel audio capability into their products. Virtual surround sound technology is also beginning to be incorporated into portable media playback devices, such as mobile phones and laptop PCs, which allows listeners to enjoy a simulated surround sound experience using two speakers or headphones. These markets represent significant growth opportunities as content providers and consumers become more familiar with the capability of digital multi-channel audio to enhance the entertainment experience.

        Home networks, Internet-based content, and digital broadcast products/markets will also represent significant future opportunities for deployment of our technologies and the delivery of high definition entertainment. Target markets include broadcast hardware, high definition set-top boxes, televisions, and network-enabled media devices.

        With a regulatory demand for broadcasters to adopt digital distribution in the United States and around the globe, we see increasing demand for our broadcast technology solutions that allow operators to simultaneously interoperate and distribute audio on multiple media formats such as compressed stereo audio on the internet and multi-channel sound to an HDTV audience. Furthermore, the proliferation of digital media distribution creates new demand for playback enhancement technologies such as digital audio optimization for televisions, portable media devices and PCs alike.

The DTS Solution

        In 1996, we introduced our Coherent Acoustics technology to bring advanced digital audio entertainment to the home. Coherent Acoustics is an audio compression/decompression algorithm, or codec, that enables the encoding and decoding of audio tracks in the DTS digital multi-channel sound format. The design architecture of our technology allows us to scale or adapt, adding features or performance while maintaining backward compatibility with earlier implementations of the technology.

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The encoding process reduces the storage space or transmission bandwidth required for the audio information, while maximizing the quality of the sound. The audio information can then be stored on a digital medium, such as a Blu-ray Disc or DVD, or transmitted over a broadband connection or broadcast signal. The encoded content can be played back on any digital audio electronics product equipped with a DTS Coherent Acoustics decoder, such as a Blu-ray Disc or DVD based home theater system.

        The performance and flexibility of our Coherent Acoustics technology enables easy implementation in a variety of consumer electronics products. Our core technology has also been incorporated into sound systems used in homes, cars, personal computers, video game consoles, digital media players/adapters, and digital broadcast products.

        The adoption of our technologies depends on the availability of compelling content, along with the devices required to play it. Accordingly, we provide products and services to motion picture studios, recording artists, producers, and software developers to facilitate the creation and delivery of audio content in our proprietary digital multi-channel format.

        In 2006, we introduced DTS-HD Master Audio, which extends our technology offerings for Blu-ray Disc in two ways. First, our lossless coding extension delivers audio which is bit-for-bit identical to the original studio master content. Secondly, DTS-HD includes a low bit rate mode, known as DTS Express, that extends our technology for use in applications where bandwidth and data capacity is much lower than in optical media, such as broadcast and portable devices. Although DTS-HD was first introduced in Blu-ray Disc players and home theater systems, these new technologies can be used in a wide variety of consumer electronic devices and applications.

        In 2008, the first consumer products were introduced using DTS Surround Sensation, our virtual surround sound technology that allows the playback of 5.1 multi-channel content over two speakers or headphones. Further drawing upon our expertise in surround sound, DTS Surround Sensation contains significant psycho-acoustic information that alters human audio perception, causing the listener to perceive that sounds are actually occurring outside the boundaries of a two-speaker system or headphones. This technology also utilizes proprietary algorithms for dialog clarity, soundstage expansion, and bass enhancement to provide listeners with a virtual multi-channel surround sound experience from only two speakers.

        The DTS Neural technologies and products include audio signal processing and optimization for digital broadcasting such as digital radio and HDTV, as well as surround audio encoding and decoding technologies for digital radio, television and gaming.

DTS Core Technology Platform

        Our Coherent Acoustics audio technology platform is designed to capture, store, and reproduce audio signals. There are several technical considerations involved in this process, including the frequency of data sampling, the word length, and the bit rate. These factors affect the quality of audio presentation and are commonly managed through compression techniques.

        A fundamental challenge with digital audio distribution is that capturing analog signal representations in digital form requires a tremendous amount of data. Therefore, the storage and subsequent transmission of that data presents physical space, efficiency, and economic challenges. We address these challenges by developing coding algorithms and products that reduce the amount of data required to store, transmit and reproduce the audio, all while maintaining the quality of the audio experience.

        The design, architecture, and implementation of our coding solution is complex. Signal coding requires a thorough and combined understanding of the disciplines of electrical engineering, computer science, and psychoacoustics, coupled with significant practical experience. One of our key technical

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strengths has been our ability to develop a system that enables the transparent reproduction of an original audio signal, meaning that the reproduction sounds indistinguishable from its source.

        Many applications for digital multi-channel audio, such as video games, Internet-based content, mobile phones and networks, portable media players and recordable media, have limited bandwidth, processing and storage capabilities. Our technology architecture is flexible enough to accommodate these needs and optimize quality within the constraints of the application.

        We have designed the following attributes into the basic architecture of our technology:

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scalable, meaning that parameters such as data rate can be set over a very wide range, as applications require;



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extensible, meaning that the structure itself accommodates additional data for enhancements both anticipated and unknown; and



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backward compatible, meaning that extensions and enhancements do not preclude the ability of earlier decoders to play the core signal.

Technology Products and Services

        We provide technology that enables digital multi-channel surround sound for home theater audio, car audio, gaming, personal computer software and hardware, professional audio, broadcast and other emerging segments of the consumer electronics market. Importantly, DTS technology was selected as a mandatory audio format in the Blu-ray Disc optical media format. As a result, DTS decoding technology will be utilized in at least two-channel form in any product that incorporates a Blu-ray Disc disc drive. To date, our decoders have been embedded in hundreds of millions audio/video devices.

        The following table summarizes how each of the proprietary technologies and products we sell relate to the various consumer markets that we serve.

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Coherent Acoustics Technology Specification

        The Coherent Acoustics specification was first presented at the Audio Engineering Society, or AES, conference in 1996. This proprietary technology specification introduced the concept of a forward looking codec with a "core+extensions architecture" focused on delivering high quality multichannel audio. The specification took into account the concept that audio trends would demand higher sampling frequencies, greater bit depth and more channels; also that processor speed and media bandwidth would continue to expand in capacity. The core is a 5.1-channel 44.1 or 48 kHz DTS decoder which was introduced as DTS Digital Surround. This architecture ensures backward compatibility with existing DTS decoders. Extensions to the core permit additional channels, data for higher sampling rates, and future enhancements. All Coherent Acoustics decoders make use of the core while advanced models make use of the core plus some or all of the extension capabilities. The products based on the Coherent Acoustics technology specification and the various extensions are outlined below.

DTS Digital Surround

        DTS Digital Surround was the first product based on the Coherent Acoustics technology specification and was the first implementation of the core outlined above. As the core of the Coherent Acoustics technology specification, DTS Digital Surround supports up to 5.1 channels of audio at up to 48kHz sampling rate and up to 1.5Mbps bit rate. From a content perspective, DTS Digital Surround is an optional format in the DVD standard and was originally introduced on Laser disc and DTS's music discs (proprietary CDs).

DTS ES and DTS Neo:6

        Utilizing the core + extension architecture of Coherent Acoustics, in 2000, DTS expanded on the DTS Digital Surround offering to support two possible 6.1 channel configurations:

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DTS Neo:6 matrix technology which expands traditional surround content from 5.1 channels to 6.1 channels.



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DTS ES, the only solution for discrete 6.1 surround sound on DVD which adds a center back channel for added realism.

        DTS Neo:6 is also offered as a stand-alone product to convert stereo to 6.1 channels and is an important building block for our other products Surround Sensation and Premium Suite.

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DTS 96/24

        In 2002, DTS developed the next product extension under the Coherent Acoustics technology specification. DTS 96/24 is the only extended definition format for DVD which adds higher sampling rates (96 kHz) and greater bit resolution (24 bit) for even better sounding audio, particularly with multi-channel music.

DTS-HD Audio Bundle

        The DTS-HD Audio Bundle is made up of a primary decoder, a secondary decoder, and a transcoder. The primary decoder is the latest instantiation of the Coherent Acoustics technology specification that provides scalable audio formats with constant and variable bit rates as high as 24.5 Mbps for Blu-ray Disc, higher sampling frequencies up to 192 kHz, greater bit depths, additional channels (7.1 for Blu-ray, many more for other applications), lossless audio capability and includes the core decoder that is backward compatible with all existing DTS content. The secondary decoder features a new technology format focused on providing high quality in a lower bandwidth environment. The transcoder consists of a DTS digital surround 1.5 Mbps encoder which re-encodes data from linear PCM (uncompressed audio) to DTS, ensuring backward compatibility to the installed base of over 80 million AVRs deployed between 1997 and 2008 that have a Sony/Philips Digital Interconnect Format (SPDIF) input. DTS-HD Audio includes four levels of performance based on the capabilities of the home audio equipment used for playback:

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DTS-HD Master Audio  

        DTS HD Master Audio is an extension of the Coherent Acoustics technology specification that provides up to 7.1 discrete channels (for Blu-ray, higher for other applications), 192 kHz/24 bit, and up to 24.5 Mbps for a lossless audio experience.

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DTS-HD High Resolution Audio  

        DTS-HD High Resolution Audio is another extension of the Coherent Acoustics technology that provides up to 7.1 channels, 192 kHz/24 bit, and up to 6.0 Mbps, which offers a bit rate up to four times higher than audio for Standard Definition DVD.

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DTS Digital Surround  

        DTS Digital Surround, and all of the prior extensions (DTS ES and 96/24), are included in the DTS HD Audio Bundle. The DTS Digital Surround component provides the core that ensures DTS HD Audio can be played back on any DTS-capable device.

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DTS-Express  

        DTS-Express provides low bit rate audio coding for applications with up to 5.1 channels, focused primarily on bandwidth constrained audio applications such as internet, broadcast audio, and secondary audio on next generation optical disc players. DTS-Express is part of the Blu-ray specification for secondary audio.

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DTS Transcoder  

        The DTS Transcoder is used to re-encode audio inside of Blu-ray Disc players after primary and secondary audio has been mixed to provide a DTS compatible 5.1 bit stream output. It also allows for DTS-Express to be backwards compatible with the core of the Coherent Acoustics technology specification, DTS Digital Surround.

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        Over the next few years we expect to see the DTS-HD Audio Bundle replace stand-alone DTS Digital Surround as the vast majority of AVRs begin to incorporate DTS-HD technology. Blu-ray drives will also incorporate elements of the DTS-HD Audio Bundle. DTS-HD will represent a large portion of our revenue growth over the next several years.

Content Creation Products; DTS Master Audio Suite and Surround Audio Suite

        In addition to the various formats and technologies that compose the DTS-HD Audio Bundle, there are also the encoding tools created by DTS for use by content professionals. These content creation products are critical to our success—without high-quality content in the various DTS formats, the value of the decoders that produce the vast majority of our revenues would not be realized.

        Over the past few years, we have developed and launched a new set of professional audio products to support the launch of DTS-HD Audio. These products include the DTS-HD Master Audio Suite (MAS), which is a Mac or PC software suite for encoding, monitoring and editing DTS-HD and standard definition digital audio encodes. We also offer our DTS Surround Audio Suite (SAS) for Mac or PC for encoding and monitoring standard definition DTS Digital Surround audio encodes. We offer DTS encoding and decoding software licensing for integration into third party professional audio software products as well as authoring systems integration. MAS and SAS, as well as DTS-licensed professional audio and authoring software products, are used primarily by audio post-production, optical disc authoring and surround music mastering facilities, enabling them to produce and release audio and audio/video products containing DTS digital multi-channel soundtracks for content owners. To date, there has been significant uptake of the DTS Master and Surround Audio Suites and they have been deployed to many key post production sites in the U.S., Europe, and Japan.

DTS Neural Surround

        DTS Neural Surround technology is an encoder/decoder technology that takes up to 7.1 channels of audio and using advanced techniques, including a feedback loop for optimal encoder performance, encodes the multi-channel audio to stereo while maintaining the surround queues from the discrete digital multi-channel track. The two channel stereo audio can then be broadcast or carried on other media that is limited to stereo tracks. In the home, the DTS Neural Surround decoder then decodes the signal, up to 7.1 channels, providing a surround experience. The DTS Neural Surround decoder is available in home theater, car audio systems and video games.

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DTS Neural Surround—Dynamic Image Control Enhancement (DICE)  

        DTS Neural Surround DICE technology is a post processing technology for consumer electronics and automotive audio systems that provides simulated surround or multi-speaker image expansion of compressed audio signals such as MP3s, iPods or digital radio signals, to present a full and immersive listening experience while dynamically compensating and effectively masking any digital encoding artifacts typically inherent in such signals.

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DTS Neural Surround Broadcast Tools  

        DTS Neural Surround technologies were first deployed on national digital radio broadcast in 2005. Since then, it is widely deployed to enhance legacy stereo content for surround distribution for HDTV and as an effective method of surround audio encoding and decoding that seamlessly integrates surround sound in a stereo signal without use of a separate data stream. The DTS Neural Surround encoder's unique method embeds and transmits the surround data in the audio waveform itself. So instead of needing to read the surround information from a separate data stream, the DTS Neural Surround decoder analyzes the received audio and extracts the key perceptual spatial cues to reproduce the multi-channel representation from the encoded stereo

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signal. This has significant benefits for distribution of content that needs to be presented in high quality stereo and surround from the same source in real time which is increasingly the case for digital radio and any live-for-TV production, such as sports programming.

Virtual Surround Sound

        Since the discrete multi-channel audio experience changed consumer listening habits and expectations, the consumer electronics marketplace has experienced a growing need for simulated (or virtual) surround sound technology solutions. This has been magnified by the growth of HDTV, the use of personal computers as complete home entertainment devices, and the proliferation of higher quality portable electronics. We currently offer the following simulated surround sound technology solutions that satisfy this requirement:

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DTS Surround Sensation  

        DTS Surround Sensation contains significant psycho-acoustic information that alters human audio perception, causing the listener to perceive that sounds are actually occurring outside the boundaries of the two-speaker system or headphones. Developed with a key understanding of acoustics and significant experience with the properties of sound, DTS Surround Sensation creates a three-dimensional sound field that exceeds the limitations of just two speakers.

Key features of DTS Surround Sensation include:

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Dialog Clarity—The DTS algorithm enhances signal clarity to address problems that may occur due to competing signals from speakers and film content that is specifically mixed for cinema playback.



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Soundstage Expansion—In instances where the original source material is only a two-channel input stream, DTS Surround Sensation will improve the listening experience by broadening the soundstage and creating a simulated center channel for improved clarity and audio crispness. This can create the sensation that the speakers or headphones are farther apart than they actually are, and some sounds are perceived to be directly in front of the listener.



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Bass Enhancement—DTS Surround Sensation restores the perception of fundamental low-frequency effects (LFE) by dynamically augmenting harmonics, yielding improved bass performance without the additional hardware costs of adding a subwoofer.



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DTS Envelo  

        In 2007, we purchased the majority of the assets of Spatializer Audio Laboratories, Inc. or Spatializer, and assumed certain ongoing license contracts. Spatializer was an early pioneer in virtual audio technologies and had developed several technologies optimized for very low processing and memory requirements. This technology has been rebranded as DTS Envelo. In conjunction with DTS Surround Sensation, DTS Envelo addresses a range of product applications, where significant constraints such as low power and low memory capacity exists, to applications where memory, processing power and battery life are less constrained. DTS Envelo is a flexible virtual surround sound solution for portable audio devices, and it is capable of providing a surround sound effect from any input source ranging from stereo to 5.1 multi-channel.

DTS Premium Suite

        DTS Premium Suite is a bundle of DTS audio technologies for PCs that includes:

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DTS-HD Master Audio bundle;

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DTS Connect, which includes a PC version of Neo6, and DTS Interactive, a stand-alone DTS transcoder for PC;



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DTS Surround Sensation, for both speaker and headphone applications;



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DTS Symmetry, to balance loudness levels between diverse multimedia sources; and



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DTS Boost which maximizes acoustic power beyond the volume limits of PC hardware

        The DTS Premium Suite is part of a cooperative marketing agreement with Intel, signed February 2009, for the mobile PC platform. Initially, through this arrangement DTS and Intel will bring a compelling set of audio enhancement technologies that improve audio performance while minimizing energy consumption in mobile PCs.

DTS Symmetry

        DTS Symmetry is an advance signal processing technology that accurately detects and regulates the perceived volume of different input sources.

        The benefit to consumers is maintaining ideal loudness across all content, programs and input sources, which is a growing problem as the wide range of entertainment options accessible to consumers represents a nearly unlimited selection at various production quality.

        In addition to being a component of Premium Suite, Symmetry is licensed as a stand-alone technology to markets such as home theater AV, display, automotive, portable electronics, and broadcast.

New and Emerging Market Segments for DTS

        The high quality and flexibility of our algorithms provides for a variety of potential alternative applications. We are expanding into new and emerging markets for consumer electronics and entertainment products that incorporate higher-quality digital audio, including:

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Network based home media playback and storage systems.  These are home-based entertainment systems and servers that deliver entertainment content to various network-enabled playback devices throughout the home often referred to as Digital Media Players (DMP) or Digital Media Adaptors (DMA). DMPs and DMAs are consumer electronic products that manage and decode for playback audio and video content from the Internet, home networks and flash-based storage for consumption directly on TVs and home theatre products without the need for a PC. This functionality is often also found included in multi-function devices such as video game consoles, and recent network-enabled Blu-ray players and TVs. DTS technologies can be found in a number of these types of products and we continue to see this functionality move into traditional consumer electronics categories as those products become network-capable.



•

Portable electronics devices.  Our technology is incorporated into some portable electronics devices, such as portable DVD and Blu-ray Disc players. We are aggressively pursuing incorporation of our technology into other portable electronics devices such as mobile phones and portable media players to enable, among other things, multi-channel content support and simulated multi-channel playback utilizing DTS Surround Sensation and DTS Envelo.



•

Digital satellite, cable, and IPTV broadcast products.  Our technology is currently in use for pre-processing, transmission and playback of satellite, digital cable and terrestrial broadcast. As digital broadcasters expand their implementation of high bandwidth transmission we see increasing demand for our high quality digital audio delivery. We are therefore actively working with broadcasters, international standards organizations and set top manufacturers to expand the penetration of our technology into broadcast hardware, set-top-boxes, and televisions. To date,

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we have licensed our trademarks and encoding technology for incorporation into broadcast hardware and television set-top-boxes.

        DTS is in a position to aggressively pursue all of these current and future opportunities due to the platform we have built over the course of the last 17 years. This platform of intellectual property development and protection, brand, customer relationships, and consumer goodwill enables us to actively expand into new markets and product categories to continue to expand the size and scope of our business.

Intellectual Property

        As a provider of high quality branded entertainment technologies to markets worldwide, we believe it is extremely important to protect our technology through the use of patents, trademarks, copyrights, and trade secrets in many countries.

        We have a substantial base of intellectual property assets, including patents, trademarks, copyrights, and trade secrets. We have many individual patent families resulting in hundreds of individual patents and patent applications throughout the world. We have hundreds of trademarks and trademark applications pending worldwide with additional marks in the pre-application phase. We also have a number of federally registered copyrights and maintain a sizeable library of copyrighted software and other technical materials as well as numerous trade secrets. We have targeted our intellectual property coverage to provide protection in the major manufacturing and commercial markets of the world.

        It is our general practice to file patent applications for our technology in the United States and various foreign countries where our customers manufacture, distribute, or sell licensed products. We actively pursue new applications to expand our patent portfolio to address new technological innovations. Most of the patents in our patent portfolio have an average life of 20 years from their date of filing. Many of our more substantive patents have expiration dates ranging from 2015 to 2018. These rights primarily cover the process of producing media containing DTS and digital multi-channel audio as well as the individual finished product. We have multiple patents covering unique aspects and improvements for many of our technologies. We do not believe that the expiration of any single patent is likely to significantly affect our intellectual property position or our ability to generate licensing revenues.

        Our trademarks consist of many individual word marks, logos, and slogans filed throughout the world. The marks cover our various products, technology, improvements, and features as well as the services that we provide. Our trademarks are an integral part of our licensing program and, generally, are required to be used on licensed products to identify the existence of the technology, to provide greater consumer awareness and to advance the sales of the product the trademark is on.

        We have a significant amount of copyright protected materials including software and textual materials. A number of these products have been federally registered

Branding

        Since the first DTS audio soundtrack was created for the release of Steven Spielberg's Jurassic Park in 1993, content producers, electronic manufacturers, and sophisticated audio consumers have recognized the DTS trademark as a symbol of superior multi-channel audio for motion pictures and home theaters.

        A core part of our business strategy is to continue to enhance and build the strength of the DTS brand by encouraging the use of our trademarks throughout the entertainment industry so that professionals and consumers alike will know that we have helped ensure consistent quality as content moves throughout the entertainment value chain.

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        We actively encourage our content partners such as major motion picture studios, music labels, broadcasters and other digital media distribution partners to place our trademark on their products in conjunction with the inclusion of our technologies. We also work with all our licensees manufacturing consumer products to display our trademark on all products that incorporate our technologies.

        The inclusion of the DTS trademark informs audiences and consumers that the content and/or product incorporates our technologies and meets our quality standards, which we believe helps consumer manufacturers sell their products.

        We believe the strong adoption of DTS as a preferred audio format for Blu-ray and our continued technology innovation will continue to proliferate the DTS trademark into expanding categories of consumer electronics and in turn grow the positive consumer affiliation with the DTS brand.

        To support this process we work with content partners and consumer manufacturers to provide marketing materials such as printed materials, trailers and other digital media assets to promote the quality of experience that is associated with the DTS brand.

        We believe that our reputation as a trusted provider of high quality entertainment technologies and the strength of the DTS brand will assists us in expanding use of our existing technologies in new markets and in commercializing new technologies.

Licensing

        We have historically derived the majority of our revenue from licensing our technology for incorporation into home theater products. DTS-enabled audio decoders are embedded in popular home theater products including audio/video receivers, home-theater-in-a-box systems, and Blu-ray Disc players. Our technology is also embedded and supported in new and emerging consumer electronics products that use digital multi-channel audio, including home audio systems, car audio systems, personal computers, video games and consoles, portable electronics devices, televisions, digital media adapters and players, and digital broadcast products.

        We have a licensing team headquartered in Limerick, Ireland that markets our technology directly to large consumer electronics product manufacturers and semiconductor manufacturers. This team also includes employees located in the United States, China, Hong Kong, Japan, Northern Ireland, South Korea and Taiwan. We believe that by locating staff near the leading consumer electronics and semiconductor manufacturers, we can enhance our sales and business development efforts.

        We license our technology to consumer electronics product manufacturers primarily through a two step process. First, we license our technology to semiconductor manufacturers who typically embed our decoding software into their digital signal processor chips. In turn, these semiconductor manufacturers are required to sell DTS-enabled chips only to hardware manufacturers who have entered into consumer manufacturer licenses with us. Our business model typically provides for us to receive a per-unit royalty for products produced by the consumer manufacturer licensees that contain our decoding technologies. As part of the licensing terms for both semiconductor and hardware manufacturer licensees, we typically receive fees for access to our developer kits and for our certification, prior to sale, of the quality and performance of their products. We license on a non-exclusive, worldwide basis. We require that all licensees have their integrated circuits or hardware devices certified by us prior to distribution. We reserve the right to audit their records and quality standards. Licensees are generally required to display the appropriate DTS trademark on the products they manufacture.

        We market our digital sound encoding equipment directly to the content providers and audio professionals serving the consumer electronics market. We believe that allowing easy access to DTS encoders will result in more DTS content, which we believe will drive consumer demand for DTS-enabled electronic products.

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Customers

Consumer Electronics Products Manufacturers

        We have licensed our technologies or our trademarks to substantially all of the major consumer electronics product manufacturers for use in hundreds of consumer audio products. Collectively, these manufacturers have sold hundreds of millions of DTS-licensed consumer electronics products worldwide. Sony accounted for 15% of total revenues for the year ended December 31, 2009.

Semiconductor Manufacturers

        We have licensed to a substantial number of the major semiconductor manufacturers the right to incorporate our technology in their semiconductors and to sell semiconductors with DTS technology to our hardware manufacturer licensees.

Content Providers

        We have sold or provided encoding products to many of the leading home video and music content providers and professional audio facilities enabling them to create high quality DTS-enabled content. To date, thousands of Blu-ray Disc and DVD titles have been produced with DTS digital multi-channel audio tracks.

Seasonality of Business

        Generally, consumer electronics manufacturing activities are lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. The third and fourth quarters are typically the strongest in terms manufacturing output as our technology licensees increase their manufacturing output to prepare for the holiday buying season. Since recognition of revenues in our business generally lags manufacturing activity by one quarter, our revenues and earnings are generally lowest in the second quarter.

        In general, the introduction and inclusion of DTS technologies in new and rapidly growing markets can have a material effect on quarterly revenues and profits, and can distort the moderate seasonality described above.

        Also, from time to time, we may recognize royalty revenues that relate to licensing obligations that occurred in prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods.

Research and Development

        As demonstrated by our portfolio of industry-recognized, advanced technologies, DTS has always had, as its anchor, strong research and development abilities. The company was founded with key research and development that solved customer problems in a high quality and differentiated manner and we continue to develop new technologies with that same goal.

        As the company has grown, new technology has been developed internally as well as acquired from outside sources. Acquired technologies, and the talent and knowledge that created it, are key elements of our research and development base and will continue to be a source of new ideas going forward.

        We have a group of 57 engineers and scientists, including nine PhDs, focused on research and development. This group oversees our product development efforts and is responsible for implementing our technology into our existing and emerging products. We carry out research and development activities at our corporate headquarters in Calabasas, California and at our facilities in Bangor, Northern Ireland, Vancouver, Canada, Kirkland, Washington and Scotts Valley, California.

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        Our research and development expenses totaled approximately $9.1 million during 2009, $6.9 million during 2008, and $6.5 million during 2007. We expect that we will continue to commit significant resources to applications engineering efforts, particularly in support of the new high definition disc standards, and to research and development in the future.

Governmental and Industry Standards

        There are a variety of governmental and industry-related organizations that are responsible for adopting system and product standards. Standards are important in many technology-focused industries as they help to ensure compatibility across a system or series of products. Generally, standards adoption occurs on either a mandatory basis, requiring the existence of a particular technology or feature, or an optional basis, meaning that a particular technology or feature may be, but is not required to be, utilized.

        We believe the market for audio and audio/video products is very standards driven and our active participation with standards organizations is important as we work to include our technology in standards or change our status from optional to mandatory, where possible. We believe our standards involvement also provides us early visibility into future opportunities.

        We actively participate in a variety of standards organizations worldwide, including the DVD Forum, Blu-ray Disc Association, Digital Video Broadcast (DVB), American Television Standards Committee (ATSC), International Engineering Consortium (IEC), Consumer Electronics Assoication (CEA), Audio Engineering Society (AES), Society for Motion Picture and Television Engineers (SMPTE), Digital Entertainment Content Ecosystem (DECE), Open IPTV Forum (OIPF), Digital Living Network Alliance (DLNA), and Moving Pictures Expert Group (MPEG). We anticipate being involved in a number of other standards organizations as appropriate to facilitate the adoption and inclusion of our technology.

        We have seven employees and consultants focused on standards activities, including one in Europe, one in Japan, one in South Korea, one in Canada, and three in the United States. We also employ additional resources as necessary to assist with specific standards-related tasks.

Competition

        We face strong competition in the consumer electronics market and expect competition to intensify in the future. Our primary competitor is Dolby Laboratories, who develops and markets, among other things, digital multi-channel audio products and services. Dolby was founded over 40 years ago and for many years was the only significant provider of audio technologies. Dolby's long-standing market position, brand, business relationships, and inclusion in various industry standards provide it with a strong competitive position.

        In addition to Dolby, we also compete in specific product markets with Fraunhofer Institut Integrierte Schaltungen, Koninklijke Philips Electronics N.V., Microsoft Corporation, Sony Corporation, Thomson, SRS Labs and various consumer electronics product manufacturers. Many of these competitors have longer operating histories and significantly greater resources or greater name recognition than we do.

        We believe that the principal competitive factors in each of our markets include some or all of the following:

•

technology performance, flexibility, and range of application;



•

quality and reliability of technologies, products and services;



•

brand recognition and reputation;

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•

inclusion in industry standards;



•

price;



•

relationships with semiconductor, consumer electronics manufacturers, and content producers;



•

availability of compatible high-quality audio content;



•

timeliness and relevance of new product introductions; and



•

relationships and distribution network for North American broadcasters, satellite radio operators, production and post production operators providing content for digital broadcast.

        We have been successful in penetrating the consumer electronics markets and building and maintaining market share. A substantial portion of Blu-ray Disc titles include DTS sound tracks. Also, many top selling and premier edition DVDs contain digital multi-channel soundtracks in our format, and a substantial majority of consumer electronics products with digital multi-channel capability incorporate our technology, trademarks, or know-how. Our success has been due in large part to our ability to position our brand as a premium offering that contains superior proprietary technology, the quality of our customer service, our inclusion in industry standards, and our industry relationships.

        We believe there are significant barriers to entry in the consumer electronics products market, but we have obtained mandatory status in the Blu-ray Disc format. Also, the standards relating to DVD are well established and support a limited number of technologies including DTS Coherent Acoustics. Numerous other standards we participate in support a limited number of technologies including various DTS technologies.

Employees

        As of December 31, 2009, we had 203 employees, which includes 57 employees classified on our income statement as research and development, 5 employees classified in cost of revenue, and 141 classified as selling, general and administrative. Of the 203 total employees, 133 work in the United States and 70 work in our various international locations, including 33 in Asia and 30 in Europe. None of our employees are subject to a collective bargaining agreement, and we have never experienced a work stoppage. We believe our relations with our employees are good. Our future success depends on our ability to attract, motivate, and retain highly-qualified technical and management personnel. From time to time, we also employ independent contractors to support our product development, sales, marketing, business development, and information technology and administration organizations.

Recent Developments

        On October 12, 2009, we filed a complaint in the Superior Court of the State of California, County of Los Angeles against Datasat Digital Entertainment, Inc. ("DDE"), Beaufort International Group Plc ("Beaufort"), and Datasat Communications Limited ("Datasat Communications") (collectively "Defendants") asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment, and seeking monetary damages of at least $8.75 million related to the sale of our digital cinema business in May 2008. The sale called for a $6.75 million deferred payment to be made to us in May 2009, as well as potential additional payments based on future revenue performance milestones. Defendants failed to make the deferred payment when due, and allegedly failed to achieve the performance milestones. On November 30, 2009, Defendants answered to the complaint and a cross-complaint against us, as well as certain of our executives. The Defendants subsequently amended their cross-complaint to allege fraud, negligence misrepresentation, breach of contract and related claims in connection with the sale transaction. We dispute these allegations, and we believe that the Defendants' cross-complaint is without merit. The lawsuit is in the early stages of

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discovery. No trial date has been set. The Company intends to vigorously prosecute its claims and defenses in the Lawsuit.

Website Access To SEC Filings

        We maintain an Internet website at www.dts.com. We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

        Materials we file with the SEC may be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding our Company that we file electronically with the SEC.

Item 1A.    Risk Factors

        Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make. If any of the following risks actually occurs, our business, financial condition, or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We do not expect sales of DVD based products to sustain their past growth rates. Our business is highly dependent on the growth in Blu-ray Disc products, and we do not have near-term visibility into the precise timing of this expected growth or how smooth or linear this growth will be. To the extent that sales of DVD based products and home theater systems level off or decline, consumer adoption of Blu-ray Disc products fails to materialize or does not materialize as quickly or extensively as we expect, or alternative technologies in which we do not participate replace DVD based products as a dominant medium for consumer video entertainment, our business will be adversely affected.

        Past growth in our business has been due in large part to the rapid growth in sales of DVD based products and home theater systems incorporating our technologies. As the markets for DVD based products mature, we expect sales of these products to decline. To the extent that sales of DVD based products and home theater systems level off or decline, our business will be adversely affected. Additionally, the release and consumer adoption of Blu-ray Disc players has only just begun to ramp up. A potentially slow adoption by consumers of Blu-ray Disc players, as well as the inability of DVD based products to sustain their past growth rates, could adversely affect our business, as revenue and earnings derived from these new players and associated home theater system sales may not fully replace the anticipated decline in revenue and earnings associated with DVD based products and home theater systems. Even with the resolution of the competing disc format conflict in early 2008, the rate of consumer adoption and ultimate penetration of Blu-ray Disc players is uncertain and may be slower than past growth rates of DVD based products. In addition, if new technologies are developed for use with DVDs or new technologies, including direct downloads of content, are developed or deployed that substantially compete with or replace DVDs as a dominant medium for consumer video entertainment, our business, operating results and prospects could be adversely affected.

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Economic downturns could disrupt and materially harm our business.

        Negative trends in the general economy could cause a downturn in the market for our technology, products and services. The current and continuing financial disruption affecting the global financial markets and the concern whether investment banks and other financial institutions will continue operations in the foreseeable future have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in credit and equity markets. The ongoing financial crisis may adversely affect our operating results if it results, for example, in the insolvency of a key licensee or other customer, the inability of our licensees and/or other customers to obtain credit to finance their operations, including to finance the manufacture of products containing our technologies, and delays in reporting and/or payments from our licensees. Tight credit markets could also delay or prevent us from acquiring or making investments in other technologies, products or businesses that could enhance our technical capabilities, complement our current products and services, or expand the breadth of our markets. If we are unable to execute such acquisitions and/or strategic investments, our operating results and business prospects may suffer.

        In addition, global economic conditions, including the credit crisis, increased cost of commodities, widespread employee layoffs, actual or threatened military action by the United States and the continued threat of terrorism, have resulted in decreased consumer spending and may continue to negatively impact consumer confidence and spending. Any reduction in consumer confidence or disposable income, in general, may negatively affect the demand for consumer electronics products that incorporate our digital audio technology.

        We cannot predict other negative events that may have adverse effects on the global economy in general and the consumer electronics industry specifically. However, the factors described above and such unforeseen events could negatively affect our revenues and operating results.

If we fail to protect our intellectual property rights, our ability to compete could be harmed.

        Protection of our intellectual property is critical to our success. Patent, trademark, copyright, and trade secret laws and confidentiality and other contractual provisions afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We face numerous risks in protecting our intellectual property rights, including the following:

•

our patents may be challenged, found unenforceable or invalidated by our competitors;



•

our pending patent applications may not issue, or if issued, may not provide meaningful protection for related products or proprietary rights;



•

we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees, consultants, and advisors;



•

we may not be able to practice our trade secrets as a result of patent protection afforded a third-party for such product, technique or process;



•

the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, and mechanisms for enforcement of intellectual property rights may be inadequate in foreign countries;



•

our competitors may produce competitive products or services that do not unlawfully infringe upon our intellectual property rights;



•

efforts to identify and prosecute unauthorized uses of our technology are time consuming, expensive, and divert resources from the operation of our business; and



•

we may be unable to successfully identify or prosecute unauthorized uses of our technology.

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        As a result, our means of protecting our intellectual property rights and brands may not be adequate. Furthermore, despite our efforts, third parties may violate, or attempt to violate, our intellectual property rights. Enforcement, including infringement claims and lawsuits would likely be expensive to resolve and would require management's time and resources. In addition, we have not sought, and do not intend to seek, patent and other intellectual property protections in all foreign countries. In countries where we do not have such protection, products incorporating our technology may be lawfully produced and sold without a license.

Our business and prospects depend on the strength of our brand, and if we do not maintain and strengthen our brand, our business will be materially harmed.

        Establishing, maintaining and strengthening our "DTS" brand is critical to our success. Our brand identity is key to maintaining and expanding our business and entering new markets. Our success depends in large part on our reputation for providing high quality products, services and technologies to the consumer electronics products industry and the entertainment industry. If we fail to promote and maintain our brand successfully, our business and prospects may suffer. Moreover, we believe that the likelihood that our technologies will be adopted in industry standards depends, in part, upon the strength of our brand, because professional organizations and industry participants are more likely to incorporate technologies developed by a well-respected and well-known brand into standards.

We may not be able to evolve our technology, products, and services or develop new technology, products, and services that are acceptable to our customers or the changing market.

        The market for our technology, products, and services is characterized by:

•

rapid technological change;



•

new and improved product introductions;



•

changing customer demands;



•

evolving industry standards; and



•

product obsolescence.

        Our future success depends on our ability to enhance our existing technology, products, and services and to develop acceptable new technology, products, and services on a timely basis. The development of enhanced and new technology, products, and services is a complex and uncertain process requiring high levels of innovation, highly-skilled engineering and development personnel, and the accurate anticipation of technological and market trends. We may not be able to identify, develop, market, or support new or enhanced technology, products, or services on a timely basis, if at all. Furthermore, our new technology, products, and services may never gain market acceptance, and we may not be able to respond effectively to evolving consumer demands, technological changes, product announcements by competitors, or emerging industry standards. Any failure to respond to these changes or concerns would likely prevent our technology, products, and services from gaining market acceptance or maintaining market share and could lead to our technology, products and services becoming obsolete.

We may be sued by third parties for alleged infringement of their proprietary rights.

        Companies that participate in the digital audio, digital image processing, consumer electronics, and entertainment industries hold a large number of patents, trademarks, and copyrights, and are frequently involved in litigation based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes frequently involve highly complex and costly scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and

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uncertainty. Accordingly, intellectual property disputes, with or without merit, could be costly and time consuming to litigate or settle, and could divert management's attention from executing our business plan. In addition, our technology and products may not be able to withstand any third-party claims or rights against their use. If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our products to avoid infringing a third party's rights and could be required to temporarily or permanently discontinue licensing our products.

We may be subject to litigation proceedings that could harm our business.

        Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages (including treble damages under the Clayton Act) and an injunction prohibiting us from licensing our technology in particular ways or at all. Were an unfavorable ruling to occur, our business and results of operations could be materially harmed. In addition, any protracted litigation could divert management's attention from our day-to-day operations, disrupt our business and cause our operating results to suffer.

We face intense competition. Certain of our competitors have greater brand recognition and resources than we do.

        The digital audio, consumer electronics and entertainment markets are intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. Our principal competitor is Dolby Laboratories, Inc., who competes with us in most of our markets. We also compete with other companies offering digital audio technology incorporated into consumer electronics product and entertainment mediums, including Fraunhofer Institut Integrierte Schaltungen, Koninklijke Philips Electronics N.V. (Philips), Microsoft Corporation, Sony Corporation, Thomson and SRS Labs, Inc.

        Certain of our current and potential competitors may enjoy substantial competitive advantages, including:

•

greater name recognition;



•

a longer operating history;



•

more developed distribution channels and deeper relationships with our common customer base;



•

a more extensive customer base;



•

digital technologies that provide features that ours do not;



•

broader product and service offerings;



•

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



•

more technicians and engineers; and



•

greater technical support.

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

        In addition to the competitive advantages described above, Dolby also enjoys other unique competitive strengths relative to us. For example, it introduced multi-channel audio technology before we did. Its technology has been incorporated in significantly more DVD based products than our

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technology. It has also achieved mandatory standard status in product categories that we have not, including DVD based products, for its stereo technology and terrestrial digital television broadcasts in the United States. As a result of these factors, Dolby has a competitive advantage in selling its digital multi-channel audio technology to consumer electronics products manufacturers.

We have limited control over existing and potential customers' and licensees' decisions to include our technology in their product offerings.

        Except for Blu-ray enabled products where our technology is mandatory, we are dependent on our customers and licensees—including consumer electronics product manufacturers, semiconductor manufacturers, producers and distributors of content for music, videos, and games—to incorporate our technology into their products, purchase our products and services, or release their content in our proprietary DTS audio format. Although we have contracts and license agreements with many of these companies, these agreements do not require any minimum purchase commitments, are on a non-exclusive basis, and do not typically require incorporation or use of our technology, trademarks or services. Our customers, licensees and other manufacturers might not utilize our technology or services in the future.

If we are unable to maintain and increase the amount of entertainment content released with DTS audio soundtracks, demand for the technology, products, and services that we offer to consumer electronics product manufacturers may significantly decline.

        We expect to derive a significant percentage of our revenues from the technology, products, and services that we offer to manufacturers of consumer electronics products. To date, the most significant driver for the use of our technology in the home theater market has been the release of major movie titles with DTS audio soundtracks. We also believe that demand for our DTS audio technology in growing markets for multi-channel audio, including cars, personal computers, and video game consoles, will be based on the number, quality, and popularity of the Blu-ray Disc titles, computer software programs, and video games either released with DTS audio soundtracks or capable of being coded and played in DTS format. Although we have existing relationships with many leading providers of movie, music, computer, and video game content, we do not have contracts that require any of these parties to develop and release content with DTS audio soundtracks. In addition, we may not be successful in maintaining existing relationships or developing relationships with other existing providers or new market entrants that provide content. As a result, we cannot assure you that a significant amount of content in movies, Blu-ray Disc titles, computer software programs, video games, or other entertainment mediums will be released with DTS audio soundtracks. If the amount, variety, and popularity of entertainment content released with DTS audio soundtracks do not increase, consumer electronics products manufacturers that pay us per-unit licensing fees may discontinue offering DTS playback capabilities in the consumer electronics products that they sell.

Declining retail prices for consumer electronics products could force us to lower the license or other fees we charge our customers.

        The market for consumer electronics products is intensely competitive and price sensitive. Retail prices for consumer electronics products that include our DTS audio technology, such as DVD based products and Blu-ray Disc players and home theater systems, have decreased significantly and we expect prices to continue to decrease for the foreseeable future. Declining prices for consumer electronics products could create downward pressure on the licensing fees we currently charge our customers who integrate our technology into the consumer electronics products that they sell and distribute. Most of the consumer electronics products that include our audio technology also include Dolby's multi-channel audio technology. As a result of pricing pressure, consumer electronics products manufacturers who manufacture products in which our audio technology is not a mandatory standard could decide to exclude our DTS audio technology from their products altogether.

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Our licensing revenue depends in large part upon semiconductor manufacturers incorporating our technologies into integrated circuits, or ICs, for sale to our consumer electronics product licensees and if, for any reason, our technologies are not incorporated in these ICs or fewer ICs are sold that incorporate our technologies, our operating results would be adversely affected.

        Our licensing revenue from consumer electronics product manufacturers depends in large part upon the availability of ICs that implement our technologies. IC manufacturers incorporate our technologies into these ICs, which are then incorporated into consumer electronics products. We do not manufacture these ICs, but rather depend on IC manufacturers to develop, produce and then sell them to licensed consumer electronics product manufacturers. We do not control the IC manufacturers' decisions whether or not to incorporate our technologies into their ICs, and we do not control their product development or commercialization efforts. If these IC manufacturers are unable or unwilling, for any reason, to implement our technologies into their ICs, or if, for any reason, they sell fewer ICs incorporating our technologies, our operating results will be adversely affected.

We rely on the accuracy of our customers' manufacturing reports for reporting and collecting our revenues, and if these reports are untimely or incorrect, our revenues could be delayed or inaccurately reported.

        Most of our revenues are generated from consumer electronics product manufacturers who license and incorporate our technology in their consumer electronics products. Under our existing agreements, these customers pay us per-unit licensing fees based on the number of consumer electronics products manufactured that incorporate our technology. We rely on our customers to accurately report the number of units manufactured in collecting our license fees, preparing our financial reports, projections, budgets, and directing our sales and product development efforts. Most of our license agreements permit us to audit our customers, but audits are generally expensive, time consuming, difficult to manage effectively, dependent in large part on the cooperation of our licensees and the quality of the records they keep, and could harm our customer relationships. If any of our customer reports understate the number of products they manufacture, we may not collect and recognize revenues to which we are entitled, or may endure significant expense to obtain compliance.

We expect our operating expenses to increase in the future, which may impact profitability.

        We expect our operating expenses to increase as we, among other things:

•

expand our sales and marketing activities, including the continued development of our international operations;



•

adopt a more customer-focused business model which is expected to entail additional hiring;



•

acquire businesses or technologies and integrate them into our existing organization;



•

increase our research and development efforts to advance our existing technology, products, and services and develop new technology, products, and services;



•

hire additional personnel, including engineers and other technical staff;



•

expand and defend our intellectual property portfolio;



•

upgrade our operational and financial systems, procedures, and controls; and



•

continue to assume the responsibilities of being a public company.

        As a result, we will need to grow our revenues and manage our costs in order to positively impact profitability. In addition, we may fail to accurately estimate and assess our increased operating expenses as we grow.

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We have a limited operating history in certain new and evolving markets.

        Our technology has only recently been incorporated into other consumer electronics markets, such as personal computers, video game consoles, portable electronics devices, and digital satellite and cable broadcast products. More recently, we have entered into the "virtual" surround space with the internal development of technology that we have branded DTS Surround Sensation. We do not have experience in this specific segment of the market and it is dominated by existing technologies from companies including Dolby Laboratories, Inc., SRS Labs, Inc. and BBE Sound, Inc. As a result, the demand for our technology, products, and services and the income potential of these businesses are unproven. In addition, because the market for digital audio technology is relatively new and rapidly evolving, we have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business. Before investing in our common stock, you should consider the risks, uncertainties, and difficulties frequently encountered by companies in new and rapidly evolving markets such as ours. We may not be able to successfully address any or all of these risks.

Our technology and products are complex and may contain errors that could cause us to lose customers, damage our reputation, or incur substantial costs.

        Our technology or products could contain errors that could cause our products or technology to operate improperly and could cause unintended consequences. If our products or technology contain errors we, could be required to replace them, and if any such errors cause unintended consequences, we could face claims for product liability. Although we generally attempt to contractually limit our exposure to incidental and consequential damages, as well as provide insurance coverage for such events, if these contract provisions are not enforced or are unenforceable for any reason, if liabilities arise that are not effectively limited, or if our insurance coverage is inadequate to satisfy the liability, we could incur substantial costs in defending and/or settling product liability claims.

We cannot be certain of the future effectiveness of our internal control over financial reporting or the impact thereof on our operations or the market price of our common stock.

        Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on Form 10-K our assessment of the effectiveness of our internal control over financial reporting. We cannot assure you that our system of internal control will be effective in the future as our operations and control environment change. If we cannot adequately maintain the effectiveness of our internal control over financial reporting, our financial reporting may not be timely and/or accurate. If reporting delays or errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the SEC. Moreover, even if we conclude that our internal control is effective, our independent registered public accounting firm may disagree. If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our internal control over financial reporting is documented, designed, operated or reviewed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may issue an adverse or qualified opinion. Any of the above outcomes could adversely affect our financial results or result in a loss of investor confidence in the reliability of our financial information, which could materially and adversely affect the market price of our common stock.

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We are subject to additional risks associated with our international operations.

        Our licensing headquarters are located in Limerick, Ireland, and we market and sell our products and services outside the United States. We currently have employees located in eight countries, and many of our customers and licensees are located outside the United States. As a key component of our business strategy, we intend to expand our international sales and customer support. For the quarter ended December 31, 2009, over 90% of our revenues were derived internationally. We face numerous risks in doing business outside the United States, including:

•

unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements;



•

tariffs, trade protection measures, import or export licensing requirements, trade embargos, and other trade barriers;



•

difficulties in attracting and retaining qualified personnel and managing foreign operations;



•

competition from foreign companies;



•

dependence on foreign distributors and their sales channels;



•

longer accounts receivable collection cycles and difficulties in collecting accounts receivable;



•

less effective and less predictable protection and enforcement of our intellectual property;



•

changes in the political or economic condition of a specific country or region, particularly in emerging markets;



•

fluctuations in the value of foreign currency versus the U.S. dollar and the cost of currency exchange;



•

potentially adverse tax consequences; and



•

cultural differences in the conduct of business.

        Such factors could cause our future international sales to decline.

        Our business practices in international markets are also subject to the requirements of the Foreign Corrupt Practices Act. If any of our employees is found to have violated these requirements, we and our employees could be subject to significant fines, criminal sanctions and other penalties.

        Our international revenue is mostly denominated in U.S. dollars. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our technology, products, and services more expensive for international customers, which could cause them to decrease their purchases from us. Expenses for our subsidiaries are denominated in their respective local currencies. As a result, if the U.S. dollar weakens against the local currency, the translation of our foreign-currency-denominated expenses will result in higher operating expense without a corresponding increase in revenue. Significant fluctuations in the value of the U.S. dollar and foreign currencies could have a material impact on our consolidated financial statements. The main foreign currencies we encounter in our operations are the Yen, Euro, CAD, RMB and GBP. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

We face risks in expanding our business operations in China.

        An important strategy of ours is to expand our business operations in China. However, we may be unsuccessful in implementing this strategy as planned or at all. Factors that could inhibit our successful expansion into China include its historically poor recognition of intellectual property rights and poor performance in stopping counterfeiting and piracy activity as well as enforcing judgments. If we are unable to successfully stop unauthorized use of our intellectual property and assure compliance by our

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Chinese licensees, we could experience increased operational and enforcement costs both inside and outside China.

        Even if we are successful in expanding into China, we may be greatly impacted by the political, economic, and military conditions in China, Taiwan, North Korea, and South Korea. Such disputes may continue or escalate, resulting in economic embargos, disruptions in shipping, or even military hostilities. This could severely harm our business by interrupting or delaying production or shipment of our products or products that incorporate our technology.

We may experience fluctuations in our operating results.

        We have historically experienced moderate seasonality in our business due to our business mix and the nature of our products. Consumer electronics manufacturing activities are generally lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. Manufacturing output is generally strongest in the third and fourth quarters as our technology licensees increase manufacturing to prepare for the holiday buying season. Since recognition of revenues generally lags manufacturing activity by one quarter, our revenues and earnings are generally lowest in the second quarter. The introduction of new products and inclusion of our technologies in new and rapidly growing markets can distort and amplify the seasonality described above. For example, the introduction of Blu-ray Disc players may result in an overall near-term slowdown in our business as sales of DVD based products slow in anticipation of purchasing Blu-ray Disc products, but purchases of Blu-ray Disc products are in an early phase market adoption. Our revenues may continue to be subject to fluctuations, seasonal or otherwise, in the future. Unanticipated fluctuations, whether due to seasonality, economic down turns, product cycles, or otherwise, could cause us to miss our earnings projections, or could lead to higher than normal variation in short-term earnings, either of which could cause our stock price to decline.

        In addition, we actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technology, trademarks, or know-how without a license or who have underreported to us the amount of royalties owed under license agreements with us. As a result of these activities, from time to time, we may recognize royalty revenues that relate to manufacturing activities from prior periods and we may incur expenditures related to enforcement activity. These expenditures and royalty recoveries, as applicable, may cause revenues to be higher than expected,or net profit to be lower than expected, during a particular reporting period and may not recur in future reporting periods. Such fluctuations in our revenues and operating results may cause declines in our stock price.

Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

        Our capital requirements will depend on many factors, including:

•

acceptance of, and demand for, our products and technology;



•

the costs of developing new products or technology;



•

the extent to which we invest in new technology and research and development projects;



•

the number and timing of acquisitions and other strategic transactions;



•

the costs associated with our expansion, if any; and



•

the costs of litigation and enforcement activities to defend our intellectual property.

        In the future, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all, particularly given the continuing credit crisis and downturn in the overall

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global economy. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, or at all, we may not be able to develop or enhance our products and services, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations, and financial condition.

Even if our technologies are adopted as an industry standard for a particular market, manufacturers may not widely adopt our technologies.

        Even if a standards-setting body mandates our technologies for a particular market, our technologies may not be the sole technologies adopted for that market as an industry standard. Further, even when inclusion of certain of our technologies is mandated by a particular standard, market participants may choose not to implement or adopt any of our technologies beyond those required by the mandate. Our revenues and operating results depend on manufacturers choosing to adopt our technologies instead of or along with competitive technologies that may also be acceptable under industry standards. For example, the continued growth of our revenue from the Blu-ray Disc market depends upon both the continued growth of the format generally and manufacturers' choosing to incorporate our multi-channel technologies where they are an optional industry standard.

Our licensing of industry standard technologies can be subject to limitations that could adversely affect our business and prospects.

        When a standards-setting body adopts our technologies as explicit industry standards, we generally must agree to license such technologies on a fair, reasonable and non-discriminatory basis, which could limit our control over the use of these technologies. In these situations, we may be required to limit the royalty rates we charge for these technologies, which could adversely affect our business. Furthermore, we may have limited control over whom we license such technologies, and may be unable to restrict many terms of the license. From time to time, we may be subject to claims that our licenses of our industry standard technologies may not conform to the requirements of the standards-setting body. Claimants in such cases could seek to restrict or change our licensing practices or our ability to license our technologies in ways that could injure our reputation and otherwise materially and adversely affect our business, operating results and prospects.

Our ability to develop proprietary technology in markets in which "open standards" are adopted may be limited, which could adversely affect our ability to generate revenue.

        Standards-setting bodies may require the use of so-called "open standards," meaning that the technologies necessary to meet those standards are publicly available. The use of open standards may reduce our opportunity to generate revenue, as open standards technologies are based upon non-proprietary technology platforms in which no one company maintains ownership over the dominant technologies.

We are dependent on our management team and technical talent.

        Our success depends, in part, upon the continued availability and contributions of our management team and engineering and technical personnel because of the complexity of our products and services. Important factors that could cause the loss of key personnel include:

•

our existing employment agreements with the members of our management team allow such persons to terminate their employment with us at any time;

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•

we do not have employment agreements with a majority of our key engineering and technical personnel;



•

significant portions of the equity awards held by the members of our management team are vested; and



•

equity awards held by some of our executive officers provide for accelerated vesting in the event of a sale or change of control of our company.

        The loss of key personnel or an inability to attract qualified personnel in a timely manner could slow our technology and product development and harm our ability to execute our business plan.

A loss of one or more of our key customers or licensees in any of our markets could adversely affect our business.

        From time to time, one or a small number of our customers or licensees may represent a significant percentage of our revenue. For instance, in 2009, one customer accounted for 15% of revenues from our continuing operations. Although we have agreements with many of our customers, these agreements typically do not require any material minimum purchases or minimum royalty fees and do not prohibit customers from purchasing products and services from competitors. A decision by any of our major customers or licensees not to use our technologies, or their failure or inability to pay amounts owed to us in a timely manner, or at all, could have a significant adverse effect on our business.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our net income.

        We are subject to income taxes in both the United States and foreign jurisdictions. Our effective income tax rates have recently been and could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We may come under audit by tax authorities. For instance, the Internal Revenue Service is examining our 2005 to 2007 federal income tax returns, including certain prior period carryforwards, and the State of California is examining our 2004 and 2005 corporate tax returns. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Based on the results of an audit or litigation, a material effect on our income tax provision, net income or cash flows in the period or periods for which that determination is made could result. In addition, changes in tax rules may adversely affect our future reported financial results or the way we conduct our business. For example, we consider the operating earnings of our foreign subsidiaries to be invested indefinitely outside the United States. We have not provided for United States federal or foreign withholding taxes that may result on future remittances of undistributed earnings of foreign subsidiaries. Our future reported financial results may be adversely affected if tax or accounting rules regarding unrepatriated earnings change.

        As part of the 2011 Budget, the Obama administration recently announced several proposals to reform United States tax rules. We are still examining these proposals to determine what, if any, impact these proposals will have on the Company.

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Current and future governmental and industry standards may significantly limit our business opportunities.

        Technology standards are important in the audio and video industry as they help to assure compatibility across a system or series of products. Generally, standards adoption occurs on either a mandatory basis, requiring a particular technology to be available in a particular product or medium, or an optional basis, meaning that a particular technology may be, but is not required to be, utilized. For example, both our digital multi-channel audio technology and Dolby's have optional status in DVD based products and Blu-ray Disc. In the standard for Blu-ray Disc, both DTS and Dolby technologies have been selected as mandatory standards for two-channel output. However, if either or both of these standards are re-examined or a new standard is developed, we may not be included as mandatory in any such new or revised standard which would cause revenue growth in our consumer business to be significantly lower than expected and could have a material adverse affect on our business.

        Various national governments have adopted or are in the process of adopting standards for all digital television broadcasts, including cable, satellite, and terrestrial. In the United States, Dolby's audio technology has been selected as the sole, mandatory audio standard for terrestrial digital television broadcasts. As a result, the audio for all digital terrestrial television broadcasts in the United States must include Dolby's technology and must exclude any other format, including ours. We do not know whether this standard will be reopened or amended. If it is not, our audio technology may never be included in that standard. Certain large and developing markets, such as China, have not fully developed their digital television standards. Our technology may or may not ultimately be included in these standards.

        As new technologies and entertainment media emerge, new standards relating to these technologies or media may develop. New standards may also emerge in existing markets that are currently characterized by competing formats, such as the market for personal computers. We may not be successful in our efforts to include our technology in any such standards.

We may not successfully address problems encountered in connection with any acquisitions.

        We expect to consider opportunities to acquire or make investments in other technologies, products, and businesses that could enhance our technical capabilities, complement our current products and services, or expand the breadth of our markets. We have a limited history of acquiring and integrating businesses. Acquisitions and strategic investments involve numerous risks, including:

•

problems assimilating the purchased technologies, products, or business operations;



•

significant future charges relating to in-process research and development and the amortization of intangible assets;



•

significant amount of goodwill that is not amortizable and is subject to annual impairment review;



•

problems maintaining uniform standards, procedures, controls, and policies;



•

unanticipated costs associated with the acquisition, including accounting and legal charges, capital expenditures, and transaction expenses;



•

diversion of management's attention from our core business;



•

adverse effects on existing business relationships with suppliers and customers;



•

risks associated with entering markets in which we have no or limited prior experience;



•

unanticipated or unknown liabilities relating to the acquired businesses;



•

the need to integrate accounting, management information, manufacturing, human resources and other administrative systems to permit effective management; and

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•

potential loss of key employees of acquired organizations.

        If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders would be diluted. Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different geographies, cultures and languages, currency risks and risks associated with the particular economic, political and regulatory environment in specific countries. Also, the anticipated benefit of our acquisitions may not materialize, whether because of failure to obtain stockholder approval or otherwise. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our operating results or financial condition. Future acquisitions may also require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.

We may have difficulty managing any growth that we might experience.

        As a result of a combination of internal growth and growth through acquisitions, we expect to continue to experience growth in the scope of our operations and the number of our employees. If our growth continues, it may place a significant strain on our management team and on our operational and financial systems, procedures, and controls. Our future success will depend in part on the ability of our management team to manage any growth effectively. This will require our management to:

•

hire and train additional personnel in the United States and internationally;



•

implement and improve our operational and financial systems, procedures, and controls;



•

maintain our cost structure at an appropriate level based on the revenues we generate;



•

manage multiple concurrent development projects; and



•

manage operations in multiple time zones with different cultures and languages.

        Any failure to successfully manage our growth could distract management's attention, and result in our failure to execute our business plan.

Risks Related to Our Common Stock

We expect that the price of our common stock will fluctuate substantially.

        The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:

•

actual or anticipated fluctuations in our results of operations;



•

market perception of our progress toward announced objectives;



•

announcements of technological innovations by us or our competitors or technology standards;



•

announcements of significant contracts by us or our competitors;



•

changes in our pricing policies or the pricing policies of our competitors;



•

developments with respect to intellectual property rights;



•

the introduction of new products or product enhancements by us or our competitors;



•

the commencement of or our involvement in litigation;



•

resolution of significant litigation in a manner adverse to our business;

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•

our sale or purchase of common stock or other securities in the future;



•

conditions and trends in technology industries;



•

changes in market valuation or earnings of our competitors;



•

the trading volume of our common stock;



•

announcements of potential acquisitions;



•

the adoption rate of new products incorporating our or our competitors' technologies, including Blu-ray Disc players;



•

changes in the estimation of the future size and growth rate of our markets; and



•

general economic conditions.

        In addition, the stock market in general, and the Nasdaq Global Select Market and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of technology companies have been particularly volatile. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources.

Shares of our common stock are relatively illiquid.

        As a result of our relatively small public float, our common stock may be less liquid than the common stock of companies with broader public ownership. Among other things, trading of a relatively small volume of our common shares may have a greater impact on the trading price for our shares than would be the case if our public float were larger.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.

        Our Restated Certificate of Incorporation and Restated Bylaws contain provisions that could delay or prevent a change of control of our company or changes in our Board of Directors that our stockholders might consider favorable. Some of these provisions:

•

authorize the issuance of preferred stock which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of the common stock;



•

provide for a classified Board of Directors, with each director serving a staggered three-year term;



•

prohibit stockholders from filling Board vacancies, calling special stockholder meetings, or taking action by written consent; and



•

require advance written notice of stockholder proposals and director nominations.

        In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our Restated Certificate of Incorporation, Restated Bylaws and Delaware law could make it more difficult for stockholders or potential acquirors to obtain control of our Board or initiate actions that are opposed by the then-current Board, including delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or

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prevention of a change of control transaction or changes in our Board could cause the market price of our common stock to decline.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Our corporate headquarters and principal office is located in Calabasas, California, where we own real property, which includes an approximately 89,000 square foot building. We lease smaller facilities in other locations including the United States, Republic of Ireland, Canada, China, Northern Ireland, Japan, Korea and Taiwan. We believe that our existing space is adequate for our current operations. We believe that suitable replacement and additional space will be available in the future on commercially reasonable terms.

Item 3.    Legal Proceedings

        In the ordinary course of our business, we actively pursue legal remedies to enforce our intellectual property rights and to stop unauthorized use of our technology and trademarks.

        On October 12, 2009, we filed a complaint in the Superior Court of the State of California, County of Los Angeles against Datasat Digital Entertainment, Inc. ("DDE"), Beaufort International Group Plc ("Beaufort"), and Datasat Communications Limited ("Datasat Communications") (collectively "Defendants") asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment, and seeking monetary damages of at least $8.75 million related to the sale of our digital cinema business in May 2008. The sale called for a $6.75 million deferred payment to be made to us in May 2009, as well as potential additional payments based on future revenue performance milestones. Defendants failed to make the deferred payment when due, and allegedly failed to achieve the performance milestones. On November 30, 2009, Defendants answered to the complaint and a cross-complaint against us, as well as certain of our executives. The Defendants subsequently amended their cross-complaint to allege fraud, negligence misrepresentation, breach of contract and related claims in connection with the sale transaction. We dispute these allegations, and we believe that the Defendants' cross-complaint is without merit. The lawsuit is in the early stages of discovery. No trial date has been set. The Company intends to vigorously prosecute its claims and defenses in the Lawsuit.

        We are not currently a party to any other material legal proceedings. We may, however, become subject to lawsuits from time to time in the course of our business.

Item 4.    Submission of Matters to a Vote of Security Holders

        We did not submit any matters to a vote of security holders during the fourth quarter of the year ended December 31, 2009.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PRICE RANGE OF COMMON STOCK

        Our common stock is traded on the Nasdaq Global Select Market under the symbol "DTSI." Prior to July 1, 2006 our common stock was listed on the Nasdaq National Market since our initial public offering on July 9, 2003. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the Nasdaq Global Select Market:

        As of January 29, 2010 there were approximately 3,300 stockholders of record of our common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held through brokerage firms in "street name."

RECENT SALES OF UNREGISTERED SECURITIES

        During the fiscal year ended December 31, 2009, we did not issue any securities that were not registered under the Securities Act of 1933.

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STOCK PERFORMANCE GRAPH

        The following graph and table compares the cumulative total stockholder return on our common stock to that of the NASDAQ Market Index and the Russell 2000® Index for the five fiscal year period ending December 31, 2009, the date of our fiscal year end. The following graph and table assumes that a $100 investment was made at the close of trading on December 31, 2004 in our common stock and in each index, and that dividends, if any, were reinvested. The stock price performance shown on the graph below should not be considered indicative of future price performance.

DIVIDEND POLICY

        We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds to support our operations and to finance the growth and development of our business. We do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, and other factors as the Board of Directors may deem relevant.

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ISSUER PURCHASES OF EQUITY SECURITIES

        On August 1, 2006, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to one million shares of our common stock in the open market or in privately negotiated transactions. Through August 13, 2007, all shares of common stock under this authorization were repurchased for an aggregate cost of $22.7 million.

        On February 21, 2008, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to one million shares of our common stock in the open market or in privately negotiated transactions. Through November 25, 2008, all shares of common stock under this authorization were repurchased for an aggregate cost of $18.9 million.

        On November 12, 2009, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to one million shares of our common stock in the open market or in privately negotiated transactions. During the three months ended December 31, 2009, we repurchased 130,000 under this authorization for an aggregate cost of $3.9 million.

        All shares repurchased under these authorizations are accounted for as treasury stock.

        Stock repurchase activity during the quarter ended December 31, 2009 was as follows:

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Item 6.    Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

        In the table below, we provide you with historical selected consolidated financial data of DTS, Inc. and its subsidiaries. We derived the following historical data from our audited consolidated financial statements. It is important that you read the selected consolidated financial data set forth below in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.

        During the first quarter of 2007, DTS Digital Cinema's assets and liabilities were classified as held for sale and its operations were reported as discontinued operations. As a result, we reclassified our balance sheets and statements of operations for all periods presented in this report to reflect DTS Digital Cinema as discontinued operations.

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        Our historical results are not necessarily indicative of the operating results that may be expected in the future. We have described various risks and uncertainties that could affect future operating results under the heading "Risk Factors" included elsewhere in this Form 10-K.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        This Annual Report on Form 10-K (including, but not limited to, the following discussion of our financial condition and results of operations) and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "believes," "anticipates," "estimates," "expects," "projections," "may," "potential," "plan," "continue" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial performance or position, our business strategy, plans or expectations, and our objectives for future operations, including relating to our products and services. Although forward-looking statements in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements contained herein are inherently subject to risks and uncertainties and our actual results and outcomes may be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the "Risk Factors" section contained in Item 1A and elsewhere in this report and in other documents we file with the Securities and Exchange Commission, or SEC. We cannot guarantee future results, levels of activity, performance or achievements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to revise or update these forward-looking statements to reflect future events or circumstances.

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        You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Form 10-K. All discussions and amounts in Management's Discussion and Analysis, except for Liquidity and Capital Resources, for all periods presented relate to continuing operations only, unless otherwise noted.

Overview

        We are a leading provider of high quality branded entertainment technologies, which are incorporated into an array of entertainment products by hundreds of licensee customers around the world. Our core DTS digital multi-channel audio technology enables the delivery and playback of compelling surround sound and is currently used in a variety of product applications, including audio/video receivers, Blu-ray Disc players, DVD based products, personal computers or PCs, car audio products, video game consoles, network capable televisions, digital media players and home theater systems. In addition, we provide products and services to studios, radio and television broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded soundtracks in movies, sporting events, television shows and music content.

        We derive revenues from licensing our audio technology, trademarks, and know-how under agreements with substantially all of the major consumer audio electronics manufacturers. Our business model provides for these manufacturers to pay us a per-unit amount for DTS-enabled products that they manufacture.

        We actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technology, trademarks, or know-how without a license or who have under-reported the amount of royalties owed under license agreements with us. We continue to invest in our compliance and enforcement infrastructure to support the value of our intellectual property to us and our licensees and to improve the long-term realization of revenue from our intellectual property. As a result of these activities, from time to time, we recognize royalty revenues that relate to consumer electronics manufacturing activities from prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. While we consider such revenues to be a regular part of our normal operations, we cannot predict such recoveries or the amount or timing of such revenues.

        Our cost of revenues consists primarily of amounts paid for products and materials, salaries and related benefits for operations personnel, amortization of acquired intangibles and payments to third parties for copyrighted material.

        Our selling, general, and administrative expenses consist primarily of salaries and related benefits for personnel engaged in sales and licensee support, as well as costs associated with promotional and other selling and licensing activities. Selling, general, and administrative expenses also include professional fees, facility-related expenses, and other general corporate expenses, including personnel engaged in corporate administration, finance, human resources, information systems and legal.

        Our research and development costs consist primarily of salaries and related benefits for research and development personnel, engineering consulting expenses associated with new product and technology development, and quality assurance and testing costs. Research and development costs are expensed as incurred.

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Executive Summary

Financial Highlights

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Revenues increased 29% for the year ended December 31, 2009, compared to the same prior year period.



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Royalty recoveries from intellectual property compliance and enforcement activities increased $11.8 million for the year ended December 31, 2009, compared to the same prior year period. The increase in these recoveries resulted primarily from the settlement of legal matters with Zoran Corporation.



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Royalties from Blu-ray product markets increased 57% for the year ended December 31, 2009, compared to the same prior year period.



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Royalties from broadcast markets comprised 5% of total revenue for the year ended December 31, 2009, primarily as a result of the business that we acquired from Neural Audio Corporation, or Neural, on December 31, 2008.



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Gross profit percentage for the year ended December 31, 2009 remained at 98%, compared to the same prior year period.



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Selling, general and administrative expenses were within 61% to 63% as a percentage of revenues for each of the three years ended December 31, 2009.



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Research and development expenses were within 11% to 12% as a percentage of revenues for each of the three years ended December 31, 2009.



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Income from operations was within 23% and 24% as a percentage of revenues for each of the three years ended December 31, 2009.



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Diluted earnings per share from continuing operations increased $0.08 to $0.60 for the year ended December 31, 2009, compared to the same prior year period.

Trends, Opportunities, and Challenges

        Historically, our revenue has been primarily dependent upon the DVD based home theater market. The success of DVD based systems and products has fueled a demand for higher quality entertainment in the home, and this demand is extending into the car audio, personal computer, portable electronics, online networked devices, broadcast and video game console markets as well. We have seen the acceleration of the market for high definition televisions drive demand for Blu-ray Disc players and advanced home theater systems. Consumers are more broadly embracing the Blu-ray technology as prices decline and content availability increases, and as customers realize the value of the advanced features that Blu-ray provides, such as the ability to connect to the internet.

        Because we are a mandatory technology in the Blu-ray Disc standard, our revenue growth is closely tracking the growth in sales of Blu-ray equipped players, game consoles and PCs. Further, we believe that this mandatory position in the Blu-ray Disc standard will give us the ability to extend the reach of a broad array of our technologies in several large markets such as personal computers, in-car entertainment systems, network capable TVs, digital media players, and ultimately the mobile handset market.

        There has been increasing interest in our technologies for applications beyond optical media. We see a growing opportunity to extend our reach into new markets such as the online space where consumers want a higher quality entertainment experience. For example, we have signed agreements with a number of digital media player and network-connected digital television manufacturers to incorporate DTS decoders into their products.

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        One of the largest challenges that we face is the growing consumer trend toward open platform, on-line entertainment consumption and the need to constantly and rapidly evolve our technologies to address the emerging markets. Further, we currently face a challenge regarding our ability to determine the impact of the current global economic downturn on consumer buying patterns. While we do not have near-term visibility into the timing or extent of an economic recovery, we continue to remain optimistic that our revenues from both Blu-ray enabled products and our newer markets will continue to grow.

Critical Accounting Policies and Estimates

        Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, estimates and judgments are evaluated, including those related to revenue recognition, allowance for doubtful accounts, impairment of long-lived assets, stock-based compensation, and income taxes. These estimates and judgments are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from these estimates.

        We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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Revenue Recognition.  We recognize revenues in accordance with generally accepted accounting principles in the United States of America, or GAAP, and the guidelines of the SEC. Revenues from multiple-element arrangements involving license fees, up-front payments and milestone payments, which are received and/or billable by us in connection with other rights and services that represent continuing obligations of ours, are deferred until all of the elements have been delivered or until we have established objective and verifiable evidence of the fair value of the undelivered elements.

We are responsible for the licensing and enforcement of our patented technologies and pursue third parties that are utilizing our intellectual property without a license or who have under-reported the amount of royalties owed under a license agreement with us. As a result of these activities, from time to time, we may recognize royalty revenues that relate to infringements that occurred in prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. Differences between amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts due from licensees, will be recognized in the period such adjustment is determined or contracted, as appropriate, as a change in accounting estimate.

We make estimates and judgments when determining whether the collectibility of license fees receivable from licensees is reasonably assured. We assess the collectibility of accrued license fees based on a number of factors, including past transaction history with licensees and the credit-worthiness of licensees. If it is determined that collection is not reasonably assured, the fee is recognized when collectibility becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash. Management estimates regarding collectibility impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectibility could differ from actual events, thus materially impacting our financial position and results of operations.

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Revenues from licensing audio technology, trademarks, and know-how are generated from licensing agreements with consumer electronics products manufacturers that generally pay a per-unit license fee for products manufactured under those license agreements. Licensees generally report manufacturing information within 30 to 60 days after the end of the quarter in which such activity takes place. Consequently, we recognize revenue from these licensing agreements on a three-month lag basis, generally in the quarter following the quarter of manufacture, provided amounts are fixed or determinable and collection is reasonably assured. Use of this lag method allows for the receipt of licensee royalty reports prior to the recognition of revenue, since we cannot reliably estimate the amount of revenue earned prior to our receipt of such reports. Generally, consumer electronics manufacturing activities are lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. The third and fourth quarters are typically the strongest in terms manufacturing output as our technology licensees increase their manufacturing output to prepare for the holiday buying season. Since recognition of revenues in our business generally lags manufacturing activity by one quarter, our revenues and earnings are generally lowest in the second quarter. In general, the introduction and inclusion of DTS technologies in new and rapidly growing markets can have a material effect on quarterly revenues and profits, and can distort the moderate seasonality described above.

Revenues from the sale of digital multi-channel audio and video content are recorded upon shipment to retail accounts or end customers, assuming title and risk of loss has transferred, prices are fixed or determinable, we have no significant obligations remaining, and collection of the related receivable is reasonably assured. We provide for returns on product sales based on historical experience and adjust such reserves as considered necessary. To date, there have been no significant sales returns.

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Impairment of Long-Lived Assets and Intangibles.  We periodically assess potential impairments of our long-lived assets and intangibles in accordance with the provisions of GAAP. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered by us include, but are not limited to, significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends. We believe this to be a critical accounting policy because if those estimates or related assumptions change in the future, we may be required to record impairment charges for such assets which could have a material impact on our results of operations. To date there has been no impairment of long lived assets or intangible assets for continuing operations.



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Stock-based Compensation.  Effective January 1, 2006, we began recognizing compensation costs relating to share-based payment awards made to employees and directors in the financial statements. Stock-based compensation charges are based upon the fair value of each option on the date of grant using the Black-Scholes option pricing model. This model requires that we estimate a risk free interest rate, expected lives, dividend yield, and the expected volatility of our stock. We believe this to be a critical accounting policy because if any of the estimates above require significant changes, these changes could result in fluctuating expenses that could have a material impact on our results of operations.



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Income taxes.  We must make estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

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We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We consider all available positive and negative evidence when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income. As of December 31, 2009, we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered. We believe this to be a critical accounting policy because should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that the recovery is not likely, which could have a material impact on our results of operations.

We have not provided for U.S. federal income and foreign withholding taxes on the undistributed earnings of our foreign subsidiaries because we intend to reinvest such earnings indefinitely. Should we decide to remit this income to the U.S. in a future period, our provision for income taxes may increase materially in the period that our intent changes.

Other long-term liabilities, at December 31, 2009 and 2008, includes unrecognized tax benefits of $5.6 million and $3.5 million, respectively, for both domestic and foreign issues. Inherent uncertainties exist in estimating accruals for uncertain tax positions due to the progress of income tax audits and changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued each year.

Segment and Geographic Information

        Our revenue by geographical area, based on the customer's country of domicile, is as follows (in thousands):

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        The following table sets forth, for the periods indicated, long-lived tangible assets by geographic region (in thousands):

Results of Operations

Revenues

        The increase in revenues for the year ended December 31, 2009, compared to the same prior year period, was primarily attributable to an $11.8 million increase in royalty recoveries from intellectual property compliance and enforcement activities. The increase in these recoveries resulted primarily from the settlement of legal matters with Zoran Corporation. Also, revenues from Blu-ray product markets and broadcast markets increased for the year ended December 31, 2009, compared to the same prior year period. Blu-ray related revenues comprised 21% and 17% of total revenue for the year ended December 31, 2009 and 2008, respectively. In dollar terms, these royalties were up 57% for the year ended December 31, 2009, compared to the same prior year period. Royalties from broadcast markets comprised 5% of total revenue for the year ended December 31, 2009, primarily as a result of the business that we acquired from Neural, on December 31, 2008. Partially offsetting these increases are declines in DVD related royalties and the car audio market, excluding the aforementioned royalty recoveries. We continue to be cautious regarding the outlook for the consumer electronics industry as a whole, and the revenues we derive from that industry, in light of the turmoil in the global economic environment. However, we expect technology licensing revenues to grow as wider availability of Blu-ray enabled players, PCs and game consoles, coupled with expected aggressive pricing and promotion of these products, should result in increasing licensing revenues from the Blu-ray format.

        Revenues for the year ended December 31, 2008 increased compared to the year ended December 31, 2007, primarily due to increased Blu-ray related royalties. These royalties comprised 17% and 8% of total revenue for the years ended December 31, 2008 and 2007, respectively. In dollar terms, these royalties were up nearly 127% for the year ended December 31, 2008, compared to the same prior year period, as sales of stand-alone Blu-ray players and Blu-ray enabled PCs have begun supplementing the revenues from game consoles which have for 2007 constituted the majority of Blu-ray product shipments. In addition, revenues from the car audio market increased 28% during the year ended December 31, 2008, compared to the same prior year period, which included royalty recoveries from intellectual property compliance and enforcement activities in this market. Partially offsetting our increase in revenues for the year ended December 31, 2008, compared to the same prior year period, was a decrease in revenues from DVD related royalties, which resulted primarily from a decrease in royalty recoveries from intellectual property compliance and enforcement activities in this market.

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Gross Profit

        Gross profit percentage for the years ended December 31, 2009, 2008 and 2007, remained consistent.

Selling, General and Administrative ("SG&A")

        The dollar increase in SG&A expenses for the year ended December 31, 2009, compared to the same prior year period, was primarily due to a $7.3 million increase in professional fees. This increase resulted primarily from legal fees for the settlement of legal matters with Zoran Corporation. Also, employee related costs, including expanded operations and stock-based compensation, increased $2.7 million for the year ended December 31, 2009, compared to the same prior year period. Other increases for the year ended December 31, 2009, compared to the same prior year period, include travel related expenses for increased sales activities and expanding operations, occupancy costs for expanded operations and advertising expenses.

        SG&A expenses, in dollars, increased for the year ended December 31, 2008, compared to the year ended December 31, 2007, primarily due to a $2.9 million increase in employee related costs, including a $1.2 million increase in stock-based compensation expense related to additional employee equity grants since the prior year period and additional costs associated with increased headcount for expanded foreign operations. In addition, advertising expenses increased $0.6 million for the year ended December 31, 2008, compared to the same prior year period, primarily due to newer technology initiatives and international expansion.

        We expect SG&A expenses to continue to increase to support activities such as new technology initiatives, international expansion and intellectual property enforcement.

Research and Development ("R&D")

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