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SECURITIES AND EXCHANGE COMMISSION

Amendment No. 1

Digital Theater Systems, Inc.

5171 Clareton Drive

Jon E. Kirchner

Copies to:

     Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

     If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.    o

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

4,500,000 Shares

Common Stock

Our company, Digital Theater Systems, Inc., is selling 1,500,000 shares of common stock. The selling stockholders named in this prospectus are selling 3,000,000 shares of our common stock. The offering is being made on a firm commitment basis.

Our common stock is traded on the Nasdaq National Market under the symbol “DTSI.” On November 3, 2003, the last reported sale price of our common stock on the Nasdaq National Market was $31.38 per share.

Our business and an investment in our common stock involve significant risks. These risks are described under the caption “Risk Factors” beginning on page 6 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters may also purchase up to 675,000 shares of our common stock from us at the public offering price, less underwriting discounts and commissions, to cover over-allotments, if any. We will not receive any of the proceeds of the sale of shares by the selling stockholders.

The underwriters expect to deliver the shares in New York, New York on           , 2003.

SG Cowen

	William Blair & Company

	Thomas Weisel Partners LLC

	U.S. Bancorp Piper Jaffray

                          , 2003

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      You should rely only on the information contained in this prospectus. Neither we nor the selling stockholders have authorized anyone to provide you with information that is different. We and the selling stockholders are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

      Until                     , 2003, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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      This summary highlights the information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including “Risk Factors” and the consolidated financial statements and accompanying notes before making an investment decision.

Our Business

      We are a leading provider of high-quality digital multi-channel audio technology, products, and services for entertainment markets worldwide. Multi-channel audio, commonly referred to as surround sound, allows listeners to hear discrete sounds simultaneously through more than two speakers. Our DTS digital multi-channel audio technology delivers compelling surround sound and is frequently described as the top performing surround sound technology by authoritative sources such as Widescreen Review and AudioRevolution.com in their reviews of products featuring multi-channel audio. In addition, we have received a number of awards for our technology, including a Scientific and Engineering Oscar Award from the Academy of Motion Picture Arts and Sciences for our movie theater playback system.

      We were founded in 1990 and received a key strategic investment in 1993 from investors, including Universal City Studios, Inc. The first DTS digital multi-channel audio soundtrack was created for Steven Spielberg’s Jurassic Park in 1993.

      We provide products and services to film studios, production companies, and movie theaters to produce and play back digital multi-channel film soundtracks. We license our sound technology to all major film distributors in the United States, including 20th Century Fox, Buena Vista Pictures, Warner Bros. Pictures, and many international distributors. These studios use our technology to create digital multi-channel soundtracks in our DTS format. Our playback systems for DTS-formatted soundtracks have been installed in over 20,000 movie theaters worldwide.

      We license our technology to consumer electronics products manufacturers for inclusion in products such as audio/video receivers, DVD players, and home theater systems. This consumer business is now our largest segment. Our technology enables consumers to enjoy movies, video games, and music in our DTS multi-channel format. Our technology, trademarks, and/or know-how have been incorporated in more than 200 million consumer electronics products worldwide. We license our technology to:

	•	substantially all of the major consumer audio electronics products manufacturers in the world, including Pioneer Corporation, Sony Corporation, and Yamaha Corporation; and
	•	major consumer semiconductor manufacturers, including Cirrus Logic Inc., Yamaha Corporation, and Zoran Corporation.

      We provide multi-channel audio CDs and DVDs for the consumer retail market. We have released titles by classical composers such as Handel and Tchaikovsky, and titles by artists such as Diana Krall, Herb Alpert, Vince Gill, Lyle Lovett, The Eagles, Queen, Sting, and Bonnie Raitt. We are pursuing relationships with major record labels whereby we re-mix and produce titles from the labels in our multi-channel format and the label distributes these titles. We announced our first such relationship with EMI Music in August 2003.

Market Opportunity

      In the early 1990s, the listening experience of movie audiences was significantly enhanced through the introduction of digital multi-channel surround sound technology. Digital multi-channel sound is now an industry standard audio format for feature films. Today, all of the major film producers and distributors in the United States, and an increasing number of international film producers and distributors, release their feature films with digital multi-channel soundtracks.

      The proliferation of digital multi-channel audio in movie theaters has fueled demand for digital multi-channel audio in consumer electronics products, such as home theater systems. Digital multi-channel audio is extending into a growing number of consumer electronics environments, including homes, cars, personal computers, video games and consoles, portable electronics devices, and digital satellite and cable broadcast products. In addition, there is an emerging market for multi-channel music content.

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The DTS Solution

      Our proprietary DTS digital audio system provides moviegoers with a high-quality, digital multi-channel audio experience. Our proprietary audio technology for the consumer market brings advanced digital audio entertainment to the home and other consumer electronics environments such as cars and portable electronics devices.

      To facilitate the availability of high-quality digital multi-channel audio content, we provide products and services to filmmakers, recording artists, producers, and software developers to make it easy to create content in our proprietary format.

Our Strategy

      Our goal is to become essential to the ultimate entertainment experience by incorporating our technology into every device that manages or controls high-quality digital audio. Key elements of our strategy include the following:

	•	Drive proliferation of high-quality digital multi-channel audio in new and growing markets through effective licensing strategies. We intend to actively promote the adoption of our technology into markets for home audio components and systems, car audio systems, personal computers, video games and consoles, portable electronics devices, and digital satellite and cable broadcast products.
	•	Expand our global presence. We believe we can broaden and deepen our relationships with customers and accelerate the worldwide adoption of our technology by expanding our global sales, distribution, and support network, and by locating personnel close to our customers.
	•	Leverage our premium brand name to enhance our market position. We plan to capitalize on our brand awareness and strong market position in our theatrical and consumer markets to drive the continued adoption of our technology in existing and emerging consumer electronics markets.
	•	Continue to support the creation and widespread availability of premium digital multi-channel audio content. To aid in the adoption of content, we will continue to sell our hardware-based encoders directly to content providers, license our encoding technology, and produce multi-channel music content directly through our DTS Entertainment label.
	•	Continue to develop and expand our technology, product offerings, and intellectual property portfolio. We intend to work closely with our consumer electronics products and film studio customers to evolve our proprietary technology and product offerings based on our customers’ plans for development and expansion.

Company Information

      Our business was incorporated in California in October 1990 as Digital Theater Systems Corporation. In February 1993, we became the general partner of Digital Theater Systems, L.P., a Delaware limited partnership. In 1996, we formed DTS Technology, LLC, a majority-owned subsidiary, to develop audio technologies for the consumer electronics and other markets. In October 1997, we completed a reorganization and consolidation of the predecessor entities and were re-incorporated in Delaware as Digital Theater Systems, Inc.

      Our principal executive offices are located at 5171 Clareton Drive, Agoura Hills, California 91301. Our telephone number is (818) 706-3525. Our website is located at www.dtsonline.com. The information contained on our website is not part of this prospectus.

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The Offering

      The number of shares of our common stock to be outstanding immediately after the offering is based on 13,759,449 shares of common stock outstanding as of September 30, 2003. The number of shares of our common stock that will be outstanding immediately after this offering also includes 258,965 and 14,709 shares of common stock issuable upon exercise of options and warrants, respectively, outstanding as of September 30, 2003 with weighted average exercise prices of $1.02 and $4.038 per share, respectively. We expect that these options and warrants will be exercised by certain of our selling stockholders and that the shares purchased through these exercises will be sold in this offering. The number of shares of our common stock that will be outstanding immediately after this offering excludes:

	•	1,279,845 shares issuable upon exercise of outstanding warrants as of September 30, 2003 at an exercise price of $12.114 per share;
	•	35,008 shares issuable upon exercise of outstanding warrants as of September 30, 2003 at an exercise price of $4.038 per share, other than 14,709 shares of common stock subject to warrants that we expect will be exercised by selling stockholders in connection with this offering, which shares are included in our calculation of our shares outstanding after this offering;
	•	1,765,990 shares issuable upon exercise of outstanding options as of September 30, 2003 at a weighted average exercise price of $2.77 per share, other than 258,965 shares of common stock subject to options that we expect will be exercised by selling stockholders in connection with this offering, which shares are included in our calculation of our shares outstanding after this offering;
	•	953,170 shares available for future issuance as of September 30, 2003 under our 2003 Equity Incentive Plan and an additional 500,000 shares available for future issuance under our 2003 Employee Stock Purchase Plans; and
	•	675,000 shares of common stock that may be sold by us if the underwriters exercise their over-allotment option in full.

      Except as otherwise noted, all information in this prospectus assumes the underwriters do not exercise their over-allotment option to purchase up to 675,000 shares.

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      DTS, DTS Digital Surround, DTS Digital Out, Neo:6, Coherent Acoustics, and DTS Digital Sound are trademarks of Digital Theater Systems, Inc. We have trademark rights in these marks in the United States and other countries and have a number of registrations issued and pending in the United States and other countries. This prospectus also refers to brand names, trademarks, service marks, and trade names of other companies and organizations, and these brand names, trademarks, service marks, and trade names are the property of their respective holders.

      This prospectus contains market data and industry forecasts that were obtained from industry publications.

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Summary Consolidated Financial Data

      The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus.

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      An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business, financial condition, or results of operations. 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

      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 each of our markets. We also compete with other companies offering:

	•	digital audio technology incorporated into consumer electronics products and entertainment mediums, including Fraunhofer Institut Integrierte Schaltungen, Koninklijke Philips Electronics N.V. (Philips), Meridian Audio Limited, Microsoft Corporation, Sony Corporation, and Thomson; and
	•	products for theatrical markets, such as Smart Devices, Inc., Sony Corporation, and Ultra Stereo Labs, Inc.

      Many of our current and potential competitors, including Dolby, enjoy substantial competitive advantages, including:

	•	greater name recognition;
	•	a longer operating history;
	•	more developed distribution channels and deeper relationships with semiconductor and consumer electronics products manufacturers;
	•	a more extensive customer base;
	•	digital technologies that offer greater compression and require less storage capacity;
	•	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; and
	•	more technicians and engineers.

      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. It has a larger base of installed movie theaters for its cinema playback equipment. Its technology has been incorporated in significantly more DVD-Video films than our technology. It has also achieved mandatory standard status in a few product categories, including DVD-Video and DVD Audio Recordable, 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 technology to consumer electronics products manufacturers.

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      Sony Corporation is both a competitor and a significant customer in all of our markets. If Sony decides to eliminate the use of our technology in its products or to compete with us more aggressively in our markets, the revenues that we derive from Sony would be lower than expected.

      Technology standards are important in the audio 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 audio technology to be available in a particular product or medium, or an optional basis, meaning that a particular audio technology may be, but is not required to be, utilized. For example, Dolby’s technology for stereo playback has been selected as a mandatory standard for DVD-Video and DVD Audio Recordable. Both Dolby’s and our digital multi-channel technology have optional status in the DVD-Video standard.

      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 technology has been selected as the sole, mandatory standard for terrestrial digital television broadcasts. As a result, 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 technology may never be included. 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.

      Adoption of our technology is not mandatory as part of any governmental or industry accepted standards in any specific entertainment medium or format. As such, there can be no assurance that our technology will continue to be used in current and future applications.

      As new technologies and entertainment mediums emerge, including future generations of DVD technology, new standards relating to these technologies or mediums 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.

      The market for our digital audio 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 will depend on our ability to enhance our existing digital audio 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. For example, we may not be able to effectively address concerns in the film and music industries relating to piracy in our current or future products. Any failure

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

      As a result, we cannot assure you that our means of protecting our intellectual property rights and brands will be adequate. Furthermore, despite our efforts, third parties may violate, or attempt to violate, our intellectual property rights. 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.

      Companies that participate in the digital audio, 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 uncertainty. Accordingly, intellectual property contests, 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 patent and could be required to temporarily or permanently discontinue licensing our products.

      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 emerging

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      Our DTS-CSS system for subtitles, captions, and descriptive narration for films is a key new product of ours. To date, sales and revenues from this system have been immaterial and we have limited experience to indicate whether or not this system will be widely adopted. Nonetheless, we have anticipated significant future sales of this system and our revenue and growth projections contemplate that it will generate significant future revenues. We have also entered into an agreement with a supplier of projection equipment for this system that obligates us to purchase a minimum of approximately $7.9 million in equipment over a two-year period ending in March 2004. Our remaining obligation under this purchase commitment was approximately $5.5 million at September 30, 2003. If we are unsuccessful in selling our DTS-CSS system, our future revenues will be lower than expected and we could be obligated to purchase projection equipment that we may be unable to re-sell at our cost or at all.

      Although we have established relations with a number of artists and music labels, we do not have any contractual agreements that require artists or music labels to provide us with music content to re-mix and release in our proprietary DTS audio format. Music companies may in the future be unwilling to license titles from their music catalogs to us. In addition, our audio content competes with other multi-channel formats, including Super Audio CD, which is a format developed jointly by Philips and Sony Corporation. As a result, we may have difficulty in obtaining rights to release a significant amount of audio content, and any content that we do release may not be commercially successful.

      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 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. As a result of pricing pressure, consumer electronics products manufacturers could decide to exclude our DTS audio technology from their products altogether.

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      We are dependent on our customers and licensees — including consumer electronics products manufacturers, semiconductor manufacturers, movie theaters, and producers and distributors of content for music, films, videos, and games — to incorporate our digital audio technology in their products, purchase our products and services, and release their content in our proprietary DTS audio format. Although we have license agreements with many of these companies, these license agreements do not require any minimum purchase commitments and are on a non-exclusive basis. Our customers and other licensees might not continue to utilize our technology in the future.

      Although all nine major film producers and distributors are customers of ours, we generally do not have contractual arrangements that require them to use our DTS audio technology. Our theatrical business depends on our having good relations with these film studios. A deterioration in our relationship with any of these film studios could cause these customers to stop using our DTS audio technology. Any significant decline in the release of motion pictures with DTS audio soundtracks would decrease the demand for and revenues from the playback products and services that we offer to movie theaters. In addition, other film studios throughout the world generally adopt the technologies used by the major U.S. film studios. Therefore, if the major U.S. film studios stop using our technology, we would not only lose the per-movie licensing fee we receive from these customers, but may also lose per-movie licensing fees from other film studios throughout the world.

      The movie theater industry may transition from film-based media to electronic-based, or digital, media. If this transition occurs, we may be unable to meaningfully respond with competitive product offerings. In addition, if the film industry broadly adopts digital cinema, our technology and current product offerings could be rendered obsolete. In such an event, demand by movie theaters for our playback systems, cinema processors, and systems for subtitling, captioning, and descriptive narration would decline.

      Our theatrical business depends in part on the construction of new screens and the renovation of existing theaters that install our DTS playback systems and cinema processors. In recent years, aggressive building of megaplexes by companies that operate movie theaters has generated significant competition and resulted in an oversupply of screens in some domestic and international markets. The resulting oversupply of screens led to significant declines in revenues per screen and, eventually, to an inability by many major film exhibitors to satisfy their financial obligations. Several major movie theater operators have reorganized through bankruptcy proceedings, and many movie theaters have closed. As a result, our playback systems and cinema processors that we previously sold to movie theaters that have reorganized and closed have been relocated to other theaters or have been available for resale in the secondary market to movie theaters that might otherwise have purchased these products directly from us. If movie theater operators decide to close a significant number of screens in the future or cut their capital spending, demand for our playback systems and cinema processors will decline.

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      Our success depends, in part, upon the continued availability and contributions of our management team, particularly Jon Kirchner, our President and Chief Executive Officer, and W. Paul Smith, our Senior Vice President, Research and Development. We also rely on the skills and talents of our engineering and technical personnel because of the complexity of our products and services. Several of our key engineers have been instrumental in the development of our technology. 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;
	•	we do not have employment agreements with a majority of our key engineering and technical personnel;
	•	we do not maintain key-man life insurance on any of our employees;
	•	significant portions of the stock options held by the members of our management team are vested; and
	•	many of the stock options held by 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.

      Although the first movie with a DTS audio soundtrack was released in 1993, we did not enter the home theater market until 1996, and our technology has only recently been incorporated into other consumer electronics markets, such as car audio, personal computers, video games and consoles, portable electronics devices, and digital satellite and cable broadcast products. 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 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, if these contract provisions are not enforced or are unenforceable for any reason, or if liabilities arise that are not effectively limited, we could incur substantial costs in defending and/or settling product liability claims.

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      Although we have been in business since 1990, we have only achieved profits from our business operations in the last nine fiscal quarters. We expect our operating expenses to increase, as we, among other things:

	•	expand our domestic and international sales and marketing activities;
	•	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;
	•	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 in order to maintain and increase our profitability. In addition, we may fail to accurately estimate and assess our increased operating expenses as we grow.

      We market and sell our products and services outside the United States, and currently have employees located in China, England, Japan, Mexico, Northern Ireland, and Spain. 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. 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 staffing and managing foreign operations;
	•	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 of 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; and
	•	potentially adverse tax consequences.

      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 could be subject to significant fines 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. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

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      One of our key strategies 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. If we are unable to successfully stop unauthorized use of our intellectual property and assure compliance by our 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. These countries have recently conducted military exercises in or near the other’s territorial waters and airspace. 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.

      We purchase a small number of parts from sole-source suppliers. In addition, our professional audio encoding devices and movie theater playback systems are manufactured according to our specifications by single third-party manufacturers. Because we have no direct control over these third-party suppliers and manufacturers, interruptions or delays in the products and services provided by these third parties may be difficult to remedy in a timely fashion. In addition, if such suppliers or manufacturers are incapable of or unwilling to deliver the necessary parts or products, we may be unable to redesign our technology to work without such parts or find alternative suppliers or manufacturers. In such events, we could experience interruptions, delays, increased costs, or quality control problems.

      In addition, we have entered into agreements with two companies to serve as our sole distributors for our DTS Entertainment products in the United States and Canada and in Europe, respectively. We have no direct control over these distributors and any problems with their performance may take time to identify and/or remedy, and any remedial measures that we take may be unsuccessful. In addition, if either or both of these distributors were to go out of business, as our last distributor did, or otherwise becomes incapable of continuing as our distributor, we could experience delays in distributing our DTS Entertainment products to the retail market, loss of inventory, and loss of revenue.

      A significant percentage of our revenues are generated from our consumer electronics products manufacturer customers who license and incorporate our technology in their consumer electronics products. Under our existing arrangements, these customers pay us a per-unit licensing fee 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 and time consuming 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.

      Negative trends in the general economy, including trends resulting from actual or threatened military action by the United States and threats of terrorist attacks on the United States and abroad, could cause a decrease in consumer spending on entertainment in general. Any reduction in consumer confidence or

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      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 not made any acquisitions or strategic investments to date, and therefore our ability as an organization to make acquisitions or strategic investments is unproven. Acquisitions and strategic investments involve numerous risks, including:

	•	problems assimilating the purchased technologies, products, or business operations;
	•	problems maintaining uniform standards, procedures, controls, and policies;
	•	unanticipated costs associated with the acquisition, including accounting charges 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; and
	•	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.

      We expect to continue to experience growth in the scope of our operations and the number of our employees. If this growth continues, it will 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. For instance, the establishment of our operations in Guangzhou, China has required significant time and attention from our management team. Any future growth could cause similar management challenges or create distractions.

      We have historically experienced moderate seasonality in our business due to our busine