SRS LABS, INC.

2909 Daimler Street

Santa Ana, California 92705

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

We cordially invite you to attend the 2010 Annual Meeting of Stockholders for SRS Labs, Inc. (the “Company”). This Annual Meeting will be held at 9:00 a.m., California time, on June 21, 2010, at the principal executive offices of the Company located at 2909 Daimler Street, Santa Ana, California 92705, for the following purposes:

1.                                       To elect David R. Dukes as the Class II director to the Board of Directors to hold office for a term of three years or until his successor is elected and qualified;

2.                                       To approve an amendment to the SRS Labs, Inc. 2006 Stock Incentive Plan to increase the number of shares of common stock available for issuance thereunder by 1,000,000;

3.                                       To ratify the appointment of Squar, Milner, Peterson, Miranda & Williamson, LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2010; and

4.                                       To transact such other business as may properly come before this Annual Meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on April 22, 2010 as the record date for the determination of stockholders entitled to notice of, and to vote at, this Annual Meeting.

You are cordially invited to be present and to vote at this Annual Meeting in person. However, you are also requested to sign, date and return the enclosed proxy in the enclosed postage-paid and addressed envelope, whether or not you expect to attend. In the event you have returned a signed proxy, but elect to attend this Annual Meeting and vote in person, you will be entitled to vote.

SRS LABS, INC.

2909 Daimler Street

Santa Ana, California 92705

PROXY STATEMENT

The Board of Directors of SRS Labs, Inc. (the “Company”) is soliciting proxies to be voted at the Annual Meeting of Stockholders of the Company to be held on June 21, 2010 at the principal executive offices of the Company, located at 2909 Daimler Street, Santa Ana, California 92705, at 9:00 a.m. California time, and at any adjournments thereof (the “Annual Meeting” or the “Meeting”), for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders and described herein. This Proxy Statement describes issues on which we would like you, as a stockholder, to vote. It also gives you information on these issues so that you can make an informed decision. The approximate date on which this Proxy Statement and the enclosed form of proxy are first being sent or given to stockholders is May 7, 2010.

VOTING INFORMATION

Who May Vote

The Board of Directors of the Company (the “Board of Directors” or the “Board”) has fixed the close of business on April 22, 2010 as the record date for the determination of stockholders entitled to receive notice of, and to vote at, the Annual Meeting (the “Record Date”). The only outstanding class of stock of the Company is its common stock, par value $0.001 per share (“Common Stock”). As of the Record Date, 14,592,490 shares of Common Stock were outstanding. Each share of Common Stock entitles its record holder on the Record Date to one vote on all matters subject to a stockholder vote.

Revocability of Proxy

You may revoke your proxy prior to its exercise. You may do this by (a) delivering to the Secretary of the Company, Ulrich Gottschling, at or prior to the Annual Meeting, an instrument of revocation or another proxy bearing a date or time later than the date or time of the proxy being revoked or (b) voting in person at the Annual Meeting. Mere attendance at the Annual Meeting will not serve to revoke your proxy.

How Your Shares Will Be Voted; Broker Non-Votes

All proxies received and not revoked will be voted as directed. If no directions are specified, such proxies will be voted “FOR” (a) the election of the Board’s nominee for Class II director, (b) approval of the amendment to the SRS Labs, Inc. 2006 Stock Incentive Plan to increase the number of shares of Common Stock issuable thereunder by 1,000,000 shares, and (c) the ratification of the appointment of Squar, Milner, Peterson, Miranda & Williamson, LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2010.  As to any other business which may properly come before the Annual Meeting, the persons named in such proxies will vote in accordance with their best judgment, although the Company does not presently know of any other such business.

As indicated above, if you are a stockholder of record who submits a proxy but does not indicate how the proxies should vote on one or more matters, the named proxies will vote as indicated in the preceding paragraph. However, if your shares are held by a broker and you do not provide instructions to the broker on how to vote, the absence of instructions may cause a “broker non-vote” on the matters for which you do not provide instructions. Accordingly, if you want to vote your shares on a matter, it is important that you provide voting instructions to your broker on that matter. A broker non-vote occurs when the stockholder grants a limited proxy that does not empower the holder to vote on a particular proposal(s).

Quorum and Voting

Shares of Common Stock will be counted as present at the Annual Meeting if the stockholder is present and votes in person at the Meeting or has properly submitted, and not revoked, a valid proxy. A quorum must be present at the Annual Meeting in order to hold the Annual Meeting and conduct business. Shares representing a majority of the voting power of the Company’s outstanding shares of Common Stock (excluding treasury shares) entitled to vote as of the Record Date, present in person or by proxy, will be necessary to establish a quorum for the Annual Meeting. Abstentions and non-votes will be counted for purposes of determining the existence of a quorum at the Annual Meeting.

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In the election of the director under Proposal 1, the nominee receiving the highest number of votes “FOR” director will be elected as director. This number is called a plurality. The affirmative vote of a majority of the votes cast by holders of the shares of Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote on the matter is required for the adoption of Proposals 2 and 3.  Abstentions will be counted towards the tabulation of votes cast on Proposals 2 and 3 and will have the same effect as negative votes.  Broker non-votes will have no effect on the voting with respect to Proposals 1, 2 and 3.

Expenses and Method of Solicitation

The expenses of soliciting proxies for the Annual Meeting pursuant to this Proxy Statement are to be paid by the Company. Solicitation of proxies may be made by means of personal calls upon, or by telephonic, facsimile, email or other communications with, stockholders or their personal representatives by directors, officers and employees of the Company who will not be specially compensated for such services. Although there is no formal agreement to do so, the Company may reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for their reasonable expenses in forwarding this Proxy Statement to stockholders whose Common Stock is held of record by such entities. The Board of Directors has authorized certain officers of the Company to retain the services of a proxy solicitation firm if, in such officers’ view, it is deemed necessary or advisable. Although the Company does not currently expect to retain such a firm, it estimates that the fees of such firm could be up to $20,000 plus out-of-pocket expenses, all of which would be paid by the Company.

Nominations of Director for the Annual Meeting

The Bylaws of the Company (the “Bylaws”) set forth certain procedures relating to the nomination of directors (the “Nomination Bylaw”) and no person will be eligible for election as a director unless nominated in accordance with the provisions of the Nomination Bylaw. Under the terms of the Nomination Bylaw, to be timely for the Annual Meeting, a stockholder’s notice must have been delivered to or mailed and received at the principal executive offices of the Company not earlier than March 19, 2010 and not later than April 18, 2010. As of April 19, 2010, the Company had not received any nominations for the Annual Meeting in accordance with the Nomination Bylaw. The presiding officer of the Annual Meeting will, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by the Nomination Bylaw, and if he should so determine, he will so declare to the Meeting and the defective nomination will be disregarded. Notwithstanding the provisions of the Nomination Bylaw, a stockholder also must comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder with respect to the matters set forth in the Nomination Bylaw. For information related to application of the Nomination Bylaw for the annual meeting of stockholders to be held in 2011 (the “2011 Annual Meeting”), see the discussion in this Proxy Statement under the caption “Submission of Stockholder Proposals and Director Nominations for the 2011 Annual Meeting.”

Stockholder Proposals for the Annual Meeting

The Bylaws set forth certain procedures relating to the procedures for properly bringing business before an annual meeting of the stockholders (the “Stockholder Proposal Bylaw”). Under the terms of the Stockholder Proposal Bylaw, to be timely for the Annual Meeting, a stockholder must have delivered a notice regarding a proposal to the principal executive offices of the Company no earlier than March 19, 2010 and no later than April 18, 2010. As of April 19, 2010, the Company had not received any stockholder proposals for the Annual Meeting in accordance with the Stockholder Proposal Bylaw. The presiding officer of the Annual Meeting shall, if the facts warrant, determine and declare to the Meeting that business was not properly brought before the Meeting in accordance with the provisions of the Stockholder Proposal Bylaw, and if he should so determine, he shall so declare to the Meeting that any such business not properly brought before the Meeting shall not be transacted. For information related to the application of the Stockholder Proposal Bylaw for the 2011 Annual Meeting, see the discussion in this Proxy Statement under the caption “Submission of Stockholder Proposals and Director Nominations for the 2011 Annual Meeting.”

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL

OWNERS AND MANAGEMENT

Beneficial Ownership Table

The following table sets forth certain information about the beneficial ownership of the Common Stock as of April 9, 2010, by:

·                  each person known by the Company to own beneficially more than 5% of the voting power of the outstanding Common Stock;

·                  each of the Company’s current directors;

·                  each nominee for election to become a director;

·                  the Company’s Chief Executive Officer and the other persons named in the Summary Compensation Table set forth under the caption “Compensation of Executive Officers” (we refer to these officers as the “Named Executive Officers”); and

·                  all of the Company’s current directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the “SEC”). Shares over which a person exercises voting and/or investment power are deemed to be beneficially owned by such person. In addition, shares subject to options, warrants or other convertible securities that are exercisable within 60 days of April 9, 2010 are deemed to be outstanding and beneficially owned by the person who holds such option, warrant or other convertible security for the purpose of computing share and percentage ownership of that person but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Accordingly, for each named person, the percentage of shares beneficially owned by such person is based upon the number of shares of Common Stock outstanding on April 9, 2010, exclusive of treasury shares, together with options, warrants or other convertible securities held by such person that are exercisable for shares of Common Stock within 60 days of April 9, 2010. As of April 9, 2010, 14,592,490 shares of Common Stock were outstanding.

Unless otherwise indicated in the footnotes below, we believe that the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to applicable community property laws and similar statutes. The information with respect to each person is as supplied or confirmed by such person, based upon statements filed with the SEC or based upon the actual knowledge of the Company.

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*                                         Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock.

(1)                                  Includes shares beneficially owned, whether directly or indirectly.

(2)                                  Consists of shares of Common Stock issuable upon exercise of stock options that are exercisable within 60 days following April 9, 2010.

(3)                                  Includes 2,546,566 shares of Common Stock held by Mr. Yuen and Mrs. Yuen as co-trustees of the Thomas Yuen Family Trust and 252,790 shares held by Mr. Yuen directly. The address for Mr. and Mrs. Yuen is c/o SRS Labs, Inc., 2909 Daimler Street, Santa Ana, California 92705.

(4)                                  Based on a Schedule 13G filed with the SEC on February 16, 2010, Burnham Asset Management Corporation has shared dispositive power over 978,632 shares and Burnham Securities Inc. has shared dispositive power over 114,000 shares. Burnham Asset Management Corporation serves as the investment manager for a number of managed accounts and has dispositive authority over the 978,632 shares held in such accounts.  Burnham Securities Inc. is a registered broker-dealer with a number of discretionary accounts and has dispositive authority over the 114,000 shares held in such accounts.  Burnham Asset Management Corporation and Burnham Securities Inc. disclaim beneficial ownership of such shares.  The address for Burnham Asset Management Corporation and Burnham Securities Inc. is 1325 Avenue of the Americas, New York, NY 10019.

(5)                                  Based on an amendment to a Schedule 13G filed with the SEC on February 4, 2010, Dialectic Capital Management, LLC, John Fichthorn and Luke Fichthorn have shared voting and dispositive power over 1,083,519 shares. The address for Dialectic Capital Management, LLC, John Fichthorn and Luke Fichthorn is 875 Third Avenue 15 th  Floor, New York, NY 10022.

(6)                                  Based on an amendment to a Schedule 13G filed with the SEC on February 9, 2010. Cardinal Capital Management, LLC has sole voting power over 543,575 shares and sole dispositive power over 1,017,535 shares. The address for Cardinal Capital Management, LLC is One Greenwich Office Park, Greenwich, CT 06831.

(7)                                  Based on an amendment to a Schedule 13G filed with the SEC on February 16, 2010. Wentworth, Hauser & Violich, Inc. (“Wentworth”) has sole voting power over 317,600 shares and sole dispositive power over 812,400 shares.  Under the definition of “beneficial ownership” in Rule 13d-3 under the Exchange Act, it is also possible that the individual directors, executive officers, and/or shareholders of Wentworth might be deemed the “beneficial owners” of some or all of the shares held by Wentworth in that they might be deemed to share the power to direct the voting or disposition of such securities. Such persons expressly disclaim beneficial ownership of the shares held by Wentworth. The address for Wentworth is 301 Battery Street, Suite 400, San Francisco, CA 94111.

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(8)                                  Includes shares held by Allen Gharapetian (or shares issuable to him upon exercise of stock options that are exercisable within 60 days following April 9, 2010), our Vice President, Marketing, who is an executive officer but not a Named Executive Officer of the Company.

(9)                                  SRSWOWcast.com, Inc. (“SRSWOWcast”) is a wholly-owned subsidiary of the Company. As of April 9, 2010, 1,570,000 shares of common stock of SRSWOWcast were outstanding, all of which were held by the Company. All share amounts represent shares of SRSWOWcast common stock issuable upon exercise of stock options.

No director, officer, affiliate of the Company or record owner of more than five percent of the Common Stock, or any associate of such person, is a party adverse to the Company in any material pending legal proceeding or has a material interest adverse to the Company in such proceeding.

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ELECTION OF DIRECTORS

(Proposal 1)

The Company’s Certificate of Incorporation and Bylaws provide for a “classified” board of directors. The number of authorized directors is currently five. Currently, there are two Class I directors (Mr. Hickman and Ms. Miltner), whose terms expire at the 2012 annual meeting of stockholders; one Class II director (Mr. Dukes), whose term expires at this 2010 annual meeting; and two Class III directors (Messrs. Yau and Yuen), whose terms expire at the 2011 annual meeting. The Nomination and Corporate Governance Committee recommended to the Board, and the Board approved, the nomination of David R. Dukes for election as the Class II director at this Annual Meeting, to serve a three year term expiring at the 2013 annual meeting of stockholders or until his successor is elected and qualified. The Nomination and Corporate Governance Committee of the Board did not receive from a stockholder or any other source the name of any other person for consideration as a nominee for director of the Company. The Class II director shall be elected by a plurality of the votes of shares of Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote on such election.

In the event any of the nominees is unable to or declines to serve as a director at the time of the Annual Meeting (which is not anticipated), the persons named in the proxy will vote for the election of such person as may be designated by the present Board of Directors.

The Board of Directors unanimously recommends a vote “FOR” the election of David R. Dukes as a Class II director. Unless otherwise directed in the accompanying proxy, the persons named therein will vote for the election of David R. Dukes.

Information About Directors and Nominees

The Company believes that its Board as a whole should encompass a range of talent, skill, diversity and expertise enabling it to provide sound guidance with respect to the Company’s operations and interests.  In addition to considering a candidate’s background and accomplishments, the Nomination and Corporate Governance Committee reviews candidates in the context of the current composition of the Board and the evolving needs of our business.  The Company’s policy is to have at least a majority of the directors qualify as “independent” under the listing requirements of The Nasdaq Stock Market.  The Nomination and Corporate Governance Committee generally identifies candidates for election to the Board of Directors; reviews their skills, characteristics and experiences; and recommends director nominees to the Board for approval.   While the Board does not have a formal policy with regard to the consideration of diversity in identifying director nominees, the Nomination and Corporate Governance Committee strives to nominate directors with a variety of complementary skills and backgrounds so that as a group, the Board will possess the appropriate talent, skills, insight and expertise to oversee the Company’s business.

The Nomination and Corporate Governance Committee seeks directors with strong reputations and experience in areas relevant to the operations and strategies of the Company’s business.  The tables below set forth information regarding the director nominee and each director who is continuing in office, including his or her age as of the date of the Annual Meeting, the year they first became directors, business experience during at least the past five years, public company boards they currently serve on or have served on since January 1, 2005, and certain other biographical information and attributes that the Nomination and Corporate Governance Committee determined qualify them to serve as directors.

The Nomination and Corporate Governance Committee also believes that the director nominee and the other current directors have the following other key attributes that are important to an effective board of directors:  integrity and demonstrated high ethical standards; sound judgment; analytical skills; the ability to engage management and each other in a constructive and collaborative fashion; diversity of origin, background, experience and thought; and the commitment to devote significant time and energy to service on the Board and its committees.

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Class II Director Nominee

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Class III Directors—Terms Expiring at the 2011 Annual Meeting

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Class I Director—Terms Expiring at the 2012 Annual Meeting

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INFORMATION ABOUT THE BOARD OF DIRECTORS AND

COMMITTEES OF THE BOARD

The Board of Directors provides general oversight for our business. It establishes overall policies and standards for the Company and reviews the performance of management. In addition, the Board has established three standing committees, an Audit Committee, a Compensation Committee and a Nomination and Corporate Governance Committee, whose functions are briefly described below.

During the fiscal year ended December 31, 2009 (“Fiscal 2009”), the Board of Directors and the various committees of the Board held the following number of meetings: Board of Directors, 6; Audit Committee, 4; Compensation Committee, 7; and Nomination and Corporate Governance Committee, 4. During Fiscal 2009, no director attended fewer than 75% of the aggregate of the total number of meetings of the Board of Directors and total number of meetings of any committees of the Board, which he or she was required to attend.

Committees of the Board

Audit Committee.   The Audit Committee assists the Board in overseeing (a) the integrity of the Company’s accounting and financial reporting processes, the audits of the financial statements as well as systems of internal controls regarding finance, accounting, legal compliance and ethics that management and the Board have established; (b) the Company’s compliance with legal and regulatory requirements; (c) the qualifications and independence of the Company’s independent auditors; (d) the Company’s financial risk; and (e) the performance of the Company’s independent auditors. The Audit Committee evaluates the performance of the Company’s independent registered public accounting firm, and makes decisions regarding the selection, retention and, where appropriate, the replacement of, the Company’s independent registered public accounting firm. The Audit Committee also reviews with management and the Company’s independent registered public accounting firm the Company’s interim and year-end financial statements and internal controls and discusses with management and the Company’s independent registered public accounting firm any significant accounting, internal control and reporting issues and conformance of the Company’s financial statements with applicable accounting and regulatory requirements. The Audit Committee is responsible for recommending to the Board of Directors whether the Company’s audited financial statements should be included in the Company’s annual report on Form 10-K and is responsible for the oversight of the creation and implementation of corporate risk policies and procedures.

The current members of the Audit Committee are Winston E. Hickman (Chair), David R. Dukes and Carol L. Miltner. The Board of Directors has determined that each member of the Audit Committee is independent, as defined in Rule 4200(a)(15) of the NASDAQ Stock Market Marketplace Rules (the “NASDAQ Rules”) and Rule 10A-3 under the Exchange Act. The Board of Directors has determined that Mr. Hickman, the Chairman of the Audit Committee, is an “Audit Committee financial expert,” as defined under the rules of the SEC. The Audit Committee operates under a written charter adopted by the Board of Directors. The charter of the Audit Committee is also available at http://www.srslabs.com/auditcommitteecharter412.asp . A copy of the charter may be obtained upon request, without charge, by contacting our Investor Relations Department at (949) 442-1070 or by writing to us at SRS Labs, Inc., 2909 Daimler Street, Santa Ana, California 92705, Attn: Investor Relations Manager.

Compensation Committee.   The responsibilities of the Compensation Committee include (a) assisting the Board in developing and evaluating potential candidates for executive positions; (b) with the assistance of the other independent directors on the Board, recommending to the Board for determination the compensation, including incentive pay, of the Chief Executive Officer; (c) approving the annual compensation of the other executive officers of the Company; (d) approving or recommending to the Board for approval compensation for directors, and (e) approving and/or administering the Company’s equity incentive compensation and cash bonus plans and determining awards thereunder. The current members of the Compensation Committee are Carol L. Miltner (Chair), David R. Dukes, Winston E. Hickman and Sam Yau. Our Board of Directors has determined that each member of the Compensation Committee is independent under the NASDAQ Rules. A more detailed description of the role of the committee, including the role of executive officers and consultants in compensation decisions, can be found under “Compensation of Executive Officers ¾ Compensation Discussion and Analysis” below. The charter of the Compensation Committee is available at http://www.srslabs.com/compensationcommitteecharter414.asp . A copy of the charter may be obtained upon request, without charge, by contacting our Investor Relations Department at 949-442-1070 or by writing to us at SRS Labs, Inc., 2909 Daimler Street, Santa Ana, California 92705, Attn: Investor Relations Manager.

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Nomination and Corporate Governance Committee.   The Nomination and Corporate Governance Committee identifies and recommends candidates for election to the Board of Directors. It advises the Board of Directors on all matters relating to directorship practices, including the criteria for selecting directors, policies relating to tenure and retirement of directors and compensation and benefit programs for non-employee directors. The Nomination and Corporate Governance Committee also makes recommendations relating to the duties and membership of committees of the Board of Directors, recommends processes to evaluate the performance and contributions of individual directors and the Board of Directors as a whole, and approves procedures designed to provide that adequate orientation and training are provided to new members of the Board of Directors. The Nomination and Corporate Governance Committee also makes recommendations relating to the development of the Company’s corporate governance guidelines and is responsible for overseeing the development of executive succession plans. The members of the Nomination and Corporate Governance Committee are Sam Yau (Chair), David R. Dukes, Winston E. Hickman and Carol L. Miltner. Our Board of Directors has determined that each member of the Nomination and Corporate Governance Committee is independent under the NASDAQ Rules. The charter of the Nomination and Corporate Governance Committee is available at http://www.srslabs.comp/compensationcommittee413.asp . A copy of the charter may be obtained upon request, without charge, by contacting our Investor Relations Department at 949-442-1070 or by writing to us at SRS Labs, Inc., 2909 Daimler Street, Santa Ana, California 92705, Attn: Investor Relations Manager.

Nominations for directors submitted to the Committee by stockholders, other directors or management are evaluated according to the nominee’s knowledge, experience and background. While the Nomination and Corporate Governance Committee does not have any specific minimum qualifications for director candidates, the Committee may take into consideration such factors and criteria as it deems appropriate in evaluating a candidate, including his or her judgment, skill, integrity, diversity and business or other experience.  The Committee does not have a formal policy with respect to diversity in identifying director nominees but, as indicated above, diversity is one factor in the total mix of information the Board considers when evaluating director candidates.

The Nomination and Corporate Governance Committee is responsible for identifying and evaluating candidates for Board membership and selecting or recommending to the Board nominees to stand for election. Candidates may come to the attention of the Nomination and Corporate Governance Committee through current Board members, professional search firms, stockholders or other persons. The Nomination and Corporate Governance Committee evaluates all candidates selected for consideration, including incumbent directors, based on the same criteria as described above. All candidates who, after evaluation, are then recommended by the Nomination and Corporate Governance Committee and approved by the Board, are included in the Company’s recommended slate of director nominees in its proxy statement.

The Nomination and Corporate Governance Committee will consider nominees recommended by stockholders. Any stockholder who wishes to recommend for the Nomination and Corporate Governance Committee’s consideration a prospective nominee to serve on the Board of Directors may do so by giving the candidate’s name and qualifications in writing to the Company’s Secretary at the following address: 2909 Daimler Street, Santa Ana, California 92705.

Corporate Governance

Code of Business and Ethics and Corporate Governance Guidelines.   The Company is committed to having sound corporate governance principles and has implemented the following corporate governance policies and procedures. The Company’s Code of Business Conduct and Ethics, which is applicable to our directors, our principal executive officer, our principal financial officer, our principal accounting officer and all of our other officers and employees, is available at http://www.srslabs.com/conductandethics416.asp . Our Corporate Governance Guidelines can be found at http://www.srslabs.com/governanceguidelines415.asp . Copies of the Corporate Governance Guidelines and the Code of Business Conduct and Ethics may be obtained upon request, without charge, by contacting our Investor Relations Department at 949-442-1070 or by writing to us at SRS Labs, Inc., 2909 Daimler Street, Santa Ana, California 92705, Attn: Investor Relations Manager. The Company intends to disclose future amendments to certain provisions of the Code of Business Conduct and Ethics and any waivers of such provisions, that are required to be disclosed under the rules of the SEC in the “Investors—Corporate Governance” section of the Company’s website at www.srslabs.com.

Board  Structure and Lead Director.   The Board does not have a policy regarding the separation of the roles of the Chief Executive Officer and Chairman of the Board as the Board believes it is in the best interest of the Company to make that determination based on the position and direction of the Company and the membership of the Board from time to time. The Board has determined that having the Company’s Chief Executive Officer serve as the Chairman is currently in the best interest of the Company’s stockholders as this structure makes the best use of the Chief Executive Officer’s extensive knowledge of the Company and its industry, as well as fostering greater communication between the Company’s management and the Board.

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The Company does, however, have a policy that if the Chairman of the Board of the Company does not qualify as an independent director, the independent directors of the Board will select one of the independent directors to be the “Lead Director.”  Since the Chairman of the Board is currently the Company’s Chief Executive Officer, the Board of Directors has designated Sam Yau as the Lead Director.  The Lead Director has the following duties and responsibilities: (a) acting as Chair of the meetings of the independent directors; (b) serving as a conduit of information between the independent directors and the Chairman of the Board, the CEO and other members of management; (c) together with the Chairman of the Board, scheduling and developing the agenda for at least one strategic planning meeting of the Board and at least one meeting to develop the annual financial plan; (d) together with the Chairman of the Board, setting the annual calendar of Board meetings throughout the year, preparing the list of regular items to be included in Board agendas throughout the year and establishing and circulating the Board agendas for each Board meeting; and (e) such other responsibilities and duties as the Board of Directors shall designate.  The Board believes that this current leadership structure, in which the offices of Chairman and Chief Executive Officer are held by one individual and an independent director acts as Lead Director, provides for dynamic Board leadership and enhances the Company’s ability to execute its business and strategic plans, while maintaining strong independence for Board decisions and oversight.

Board Independence.   The Board has determined that each of the Company’s directors other than Mr. Yuen satisfies the requirements for “independence” under the NASDAQ Rules. Thomas C.K. Yuen, our Chairman and Chief Executive Officer, is our only non-independent director.

Risk Oversight Role.   The Board is responsible for overseeing our risk management but its duties in this regard are supplemented by the Audit Committee, which is responsible for discussing with management policies with respect to risk assessment and risk management, including the process by which major financial and accounting risk assessment and management is undertaken by the Company.  The Audit Committee also oversees our corporate compliance programs, as well as the internal audit function. In addition to the Audit Committee’s work in overseeing risk management, our full Board periodically engages in discussions of the most significant risks that the Company is facing and how these risks are being managed, and the Board receives reports on risk management from senior officers of the Company and from the Chairman of the Audit Committee.

Communications with the Board.   You may send communications to the Board of Directors, to the non-management members of the Board or to an individual Board member by sending a letter to SRS Labs, Inc., SRS Labs, Inc., 2909 Daimler Street, Santa Ana, California 92705, Attn: Corporate Secretary. The Corporate Secretary will forward these communications to the intended recipients. Unsolicited advertisements or invitations to conferences or promotional materials, in the discretion of the Secretary, may not be forwarded to directors.

Director Attendance at Annual Meetings of Stockholders.   Under the Company’s Corporate Governance Guidelines, the Company’s directors are encouraged to attend annual meetings of the Company’s stockholders. All of the then current members of the Board of Directors attended the Company’s 2009 annual meeting of stockholders.

Compensation of Directors

The following table provides compensation information for the one year period ended December 31, 2009 for each member of the Board of Directors other than Thomas C.K. Yuen who is also an executive officer of the Company. Please see the Summary Compensation Table for compensation information relating to Mr. Yuen.

(1)          The amounts reported above reflect the aggregate grant date fair value of these awards computed in accordance with FASB ASC Topic 718 “ Stock Compensation ,” which excludes the effect of estimated forfeitures. See Note 6 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 regarding assumptions underlying valuation of equity awards.

(2)          Includes $60,000 paid by the Company to Mr. Yau for his work on corporate strategic matters.

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Cash Compensation.   Directors who also are employees of the Company are not paid any fees or remuneration, as such, for their service on the Board or on any Board committee. Each non-employee director of the Company receives an annual retainer of $12,000 and a fee of $1,000 per Board meeting attended and $500 per committee meeting attended. The Lead Director also receives a supplemental annual retainer of $4,000. In addition, the chairpersons and members of the standing committees of the Board receive the following supplemental annual cash retainers:

Each non-employee director who resides outside the Southern California area is entitled to receive reimbursement for reasonable travel expenses in accordance with the Company’s travel expense policy with respect to each Board or Board committee meeting held in Southern California that such non-employee director attends in person. For Board or Board committee meetings held outside the Southern California area, each director is entitled to receive reimbursement for reasonable travel expenses in accordance with the Company’s travel policy for meetings such director attends in person.

Non-employee Directors’ Plan.   Each non-employee director is eligible to receive stock options under the SRS Labs, Inc. Amended and Restated 1996 Non-employee Directors’ Stock Option Plan (the “Non-employee Directors’ Plan”), a non-discretionary, formula stock option plan. Under the Non-employee Directors’ Plan, (a) each non-employee director who first becomes a member of the Board is granted an option to purchase 10,000 shares of Common Stock automatically upon election to the Board of Directors which vests upon the date of grant, and (b) each non-employee director is granted an option to purchase 15,000 shares of Common Stock automatically effective at the close of business on the date of each of the Company’s annual meeting of stockholders at which such non-employee director is elected which vests in three equal annual installments commencing on the first anniversary of the applicable date of grant. The exercise price for all options granted under the Non-employee Directors’ Plan is the fair market value of Common Stock on the date of grant. At the close of the Company’s Annual Meeting of stockholders in 2009, Carol L. Miltner and Winston E. Hickman were each granted an option to purchase 15,000 shares of Common Stock at an exercise price of $6.25 per share under the Non-employee Directors’ Plan. In the event that David Dukes is elected as director at the Annual Meeting, he will receive on such date an option pursuant to the Non-employee Directors’ Plan to purchase 15,000 shares of Common Stock which vests in three equal annual installments.

2006 and 1996 Plans.   Each non-employee director is also eligible to receive equity incentive awards under the SRS Labs, Inc. 2006 Stock Incentive Plan (the “2006 Plan”).  Prior to June 2006, such awards were granted under the Company’s Amended and Restated 1996 Long-Term Incentive Plan (the “1996 Plan”). In June 2006, the Company’s stockholders approved the 2006 Plan, and no further awards have been, or will be, made under the 1996 Plan since the date of such stockholder approval.  Any option awards to non-employee directors granted after the date of approval of the 2006 Plan, other than those granted under the Non-employee Directors’ Plan, have been, and will be, granted pursuant to the 2006 Plan rather than pursuant to the 1996 Plan.  Under the Company’s Non-Employee Director Compensation Policy, each non-employee member of the Board of Directors is granted an option to purchase 25,000 shares of Common Stock pursuant to the 2006 Plan on the date of each annual meeting of stockholders at which such non-employee director is re-elected as a non-employee director or continues in office as an incumbent director, with the following terms and conditions: (a) 25% of the shares underlying the options vest one year after the date of grant and one-sixteenth of such options vest every three months during the next three successive years thereafter; (b) the options shall have a term of ten years from the date of grant subject to continued service requirements; and (c) the exercise price shall be the fair market value of the Common Stock on the date of grant.

In 2009, the Board of Directors awarded to each of David R. Dukes, Winston E. Hickman, Carol Miltner and Sam Yau a non-qualified option to purchase 25,000 shares of Common Stock under the 2006 Plan at an exercise price of $6.25 per share with terms consistent with the terms of the Non-Employee Director Compensation Policy. In 2009, the Board of Directors also awarded Sam Yau a non-qualified option to purchase 12,500 shares of Common Stock under the 2006 Plan at an exercise price of $5.59 per share in recognition of his service as Lead Director of the Board of Directors. This option grant has a one year vesting period. In January 2010, Mr. Yau received an additional option to purchase 10,000 shares of Common Stock at an exercise price of $7.28 per share for his service as Lead Director.  Beginning in January 2011, as long as he continues to serve as the Lead Director, Mr. Yau will receive an annual option grant to purchase 10,000 shares of Common Stock at an exercise price equal to the closing sales price of the Common Stock on the grant date.  The options granted to Mr. Yau for his service as Lead Director will vest one year from the grant date. In addition, provided that they continue in office, pursuant to the Non-Employee Director Compensation Policy, Carol L. Miltner, Winston E. Hickman  and Sam Yau will each be awarded an option to purchase 25,000 shares of Common Stock pursuant to the 2006 Plan as of the close of business

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on the date of the 2010 Annual Meeting, with the following terms and conditions: (a) 25% of the shares underlying the options vest one year after the date of grant; and one-sixteenth of such options vest every three months during the next three successive years thereafter; (b) the options shall have a term of ten years from the date of grant subject to continued service requirements; and (c) the exercise price shall be the fair market value of the Common Stock on the date of grant. Similarly, provided that he is re-elected at the Annual Meeting, David R. Dukes will also be awarded an option to purchase 25,000 shares of Common Stock pursuant to the 2006 Plan under this policy as of the close of business on the date of the Annual Meeting.

APPROVAL OF AN AMENDMENT TO THE SRS LABS, INC.

2006 STOCK INCENTIVE PLAN

(Proposal 2)

The Board of Directors has adopted, and the stockholders have approved, the SRS Labs, Inc. 2006 Stock Incentive Plan, a discretionary incentive plan which affords the Compensation Committee of the Company’s Board of Directors or the Board of Directors the ability to design compensatory awards to attract and retain employees (including officers), directors and consultants of the Company and its subsidiaries. The Board of Directors has adopted, subject to stockholder approval, an amendment to the 2006 Plan to increase the number of shares of Common Stock that may be issued pursuant to awards granted thereunder by 1,000,000 (the “Share Amendment”). The 2006 Plan, as amended by the Share Amendment, is set forth in full as Appendix A to this Proxy Statement and is summarized under the caption “Summary of the 2006 Stock Incentive Plan” below.

The Company has registered with the SEC on Form S-8 Registration Statements the 3,250,000 shares of Common Stock currently issuable under the 2006 Plan. If the Share Amendment is approved by the stockholders, the Board intends to cause the 1,000,000 additional shares of Common Stock that will become available for issuance under the 2006 Plan to be registered on a Form S-8 Registration Statement to be filed with the SEC at the Company’s expense.

Subject to certain exceptions, Section 162(m) of the Internal Revenue Code of 1986, as amended, generally limits corporate income tax deductions to $1,000,000 annually for compensation paid to each of the Chief Executive Officer and the other four highest paid executive officers of the Company. Currently, any performance-based compensation paid by the Company pursuant to the 2006 Plan is excluded from this $1,000,000 limitation. If the Share Amendment is approved by the stockholders, such approval will constitute approval of the Share Amendment to the 2006 Plan under Section 162(m) and allow the Company to rely upon the exception under Section 162(m) for performance-based compensation awarded under the plan.

Currently, the number of shares of Common Stock authorized for issuance in connection with stock-based awards pursuant to the 2006 Plan is 3,250,000 (subject to adjustment as provided in the 2006 Plan). As of the Record Date, options granted under the 2006 Plan to purchase 2,607,080 shares of Common Stock are outstanding and only 617,841 shares of Common Stock remain authorized for issuance pursuant to awards to be made under the 2006 Plan.

The Board of Directors continues to believe that such a compensatory award program is an important factor in attracting, retaining and motivating employees, officers, directors and consultants of the Company, and believes that it is appropriate to increase the number of shares of Common Stock which may be issued in connection with awards to be made under the 2006 Plan.  Accordingly, the Board of Directors has adopted, subject to stockholder approval, the Share Amendment, which amends Section 3 of the 2006 Plan to increase the number of shares of Common Stock that may be issued or transferred pursuant to awards granted under the 2006 Plan by 1,000,000 shares, from 3,250,000 to 4,250,000 shares of Common Stock. If the Share Amendment is not approved by the stockholders at the Annual Meeting, the 2006 Plan will remain in effect; however, as stated above, only 617,841 shares of Common Stock remain available for grant as of the Record Date.  If the Share Amendment is approved by the stockholders at the Annual Meeting, the stockholders will suffer further dilution upon the exercise of future awards granted under the 2006 Plan. If approved, up to an additional 1,000,000 shares of Common Stock will be available for issuance pursuant to future awards under the 2006 Plan.  As of the Record Date, 14,592,490 shares of Common Stock were issued and outstanding.

Each of the Company’s executive officers, directors and nominees for election as a director is eligible to receive awards pursuant to the 2006 Plan.  Under the Company’s current Non-Employee Director Compensation Policy, each non-employee member of the Board of Directors is granted an option under the 2006 Plan, which vests over four years, on the date of each annual meeting of stockholders at which such non-employee director is re-elected as a non-employee director or continues in office as an incumbent director.  In addition, beginning in January 2011, as long as he continues to serve as the Lead Director, Sam Yau will receive an additional annual option grant, which vests one year from the grant date.  Non-employee directors also receive option grants under the Non-employee Directors’ Plan.  See “Information About the Board of Directors and Committees of the Board ¾ Compensation of Directors” for more information regarding grants to non-employee directors.

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The Board of Directors unanimously recommends that the stockholders vote for approval of the Share Amendment. The affirmative vote of the holders of a majority of the shares of Common Stock present in person or by proxy at the Annual Meeting and entitled to vote on this proposal is required for approval of this proposal.

Summary of the 2006 Stock Incentive Plan

The following summary is not intended to be complete and reference should be made to Appendix A for a complete statement of the terms and provisions of the 2006 Plan. Capitalized terms used in this summary and not otherwise defined will have the meanings ascribed to such terms in the 2006 Plan.

Purpose.   The purpose of the 2006 Plan is to attract, retain and motivate select employees, officers, directors and consultants of the Company and its affiliates (referred to collectively as “Eligible Persons”) and to provide incentives and rewards for superior performance.

Shares Subject to the Plan.   The 2006 Plan currently provides that no more than 3,250,000 shares of Common Stock may be issued pursuant to Awards under the plan.  If the Share Amendment is approved, an additional 1,000,000 shares of Common Stock will be available for issuance pursuant to future awards under the plan.  These shares shall be authorized but unissued shares, or shares that the Company has reacquired or otherwise holds in treasury or in a trust. The number of shares available for Awards, as well as the terms of outstanding Awards, are subject to adjustment as provided in the 2006 Plan for stock splits, stock dividends, recapitalizations and other similar events. Shares of Common Stock that are subject to any Award that expires, or is forfeited, cancelled or becomes unexercisable will again be available for subsequent Awards, except as prohibited by law. In addition, shares that the Company refrains from delivering pursuant to an Award as payment of either the exercise price of an Award or applicable withholding and employment taxes will be available for subsequent Awards.

Administration.   Either the Board of Directors or a committee appointed by the Board will administer the 2006 Plan. The Board of Directors and any committee exercising discretion under the plan from time to time are referred to as the “Committee.” The Compensation Committee of the Board of Directors is currently acting as the Committee for purposes of the 2006 Plan. The Board of Directors may at any time appoint additional members to the Committee, remove and replace members of the Committee with or without cause, and fill vacancies on the Committee. To the extent permitted by law, the Committee may authorize one or more persons who are reporting persons for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, (or other officers) to make Awards to eligible persons who are not reporting persons for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (or other officers whom the Company has specifically authorized to make Awards). With respect to decisions involving an Award intended to satisfy the requirements of Section 162(m) of the Code, the Committee is to consist of two or more directors who are “outside directors” for purposes of that Code section. The Committee may delegate administrative functions to individuals who are reporting persons for purposes of Rule 16b-3 of the Exchange Act, officers or employees of the Company or its affiliates.

Subject to the terms of the 2006 Plan, the Committee has express authority to determine the Eligible Persons who will receive Awards, the number of shares of Common Stock, units or dollars to be covered by each Award, and the terms and conditions of Awards. The Committee has broad discretion to prescribe, amend and rescind rules relating to the 2006 Plan and its administration, to interpret and construe the plan and the terms of all Award agreements, and to take all actions necessary or advisable to administer the plan. Within the limits of the 2006 Plan, the Committee may accelerate the vesting of any Award, allow the exercise of unvested Awards, and may modify, replace, cancel or renew them.

The plan provides that the Company and its affiliates will indemnify members of the Committee and their delegates against any claims, liabilities or costs arising from the good faith performance of their duties under the plan. The plan releases these individuals from liability for good faith actions associated with the plan’s administration.

Eligibility.   The Committee may grant options that are intended to qualify as incentive stock options (“ISOs”) only to employees, but may grant all other Awards to any Eligible Person. The 2006 Plan and the discussion below use the term “Participant” to refer to an Eligible Person who has received an Award. The plan provides that during any calendar year no Participant may receive options and SARs that relate to more than 750,000 shares of Common Stock. As of April 22. 2010, substantially all of the approximately 71 employees (including officers) of the Company and its affiliates and all four of the Company’s non-employee directors would have been eligible to participate in the plan.

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Options.    Options granted under the 2006 Plan provide Participants with the right to purchase shares of Common Stock at a predetermined exercise price. The Committee may grant options that are intended to qualify as ISOs or options that are not intended to so qualify (“Non-ISOs”). The plan also provides that ISO treatment may not be available for options that become first exercisable in any calendar year to the extent the value of the underlying shares that are the subject of the option exceeds $100,000 (based upon the fair market value of the shares of Common Stock on the option grant date).

Share Appreciation Rights (SARs).    A share appreciation right generally permits a Participant who receives it to receive, upon exercise, cash and/or shares of Common Stock equal in value to an amount determined by multiplying (a) the excess of the fair market value, on the date of exercise, of the shares of Common Stock with respect to which the SAR is being exercised, over the exercise price of the SAR for such shares by (b) the number of Shares with respect to which the SARs are being exercised. The Committee may grant SARs in tandem with options or independently of them. SARs that are independent of options may limit the value payable on its exercise to a percentage, not exceeding 100%, of the excess value.

Exercise Price for Options and SARs.   The exercise price of ISOs, Non-ISOs, and SARs may not be less than 100% of the fair market value on the grant date of the shares of Common Stock subject to the Award (110% of fair market value for ISOs granted to employees who, at the time of grant, own more than 10% of the Company’s outstanding shares of Common Stock). As of the Record Date, the closing price of a share of Common Stock on The NASDAQ Global Market was $9.56 per share.

Exercise of Options and SARs.   To the extent exercisable in accordance with the agreement granting them, an option or SAR may be exercised in whole or in part, and from time to time during its term; subject to earlier termination relating to a holder’s termination of employment or service. With respect to options, the Committee has the discretion to accept payment of the exercise price in any of the following forms (or combination of them): (i) cash or check in U.S. dollars, (ii) certain shares of Common Stock or (iii) cashless exercise under a program the Committee approves. The term over which Participants may exercise options and SARs may not exceed ten years from the date of grant (five years in the case of ISOs granted to employees who, at the time of grant, own more than 10% of the Company’s outstanding shares of Common Stock).

Restricted Shares, Restricted Share Units, Unrestricted Shares and Deferred Share Units.    Under the 2006 Plan, the Committee may grant restricted shares that are forfeitable until certain vesting requirements are met, may grant restricted share units which represent the right to receive shares of Common Stock after certain vesting requirements are met, and may grant unrestricted shares as to which the Participant’s interest is immediately vested. For restricted Awards, the plan provides the Committee with discretion to determine the terms and conditions under which a Participant’s interest in such Awards becomes vested. The plan provides for deferred share units in order to permit certain directors, consultants or select members of management to defer their receipt of compensation payable in cash or shares of Common Stock (including shares that would otherwise be issued upon the vesting of restricted shares and restricted share units). Deferred share units represent a future right to receive shares of Common Stock.

Whenever shares of Common Stock are released pursuant to these Awards, the Participant will be entitled to receive additional shares of Common Stock equal to the sum of (i) any stock dividends that the Company’s stockholders received between the date of the Award and issuance or release of the shares of Common Stock and (ii) a number of additional shares of Common Stock equal to the shares of Common Stock that the Participant could have purchased at Fair Market Value on the payment date of any cash dividends for shares of Common Stock if the Participant had received such cash dividends between its grant date and its settlement date.

Performance Awards.   The 2006 Plan authorizes the Committee to grant performance-based awards in the form of Performance Units that the Committee may, or may not, designate as “Performance Compensation Awards” that are intended to be exempt from Code section 162(m) limitations. In either case, Performance Awards vest and become payable based upon the achievement, within the specified period of time, of performance objectives applicable to the individual, the Company or any affiliate. Performance Awards are payable in shares of Common Stock, cash or some combination of the two; subject to an individual Participant limit of 1,000,000 shares of Common Stock and $1,000,000 cash. The Committee decides the length of performance periods, but the periods may not be less than one fiscal year of the Company.

With respect to Performance Compensation Awards, the 2006 Plan requires that the Committee specify in writing the performance period to which the Award relates, and an objective formula by which to measure whether and the extent to which the Award is earned on the basis of the level of performance achieved with respect to one or more performance measures. Once established for a performance period, the performance measures and performance formula applicable to the Award may not be amended or modified in a manner that would cause the compensation payable under the Award to fail to constitute performance-based compensation under Code section 162(m).

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Under the 2006 Plan, the possible performance measures for Performance Compensation Awards include basic, diluted or adjusted earnings per share; sales or revenue; earnings before interest, taxes and other adjustments (in total or on a per share basis); basic or adjusted net income; returns on equity, assets, capital, revenue or similar measure; economic value added; working capital; total stockholder return; and product development, product market share, research, licensing, litigation, human resources, information services, mergers, acquisitions, and sales of assets of affiliates or business units. Each measure will be, to the extent applicable, determined in accordance with generally accepted accounting principles as consistently applied by the Company (or such other standard applied by the Committee) and, if so determined by the Committee, and in the case of a Performance Compensation Award, to the extent permitted under Code section 162(m), adjusted to omit the effects of extraordinary items, gain or loss on the disposal of a business segment, unusual or infrequently occurring events and transactions and cumulative effects of changes in accounting principles. Performance measures may vary from performance period to performance period, and from Participant to Participant, and may be established on a stand-alone basis, in tandem or in the alternative.

Income Tax Withholding.    As a condition for the issuance of shares of Common Stock pursuant to Awards, the 2006 Plan requires satisfaction of any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the Award or the issuance of shares of Common Stock.

Transferability.   Awards may not be sold, pledged, assigned, hypothecated, transferred or disposed of other than by will or the laws of descent and distribution, except to the extent the Committee permits lifetime transfers in the form of a Non-ISO, Share-settled SAR, Restricted Shares, or Performance Shares to charitable institutions, certain family members or related trusts, or as otherwise approved by the Committee.

Certain Corporate Transactions.    The Committee shall equitably adjust the number of shares covered by each outstanding Award, and the number of shares that have been authorized for issuance under the 2006 Plan but as to which no Awards have yet been granted or that have been returned to the plan upon cancellation, forfeiture or expiration of an Award, as well as the price per share covered by each such outstanding Award, to reflect any increase or decrease in the number of issued shares resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the shares of Common Stock, or any other increase or decrease in the number of issued shares effected without receipt of consideration by the Company. In the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding Options under the 2006 Plan such alternative consideration (including securities of any surviving entity) as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all Options so replaced. In any case, such substitution of securities will not require the consent of any person who is granted options pursuant to the plan.

In addition, in the event or in anticipation of a Change in Control, the Committee may at any time in its sole and absolute discretion and authority, without obtaining the approval or consent of the Company’s stockholders or any Participant with respect to his or her outstanding Awards (except to the extent an Award provides otherwise), take one or more of the following actions: (a) arrange for or otherwise provide that each outstanding Award will be assumed or substituted with a substantially equivalent award by a successor corporation or a parent or subsidiary of such successor corporation; (b) accelerate the vesting of Awards for any period (and may provide for termination of unexercised Options and SARs at the end of that period) so that Awards shall vest (and, to the extent applicable, become exercisable) as to the shares of Common Stock that otherwise would have been unvested and provide that repurchase rights of the Company with respect to shares of Common Stock issued upon exercise of an Award shall lapse as to the shares of Common Stock subject to such repurchase right; (c) arrange or otherwise provide for payment of cash or other consideration to Participants in exchange for the satisfaction and cancellation of outstanding Awards; or (d) terminate upon the consummation of the transaction, provided that the Committee may in its sole discretion provide for vesting of all or some outstanding Awards in full as of a date immediately prior to consummation of the Change of Control. To the extent that an Award is not exercised prior to consummation of a transaction in which the Award is not being assumed or substituted, such Award shall terminate upon such consummation.

Notwithstanding the above, unless specifically provided otherwise in the applicable Award Agreement, each Award held by a Participant will accelerate and become fully vested (and exercisable in full in the case of Options and SARs), and any repurchase right applicable to any shares held by a Participant will lapse in full, immediately prior to the consummation of a Change in Control which occurs prior to the termination of such Participant’s Continuous Service.

In the event of any distribution to the Company’s stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Committee may, in its discretion, appropriately adjust the price per share covered by each outstanding Award to reflect the effect of such distribution. Finally, if the Company dissolves or liquidates, all Awards will terminate immediately prior to such dissolution or liquidation, subject to the ability of the Board to exercise any discretion that the Board may exercise in the case of a Change in Control.

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Term of Plan; Amendments and Termination.    The term of the 2006 Plan will be ten years from June 22, 2006, the date of stockholder approval of the plan. The Board may, from time to time, amend, alter, suspend, discontinue or terminate the 2006 Plan; provided that no amendment, suspension or termination of the plan shall materially and adversely affect Awards already granted unless it (a) relates to an adjustment pursuant to certain transactions that change the Company’s capitalization; (b) is otherwise mutually agreed between the Participant and the Committee; or (c) the Committee determines in good faith, before a Change in Control, that the modification is not materially adverse to the Participant. Furthermore, neither the Company nor the Committee shall, without shareholder approval, allow for a repricing within the meaning of the federal securities laws applicable to proxy statement disclosures. In addition, the Committee may not cancel an outstanding option whose exercise price is greater than Fair Market Value at the time of cancellation for the purpose of reissuing the option to the participant at a lower exercise price or granting a replacement award of a different type. Notwithstanding the foregoing, the Committee may amend the plan to eliminate provisions which are no longer necessary as a result of changes in tax or securities laws or regulations, or in the interpretation thereof.

Expected U.S. Federal Income Tax Consequences.   The following is a brief summary of certain U.S. federal income tax consequences of certain transactions under the 2006 Plan. This summary is not intended to be complete and does not describe state or local tax consequences. Under the United States Internal Revenue Code, the Company will generally be entitled to a deduction for federal income tax purposes at the same time and in the same amount as the ordinary income that Participants recognize pursuant to Awards (subject to the Participant’s overall compensation being reasonable, and to the discussion below with respect to Code section 162(m)). For Participants, the expected U.S. federal income tax consequences of Awards are as follows:

Non-ISOs.   A Participant will not recognize income at the time a Non-ISO is granted. At the time a Non-ISO is exercised, the Participant will recognize ordinary income in an amount equal to the excess of (a) the fair market value of the shares of Common Stock issued to the Participant on the exercise date, over (b) the exercise price paid for the shares. At the time of sale of shares acquired pursuant to the exercise of a Non-ISO, the appreciation (or depreciation) in value of the shares after the date of exercise will be treated either as short-term or long-term capital gain (or loss) depending on how long the shares have been held.

ISOs.   A Participant will not recognize income upon the grant of an ISO. There are generally no tax consequences to the Participant upon exercise of an ISO (except the amount by which the fair market value of the shares at the time of exercise exceeds the option exercise price is a tax preference item possibly giving rise to an alternative minimum tax). If the shares of Common Stock are not disposed of within two years from the date the ISO was granted or within one year after the ISO was exercised, any gain realized upon the subsequent disposition of the shares will be characterized as long-term capital gain and any loss will be characterized as long-term capital loss. If both of these holding period requirements are not met, then a “disqualifying disposition” occurs and (a) the Participant recognizes gain in the amount by which the fair market value of the shares at the time of exercise exceeded the exercise price for the ISO and (b) any remaining amount realized on disposition (except for certain “wash” sales, gifts or sales to related persons) will be characterized as capital gain or loss.

Share Appreciation Rights.   A Participant to whom a SAR is granted will not recognize income at the time of grant of the SAR. Upon exercise of a SAR, the Participant must recognize taxable compensation income in an amount equal to the value of any cash or shares of Common Stock that the Participant receives.

Restricted Shares, Restricted Share Units, Deferred Share Units and Performance Awards.   In general, a Participant will not recognize income at the time of grant of restricted shares, restricted share units, deferred share units or Performance Awards, unless the Participant elects with respect to restricted shares or restricted share units to accelerate income taxation to the date of the Award. In this event, a Participant would recognize ordinary income equal to the excess of the market value of the restricted shares over any amount the Participant pays for them (in which case subsequent gain or loss would be capital in nature). In the absence of an election to accelerate income taxation to the date of an Award, a Participant must recognize taxable compensation income equal to the value of any cash or shares of Common Stock that the Participant receives when the Award vests. The same tax consequences apply to Performance Awards.

Special Tax Provisions.   Under certain circumstances, the accelerated vesting, cash-out or accelerated lapse of restrictions on Awards in connection with a change in control of the Company might be deemed an “excess parachute payment” for purposes of the golden parachute tax provisions of Code section 280G, and the Participant may be subject to a 20% excise tax and the Company may be denied a tax deduction. Furthermore, the Company may not be able to deduct the aggregate compensation in excess of $1,000,000 attributable to Awards that are not “performance-based” within the meaning of Code section 162(m) in certain circumstances.

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Income Taxes and Deferred Compensation.   The 2006 Plan provides that participants are solely responsible and liable for the satisfaction of all taxes and penalties that may arise in connection with Awards (including any taxes arising under Section 409A of the Code), and that the Company will not have any obligation to indemnify or otherwise hold any Participant harmless from any or all of such taxes. Nevertheless, the plan authorizes the Committee to organize a deferral program, to require deferral election forms, and to grant or to unilaterally modify any Award in a manner that (a) conforms with the requirements of Section 409A of the Code, (b) that voids any Participant election to the extent it would violate Section 409A of the Code, and (c) for any distribution election that would violate Section 409A of the Code, to make distributions pursuant to the Award at the earliest to occur of a distribution event that is allowable under Section 409A of the Code or any distribution event that is both allowable under Section 409A of the Code and is elected by the Participant, with the Committee’s consent, in accordance with Section 409A.

General Tax Law Considerations.    The preceding paragraphs are intended to be merely a summary of certain important tax law consequences concerning a grant of Awards under the 2006 Plan and the disposition of shares issued thereunder in existence as of the date of this Proxy Statement. Special rules may apply to the Company’s officers, directors or greater than ten percent stockholders. Participants in the plan should review the current tax treatment with their individual tax advisors at the time of grant, exercise or any other transaction relating to an Award or the underlying shares.

New Plan Benefits.   The Committee will grant Awards under the 2006 Plan at its discretion, and the Committee has not granted Awards that are contingent upon the approval of the plan.  Consequently, it is not possible to determine at this time the amount or dollar value of Awards to be provided under the 2006 Plan.

RATIFICATION OF THE APPOINTMENT OF THE COMPANY’S

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

(Proposal 3)

The Audit Committee has selected the firm of Squar, Milner, Peterson, Miranda & Williamson, LLP (“Squar Milner”) to act as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2010, and has further directed that management submit the selection of the Company’s independent registered public accounting firm for ratification by the stockholders at the Annual Meeting. Representatives of Squar Milner are expected to be present at the Annual Meeting, will have the opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions.

Stockholder ratification of the selection of Squar Milner as the Company’s independent registered public accounting firm is not required by the Company’s Bylaws or otherwise. However, the Board of Directors is submitting the selection of Squar Milner to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain Squar Milner. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if they determine that such a change would be in the best interests of the Company and its stockholders.

The Board of Directors unanimously recommends that you vote “FOR” ratification of the appointment of Squar Milner as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2010. The affirmative vote of a majority of the votes cast by holders of shares of Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote on this proposal is required for approval of this proposal.

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RELATIONSHIP OF THE COMPANY WITH

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The following table sets forth the fees billed to us by Squar, Milner, the Company’s independent registered public accounting firm, for the years ended December 31, 2009 and 2008.

Audit Fees   In fiscal years 2009 and 2008, audit fees included fees associated with the audit of the Company’s annual consolidated financial statements, the review of financial statements included in the Company’s Form 10-Q filings, the audit of internal control over financial reporting, consents included in other SEC filings and services that are normally provided by the Company’s independent registered public accounting firm in connection with statutory and regulatory filings or engagements related to those fiscal years.

Audit Related Fees.   There were no fees billed by Squar Milner for audit related services in 2009 or 2008.

Tax Fees.   Tax fees in fiscal years 2009 and 2008 consisted of fees for professional services billed for tax services, including tax compliance and tax planning.

All Other Fees.   There were no fees billed by Squar Milner for other services in 2009 or 2008.

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor

The Audit Committee is responsible for appointing, setting compensation and overseeing the work of the independent auditor. The Audit Committee has established a policy regarding pre-approval of all audit and non-audit services provided by the independent auditor. On an ongoing basis, management communicates specific projects and categories of service for which the advance approval of the Audit Committee is requested. The Audit Committee reviews these requests and advises management if the Committee approves the engagement of the independent auditor. On a periodic basis, management reports to the Audit Committee regarding the actual spending for such projects and services compared to the approved amounts. The prior approval of the Audit Committee was obtained for all services provided by Squar Milner in 2009 and 2008.

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REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act or the Exchange Act that might incorporate this Proxy Statement or future filings with the SEC, in whole or in part, the following report shall not be deemed to be incorporated by reference into any such filing.

The Audit Committee has reviewed and discussed the audited financial statements of the Company for the year ended December 31, 2009 with the Company’s management. The Audit Committee has discussed with Squar, Milner, Peterson, Miranda & Williamson, LLP (“Squar Milner”), the Company’s independent registered public accounting firm, the matters required to be discussed by the statement on Auditing Standards No. 61, as amended, “Communications with Audit Committees,” as adopted by the Public Company Accounting Oversight Board.

The Audit Committee has also received the written disclosures and the letter from Squar Milner required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence and the Audit Committee has discussed the independence of Squar Milner.

Based on the Audit Committee’s review and discussions noted above, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 for filing with the SEC.

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EXECUTIVE OFFICERS

The following table sets forth the executive officers of SRS Labs, Inc., their ages as of the date of the Annual Meeting, and the positions currently held by each person:

All officers serve at the pleasure of the Board of Directors. Biographical information regarding Mr. Yuen appear earlier in this Proxy Statement. See “Election of Directors”.

Ulrich E. Gottschling has served as the Company’s Chief Financial Officer, Secretary and Treasurer since January 2006. Prior to that, Mr. Gottschling served as Chief Financial Officer of Valor Computerized Systems, Inc. (“VCS”), which offers integrated software solutions from design through manufacturing to the electronics supply chain, from 1999 to December 2005 and as Vice President of Operations of VCS from 2000 to December 2005. He was also President, Chief Financial Officer and a member of the board of directors of E4ENET.Com, Inc., an affiliated company of VCS, which offers business-to-business collaboration technology. Prior to joining VCS, Mr. Gottschling was Chief Financial Officer of Sound Source Interactive, Inc, a publicly-held entertainment software company, from 1995 to 1999 and also served as President and Chief Operating Officer of Sound Source from 1997 to 1999.  Mr. Gottschling holds a Bachelor of Arts degree in Business Administration from Washington State University.

Alan D. Kraemer has served as the Company’s Chief Technology Officer since January 2005 and as the Executive Vice President, Technology and Business Development since June 2004. Prior to that, he served as the Company’s Vice President, Engineering from April 2000 to May 2004 and Director of Engineering from February 1994 to March 2000. In addition, Mr. Kraemer has served as President of Sierra Digital Productions, Inc., a compact disc production and recording company, since August 1989. Prior to that, Mr. Kraemer served as Senior Vice President of Engineering of De LaRue Printrak; Vice President of Engineering for AST Research; Vice President of Engineering with Point4 Data Corporation; and Director of Software Engineering of Northrop Electronics. Mr. Kraemer holds a Bachelor of Arts degree in Fine Arts from California State University, Fullerton.

Jeff Klaas has served as the Company’s Vice President, Global Sales since May 2008.  Prior to that, Mr. Klaas served as the Director of Global Retail Sales and European Business Development at Entropic Communications, a leading provider of silicon solutions that enable connected home entertainment systems, from December 2006 to May 2008. Mr. Klaas was, prior to that, general manager of business development at Viewsonic from March 2000 to May 2005. Mr. Klaas co-founded IAVI, a plasma TV and projector distribution company, which was named one of Entrepreneur Magazine’s Hot 100 Fastest Growing Companies in America in 1999. Mr. Klaas holds a Bachelor of Science degree in Business Administration from the University of Southern California.

Sarah Yang has served as the Company’s Vice President of Software Engineering since January 2006. Ms. Yang previously served as the Company’s Senior Director of Software Engineering from April 2004 to December 2005 and the Director of Software Engineering from April 2001 to March 2004. Ms. Yang joined the Company in February 2000 as senior DSP engineer. Prior to joining SRS, Ms. Yang was Senior Consultant at Computer Sciences Corporation and has held senior software engineering positions at Vicor Corporation and National Instruments. Ms. Yang holds a Bachelor of Science in Electrical Engineering from the University of Science and Technology of China, a Masters of Science degree in Physics from Texas A&M University and a Masters of Science degree in Electrical Engineering from The Institute of Acoustics in China.

Allen H. Gharapetian has served as the Company’s Vice President of Marketing since February 2008.  Prior to that, Mr. Gharapetian served as the Vice President of Marketing for Starport Systems, a RFID technology company, from April 2007 to February 2008.  From September 2006 to April 2007, Mr. Gharapetian was the Vice President of Global Marketing and Global Product Management at Targus Group International, the industry leader in notebook cases and mobile accessories.  Prior to its acquisition by Imation, he was the Vice President of Marketing and Product Development at Memorex Products Inc. from March 2003 until August 2006 where he was instrumental in raising Memorex’ brand positioning and expanding its product portfolio.  Mr. Gharapetian also spent several years at Yamaha Corporation of America where he last served as the General Manager of the Multimedia Products Division of Yamaha Electronics. Mr. Gharapetian holds Bachelors degrees in both Business Administration and Computer Sciences from the European University of Brussels, Belgium, and a Masters degree in Business Administration in International Business from the Thunderbird School of Global Management in Arizona.

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COMPENSATION OF EXECUTIVE OFFICERS

We are required by the SEC to discuss the compensation awarded to, earned by, or paid to (a) the Company’s principal executive officer; (b) the Company’s principal financial officer; (c) the Company’s three most highly compensated executive officers, other than the officers described in clauses (a) and (b), who were serving as executive officers at the end of Fiscal 2009 and whose total compensation exceeded $100,000, and (d) up to two additional persons for whom disclosure would have been provided under clause (c) but for the fact that the person was not serving as an executive officer at the end of Fiscal 2009.

Accordingly, the following sections disclose information regarding compensation awarded to, earned by, or paid to (a) Mr. Thomas C.K. Yuen, the Company’s Chief Executive Officer; (b) Ulrich Gottschling, the Company’s Chief Financial Officer;  (c) Alan D. Kraemer, Jeff Klaas and Sarah Yang, the three most highly-compensated executive officers other than the Chief Executive Officer and Chief Financial Officer, who were serving as executive officers at the end of Fiscal 2009 and whose total compensation exceeded $100,000. All of these officers are referred to in this Proxy Statement as the “Named Executive Officers.”

Compensation Discussion and Analysis

The Company’s compensation philosophy for all of its executive officers is based upon three primary themes: (a) offer base compensation sufficient to attract and retain high quality management talent; (b) provide variable compensation components (including short and long-term incentive awards) that are linked with the performance of the Company and that align executive remuneration with the interests of the stockholders; and (c) provide a benefits package which is competitive with similarly situated companies. Our compensation program is designed to reward teamwork and each employee’s contribution to the Company utilizing a pay for performance model.  In measuring the executive officers’ contributions to the Company, the Compensation Committee considers a number of factors, including the Company’s revenue growth, net income and other financial performance measurements, as well as the officers’ individual contribution to the Company’s success.

The Company’s Compensation Committee is empowered to review, and approve or recommend for the approval of the full Board of Directors, the annual compensation and compensation procedures for the executive officers of the Company. Our management provides recommendations to the Compensation Committee with respect to most compensation matters, including executive compensation, and we utilize the services of compensation consultants and independent third party salary survey data as reference points; however, the final decisions regarding the compensation of our executive officers are made by the Compensation Committee and ratified by the full Board of Directors.  The Compensation Committee and the Board of Directors meets at times without management present.

In 2009, the Compensation Committee retained Frederick W. Cook & Co., Inc., an independent compensation consultant, to review and provide an assessment of the Company’s compensation levels for executive officers and equity grant guidelines.  Frederick W. Cook compared our executive officer compensation and equity compensation guidelines with compensation information from 14 similarly situated, U.S.-based, publicly-held companies in the technology and entertainment industry. These companies were selected by the Compensation Committee based on several factors, including their industry or business focus, market capitalization, revenue and other financial performance measures.  The information provided by the compensation consultant was one of the factors considered by the Compensation Committee in setting the compensation levels for our executive officers for 2010.

Elements of Company’s Compensation Plan

In 2009, the components of the Company’s executive compensation program consisted of (a) base salary; (b) the opportunity to earn a profit-sharing awards and quarterly and annual bonus awards under the SRS Labs, Inc. Profit Sharing and Bonus Plan, as amended in June 2007 (the “Profit Sharing and Bonus Plan”); (c) awards under the Company’s 2006 Stock Incentive Plan; (d) individual merit bonuses; and (e) participation in the Company’s 2005 Change of Control Protection Plan. It is the Compensation Committee’s intention to set total executive compensation sufficiently high to attract and retain a strong motivated leadership team. The stock-based compensation is included in total compensation to align the executives’ financial incentives with the interests of our stockholders; however, the Company does not have an exact formula for allocating between cash and non-cash compensation. The components of compensation to the Chief Executive Officer and

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the other executive officers of the Company that were directly related to the Company’s performance were comprised of compensation to be earned under the Company’s Profit Sharing and Bonus Plan and performance-based bonus awards. The Compensation Committee also considers the Company’s performance as a primary factor in granting the number of stock options and annual base salary increases. Of course, the compensation benefits related to stock option grants are related to the Company’s performance as reflected in the price of the Common Stock underlying the option.

With respect to the compensation of the Chief Executive Officer, the Compensation Committee reviews and approves on an annual basis the corporate goals and objectives with respect to the compensation of the Chief Executive Officer and at least once a year evaluates the Chief Executive Officer’s performance in light of those established goals and objectives. Based upon that evaluation, the Compensation Committee then recommends to the full Board of Directors for determination the compensation of the Chief Executive Officer, including incentive pay. Among the most important goals and objectives that the Compensation Committee and the Board considered were the Company’s achievement of financial results (including revenue growth and net income), strategic management and planning, and management team building.

In Fiscal 2009, the Compensation Committee also used an individualized Management By Objective (“MBO”) program as a tool to evaluate and motivate the performance of the Company’s other executive officers. These individual MBOs, comprised of strategic and operating objectives, were developed in connection with an interactive process between executive management and each individual executive. The resulting MBOs were used as one of a number of guidelines that assisted the Chief Executive Officer in making recommendations to the Compensation Committee for their use in making decisions relating to several of the components of compensation discussed below, such as base salary increases, stock option awards under the Company’s equity incentive plans and merit bonus awards.

Additionally, the Vice President of Global Sales is eligible to receive quarterly variable compensation based upon achievement of quarterly revenue targets.  The quarterly revenue targets for 2009 ranged from $4.9 million to $6.1 million.  The quarterly revenue targets for 2010 range from $6.6 million to $8.2 million.  The target variable compensation at plan is $25,000 per quarter or $100,000 per year.  If the quarterly revenue achievement is less than 85% of the quarterly revenue target, then there is no payout under the plan.  If quarterly revenue achievement is greater than 100%, the Company will pay an increased amount, ranging from 110% to 200% of the $25,000 variable compensation target.

Additionally, the Chief Executive Officer is eligible to receive annual variable compensation based upon achievement of annual revenue and net income targets.  The target variable compensation at plan is $30,000 per year.  If the quarterly revenue and/or net income achievement is less than 85% of the quarterly revenue target, then there is no payout under the plan.  If quarterly revenue and/or net income achievement is greater than 100%, the Company will pay an increased amount, ranging from 110% to 200% of the $30,000 variable compensation target.

Base Salary.   Salaries are evaluated annually for all executive officers. Mr. Yuen’s base salary had remained unchanged since 2001 because he had declined previous offers from the Board of Directors to increase his base salary based upon his superior performance; but his salary was increased to $330,000 for 2010 at the request of the Compensation Committee. In determining the appropriate salary levels for the executive officers, the Compensation Committee considers, among other factors, the officer’s scope of responsibility, prior experience, past and current performance, the prevailing compensation levels for similar positions at comparable companies and, with respect to executive officers other than himself, the recommendation of the Chief Executive Officer.

Profit Sharing and Bonus Plan.   In 2009, all of the Company’s full-time employees, including the Chief Executive Officer and the other executive officers of the Company, were eligible to receive profit sharing awards and quarterly and annual bonus awards payments under the Profit Sharing and Bonus Plan. The Profit Sharing and Bonus Plan (a) recognizes that employees’ and management’s contribution to stockholders’ returns comes from maximizing earnings and the quality of those earnings, and (b) is designed to provide a performance-based incentive for all Company employees, including executive officers, and to attract and retain qualified personnel. Under the Profit Sharing and Bonus Plan, bonuses are paid based on a percentage of the excess of the Company’s actual net income for the applicable fiscal year over targeted net income goals for that year, and profit-sharing payments are tied to a percentage of net income. Bonus and profit-sharing payments under the Profit Sharing and Bonus Plan were based upon a percentage of the recipient’s annual salary, which was 12% among the Named Executive Officers. The targets for the Profit Sharing and Bonus Plan are established by the Board of Directors based on recommendations by the Compensation Committee. The targets for 2009 were annual revenues of $23 million for purposes of computing the 2009 profit sharing and bonus payments.  For 2010, the Board of Directors has established $30 million as the target for 2010 revenue, for purposes of computing the 2010 profit sharing and bonus payments.  The Profit Sharing and Bonus Plan is subject to change or termination by the Company at any time. For 2009, although the target annual net income was not attained, the Compensation Committee determined to fund the pool for the plan based on the Company’s overall superior performance.  Accordingly, a payment of $35,812 was made to the Chief Executive Officer and  an aggregate payment of $121,785 was made to the Company’s other executive officers and key employees under the Profit Sharing and Bonus Plan.

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Stock-Based Compensation.   We believe that long-term performance is achieved through an ownership culture that encourages long-term performance by our executive officers through the use of stock-based awards. We have established equity incentive plans to provide our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of stockholders. In 2009, the Compensation Committee awarded options to purchase an aggregate of 383,000 shares of Common Stock to the Company’s Named Executive Officers. The options granted vest over a four year period to provide a long-term incentive to such officers, provide them with an opportunity to obtain an ownership interest in the Company and further align their interests with the interests of our stockholders. The Company does not have a policy that requires Named Executive Officers to hold shares issued upon the exercise of vested options.  The number of stock options granted to each executive officer is determined by the Compensation Committee based upon the individual’s overall performance, with input from the Company’s Chief Executive Officer. To date, the Compensation Committee has viewed the options program as a necessary supplement to the base salary to provide a competitive compensation package, as well as a reward and an incentive for superior on-the-job performance.

Options are generally granted at the regularly scheduled meetings of our Board of Directors or Compensation Committee, which meetings are scheduled.  Except in unusual circumstances, we generally do not make option grants at other dates. The grant date is established when the Company’s Compensation Committee approves the grant and all key terms have been determined. The exercise price of each of our stock option grants is the market closing price on the grant date.

Performance-Based Merit Bonuses.   Based upon the overall performance of the Company and their individual and collective performance as an executive management team in 2009, Thomas C.K. Yuen, the Company’s Chief Executive Officer, earned a merit bonus in the amount of $28,078, and the Company’s other executive officers earned merit bonuses in the aggregate amount of $105,702. Any and all amounts awarded by the Compensation Committee to executive management as merit bonuses are performance based and no amounts are guaranteed.

Change in Control Protection Plan.   The Company adopted the SRS Labs, Inc. 2005 Change in Control Protection Plan in April 2005 to address retention concerns for certain key employees of the Company.  The plan was amended and restated in August 2009 (as amended and restated, the “Change in Control Plan”).  Certain employees of the Company and its subsidiaries selected by the Board of Directors are eligible to participate in the Change in Control Plan. The Change in Control Plan generally provides that if a participant’s employment is terminated without cause or if the participant resigns for good reason, as defined in the plan, during a two year period following a change in control (as defined in such plan), the participant will be entitled to receive a severance payment. The size of severance payment that would be due to a participant upon the occurrence of a covered termination ranges from one to two times the participant’s “base amount”, depending on the participant’s position with the Company. The “base amount” for a participant includes the participant’s base salary in effect immediately before the change in control plus the cash bonus and cash commissions paid to the participant by the Company during the last completed calendar year immediately before the year in which a change of control occurs.  The Change in Control Plan also provides that the Company will reimburse a participant for COBRA premiums he or she pays for a period of 18 months following a covered termination.

Under the Change in Control Plan, Thomas C.K. Yuen, the Company’s Chairman and Chief Executive Officer, would be entitled to two times his base amount, upon the occurrence of a covered termination within a two year period following a change in control. Ulrich Gottschling, the Company’s Chief Financial Officer, and Alan D. Kraemer, the Company’s Executive Vice President and Chief Technology Officer, would each be entitled to one and one-half times his base amount upon the occurrence of a covered termination within a two year period following a change in control; and Jeff Klaas, the Company’s Vice President, Global Sales, and Sarah Yang, the Company’s Vice President, Software Engineering, would each be entitled to one times his or her base amount upon the occurrence of a covered termination within a two year period following a change in control. Any participant, like Mr. Yuen, that has an employment agreement or severance agreement with the Company that provides for severance-related benefits will not be entitled to receive any benefits under the Change in Control Plan unless the participant waives any and all severance benefits under the employment or severance agreement within five business days after a covered termination. No severance payments were made under the Change in Control Plan in 2009.

Accounting and Tax Considerations

The Company measures all employee stock-based compensation awards using a fair-value method and records such expense in the consolidated financial statements over the requisite service period.

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We have structured our compensation program to comply with Internal Revenue Code Sections 162(m) and 409A. Under Section 162(m) of the Internal Revenue Code, a limitation was placed on tax deductions of any publicly-held corporation for individual compensation to certain executives of such corporation exceeding $1,000,000 in any taxable year, unless the compensation is performance-based. If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, then the benefits are taxable in the first year they are not subject to a substantial risk of forfeiture. In such case, the executive is subject to regular federal income tax, interest and an additional federal income tax of 20% of the benefit includible in income.

The Board plans to continue to monitor issues concerning the deductibility of executive compensation and will take appropriate action if and when it is warranted. Since corporate objectives may not always be consistent with the requirements for full deductibility, the Board is prepared, if it deems appropriate, to enter into compensation arrangements or pay compensation under which payments may not be deductible under Section 162(m); such deductibility will not be the sole factor used by the Board in ascertaining appropriate levels or modes of compensation. In 2009, since no executive officer of the Company was expected to earn compensation of $1,000,000 or more (as calculated under Section 162(m)), the Company did not take steps to avail itself of all potential deductions for executive officer compensation in excess of $1,000,000.

Summary Compensation Table

The following table provides certain information concerning the compensation earned for the years ended December 31, 2009, 2008 and 2007 by the Company’s Chief Executive Officer, Chief Financial Officer, each of the three other most highly compensated executive officers whose total compensation during Fiscal 2009 exceeded $100,000.

(1)                                  Amounts found in the Bonus Column of this Table are equal to amounts received under the Profit Sharing and Bonus Plan and performance based bonus(es) awarded by the Compensation Committee in each respective fiscal year.

(2)                                  The amounts reported above reflect the aggregate grant date fair value of these awards computed in accordance with FASB ASC Topic 718 “ Stock Compensation ,” which excludes the effect of estimated forfeitures. See Note 6 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 regarding assumptions underlying valuation of equity awards.

(3)                                  Consists of amounts received based on the percentage achievement of quarterly sales targets and goals.

(4)                                  Consists of contributions of $4,434, $4,197 and $4,368 by the Company for the benefit of the executive to the Company’s 401(k) plan for the fiscal year 2009, 2008 and 2007, respectively, and payment of $2,000 under the Company’s Patent Reward Program in each of 2009 and 2007.

(5)                                  Consists of contributions by the Company for the benefit of the executive to the Company’s 401(k) plan.

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(6)                                  Consists of contributions of $7,350, $6,900 and $6,750 by the Company for the benefit of the executive to the Company’s 401(k) plan and payment of $11,000, 3,000 and $2,000 under the Company’s Patent Reward Program for the fiscal year 2009, 2008 and 2007, respectively.

(7)                                  Consists of signing bonus of $30,000 and payment of $2,000 under the Company’s Employee Referral Bonus Program

(8)                                  Consists of contributions of $7,350, $6,900 and $6,750 by the Company for the benefit of the executive to the Company’s 401(k) plan for the fiscal year 2009, 2008 and 2007, respectively, and payment of $2,000 under the Company’s Employee Referral Bonus Program in 2009.

Employment Contracts and Termination of Employment and Change of Control Arrangements

Employment Contracts

Thomas C.K. Yuen.   The Company entered into an employment agreement with Mr. Yuen effective as of July 1, 1996. The agreement provided for a fixed base salary, with annual increases and performance bonuses at the discretion of the Board of Directors. The agreement provides for a base salary for Mr. Yuen of $175,000 per year commencing July 1, 1996 and $225,000 per year for the 12-month period commencing January 1, 1997; such base salary to be adjusted, thereafter, by the Board of Directors, but not to be reduced below the initial base salary provided in the agreement. Mr. Yuen’s employment agreement provides that he should devote at least 40% of his time (based on an average eight hour work day) to the business of the Company. Effective April 1, 2000, on the basis of Mr. Yuen’s commitment to devote substantially greater time to the business of the Company the Compensation Committee of the Board set Mr. Yuen’s annual salary at $300,000. Mr. Yuen is permitted to directly engage in other business activities provided such activities are not competitive with the Company. The employment agreement with Mr. Yuen could be terminated by the Company for cause, which is defined as (a) the failure to follow the reasonable instructions of the Board of Directors, (b) the material breach of any term of the employment agreement and failure to cure such breach within 10 days after written notice thereof from the Company, or (c) the misappropriation of assets of the Company or any subsidiary by Mr. Yuen resulting in a material loss to such entity. Mr. Yuen could terminate the employment agreement upon 60 days prior written notice.

The initial term of the employment agreement was two years. The agreement automatically renews for additional one-year periods unless prior notice of termination is given by either the Company or Mr. Yuen. Mr. Yuen’s employment agreement has been automatically renewed for each successive one-year period.

In the event the Company either terminates Mr. Yuen’s employment agreement at the end of the current term, or terminates such employment agreement during the current term without cause, Mr. Yuen is entitled to receive his salary and benefits for the remainder of the current term of his employment agreement plus an additional period of 12 months. During such period, Mr. Yuen is obligated to provide advisory services and may not compete with the Company. In addition, Mr. Yuen’s employment agreement provides for the 100% acceleration of vesting for outstanding stock options if Mr. Yuen is terminated or terminates his employment for certain enumerated reasons within 90 days before or one year after a change in control in the Company, as defined in the employment agreement.

Alan D. Kraemer.   The Company entered into an employment agreement with Mr. Kraemer effective as of July 1, 1996. Such agreement provides for a fixed base salary, with annual increases and performance bonuses at the discretion of the Board of Directors. The agreement provides for base salary of $65,000 per year commencing July 1, 1996. Thereafter, such base salary may be adjusted by the Board of Directors and/or Compensation Committee, but it may not be reduced below the initial base salary provided in the agreement. Mr. Kraemer’s employment agreement acknowledges that he serves as President of Sierra Digital and that he may continue to do so while employed by the Company. The employment agreement may be terminated by the Company for cause which is defined as (a) the failure to follow the reasonable instructions of the Board of Directors, (b) the material breach of any term of the employment agreement and failure to cure such breach within ten (10) days after written notice thereof from the Company, or (c) the misappropriation of assets of the Company or any subsidiary by Mr. Kraemer resulting in a material loss to such entity. The employment agreement may be terminated by Mr. Kraemer upon sixty (60) days prior written notice. The initial term of the employment agreement was from May 1, 1996 to April 30, 1999. The employment agreement automatically renews for additional one (1) year periods unless prior notice of termination is given by either the Company or the employee. The employment agreement has been automatically renewed for each successive renewal period. In the event that the Company either terminates the employment agreement at the end of the current term, or terminates the employment agreement during the current term without cause, Mr. Kraemer is entitled to receive his salary and benefits for the remainder of the current term of the employment agreement plus an additional period of 12 months. During such period, Mr. Kraemer is obligated to provide advisory services and may not compete with the Company. The employment agreement also generally provides Mr. Kraemer with compensation for the remainder of the current term plus an additional 12 months and certain other benefits and for the acceleration of the date of vesting for outstanding stock options if Mr. Kraemer is terminated or terminates his employment for certain enumerated reasons within 90 days before or one year after a change in control in the Company, as defined in the employment agreement.

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Change in Control Protection Plan

The Change in Control Plan was adopted by the Company to address retention concerns for certain key employees.  Employees of the Company and its subsidiaries, who are selected by the Company’s Board of Directors, are eligible to participate in the plan. The Change in Control Plan generally provides that if a participant’s employment with the Company is terminated without cause or if the participant resigns for good reason during a two year period following a change in control (through a merger, consolidation, sale of all or substantially all of the Company’s assets or otherwise), the participant will be entitled to receive a lump sum severance payment, which ranges from one to two times the participant’s “base amount”, or base salary in effect immediately before the change in control plus the cash bonus and cash commissions paid to the participant during the last completed calendar year immediately before the year in which a change of control occurs. The Change in Control Plan also provides that the Company will reimburse a participant for COBRA premiums he or she pays for a period of 18 months following a covered termination.

Under the Change in Control Plan, Thomas C.K. Yuen, the Company’s Chairman and Chief Executive Officer, would be entitled to two times his base amount, upon the occurrence of a covered termination within a two year period following a change in control. Ulrich Gottschling, the Company’s Chief Financial Officer, and Alan D. Kraemer, the Company’s Executive Vice President and Chief Technology Officer, would each be entitled to one and one-half times his base amount upon the occurrence of a covered termination within a two year period following a change in control; and Jeff Klaas, the Company’s Vice President, Global Sales, and Sarah Yang, the Company’s Vice President, Software Engineering, would each be entitled to one times his or her base amount upon the occurrence of a covered termination within a two year period following a change in control. If a triggering event under the Change in Control Plan had occurred on December 31, 2009, the last business day of Fiscal 2009, then the following Named Executive Officers would have been entitled to the following one time lump sum payments indicated: Mr. Yuen—$795,637; Mr. Gottschling—$457,110; Mr. Kraemer—$567,134; Mr. Klaas—$436,551; and Ms. Yang—$309,236. Any participant who has an employment agreement or severance agreement with the Company that provides for severance-related benefits will not be entitled to receive any benefits under the Change in Control Plan, unless the participant waives any and all severance benefits under the employment or severance agreement within five business days after a covered termination.

In addition to the agreements described above, certain of the Company’s stock option plans contain termination or change of control provisions which may automatically, or at the discretion of the Board of Directors, result in 100% vesting of all outstanding stock options.

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Grants of Plan-Based Awards

The following table sets forth certain information with respect to the options granted during or for the fiscal year ended December 31, 2009 to each of the Named Executive Officers. Each option is a ten year option granted under the 2006 Plan, and vests and becomes exercisable 25% on the first anniversary of the grant date and 6.25% quarterly thereafter.

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Outstanding Equity Awards Value at Fiscal Year-End

The following table includes certain information with respect to all unexercised options outstanding as of the fiscal year ended December 31, 2009 that were previously awarded to the Named Executive Officers. The number of options held at December 31, 2009 includes options granted under the 1996 Plan and the 2006 Plan.

(1)                                  Options vest and become exercisable 25% on the first anniversary of the grant date and 6.25% quarterly thereafter, with the exception of the 3/29/05 stock option grants which fully vested one year from the date of grant.

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Option Exercises and Stock Vested

The following table includes certain information with respect to the options exercised by the Named Executive Officers during the fiscal year ended December 31, 2009.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Board of Directors is comprised of Carol L. Miltner (Chair), David R. Dukes, Winston E. Hickman and Sam Yau.  No member of the Compensation Committee during 2009 has ever served as an officer or an employee of the Company or any of its subsidiaries. None of our executive officers served as a member of the board of directors or the compensation committee of any other company that has an executive officer serving as a member of the Company’s Board of Directors or its Compensation Committee.

Compensation Committee Report

We have reviewed and discussed with management the Compensation Discussion and Analysis to be included in the Proxy Statement on Schedule 14A for the Company’s 2010 Annual Meeting of Stockholders. Based on the reviews and discussions referred to above, we recommended to the Board of Directors that the Compensation Discussion and Analysis referred to above be included in such Proxy Statement and incorporated by reference into the Company’s annual report on Form 10-K for the year ended December 31, 2009.

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TRANSACTIONS WITH MANAGEMENT

AND OTHERS

The Company’s corporate headquarters are located in Santa Ana, California, in a 23,400 square foot facility consisting of office and warehouse space. The Company leases the facility from Daimler Commerce Partners, L.P. (“Daimler”), the general partner of which is Conifer Investments, Inc. The sole stockholders of Conifer are Thomas C.K. Yuen, the Company’s Chairman, Chief Executive Officer and President, and his spouse, Misako Yuen, as co-trustees of The Thomas Yuen Family Trust (the “Trust”). Mr. and Mrs. Yuen also serve as the executive officers of Conifer. Mr. and Mrs. Yuen, as co-trustees of the Trust, also beneficially own a significant amount of the outstanding shares of the Company’s Common Stock. Mr. Yuen is the Chairman of the Board, Chief Executive Officer and President of the Company. Pursuant to the Company’s lease agreement with Daimler, the Company leases all 23,400 square feet of space at the above-referenced facility. The lease has a term of three years, expiring in May 2011, with an option to renew for an additional three years. The Company paid Daimler rent of $238,680 during 2009. In the opinion of management and the Audit Committee, the terms of the above-described agreement are fair and reasonable and as favorable to the Company as those which could have been obtained from unrelated third parties at the time of their execution.

Pursuant to its written charter, the Audit Committee of the Board of Directors is responsible for reviewing and approving all related party transactions. The Audit Committee monitors and reviews potential conflict of interest situations involving a principal stockholder, a member of the Board of Directors or senior management.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and persons who beneficially own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of the Common Stock and other equity securities. Officers, directors and beneficial owners of more than 10% of the Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during Fiscal 2009, the Company’s officers, directors and beneficial owners of more than 10% of the Common Stock complied with all Section 16(a) filing requirements.

SUBMISSION OF STOCKHOLDER PROPOSALS

AND DIRECTOR NOMINATIONS FOR THE 2011 ANNUAL MEETING

The Company’s current Bylaws include (a) a provision setting forth certain procedures relating to the nomination of directors (the “Nomination Bylaw”) and (b) a provision setting forth certain procedures for properly bringing business before an annual meeting of the stockholders (the “Stockholder Proposal Bylaw”).

Nominations of Directors for the 2011 Annual Meeting

No person will be eligible for election as a director unless nominated in accordance with the provisions of the Nomination Bylaw. Nominations of persons for election to the Board of Directors may be made by (a) the Board of Directors or a committee appointed by the Board of Directors or (b) any stockholder who (i) is a stockholder of record at the time of giving the notice provided for in the Nomination Bylaw, (ii) will be entitled to vote for the election of directors at the Annual Meeting and (iii) complies with the notice procedures set forth in the Nomination Bylaw.

Nominations by stockholders must be made in written form to the Secretary of the Company. Under the Nomination Bylaw, to be timely for an annual meeting, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not more than 90 days nor less than 60 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of an annual meeting is changed by more than 30 days from such anniversary date, notice by the stockholder to be timely must be received by us not later than the close of business on the 10th day following the day on which public announcement of the date of the meeting is first made.

Therefore, in order to be timely for the 2011 Annual Meeting, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices at SRS Labs, Inc., 2909 Daimler Street, Santa Ana, California 92705, Attention: Corporate Secretary, not earlier than March 19, 2011 and not later than April 18, 2011. To be effective, the written notice must include (a) the name and address as they appear on our books, of the stockholder giving the notice and of the beneficial owner, if any, on whose behalf the nomination is made; (b) a representation that the stockholder giving the notice

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is a holder of record of our stock entitled to vote at the 2011 Annual Meeting and intends to appear in person or by proxy at the 2010 Annual Meeting to nominate the person or persons specified in the notice; (c) the class and number of shares of the Company owned beneficially and of record by the stockholder giving the notice and by the beneficial owner, if any, on whose behalf the nomination is made; (d) a description of all arrangements or understandings between or among any of (i) the stockholder giving the notice, (ii) the beneficial owner on whose behalf the notice is given, (iii) each nominee, and (iv) any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder giving the notice; (e) such other information regarding each nominee proposed by the stockholder giving the notice as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had the nominee been nominated, or intended to be nominated, by the Board; and (f) the signed consent of each nominee to serve as a director of the Company if so elected.

Stockholder Proposals for the 2011 Annual Meeting

Under the terms of the Stockholder Proposal Bylaw, to be properly brought before an annual meeting of stockholders, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, (c) otherwise properly brought before an annual meeting by a stockholder. For business (other than the nomination of directors, which is governed by the Nomination Bylaw) to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company.

To be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that if the annual meeting is not held within 30 days before or after such anniversary date, then for the notice by the stockholder to be timely it must be so received not later than the close of business on the 10th day following the date on which the notice of the meeting was mailed or such public disclosure was made, whichever occurs first. Therefore, in order to be timely for the 2011 Annual Meeting, a stockholder’s notice regarding a proposal must be delivered to or mailed and received at our principal executive offices not earlier than March 23, 2011 and not later than April 22, 2011.

To be effective, the written notice must include, as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Company’s books, of the stockholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, (c) the class and number of shares of the Company which are beneficially owned by the stockholder and by the beneficial owner, if any, on whose behalf the proposal is made, and (d) any material interest of the stockholder in such business and the beneficial owner, if any, on whose behalf the proposal is made.

Any stockholder wishing to bring business before the 2011 Annual Meeting, who would like the Company to consider the inclusion of such proposal in the Company’s proxy materials relating to the 2011 Annual Meeting under Rule 14a-8 under the Exchange Act, also must submit such proposal to the Company and such proposal must be mailed and received at our principal executive offices no later than January 7, 2011. However, if the date of the 2011 Annual Meeting is changed by more than 30 days from the first anniversary of the Annual Meeting, the deadline for submission of a stockholder proposal for inclusion in the Company’s proxy statement will be a reasonable time before the Company mails its proxy materials for the 2009 Annual Meeting, and the Company will disclose the deadline in a report filed with the SEC. You should direct any such stockholder proposals to the attention of the Secretary of the Company at our address set forth on the first page of this Proxy Statement.

With respect to any proposal that a stockholder of the Company presents at the annual meeting of stockholders to be held in the year 2011 that is not submitted for inclusion in the Company’s proxy materials pursuant to Rule 14a-8 under the Exchange Act, the proxy for such annual meeting of stockholders will confer discretionary voting authority to vote on such stockholder proposal to the extent permitted under Rule 14a-4 under the Exchange Act.

ANNUAL REPORT

You may obtain, without charge, a copy of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, including the financial statements and the financial statement schedules required to be filed with the SEC pursuant to rule 13a-1 of the Exchange Act. You may also obtain copies of exhibits to the Form 10-K, but we will charge a reasonable fee to stockholders requesting such exhibits. You should direct your request in writing to us at the address of the Company set forth on the first page of this Proxy Statement, attention: Ulrich Gottschling, Secretary.

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IMPORTANT NOTICE REGARDING THE AVAILABILITY OF
PROXY MATERIALS FOR THE 2010 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 21, 2010

This proxy statement and our annual report on Form 10-K for the year ended December 31, 2009 are also available at www.srslabs.com.   We encourage you to access and review all of the important information contained in the proxy materials before voting.

OTHER MATTERS

The Board of Directors does not intend to present any items of business other than those stated in the Notice of Annual Meeting of Stockholders. If other matters are properly brought before the meeting, the persons named in the accompanying proxy will vote the shares represented by it in accordance with their best judgment. Discretionary authority to vote on other matters is included in the proxy.

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Appendix A

SRS LABS, INC.

2006 Stock Incentive Plan

(as amended on April 8, 2010)

1.              Establishment, Purpose, and Types of Awards

SRS Labs, Inc. (the “Company”) has established this equity-based incentive compensation plan known as the “SRS Labs, Inc. 2006 Stock Incentive Plan” (hereinafter referred to as the “Plan”), in order to provide incentives and awards to select employees, directors, consultants, and advisors of the Company and its Affiliates.

The Plan permits the granting of the following types of awards (“Awards”), according to the Sections of the Plan listed here:

Section 6               Options

Section 7               Share Appreciation Rights

Section 8               Restricted Shares, Restricted Share Units, and Unrestricted Shares

Section 9               Deferred Share Units

Section 10             Performance Awards

The Plan is not intended to affect and shall not affect any stock options, equity-based compensation, or other benefits that the Company or its Affiliates may have provided, or may separately provide in the future pursuant to any agreement, plan, or program that is independent of this Plan.

2.              Defined Terms

Terms in the Plan that begin with an initial capital letter have the defined meaning set forth in Appendix A , unless defined elsewhere in this Plan or the context of their use clearly indicates a different meaning.

3.              Shares Subject to the Plan

Subject to the provisions of Section 13 of the Plan, the maximum number of Shares that the Company may issue for all Awards is 4,250,000 Shares.  For all Awards, the Shares issued pursuant to the Plan may be authorized but unissued Shares, or Shares that the Company has reacquired or otherwise holds in treasury or in a trust.

Shares that are subject to an Award that for any reason expires, is forfeited, is cancelled, or becomes unexercisable, and Shares that are for any other reason not paid or delivered under the Plan shall again, except to the extent prohibited by Applicable Law, be available for subsequent Awards under the Plan.  In addition, the Committee may make future Awards with respect to Shares that the Company retains from otherwise delivering pursuant to an Award either (i) as payment of the exercise price of an Award, or (ii) in order to satisfy the withholding or employment taxes due upon the grant, exercise, vesting or distribution of an Award.  Notwithstanding the foregoing, but subject to adjustments pursuant to Section 13 below, the number of Shares that are available for ISO Awards shall be determined, to the extent required under applicable tax laws, by reducing the number of Shares designated in the preceding paragraph by the number of Shares granted pursuant to Awards (whether or not Shares are issued pursuant to such Awards), provided that any Shares that are either issued or  purchased under the Plan and forfeited back to the Plan, or surrendered in payment of the Exercise Price for an Award shall be available for issuance pursuant to future ISO Awards.

4.              Administration

(a)            General .  The Committee shall administer the Plan in accordance with its terms, provided that the Board may act in lieu of the Committee on any matter.  The Committee shall hold meetings at such times and places as it may determine and shall make such rules and regulations for the conduct of its business as it deems advisable.  In the absence of a duly appointed Committee or if the Board otherwise chooses to act in lieu of the Committee, the Board shall function as the Committee for all purposes of the Plan.

A-1

(b)           Committee Composition .  The Board shall appoint the members of the Committee. If and to the extent permitted by Applicable Law, the Committee may authorize one or more Reporting Persons (or other officers) to make Awards to Eligible Persons who are not Reporting Persons (or other officers whom the Committee has specifically authorized to make Awards).  The Board may at any time appoint additional members to the Committee, remove and replace members of the Committee with or without Cause, and fill vacancies on the Committee however caused.

(c)           Powers of the Committee .  Subject to the provisions of the Plan, the Committee shall have the authority, in its sole discretion:

(i)            to determine Eligible Persons to whom Awards shall be granted from time to time and the number of Shares, units, or dollars to be covered by each Award;

(ii)           to determine, from time to time, the Fair Market Value of Shares;

(iii)          to determine, and to set forth in Award Agreements, the terms and conditions of all Awards, including any applicable exercise or purchase price, the installments and conditions under which an Award shall become vested (which may be based on performance), terminated, expired, cancelled, or replaced, and  the circumstances for vesting acceleration or waiver of forfeiture restrictions, and other restrictions and limitations;

(iv)          to approve the forms of Award Agreements and all other documents, notices and certificates in connection therewith which need not be identical either as to type of Award or among Participants;

(v)           to construe and interpret the terms of the Plan and any Award Agreement, to determine the meaning of their terms, and to prescribe, amend, and rescind rules and procedures relating to the Plan and its administration; and

(vi)          in order to fulfill the purposes of the Plan and without amending the Plan, to modify, to cancel, or to waive the Company’s rights with respect to any Awards, to adjust or to modify Award Agreements for changes in Applicable Law, and to recognize differences in foreign law, tax policies, or customs; and

(vii)         to make all other interpretations and to take all other actions that the Committee may consider necessary or advisable to administer the Plan or to effectuate its purposes.

Subject to Applicable Law and the restrictions set forth in the Plan, the Committee may delegate administrative functions to individuals who are Reporting Persons, officers, or Employees of the Company or its Affiliates.

(d)           Deference to Committee Determinations .  The Committee shall have the discretion to interpret or construe ambiguous, unclear, or implied (but omitted) terms in any fashion it deems to be appropriate in its sole discretion, and to make any findings of fact needed in the administration of the Plan or Award Agreements.  The Committee’s prior exercise of its discretionary authority shall not obligate it to exercise its authority in a like fashion thereafter.  The Committee’s interpretation and construction of any provision of the Plan, or of any Award or Award Agreement, shall be final, binding, and conclusive.  The validity of any such interpretation, construction, decision or finding of fact shall not be given de novo review if challenged in court, by arbitration, or in any other forum, and shall be upheld unless clearly made in bad faith or materially affected by fraud.

(e)           No Liability; Indemnification .  Neither the Board nor any Committee member, nor any Person acting at the direction of the Board or the Committee, shall be liable for any act, omission, interpretation, construction or determination made in good faith with respect to the Plan, any Award or any Award Agreement.  The Company and its Affiliates shall pay or reimburse any member of the Committee, as well as any Director, Employee, or Consultant who takes action on behalf of the Plan, for all expenses incurred with respect to the Plan, and to the full extent allowable under Applicable Law shall indemnify each and every one of them for any claims, liabilities, and costs (including reasonable attorney’s fees) arising out of their good faith performance of duties on behalf of  the Plan.  The Company and its Affiliates may, but shall not be required to, obtain liability insurance for this purpose.