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

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to
________________

Commission File No.: 0-11353

CIRCUIT RESEARCH LABS, INC.
(Exact name of small business issuer as specified in its charter)

Arizona 86-0344671
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)

1302 W. Drivers Way, Tempe, Arizona 85284
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (480) 403-8300

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

The number of shares outstanding of each class of our common equity as of
August 14, 2004 is as follows:
Class of Common Equity Number of Shares Common
---------------------- -----------------------
Stock, par value $.10 4,332,533

Circuit Research Labs, Inc.
Index to Form 10-QSB Filing
For the Quarter Ended June 30, 2004

Table of Contents

Page

PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . 3

ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . 3

Consolidated Condensed Balance Sheets -
June 30, 2004 (unaudited) and December 31, 2003 . . . . . . . 3

Consolidated Condensed Statements of Operations -
Three and Six Months ended June 30, 2004 and 2003
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 5

Consolidated Condensed Statements of Cash Flows -
Six Months ended June 30, 2004 and 2003
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 6

Notes to Consolidated Condensed Financial Statements . . . . 8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 16
ITEM 3. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . 29

PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 30
ITEM 1. LEGAL PROCEDINGS . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . 31
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 32

SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

PART I - FINANCIAL INFORMATION

CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS

June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS

CURRENT ASSETS:
Cash $166,822 $222,631
Accounts receivable, trade (net of allowance
for doubtful accounts of $33,361 at June 30,
2004 and at December 31, 2003) 681,230 866,451
Inventories 2,403,813 2,112,614
Other current assets 169,742 168,896
----------- -----------
Total current assets 3,421,607 3,370,592
----------- -----------

PROPERTY, PLANT AND EQUIPMENT, NET 575,690 569,183
----------- -----------
OTHER ASSETS:
Goodwill, net 7,476,008 7,476,008
Other 390,620 351,503
7,866,628 7,827,511
----------- -----------

TOTAL $11,863,925 $11,767,286
=========== ===========

See accompanying notes to consolidated condensed financial statements

(continued)

CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS

June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable $1,167,834 $1,103,452
Notes payable to shareholders 67,500 92,500
Notes payable 8,482,000 8,482,000
Current portion of long-term debt 1,086,295 1,340,709
Accrued salaries and benefits 474,630 535,017
Customer deposits 134,082 39,266
Other accrued expenses and liabilities 1,503,135 1,001,097
----------- -----------
Total current liabilities 12,915,476 12,594,041

LONG-TERM DEBT, LESS CURRENT PORTION 102,464 39,662
----------- -----------
Total Liabilities 13,017,940 12,663,703
----------- -----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $100 par value - authorized
500,000 shares, none issued
Common stock, $.10 par value - (authorized
20,000,000 shares, 4,272,533 issued as of
June 30, 2004 and 4,153,574 as of December
31, 2003) 417,254 415,358
Additional paid-in capital 5,567,498 5,555,932
Accumulated deficit (7,138,767) (6,837,707)
----------- -----------
Total stockholders' deficit (1,154,015) (866,417)
----------- -----------
TOTAL $11,863,925 $11,767,286
=========== ===========

See accompanying notes to consolidated condensed financial statements

CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)

Three Months Ended Six Months Ended
June 30, June 30,

2004 2003 2004 2003
---------- ---------- ---------- ----------

NET SALES $3,127,863 $3,390,417 $6,419,227 $6,165,992
COST OF GOODS SOLD 1,298,984 1,386,623 2,682,241 2,698,711
---------- ---------- ---------- ----------
Gross profit 1,828,879 2,003,794 3,736,986 3,467,281
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative 1,444,983 1,148,536 2,689,164 2,190,413
Research and development 326,344 333,577 701,520 712,772
Depreciation 35,808 65,247 70,724 148,220
---------- ---------- ---------- ----------
Total operating expenses 1,807,135 1,547,360 3,461,408 3,051,405
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 21,744 456,434 275,578 415,876
---------- ---------- ---------- ----------
OTHER EXPENSE
Sundry 9,265 15,273 18,875 3,880
Interest 276,191 280,980 557,763 578,954
---------- ---------- ---------- ----------
Total other expense 285,456 296,253 576,638 582,834
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX (263,712) 160,181 (301,060) (166,958)

PROVISION FOR INCOME TAXES 0 0 0 0
---------- ---------- ---------- ----------
NET INCOME (LOSS) ($263,712) $160,181 ($301,060) ($166,958)
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON
SHARE - BASIC AND DILUTED ($0.06) $0.04 ($0.07) ($0.04)

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and diluted 4,272,533 3,837,161 4,169,333 3,811,885

See accompanying notes to consolidated condensed financial statements.

CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)

Six Months Ended
June 30,
2004 2003
-------- --------
OPERATING ACTIVITIES:
Net Loss ($301,060) ($166,958)

Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 114,450 192,038
Stock compensation 13,462 50,479

Changes in assets and liabilities:
Accounts receivable 185,221 (523,437)
Inventories (291,199) 60,829
Prepaid expenses and other assets (39,963) (24,013)
Accounts payable and accrued expenses 600,849 732,710
-------- --------
Net cash provided by operating activities 281,760 321,648
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (120,957) (25,932)
-------- --------
Net cash used in investing activities (120,957) (25,932)
-------- --------
FINANCING ACTIVITIES:
Proceeds from shareholder advances 50,000 298,000
Repayment of shareholder advances (75,000) (168,000)
Principal payments on notes payable 0 (304,000)
Principal payments on long-term debt (191,612) (76,341)
-------- --------
Net cash used in financing activities (216,612) (250,341)
-------- --------

NET INCREASE (DECREASE) IN CASH (55,809) 45,375

CASH AT BEGINNING OF PERIOD 222,631 214,401
-------- --------
CASH AT END OF PERIOD $166,822 $259,776
======== ========

See accompanying notes to consolidated condensed financial statements.

(continued)

CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)

Six Month Ended
June 30,
2004 2003
-------- --------
Supplemental Disclosures of Cash Flow Information

Cash paid for interest $359,390 $117,229
======== ========

Supplemental schedule of non-cash investing and
financing activities:

Common stock issued for compensation $13,462 $50,479
======== ========

See accompanying notes to consolidated condensed financial statements.

CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)

The Consolidated Condensed Financial Statements included herein have been
prepared by Circuit Research Labs, Inc. (CRL or the Company), pursuant to
the rules and regulations of the Securities and Exchange Commission. The
Consolidated Condensed Balance Sheet as of June 30, 2004 and the Consolidated
Condensed Statements of Operations for the three and six months ended June 30,
2004 and 2003 and the Consolidated Condensed Statements of Cash Flows for the
six months ended June 30, 2004 and 2003 have been prepared without audit.

Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. You should read the
Consolidated Condensed Financial Statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2003.

In the opinion of management, the Consolidated Condensed Financial
Statements for the unaudited interim periods presented herein include all
adjustments, consisting only of normal recurring adjustments, necessary to
present a fair statement of the results of operations for such interim periods.
Net operating results for any interim period may not be comparable to the same
interim period in previous years, nor necessarily indicative of the results that
may be expected for the full year.

2. Significant Accounting Policies are as follows:

a. Net loss per share

In calculating net loss per share for the three and six months ended June
30, 2004, the effects of 3,015,000 shares relating to options to purchase common
stock were not used for computing diluted earnings per share because the results
would be anti-dilutive because the option exercise price was greater than the
market price of the common stock. For the three and six months ended June 30,
2003, the effects of 1,995,005 and 3,245,005 shares; respectively, relating to
options to purchase common stock and 1,395,690 shares relating to warrants were
not used for computing diluted earnings per share because the option price was
greater then the market price. Furthermore, the 1,395,690 shares related to the
Harman warrant expired May 31, 2003. Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share, establishes standards for computing and
presenting earnings per share. It also requires the dual presentation of basic
and diluted earnings per share on the face of the statement of operations.
Earnings per share is calculated as follows:

Three Months Ended Six Months Ended
June 30, June 30,

2004 2003 2004 2003
--------- --------- --------- --------

Numerator
Net Income (loss) ($263,712) $160,181 ($301,060) ($166,958)
========= ========= ========= =========
Denominator
Weighted average shares 4,172,533 3,837,161 4,169,333 3,811,885
========= ========= ========= =========

Basic and diluted income (loss) per share ($0.06) $0.04 ($0.07) ($0.04)

b. New accounting pronouncements

In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). The requirements of
this statement apply to issuers' classification and measurement of freestanding
financial instruments, including those that comprise more than one option or
forward contract. SFAS 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. Adoption of SFAS 150 did
not have any impact on the Company's results of operations or financial
position.

In January 2003, the FASB issued Interpretation No 46 (FIN 46),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a VIE and determine
when the assets, liabilities, non controlling interests and results of
operations of a VIE need to be included in a company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate the entity if the company's interest in the variable interest entity
is such that the company will absorb a majority of the variable interest
entity's expected losses and/or receive a majority of the entity's expected
residual returns, if they occur. The Company has no interests in a VIE and FIN
46 did not have an impact on the Company's results of operations or financial
position.

In December 2003, the FASB issued FIN 46R, Consolidation of Variable
Interest Entities, an Interpretation of ARB 51, replacing FIN 46. FIN 46R
provides guidance on which certain entities should be consolidated or the
interests in those entities should be disclosed by enterprises that do not
control them through majority voting interest. Under FIN 46R, entities are
required to be consolidated by enterprises that lack majority voting interest
when equity investors of those entities have insignificant capital at risk or
they lack voting rights, the obligation to absorb expected losses, or the right
to receive expected returns. Entities identified with these characteristics are
called VIEs and the interests that enterprises have in these entities are called
variable interests. These interests can derive from certain guarantees, leases,
loans or other arrangements that result in risks and rewards that are
disproportionate to the voting interests in the entities.

The provisions of FIN 46R must be applied for VIEs created after January
31, 2003 and for variable interests in entities commonly referred to as special
purpose entities. For all other VIEs, implementation is required by March 31,
2004. The Company has no interest in a VIE. Our adoption of FIN 46R did not have
an impact on our consolidated financial statements or disclosures.

3. INVENTORIES

Inventories consist of the following at June 30, 2004 and December 31, 2003:

June 30, December 31,
2004 2003
---------- ----------
(Unaudited)

Raw materials and supplies $2,554,008 $2,336,617
Work in process 860,891 792,334
Finished goods 530,308 525,057
---------- ----------
Total 3,945,207 3,654,008

Less obsolescence reserve (1,541,394) (1,541,394)
---------- ----------
Inventories, net $2,403,813 $2,112,614
========== ==========

4. LONG-TERM DEBT

Long term-debt at June 30, 2004 and December 31, 2003 consisted of the
following:
June 30, December 31,
2004 2003
--------- ---------
(Unaudited)

Note to stockholder $178,905 $178,905
Avocet Instruments, Inc. 27,367 32,824
Dialog4 Engineering GmbH
(see also Note 6) 597,055 597,055
Solectron GmbH 368,453 504,271
Employee Note 0 4,250
Accounts payable converted to debt 16,979 63,066
--------- ---------
Total long-term debt 1,188,759 1,380,371
Less current portion 1,086,295 1,340,709
--------- ---------
Total long-term debt,
less current portion $102,464 $39,662
========= =========

In connection with its acquisition of the assets of Orban in 2000, the
Company issued $205,000 in long-term debt to a stockholder in consideration for
his role in such acquisition. The note bears interest at 7.5 percent per annum,
with principal and interest due monthly beginning August 1, 2000 for four years.
Based on a verbal agreement with the note holder, the Company made payments in
2001 sufficient for interest and some principal. On November 12, 2001, the
Company and the stockholder agreed to defer the payments to January 2002 with
interest accruing at the rate of 7.5% per annum. As of June 30, 2004, the
Company has made partial payments on the accrued interest, and the outstanding
principal balance of this debt was $178,905, plus accrued interest of $1,746.
The Company signed a new promissory note to replace the original note on August
3, 2004 for $180,000 payable on or before July 1, 2007, with interest only
payments to be made monthly, in arrears at the rate of 10% per annum commencing
August 1, 2004. In the event an interest payment is not received before the 16th
of the month the interest rate will increase to a rate of 12% per annum form the
date of delinquency until the accrued interest is brought current.

On May 31, 2001, CRL acquired the assets of Avocet Instruments, Inc. for
$82,980 plus other costs of $3,350. The remaining unpaid purchase price is being
paid in monthly installments of $1,200, including interest at the rate of five
percent per annum through June 30, 2006. As of June 30, 2004, $27,367 is the
balance of the note.

In the fourth quarter of 2001, the Company converted various trade
payables into notes payable and long-term debt totaling $179,903. Accounts
payable converted to notes payable at June 30, 2004 was 16,979.

The Company owes Dialog4 approximately $597,000, which is payable $37,500
monthly plus interest, for the purchase of the Dialog4 assets, and the Company
needs to register the 1,250,000 shares of our common stock issued to Dialog4 for
the purchase of the assets. The Company has not been making payments since
August 2002 due to disputes with Dialog4 and with Solectron and other vendors to
Dialog4 that have claims against Dialog4 that pre-date our acquisition of
Dialog4's assets, but for which we may have liability under German Law. The
Company made an unsuccessful effort to negotiate with the Dialog4's creditors to
assume some of Dialog4's liabilities in lieu of making payments directly to
Dialog4. Dialog4 has since given us notice of default for non- payment and has
accelerated all amounts due. On February 14, 2003, Dialog4 demanded the Company
register the 1,250,000 shares issued to Dialog4. On April 29, 2003, the Company
and Dialog4 entered formal Arbitral proceedings. We are currently in arbitration
and there is no assurance that the Company can achieve a satisfactory settlement
with Dialog4 (see Note 7).

On August 9, 2002, the Company agreed to purchase all existing inventory
of parts related to its Sountainer product from Solectron GmbH for a total price
of $829,328, payable in 24 equal monthly installments including interest.
Solectron had purchased the inventory pursuant to an agreement with Dialog4
approximately two years prior to the Company's purchase of the assets of
Dialog4. The price was equal to the amount paid by Solectron for the inventory,
which the Company expects to realize from future sales of that inventory. The
agreement settled a dispute between the Company and Solectron in which Solectron
claimed the Company became liable for the obligation of Dialog4 to purchase the
inventory when the Company acquired the assets of Dialog4. The Company maintains
it did not undertake the obligation of Dialog4, but to settle the dispute,
agreed to purchase the inventory, which it will use in the manufacture of
Sountainer products. On January 20, 2004, we renegotiated the terms and agreed
to pay monthly installments of principal and interest in the amount of $25,000.
The final installment will be due October 15, 2005 in the amount of $15,681. We
owed Solectron $368,453 as of

June 30, 2004 and are current under the existing payment plan. As of June 30,
2004, the Company has cumulatively paid Solectron $350,029 in principal and
$64,194 in interest. Mr. Brentlinger, President and CEO of the Company has also
signed a personal guarantee under the revised Settlement Agreement. The Company
further agreed to indemnify Mr. Brentlinger should he be required to make any
payment under this guarantee. An amount of $233,000 is reported in other assets
pending delivery of that amount of inventory by Solectron.

5. NOTES PAYABLE

Payable to others

On May 31, 2000, our wholly owned subsidiary, CRL Systems, Inc., acquired
the assets of Orban, Inc., now known as Harman Acquisition Corp. (HAC) a wholly
owned subsidiary of Harman International Industries, Inc. The purchase price
was $10.5 million, of which $2 million was paid in cash and the balance of which
was paid by means of a combination of short-term and long- term promissory notes
that we issued to Harman. On October 1, 2001, we entered into an amendment
agreement with Harman under which both the long-term and the short-term notes
were converted to demand notes payable on the demand of Harman or, if no demand
is sooner made, on the dates and in the amounts specified in the amended
agreement. At June 30, 2004, $8,482,000 is outstanding, and the notes bear
interest at 12% per annum.

Management for some time has been negotiating with Harman with respect to
restructuring the existing debt of the Company to Harman. If such a
restructuring occurs under the terms presently being discussed, the Company will
need to make a one time principal payment to Harman on or before August 30, 2004
of $1,000,000, following which, the interest rate on the unpaid balances will
be reduced to 6% per annum retroactive to April 1, 2003, reducing the unpaid
interest balance as of June 30, 2004 from $908,450 to $272,300, which would be
added to the principal. The total principal amount due after payment of the
$1,000,000 and reduction of unpaid interest will equal $7,754,300.

Harman then would agree to convert $2,104,000 of the debt to 2,104,000
shares of common stock. Thereafter, one officer or nominee of the Company would
purchase those shares form Harman upon terms to be agreed upon.

Harman would also exchange another $2,400,000 of the existing unpaid
balance for CRLI common stock such that Harman will own 19% of the then
outstanding shares of CRLI common stock on a fully-diluted basis at the
completion of the transaction.

The remaining unpaid balance of $3,250,300 would be evidenced by a new
note that 1) renews and extends (but does not extinguish) the indebtedness
owing to Harman and 2) reduces the interest rate equal to 6% payable monthly in
arrears. The debt would be secured on the same terms. Mandatory principal
payments would be made as follows and as otherwise required by definitive
agreements referred to below:

Applicable anniversary of restructuring Payment
--------------------------------------- --------
First $400,000
Second $450,000
Third $450,000
Fourth $500,000
Fifth Balance

No agreement has yet been entered into with Harman, and if no agreement is
reached, the principal balance of $8,482,000 plus interest at the rate of 12%
per annum will continue to be payable on demand. There is no assurance that the
Company can reach a final agreement with Harman for restructuring of the debt,
nor that the agreement, if entered into, will contain the same terms as those
presently being discussed.

As of June 30, 2004, we are in arrears for interest installments on the
Harman obligation in an aggregate amount of $908,450 (at a rate of 12% per
annum).

Payable to stockholders

On January 23, 2003, Jayson Russell Brentlinger, the father of the
Company's president, Charles Jayson Brentlinger, loaned the Company $100,000 for
its short term working capital needs. On May 9, 2003, the loan was paid in full.
To induce Jayson Russell Brentlinger to make the loan, the Company issued
options to him to purchase 1,250,000 shares of common stock of the Company for a
purchase price of $0.55 per share, the market price of the shares on the date
the option was issued. Jayson Russell Brentlinger may exercise the option at any
time prior to January 23, 2006. As of June 30, 2004, the options holder has not
exercised any of the options.

On February 20, 2003, Robert Orban, the Company's Vice President and Chief
Engineer, loaned the Company $68,000 for short term working capital needs. The
loan was paid in full on May 20, 2003. To induce Mr. Orban to make the loan, the
Company gave him a choice to receive options to purchase 68,000 shares of common
stock or to receive 1 (one) share of common stock per dollar loaned. As of June
30, 2004, Mr. Orban has not made a decision under his right to elect.

On May 19, 2003, Phillip T Zeni, the Company's Executive Vice President
and Chief Operating Officer, loaned the Company $100,000 to be applied to the
Harman debt. The loan was due August 19, 2003, with interest at a rate of 16
percent per annum. To induce Mr. Zeni to make the loan, the Company granted 2
(two) shares of common stock per dollar loaned. The Company will also issue
options to Mr. Zeni to purchase 200,000 shares of common stock of the Company
for a purchase price of $0.45 per share. These options will be issued up to one
year after the maturity date of the note, or when and if a private placement is
offered to raise the $1,000,000 to satisfy the terms of the proposed Harman debt
restructure, whichever last occurs. The Company has repaid the entire loan to
Mr. Zeni.

Two stockholders loaned the Company $10,000 and $20,000, pursuant to one
year notes accruing interest at rate of 9% per annum. Both notes where due and
payable with interest in June 2004. The proceeds from these notes were used to
reduce the accrued interest to Harman. The two shareholders have verbally agreed
to extend the loans and the Company will continue to accrue interest under the
loans.

On May 25, 2004, Robert McMartin, the Company's Vice President and Chief
Financial Officer, loaned the Company $50,000 to be applied to reduce the
accrued interest to Harman. The loan is due August 25, 2004, with interest at a
rate of 16 percent per annum. To induce Mr. McMartin to make the loan, the
Company promised 2 (two) shares of common stock per dollar loaned. The Company
will also issue options to Mr. McMartin to purchase 100,000 shares of common
stock of the Company for a purchase price of $0.45 per share. These options will
be issued up to one year after the maturity date of the note, or when and if a
private placement is offered to raise the $1,000,000 in connection with the
Harman debt restructure, which ever occurs last.

Interest expense on all stockholder loans for the three and six months
ended June, 2004 was $2,561 and $4,426, respectively.

6. ACQUISITION OF DIALOG4 ASSETS

On January 18, 2002, the Company acquired the assets of Dialog4 System
Engineering GmbH (Dialog4). Dialog4, a German corporation based in
Ludwigsburg, Germany, is a worldwide leader in ISO/MPEG, audio, ISDN, satellite
transmission, networking and storage. Dialog4 has been designing and
manufacturing equipment for the codec market for over ten years. Its products,
available in Europe since 1993, include the MusicTaxi codec for encoding and
decoding audio and data over TCP/IP on the Internet, ISDN and satellite, whose
technology is to be considered state of the art at that time.

The Company purchased the assets of Dialog4 pursuant to an Asset Sale and
Purchase Agreement for $2 million, comprised of 1,250,000 shares of restricted
CRL common stock, valued at $1.00 per share, and $750,000 obligation (see note
4).

7. CONTINGENCIES AND LITIGATION

Dialog4

We purchased assets January 18, 2002 from Dialog4, System Engineering
GmbH. We and Dialog4 subsequently each notified the other of alleged defaults
arising from that transaction. On April 29, 2003, the Company was notified that
Dialog4 filed a demand for arbitration in Germany. On June 30, 2003, we gave
notice of various claims pertaining the representations and warranties made by
Dialog4 in the Asset Sale and Purchase Agreement. The Company then filed a
formal statement of defense along with counterclaims against Dialog4 on August
25, 2003, within the time limits as by the Arbiter. Dailog4 filed its response
on October 16, 2003. The Company submitted a response on December 1, 2003.
Dialog4 submitted a further response on January 12, 2004, and amended its
original demand for arbitration with additional claims. On February 17, 2004,
the Company filed a response. On April 28, 2004, an evidentiary hearing was held
in Stuttgart, Germany and both sides presented evidence and testified before the
Arbiter. Each side then submitted a post brief on July 5, 2004, after which the
Arbiter indicated that he may rule in late August or early September. Although
the Company believes that it has a strong position, it is not possible to
predict with certainty how the Arbiter may rule.

Formosa International Systems Co., Inc.

cash portion of the rent, but refused to pay the stock portion until the owner
vacated the Building so the Company could use all of the space it was renting.
The owner refused to vacate. In addition, the owner requested the Company to
execute a subordination agreement with its lender on terms the Company found
unacceptable and the Company refused to execute it without modifications. The
owner then locked out the Company for nonpayment of the stock portion of the
rent on November 10, 2003. The Company immediately sought and obtained a
Temporary Restraining Order (TRO) from the Superior Court of Maricopa County,
Arizona requiring the owner to allow the Company continued use of the Building,
and the Company moved back into the Building that day.

The Company declared the lockout to be a default under the lease and
vacated the Building in late November 2003, entering into the present lease for
a building located at 1302 West Drivers Way, Tempe, Arizona. The Company
thereafter amended its complaint in the Superior Court alleging breach of lease
and constructive eviction, seeking from the owner of the Building its actual
damages, which it alleges to be at least $100,000. The owner of the Building
has counterclaimed for breach of lease, claiming damages of $177,500, and for
the allegedly wrongful conduct of the Company in refusing to execute the
subordination agreement requested by the owner, claiming unspecified damages.
The Company has denied the allegations of the counterclaim and the matter is
pending.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion of our financial condition and results of
operations should be read together with the financial statements and the
accompanying notes included elsewhere in this report. This discussion contains
statements about future events, expectations, risks and uncertainties that
constitute forward- looking statements, as do discussions elsewhere in this
report. Forward-looking statements are based on management's beliefs,
assumptions and expectations of our future economic performance, taking into
account the information currently available to management. These statements are
not statements of historical fact. Forward-looking statements involve risks and
uncertainties that may cause actual results, performance or financial condition
to differ materially from the expectations of future results, performance or
financial condition we express or imply in any forward-looking statements. The
words believe, may, will, should, anticipate, estimate, expect, intend,
objective, seek, strive or similar words, or the negative of these words,
identify forward-looking statements. Our actual results may differ materially
from those anticipated in those forward-looking statements as a result of
certain factors, including, but not limited to, those described below under this
Item 2, Management's Discussion and Analysis or Plan of Operation Risk Factors.
We qualify any forward-looking statements entirely by these cautionary factors.

Recent Developments

Harman Debt

Management for some time has been negotiating with Harman with respect to
restructuring the existing debt of the Company to Harman. If such a
restructuring occurs under the terms presently being discussed, the Company will
need to make a principal payment to Harman on or before August 30, 2004 of
$1,000,000, following which the interest rate on the unpaid balance will be
reduced to 6% per annum retroactive to April 1, 2003, reducing the unpaid
interest balance as of June 30, 2004 from $908,450 to $272,300, which would be
added to the principal. The total principal amount due after payment of the
$1,000,000 and reduction of unpaid interest will equal $7,754,300. Further
aspects of the potential debt restructuring are described above in Note 5 of
Notes to Consolidated Condensed Financial Statements.

Dialog4

As discussed above more fully in Note 5 of the Notes to the Consolidated
Condensed Financial Statements, we owe Dialog4 approximately $597,000, in
connection with our purchase of the Dialog4 assets, and we may need to register
the 1,250,000 shares issued to Dialog4 for the purchase of the assets. The
Company has not been making payments since August 2002 due to disputes with
Solectron and other companies that have claims against Dialog4 that pre-date our
acquisition of Dialog4's assets, but for which we may have liability under
German law.

On April 29, 2003, Dialog4 filed a demand for arbitration in Germany. On
June 30, 2003, we gave notice of various defaults pertaining the Dialog4
representations and warranties in the Asset Sale

and Purchase Agreement. On April 28, 2004, an evidentiary hearing was held in
Stuttgart, Germany and both sides presented evidence and testified before the
Arbiter. Each side then submitted a post brief on July 5, 2004, after which the
Arbiter indicated he may rule in late August or early September.

If we do not prevail in the arbitration, we will need to satisfy or settle
the demands of Dialog4 for payment under the original Asset Sale and Purchase
Agreement. The Company believes it has defenses and claims against Dialog4
arising from the asset sale. The acceleration of indebtedness by Dialog4
constitutes a default under the existing credit agreements between the Company
and Harman International, Inc. and would continue to constitute a default even
if our proposal to Harman relating to the restructuring of the $8.5 million in
notes that we currently owe Harman.

We are still in the process of integrating the operations of our most
recently acquired operations. Once this integration is complete, we expect to
begin to benefit from cost savings produced by combined research and
development, marketing, sales and administration, manufacturing efficiencies and
cross-selling opportunities. Our acquisition of the Dialog4 product line has
led to the establishment of our new Orban Europe division offices in
Ludwigsburg, Germany. We continue to work through the challenge of integrating
Dialog4 as well as the challenge of overcoming obstacles produced as a result of
different corporate cultures, a difficult legal system and different accounting
and reporting regulations. We will also face new risks arising from foreign
currency fluctuations.

Solectron

On August 9, 2002, the Company agreed to purchase all existing inventory
of parts related to its Sountainer product from Solectron GmbH for a total price
of $829,328, payable in 24 equal monthly installments including interest.
Solectron had purchased the inventory pursuant to an agreement with Dialog4
approximately two years prior to the purchase of the assets of Dialog4 by the
Company. The price was equal to the amount paid by Solectron for the inventory,
which the Company expects to realize from future sales of that inventory. The
agreement settled a dispute between the Company and Solectron in which Solectron
claimed the Company became liable for the obligation of Dialog4 to purchase the
inventory when the Company acquired the assets of Dialog4. On January 20, 2004
we renegotiated the terms and agreed to pay monthly installments of principal
and interest in the amount of $25,000. The final installment will be due October
15, 2005 in the amount of $15,681. We owed Solectron $368,453 as of June 30,
2004, and are current under the existing payment plan. As a result of the new
payment terms, the Company was able to reclassify $234,139 as non current
maturities of long term debt in January 2004. An amount of $233,000 is reported
in our balance sheet in other assets pending delivery of that amount of
inventory by Solectron.

Overview

The events of September 11, 2001, had a significant impact on the market
for audio processing equipment. We experienced a reduction in orders for new
audio equipment from many radio and television stations. We believe the
reduction was due in part to the decrease in advertising revenue realized by
these stations. The market for audio processing equipment has been slowly
showing increased demand throughout 2003 and the first half of 2004, effectively
beginning to reverse the trend caused by September 11, 2001.

We have reduced our net loss from $2,135,039 in 2002 to $384,877 in 2003
and $301,060 during the first six months of 2004. Despite this encouraging
trend, our previous financial results have strained our liquidity, and we have
for some time trying to renegotiate our $8.5 million debt owed to Harman. Under
the terms of our debt agreement with Harman as now in effect, Harman can demand
at any time that we immediately pay in full the outstanding balance of our debt.
Should this happen, we would immediately be forced to file for protection under
Chapter 11 of the United States Bankruptcy Code. Our inability to pay the $8.5
million in principal and $900,000 in accrued interest to Harman, should payment
be demanded, our difficulties in meeting our financing needs and our negative
working capital position have resulted in our independent public accountants
adding a going concern emphasis paragraph to their reports on our financial
statements by including a statement that such factors raise substantial doubt
about our ability to continue as a going concern.

In addition to our efforts to reduce costs and increase sales, we continue
to seek sources of long-term financing. However, the inclusion of a going
concern emphasis paragraph by our independent accountants generally makes it
significantly more difficult to obtain trade credit or additional capital
through public or private debt or equity financings. We cannot offer any
assurances that we will be able to attract additional capital or that additional
financing, if obtained, will be sufficient to meet our current obligations. If
we cannot meet our current obligations, our ability to continue as a going
concern will be jeopardized.

Results of Operations

The following table sets forth for the periods indicated certain summary
operating results:

Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------

Revenues:
Net sales $3,127,863 $3,390,417 $6,419,227 $6,165,992
Other expense 9,265 15,273 18,875 3,880
---------- ---------- ---------- ----------
Total revenues $3,118,598 $3,375,144 $6,400,352 $6,162,112
========== ========== ========== ==========
Gross profit on net sales $1,828,879 $2,003,794 $3,736,986 $3,467,281
Gross profit margin 58% 59% 58% 56%
Net cash provided by (used in)
operating activities ($39,284) $450,047 $281,760 $321,648
Net cash used in investing activities $63,241 $12,208 $120,957 $25,932
Net cash used in financing activities $61,395 $362,358 $216,612 $250,341
Net income (loss) ($263,712) $160,181 ($301,060) ($166,958)
Net income (loss) as a percent of net sales (8%) 5% (5%) (3%)
Income (loss) per share - basic and diluted ($0.06) $0.04 ($0.07) ($0.04)

THREE AND SIX MONTHS ENDED JUNE 30, 2004
COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2003

Net Sales. Net sales during the three and six months ended June 30, 2004
were $3.1 million and $6.4 million, respectively, compared to $3.4 million and
$6.2 million during the comparable periods in 2003 reflecting a decrease of 9%
and an increase 3%, respectively. The 9% decrease for the three months ended
June 30, 2004 compared to the same period in 2003 was primarily attributed to
the introduction in April 2004 of two new successor products, the Optimod 2300
and the Optimod 8300. The Optimod 2300 replaces the Optimod 2200 and the Optimod
8300 replaces the industry Optimod 8200 which the Company considered to be the
industry standard. Management believes that customers delayed their orders
because they were waiting for availability and release of the new models. The
3% increase in net sales for the six months ended was primarily attributable to
an increase in overall demand for our products. Our Orban division reported net
sales for the three and six months ended June 30, 2004 of $2.7 million and $5.7
million, respectively, compared to $2.9 million and $5.6 million for the same
periods in 2003. Our CRL division reported net sales for the three and six
months ended June 30, 2004 of $80,000 and $226,000, respectively, compared to
$198,000 and $261,000 for the same periods in 2003, representing a decrease of
60% and 13%, respectively. This overall decrease was in part the result of our
facilities move on December 12, 2002 and in part due to decreased demand for our
CRL line of products. The Company moved its corporate offices and manufacturing
to a new facility after the sale of its Tempe building. Net sales for Orban
Europe during the three and six months ended June 30, 2004 were $309,000 and
$471,000, respectively, as compared to $190,000 and $262,000 for the same
periods in 2003, reflecting increases of 63% and 80%. The change was primarily a
result from our inability to ship product from our German location during the
three and six months ended June 30, 2003 due to the change in suppliers for its
Codec products, which was reflected by the corresponding periods in 2004.

Gross Profit. Gross profit for the three and six months ended June 30,
2004 was 58%, compared to 59% and 56% for the same periods in 2003. The
decrease of 1% and increase of 2% respectively in gross profit is primarily due
to the variable components of production costs associated with production runs
in the San Leandro facility effectively increasing and reducing the indirect
costs associated with set up and labor.

Selling, General and Administrative. Selling, general and administrative
expenses (SG&A) for the three and six months ended June 30, 2004 were
$1,445,000 and $2,689,000, respectively, representing an increase of 26% and
23%, respectively, compared to $1,149,000 and $2,190,000 reported the same
periods during 2003. As a percentage of net revenue, SG&A increased from 34%
for the three months ended June 30, 2003 to 42% for the same period in 2004.
SG&A as a percentage of net revenue increased from 36% for the six months ended
June 30, 2003 to 42% for the period in 2004. The increase in SG&A expense is due
in part to the variable component of SG&A relating to our domestic and
international sales and marketing expenses coupled with an increase in
attorney's fees associated with the Dialog4 arbitration. The company has
increased its marketing staff as compared to the prior year.

Research and Development. Research and development expense during the
three and six months ended June 30, 2004 were $326,000 and $702,000
respectively, compared to $334,000 and $713,000 during the comparable periods
for 2003, respectively, reflecting a decrease of 1% and of 2%. The overall
decrease is due to a decrease in personnel.

Other Expense. Other expense, net for the three and six months ended
June 30, 2004 was $285,000 and $577,000, respectively, of which $254,000 and
$509,000 respectively, represents interest to Harman in connection with the
seller carry-back loan that financed a portion of our purchase of the Orban
assets in 2000. Other expense, net for the three and six months ended June 30,
2003 was $296,000

and $583,000, respectively, of which $253,000 and $508,000 respectively,
represented interest to Harman. Interest expense during the three and six
months ended June 30, 2004 was $276,000 and $558,000, respectively compared to
$281,000 and $579,000 for the same periods in 2003, respectively, reflecting a
decrease of 2% and 4%, respectively. The decrease for the three and six months
ended is due to the reduction short-term loans to the company

Net Loss. Net loss for the three and six months ended June 30, 2004 was
$264,000 and $301,000, respectively, compared to net income of $160,000 and net
loss of $167,000 for the same periods in 2003.

LIQUIDITY AND CAPITAL RESOURCES

We had negative net working capital of approximately $9.5 million at June
30, 2004, and the ratio of current assets to current liabilities was .26 to 1.
At June 30, 2003, we had net negative working capital of approximately $8.9
million and a current ratio of .30 to 1. The decrease in working capital is an
increase in accrued interest.

The negative working capital primarily resulted from the conversion in
2001 to demand notes of the $3.5 million short-term note and the $5 million
long-term notes payable to Harman.

Our substantial obligation to Harman may have important consequences for
us, including the following:

* Our ability to continue as a going concern will depend in part on
whether Harman demands payment on the $8.5 million debt, or any portion
thereof;

* A significant portion of our cash flow from operations will be
dedicated to servicing our debt obligations, including interest
payments, and will not be available for other business purposes;

* The terms and conditions of our indebtedness limit our flexibility in
planning for and reacting to changes in our business, and in making
strategic acquisitions;

* Our ability to obtain additional financing in the future for working
capital, capital expenditures and other purposes may be substantially
impaired; and

* Our substantial leverage may make us more vulnerable to economic
downturns and competitive pressures.

Our ability to meet our debt service obligations and reduce our total
indebtedness to Harman depends in part on our future operating performance. Our
future operating performance will depend on our ability to expand our business
operations by growing our core audio processing business, expanding our product
offerings and penetrating new and emerging markets, which we anticipate will
require additional financing. In addition, our future operating performance
will depend on economic, competitive, regulatory and other factors affecting our
business that are largely beyond our control. If we are unable to expand our
business operations as planned, we may not be able to service our outstanding
indebtedness to Harman.

In addition to our efforts to reduce costs and increase sales, we are
currently seeking sources of long-term financing. However, the inclusion of a
going concern emphasis paragraph by our independent accountants generally makes
it significantly more difficult to obtain trade credit or additional capital

through public or private debt or equity financings. Although we have engaged a
nationally recognized investment banker to advise and assist us in capital
raising efforts. We cannot offer any assurances that we will be able to attract
additional capital or that additional financing, if obtained, will be sufficient
to meet our current obligations. If we cannot meet our current obligations, our
ability to continue as a going concern will be jeopardized.

As noted above and discussed in detail in Note 5 to Consolidated Condensed
Financial Statements included elsewhere herein, management for some time has
been negotiating with Harman with respect to restructure the existing debt of
the Company to Harman. If such a restructuring occurs under the terms presently
being discussed, the Company will need to make a one time principal payment on
or before August 30, 2004 of $1,000,000, following which, the interest rate on
the unpaid balances will be reduced to 6% per annum retroactive to April 1,
2003, reducing the unpaid interest balance as of June 30, 2004 from $908,450 to
$272,300, which would be added to the principal. The total principal amount due
after payment of the $1,000,000 and reduction of unpaid interest will equal
$7,754,300.

As of June 30, 2004, we are in arrears for interest installments on the
Harman obligation in an aggregate amount of $908,450 (at a rate of 12% per
annum). If Harman were to demand payment of our debt to them, we do not have the
resources to pay that debt and would very likely have to file for protection
under the appropriate provisions of the United States Bankruptcy Code.

On January 18, 2002, with Harman's consent, we acquired the assets of
Dialog4 System Engineering GmbH. As described above in Note 5 of the
Consolidated Condensed Financial Statements,we owed Dialog4 approximately
$597,000, for the purchase of the Dialog4 assets and we still need to register
the 1,250,000 shares issued to Dialog4 for the purchase of the assets. The
Company has not been making payments since August 2002 due to disputes with
Solectron and other companies that have claims against Dialog4 that pre-date our
acquisition of Dialgo4's assets, but for which we may have liability under
German Law. The company made an unsuccessful effort to negotiate with the
Dialog4's creditors to assume some of Dialog4's liabilities in lieu of making
payments directly to Dialog4. Dialog4 has since given us notice of default for
non-payment and has accelerated all amounts due. On February 14, 2003, Dialog4
demanded the Company register the 1,250,000 shares issued to Dialog4 for the
purchase of the assets. On April 29, 2003, the Company and Dialog4 entered
formal Arbitral proceedings. We are currently in arbitration and there is no
assurance the company can achieve a satisfactory settlement with Dialog4. (see
Item 1 Part II Legal Proceedings elsewhere in this Report).

We owe Solectron GmbH $368,453 as of June 30, 2004. This obligation was a
result of claims originating between Solectron GmbH and Dialog4. We are
currently making monthly installments of principal and interest in the amount of
$25,000. The final installment will be due October 15, 2005 in the amount of
$15,681. The company is current with the existing payment plan. As a result of
the new payment terms the Company was able to reclassify $234,139 as non current
maturities of long term debt in January 2004. As of June 30, 2004, the Company
has cumulatively paid $350,029 in principal and $64,194 in interest. Mr.
Brentlinger, President and CEO has also signed a personal guarantee under the
revised Settlement Agreement. The Company further agreed to indemnify Mr.
Brentlinger should he be

required to make any payment under this guarantee. An amount of $233,000 is
reported in other assets pending delivery of that amount of inventory by
Solectron.

Working capital generated from 2004 operations will be used to service our
commitments excluding our obligations to Harman. Any excess working capital
generated from 2004 operations will be applied to expand our business
operations. The terms of the Harman debt restrict our ability to obtain
financing for these types of expansion expenditures, as well as financing for
other purposes. Accordingly, our ability to expand will primarily depend on our
ability to generate sufficient working capital from operations. We will closely
monitor our working capital in 2004 as we evaluate any expenditure related to
expansion.

Accounts receivable were $681,000 at June 30, 2004, compared to $866,000
at December 31, 2003, a net decrease of $185,000 or 21%. The decrease is
primarily due to an increase in customers paying cash in advance to take
advantage of sales discounts for the quarter ended June 30, 2004 compared to the
quarter ended December 31, 2003.

Total inventories were $2,404,000 at June 30, 2004 compared to total
inventories of $2,113,000 at December 31, 2003. The increase of $291,000, or
14%, is due in part to our increased stores of raw materials and work in process
to meet the increased demand for our Optimod products.

For the year ending December 31, 2004, our principal working capital
requirements will be the payment of normal recurring operating costs. Management
believes that these requirements can be met from the operating cash flows.

RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this report in evaluating us and our business. You
should also keep these risk factors in mind when you read and consider the
forward-looking statements in this report and other reports we file with the
SEC. The risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties that we are unaware of, or that we
currently deem less material, also may become important factors that affect us.

AS A RESULT OF OUR LARGE OUTSTANDING DEBT OBLIGATIONS, WE HAVE SIGNIFICANT
ONGOING DEBT SERVICE REQUIREMENTS WHICH MAY ADVERSELY AFFECT OUR FINANCIAL AND
OPERATING FLEXIBILITY.

On May 31, 2000, we acquired the assets of Orban, a wholly- owned
subsidiary of Harman International Industries, Inc. Including the $250,000
previously paid to Harman as non- refundable deposits in 1999, the total stated
purchase price was $10.5 million, of which $2 million was paid in cash and the
balance of which was paid by means of a combination of short-term and long-term
promissory notes that we issued to Harman. As of September 30, 2001, our total
indebtedness to Harman was approximately $8.5 million. Effective October 1,
2001, this indebtedness was converted to demand notes payable on the demand of
Harman or, if no demand is sooner made, on the dates and in the amounts set
forth in the amended Credit Agreement that we entered into with Harman. Our
substantial leverage may have important consequences for us, including the
following:

* our ability to continue as a going concern will depend in part on
whether Harman demands payment on the $8.5 million debt, or any portion
thereof; a significant portion of our cash flow from operations will be
dedicated to servicing our debt obligations and will not be available
for other business purposes;

* the terms and conditions of our indebtedness limit our flexibility in
planning for and reacting to changes in our business, and in making
strategic acquisitions;

* our ability to obtain additional financing in the future for working
capital, capital expenditures, and other purposes may be substantially
impaired; and

* our substantial leverage may make us more vulnerable to economic
downturns and competitive pressures.

Our ability to meet our debt service obligations and reduce our total
indebtedness to Harman depends in part on our future operating performance. Our
future operating performance will depend on our ability to expand our business
operations by growing our core audio processing business, expanding our product
offerings and penetrating new and emerging markets, which we anticipate will
require additional financing. In addition, our future operating performance
will depend on economic, competitive, regulatory and other factors affecting our
business that are beyond our control. If we are unable to expand our business
operations as planned, we may not be able to service our outstanding
indebtedness to Harman.

THE EXISTENCE OF AN AUDIT OPINION CONTAINING A GOING CONCERN EMPHASIS PARAGRAPH
MAY MAKE IT MORE DIFFICULT FOR US TO OBTAIN CREDIT OR ADDITIONAL CAPITAL AND MAY
JEOPARDIZE OUR RELATIONSHIP WITH EXISTING AND NEW CUSTOMERS.

Our inability to pay the $8.5 million debt to Harman should payment be
demanded, our difficulties in meeting our financing needs and our negative
working capital position created by the demand notes have resulted in our
independent public accountants adding a going concern emphasis paragraph in
their report by including a statement that such factors raise substantial doubt
about our ability to continue as a going concern. The inclusion of a going
concern emphasis paragraph generally makes it more difficult to obtain trade
credit, insurance or additional capital through public or private debt or equity
financings. We may also find it more difficult to maintain existing customer
relationships and to initiate new customer relationships.

WE WILL NEED ADDITIONAL DEBT OR EQUITY TO SERVICE THE DEBT PAYABLE AS A RESULT
OF OUR ACQUISITION OF ORBAN, AND WE MAY NOT BE ABLE TO OBTAIN THIS FINANCING ON
ACCEPTABLE TERMS.

Upon our acquisition of the assets of Orban, we issued a $3.5 million
short-term note and a $5 million long-term note payable to Harman. Effective
October 1, 2001, both of these notes were converted to demand notes payable on
the demand of Harman or, if no demand is sooner made, on the dates and in the
amounts set forth in the amended Credit Agreement that we entered into with
Harman. Our ability to service this debt will depend on our ability to obtain
either additional debt or equity financing, or a combination thereof. We cannot
be sure, however, that we will be able to obtain the necessary debt or equity
financing on acceptable terms. Also, additional debt financing or the sale of
additional equity securities may cause the market price of our common stock to
decline. If we are unable to obtain additional debt or equity financing on
acceptable terms, we may have to negotiate further restructuring of the debt
with Harman. If Harman is unwilling to restructure the debt, we may default on
the debt and our ability to continue as a going concern would be jeopardized.

OUR ABILITY TO OBTAIN AN OUTSIDE LINE OF CREDIT IS SUBJECT TO THE APPROVAL OF
OUR CURRENT CREDITORS AND, IF SUCH APPROVAL IS WITHHELD, OUR ABILITY TO COMPETE
EFFECTIVELY IN OUR INDUSTRY COULD BE JEOPARDIZED.

In connection with our acquisition of Orban, we entered into a Credit
Agreement with Harman. Under the terms of the Credit Agreement, we are bound by
certain covenants that prevent us from obtaining additional credit facilities
without the prior written approval of Harman. This limitation on our ability to
obtain additional outside lines of credit may curtail our ability to make
strategic acquisitions and to conduct research and development. This in turn
could jeopardize our competitive position within our industry.

FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

On January 18, 2002, we acquired the assets of Dialog4 System Engineering
GmbH. Our acquisition of this new product line has led to the establishment of
our new Orban Europe offices in Ludwigsburg, Germany. Transactions and expenses
of our Orban Europe operations will be conducted in Euros which will expose us
to market risks related to foreign currency exchange rate fluctuations that
could adversely affect our operating results. For instance, a strengthening of
the U.S. dollar against the Euro could reduce the amount of cash and income we
receive and recognize from Orban Europe. Furthermore, it is likely that for
accounting purposes we will recognize foreign currency gains or losses arising
from our operations in Europe on weighted average rates of exchange in the
period incurred and translate assets and liabilities of these operations into
U.S. dollars based on year- end foreign currency exchange rates, both of which
are subject to currency fluctuations between the U.S. dollar and the Euro. As
foreign exchange rates vary, our results from operations and profitability may
be adversely affected.

We expect to derive approximately 13% of our total revenues from our Orban
Europe operations. This percentage may increase in future years as we further
develop and expand our operations in Europe. We cannot predict the effects of
exchange rate fluctuations on our operating results. We do not currently intend
to engage in foreign currency exchange hedging transactions to manage our
foreign currency exposure. If and when we do engage in foreign currency
exchange hedging transactions, we cannot assure you that our strategies will
adequately protect our operating results from the effects of exchange rate
fluctuations.

WE SERVE A MARKET IN WHICH THERE ARE A LIMITED NUMBER OF CUSTOMERS AND OUR
FINANCIAL WELL-BEING IS DIRECTLY TIED TO THE FINANCIAL HEALTH OF THESE
CUSTOMERS.

In recent years, the radio and television industry in the United States
has experienced a great deal of consolidation of ownership. As a result,
several corporations each now own a substantial number of radio and television
stations. These corporations are the largest purchasers of our audio processing
and post-production equipment. Moreover, a significant amount of our revenue is
derived from audio processing replacement orders that come from these customers.
Our financial stability and well- being is thus directly tied to the financial
health of these customers. If these customers experience financial difficulty,
regardless of the cause, they may delay, reduce or cancel orders for new audio
processing or post-production equipment. If this occurs, our results of
operations could decline and we could experience difficulty in servicing our
debt obligations.

WE MUST ADAPT TO RAPID TECHNOLOGICAL CHANGE AND INCREASED COMPETITION IF WE ARE
GOING TO BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY.

While audio processing has been and will continue to be our core business,
we are using our existing technologies to enter the emerging markets of digital
audio broadcasting, cable television and Internet-related audio delivery. These
markets are characterized by rapid technological change and require a
significant commitment of capital and human resources. We intend to engage
continually in research and development activities so that we can improve our
current products and develop new products. However, our significant debt
obligations may limit the amount of resources, both capital and human, that we
can commit to research and development. This could jeopardize the success and
reception of our products in these emerging markets. In addition, because of the
rapid pace of change and the intense competition that characterizes these
markets, our products may become unmarketable or obsolete by a competitor's more
rapid introduction to the marketplace.

WE MAY NOT BE ABLE TO RETAIN OUR EXISTING PERSONNEL OR HIRE AND RETAIN THE
ADDITIONAL PERSONNEL THAT WE NEED TO SUSTAIN AND GROW OUR BUSINESS.

Our future success will depend on our ability to attract, retain and
motivate employees with the necessary skills and expertise required by our
business. Competition for employees who possess the technical expertise to
develop and manufacture our products is intense. A shortage in available
skilled labor could require us to increase our wages and benefits to attract and
retain enough employees. An increase in our labor costs, or our inability to
attract, retain and motivate employees, would likely harm our growth plans and
may adversely affect our business and results of operations.

WE DEPEND ON A NUMBER OF VENDORS TO SUPPLY US WITH COMPONENT PARTS THAT ARE
NECESSARY TO THE PRODUCTION OF OUR AUDIO PROCESSING AND POST-PRODUCTION
EQUIPMENT.

We rely on certain vendors to provide component parts for use in the
manufacturing of our audio processing and post- production equipment. As
technology improves, some of these parts have become obsolete and vendors have
discontinued their production of such parts. When this occurs, we must either
obtain these necessary parts from alternative sources, or design around these
parts so that we are able to continue producing our audio processing and
post-production equipment. If any of the component parts that we require become
unavailable and we are not able to design around these parts, we may not be able
to offer some of our products and our sales revenues may decline.

OUR PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD EXERCISES
SIGNIFICANT CONTROL OVER US.

C. Jayson Brentlinger Family Limited Partnership, controlled by Charles J.
Brentlinger, our President, Chief Executive Officer and Chairman of the
Board, currently owns 824,536 shares of our common stock and holds options
to purchase approximately 1,365,005 additional shares. Based on a total of
4,172,533 shares of our common stock issued and outstanding as of June 30,
2004, if Mr. Brentlinger exercises all of his options he will own of
record and beneficially approximately 39.5% of our issued and outstanding
shares. This means that Mr. Brentlinger exercises, and will continue to
exercise, significant control over the business and affairs of our
company. Mr. Brentlinger's exercise of this control may, in certain
circumstances, deter or delay a merger, tender offers, other possible
takeover attempts or changes in our management which may be favored by
some or all of our minority shareholders.

WE DEPEND ON A FEW KEY MANAGEMENT PERSONS.

We are substantially dependent on the personal efforts and abilities of
Charles Jayson Brentlinger, our Chairman, President and Chief Executive Officer,
and Robert Orban, our Vice President and Chief Engineer. The loss of either of
these officers or our other key management persons could harm

our business and prospects for growth. As a result, we have obtained key man
life insurance policies on the lives of each of these officers. We also have
employment agreements with each of these officers which are more fully described
elsewhere in this report.

THE LOCATION OF OUR ORBAN DIVISION SUBJECTS US TO A NUMBER OF RISKS THAT ARE
BEYOND OUR CONTROL WHICH COULD RESULT IN PRODUCTION INTERRUPTIONS.

Our business depends on the efficient and uninterrupted production of our
audio processing equipment and other products. Our Orban division is currently
located in San Leandro, California, and we expect to maintain our operations at
this facility for the foreseeable future. While we have taken precautions
against production interruptions, interruptions could nevertheless result from
natural disasters such as earthquakes, fires or floods. In addition, the power
shortages which occur in California from time to time have resulted in planned
and unplanned power outages and increased energy costs which we may not be able
to pass on to our customers. Power outages, which last beyond our backup and
alternative power arrangements, could harm our customers and our business.
Finally, our location in the Silicon Valley corridor of California subjects us
to increased operating costs and labor shortages which could adversely affect
our production capabilities and result in reduced revenues.

THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND THE VALUE OF YOUR
INVESTMENT MAY DECLINE.

The volatility of the market price of our common stock may cause wide
fluctuations in the price of our common stock on the OTC Bulletin Board. The
market price of our common stock is likely to be affected by:

* changes in general conditions in the economy or the financial markets;

* variations in our quarterly operating results;

* changes in financial estimates by securities analysts;

* other developments affecting us, our industry, customers or
competitors;

* the operating and stock price performance of companies that investors
deem comparable to us; and

* the number of shares available for resale in the public markets under
applicable securities laws.

THE LIQUIDITY OF OUR COMMON STOCK COULD BE RESTRICTED BECAUSE OUR COMMON STOCK
FALLS WITHIN THE DEFINITION OF A PENNY STOCK.

Under the rules and regulations of the Securities and Exchange Commission
(SEC), as long as the trading price of our common stock on the OTC Bulletin
Board is less than $5 per share, our common stock will come within the
definition of a penny stock. On June 30, 2004, the last sale price of our
common stock on the OTC Bulletin Board was $0.75 per share. Generally speaking,
the definition of a penny stock does not include stock that is traded on Nasdaq
or on a national securities exchange. Since our common stock is traded on the
OTC Bulletin Board, rather than on Nasdaq or a national securities exchange, our
common stock falls within the definition of a penny stock while it is trading
below $5 per share. As a result, the trading of our common stock is subject to
certain penny stock rules and regulations.

The SEC rules and regulations require that broker-dealers, prior to
effecting any transaction in a penny stock, satisfy certain disclosure and
procedural requirements with respect to the prospective customer. These
requirements include delivery to the customer of an SEC-prepared risk disclosure
schedule explaining the nature and risks of the penny stock market, disclosure
to the customer of the commissions payable to both the broker-dealer and any
other salesperson in connection with the transaction, and disclosure to the
customer of the current quotations for the stock to be purchased. In addition,
if the broker-dealer is the sole market maker, it must disclose this fact and
the broker-dealer's presumed control over the market. Finally, prior to
effecting any penny stock transaction, broker- dealers must make individualized
written suitability determinations and obtain a written agreement from customers
verifying the terms of the transaction. Subsequent to any sale of penny stock,
broker-dealers must send monthly statements disclosing recent price information
for the penny stock held in the customer's account and certain other information
relating to the limited market in penny stocks. These rules, regulations and
procedural requirements may restrict the ability of broker- dealers to sell our
common stock or discourage them from doing so. As a result, purchasers may find
it more difficult to dispose of, or to obtain accurate quotations for, our
common stock.

BECAUSE OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO PROTECT OUR INTELLECTUAL
PROPERTY, INFRINGEMENT ON OUR PROPRIETARY RIGHTS COULD LEAD TO COSTLY LITIGATION
AND DECREASED REVENUES.

Our copyrights, patents, trademarks, trade secrets and similar
intellectual property are critical to our success. To establish and protect our
proprietary rights, we rely on a combination of copyright, trademark, patent and
trade secret laws, confidentiality and non-disclosure agreements and contractual
provisions with employees and third parties, and license agreements with
consultants, vendors and customers. Despite such protections, there can be no
assurance that these steps will be adequate, that we will be able to secure
trademark registrations for all of our marks in the United States or other
countries or that third parties will not infringe upon or misappropriate our
copyrights, patents, trademarks and similar proprietary rights. In addition,
effective copyright, patent and trademark protection may be unenforceable or
limited in certain countries. In the future, litigation may be necessary to
enforce and protect our trade secrets, copyrights, patents and other
intellectual property rights. We may also be subject to litigation to defend
against claims of infringement of the rights of others or to determine the scope
and validity of the intellectual property rights of others. Any such litigation
could cause us to incur substantial expenses and would adversely affect our
financial condition.

ITEM 3. CONTROLS AND PROCEDURES.

As of the end of the period covered by this report on Form 10-QSB we
carried out an evaluation, under the supervision and with the participation of
our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are effective in alerting them in a timely manner to material
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission. In addition, we reviewed our internal
controls, and there have been no significant changes in our internal controls or
in other factors that could significantly affect those controls subsequent to
the date of their most recent evaluations.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEDINGS

Dialog4

Formosa International Systems Co., Inc.

The Company leased space at 1330 West Auto Drive, Tempe, Arizona (the
Building) beginning January 2, 2003. The owner of the Building, Formosa
International Systems Co., Inc., was also a tenant in the Building. An informal
lease was executed which provided that the owner would vacate the Building upon
request and that the Company would pay rent partly in cash and partly in stock
of the Company, subject to compliance with securities laws. The Company made all
payments of the cash portion of the rent, but refused to pay the stock portion
until the owner vacated the Building so the Company could use all of the space
it was renting. The owner refused to vacate. In addition, the owner requested
the Company to execute a subordination agreement with its lender on terms the
Company found unacceptable and the Company refused to execute it without
modifications. The owner then locked out the Company for nonpayment of the stock
portion of the rent on November 10, 2003. The Company immediately sought and
obtained a temporary restraining order (TRO) from the Superior Court of Maricopa
County, Arizona requiring the owner to allow the Company continued use of the
Building, and the Company moved back into the Building that day.

ITEM 2. CHANGES IN SECURITIES

Recent Sales of Unregistered Securities

Set forth below is information concerning sales of our common stock (or
transactions deemed to be sales) during the quarter ended June 30, 2004 that
were not registered under the Securities Act of 1933, as amended (the "Act").
All such securities issued are restricted securities and the certificates bear
restrictive legends.

Mr. Phil Zeni, the Company's executive vice president and chief operating
officer and Director, was issued an aggregate of 18,959 shares during the
quarter ended March 31 2004. Under his employment contract with the Company, Mr.
Zeni's monthly base compensation is paid to him in shares of stock. The value of
the stock for purposes of these payments is the monthly average closing price
for the month in which the salary is earned.

Mr. Robert McMartin, the Company's vice president and chief financial
officer was issued 100,000 shares on May 25, 2004 as inducement to loan the
company $50,000, which was used to reduce the amount of accrued interest owed
to Harman.

Mr. Bill Cowan was issued 20,000 shares on August 10, 2004 as inducement
to loan the Company $10,000, which was used to reduce the amount of accrued
interest to Harman.

Mr. Bill Gruwell was issued 40,000 shares on August 10, 2004 as inducement
to loan the Company $20,000, which was to reduce the amount of accrued interest
to Harman.

ITEM 5. OTHER INFORMATION

Pursuant to Item 401(g) of Regulation S-B, the Company is required to
describe any material changes to the procedures by which security holders may
recommend nominees to the Board of Directors. The Company currently does not
have in place any such procedures.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit Description
Number
2.1(1) Asset Sale and Purchase Agreement, dated as of November
16, 2001, among Dialog4 System Engineering GmbH,
Berthold Burkhardtsmaier, Cornelia Burkhardtsmaier,
Friedrich Maier, Circuit Research Labs, Inc. and CRL
Systems, Inc.
10.1 Amendment to Existing Agreements and Closing
(1) Declaration, dated as of January 18, 2002, among
Dialog4 System Engineering GmbH, Berthold
Burkhardtsmaier, Cornelia Burkhardtsmaier, Friedrich
Maier, Circuit Research Labs, Inc., CRL Systems, Inc.
and Charles Jayson Brentlinger
10.2 Second Amendment to Existing Agreements and Closing
(2) Declaration, dated as of March 26, 2002, among Dialog4
System Engineering GmbH, Berthold Burkhardtsmaier,
Cornelia Burkhardtsmaier, Friedrich Maier, Circuit
Research Labs, Inc., CRL Systems, Inc. and Charles
Jayson Brentlinger
10.3 Second Amendment to Credit Agreement, dated as of May
(3) 1, 2002, by and among Circuit Research Labs, Inc., as
Parent, CRL Systems, Inc. as Borrower, and Harman
Acquisition Corporation (formerly known as Orban,
Inc.), as Lender
10.4 Second Amended and Restated Tranche A Note, dated as of
(3) May 1, 2002, from CRL Systems, Inc. to Harman
Acquisition Corporation (formerly known as Orban, Inc.)
in the amount of $5,000,000
10.5 Second Amended and Restated Tranche B Note, dated as of
(3) May 1, 2002, from CRL Systems, Inc. to Harman
Acquisition Corporation (formerly known as Orban, Inc.)
in the amount of $3,500,000
10.6 Form of Circuit Research Labs, Inc. Stock Option
(4) Agreement

31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.1 Letter Agreement between Circuit Research Labs, Inc.
(5) and Harman Acquisition Corp. dated as of March 27, 2003
Letter Agreement among Circuit Research Labs, Inc., CRL
99.2 Systems, Inc. and Harman Acquisition Corp. dated as of
(6) May 16, 2003

(3) Incorporated by reference to the Registrant's Report on Form
8-K dated May 13, 2002.
(4) Incorporated by reference to with the Registrant's Form 10-
QSB for the first quarter ended March 31, 2002.
(5) Incorporated by reference to the Registrant's Report on Form
8-K dated April 1, 2003.
(6) Incorporated by reference to the Registrant's Form 10-QSB
for the Quarter ended March 31, 2003

(b) During the three months ended June 30, 2004, the
Registrant filed the following reports on Form 8-K:

Form 8-K (Item 5) filed on April 15, 2004 announced the Registrant was
waiting for third party information to be supplied to the Registrant's
auditors and that the Registrant was unable to finalize the audit of
its financial statements until the material was received.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

CIRCUIT RESEARCH LABS, INC.

Dated: August 23, 2004 By: /s/ Robert W. McMartin
---------------------------
Robert W. McMartin
Vice President, Treasurer and
Chief Financial Officer

EXHIBIT INDEX
Exhibit Description
Number
2.1(1) Asset Sale and Purchase Agreement, dated as of November
16, 2001, among Dialog4 System Engineering GmbH,
Berthold Burkhardtsmaier, Cornelia Burkhardtsmaier,
Friedrich Maier, Circuit Research Labs, Inc. and CRL
Systems, Inc.
10.1 Amendment to Existing Agreements and Closing
(1) Declaration, dated as of January 18, 2002, among
Dialog4 System Engineering GmbH, Berthold
Burkhardtsmaier, Cornelia Burkhardtsmaier, Friedrich
Maier, Circuit Research Labs, Inc., CRL Systems, Inc.
and Charles Jayson Brentlinger
10.2 Second Amendment to Existing Agreements and Closing
(2) Declaration, dated as of March 26, 2002, among Dialog4
System Engineering GmbH, Berthold Burkhardtsmaier,
Cornelia Burkhardtsmaier, Friedrich Maier, Circuit
Research Labs, Inc., CRL Systems, Inc. and Charles
Jayson Brentlinger
10.3 Second Amendment to Credit Agreement, dated as of May
(3) 1, 2002, by and among Circuit Research Labs, Inc., as
Parent, CRL Systems, Inc. as Borrower, and Harman
Acquisition Corporation (formerly known as Orban,
Inc.), as Lender
10.4 Second Amended and Restated Tranche A Note, dated as of
(3) May 1, 2002, from CRL Systems, Inc. to Harman
Acquisition Corporation (formerly known as Orban, Inc.)
in the amount of $5,000,000
10.5 Second Amended and Restated Tranche B Note, dated as of
(3) May 1, 2002, from CRL Systems, Inc. to Harman
Acquisition Corporation (formerly known as Orban, Inc.)
in the amount of $3,500,000
10.6 Form of Circuit Research Labs, Inc. Stock Option
(4) Agreement

31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the Registrant's Report on Form
8-K dated February 4, 2002.
(2) Incorporated by reference to the Registrant's Report on Form
10-KSB for the fiscal year ended December 31, 2001.
(3) Incorporated by reference to the Registrant's Report on Form
8-K dated May 13, 2002.
(4) Incorporated by reference to with the Registrant's Form 10-
QSB for the first quarter ended March 31, 2002.
(5) Incorporated by reference to the Registrant's Report on Form
8-K dated April 1, 2003.
(6) Incorporated by reference to the Registrant's Form 10-QSB
for the Quarter ended March 31, 2003