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

FORM 10-QSB

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

Table of Contents

Page

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

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

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

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

Consolidated Condensed Statements of Cash Flows -
Nine Months ended September 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 . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 32

SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

PART I - FINANCIAL INFORMATION

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

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

CURRENT ASSETS:
Cash $564,692 $222,631
Accounts receivable, trade (net of allowance
for doubtful accounts of $33,361 at
September 30, 2004 and at December 31, 2003) 777,800 866,451
Inventories 2,422,411 2,112,614
Other current assets 205,030 168,896
----------- -----------
Total current assets 3,969,933 3,370,592
----------- -----------

PROPERTY, PLANT AND EQUIPMENT, NET 559,311 569,183
----------- -----------

OTHER ASSETS:
Goodwill, net 7,476,008 7,476,008
Other 412,665 351,503
----------- -----------
7,888,673 7,827,511

TOTAL $12,417,917 $11,767,286
=========== ===========

See accompanying notes to consolidated condensed financial statements.

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

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

CURRENT LIABILITIES:
Accounts payable $1,342,985 $1,103,452
Notes payable to shareholders 30,000 92,500
Notes payable 8,482,000 8,482,000
Current portion of long-term debt 938,608 1,340,709
Accrued salaries and benefits 528,590 535,017
Customer deposits 315,746 39,266
Other accrued expenses and liabilities 1,897,746 1,001,097
----------- -----------
Total current liabilities 13,535,675 12,594,041

LONG-TERM DEBT, LESS CURRENT PORTION 205,025 39,662
----------- -----------
Total Liabilities 13,740,700 12,633,703
----------- -----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $100 par value -
authorized 500,000 shares, none issued
Common stock, $.10 par value -
(authorized 20,000,000 shares, 4,332,533
issued as of September 30, 2004 and
4,153,574 as of December 31, 2003) 433,254 415,358
Additional paid-in capital 5,599,498 5,555,932
Accumulated deficit (7,355,535) (6,837,707)
----------- -----------
Total stockholders' deficit (1,322,783) (866,417)
----------- -----------
TOTAL $12,417,917 $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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------

NET SALES $3,481,313 $3,240,224 $9,900,540 $9,406,216
COST OF GOODS SOLD 1,528,681 1,420,144 4,210,922 4,118,855
---------- ---------- ---------- ----------
Gross profit 1,952,632 1,820,080 5,689,618 5,287,361
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative 1,186,119 1,080,814 3,875,283 3,271,247
Research and development 339,373 309,900 1,040,893 1,022,672
Depreciation 37,867 28,998 108,591 177,218
---------- ---------- ---------- ----------
Total operating expenses 1,563,359 1,419,712 5,024,767 4,471,137
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 389,273 400,368 664,851 816,224
---------- ---------- ---------- ----------

OTHER EXPENSE
Sundry 13,369 31,591 32,244 35,471
Interest 280,252 282,773 838,015 861,727
Resolution of business acquisition
contingency 312,420 0 312,420 0
---------- ---------- ---------- ----------
Total other expense 606,041 314,364 1,182,672 897,198
---------- ---------- ---------- ----------

INCOME (LOSS) BEFORE INCOME TAX (216,768) 86,004 (517,828) (80,974)

PROVISION FOR INCOME TAXES 0 0 0 0
---------- ---------- ---------- ----------
NET INCOME (LOSS) ($216,768) $86,004 ($517,828) ($80,974)
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON
SHARE- BASIC AND DILUTED ($0.05) $0.02 ($0.12) ($0.02)

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic 4,262,968 3,892,823 4,200,773 3,839,161
Diluted 5,142,823

See accompanying notes to consolidated condensed financial statements.

CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net Loss ($517,828) ($80,974)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 173,625 242,688
Stock compensation 61,462 76,207

Changes in assets and liabilities:
Accounts receivable 88,651 (294,130)
Inventories (309,797) 17,101
Prepaid expenses and other assets (97,296) (122,676)
Accounts payable and accrued expenses 1,407,330 832,346
--------- ---------
Net cash provided by operating activities 806,147 670,562
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (163,753) (72,261)
--------- ---------
Net cash used in investing activities (163,753) (72,261)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from shareholder advances 50,000 298,000
Repayment of shareholder advances (112,500) (168,000)
Principal payments on notes payable 0 (515,656)
Principal payments on long-term debt (237,833) (105,334)
--------- ---------
Net cash used in financing activities (300,333) (490,990)
--------- ---------

NET INCREASE IN CASH 342,061 107,311

CASH AT BEGINNING OF PERIOD 222,631 214,401
--------- ---------
CASH AT END OF PERIOD $564,692 $321,712
========= =========

See accompanying notes to consolidated condensed financial statements.

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

Nine Months Ended
September 30,
2004 2003
--------- ---------
Supplemental Disclosures of Cash Flow Information

Cash paid for interest $529,917 $134,995
========= =========

Supplemental schedule of non-cash financing activities:

Common stock issued for compensation $61,462 $76,207
========= =========

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 September 30, 2004 and the
Consolidated Condensed Statements of Operations for the three and nine months
ended September 30, 2004 and 2003 and the Consolidated Condensed Statements of
Cash Flows for the nine months ended September 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 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 nine months ended
September 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 nine
months ended September 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 than 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 Nine Months Ended
September 30, September 30,

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

Numerator
Net Income (loss) ($216,768) 86,004 ($517,828) ($80,974)
========= ========= ========= =========

Denominator
Weighted average shares - basic 4,262,968 3,892,823 4,200,773 3,839,161
========= ========= ========= =========
Weighted average shares - diluted 7,347,533 5,142,823 4,200,773 3,839,161
========= ========= ========= =========

Basic and diluted income (loss)
per share ($0.05) $0.02 ($0.12) ($0.02)
========= ========= ========= =========

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 September 30, 2004 and
December 31, 2003:

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

Raw materials and supplies $2,538,724 $2,336,617
Work in process 922,274 792,334
Finished goods 502,807 525,057
---------- ----------
Total 3,963,805 3,654,008
Less obsolescence reserve (1,541,394) (1,541,394)
---------- ----------
Inventories, net $2,422,411 $2,112,614
========== ==========

4. LONG-TERM DEBT

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

Note to stockholder $180,000 $178,905
Avocet Instruments, Inc. 27,367 32,824
Dialog4 Engineering GmbH
(see also Note 6) 597,055 597,055
Solectron GmbH 322,232 504,271
Employee Note 0 4,250
Accounts payable converted to debt 16,979 63,066
---------- ----------
Total long-term debt 1,143,633 1,380,371
Less current portion 938,608 1,340,709
Total long-term debt, less ---------- ----------
current portion $205,025 $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 September 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 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 September 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 September 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
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.

On April 29, 2003, Dialog4 filed a demand for arbitration in Germany. On
June 30, 2003, the Company 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.

On October 8, 2004 the Company learned the Arbiter in the arbitration
between CRL and Dialog4 had awarded Dialog4 approximately $1.0 million.
The Company filed a request for correction of the arbitral award with the
arbiter on November 8, 2004, and the Company anticipates that it will receive a
response within 30 days. The correction relates to an aggregate amount of
less than $50,000. The Company has increased its liability from $712,000, which
represents the principal and interest under the Company's note payable to
Dialog4 to $1,024,000. This increase represents the amount awarded by the
arbiter for Dialog4's cost and fees incurred in connection with the
arbitration and the amount of a liability to a third party vendor to Dialog4.

Dialog4 had previously accelerated the maturity date of the debt under our
promissory note. The acceleration of indebtedness by Dialog4 constitutes a
default under agreements between the Company and Harman International, Inc. and
will most likely continue to constitute a default even when the restructuring
(discussed below in Item 2) of the $8.5 million dollar Harman debt is completed.

The Company has not identified the sources from which the payment of the
approximately $1.0 million award to Dialog4 can be made. The Company is also
required to register the shares owned by Dialog4, which is an expensive and
time-consuming process. The existence of the award and the requirement for
registration of the shares may adversely impact any prospective financing which
the Company may wish to undertake

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 $322,232 as of September 30, 2004 and are current under the existing
payment plan. As of September 30, 2004, the Company has cumulatively paid
Solectron $396,251 in principal and $67,972 in interest. Charles Jayson
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, the Company's 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, the Company
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. As of September 30, 2004, the Company owes
Harman $8,482,000 in principal and is in arrears for interest in an aggregate
amount of $1,012,910 (interest accrues under the note at a rate of 12% per
annum).

On October 12, 2004, the Company announced it had reached an agreement with
Harman pertaining to the restructure of the Company's indebtedness owed to
Harman International Industries. The Company paid Harman $1,000,000 in cash in
repayment of debt as a condition for the restructure. The funds for this payment
came from two sources: (i) $300,000 came from cash generated from Company
operations and (ii) $700,000 came from a short term loan from a related party
lender who is a family member of the Company's President and CEO.

The loan bears interest at 11.5% per annum and requires monthly
interest-only payments. The Company is currently negotiating with the lender
about the terms of repayment and the possibility of the lender converting the
note into preferred or common stock of the Company. No agreement about the
terms and conditions of the payment or conversion has yet been completed.

Prior to the restructure transaction, the interest rate on the debt owed
Harman was 12.0% per annum. As part of the debt restructure, Harman will waive
all interest accrued after April 1, 2003 in excess of 6% per annum. On September
30, 2004, the accumulated accrued interest before the restructure was
$1,012,910, of which $763,380 will be waived. The remaining $249,530 of accrued
interest will be added to the total outstanding principal balance of the
Company's indebtedness to Harman. After giving effect to the $1,000,000
principal payment, the principal amount due Harman by the Company was $7,482,000
(before giving effect to the waiver unpaid interest and the addition of
remaining accrued interest to the loan principal balance). Adding the remaining
unpaid interest of $249,530 to principal resulted in a total unpaid principal
loan balance of $7,731,530 as of September 30, 2004.

Harman also agreed to exchange $2,104,000 of the debt for 2,104,000 shares
of the Company's common stock, and then sold all such shares to a nominee of Jay
Brentlinger, the Company's President and Chief Executive Officer. The nominee
agreed to purchase all such shares for $1,000,000. Payment was made by delivery
of a promissory note due and payable on September 30, 2007. Harman's recourse
for non-payment under the note is limited to a security interest in the shares
purchased.

Harman has agreed to exchange an additional $2,400,000 of indebtedness for
additional shares of Company common stock such that Harman will own
approximately 1,500,000 shares resulting in ownership of 19% of the then
outstanding shares on a fully diluted basis after giving effect to the
transactions described above. Should the related-party lender elect to convert
his $700,000 note into shares of the Company's common stock, the Company will
issue as many additional shares to Harman as necessary to cause Harman to
maintain a 19% ownership after the entire transaction is completed.

Harman agreed that the remaining $3,227,530 of indebtedness owed to it by
the Company after giving effect to the transactions described above will be
evidenced by a new note that 1) renews and extends (but does not extinguish) the
Company's indebtedness owing to Harman and 2) reduces the interest rate to 6%
per annum, with interest payable monthly in arrears. The Company's indebtedness
to Harman shall continue to be secured by a security interest covering all of
the Company's assets. Mandatory principal payments by the Company shall be made
as follows:

Amount

September 30, 2005 $400,000
September 30, 2006 $450,000
September 30, 2007 $450,000
September 30, 2008 $500,000
September 30, 2009 Balance

Payable to stockholders

On January 23, 2003, Jayson Russell Brentlinger, the father of the
Company's president, loaned the Company $100,000 for its short term working
capital needs. On May 9, 2003, the loan was paid in full. To induce Mr.
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. He
may exercise the option at any time prior to January 23, 2006. As of September
30, 2004, none of the options had been exercised.

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 the right to elect 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 September 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%
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 loan to Mr.
Zeni.

During June of 2003 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 and unpaid interest owed 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 past due interest owed to Harman. The loan was due August 25, 2004,
and paid with interest at a rate of 16% per annum. To induce Mr. McMartin to
make the loan, the Company granted 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 nine months
ended September, 2004 was $1,023 and $5,449, 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 had 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 a $750,000 promissory note(see
note 4).

7. CONTINGENCIES AND LITIGATION

Dialog4

The Company purchased assets of Dialog4 on January 18, 2002. As stated in
Note 4, we and Dialog4 subsequently had disputes that arose in connection with
this transaction. Those disputes were submitted to arbitration in Germany.

On October 8, 2004 the Company learned the Arbiter in the arbitration
between CRL and Dialog4 had awarded Dialog4 approximately $1.0 million. The
Company filed a request for correction of the arbitral award with the arbiter on
November 8, 2004, and the Company anticipates that it will receive a response
within 30 days. The correction relates to an aggregate amount of less than
$50,000. The Company increased its liability from $712,000, which represents
the principal and interest under the Company's note payable to Dialog4 (see Note
4) to $1,024,000. This increase represents the amount awarded by the arbiter
for Dialog4's cost and fees incurred in connection with the arbitration and the
amount of a liability to a third party vendor to 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. A 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 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, entered into the present lease for a
building located at 1302 West Drivers Way, Tempe, Arizona and filed an action
against Formosa. 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.

On November 1, 2004, the Company received a letter from the court informing
the Company the claim Formosa filed against the Company was dismissed without
prejudice for failure to prosecute.

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

Prior to the restructure transaction, the interest rate on the debt owed
Harman was 12.0% per annum. As part of the debt restructure, Harman will waive
all interest accrued after April 1, 2003 in excess of 6% per annum. On September
30, 2004, the accumulated accrued interest before the restructure was
$1,012,910, of which $763,380 will be waived. The remaining $249,530 of accrued
interest will be added to the total outstanding principal balance of the
Company's indebtedness to Harman. After giving effect to the $1,000,000
principal payment, the principal amount due Harman by the Company was $7,482,000
(before giving effect to the waiver of unpaid interest and the addition of
remaining accrued interest to the loan principal balance). Adding the remaining
unpaid interest of $249,530 to principal resulted in a total unpaid principal
loan balance of $7,731,530 as of September 30, 2004.

Amount

September 30, 2005 $400,000
September 30, 2006 $450,000
September 30, 2007 $450,000
September 30, 2008 $500,000
September 30, 2009 Balance

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
principal under a not we issued. In connection with our purchase of the Dialog4
assets and we need to register the 1,250,000 shares issued to Dialog4 in partial
payment of the purchase price of the assets. The Company has not been making
payments to Dialog4 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.

On April 29, 2003, Dialog4 filed a demand for arbitration in Germany. Then
on October 8, 2004 the Company learned the Arbiter had awarded Dialog4
approximated $1.0 million. The Company filed a request for correction of the
arbitral award with the arbiter on November 8, 2004, and the Company anticipates
that it will receive a response within 30 days. The correction relates to an
aggregate amount of less than $50,000. The Company has increased its liability
from $712,000, which represents the principal and interest under the Company's
note payable to Dialog4 (see Note 4) to $1,024,000. This increase represents the
amount awarded by the arbiter for Dialog4's cost and fees incurred in
connection with the arbitration and the amount of a liability to a third party
vendor to Dialog4.

The Company has not identified the sources from which the payment of the
approximately $1.0 million award to Dialog4 can be made. Upon domestication of
the award in the United States, Dialog4 will be able to seize any unencumbered
assets of the Company (there are none; all of the Company's assets are pledged
as security for the Harman debt) and could potentially disrupt transactions of
the Company. The Company is also required to register the shares owned by
Dialog4, which is an expensive and time-consuming process. The existence of the
award and the requirement for registration of the shares may adversely impact
any prospective financing which the Company may wish to undertake.

The Harman debt restructure and the award in the Dialog4 arbitration
occurred after our third quarter ended on September 30, 2004, and are therefore
not reflected in our results to that date.

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 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.
Despite this encouraging trend, our previous financial results have strained our
liquidity. However, the restructure of our debt owed to Harman, we believe we
can improve our financial condition allowing the Company to focus more on
operations and growth.

In 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Revenues: ---------- ---------- ---------- ----------

Net sales $3,481,313 $3,240,224 $9,900,540 $9,406,216

Total revenues $3,481,313 $3,240,224 $9,900,540 $9,406,216
========== ========== ========== ==========
Gross profit on net sales $1,952,633 $1,820,080 $5,689,618 $5,287,361
Gross profit margin 56% 56% 57% 56%
Net cash provided by operating activities $524,387 $220,515 $806,147 $670,562
Net cash used in investing activities ($42,796) ($60,053) ($163,753) ($72,261)
Net cash used in financing activities ($83,721) ($128,632) ($300,333) ($490,990)
Net income (loss) ($216,768) $86,004 ($517,828) ($80,974)
Net income (loss) as a percent of net sales -6% 3% -5% -1%
Income (loss) per share - basic and diluted ($0.05) $0.02 ($0.12) ($0.02)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003

Net Sales. Net sales during the three and nine months ended September 30,
2004 were $3.5 million and $9.9 million, respectively, compared to $3.2 million
and $9.4 million during the comparable periods in 2003, reflecting increases of
9% and 5%, respectively. The 9% increase for the three months ended September
30, 2004 compared to the same period in 2003 was primarily attributable to an
increased demand for CRL's television line products. The 5% increase in net
sales for the nine month period ended was primarily attributable to an increase
in overall demand for our products. Our Orban division reported net sales for
the three and nine months ended September 30, 2004 of $2.9 million and $8.6
million, respectively, compared to $2.9 million and $8.5 million for the same
periods in 2003 representing an increase of 0% and 1% respectively. Our CRL
division reported net sales for the three and nine months ended September 30,
2004 of $295,000 and $521,000, respectively, compared to $108,000 and $369,000
for the same periods in 2003, representing an increase of 173% and 41%,
respectively. This overall increase was in part the result of increased demand
for the television line of products from one single customer. Net sales for
Orban Europe during the three and nine months ended September 30, 2004 were
$289,000 and $760,000, respectively, as compared to $226,000 and $488,000 for
the same periods in 2003, reflecting increases of 27% and 55%. The change was
primarily a result from our inability to ship product from our German location
during the three and nine months ended September 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 nine months ended September
30, 2004 was 56%, and 57%, respectively, compared to 56% and 56% for the same
periods in 2003. The increase of 0% and 1% 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 nine months ended September 30, 2004 were
$1,186,000 and $3,875,000, respectively, representing increases of 10% and 18%,
respectively, as compared to $1,080,000 and $3,271,000 reported the same periods
during 2003. As a percentage of net revenue, SG&A increased from 33% for the
three months ended September 30, 2003 to 34% for the same period in 2004. SG&A
as a percentage of net revenue increased from 35% for the nine months ended
September 30, 2003 to 39% 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 nine months ended September 30, 2004 were $339,000 and $1,041,000
respectively, compared to $309,000 and $1,023,000 during the comparable periods
for 2003, reflecting increases of 9% and of 2%. The overall increase is due to
costs associated with the development of our new Opticodec PC line of products
along with costs associated with the introduction of our two newest audio
processors Optimod 8300 and Optimod 2300.

Other Expense. Other expense, net for the three and nine months ended
September 30, 2004 was $606,000 and $1,183,000, respectively, of which $254,000
and $762,000, respectively, represents interest

to Harman accrued in connection with the seller (Harman) carry-back loan that
financed a portion of our purchase of the Orban assets in 2000. $312,000 was
recorded in the 3 month period ended September 30, 2004 as a result of the
arbitration between Dialog4 and the Company ( see Note 4 ). Other expense, net
for the three and nine months ended September 30, 2003 was $314,000 and
$897,000, respectively, of which $254,000 and $761,000, respectively,
represented interest accrued in connection with the loan to us from Harman.
Interest expense during the three and nine months ended September 30, 2004 was
$280,000 and $838,000, respectively, compared to $282,000 and $861,000 for the
same periods in 2003, reflecting decreases of 1% and 3%, respectively. The
decrease for the three and nine months ended is due to the reduction short- term
loans to the Company.

Net Income (Loss). The Company reported a net loss of $217,000 and
$518,000 for the three and nine months ended September 30, 2004, respectively,
compared to net income of $86,000 and net loss of $81,000 for the same periods
in 2003.

LIQUIDITY AND CAPITAL RESOURCES

We had negative net working capital of approximately $9.3 million at
September 30, 2004, and the ratio of current assets to current liabilities was
..26 to 1. At September 30, 2003, we had net negative working capital of
approximately $9.0 million and a current ratio of .29 to 1. The decrease in
working capital is principally due to 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.

The restructure of our debt to Harman described above in this Item 2 under
the aption "Recent Developments" will effectively reduce approximately $8.5
million in principal and $1.0 million in accrued but unpaid interest to a new
note approximating $3.3. In addition Harman will own 19% of the outstanding
capital stock of the Company. It is anticipated that our working capital will
increase by $7.5 million once the restructure is completed.

We believe we could generate a least $1.0 million in cash flow the first
year after the Harman debt restructure principally due to savings we anticipate
we will realize in interest expense.

The following table shows the pro forma affect of the restructure of our
debt owed to Harman as if the transaction had occurred on September 30, 2004.
The documentation evidencing the transaction has not yet been finalized, but we
do not expect that the final terms of the transaction will differ materially
from the results we anticipated.

Balance Sheet Data
(in thousands)
(unaudited) December 31, September 30, As Adjusted
2003 2004 After the
Actual Restructure
September 30,
2004

(unaudited) (unaudited)

Working Capital (Deficit) (9,293) (9,566) (1,055)

Property and Equipment, net 569 559 559
Total Assets 11,767 12,418 12,418

Total Liabilities 12,634 13,741 7,474
Total Shareholders' Equity (Deficit) (866) (1,323) 4,944

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

* 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 repay our total
indebtedness to Harman, Dialog4 and other creditors 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 and Dialog4.

Accounts receivable were $778,000 at September 30, 2004, compared to
$866,000 at December 31, 2003, a net decrease of $88,000 or 10%. The decrease
is primarily due to an increase in customers paying cash in advance to take
advantage of sales discounts for the quarter ended September 30, 2004 compared
to the quarter ended December 31, 2003.

Total inventories were $2,422,000 at September 30, 2004 compared to total
inventories of $2,113,000 at December 31, 2003. The increase of $309,000, or
15%, 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 remainder year ending December 31, 2004 and 2005, 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.

EVEN AFTER GIVING EFFECT TO THE RECENT RESTRUCTURE OF OUR INDEBTEDNESS, WE HAVE
SIGNIFICANT ONGOING DEBT SERVICE REQUIREMENTS WHICH MAY ADVERSELY AFFECT OUR
FINANCIAL AND OPERATING FLEXIBILITY.

After giving effect to the reduction of our indebtedness as part of the
restructure, our substantial leverage may have important consequences for us,
including the following:

* 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 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.

THE EXISTENCE OF THE ARBITRAL AWARD AGAINST THE COMPANY IN FAVOR OF DIALOG4 MAY
ADVERSELY AFFECT OUR FINANCIAL AND OPERATING FLEXIBILITY.

The Company has not identified the sources from which the payment of the
approximately $1.0 million award to Dialog4 can be made. Upon domestication of
the award in the United States, Dialog4 will be able to seize any
unencumbered assets of the Company (there are none; all of the Company's
assets are pledged as security for the Harman debt) and could potentially
disrupt transactions of the Company. The Company is also required to
register the shares owned by Dialog4, which is an expensive and time-consuming
process. The existence of the award and the requirement for registration of
the shares may adversely impact any prospective financing which the Company
may wish to undertake.

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.

Including 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 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.

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.

Pursuant to our agreements with Harman, 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 are 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 7% of our 2004 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.

Charles Jayson Brentlinger Family Limited Partnership, which is controlled
by Charles Jayson Brentlinger, our President, Chief Executive Officer and
Chairman of the Board, currently owns 788,694 shares of our common stock and
holds options to purchase approximately 1,365,005 additional shares. Based on a
total of 4,332,533 shares of our common stock issued and outstanding as of
September 30, 2004, if Mr. Brentlinger exercises all of his options he will own
of record and beneficially approximately 39 % 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 September 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

We purchased assets from Dialog4, System Engineering GmbH in January 2002.
We and Dialog4 subsequently has disputes that arose in connection with this
transaction. Those disputes were submitted to an arbitration in Germany.

On October 8, 2004 the Company learned the Arbiter in the arbitration
between CRL and Dialog4 had awarded Dialog4 approximated $1.0 million. The
Company filed a request for correction of the arbitral award with the arbiter on
November 8, 2004, and the Company anticipates that it will receive a response
within 30 days. The correction relates to an aggregate amount of less than
$50,000. The Company has increased its liability from $712,000, which
represents the principal and interest under the Company's note payable to
Dialog4 (see Note 4) to $1,024,000. This increase represents the amount awarded
by the arbiter for Dialog4's cost and fees incurred in connection with the
arbitration and the amount of a liability to a third party vendor to Dialog4.

Formosa International Systems Co., Inc.

As reported in prior periodic reports, the Company leased space at 1330
West Auto Drive, Tempe, Arizona (the "Building") beginning January 2, 2003.
Following a series of disputes, we and the landlord filed actions in the
superior court of the County of Maricopa, Arizona. On November 1, 2004, the
Company received a letter from the court informing the Company the claim that
Formosa filed against the Company was dismissed without prejudice for failure to
prosecute.

ITEM 2. CHANGES IN SECURITIES AND ISUUER REPURCHASES OF EQUITY 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 September 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. Bill Cowan, an existing shareholder 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, an existing shareholder 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.

The above issuances were made in reliance upon the exemption from
registration of securities provided by Section 4(2) of the Securities Act of
1933.

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
Number Description
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.(Filed
herewith)
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.(Filed
herewith)
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. (Filed herewith)
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. (Filed herewith)
99.1 Letter Agreement between Circuit Research Labs, Inc.
and Harman Acquisition Corp. dated as of October 11, 2004.
(Filed herewith)

(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.

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: November 16, 2004 By: /s/ Robert W. McMartin
-----------------------------
Robert W. McMartin
Vice President, Treasurer and
Chief Financial Officer

EXHIBIT INDEX

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

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

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. (Filed herewith)

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. (Filed herewith)

99.1 Letter Agreement between Circuit Research Labs, Inc.
and Harman Acquisition Corp. dated as of October 11, 2004.
(Filed herewith)

(4) Incorporated by reference to with the Registrant's Form 10-
QSB for the first quarter ended March 31, 2002.