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 March 31, 2007

OR

[  ]

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

7970 South Kyrene Road, 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.     Yes /X/    No /_/

The number of shares outstanding of each class of our common equity as of May 15, 2007 follows:

Class of Common Equity	Number of Shares
Common Stock, par value $.10	8,648,459

Transitional Small Business Disclosure Format (check one):              Yes /_/

No /X/

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Circuit Research Labs, Inc.

Index to Form 10-QSB Filing

For the Quarter Ended March 31, 2007

Table of Contents

Page

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PART I — FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

	March 31,	December 31,
	2007	2006
	(unaudited)
CURRENT ASSETS:
Cash	$21,458	$30,125
Accounts receivable, trade, net of allowance for doubtful accounts of $33,361 in 2007 and in 2006	1,016,783	830,571
Inventories	2,720,218	2,585,828
Other current assets	84,881	113,960
Total current assets	3,843,339	3,560,484
PROPERTY, PLANT AND EQUIPMENT - Net	224,794	264,684
OTHER ASSETS:
Goodwill	6,531,678	6,531,678
Other	361,718	371,539
	6,893,396	6,903,217
TOTAL	$10,961,530	$10,728,385
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	1,949,163	1,510,620
Notes payable to stockholders	1,195,000	1,195,000
Current portion, notes payable, Harman	624,998	537,498
Current portion of other long-term debt	1,515,782	1,582,293
Accrued salaries and benefits	557,080	568,847
Customer deposits	914,433	534,407
Other accrued expenses and liabilities	407,748	333,110
Total current liabilities	7,164,204	6,261,775
LONG-TERM DEBT, LESS CURRENT PORTION	1,941,544	2,131,525
Total liabilities	9,105,748	8,393,300

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CONSOLIDATED CONDENSED BALANCE SHEETS - continued	March 31,	December 31,
	2007	2006
	(unaudited)
STOCKHOLDERS’ EQUITY
Preferred stock, $100 par value – authorized, 500,000 shares, None issued
Common stock, $.10 par value – authorized, 20,000,000 shares, 8,648,459 shares issued and outstanding at March 31, 2007 and December 31, 2006.	864,846	864,846
Additional paid-in capital	9,394,470	9,394,470
Accumulated deficit	(8,403,534)	(7,924,231)
Total stockholders’ equity	1,855,782	2,335,085
TOTAL	$10,961,530	$10,728,385

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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

    Three months ended

	March 31,		March 31,
	2007		2006 (Restated)
NET SALES	$2,636,321		$2,812,749
COST OF GOODS SOLD	1,234,583		1,533,983
Gross profit	1,401,738		1,278,766
OPERATING EXPENSES
Selling, general and administrative	1,249,029		1,552,906
Research and development	502,368		469,825
Depreciation	22,624		24,218
Total operating expenses	1,774,021		2,046,949
INCOME  (LOSS) FROM OPERATIONS	(372,283)		(768,183)
OTHER EXPENSE:
Convertible debt rights, other share-related, and other expenses	38,625		466,307
Interest	68,395		56,670
Total other expense	107,020		522,977
LOSS BEFORE INCOME TAXES	(479,303)		(1,291,160)
PROVISION FOR INCOME TAXES	0		0
NET LOSS	($479,303)		($1,291,160)
NET LOSS PER COMMON SHARE – BASIC AND
DILUTED		($0.05)	($0.15)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic and diluted		8,648,459	8,457,940

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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended
	March 31,	March 31,
	2007	2006 (Restated)
OPERATING ACTIVITIES:
Net loss	($479,303)	($1,291,160)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization	45,543	47,117
Expense for anti-dilution shares issued	0	126,080
Expense for options and convertible debt rights	0	382,031
Changes in assets and liabilities:
Accounts receivable	(186,212)	(6,613)
Inventories	(134,390)	(33,150)
Other assets	38,899	68,980
Accounts payable, accrued expenses and customer                deposits	881,440	900,307
Net cash provided by operating activities	165,977	193,592
INVESTING ACTIVITIES:
Capital expenditures	(5,653)	(7,569)
Net cash used in investing activities	(5,653)	(7,569)
FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders		595,000
Principal payments on notes payable to stockholders	(5,000)	(50,000)
Principal payments on long-term debt	(163,991)	(726,481)
Net cash used in financing activities	(168,991)	(181,481)
NET  INCREASE (DECREASE) IN CASH	(8,667)	4,542
CASH AT BEGINNING OF PERIOD	30,125	137,743
CASH AT END OF PERIOD	$21,458	$142,285

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(continued)

CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended
	March 31,              March 31,
	2007	2006
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$        18,367	$           68,880
Supplemental schedule of non-cash financing activities:
Cashless option exercise	$                 0	$           60,000

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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1.

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 March 31, 2007, the Consolidated Condensed Statements of Operations for the three months ended March 31, 2007 and 2006, and the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2007 and 2006 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.  These Consolidated Condensed Financial Statements should 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, 2006.

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.

Quarter ended March 31, 2006 restatement

The net loss for the quarter ended March 31, 2006 has been restated for an adjustment related to the reclassification of a $388,300 liability for intrinsic value-measured options to additional paid in capital that had previously been reflected as a reduction in selling, general and administrative expense. The amount for the quarter ended March 31, 2006 was $211,800 and an increase in expense of $176,500 for the quarter ended June 30, 2006. The adjustment was previously described reported in the Company’s Form 10-KSB for the year ended December 31, 2006. There was no restatement of the net loss for the year ended December 31, 2006.

A summary of the restatement follows:

Net loss, quarter ended March 31, 2006 as previously reported

           $(1,079,360)

Increase in selling general and administrative expense

for reclassification of reduction

of liability to additional paid in capital

   (211,800)

Net loss, quarter ended March 31, 2006 as restated

           $(1,291,160)

2.      Significant Accounting Policies are as follows:

a.     Net loss per share

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In calculating net loss per share for the three months ended March 31, 2007, the effects of 2,341,000 shares relating to options to purchase common stock were not used for computing diluted earnings per share because the results would be anti-dilutive.  For the three months ended March 31, 2006, the effects of 2,341,000 shares relating to options to purchase common stock were not used for computing dilutive earnings per share because the results would be anti-dilutive. 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.  

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Earnings (loss) per shares is calculated as follows:

	Three Months Ended                    March 31,
	2007	2006 (Restated)
Numerator
Net loss	($479,303)	($1,291,160)
Denominator
Weighted average number of shares outstanding	8,648,459	8,457,940
Basic and diluted loss per share	($0.05)	($0.15)

b.         New accounting pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS 157 also requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not believe that the adoption of SFAS No. 157 will have a material effect on our Consolidated Financial Statements.

 In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our Consolidated Financial Statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of FIN 48 did not have a material effect on our Consolidated Financial Statements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) which provides companies with an option to report selected financial assets and liabilities at fair value. The standard’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. With certain limitations, early adoption is permitted. We are evaluating the impact of this new statement on our financial statements

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c.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of trade accounts receivables and cash balances in excess of FDIC limits.

At March 31, 2007, the Company had trade receivables due from three customers which represented an aggregate of approximately 46% of the receivable balance.  At March 31, 2006, the Company had trade receivables due from three customers representing approximately 34% of the receivable balance.

d.

Income taxes

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes”. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to FASB Statement No. 109.

FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as cumulative- effect adjustment recorded to the beginning balance or retained earnings. The adoption of FIN 48 did not have a material impact on our loss from continuing operation, net loss, or earnings per share.

The Company currently has not developed a policy on classification of interest and penalties. The Company has no unrecognized tax benefits, accrued interest, or penalties as of the date of adoption. The Company has no tax positions at the date of adoption in which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within one year of the adoption of FIN 48. Tax years 2004 through 2006 remain subject to examination by major tax jurisdictions upon the adoption of FIN 48.

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3.

INVENTORIES

 Inventories consist of the following at March 31, 2007 and December 31, 2006:

	March 31,	December 31,
	2007	2006
	(Unaudited)
Raw materials and supplies	$3,104,490	$2,966,964
Work in process	974,805	933,132
Finished goods	429,020	473,829
Total	4,508,315	4,373,925
Less obsolescence reserve	(1,788,097)	(1,788,097)
Inventories, net	$2,720,218	$2,585,828

4.

LONG-TERM DEBT

Long term-debt consists of the following at March 31, 2007 and December 31, 2006:

	March 31,	December 31,
	2007	2006
	(Unaudited)
Orban acquisition note to stockholder	$180,000	$180,000
Avocet Instruments, Inc.	27,367	27,367
Dialog4 Engineering GmbH (see Note 6)	252,720	273,780
Solectron GmbH see (Note 6)	227,107	227,107
Harman see (Note 5)	2,302,530	2,340,030
Harman accumulated interest, long-term portion	255,171	266,871
Note payable to private investor	200,000	200,000
Vendor notes	583,838	677,569
Employee note	53,592	58,592
Total long-term debt	4,082,325	4,251,316
Less current portion Harman and others	2,140,781	2,119,791
Total long-term debt, less current portion	$1,941,544	$2,131,525

Scheduled principal payments due within one year aggregate $2,165,479 as of March 31, 2007. Non-current maturities at March 31, 2007 include $108,749 of future interest due to Harman (Note 5).

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In connection with its acquisition of the assets of Orban in 2000, the Company issued $205,000 in long-term debt to an unrelated stockholder in consideration for his role in such acquisition.  The note bears interest at 7.5% per annum.  The Company signed a new promissory note to replace the original note on August 3, 2004, which took effect August 1, 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 16^th of the month, the interest rate will increase to 12% per annum from the date of delinquency until the accrued interest is brought current.  

On May 31, 2001, the Company acquired the assets of Avocet Instruments, Inc. for $82,980 plus other costs of $3,350. The remaining unpaid purchase price is being offset by periodic product purchases by the lender. As of March 31, 2007, $27,367 is the balance of the note, of which the Company is able to offset $20,789 it has recorded in accounts receivable.

In the fourth quarter of 2001, the Company converted various trade payables into notes payable and long-term debt totaling $179,903. In 2006, the Company converted approximately $992,000 and for the three months ended March 31, 2007 the company converted another $41,000. As of March 31, 2007, the unpaid portion of all notes payable is $583,838. Interest rates on converted notes range from 0% to 8% and payment periods range from less than one to two years.

On October 12, 2005, a private investor, who is not related to the Company or any of its executives, loaned the Company $200,000 secured by a promissory note with an interest rate of 11% per annum. The note matures October 12, 2010 and has interest-only payments payable monthly. At anytime on or before the maturity date, the holder of the note may convert the note into restricted shares of common stock for $0.75 per share, which per-share price was a beneficial conversion right on the transaction date. The Company immediately expensed $117,096 related to the conversion right.

5.

NOTES PAYABLE

Notes payable to stockholders aggregate $1,195,000 at March 31, 2007 and December 31, 2006.

During June 2003, two stockholders, unrelated to the Company or any executives of the Company, loaned the Company $10,000 and $20,000, pursuant to one-year notes accruing interest at 9.0% per annum. Both notes were due and payable with interest in June 2004.  As previously agreed, in the second quarter of 2005, the Company issued options to the lenders to purchase an aggregate of 60,000 shares of common stock of the Company for a purchase price of $0.45 per share. The proceeds from these notes were used to reduce accrued and unpaid interest owed to Harman. The two non-related stockholders verbally agreed to extend the loans and the Company continued to accrue interest under the loans.  Upon the request of one of the stockholders, on October 21, 2005, the Company repaid the principal amount of $10,000 together with the accrued interest of $2,140.

On October 4, 2004, Jayson Russell Brentlinger, a stockholder and the father of the Company’s President and CEO, loaned the Company $700,000 in connection with the Harman debt restructure. The loan bears interest at 11.5% per annum and requires monthly interest-only payments.  Management is negotiating with Mr. Brentlinger concerning the terms of repayment and the possibility of converting the note into preferred or common stock of the Company. C. Jayson Brentlinger President and CEO has signed a repayment guarantee under the Note. As of March 31, 2007, the Company is 11 months in arrears totaling $65,440. The Company will perform its best efforts to eliminate the arrearage during the remainder of 2007.

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On March 31, 2006, Jayson Russell Brentlinger loaned the Company $475,000, secured by a demand note (the “Note”).  All of the proceeds of the Note were used to pay the April 2006 installment of the settlement with Dialog4.  The Note is payable within 30 days upon demand and has an interest rate of 11.5%.  In addition, Jayson Russell Brentlinger through March 31, 2007 had the right to convert the then-outstanding principal of the Note into either common shares at $0.50 per share, or cumulative preferred shares $100 par value per share. The preferred shares were alternatively convertible into the Company’s common shares at a price of $0.50 per share. C. Jayson Brentlinger president, CEO and Chairman has signed a repayment guarantee under the Note. In the quarter ended March 31, 2006, the Company recorded an expense of $328,312 associated with the conversion right.  The expense was determined by using the Black Scholes method to value the conversion option.

As of March 31, 2007, the Company is 19 months in arrears totaling $125,910. The Company will perform its best efforts to eliminate the arrearage during the remainder of 2007.

On January 18, 2006 Mr. McMartin, the Company’s Executive Vice President and Chief Financial Officer, loaned the Company $100,000 represented by a promissory note at a rate 21% per annum. The note was due January 31, 2006 and now bears interest at a rate of 25% per annum until paid. The remaining balance as of March 31, 2007 is $34,000.

On February 1, 2006 Mr. Clarkson, the Company’s Vice President and General Manager loaned the Company $20,000 represented by a promissory note at a rate 21% per annum. The note was due February 14, 2006 and now bears interest at a rate of 25% per annum until paid. The remaining balance as of March 31, 2007 is $20,000.

The previous two obligations are included in long term debt.

Interest expense on all stockholder loans for the three months ended March 31, 2007 was missing JRB interest $38,247.  

       Harman

On May 31, 2000, the Company acquired the assets of Orban, Inc., which was then a wholly-owned subsidiary of Harman, including the rights to the name “Orban.”  The purchase price was paid partially in cash and partially by issuing notes payable to Harman.

On October 12, 2004, the Company executed a letter agreement with Harman, whereby its indebtedness, then in an amount of almost $8.5 million plus $1.0 million of accrued but unpaid interest, would be restructured, subject to certain conditions, including the execution by the parties of definitive documents.  These documents were executed on April 29, 2005.

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The Harman debt restructure consisted of:

·

In October 2004, the Company paid Harman a $1,000,000 principal payment as a condition to restructuring the remaining indebtedness.  The funds for this payment came from $300,000 generated from the Company’s operations, and $700,000 from the loan from the father of the Company’s President and Chief Executive Officer.

·

Prior to the debt restructure, the Company’s debt to Harman bore interest at a rate of 12% per annum.  As part of the debt restructure, Harman waived all interest accrued after April 1, 2003 in excess of 6.0% per annum, which resulted in Harman waiving $763,380 of approximately $1.0 million in accrued interest.  The remaining $249,530 in accrued interest was added to the outstanding principal balance of the Company’s indebtedness to Harman.  After giving effect to the $1.0 million principal payment, the principal amount due Harman was $7,482,000.  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.  

·

In April 2005, Harman exchanged $2,104,000 of the remaining indebtedness for 2,104,000 shares of the Company’s common stock, which Harman then sold to the Company’s President and Chief Executive Officer 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.  

·

In April 2005, Harman exchanged an additional $2,400,000 of indebtedness for 19% of the shares of the Company’s common stock, which consisted of approximately 1,509,000 shares at the time of the restructure.  This exchange included an anti-dilution provision, which entitles Harman to receive additional shares equaling 19% of the amount of any shares that are issued as a result of exercise of options in existence on the date of the restructure. This could result in the issuance of 738,860 additional shares to Harman, if all currently outstanding options are exercised. Harman will have no right to additional shares as the result of new share issuances occurring after the date of the restructure.  C. Jayson Brentlinger president, CEO and Chairman has signed a personal guarantee under the Note and under the Harman Agreement.

The remaining $3,227,530 of indebtedness, after giving effect to the transactions described above, is evidenced by a new note, secured by a security interest covering all of the Company’s assets, that (i) renews and extends (but does not extinguish) the indebtedness owed to Harman, and (ii) reduces the interest rate on the debt to 6.0% per annum, with interest payable monthly in arrears.  Principal repayment of the note is amortized over a five year period, and the final principal payment is due September, 2009.  The Company is required to make monthly principal payments of $37,500 through September 2007; $41,666 commencing in October 2007 through September 2008 and $118,961 commencing in October 2008 through September 2009.

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In summary, Harman waived $935,000 of unpaid interest, and was issued 3,613,000 shares of the Company’s common stock to reduce the Company’s principal obligation by $4,255,000.  This total $5,113,000 debt reduction has been recorded as a $361,000 increase to common stock par value, a $2,710,000 increase to additional paid in capital and a $2,119,000 gain on debt restructure.  A per share fair value of $0.85 was used to measure the gain, which was the shares’ quoted market price in October 2004 when the letter agreement to restructure the debt was concluded.

The debt restructure reduced the Company’s annual debt service to Harman initially by approximately $824,000 a year.  In addition, the restructured debt is a long-term obligation, compared to the demand note status of the previous debt structure.

In recording the restructure, the obligation to Harman for unpaid interest was not eliminated, but was reduced to equal the aggregate future 6.0% interest payments scheduled under the restructured obligation.  Accordingly, no additional interest expense will be recorded while the restructured obligation is outstanding.  As of March 31, 2007, the Company is four months in arrears. The Company will perform its best efforts to eliminate the arrearage during the remainder of 2007.

6.

DIALOG4

Dialog4 was a German Corporation that produced products within the Company’s industry, including its Codec line of products. The Company purchased the assets of Dialog4 on January 18, 2002. The Company and Dialog4 had disputes that arose in connection with this transaction which were submitted to arbitration in Germany. The disputes have all been resolved as discussed below.

On October 8, 2004, the Company learned that an Arbiter had awarded Dialog4 approximately $1.0 million. The Company increased its reserves from $712,000, the amount of principal and interest then due under its note payable to Dialog4, to $1,393,000. The increase of $681,135 was reported as resolution of business acquisition contingency in the 2004 Statements of Operations.  The increase represents the amount awarded by the Arbiter on account of Dialog4’s costs and fees incurred in connection with the arbitration and the amount of a liability to a third party vendor to Dialog4.  Dialog4 filed an action in the U.S. District Court for the District of Arizona (the Arizona Litigation) to enforce the arbitration award.

On March 30, 2005, the Company and Dialog4 agreed upon settlement terms for all disputes between them. The Company paid Dialog4 $490,000 at the time the settlement papers were signed on April 15, 2005 and paid an additional $475,000 on April 1, 2006. The Company also filed with the SEC a registration statement under the Securities Act covering sales by Dialog4 of the 1,250,000 shares of stock issued in 2002 as partial payment of the purchase price.  C. Jayson Brentlinger president, CEO and Chairman had signed a personal guarantee under the Note.

In March 2005, as part of the Dialog4 settlement, the Company agreed to resolve a separate employment dispute being litigated in Germany between Berthold Burkhardtsmaier and the Company. Mr. Burkhardtsmaier agreed to resign from the Board of Directors, and the Company agreed to pay him approximately $421,200 in monthly installments of $7,020 for 60 months.

Dialog4 dismissed the Arizona litigation without prejudice, and when all the terms and conditions of the settlement agreement have been met, Dialog4 and the Company will release each other from any further claims arising out of or related to the Asset Purchase Agreement.

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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, it agreed to purchase the inventory, which it will use in the manufacture of Sountainer products.  On January 20, 2004, the Company renegotiated the terms and agreed to pay monthly installments of principal and interest in the amount of $25,000 with the final installment being due October 15, 2005 in the amount of $15,681.

The Company currently owes Solectron $227,107 and has stopped making debt service payments because the Company has not received $233,000 of inventory pursuant to the materiality agreement entered into between Dialog 4 and Solectron for which it was found to be responsible. This obligation now in the amount of $227,107 was a result of claims originating between Solectron and Dialog4.  As of March 31, 2007, the Company has cumulatively paid Solectron $529,500 in principal and $72,733 in interest. Charles Jayson Brentlinger, President and CEO of the Company has also signed a repayment 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. The inventory of $233,000 is reported in other assets pending delivery of that amount of inventory by Solectron.

7. STOCK OPTIONS AND STOCK-BASED COMPENSATION

All options that have been issued vest and are expensed  immediately.  The expected life of each grant is generally estimated to be a period of approximately one half of the exercise period, plus one year. The intrinsic value of all options outstanding aggregated  $0 and $370,500 and March 31, 2007 and 2006.

During the three months ended March 31, 2007 and 2006, there were no options issued, none exercised (except as discussed in the next paragraph) and none lapsed.

On December 29, 2004, the company modified the strike price of the 1,765,000 options to $0.70 per share and extended the expiration date to December 29, 2009. On that date the modified strike price exceeded the market price. Also on that date, we had not adopted 123R and accordingly reported the treatment of the options under Financial Accounting Standards Board Interpretation 44, pursuant to which stock compensation expense is recorded when the strike price for the options is less than the market price of the underlying shares. Through December 2005, each quarter we adjusted the option expense when the market price of the underlying shares exceeds the strike price. The market price exceeded the strike price at December 31, 2005 and cumulative expense of $388,300 related to modified options had been recorded. Effective January 2006, quarterly adjustments were discontinued and the previously recorded $388,300 liability was reclassified to additional paid in capital

On January 23, 2006, the C. Jayson Brentlinger Family Limited Partnership, of which the Company’s Chief Executive Officer, President and Chairman is the General Partner, converted 1,250,000 options to purchase shares of the Company’s common stock (the “Options”) at the option price of $0.55 per share (the market price of the shares on the date the option was issued), in the form of a cashless

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exercise, into 548,469 of the Company’s common shares (the market price of the shares was $0.98 on the day the options were exercised).  

Harman Pro North Company, an existing stockholder was issued 128,653 shares on January 23, 2006 as part of anti-dilution provision required as per the Harman debt restructure.

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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.

Overview

In 2006 we consolidated our U.S. manufacturing into our new corporate headquarters located in Tempe, Arizona. We have increased its manufacturing capacity by outsourcing most low-level assemblies and subassemblies over the past year. Final assembly and a full range of quality controls will be performed from our new headquarters in Tempe, Arizona. The goal is to be more responsive to customers’ demands for advanced products while increasing efficiencies and maintaining the same high standards of performance and quality that Orban and CRL have achieved over the past 35 years. We incurred one time charges of approximately $198,000 to realize a savings of up to $432,000 annually. We started shipping nearly all of our U.S. manufactured products out of the new Tempe plant as of April 15, 2006. Due to the manufacturing consolidation and the move into our new corporate headquarters, our net revenues were $12,677,000 for the year ended December 31, 2006 compared to $15,190,000 for same period in 2005 representing a decrease of 17%.  The decrease was primarily a result of production down-time due to the move along experiencing long lead times for components associated with the implementation of an EU directive requiring that electrical and electronic equipment placed on the EU market after July 1, 2006 contain restricted levels of lead, mercury, cadmium, hexavalent chromium and brominated flame retardants. EU member states were required to enact and implement legislation that complies with this directive by August 13, 2004 (such legislation together with this directive, “RoHS”).  The Company has not been required to write down or reserve any inventory as a result of the directive and doesn’t anticipate creating a reserve in the near future.

We currently have a backlog of orders totaling approximately $3.5 million.

Recent Developments

On April 12, 2007, Jayson Russell Brentlinger, a stockholder and the father of the Company’s President and CEO, loaned the Company $120,000 to cover some short term obligations. The loan bears interest at 11.5% per annum and was initially due April 19, 2007. On May 2, 2007, Mr. Brentlinger agreed to extend the maturity date to September 19, 2007.

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Business Overview

      We develop, manufacture and market high-quality electronic audio processing, transmission encoding and noise reduction equipment for the worldwide radio, television, cable, Internet and professional audio markets.  In recent periods, we have acquired the assets of other companies within our industry or in related industries into which we desire to expand.  On May 31, 2000, we acquired the assets of Orban, Inc., a producer of audio editing and processing equipment.  On May 31, 2001, we acquired the assets of Avocet Instruments, Inc., a supplier of quality audio receivers and coders for the television and post-production industry.  On January 18, 2002, we acquired the assets of Dialog4, a worldwide leader in ISO/MPEG, audio, ISDN, satellite transmission, networking and storage technology.  

Our acquisition of the Dialog4 product line has led to the establishment of our Orban Europe 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 risks arising from foreign currency fluctuations because transactions from our European office are often denominated in Euros rather then dollars.  

We believe the increased consolidation within the radio and television industries will provide some potential opportunities for our Company.  For example, we believe that as larger radio and television stations purchase smaller stations, orders for new equipment will increase in order to upgrade these smaller stations which would otherwise have put off purchases of such upgraded equipment.

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Results of Operations

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

	For the Three Months Ended
	March 31,
	2007	2006 (Restated)
Revenues:
Net sales	$2,636,321	$2,812,749
Other income	0	0
Total revenues	$2,636,321	$2,812,749
Gross profit on net sales	$1,401,738	$1,278,766
Gross profit margin	53%	45%
Net cash provided by operating activities	$165,977	$193,592
Net cash used in investing activities	($5,653)	($7,569)
Net cash used in financing activities	($168,991)	($181,481)
Net loss	($479,303)	($1,291,160)
Net loss as a percent of net sales	(18%)	(46%)
Loss per share – basic and diluted	($0.05)	($0.15)

Three Months Ended March 31, 2007 Compared To The Three Months Ended March 31, 2006

Net Sales.  Net sales during the three months ended March 31, 2007 were $2.6 million compared to $2.8 million during the comparable period in 2006, reflecting a decrease of 6% caused by the manufacturing consolidation. We currently have a backlog of approximately $3.5 million and have begun to increase our capacity by extending our production hours and paying overtime. Ramping up along with training has slowed our ability be more responsive to our customers demand for our products while increasing our efficiencies.   

Gross Profit.   Gross profit was 53% of net sales for the three months ended March 31, 2007 compared to 45% for the same period in 2006.  The increase in gross profit is due in part to the reduction in occupancy costs associated with manufacturing overhead due to the consolidation and the transition from manufacturing in San Leandro, California to manufacturing in Tempe, Arizona.  

Selling, General and Administrative.  Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2007 was $1,249,000, a decrease of 17% compared to $1,552,906 for the first quarter of 2006.  As a percentage of net sales, SG&A was 47% for the three months ended March 31, 2007 as compared to 55% for the same period in 2006.  Included in the $1,552,906 expense reported for March 31, 2006, was approximately $116,000 in one-time charges related to moving expenses. The decrease in SG&A expense is due primarily to the reduction in accrued variable option expense of $211,800 recorded for three months ended March 31, 2006, caused by the decrease in the Company’s stock price by $0.12 per share during the same period. Excluding the accrued variable option

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expense associated with the repriced options, SG&A would have been $1,499,000, reflecting a decrease of 20% compared to the first quarter of 2007.  

Research and Development.  Research and development expense was $502,000 for the three months ended March 31, 2007, an increase of 7% compared to $470,000 for the same period in 2006.  The increase resulted primarily from an increase in outside consulting fees and licensing associated with our software development for our PC based products.

Other Expense.   Other expense, net for the three months ended March 31, 2007 was $107,000 of which $68,000 represents interest expense. Other expense, net for the three months ended March 31, 2006 was $523,000, of which $57,000 represented interest expense and $466,000 is primarily expense associated with issuing convertible debt and shares issued under Harman’s anti-dilution rights.

Net Loss. Net loss was $479,303 for the three months ended March 31, 2007 compared to a net loss of $1,291,160 for the same period in 2006.  The decrease in net loss is primarily a result of decreased manufacturing costs associated with our Company’s consolidating its manufacturing into its new corporate headquarters, and also $466,000 associated with issuing convertible debt.  

Liquidity and Capital Resources

The Company's working capital deficit, recurring losses and limited ability to secure additional debt or equity financing imposes significant constraints on the Company’s operations. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to this matter are described below. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

We generated a net loss of $2,163,513 for the year ended December 31, 2006 compared to a net income of $2,583,906 reported in 2005. In 2006 , we consolidated our U.S. manufacturing into our new corporate headquarters located in Tempe, Arizona. Due to the manufacturing consolidation and the move into our new corporate headquarters, our net revenues were $12,677,000 for the year ended December 31, 2006 compared to $15,190,000 for same period in 2005 representing a decrease of 16%.  The decrease was primarily a result of production down-time due to the move, along with experiencing long lead times for components associated with the implementation of a European Union (EU) directive requiring that electrical and electronic equipment placed on the EU market after July 1, 2006 contain restricted levels of lead, mercury, cadmium, hexavalent chromium and brominated flame retardants. EU member states were required to enact and implement legislation that complies with this directive by August 13, 2004 (such legislation together with this directive, “RoHS”).  

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We had negative working capital of approximately $3.3 million at March 31, 3007, and the ratio of current assets to current liabilities was .54 to 1. At December 31, 2006, we had negative working capital of approximately $2.7 million and a current ratio of .57 to 1.  The decrease in working capital is attributable to an increase in accrued expenses including accrued salaries and benefits.  

On October 12, 2004, we executed a letter agreement with Harman, whereby our indebtedness to Harman, then in an amount of almost $8.5 million plus an additional $1.0 million of accrued but unpaid interest, would be restructured, subject to certain conditions including the execution by the parties of definitive documents, which were executed on April 29, 2005. The effect of the debt restructure was first reflected in our unaudited consolidated financial statements for the fiscal period ending June 30, 2005, which is the period that includes the date (April 29, 2005) on which the restructure was completed and definitive documents executed.  Those financial statements were included in our quarterly report on Form 10-QSB for the period ending June 30, 2005.  The restructure documents provide that the debt restructure will be effective as though it had occurred October 1, 2004 (the beginning of the fiscal period during which the letter agreement was executed).

The restructure reduced our debt service to Harman by approximately $386,000 in 2006 as compared to 2005.  Our previous financial results coupled with the Harman debt service (prior to the debt restructure) strained our liquidity. We are optimistic the restructure will allow us to focus on operations and generate growth.

The debt restructure transaction reduced our total debt to Harman to just over $3.2 million.  In addition, the restructured debt is a long-term obligation, compared to the demand note status of the entire $9.5 million debt (which figure includes $1.0 million of accrued but unpaid interest) prior to the restructure.

In October 2004, we paid Harman a $1,000,000 principal payment as a condition to restructuring the remaining indebtedness. The funds for this payment came from two sources: (i) $300,000 came from cash generated from our operations and (ii) $700,000 came from a short term loan from Jayson Russell Brentlinger, the father of our President and CEO.  See Note 6 of “Notes to Consolidated Financial Statements.”

Prior to the debt restructure, our debt to Harman bore interest at a rate of 12.0% per annum.  As part of the debt restructure, Harman waived all interest accrued after April 1, 2003 in excess of 6.0% per annum. On September 30, 2004, the accumulated accrued interest before the restructure was $1,012,910, of which $763,380 was waived.  The remaining $249,530 of accrued interest was added to the total outstanding principal balance of our indebtedness to Harman.  After giving effect to the $1,000,000 principal payment, the principal amount due Harman by us was $7,482,000.  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.  

In April 2005, Harman exchanged $2,104,000 of the remaining indebtedness for 2,104,000 shares of our common stock, which shares Harman then sold to our President and Chief Executive Officer 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.

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Harman also exchanged an additional $2,400,000 of the remaining indebtedness for 19% of the shares of our common stock.  Harman received approximately 1,509,000 shares at the time of the restructure, based on the issued and outstanding stock of the Company on that date.  Harman will also receive additional shares equaling 19% of the amount of any stock which is issued in the future as a result of exercise of options in existence on the date of the restructure.  This will result in the issuance of 815,927 additional shares to Harman, if all currently outstanding options are exercised.  In addition, if Jayson Russell Brentlinger, who holds the $700,000 note described above, elects to convert the note into shares of common stock, Harman will receive additional shares such that Harman will continue to own 19% of the shares of our common stock.  Harman will have no right to additional stock as the result of new stock issuances occurring after the date of restructure.

The remaining $3,227,530 of indebtedness owed to Harman, after giving effect to the transactions described above, is  evidenced by a new note that (i) renews and extends (but does not extinguish) our indebtedness owing to Harman and (ii) reduces the interest rate on the debt to 6.0% per annum, with interest payable monthly in arrears.  Principal repayment of the note is amortized over a five year period, and the final principal payment is due September, 2009.  The Company is required to make monthly principal payments of $66,667 through September 2005; $37,500 commencing in October 2005 through September 2007; $41,666 commencing October 2007 through September 2008 and payments of $118,961 commencing October 2008 through September 2009. Our indebtedness to Harman is secured by a security interest covering all of our assets.

In recording the restructure, the obligation to Harman for unpaid interest was not eliminated, but was reduced to equal the aggregate future 6.0% interest payments scheduled under the restructured obligation; accordingly, no additional interest expense will be recorded while the restructured obligation is outstanding.

With the Harman debt restructure completed, management believes that it will be able to use projected cash flows to meet current operational needs and make  the scheduled principal and interest payments due Harman.

We owe Solectron GmbH $227,107 as of December, 2006. This obligation is a result of claims originating between Solectron GmbH and 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 with the final installment being due October 15, 2005 in the amount of $15,681.  We currently owe Solectron $227,107 but have not paid because we have not received $233,000 of inventory pursuant to the materiality agreement entered into between Dialog 4 and Solectron for which we were found to be responsible.  As of December 31, 2006, we have paid Solectron $487,830 in principal and $72,733 in interest.  C. Jayson Brentlinger, President, Chief Executive Officer and Chairman of the Company has also signed a personal guarantee under the revised Settlement Agreement. We further agreed to indemnify Mr. Brentlinger should he be required to make any payment under this guarantee. The inventory of $233,000 is reported in other assets pending delivery of that amount by Solectron.

On March 30, 2005, we and Dialog4 agreed upon settlement terms for all disputes between us. We paid Dialog4 $490,000 on April 15, 2005 when the settlement papers were signed and have paid an additional $475,000 on April 1, 2006. On March 31, 2006, Jayson Russell Brentlinger loaned the Company $475,000, secured by a demand note (the “Note”).  All of the proceeds of the Note were used to pay the April 2006 installment of the settlement with Dialog4.  The Note is payable within 30 days upon demand and has an interest rate of 11.5%.  In addition, Jayson Russell Brentlinger through March 31, 2007 had the right to convert the then-outstanding principal of the Note into either common shares at

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$0.50 per share, or cumulative preferred shares $100 par value per share. The preferred shares were alternatively convertible into the Company’s common shares at a price of $0.50 per share and may be redeemed by the Company at any time.  C. Jayson Brentlinger president, CEO and Chairman has signed a repayment guarantee under the Note.

As part of the Dialog4 settlement, we agreed to resolve a separate employment dispute being litigated in Germany with Berthold Burkhardtsmaier.  When Mr. Burkhardtsmaier resigned from our Board of Directors, we agreed to pay him approximately $421,200 through monthly installments of $7,020 for 60 months.  See Note 7 of “Notes to Consolidated Financial Statements.”

Working capital generated from 2007 operations will be used to service our commitments as detailed above, excluding our obligations to Harman and Dialog4.  The Company will need to generate enough cash flow to pay for the move and the consolidation of our U.S based manufacturing.  Any excess working capital generated from 2007 operations will be applied to expand our business operations or for general working capital purposes. 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 2007 as we evaluate any expenditure related to expansion.

Accounts receivable were $1,017,000 at March 31, 2007 compared to $831,000 at December 31, 2006 representing a net increase of $186,000 or 22%.  The increase is primarily due to increased sales in the month of March 2007.

Total inventories were $2,720,000 at March 31, 2007 compared to total inventories of $2,586,000 at December 31, 2006.  The increase of $134,000 or 5% is due in part to an increase in raw materials and work in process to reduce our backlog.

We finished consolidating our U.S. manufacturing into our new corporate headquarters located in Tempe, Arizona. We have increased our manufacturing capacity by outsourcing most low-level assemblies and subassemblies over the past year. Final assembly and a full range of quality controls are performed from our new headquarters. Our goal is to be more responsive to customers’ demands for advanced products while increasing efficiencies and maintaining the same high standards of performance and quality that Orban and CRL have achieved over the past 35 years. We incurred one time charges of approximately $198,300 and hope to realize a savings of approximately $432,000 annually in occupancy costs.

For the year ending December 31, 2007, our principal working capital requirements will be the payment of normal recurring operating costs along with reducing our debt.  Management believes that these requirements can be met from the operating cash flows.  

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RISK FACTORS

Investing in our common stock involves a high degree of risk.  You should carefully consider the material risk factors listed below and all other information contained in this prospectus before investing in our common stock.  You should also keep these risk factors in mind when you read the forward-looking statements.  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 immaterial, also may become important factors that affect us.

If any of the following risks occur, our business, our quarterly and annual operating results or our financial condition could be materially and adversely affected.  In that case, the market price of our common stock could decline or become substantially volatile, and you could lose some or all of your investment.

As a result of our outstanding debt obligations, we have significant ongoing debt service requirements which may adversely affect our financial and operating flexibility.

Even after giving effect to the Harman debt restructure, the settlement of our disputes with Dialog4 and other obligations, we will need to generate significant cash flow to meet existing debt scheduled principal payments.   As of December 31, 2006, over the next twelve months, we need approximately $3,082,420 to pay scheduled installments of the principal on our existing debt. Not included in the $3,082,420 are the obligations totaling $1,175,000 held by Jayson Russell Brentlinger, the father of C. Jayson Brentlinger, our Chief Executive Officer, President and Chairman. As to $475,000 of the total obligations to Mr. Brentlinger, should he demand repayment, we upon notice, will have 30 days to satisfy the $475,000 demand note. If we fail to generate sufficient cash from its operations to meet these and other ongoing financial obligations, our results of operation and financial condition may be adversely affected.

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.

Under the terms of 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 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.  In addition, our obligation to Harman is secured by a security interest in substantially all of our assets.  Our inability to grant a security interest to other lenders is another factor that may limit our ability to obtain third party financing.

Foreign currency fluctuations could adversely affect our results of operations.

In 2002, we acquired the assets of Dialog4.  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 exposes 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

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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.

In 2006 and 2005, we derived approximately 4% 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 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.  

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Our President, Chief Executive Officer and Chairman of the Board exercises significant control over us.

Charles J. Brentlinger, our President, Chief Executive Officer and Chairman of the Board, currently controls 2,287,915 shares of our common stock and controls options (held by a family limited partnership which he manages), to purchase approximately 1,365,005 additional shares.  Based on a total of 8,648,459 shares of our common stock issued and outstanding as of May 15, 2007, if Mr. Brentlinger’s family limited partnership exercises all of its options he will own of record and beneficially approximately 36.48% of our issued and outstanding shares.  This figure includes the anti-dilution provision provided to Harman pursuant to the debt restructuring.  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.   

Consolidating our Orban manufacturing facility into our Tempe manufacturing facility 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.  The consolidation of our U. S. manufacturing facilities into our Tempe facility subjects us to a number of risks that are beyond our control and could result in production interruptions. While we have taken precautions against production interruptions, interruptions could nevertheless result from natural disasters such as earthquakes, fires or floods.  We could experience unforeseen delays in setting up the infrastructure in the new location.  We could also experience labor shortages of experienced personal that will not relocate to the Tempe facility.  

The liquidity of our common stock could be restricted because our common stock falls within the definition of a Penny Stock.

Pursuant to Rule 3a51-1 of the Securities Exchange Act of 1934, as amended, our common stock is considered "penny stock," and as such, certain sales restrictions apply to these securities.  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

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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.

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:

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

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variations in our quarterly operating results;

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changes in financial estimates by securities analysts;

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

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

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

Our independent auditors have included a “going concern” paragraph in their report on our financial statements.

While our independent auditors expressed an unqualified opinion on the financial statements, our independent auditors did include an explanatory paragraph indicating that there is substantial doubt about

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our ability as a going concern due to our working capital deficit and 2006 net loss.  Our ability to continue as an operating entity currently depends, in large measure, upon the willingness of several of our lenders to forebear from declaring indebtedness in default and/or pursuing remedies to collect debt which might go into default.  In light of this situation, it is not likely that we will be able to raise equity or debt capital to repay or restructure our existing debt.  While we intend to continue to seek ways to continue to operate and to discuss possible debt restructurings, we do not at this time have commitments or agreements from any of our creditors to restructure any indebtedness.  Our financial condition and the “going concern” emphasis paragraph may also make it more difficult for us to maintain existing customer relationships and to initiate and secure new customer relationships.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements.  Forward-looking statements include indications regarding our intent, belief or current expectations.  Discussions in this prospectus under the headings “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and “Business,” as well as in other parts of this prospectus include forward-looking statements.  These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations, prospects and intentions, markets in which we participate and other statements in this prospectus that are not historical facts.  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.  When used in this prospectus, the words “expect,” “project,” “may,” “will,” “should,” “anticipate,” “believe,” “estimate,” “intend,” “objective,” “plan,” “seek” and similar words and expressions, or the negatives of these words or expressions, are generally intended to identify forward-looking statements.  Forward-looking statements involve risks and uncertainties that may cause our 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.  Factors that could contribute to these differences include those discussed in “Risk Factors” and in other sections of this prospectus.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus.  We qualify any forward-looking statements entirely by these cautionary factors.

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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.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, except as discussed in the next paragraph below, in timely alerting them to material information relating to the Company required to be included in our periodic filings with the Securities and Exchange Commission. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at reaching that level of reasonable assurance, except as discussed in the next paragraph below.

The Company has identified a material weakness within its internal control framework relating to the preparation and timeliness of financial reporting. The Company attributes this material weakness to limited personnel resources. Though the Company has implemented levels of supervisory reviews and employs a temporary workforce from time to time, there can be no assurance that these measures can definitively prevent transactional errors from occurring or provide the necessary accounting and financial reporting support to the Company’s accounting and finance department.

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PART  II  -  OTHER INFORMATION

ITEM 2.   CHANGES IN SECURITIES AND ISUUER REPURCHASES OF EQUITY SECURITIES.

Recent Sales of Unregistered Securities

None.

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.

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ITEM 6.  EXHIBITS

Exhibit Number

Description

31.1 31.2 32.1 32.2

Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-B.  (Filed herewith). Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-B.  (Filed herewith). Certification of Chief Executive Officer pursuant to item 601(b)(32) of Regulation S-B.  (Filed herewith). Certification of Chief Financial Officer pursuant to item 601(b)(32) of Regulation S-B.  (Filed herewith).

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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: May 15, 2007

By: /s/ Robert W. McMartin

Robert W. McMartin

Vice President, Treasurer and

Chief Financial Officer

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Exhibit Index

Exhibit Number

Description

31.1 31.2 32.1 32.2

Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-B.  (Filed herewith). Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-B.  (Filed herewith). Certification of Chief Executive Officer pursuant to item 601(b)(32) of Regulation S-B.  (Filed herewith). Certification of Chief Financial Officer pursuant to item 601(b)(32) of Regulation S-B.  (Filed herewith).

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