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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    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.
  Arizona
    
    86-0344671(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 1302 W. Drivers Way, Tempe, Arizona 85284
 (480) 403-8300
 þ o
 o þ
  Class of Common Equity

Common Stock, par value $.10
    
    
    
    Number of Shares

7,946,337




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Circuit Research Labs, Inc.  Index to Form 10-QSB Filing  For the Quarter Ended September 30, 2005
 Table of Contents
 PagePART I   FINANCIAL INFORMATION
    
    
    3ITEM 1. FINANCIAL STATEMENTS
    
    
    3Consolidated Condensed Balance Sheets 
September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Consolidated Condensed Statements of Operations 
Three and Nine Months ended September 30, 2005 and 2004 (unaudited)
    
    
    5Consolidated Condensed Statements of Cash Flows 
Nine Months ended September 30, 2005 and 2004 (unaudited)
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    17ITEM 3. CONTROLS AND PROCEDURES
    
    
    28PART II    OTHER INFORMATION
    
    
    29ITEM 1. LEGAL PROCEEDINGSITEM 2. CHANGES IN SECURITIES
    
    
    29SIGNATURE
    
    
    30Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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PART I  FINANCIAL INFORMATION
 
 CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    102,815
    
    
    $
    108,488Accounts receivable, trade (net of allowance for doubtful
accounts of $33,361 at September 30, 2005 and at
December 31,
2004)
    
    
    684,597
    
    
    
    577,571Inventories
    
    
    3,353,325
    
    
    
    2,372,676Other current assets
    
    
    146,116
    
    
    
    159,984Total current assets
    
    
    4,286,853
    
    
    
    3,218,719PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    452,715
    
    
    
    501,793OTHER ASSETS:Goodwill, net
    
    
    7,476,008
    
    
    
    7,476,008Other
    
    
    324,483
    
    
    
    362,9137,800,491
    
    
    
    7,838,921TOTAL
    
    $
    12,540,059
    
    
    $
    11,559,433
  3




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CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES
 CONSOLIDATED CONDENSED BALANCE SHEETS
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    1,803,693
    
    
    $
    1,228,545Notes payable to stockholders and related parties
    
    
    730,000
    
    
    
    730,000Current portion of long-term debt
    
    
    1,432,947
    
    
    
    1,397,627Accrued salaries and benefits
    
    
    614,492
    
    
    
    506,892Customer deposits
    
    
    304,756
    
    
    
    244,885Other accrued expenses and liabilities
    
    
    980,639
    
    
    
    753,466Total current liabilities
    
    
    5,866,527
    
    
    
    4,861,415NON-CURRENT LIABILITIES :Accrued interest
    
    
    278,574
    
    
    
    0Long-term debt, less current portion
    
    
    2,862,192
    
    
    
    9,009,890Total Liabilities
    
    
    9,007,293
    
    
    
    13,871,305STOCKHOLDERS EQUITY (DEFICIT):Preferred stock, $100 par value  authorized, 500,000 shares, none issued
Common stock, $.10 par value  authorized, 20,000,000 shares, 7,946,337
and 4,332,533 shares issued and outstanding at September 30, 2005 and
December 31, 2004, respectively
    
    
    794,635
    
    
    
    433,254Additional paid-in capital
    
    
    8,386,940
    
    
    
    5,599,498Accumulated deficit
    
    
    (5,648,809
    )
    
    
    (8,344,624
    )Total stockholders equity (deficit)
    
    
    3,532,766
    
    
    
    (2,311,872
    )TOTAL
    
    $
    12,540,059
    
    
    $
    11,559,433
  4




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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004NET SALES
    
    $
    3,934,374
    
    
    $
    3,481,313
    
    
    $
    11,583,297
    
    
    $
    9,900,540COST OF GOODS SOLD
    
    
    1,561,309
    
    
    
    1,528,681
    
    
    
    4,602,402
    
    
    
    4,210,922Gross profit
    
    
    2,373,065
    
    
    
    1,952,632
    
    
    
    6,980,895
    
    
    
    5,689,618OPERATING EXPENSES:Selling, general and administrative
    
    
    1,585,525
    
    
    
    1,186,119
    
    
    
    4,634,314
    
    
    
    3,875,283Research and development
    
    
    462,073
    
    
    
    339,373
    
    
    
    1,233,094
    
    
    
    1,040,893Depreciation
    
    
    13,258
    
    
    
    37,867
    
    
    
    89,703
    
    
    
    108,591Total operating expenses
    
    
    2,060,856
    
    
    
    1,563,359
    
    
    
    5,957,111
    
    
    
    5,024,767INCOME FROM OPERATIONS
    
    
    312,209
    
    
    
    389,273
    
    
    
    1,023,784
    
    
    
    664,851OTHER INCOME (EXPENSE)Sundry, net
    
    
    (14,550
    )
    
    
    (13,369
    )
    
    
    33,948
    
    
    
    (32,244
    )Interest
    
    
    (39,695
    )
    
    
    (280,252
    )
    
    
    (403,892
    )
    
    
    (838,015
    )Gain on debt restructure
    
    
    0
    
    
    
    0
    
    
    
    2,041,975
    
    
    
    0Resolution of business acquisition
contingency
    
    
    0
    
    
    
    (312,420
    )
    
    
    0
    
    
    
    (312,420
    )Total other income (expense)
    
    
    (54,245
    )
    
    
    (606,041
    )
    
    
    1,671,031
    
    
    
    (1,182,679
    )INCOME (LOSS ) BEFORE INCOME TAX
    
    
    257,964
    
    
    
    (216,768
    )
    
    
    2,695,815
    
    
    
    (517,828
    )PROVISION FOR INCOME TAXES
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0NET INCOME (LOSS)
    
    
    257,964
    
    
    
    (216,768
    )
    
    
    2,695,815
    
    
    
    (517,828
    )NET INCOME (LOSS) PER COMMON SHAREBasic
    
    $
    0.03
    
    
    ($
    0.05
    )
    
    $
    0.42
    
    
    ($
    0.12
    )Diluted
    
    $
    0.02
    
    
    ($
    0.05
    )
    
    $
    0.27
    
    
    ($
    0.12
    )WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDINGBasic
    
    
    7,946,337
    
    
    
    4,262,968
    
    
    
    6,384,326
    
    
    
    4,200,773Diluted
    
    
    11,527,337
    
    
    
    4,262,968
    
    
    
    9,965,326
    
    
    
    4,200,773
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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2004OPERATING ACTIVITIES:Net Income (Loss)
    
    $
    2,695,815
    
    
    
    ($517,828
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activitiesDepreciation and amortization
    
    
    146,953
    
    
    
    173,625Stock compensation
    
    
    0
    
    
    
    61,462Gain on debt restructure
    
    
    (2,041,975
    )
    
    
    0Changes in assets and liabilities:Accounts receivable
    
    
    (107,026
    )
    
    
    88,651Inventories
    
    
    (980,649
    )
    
    
    (309,797
    )Prepaid expenses and other assets
    
    
    52,298
    
    
    
    (97,296
    )Accounts payable and accrued expenses
    
    
    1,276,015
    
    
    
    1,407,330Net cash provided by operating activities
    
    
    1,041,431
    
    
    
    806,147INVESTING ACTIVITIES:Capital expenditures
    
    
    (97,875
    )
    
    
    (163,753
    )Net cash used in investing activities
    
    
    (97,875
    )
    
    
    (163,753
    )FINANCING ACTIVITIES:Proceeds from shareholder advances
    
    
    53,000
    
    
    
    50,000Repayment of shareholder advances
    
    
    (53,000
    )
    
    
    (112,500
    )Principal payments on long-term debt
    
    
    (988,425
    )
    
    
    (237,833
    )Net cash used in financing activities
    
    
    (988,425
    )
    
    
    (300,333
    )NET INCREASE (DECREASE) IN CASH
    
    
    (5,673
    )
    
    
    342,061CASH AT BEGINNING OF PERIOD
    
    
    108,488
    
    
    
    222,631CASH AT END OF PERIOD
    
    $
    102,815
    
    
    $
    564,692
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(continued)
 CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
 Nine Month EndedSeptember 30,2005
    
    2004Supplemental Disclosures of Cash Flow InformationCash paid for interest
    
    $
    244,245
    
    
    $
    529,917Supplemental schedule of non-cash operating and
financing activities:Common stock issued for compensation
    
    $
    0
    
    
    $
    61,462Debt settled by issuance of common shares
    
    $
    4,255,000
    
    
    $
    0
  7




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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
        8




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004NumeratorNet income (loss)
    
    $
    257,964
    
    
    ($
    216,768
    )
    
    $
    2,695,815
    
    
    ($
    517,828
    )DenominatorWeighted average shares  basic
    
    
    7,946,337
    
    
    
    4,262,968
    
    
    
    6,384,326
    
    
    
    4,200,773Weighted average shares   diluted
    
    
    11,527,337
    
    
    
    4,262,968
    
    
    
    9,965,326
    
    
    
    4,200,773Basic income (loss) per share
    
    $
    0.03
    
    
    ($
    0.05
    )
    
    $
    0.42
    
    
    ($
    0.12
    )Diluted income (loss) per share
    
    $
    0.02
    
    
    ($
    0.05
    )
    
    $
    0.27
    
    
    ($
    0.12
    )
  Share-Based Payment , Accounting for Stock-Based
Compensation, Accounting for Stock Issued to Employees
  Inventory Costs
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Accounting Changes and Error Corrections Accounting Changes, Reporting Accounting Changes in Interim Financial
Statements
        September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)Raw materials and supplies
    
    $
    2,954,747
    
    
    $
    2,782,860Work in process
    
    
    1,368,636
    
    
    
    843,279Finished goods
    
    
    839,352
    
    
    
    555,947Total
    
    
    5,162,735
    
    
    
    4,182,086Less obsolescence reserve
    
    
    (1,809,410
    )
    
    
    (1,809,410
    )Inventories, net
    
    $
    3,353,325
    
    
    $
    2,372,676
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September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)Orban acquisition note to stockholder
    
    $
    180,000
    
    
    $
    180,000Avocet Instruments, Inc.
    
    
    27,367
    
    
    
    27,367Dialog4 Engineering GmbH (see Note 6)
    
    
    854,192
    
    
    
    1,386,200Harman (see Note 5)
    
    
    2,827,527
    
    
    
    8,503,444Solectron GmbH (see Note 6)
    
    
    227,107
    
    
    
    275,527Vendor notes
    
    
    176,946
    
    
    
    16,979Employee note
    
    
    2,000
    
    
    
    18,000Total long-term debt
    
    
    4,295,139
    
    
    
    10,407,517Less current portion
    
    
    1,432,947
    
    
    
    1,397,627Total long-term debt, less current portion
    
    $
    2,862,192
    
    
    $
    9,009,890
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Notes payable to stockholders and related parties
     12




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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
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Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Revenues:Net sales
    
    $
    3,934,374
    
    
    $
    3,481,313
    
    
    $
    11,583,297
    
    
    $
    9,900,540Other income (expense)
    
    
    (54,245
    )
    
    
    (606,041
    )
    
    
    1,671,031
    
    
    
    (1,182,672
    )Total revenues
    
    $
    3,880,129
    
    
    $
    2,875,272
    
    
    $
    13,254,328
    
    
    $
    8,717,860Gross profit on net sales
    
    $
    2,373,066
    
    
    $
    1,952,632
    
    
    $
    6,980,895
    
    
    $
    5,689,618Gross profit margin
    
    
    50
    %
    
    
    56
    %
    
    
    60
    %
    
    
    57
    %Net cash provided by operating activities
    
    $
    243,688
    
    
    $
    524,387
    
    
    $
    1,041,431
    
    
    $
    806,147Net cash used in investing activities
    
    $
    49,824
    
    
    $
    42,796
    
    
    $
    97,875
    
    
    $
    163,753Net cash used in financing activities
    
    $
    226,038
    
    
    $
    83,721
    
    
    $
    988,425
    
    
    $
    300,333Net income (loss)
    
    $
    257,964
    
    
    ($
    216,768
    )
    
    $
    2,695,815
    
    
    ($
    517,828
    )Net income (loss) as a percent of net sales
    
    
    7
    %
    
    
    -6
    %
    
    
    23
    %
    
    
    -3
    %Income (loss) per share  basic
    
    $
    0.03
    
    
    ($
    0.05
    )
    
    $
    0.42
    
    
    ($
    0.12
    )Income (loss) per share  diluted
    
    $
    0.02
    
    
    ($
    0.05
    )
    
    $
    0.27
    
    
    ($
    0.12
    )
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Three And Nine Months Ended September 30, 2005
Compared To The Three And Nine Months Ended September 30, 2004
    19




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Liquidity and Capital Resources
    20




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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.
 Our independent auditors have included a going concern paragraph in their report on our
financial statements.
  As a result of our outstanding debt obligations, we have significant ongoing debt service
requirements which may adversely affect our financial and operating flexibility.
  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.
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Foreign currency fluctuations could adversely affect our results of operations.
   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.
  We must adapt to rapid technological change and increased competition if we are going to be
able to compete effectively in our industry.
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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.
  Our President, Chief Executive Officer and Chairman of the Board exercises significant control
over us.
  We depend on a few key management persons.
  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.
  25




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The liquidity of our common stock could be restricted because our common stock falls within
the definition of a Penny 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.
  The market price of our common stock has been volatile and the value of your investment may
decline.
  
    
    changes in general conditions in the economy or the financial markets;
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
    
    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.
 FORWARD-LOOKING STATEMENTS
  27




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ITEM 3. CONTROLS AND PROCEDURES.
  28




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PART II    OTHER INFORMATION
 
 ITEM 2. CHANGES IN SECURITIES AND ISSUER REPURCHASES OF EQUITY SECURITIES.
 Recent Sales of Unregistered Securities
  ITEM 5. OTHER INFORMATION
  ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-B. (Filed herewith).31.2
    
    Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-B. (Filed herewith).32.1
    
    Certification of Chief Executive Officer pursuant to item
601(b)(32) of Regulation S-B. (Filed herewith).32.2
    
    Certification of Chief Financial Officer pursuant to item
601(b)(32) of Regulation S-B. (Filed herewith).
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SIGNATURES
  CIRCUIT RESEARCH LABS, INC.Dated: November 21, 2005
    By:
    /s/ Robert W. McMartinRobert W. McMartinVice President, Treasurer and
Chief Financial Officer 30




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ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-B. (Filed herewith).31.2
    
    Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-B. (Filed herewith).32.1
    
    Certification of Chief Executive Officer pursuant to item
601(b)(32) of Regulation S-B. (Filed herewith).32.2
    
    Certification of Chief Financial Officer pursuant to item
601(b)(32) of Regulation S-B. (Filed herewith).
 31