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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB







QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005



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.)
|---------------------------------------------------------------------- | -----------------------------------------------



1302 W. Drivers Way, Tempe, Arizona 85284

(Address of principal executive offices) (Zip code)



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



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



The number of shares outstanding of each class of our common equity as of June 3, 2005 follows:

|Class of Common Equity       |  | Number of Shares
|---------------------------- |  | ----------------
|Common Stock, par value $.10 |  | 7,946,337       





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, 2005



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Page



PART I  -  FINANCIAL INFORMATION

1



ITEM  1.  FINANCIAL STATEMENTS

1



Consolidated Condensed Balance Sheets 

March 31, 2005 (unaudited) and December 31, 2004

1



Consolidated Condensed Statements of Operations 

Three Months ended March 31, 2005 and 2004 (unaudited)

3



Consolidated Condensed Statements of Cash Flows 

Three Months ended March 31, 2005 and 2004 (unaudited)

4



Notes to Consolidated Condensed Financial Statements

6



ITEM 1A.  PRO FORMA FINANCIAL INFORMATION

13



ITEM  2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

21



ITEM  3.  CONTROLS AND PROCEDURES

33





PART  II  -  OTHER INFORMATION

34



ITEM  2.  CHANGES IN SECURITIES

34



ITEM  5.  OTHER INFORMATION

34



ITEM  6.  EXHIBITS AND REPORTS ON FORM 8-K

35





SIGNATURE

36



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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,
|------------------------------------------------------------------------------------------------- | ----------- | ------------
|                                                                                                  | 2005        | 2004        
|                                                                                                  | (unaudited) |             
|CURRENT ASSETS:                                                                                   |             |             
|Cash                                                                                              | $664,916    | $108,488    
|Accounts receivable, trade, net of allowance for doubtful accounts of $33,361 in 2005 and in 2004 | 688,617     | 577,571     
|Inventories                                                                                       | 2,771,882   | 2,372,676   
|Other current assets                                                                              | 153,310     | 159,984     
|Total current assets                                                                              | 4,278,725   | 3,218,719   
|                                                                                                  |             |             
|PROPERTY, PLANT AND EQUIPMENT - Net                                                               | 469,167     | 501,793     
|                                                                                                  |             |             
|                                                                                                  |             |             
|OTHER ASSETS:                                                                                     |             |             
|Goodwill                                                                                          | 7,476,008   | 7,476,008   
|Other                                                                                             | 379,736     | 362,913     
|                                                                                                  | 7,855,744   | 7,838,921   
|                                                                                                  |             |             
|TOTAL                                                                                             | $12,603,636 | $11,559,433 
|                                                                                                  |             |             
|                                                                                                  |             |             
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                             |             |             
|                                                                                                  |             |             
|CURRENT LIABILITIES:                                                                              |             |             
|Accounts payable                                                                                  | $1,293,121  | $1,228,545  
|Notes payable to stockholders                                                                     | 730,000     | 730,000     
|Notes payable, Harman                                                                             | 625,000     | 512,500     
|Current portion of long-term debt                                                                 | 880,024     | 885,127     
|Accrued salaries and benefits                                                                     | 664,602     | 506,892     
|Customer deposits                                                                                 | 1,033,151   | 244,885     
|Other accrued expenses and liabilities                                                            | 773,026     | 753,466     
|Total current liabilities                                                                         | 5,998,924   | 4,861,415   
|                                                                                                  |             |             
|LONG-TERM DEBT, LESS CURRENT PORTION                                                              | 9,097,533   | 9,009,890   
|Total liabilities                                                                                 | 15,096,457  | 13,871,305  
|                                                                                                  |             |             





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|CONSOLIDATED CONDENCED SHEETS
- continued                                                                                                    | March 31,   | December 31,
|-------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------
|                                                                                                                                             | 2005        | 2004        
|                                                                                                                                             | (unaudited) |             
|STOCKHOLDERS DEFICIT                                                                                                                        |             |             
|Preferred stock, $100 par value  authorized, 500,000 shares, None issued                                                                    |             |             
|Common stock, $.10 par value  authorized, 20,000,000 shares, 4,332,533 shares issued and outstanding at March 31,2005 and December 31, 2004 | 433,254     | 433,254     
|Additional paid-in capital                                                                                                                   | 5,599,498   | 5,599,498   
|Accumulated deficit                                                                                                                          | (8,525,573) | (8,344,624) 
|Total stockholders deficit                                                                                                                  | (2,492,821) | (2,311,872) 
|TOTAL                                                                                                                                        | $12,603,636 | $11,559,433 





















































See accompanying notes to consolidated condensed financial statements.



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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited)





|                                                                        | March 31,  | March 31, 
|----------------------------------------------------------------------- | ---------- | ----------
|                                                                        | 2005       | 2004      
|                                                                        |            |           
|NET SALES                                                               | $3,274,492 | $3,291,364
|COST OF GOODS SOLD                                                      | 1,373,927  | 1,383,257 
|Gross profit                                                            | 1,900,565  | 1,908,107 
|                                                                        |            |           
|OPERATING EXPENSES                                                      |            |           
|Selling, general and administrative                                     | 1,363,608  | 1,244,181 
|Research and development                                                | 398,237    | 375,176   
|Depreciation                                                            | 39,054     | 34,916    
|Total operating expenses                                                | 1,800,899  | 1,654,273 
|INCOME  FROM OPERATIONS                                                 | 99,666     | 253,834   
|                                                                        |            |           
|OTHER EXPENSE:                                                          |            |           
|Sundry                                                                  | 14,856     | 9,610     
|Interest                                                                | 265,759    | 281,572   
|Total other expense                                                     | 280,615    | 291,182   
|                                                                        |            |           
|LOSS BEFORE INCOME TAXES                                                | (180,949)  | (37,348)  
|                                                                        |            |           
|PROVISION FOR INCOME TAXES                                              | 0          | 0         
|NET LOSS                                                                | ($180,949) | ($37,348) 
|NET LOSS PER COMMON SHARE  BASIC AND                                   |           
|DILUTED                                                                 | ($0.04)    | ($0.01)   
|                                                                        |            |           
|                                                                        |            |           
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

Basic and diluted | 4,332,533  | 4,166,133 









See accompanying notes to consolidated condensed financial statements.



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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                    | Three Months Ended
|--------------------------------------------------- | ------------------
|                                                    | March 31,         
|                                                    | 2005              
|OPERATING ACTIVITIES:                               |                   
|Net Loss                                            | ($180,949)        
|Adjustments to reconcile net loss to net cash       |                   
|Provided by operating activities                    |                   
|Depreciation and amortization                       | 56,870            
|Stock compensation                                  | 0                 
|                                                    |                   
|Changes in assets and liabilities:                  |                   
|Accounts receivable                                 | (111,046)         
|Inventories                                         | (399,206)         
|Prepaid expenses and other assets                   | (10,149)          
|Accounts payable and accrued expenses               | 1,254,572         
|Net cash provided by operating activities           | 610,092           
|                                                    |                   
|INVESTING ACTIVITIES:                               |                   
|Capital expenditures                                | (24,244)          
|Net cash used in investing activities               | (24,244)          
|                                                    |                   
|FINANCING ACTIVITIES:                               |                   
|Proceeds from notes payable to stockholders         | 53,000            
|Principal payments on notes payable to stockholders | (53,000)          
|Principal payments on long-term debt                | (29,420)          
|Net cash used in financing activities               | (29,420)          
|                                                    |                   
|NET INCREASE IN CASH                                | 556,428           
|                                                    |                   
|CASH AT BEGINNING OF PERIOD                         | 108,488           
|                                                    |                   
|CASH AT END OF PERIOD                               | $664,916          













See accompanying notes to consolidated condensed financial statements.





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(continued)

CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited)



|                                                        | Three Months Ended
|------------------------------------------------------- | ------------------
|                                                        | March 31,         
|                                                        | 2005              
|                                                        |                   
|Supplemental Disclosures of Cash Flow Information       |                   
|                                                        |                   
|                                                        |                   
|Cash paid for interest                                  | $        69,881   
|                                                        |                   
|                                                        |                   
|                                                        |                   
|Supplemental schedule of non-cash financing activities: |                   
|                                                        |                   
|                                                        |                   
|                                                        |                   
|Common stock issued for compensation                    | $           0     



















































See accompanying notes to consolidated condensed financial statements.



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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



The Consolidated Condensed Financial Statements included herein have been prepared by Circuit Research Labs, Inc. (CRL or the Company), pursuant to the rules and regulations of the Securities and Exchange Commission.  The Consolidated Condensed Balance Sheet as of March 31, 2005 and the Consolidated Condensed Statements of Operations for the three months ended March 31, 2005 and 2004, and the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2005 and 2004 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, 2004.



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





2.      Significant Accounting Policies are as follows:



a.     Net loss per share





In calculating net loss per share for the three months ended March 31, 2005, the effects of 3,021,000 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, 2004, the effects of 2,815,000 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 per shares is calculated as follows:

|                                 | Three Months Ended
March 31,
|-------------------------------- | ----------------------------
|                                 | 2005                        
|Numerator                        |                             
|Net loss                         | ($180,949)                  
|                                 |                             
|Denominator                      |                             
|Weighted average shares          | 4,332,533                   
|                                 |                             
|Basic and diluted loss per share | ($0.04)                     



b.         New accounting pronouncements



SFAS No. 123, (Revised 2004) (SFAS No. 123(R)), Share-Based Payment, was issued in December 2004.  SFAS No. 123(R) is a revision of FASB Statement 123, Accounting for Stock-Based Compensation,and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance, which allowed companies to use the intrinsic method of valuing share-based payment transactions.  SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity with share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the fair-value method as defined in Statement 123.  Pro forma disclosure is no longer an alternative.  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.  This statement is effective as to the Company commencing with the interim reporting period that begins January 1, 2006.

As permitted by Statement 123, we currently account for share-based payments to employees using the intrinsic value method and, as such, generally recognize no compensation cost for employee stock options.  Accordingly, the adoption of Statement 123(R)s fair value method is expected to have an impact on our results of operations, although it will have no impact on our overall financial condition.  The impact upon adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, the valuation model used to value the options and other variables.

SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, was issued in November 2004.  SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead.  Further, SFAS No. 151 requires that allocation of fixed and production facilities overhead to conversion costs should be based on normal capacity of the production facilities.  The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005.  We do not expect the adoption of SFAS No. 151 to have a material effect on our results of operations or financial condition.











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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, 2005, the Company had trade receivables due from one customer representing approximately 41% of the receivable balance.  No other customer accounted for more than 10% of receivables at March 31, 2005.



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3.

INVENTORIES



Inventories consist of the following at March 31, 2005 and December 31, 2004:









|                           | March 31,   | December 31,
|-------------------------- | ----------- | ------------
|                           | 2005        | 2004        
|                           | (Unaudited) |             
|                           |             |             
|Raw materials and supplies | $2,905,844  | $2,782,860  
|Work in process            | 968,341     | 843,279     
|Finished goods             | 707,107     | 555,947     
|Total                      | 4,581,292   | 4,182,086   
|Less obsolescence reserve  | (1,809,410) | (1,809,410) 
|Inventories, net           | $2,771,882  | $2,372,676  























4.

LONG-TERM DEBT



Long term-debt consists of the following at March 31, 2005 and December 31, 2004:





|                                           | March 31,   | December 31,
|------------------------------------------ | ----------- | ------------
|                                           | 2005        | 2004        
|                                           | (Unaudited) |             
|Orban acquisition note to stockholder      | $180,000    | $180,000    
|Avocet Instruments, Inc.                   | 27,367      | 27,367      
|Dialog4 Engineering GmbH (see Note 6)      | 1,386,200   | 1,386,200   
|Solectron GmbH (see Note 6)                | 252,107     | 275,527     
|Vendor notes                               | 16,979      | 16,979      
|Employee note                              | 12,000      | 18,000      
|Total long-term debt                       | 1,874,653   | 1,904,073   
|Less current portion                       | 880,024     | 885,127     
|Total long-term debt, less current portion | 994,629     | 1,018,946   







Scheduled principal payments due within one year aggregate $625,000 as of March 31, 2005. Long-term debt at March 31, 2005 includes $8,102,904 owed to Harman (see note 5).



In connection with its acquisition of the assets of Orban in 2000, the Company issued $205,000 in long-term debt to a stockholder in consideration for his role in such acquisition.  The note bears interest at 7.5 percent per annum, with principal and interest due monthly beginning August 1, 2000 for four years.  Based on a verbal agreement with the note holder, the Company made payments in 2001 sufficient for interest and some principal.  On November 12, 2001, the Company and the stockholder agreed to defer the payments to January 2002 with interest accruing at the rate of 7.5% per annum. As of



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July 31, 2004, the Company has made partial payments on the accrued interest, and the outstanding principal balance of this debt was $178,905, plus accrued interest of $1,746. The Company signed a new promissory note to replace the original note on August 3, 2004 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 16th 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, CRL acquired the assets of Avocet Instruments, Inc. for $82,980 plus other costs of $3,350. The remaining unpaid purchase price is being paid in monthly installments of $1,200, including interest at the rate of 5.0%  per annum through June 30, 2006. As of March 31, 2005, $27,367 is the balance of the note.



In the fourth quarter of 2001, the Company converted various trade payables into notes payable and long-term debt totaling $179,903. As of March 31, 2005 the unpaid portion of these notes payable are $16,979.





5.

NOTES PAYABLE



Harman



On May 31, 2000, we acquired the assets of Orban, Inc., which was then a wholly owned subsidiary of Harman International Industries, Inc., including the rights to the name Orban.  We paid the purchase price partially in cash and partially by issuing notes payable to Harman.



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 $1.0 million as of September 30, 2004 of accrued but unpaid interest, would be restructured, subject to certain conditions including the execution by the parties of definitive documents.  The definitive agreements were executed on April 29, 2005.  Consequently, our financial statements for the fiscal quarter ended March 31, 2005, including our consolidated balance sheet as of March 31, 2005, do not reflect the debt restructure.  The effect of the debt restructure will first be reflected in our unaudited consolidated financial statements for the fiscal period which ends June 30, 2005, which is the period that includes the date (April 29, 2005) on which the restructure was completed and definitive documents were executed.  Those financial statements will be included in our quarterly report on Form 10-QSB for the period ending June 30, 2005.  The material contracts setting forth the terms of the debt restructure are set forth in Form 8-K which was filed with the Securities and Exchange Commission on May 4, 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 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. The amount owed to Harman at March 31, 2005 was $7,482,000 in principal and $1,391,100 in interest.



As part of the transaction, in 2004 we paid Harman $1,000,000 in cash in payment of debt 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 Company operations and (ii) $700,000 came from a



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short term loan from a related party lender who is a family member of the Companys President and CEO.   The loan bears interest at 11.5% per annum and requires monthly interest-only installments.   We are negotiating with the lender concerning the terms of repayment and the possibility of the lender converting the note into preferred or common stock of the Company.   No agreement about the terms and conditions of the payment or conversion has yet been completed.



Prior to the 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% 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 the Companys indebtedness to Harman.  After giving effect to the $1,000,000 principal payment, the principal amount due Harman by the Company was $7,482,000.  Adding the remaining unpaid interest of $249,530 to principal resulted in a total unpaid principal loan balance of $7,731,530 as of September 30, 2004.



Harman exchanged $2,104,000 of the remaining indebtedness for 2,104,000 shares of the Companys common stock, which shares Harman then sold to our 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.



Harman exchanged an additional $2,400,000 of indebtedness for additional shares of Company common stock, such that Harman owns approximately 1,509,000 shares, or 19% of the then-outstanding shares of our common stock on a fully diluted basis after giving effect to the transactions described above.   If the related party lender who holds the $700,000 note described above elects to convert the note into shares of our common stock, or issued stock options are exercised, we are obligated to issue to Harman as many additional shares as is then necessary to cause Harman to maintain a 19% ownership interest after the entire transaction is completed.



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) the Companys indebtedness owing to Harman and (ii) reduces the interest rate on the debt to 6% per annum, with interest payable monthly in arrears.  Principal repayment of the note is amortized over a five year period, and the final scheduled principal payment under the note is due October 12, 2009, the fifth anniversary of the date of the letter agreement referred to above.  The Companys indebtedness to Harman is secured by a security interest covering all of the Companys assets.



Current maturities and obligations at March 31, 2005 are measured based on the terms agreed to with Harman in April 2005. Scheduled principal payments due within one year aggregate $625,000 as of March 31, 2005. Long-term debt at March 31, 2005 includes $8,102,904 owed to Harman.



Notes payable to stockholders



As noted above, on October 4, 2004 Jayson Russell Brentlinger, the related party lender who is a family member of the Companys President and CEO, loaned the Company $700,000 in connection with the Harman Debt restructure executed in April 2005. The loan bears interest at 11.5% per annum and requires monthly interest-only installments. We are negotiating with the lender concerning the terms of repayment and the possibility of the lender converting the note into preferred or common stock of the



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Company. No agreement about the terms and conditions of the payment or conversion has yet been completed.



During June 2003 two stockholders loaned the Company $10,000 and $20,000, pursuant to one-year notes accruing interest at rate of 9% per annum. Both notes where due and payable with interest in June 2004. The Company will also issue 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. These options will be issued in 2005 as a result of the Harman debt restructure. The proceeds from these notes were used to reduce the accrued and unpaid interest owed to Harman. The two shareholders have verbally agreed to extend the loans and the Company continues to accrue interest under the loans.



On March 3, 2005 Robert McMartin (McMartin), the Companys Vice President and Chief Financial Officer and Gary Clarkson the Companys Vice President and General Manager loaned the Company $33,000 and $20,000, respectively.  These loans were repaid March 13, 2005. To induce Mr. McMartin and Mr. Clarkson to make the loans the Company promised to issue two options for every dollar loaned to purchase shares of common stock in CRLI.



On May 25, 2004, Mr. McMartin, the Companys Vice President and Chief Financial Officer, loaned the Company $50,000 to be applied to reduce the accrued past due interest owed to Harman. The loan was due August 25, 2004 and paid, with interest at a rate of 16% per annum. To induce Mr. McMartin to make the loan, the Company granted 2 (two) shares of common stock per dollar loaned. The Company will also issue options to Mr. McMartin to purchase 100,000 shares of common stock of the Company for a purchase price of $0.45 per share. These options will be issued in 2005 as a result of the Harman debt restructure. The loan was repaid to Mr. McMartin.



Interest expense on all stockholder loans for the three months ended March 31, 2005 was $22,782.



6.

DIALOG4



Dialog4 System Engineering, GmbH, was a German corporation that produced in our industry, including our Codec line of products. We purchased assets of Dialog4 on January 18, 2002. We and Dialog4 had disputes that arose in connection with this transaction. Those disputes were submitted to arbitration in Germany.



On October 8, 2004, the Company learned the Arbiter had awarded Dialog4 approximately $1.0 million. We increased our reserves from $712,000, the amount of principal and interest then due under the Companys note payable to Dialog4 (see note 4) to $1,393,000. The difference of $681,135 is reported as resolution of business acquisition contingency in the 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 United States District Court for the District of Arizona (Arizona Litigation) to enforce the arbitration award.



On March 30, 2005, the Company and Dialog4 agreed upon terms of the settlement of all disputes between them. We paid Dialog4 $490,000 at the time the settlement papers were signed on April 15, 2005 and will pay an additional $475,000 one year after the settlement date. We also agreed to file with the SEC a registration statement under the Securities Act of 1934 by June 30, 2005. The registration



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statement will cover any sales by Dialog4 of the 1,250,000 shares of stock that we issued to Dialog4 in 2002 in partial payment of the purchase price of assets we bought.



As part of the 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 of the Company; 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.



On August 9, 2002, the Company agreed to purchase all existing inventory of parts related to its Sountainer product from Solectron GmbH for a total price of $829,328, payable in 24 equal monthly installments including interest.  Solectron had purchased the inventory pursuant to an agreement with Dialog4 approximately two years prior to the Companys purchase of the assets of Dialog4.  The price was equal to the amount paid by Solectron for the inventory, which the Company expects to realize from future sales of that inventory.  The agreement settled a dispute between the Company and Solectron in which Solectron claimed the Company became liable for the obligation of Dialog4 to purchase the inventory when the Company acquired the assets of Dialog4.  The Company maintains it did not undertake the obligation of Dialog4, but to settle the dispute, agreed to purchase the inventory, which it will use in the manufacture of Sountainer products.



On January 20, 2004, we renegotiated the terms and agreed to pay monthly installments of principal and interest in the amount of $25,000. The final installment will be due October 15, 2005 in the amount of $15,681. We owed Solectron $252,107 as of March 31 2005 and are current under the existing payment plan. As of March 31, 2005, the Company has cumulatively paid Solectron $462,830 in principal and $72,733 in interest. Charles Jayson Brentlinger, President and CEO of the Company has also signed a personal guarantee under the revised Settlement Agreement. The Company further agreed to indemnify Mr. Brentlinger should he be required to make any payment under this guarantee.  An amount of $233,000 is reported in other assets pending delivery of that amount of inventory by Solectron.



ITEM 1A.  PRO FORMA FINANCIAL INFORMATION



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 $1.0 million of accrued but unpaid interest, would be restructured, subject to certain conditions including the execution by the parties of definitive documents.  The definitive agreements were executed on April 29, 2005.  Consequently, our financial statements for the fiscal quarter ended March 31, 2005 and the fiscal year ended December 31, 2004 do not reflect the debt restructure.  The effect of the debt restructure will first be reflected in our unaudited consolidated financial statements for the fiscal period which ends June 30, 2005, which is the period that includes the date (April 29, 2005) on which the restructure was completed and definitive documents were executed.  Those financial statements will be included in our quarterly report on Form 10-QSB for the period ending June 30, 2005.  The material contracts setting forth the terms of the debt restructure are set forth on Form 8-K which was filed with the Securities and Exchange Commission on May 4, 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). Accordingly, we will refer in this report to many relevant amounts as of September 30, 2004, the date immediately before such effective date.



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The restructure is encouraging for the Company because it will reduce the companys debt service to Harman by approximately $824,000 a year. Our previous financial results coupled with the Harman debt service (prior to the debt restructure) have strained our liquidity. We are optimistic the restructure will allow the Company to focus on its 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.



As part of the transaction, in 2004 we paid Harman $1,000,000 in cash in repayment of debt as a condition to restructuring the remaining indebtedness of $7.5 million plus an additional $1.0 million of overdue interest. The funds for this payment came from two sources: (i) $300,000 came from cash generated from Company operations and (ii) $700,000 came from a short term loan from a related party lender (related party lender) who is a family member of the Companys President and CEO.   The loan bears interest at 11.5% per annum and requires monthly interest-only installments.   We are negotiating with the lender concerning the terms of repayment and the possibility of the lender converting the note into preferred or common stock of the Company.  No agreement about the terms and conditions of the payment or conversion has yet been completed.



Prior to the 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 the Companys indebtedness to Harman.  After giving effect to the $1,000,000 principal payment, the principal amount due Harman by the Company was $7,482,000 (before giving effect to the waiver of certain unpaid interest and the addition of remaining accrued interest to the loan principal balance).  Adding the remaining unpaid interest of $249,530 to principal resulted in a total unpaid principal loan balance of $7,731,530 as of September 30, 2004.



Harman exchanged $2,104,000 of the remaining indebtedness for 2,104,000 shares of the Companys common stock, which shares Harman then sold to our 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.



Harman exchanged an additional $2,400,000 of indebtedness for additional shares of Company common stock, such that Harman owns approximately 1,509,000 shares, or 19% of the then outstanding shares of our common stock on a fully diluted basis after giving effect to the transactions described above.   If the related party lender who holds our $700,000 note described above elects to convert the note into shares of our common stock, or issued stock options are exercised, we are obligated to issue to Harman as many additional shares as is then necessary to cause Harman to maintain a 19% ownership interest after the entire transaction is completed.



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) the Companys indebtedness owing to Harman and (ii) reduces the interest rate on the debt to 6% per annum, with interest payable monthly in arrears.  Principal repayment of the note is amortized over a five year period, and the final scheduled principal payment under the note is due October 12, 2009, the fifth



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anniversary of the date of the letter agreement referred to above.  The Companys indebtedness to Harman is secured by a security interest covering all of the Companys assets.



We have included in this report pro forma financial information, which gives effect of the debt restructure as if it had occurred as of January 1, 2005. We provide this information because, among other reasons, we had anticipated that the restructuring would be completed prior to the end of the 2004 fiscal year and because of the significance of that restructuring to our financial condition.







|CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES                                                                    
|----------------------------------------------------------------------------------------------------------------
|PRO FORMA CONSOLIDATED BALANCE SHEET                                                                            
|MARCH 31, 2005                                                                                                  
|(unaudited)                                                                                                     
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|CURRENT ASSETS:                                                                                                 
|Cash                                                                                                            
|Accounts receivable, trade, net of allowance                                               for doubtful accounts
|Inventories                                                                                                     
|Other current assets                                                                                            
|Total current assets                                                                                            
|                                                                                                                
|PROPERTY, PLANT AND EQUIPMENT - Net                                                                             
|                                                                                                                
|OTHER ASSETS:                                                                                                   
|Goodwill                                                                                                        
|Other                                                                                                           
|                                                                                                                
|TOTAL                                                                                                           
|                                                                                                                
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                           
|                                                                                                                
|CURRENT LIABILITIES:                                                                                            
|Accounts payable                                                                                                
|Notes payable to stockholders                                                                                   
|Notes payable, Harman                                                                                           
|Current portion of long-term debt                                                                               



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|Accrued salaries and benefits          | 664,602    |               | 664,602   
|-------------------------------------- | ---------- | ------------- | ----------
|Customer deposits                      | 1,033,151  |               | 1,033,151 
|Other accrued expenses and liabilities | 773,026    |               | 773,026   
|Total current liabilities              | 5,998,924  |               | 5,998,924 
|                                       |            |               |           
|LONG-TERM DEBT, LESS CURRENT PORTION   | 9,097,533  | 5,068,145 (1) | 4,029,388 
|Total liabilities                      | 15,096,457 | 5,068,145     | 10,028,312



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|CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES                                                                           
|-----------------------------------------------------------------------------------------------------------------------
|PRO FORMA CONSOLIDATED BALANCE SHEET (unaudited)                                                                       
|MARCH  31, 2005  continued                                                                                            
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|                                                                                                                       
|STOCKHOLDERS EQUITY (DEFICIT)                                                                                         
|Preferred stock, $100 par value  authorized, 500,000 shares, None issued                                              
|Common stock, $.10 par value  authorized, 20,000,000 shares, 4,332,533 shares issued and outstanding at March 31, 2005
|Additional paid-in capital                                                                                             
|Accumulated deficit                                                                                                    
|Total stockholders equity (deficit)                                                                                   
|TOTAL                                                                                                                  











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|CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
|-------------------------------------------------------------------------------------------
|FOR THE THREE MONTHD ENDED,MARCH 31, 2005                                                  
|(Unaudited)                                                                                
|                                                                                           
|                                                                                           
|                                                                                           
|NET SALES                                                                                  
|COST OF GOODS SOLD                                                                         
|Gross profit                                                                               
|                                                                                           
|OPERATING EXPENSES                                                                         
|Selling, general and administrative                                                        
|Research and development                                                                   
|Depreciation                                                                               
|Total operating expenses                                                                   
|INCOME FROM OPERATIONS                                                                     
|                                                                                           
|OTHER EXPENSE: (INCOME)                                                                    
|Sundry                                                                                     
|Income from debt restructure                                                               
|Interest                                                                                   
|                                                                                           
|Total expense (income)                                                                     
|                                                                                           
|INCOME (LOSS) BEFORE INCOME TAX                                                            
|                                                                                           
|Income tax expense                                                                         
|Utilization of net operating loss carry forward                                            
|NET INCOME (LOSS)                                                                          
|                                                                                           
|NET (LOSS) PER COMMON SHARE  BASIC                                                        
|NET (LOSS) PER COMMON SHARE  DILUTED                                                      
|                                                                                           
|Weighted average shares outstanding --basic                                                
|Weighted average shares outstanding - diluted                                              











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|Table for adjustment #1 to balance sheet                        |             
|--------------------------------------------------------------- | ------------
|                                                                |             
|Aggregate principal owed to Harman at March 31, 2005            | $ 7,482,000 
|                                                                |             
|Aggregate interest owed to Harman at March 31, 2005             | 1,439,460   
|                                                                |             
|Principal sum owed under restructured note                      | (3,227,000) 
|                                                                |             
|Aggregate interest to be paid to Harman under restructured note | (626,315)   
|                                                                |             
|Net obligation converted to common stock                        | $ 5,068,145 
|                                                                |             
|Common stock par value of shares issued                         | $    361,380
|                                                                |             
|Additional paid in capital credit for shares issued             | 1,355,176   
|                                                                |             
|Income recognized on restructure transaction, as if the         |             
|Restructure had occurred March 31, 2005                         | 3,351,589   
|                                                                |             
|Net obligation converted to common stock, as above              | $ 5,068,145 



The value attributed to paid in capital for 3,613,000 shares issued to Harman is based on the $0.475 per share value indicated by the terms of the 2,104,000 share sale by Harman to the company's CEO for $1,000,000.













|Table for adjustment #2 to statement of operations    |            
|----------------------------------------------------- | -----------
|                                                      |            
|Aggregate principal owed to Harman at January 1, 2005 | $ 7,482,000
|                                                      |            
|Aggregate interest owed to Harman at January 1, 2005  | 1,214,686  



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|                                                                |             
|--------------------------------------------------------------- | ------------
|Principal sum owed under restructured note                      | (3,227,000) 
|                                                                |             
|Aggregate interest to be paid to Harman under restructured note | (674,736)   
|                                                                |             
|Net obligation converted to common stock                        | $ 4,794,950 
|                                                                |             
|Common stock par value of shares issued                         | $    361,380
|                                                                |             
|Additional paid in capital credit for shares issued             | 1,355,176   
|                                                                |             
|Income recognized on restructure transaction, as if the         |             
|Restructure had occurred January 1, 2005                        | 3,078,394   
|                                                                |             
|Net obligation converted to common stock, as above              | $ 4,794,950 



The value attributed to paid in capital for 3,613,000 shares issued to Harman is based on the $0.475 per share value indicated by the terms of the 2,104,000 share sale by Harman to the company's CEO for $1,000,000



|Table for adjustment #3 to statement of operations |             
|-------------------------------------------------- | ------------
|                                                   |             
|Recorded interest expense to Harman for 2005       | $    224,460
|                                                   |             
|Interest expense under revised note terms          | (0)         
|                                                   |             
|Reduction in 2005 interest expense                 | $    224,460



































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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.







Recent Developments



Restructure of Debt Owed to Harman



The restructure of our indebtedness owed to Harman International Industries, Inc. is also described above in Item 1A under the caption PRO FORMA FINANCIAL INFORMATION



Dialog4 Settlement



Dialog4 System Engineering, GmbH, was a German corporation that produced equipment for the codec market in our industry, including our Codec line of products. We purchased assets of Dialog4 on January 18, 2002.  As described in Note 6 of the notes to our consolidated financial statements, which are included elsewhere herein, we and Dialog4 had disputes that arose in connection with this transaction, and those hose disputes were submitted to arbitration in Germany.

On October 8, 2004, we learned the Arbiter had awarded Dialog4 approximately $1.0 million. We increased our reserves from $712,000, the amount of principal and interest under the Companys note payable to Dialog4 to $1,393,300 take into account the award.  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 United States District Court for the District of Arizona (Arizona Litigation) to enforce the arbitration award.

On March 30, 2005, the Company and Dialog4 agreed upon terms of the settlement of all disputes between them. We paid Dialog4 $490,000 at the time the settlement papers were signed on April 15, 2005 and will pay an additional $475,000 one year after the settlement date. We also agreed to file with the SEC a registration statement under the Securities Act of 1934 by June 30, 2005. The registration statement will cover any sales by Dialog4 of the 1,250,000 shares of stock that we issued to Dialog4 in 2002 in partial payment of the purchase price of assets we bought.





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As part of the 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 for the Company; 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.



Our acquisition of the Dialog4 product line has led to the establishment of our new Orban Europe division offices in Ludwigsburg, Germany.  We continue to work through the challenge of integrating Dialog4 as well as the challenge of overcoming obstacles produced as a result of different corporate cultures, a difficult legal and regulatory system and different accounting and reporting regulations.  Our European operations also expose us to risks arising from foreign currency fluctuations.



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 System Engineering GmbH, a worldwide leader in ISO/MPEG, audio, ISDN, satellite transmission, networking and storage technology.



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





We have incurred losses of $1,506,917 and $384,877 during the years ended December 31, 2004 and 2003, respectively. Our financial results, coupled with servicing the Harman debt (approximately $8.5 million prior to the debt restructure) strained our liquidity and made it difficult for us to focus on the Companys core competencies. Under the terms of our debt agreement with Harman International Inc. in effect prior to our restructure of our debt owed to Harman, Harman had the right to demand at any time that we immediately pay in full the outstanding balance of our debt.  If this had happened, we would likely have been forced to file for protection under Chapter 11 of the United States Bankruptcy Code.  Because of our inability at that time to pay $8.5 million in principal and $1.2 million in accrued interest



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to Harman, should payment be demanded, our difficulties in meeting our financing needs and our negative working capital position resulted in our independent public accountants adding a going concern emphasis paragraph to their report on our financial statements for the years ended December 31, 2003 and 2004 by including a statement that such factors raise substantial doubt about our ability to continue as a going concern.



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















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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,                 
|                                          | 2005                      
|Revenues:                                 |                           
|Net sales                                 | $3,274,492                
|Other income                              | 0                         
|Total revenues                            | $3,274,492                
|Gross profit on net sales                 | $1,900,565                
|Gross profit margin                       | 58%                       
|Net cash provided by operating activities | $610,092                  
|Net cash used in investing activities     | ($24,244)                 
|Net cash  used in financing activities    | ($29,420)                 
|Net loss                                  | ($180,949)                
|Net loss as a percent of net sales        | ( 6%)                     
|Loss per share  basic and diluted        | ($0.04)                   







Three Months Ended March 31, 2005 Compared To The Three Months Ended March 31, 2004



Net Sales.  Net sales during the three months ended March 31, 2005 were $3.3 million compared to $3.3 million during the comparable period in 2004, reflecting a steady trend. We currently have a backlog of around $2.7 million and are looking at increasing our capacity by contracting with subcontractors to do some of our low level assembly with the final assembly being processed in our Tempe plant to be done in parallel with the plant in San Leandro. Our aim is to be more responsive to our customers demand for our products while increasing our efficiencies.  We hope to begin shipping in parallel by the end of June.



Sales for our Orban Optimod products reported $2.9 million for the three months ended March 31, 2005 as compared to $3.0 million for the same period in 2004, a of 3%. Our CRL division reported net sales of $171,000 for the three months ended March 31, 2005 as compared to $146,000 for the same period in 2004, an increase of 21%.  This increase was the result of increased demand for our TV products in Canada. Orban Europe reported net sales of $196,000 during the three months ended March 31, 2005 compared to $162,000 during the comparable period in 2004, an increase of 17%.



Gross Profit.   Gross profit was 58% of net sales for the three months ended March 31, 2005 and 2004.  The steady production at our San Leandro facility helps us maintain our efficiencies while keeping the costs associated with set up, and labor to a minimum



Selling, General and Administrative.  Selling, general and administrative expenses (SG&A) for the three months ended March 31, 2005 was $1,365,000, an increase of 10% compared to $1,244,000 for the first quarter of 2004.  As a percentage of net sales, SG&A was 42% for the three months ended



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March 31, 2005 as compared to 38% for the same period in 2004.  The increase in SG&A expense is due in part to the variable component of SG&A relating to our domestic and international sales and marketing expenses.



Research and Development.  Research and development expense was $400,000 for the three months ended March 31, 2005, an increase of 7% compared to $375,000 for the same period in 2004.  The increase resulted primarily from an increase in salaries.



Other Expense.   Other expense, net for the three months ended March 31, 2005 was $281,000 of which $224,000 represents interest expense to Harman International Industries, Inc. in connection with the seller carry-back loan that financed a portion of our purchase price for the Orban assets.  Other expense, net for the three months ended March 31, 2004 was $291,000, of which $255,000 represented interest expense to Harman.  Total interest expense was $266,000 for the three months ended March 31, 2005, a 6% decrease from $282,000 reported for the same period in 2004.  The decrease is associated with paying down some of our long-term obligations.



Net Loss.  Net loss was $181,000 for the three months ended March 31, 2005 compared to $37,000 for the same period in 2004.  The increase in net loss is primarily a result of increased selling expenses associated with the launch of new products.





Liquidity and Capital Resources



We had negative working capital of approximately $1.7 million at March 31, 3005, and the ratio of current assets to current liabilities was .70 to 1. At December 31, 2004, we had negative working capital of approximately $1.6 million and a current ratio of .66 to 1.  The decrease in working capital is attributable to an increase in accrued expenses including accrued salaries and benefits.



Our financial results coupled with servicing the Harman debt (of $8.5 million prior to the debt restructure) strained our liquidity and made it difficult for us to focus on the Companys core competencies. Under the terms of our debt agreement with Harman International, Inc. in effect prior to our restructure of our debt owed to Harman, Harman had the right to demand at any time that we immediately pay in full the outstanding balance of our debt.  If this had happened, we would likely have been forced to file for protection under Chapter 11 of the United States Bankruptcy Code.  Because of our inability to pay $8.5 million in principal and $1.0 million as of September 30, 2004 in accrued interest to Harman, should payment be demanded, our difficulties in meeting our financing needs and our negative working capital position resulted in our independent registered public accounting firm to add a going concern emphasis paragraph to their report on our financial statements for the years ended December 31, 2003 and 2004 by including a statement that such factors raise substantial doubt about our ability to continue as a going concern.



On October 12, 2004, we executed a letter agreement with Harman, whereby our indebtedness to Harman, then in an amount in almost $8.5 million plus an additional $1.0 million as of September 30, 2004 of accrued but unpaid interest, would be restructured, subject to certain conditions including the execution by the parties of definitive documents.  The definitive agreements were executed on April 29, 2005.  Consequently, our financial statements for the fiscal year ended December 31, 2004, including our consolidated balance sheet as of December 31, 2004, do not reflect the debt restructure.  The effect of the debt restructure will first be reflected in our unaudited consolidated financial statements for the fiscal period which ends June 30, 2005, which is the period that includes the date (April 29, 2005) on which the restructure was completed and definitive documents were executed.  Those financial statements will be



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included in our quarterly report on Form 10-QSB for the period ending June 30, 2005.  The material contracts setting forth the terms of the debt restructure are set forth in Form 8-K which was filed with the Securities and Exchange Commission on May 4, 2005.



The restructure is encouraging for the Company because it reduced the companys debt service to Harman by approximately $824,000 a year. Our previous financial results coupled with the Harman debt service payments have strained our liquidity. We are optimistic the restructure will allow the Company to focus on its operations and generate growth.



We have included in this report pro forma financial information, which gives effect of the debt restructure as if it had occurred during the quarter ended March 31, 2005.  We provide this information because, among other reasons, we had anticipated that the restructuring would be completed prior to the end of the 2004 fiscal year and because of the significance of that restructuring to our financial condition. Such pro forma financial statements are set forth in Item 1A above.

The debt restructure transaction reduced the principal portion of 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 and accrued interest prior to the restructure.



As part of the transaction, in 2004 we paid Harman $1,000,000 in cash in repayment of debt as a condition to restructuring the remaining indebtedness of $7.5 million plus an additional $1.0 million of overdue interest. The funds for this payment came from two sources: (i) $300,000 came from cash generated from Company operations and (ii) $700,000 came from a short term loan from a related party lender who is a family member of the Companys President and CEO.   The loan bears interest at 11.5% per annum and requires monthly interest-only installments.   We are negotiating with the lender concerning the terms of repayment and the possibility of the lender converting the note into preferred or common stock of the Company.   No agreement about the terms and conditions of the payment or conversion has yet been completed.



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



Harman exchanged $2,104,000 of the remaining indebtedness for 2,104,000 shares of the Companys 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.



Harman exchanged an additional $2,400,000 of indebtedness for additional shares of Company common stock, such that Harman owns approximately 1,509,000 shares, or 19% of the then outstanding shares of our common stock on a fully diluted basis after giving effect to the transactions described above.   If the related party lender who holds our $700,000 note described above elects to convert the



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note into shares of our common stock, or issued stock options are exercised, we are obligated to issue to Harman as many additional shares as is then necessary to cause Harman to maintain a 19% ownership after the entire transaction is completed.



The remaining $3,227,530 of indebtedness owed to Harman by the Company after giving effect to the transactions described above is  evidenced by a new note that (i) renews and extends (but does not extinguish) the Companys indebtedness owing to Harman and (ii) reduces the interest rate on the debt to 6% per annum, with interest payable monthly in arrears.  Principal repayment of the note is amortized over a five year period, and the final scheduled principal payment under the note is due October 12, 2009, the fifth anniversary of the date of the letter agreement referred to above.  The Companys indebtedness to Harman is secured by a security interest covering all of the Companys assets.



As described elsewhere in this report, on March 30, 2005, the Company and Dialog4 agreed upon terms of the settlement of all disputes between them. We paid Dialog4 $490,000 in April 2005 when the settlement papers were signed and will pay an additional $475,000 one year after the settlement date. We also agreed to file with the SEC a registration statement under the Securities Act by June 30, 2005. The registration statement will cover any sales by Dialog4 of the 1,250,000 shares of stock we issued to Dialog4 in 2002 in partial payment of the purchase price of assets we bought.



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



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.



Working capital generated from 2005 operations will be used to service our commitments as detailed above, excluding our obligations to Harman and Dialog4.  Any excess working capital generated from 2005 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 2005 as we evaluate any expenditure related to expansion.



Accounts receivable were $689,000 at March 31, 2005 compared to $578,000 at December 31, 2004 representing a net increase of $111,000 or 19%.  The increase is primarily due to increased sales in the month of March 2005.



Total inventories were $2,772,000 at March 31, 2005 compared to total inventories of $2,373,000 at December 31, 2004.  The increase of $399,000 or 17% is due in part to an increase in raw materials and work in process to reduce our backlog.



For the year ending December 31, 2005, our principal working capital requirements will be the payment of normal recurring operating costs.  Management believes that these requirements can be met from the operating cash flows.







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Risk Factors



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



Our independent auditors have included a going concern qualification in their report on our financial statements.



Our independent auditors have included in their report on our financial statements a paragraph that states that there is substantial doubt about the companys ability as a going concern due to our deteriorating financial results and liquidity challenges.  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 is in 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



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 the Harman debt restructure and the settlement of our disputes with Dialog4, and other obligations the Company will need to generate significant cash flow to meet existing debt scheduled principal payments.  If the Company fails to generate sufficient cash from its operations to meet these and other ongoing financial obligations, the Company may be adversely effected.



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 anyone else in is another factor that limits 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 System Engineering GmbH.  Our acquisition of this new product line has led to the establishment of our new Orban Europe offices in Ludwigsburg, Germany.  Transactions and expenses of our Orban Europe operations are conducted in Euros which



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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 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 2004, we derived approximately 7% of our total revenues from our Orban Europe operations.  This percentage may increase in future years as we further develop and expand our operations in Europe.  We cannot predict the effects of exchange rate fluctuations on our operating results.  We do not currently intend to engage in foreign currency exchange hedging transactions to manage our foreign currency exposure.  If and when we do engage in foreign currency exchange hedging transactions, we cannot assure you that our strategies will adequately protect our operating results from the effects of exchange rate fluctuations.



We serve a market in which there are a limited number of customers and our financial well-being is directly tied to the financial health of these customers.



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



We must adapt to rapid technological change and increased competition if we are going to be able to compete effectively in our industry.



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



We may not be able to retain our existing personnel or hire and retain the additional personnel that we need to sustain and grow our business.



Our future success will depend on our ability to attract, retain and motivate employees with the necessary skills and expertise required by our business.  Competition for employees who possess the technical expertise to develop and manufacture our products is intense.  A shortage in available skilled



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labor could require us to increase our wages and benefits to attract and retain enough employees.  An increase in our labor costs, or our inability to attract, retain and motivate employees, would likely harm our growth plans and may adversely affect our business and results of operations.



We depend on a number of vendors to supply us with component parts that are necessary to the production of our audio processing and post-production equipment.



We rely on certain vendors to provide component parts for use in the manufacturing of our audio processing and post-production equipment.  As technology improves, some of these parts have become

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



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



Charles J. Brentlinger, our President, Chief Executive Officer and Chairman of the Board, currently controls 635,000 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 4,332,533 shares of our common stock issued and outstanding as of March 31, 2005, if Mr. Brentlingers family limited partnership exercises all of his options he will own of record and beneficially approximately 46.1% of our issued and outstanding shares.  This means that Mr. Brentlinger exercises, and will continue to exercise, significant control over the business and affairs of our company.  Mr. Brentlingers exercise of this control may, in certain circumstances, deter or delay a merger, tender offers, other possible takeover attempts or changes in our management which may be favored by some or all of our minority shareholders.



We depend on a few key management persons.



We are substantially dependent on the personal efforts and abilities of Charles Jayson Brentlinger, our Chairman, President and Chief Executive Officer, and Robert Orban, our Vice President and Chief Engineer.  The loss of either of these officers or our other key management persons could harm our business and prospects for growth.  As a result, we have obtained key man life insurance policies on the lives of each of these officers.  We also have employment agreements with each of these officers which are more fully described elsewhere in this report.



The location of our Orban division subjects us to a number of risks that are beyond our control which could result in production interruptions.



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



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the Silicon Valley corridor of California subjects us to increased operating costs and labor shortages which could adversely affect our production capabilities and result in reduced revenues.



The market price of our common stock has been volatile and the value of your investment may decline.



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



·

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

·

variations in our quarterly operating results;

·

changes in financial estimates by securities analysts;

·

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

·

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

·

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



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



Under the rules and regulations of the Securities and Exchange Commission (SEC), as long as the trading price of our common stock on the OTC Bulletin Board is less than $5 per share, our common stock will come within the definition of a penny stock.  On May 15, 2005, the closing  sale price of our common stock on the OTC Bulletin Board was $0.36 per share.  Generally speaking, the definition of a penny stock does not include stock that is traded on Nasdaq or on a national securities exchange.  Since our common stock is traded on the OTC Bulletin Board, rather than on Nasdaq or a national securities exchange, our common stock falls within the definition of a  penny stock while it is trading below $5 per share.  As a result, the trading of our common stock is subject to certain penny stock rules and regulations.



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





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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.



























































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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.



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PART  II  -  OTHER INFORMATION



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





Recent Sales of Unregistered Securities



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



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



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



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







ITEM 5.  OTHER  INFORMATION

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







































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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: June 6, 2005



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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