UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-QSB





T

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

For the quarterly period ended June 30, 2007

OR

£

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

For the transition period from ____________ to ________________

Commission File No.: 0-11353

CIRCUIT RESEARCH LABS, INC.

(Exact name of small business issuer as specified in its charter)

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

7970 S. Kyrene Road, Tempe, Arizona 85284

(Address of principal executive offices) (Zip code)

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 T      No £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange act). .     Yes £      No T

The number of shares outstanding of each class of our common equity as of August 14, 2007 is as follows:

Class of Common Equity

Number of Shares

Common Stock, par value $.10

8,648,459





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Circuit Research Labs, Inc.

Index to Form 10-QSB Filing

For the Quarter Ended June 30, 2007





Table of Contents

Page



PART I  FINANCIAL INFORMATION

3

ITEM 1.  FINANCIAL STATEMENTS

3

CONSOLIDATED CONDENSED BALANCE SHEETS

June 30, 2007 (unaudited) and December 31, 2006

3



CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

Three and Six Months ended June 30, 2007 and 2006 (unaudited)

5



CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Six Months ended June 30, 2007 and 2006 (unaudited)

6



NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

8

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

19

ITEM 3.  CONTROLS AND PROCEDURES.

30

PART  II  -  OTHER INFORMATION

32

ITEM 2.   CHANGES IN SECURITIES

32

ITEM 5.  OTHER  INFORMATION

32

ITEM 6.  EXHIBITS

33

SIGNATURES

34



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PART I  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS



CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS



|                                                                                                | June 30,    | December 31,
|----------------------------------------------------------------------------------------------- | ----------- | ------------
|                                                                                                | 2007        | 2006        
|                                                                                                | (unaudited) |             
|CURRENT ASSETS:                                                                                 |             |             
|Cash                                                                                            | $ 9,125     | $ 30,125    
|Accounts receivable, trade, net of allowance for doubtful accounts of $33,361 in 2007 and  2006 | 1,202,528   | 830,571     
|Inventories - Net                                                                               | 2,886,420   | 2,585,828   
|Other current assets                                                                            | 113,732     | 113,960     
|Total current assets                                                                            | 4,211,805   | 3,560,484   
|                                                                                                |             |             
|PROPERTY, PLANT AND EQUIPMENT - Net                                                             | 180,927     | 264,684     
|                                                                                                |             |             
|                                                                                                |             |             
|OTHER ASSETS:                                                                                   |             |             
|Goodwill                                                                                        | 6,531,678   | 6,531,678   
|Other                                                                                           | 354,648     | 371,539     
|                                                                                                | 6,886,326   | 6,903,217   
|                                                                                                |             |             
|TOTAL                                                                                           | $11,279,058 | $10,728,385 
|                                                                                                |             |             
|                                                                                                |             |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                            |             |             
|                                                                                                |             |             
|CURRENT LIABILITIES:                                                                            |             |             
|Accounts payable                                                                                | $ 2,116,784 | $ 1,510,620 
|Notes payable to stockholders                                                                   | 1,315,000   | 1,195,000   
|Current portion, notes payable, Harman                                                          | 712,498     | 537,498     
|Current portion of other long-term debt                                                         | 1,036,671   | 1,582,293   
|Accrued salaries and benefits                                                                   | 588,130     | 568,847     
|Customer deposits                                                                               | 624,778     | 534,407     
|Other accrued expenses and liabilities                                                          | 637,551     | 333,110     
|Total current liabilities                                                                       | 7,031,412   | 6,261,775   
|                                                                                                |             |             
|LONG-TERM DEBT, LESS CURRENT PORTION                                                            | 1,949,010   | 2,131,525   
|Total liabilities                                                                               | 8,980,422   | 8,393,300   
|                                                                                                |             |             



See accompanying notes to consolidated condensed financial statements



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(continued)





CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES





|CONSOLIDATED CONDENSED BALANCE SHEETS
- continued                                                                                             | June 30,    | December 31,
|--------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------
|                                                                                                                                              | 2007        | 2006        
|                                                                                                                                              | (unaudited) |             
|STOCKHOLDERS EQUITY                                                                                                                          |             |             
|Preferred stock, $100 par value  authorized, 500,000 shares, None issued                                                                     |             |             
|Common stock, $.10 par value  authorized, 20,000,000 shares, 8,648,459 shares issued and outstanding at June 30, 2007 and December 31, 2006. | 864,846     | 864,846     
|Additional paid-in capital                                                                                                                    | 9,394,470   | 9,394,470   
|Accumulated deficit                                                                                                                           | (7,960,680) | (7,924,231) 
|Total stockholders equity                                                                                                                    | 2,298,636   | 2,335,085   
|TOTAL                                                                                                                                         | $11,279,058 | $10,728,385 





























See accompanying notes to consolidated condensed financial statements





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CIRCUIT RESEARCH LABS, INC. and SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited)





|                                                                                | Three  Months Ended | Six Months Ended
|------------------------------------------------------------------------------- | ------------------- | ----------------
|                                                                                | June 30,            | June 30,        
|                                                                                | 2007                | 2006            
|                                                                                |                     |                 
|NET SALES                                                                       | $3,276,317          | $3,852,356      
|COST OF GOODS SOLD                                                              | 1,083,062           | 1,245,678       
|Gross profit                                                                    | 2,193,255           | 2,606,678       
|                                                                                |                     |                 
|OPERATING EXPENSES:                                                             |                     |                 
|Selling, general and administrative                                             | 1,197,026           | 1,305,851       
|Research and development                                                        | 460,535             | 413,460         
|Depreciation                                                                    | 20,968              | 22,796          
|Total operating expenses                                                        | 1,678,529           | 1,742,107       
|INCOME  FROM OPERATIONS                                                         | 514,726             | 864,571         
|                                                                                |                     |                 
|OTHER (INCOME)  EXPENSE                                                         |                     |                 
|Convertible debt rights, other share related expense and other expense (income) | 14,505              | (42,840)        
|Interest expense                                                                | 57,367              | 61,436          
|Total other (income) expense                                                    | 71,872              | 18,596          
|                                                                                |                     |                 
|INCOME (LOSS ) BEFORE INCOME TAXES                                              | 442,854             | 845,975         
|                                                                                |                     |                 
|PROVISION FOR INCOME TAXES                                                      | 0                   | 0               
|NET INCOME (LOSS)                                                               | $442,854            | $845,975        
|                                                                                |                     |                 
|NET INCOME (LOSS)  PER COMMON SHARE - BASIC                                     | $0.05               | $0.10           
|                                                                                |                     |                 
|NET INCOME (LOSS)  PER COMMON SHARE -  DILUTED                                  | $0.04               | $0.08           
|                                                                                |                     |                 
|WEIGHTED AVERAGE NUMBER OF                                                      |                     |                 
|COMMON SHARES OUTSTANDING                                                       |                     |                 
|Basic                                                                           | 8,648,459           | 8,623,470       
|Diluted                                                                         | 11,668,961          | 11,264,863      







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)



|                                                                                                    | Six Months Ended
June 30,
|--------------------------------------------------------------------------------------------------- | -------------------------
|                                                                                                    | 2007                     
|                                                                                                    |                          
|OPERATING ACTIVITIES:                                                                               |                          
|Net Income (Loss)                                                                                   | (36,449)                 
|Adjustments to reconcile net income (loss) to net cash (used in)  provided by  operating activities |                          
|                                                                                                    |                          
|Depreciation and amortization                                                                       | 89,390                   
|Expense for anti-dilution shares issued                                                             | -                        
|Expense for options and convertible debt rights                                                     | -                        
|Reduction in variable option accrual                                                                | -                        
|Gain on sale of building                                                                            | -                        
|                                                                                                    |                          
|Changes in assets and liabilities:                                                                  |                          
|Accounts receivable                                                                                 | (371,957)                
|Inventories                                                                                         | (300,592)                
|Current and other assets                                                                            | 17,119                   
|Accounts payable and accrued expenses                                                               | 1,020,259                
|Net cash provided by operating activities                                                           | 417,770                  
|                                                                                                    |                          
|INVESTING ACTIVITIES:                                                                               |                          
|Capital expenditures                                                                                | (5,633)                  
|Deposit for the purchase of  building                                                               | -                        
|Proceeds from sale of building                                                                      | -                        
|Net cash provided by (used in) investing activities                                                 | (5,633)                  
|                                                                                                    |                          
|FINANCING ACTIVITIES:                                                                               |                          
|Proceeds from stockholder advances                                                                  | 120,000                  
|Repayment of  stockholder advances                                                                  | (58,592)                 
|Principal payments on long-term debt                                                                | (494,545)                
|Net cash used in financing activities                                                               | (433,137)                
|                                                                                                    |                          
|NET DECREASE IN CASH                                                                                | (21,000)                 
|                                                                                                    |                          
|CASH AT BEGINNING OF PERIOD                                                                         | 30,125                   
|                                                                                                    |                          
|CASH AT END OF PERIOD                                                                               | $9,125                   

See accompanying notes to consolidated condensed financial statements.







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(continued)

CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

|                                                        | Six Month Ended      
|------------------------------------------------------- | ---------------------
|                                                        | June 30,             
|                                                        | 2007                 
|                                                        |                      
|Supplemental Disclosures of Cash Flow Information       |                      
|                                                        |                      
|                                                        |                      
|Cash paid for interest                                  | $        63,082      
|                                                        |                      
|                                                        |                      
|Supplemental schedule of non-cash financing activities: |                      
|                                                        |                      
|Cashless option exercise                                | $                   0
|                                                        |                      



















See accompanying notes to consolidated condensed financial statements.





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CIRCUIT RESEARCH LABS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)



1.

The Consolidated Condensed Financial Statements included herein have been prepared by Circuit Research Labs, Inc. (CRL or the Company), pursuant to the rules and regulations of the Securities and Exchange Commission.  The Consolidated Condensed Balance Sheet as of June 30, 2007 and the Consolidated Condensed Statements of Operations for the three and six  months ended June 30, 2007 and 2006 and the Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2007 and 2006 have been prepared without audit.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  You should read the Consolidated Condensed Financial Statements in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2006.

In the opinion of management, the Consolidated Condensed Financial Statements for the unaudited interim periods presented herein include all adjustments, consisting only of normal recurring adjustments, necessary to present a fair statement the financial position, cash flows and results of operations for such interim periods.  Net operating results for the interim period ended June 30, 2007  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 income (loss) per share

For three months ended June 30, 2007, the effects of 2,131,000 shares relating to options to purchase common stock and 266,667 shares issuable in the event of conversion of issued and outstanding convertible debt as well as the anti-dilution rights of a shareholder were not used for computing diluted earnings per share because the option price was greater than the market price. In calculating net loss per share for the six months ended June 30, 2007, the effects of 2,247,000 shares relating to options to purchase common stock and the 266,667 shares related to outstanding convertible debt as well as the anti-dilution rights of a shareholder were not used for computing diluted earnings per share because the results would be anti-dilutive.

For three months ended June 30, 2006, the effects of 2,341,000 shares relating to options to purchase common stock and 1,216,667 shares related to convertible debt as well as the anti-dilution rights of a shareholder were not used for computing diluted earnings per share using the treasury stock method. In calculating net loss per share for the six months ended June 30, 2006, the effects of 2,341,000 shares relating to options to purchase common stock and the 1,216,667 shares related to convertible debt as well as the anti-dilution rights of a shareholder were not used for computing diluted 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



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presentation of basic and diluted earnings per share on the face of the statement of operations.  Earnings per share is calculated as follows:



|                                  | Three Months Ended |            | Six Months Ended
|--------------------------------- | ------------------ | ---------- | ----------------
|                                  | June 30            |            | June 30,        
|                                  | 2007               | 2006       |                 
|Numerator                         |                    |            |                 
|Net Income (loss)                 | $442,854           | $845,975   |                 
|                                  |                    |            |                 
|Denominator                       |                    |            |                 
|Weighted average shares  basic   | 8,648,459          | 8,623,470  |                 
|Weighted average shares  diluted | 11,668,961         | 11,264,863 |                 
|                                  |                    |            |                 
|Basic income (loss) per share     | $0.05              | $0.10      |                 
|Diluted income (loss) per share   | $0.04              | $0.08      |                 
|                                  |                    |            |                 







b.

New accounting pronouncements

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

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159) which provides companies with an option to report selected financial assets and liabilities at fair value. The standards objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types



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of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007. With certain limitations, early adoption is permitted. We are evaluating the impact of this new statement on our consolidated condensed financial statements.



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 June 30, 2007, the Company had trade receivables due from three customers which represented an aggregate of approximately 49% of the receivable balance.  At June 30, 2006, the Company had trade receivables due from two customers representing approximately 34% of the receivable balance.



d.

Income taxes



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



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



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



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3.

Inventories

Inventories consist of the following at June 30, 2007 and December 31, 2006:



|                           | June 30,    |  | December 31, | 
|-------------------------- | ----------- |  | ------------ | 
|                           | 2007        |  | 2006         | 
|                           | (Unaudited) |  |              | 
|Raw materials and supplies | $3,119,777  |  | $2,966,964   | 
|Work in process            | 1,103,472   |  | 933,132      | 
|Finished goods             | 451,268     |  | 473,829      | 
|Total                      | 4,674,517   |  | 4,373,925    | 
|Less obsolescence reserve  | (1,788,097) |  | (1,788,097)  | 
|Inventories, net           | $2,886,420  |  | $2,585,828   | 
|                           |             |  |              | 







4.         Long-term debt



Long-term debt at June 30, 2007 and December 31, 2006 consisted of the following:



|                                               | June 30,    | December 31,
|---------------------------------------------- | ----------- | ------------
|                                               | 2007        | 2006        
|                                               | (Unaudited) |             
|Orban acquisition note to stockholder          | $180,000    | $180,000    
|Avocet Instruments, Inc.                       | 25,867      | 27,367      
|Dialog4 Engineering GmbH (Note 6)              | 231,660     | 273,780     
|Solectron GmbH see (Note 6)                    | 227,107     | 227,107     
|Harman  (Note 5)                               | 2,265,030   | 2,340,030   
|Harman accumulated interest, long-term portion | 69,058      | 266,871     
|Note payable to private investor               | 200,000     | 200,000     
|Vendor notes                                   | 499,457     | 677,569     
|Employee notes                                 | 0           | 58,592      
|Total long-term debt                           | 3,698,179   | 4,251,316   
|Less current portion Harman and others         | 1,749,169   | 2,119,791   
|Total long-term debt, less current portion     | $1,949,010  | $2,131,525  







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Scheduled principal payments due within one year aggregate $1,680,111 as of June 30, 2007. Non-current maturities at June 30, 2007 include $69,058 of future interest due to Harman (Note 5).

In connection with its acquisition of the assets of Orban in 2000, the Company issued $205,000 in long-term debt to an unrelated stockholder in consideration for his role in such acquisition.  The note bears interest at 7.5% per annum.  The Company signed a new promissory note to replace the original note on August 3, 2004, which took effect August 1, 2004, for $180,000, payable on or before July 1, 2007, with interest only payments to be made monthly in arrears at the rate of 10% per annum commencing August 1, 2004. In the event an interest payment is not received before the 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 June 5, 2007, the Company signed an amendment to the note extending the maturity date to January 31, 2009, while keeping all of the other provision the same.



On May 31, 2001, the Company acquired the assets of Avocet Instruments, Inc. for $82,980 plus other costs of $3,350. The remaining unpaid purchase price is being offset by periodic product purchases by the lender. As of June 30, 2007, $25,867 is the balance of the note, of which the Company is able to offset $20,789 it has recorded in accounts receivable.



In the fourth quarter of 2001, the Company converted various trade payables into notes payable and long-term debt totaling $179,903. In 2006, the Company converted approximately $992,000 of trade payables and for the six months ended June 30, 2007 the company converted another $41,000. As of June 30, 2007, the unpaid portion of all notes payable is $499,457. Interest rates on converted notes range from 0% to 8% and payment periods range from less than one to two years.



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





5.

Notes payable



Notes payable to stockholders aggregated $1,315,000 and $1,195,000 at June 30, 2007 and December 31, 2006, respectively.



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



On October 4, 2004, Jayson Russell Brentlinger, a stockholder and the father of the Companys President and CEO, loaned the Company $700,000 in connection with the Harman debt restructure. The loan bears interest at 11.5% per annum and requires monthly interest-only payments.  Management is



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negotiating with Mr. Brentlinger concerning the terms of repayment and the possibility of converting the note into preferred or common stock of the Company. C. Jayson Brentlinger President and CEO has guaranteed the repayment of the Note. As of June 30, 2007, the Company is 13 months in arrears in making payments under the Note. The arrearage totals as of June 30, 2007 are $90,460. The Company intends to perform its best efforts to eliminate the arrearage during the remainder of 2007.



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



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





As of June 30, 2007, the Company is in arrears in making interest payments under all three notes totaling $152,623.





On January 18, 2006 Mr. Robert McMartin, the Companys Executive Vice President and Chief Financial Officer, loaned the Company $100,000. The interest rate was 21% per annum, which increased to 25% after January 31, 2006 when the note was due. The note was paid in full on June 22, 2007.





On February 1, 2006 Mr. Clarkson, the Companys Vice President and General Manager loaned the Company $20,000. The interest rate was 21% per annum, which increased to 25% after February 14, 2006 when the note was due. The note was paid in full on June 22, 2007.

































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Harman



In 2000, the Company acquired the assets of Orban, Inc., which was then a wholly-owned subsidiary of Harman International, Inc. including the rights to the name Orban.  The purchase price was paid partially in cash and partially by issuing notes payable to Harman.



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

The Harman debt restructure consisted of:



·

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



·

Prior to the debt restructure, the Companys debt to Harman bore interest at a rate of 12% per annum.  As part of the debt restructure, Harman waived all interest accrued after April 1, 2003 in excess of 6.0% per annum, which resulted in Harman waiving $763,380 of approximately $1.0 million in accrued interest.  The remaining $249,530 in accrued interest was added to the outstanding principal balance of the Companys indebtedness to Harman.  After giving effect to the $1.0 million principal payment, the principal amount due Harman was $7,482,000.  Adding the remaining unpaid interest of $249,530 to principal resulted in a total unpaid principal loan balance of $7,731,530 as of September 30, 2004.



·

In April 2005, Harman exchanged $2,104,000 of the remaining indebtedness for 2,104,000 shares of the Companys common stock, which Harman then sold to the Companys President and Chief Executive Officer for $1,000,000.  Payment was made by delivery of a promissory note due and payable on September 30, 2007.  Harmans recourse for non-payment under the note was limited to a security interest in the shares purchased.



·

In April 2005, Harman exchanged an additional $2,400,000 of indebtedness for 19% of the Companys outstanding common stock, which consisted of approximately 1,509,000 shares at the time of the restructure.  This issuance included an anti-dilution provision, which entitled Harman to receive additional shares to maintain the stock ownership as a consequence of   any shares that are issued as a result of exercise of options in existence on the date of the restructure. This could result in the issuance of 738,860 additional shares to Harman, if all currently outstanding options are exercised. Harman has no right to acquire additional shares as the result of new share issuances occurring after the date of the restructure except as a consequence of option exercises.  C. Jayson Brentlinger,



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president, CEO and Chairman has signed a personal guarantee under the Note and under the Harman Agreement.



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

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

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



In recording the restructure, the obligation to Harman for unpaid interest was not eliminated, but was reduced to equal the aggregate future 6.0% interest payments scheduled under the restructured obligation.  Accordingly, no additional interest expense will be recorded while the restructured obligation is outstanding.  As of June 30, 2007, the Company is six months in arrears.



On July 13, 2007, the Company entered into a definitive agreement with Harman whereby the Company repurchased the shares of its common stock and two promissory notes. See Note 9
of Notes to Consolidated Condensed Financial Statements.





































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6.

DIALOG4 System Engineering, GmbH (Dialog4)



Dialog4 was a German corporation that produced products within the Companys industry, including its Codec line of products. The Company purchased the assets of Dialog4 on January 18, 2002. The Company and Dialog4 had disputes that arose in connection with this transaction which were submitted to arbitration in Germany. As previously reported, Dialog4 prevailed in the arbitration and was awarded approximately $1,393,000.



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



In March 2005, as part of the Dialog4 settlement, the Company agreed to resolve a separate employment dispute being litigated in Germany between Berthold Burkhardtsmaier and the Company. Mr. Burkhardtsmaier agreed to resign from the Board of Directors, and the Company agreed to pay him approximately $421,200 in monthly installments of $7,020 for 60 months. The Company is current and the remaining balance as of June 30, 2007 is $231,660.



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



The Company currently owes Solectron $227,107 and has stopped making debt service payments because the Company has not received $233,000 of inventory pursuant to the materiality agreement entered into between Dialog 4 and Solectron for which it was found to be responsible. This obligation now in the amount of $227,107 was a result of claims originating between Solectron and Dialog4.  As of June 30, 2007, the Company has cumulatively paid Solectron $529,500 in principal and $72,733 in interest. Charles Jayson Brentlinger, President and CEO of the Company has also signed a payment guarantee under the revised settlement agreement. The Company further agreed to indemnify Mr. Brentlinger should he be required to make any payment under this guarantee. The inventory of $233,000 is reported in other assets pending delivery of that amount of inventory by Solectron.













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7.

Stock options and stock based compensation

All options that have been issued were vested when issued and are expensed immediately upon issuance.  The expected life of each grant is generally estimated to be a period of approximately one half of the exercise period, plus one year. The intrinsic value of all options outstanding aggregated $0 and $370,500 at June 30, 2007 and 2006, respectively.



During the three and six months ended June 30, 2007 and 2006, there were no options issued and none exercised (except as discussed in the next paragraph). 360,000 options lapsed during the three months ended June 30, 2007. None had lapsed prior.





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



On January 23, 2006, the C. Jayson Brentlinger Family Limited Partnership, of which the Companys Chief Executive Officer, President and Chairman is the General Partner, in a cashless exercise  received 1,250,000 options to purchase shares of the Companys common stock (the Options), which options had an  exercise price of $0.55 per share (the market price of the shares on the date the option was issued), and received 548,469 of the Companys common shares and surrendered to the Company a total of 701,531 option shares (the market price of the shares was $0.98 on the day the options were exercised).



Harman Pro North Company, an existing stockholder, was issued 128,653 shares on January 23, 2006 as part of anti-dilution provision required under the Harman debt restructure. (See Note 5)





8

Building

On May 30, 2006, we exercised the option to purchase the manufacturing and office facility at 1302 W. Drivers Way, Tempe, Arizona.  The purchase price was $1,300,000.  On the same day, we sold the property for $1,550,000, which resulted in a gain, net of transaction costs, of approximately $131,000.



9.    Recentevents

On July 13, 2007, the Company entered into a definitive agreement with Harman whereby the Company repurchased the shares of its common stock, and two promissory notes payable to Harman. Harman owned 1,638,547 shares of the Companys common stock, or approximately 18.9% of the shares outstanding.  The promissory notes were made by the Company and by C. Jayson Brentlinger, the Companys Chairman and President. The Company paid Harman $1,500,000 as consideration of the



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repurchase of the shares of common stock and the promissory notes.  Jayson Russell Brentlinger funded the transaction, in exchange for the note and equities previously held by Harman.



















































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

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

Overview



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

We currently, as of July 31, 2007, have a backlog of orders totaling approximately $3.3 million.

















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Recent Developments





On July 13, 2007, the Company entered into a definitive agreement with Harman whereby the Company repurchased the shares of its common stock, and two promissory notes payable to Harman. Harman owned 1,638,547 shares of the Companys common stock, or approximately 18.9% of the shares outstanding.  The promissory notes were made by the Company and by C. Jayson Brentlinger, the Companys Chairman and President. The Company paid Harman $1,500,000 as consideration of the repurchase of the shares of common stock and the promissory notes.  Jayson Russell Brentlinger funded the transaction and will assume the position of Harman under the agreement.







Business Overview



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



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

We continue to work through the challenge of overcoming obstacles produced as a result of different processes resulting from the consolidation of our manufacturing and the move into our Tempe facilities.

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















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Results of Operations

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

|                                                     | Three Months Ended
June 30, |            | Six Months Ended
June 30,
|---------------------------------------------------- | --------------------------- | ---------- | -------------------------
|                                                     | 2007                        | 2006       |                          
|Revenues:                                            |                             |            |                          
|Net Revenues                                         | $3,276,317                  | $3,852,356 |                          
|Gross profit on net sales                            | 2,193,255                   | 2,606,678  |                          
|Gross profit margin                                  | 67%                         | 68%        |                          
|Net cash provided by  (used in) operating activities | $251,793                    | ($89,595)  |                          
|Net cash provided by (used in) investing activities  | ($5,633)                    | $151,844   |                          
|Net cash provided by (used in) financing activities  | ($264,146)                  | ($172,694) |                          
|Net income (loss)                                    | $442,854                    | $845,975   |                          
|Net income (loss)  as a percent of net sales         | 14%                         | 22%        |                          
|Income (loss) per share - basic                      | $0.05                       | $0.10      |                          
|Income (loss) per share  diluted                    | $0.04                       | $0.08      |                          





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Three And Six Months Ended June 30, 2007

Compared To The Three And Six Months Ended June 30, 2006



Net Sales.  Net sales during the three and six months ended June 30, 2007 were $3.3 million and $5.9 million, respectively, compared to $3.9 million and $6.7 million during the comparable periods in 2006, reflecting a decrease of 15% and a decrease of 11%, respectively.  The 15% decrease for the three months ended June 30, 2007 and the 11% decrease in net sales for the six months end June 30, 2007 as compared to the same periods in 2006 were each primarily attributable to the relocation and consolidation of our manufacturing to the new headquarters located in Tempe, Arizona coupled with the costs of environmental compliance mandated by the EU.

We currently have a backlog of approximately $3.3 million and have begun to increase our capacity by extending our production hours and paying overtime.

Gross Profit.   Gross profit for the three and six months ended June 30, 2007 was 67% and 61%, compared to 68% and 58% for the same periods in 2006.  The increase of 3% for the six months ended June 30, 2006 in gross profit is primarily due to the reduction in occupancy costs associated with manufacturing overhead due to the consolidation and the transition from manufacturing in San Leandro, California to manufacturing in Tempe, Arizona, and a reduction in the variable components of production costs associated with production runs in the new Tempe facility.

Selling, General and Administrative.  Selling, general and administrative expenses (SG&A) for the three and six months ended June 30, 2007 were approximately $1,197,000 and $2,446,000, respectively, representing a decrease of 8% and 7%, respectively, compared to SG&A expense of approximately $1,306,000 and $2,647,000 during the same periods in  2006.  As a percentage of net revenue, SG&A increased from 34% for the three months ended June 30, 2006 to 37% for the same period in 2007. SG&A as a percentage of net revenue was 40% for the six months ended June 30, 2006 and was 42% for the same period in 2007. Included in the $2,647,000 expense reported for the six months ended June 30, 2006, was approximately $132,000 in one-time charges related to moving expenses associated with our relocation to Tempe, Arizona.

The decrease in SG&A expense would have been larger due primarily to the reduction in accrued variable option expense of $388,300 ($176,500 from three months ended June, 30, 2006 and $211,800 from three months ended March 31, 2006) recorded for three and six months ended June 30, 2006, respectively, caused by the decrease in the Companys stock price by $0.12 per share and $0.10 per share during the same periods. Excluding the expense associated with the repriced options, SG&A would have been approximately $1,483,000 and $3,035,000 for the three and six months ended June 30, 2006, respectively, representing a decrease of 6% and 13% compared to same periods in 2007.

Research and Development.  Research and development expense during the three and six months ended June 30, 2007 was approximately $461,000 and $963,000, respectively, compared to approximately $413,000 and $883,000 during the comparable periods for 2006, reflecting an increase  of 11% and  of 9%. The overall increase is due to an increase in personnel and licensing associated with our PC line of products.

Other (Income) Expense.   Other expense, net for the three and six months ended June 30, 2007 was approximately $72,000 and $179,000, respectively, of which approximately $57,000 and $126,000 represents interest expense. Other expense, net for the three and six months ended June 30, 2006 was approximately $19,000 and $542,000 respectively, of which approximately $61,000 and $118,000



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represented interest expense. Approximately $466,000 of the $542,000 represents expensed options associated with convertible debt and the expense for shares issued under Harmans anti-dilution rights which were incurred during the three months ended March 31, 2006.  Total interest expense decreased by 7% during the three months ended June 30, 2007 and increased 6% during the six months ended June 30, 2007, respectively, as compared to the same periods in 2006.  Other expense, net during the six months ended June 30, 2006, includes the approximate $131,000 gain on the sale of the building in May 2006.

Net Income (Loss).  Net income (loss) for the three and six months ended June 30, 2007 was approximately $443,000 and ($36,000) respectively, compared to net income of approximately $846,000 and ($233,000) for the same periods in 2006. The decrease in net loss for the 6 months ended June 30, 2007 compared to the same period in 2006 is primarily a result of decreased manufacturing costs associated with our Companys consolidating its manufacturing into its new corporate headquarters, and also $466,000 associated with issuing convertible debt during the six months ended June 30, 2006. As a percentage of net revenue, the net income (loss) for the three and six months ended June 30, 2007 was 14% and (1%), respectively, compared to net  income (loss) of 22% and (4%) for the same periods in 2006.





Liquidity and Capital Resources

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

We generated a net loss of
 approximately $
2,164,000 for the year ended December 31, 2006 compared to a net income of
approximately $
2,533,000 reported in 2005. In 2006
, we consolidated our U.S. manufacturing into our new corporate headquarters located in Tempe, Arizona. Due to the manufacturing consolidation and the move into our new corporate headquarters, our net revenues were $12,677,000 for the year ended December 31, 2006 compared to $15,190,000 for same period in 2005 representing a decrease of 16%.  The decrease was primarily a result of production down-time due to the move, along with experiencing long lead times for components associated with the implementation of a European Union (EU) directive requiring that electrical and electronic equipment placed on the EU market after July 1, 2006 contain restricted levels of lead, mercury, cadmium, hexavalent chromium and brominated flame retardants. EU member states were required to enact and implement legislation that complies with this directive by August 13, 2004 (such legislation together with this directive, RoHS).



We had negative working capital of approximately $2.8 million at June 30, 3007, and the ratio of current assets to current liabilities was .60 to 1. At December 31, 2006, we had negative working capital of approximately $2.7 million and a current ratio of .57 to 1.  The decrease in working capital is attributable to an increase in accrued expenses including accrued salaries and benefits.





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On July 13, 2007, the Company entered into a definitive agreement with Harman whereby the Company repurchased the shares of its common stock, and two promissory notes payable to Harman. Harman owned 1,638,547 shares of the Companys common stock, or approximately 18.9% of the shares outstanding.  The promissory notes were made by the Company and by C. Jayson Brentlinger, the Companys Chairman and President. The Company paid Harman $1,500,000 as consideration of the repurchase of the shares of common stock and the promissory notes.  Jayson Russell Brentlinger funded the transaction, in exchange for the position held by Harman.





We owe Solectron GmbH $227,107 as of December, 2006. This obligation is a result of claims originating between Solectron GmbH and Dialog4. On January 20, 2004, we renegotiated the terms and agreed to pay monthly installments of principal and interest in the amount of $25,000 with the final installment being due October 15, 2005 in the amount of $15,681.  We currently owe Solectron $227,107 but have not paid because we have not received $233,000 of inventory pursuant to the materiality agreement entered into between Dialog 4 and Solectron for which we were found to be responsible.  As of December 31, 2006, we have paid Solectron $487,830 in principal and $72,733 in interest.  C. Jayson Brentlinger, President, Chief Executive Officer and Chairman of the Company has also signed a personal guarantee under the revised Settlement Agreement. We further agreed to indemnify Mr. Brentlinger should he be required to make any payment under this guarantee. The inventory of $233,000 is reported in other assets pending delivery of that amount by Solectron.



On March 30, 2005, we and Dialog4 agreed upon settlement terms for all disputes between us. We paid Dialog4 $490,000 on April 15, 2005 when the settlement papers were signed and have paid an additional $475,000 on April 1, 2006. On March 31, 2006, Jayson Russell Brentlinger loaned the Company $475,000, secured by a demand note (the Note).  All of the proceeds of the Note were used to pay the April 2006 installment of the settlement with Dialog4.  The Note is payable within 30 days upon demand and has an interest rate of 11.5%.  In addition, Jayson Russell Brentlinger through March 31, 2007 had the right to convert the then-outstanding principal of the Note into either common shares at $0.50 per share, or cumulative preferred shares $100 par value per share. The preferred shares were alternatively convertible into the Companys common shares at a price of $0.50 per share and may be redeemed by the Company at any time.  C. Jayson Brentlinger president, CEO and Chairman has signed a repayment guarantee under the Note.



As part of the Dialog4 settlement, we agreed to resolve a separate employment dispute being litigated in Germany with Berthold Burkhardtsmaier.  When Mr. Burkhardtsmaier resigned from our Board of Directors, we agreed to pay him approximately $421,200 through monthly installments of $7,020 for 60 months.  See Note 6 of Notes to Consolidated Condensed Financial Statements.



Working capital generated from 2007 operations will be used to service our commitments as detailed above, excluding our obligations to Harman and Dialog4.  The Company will need to generate enough cash flow to pay for the move and the consolidation of our U.S based manufacturing.  Any excess working capital generated from 2007 operations will be applied to expand our business operations or for general working capital purposes. The terms of the Harman debt restrict our ability to obtain financing for these types of expansion expenditures, as well as financing for other purposes.  Accordingly, our ability to expand will primarily depend on our ability to generate sufficient working capital from operations.  We will closely monitor our working capital in 2007 as we evaluate any expenditure related to expansion.









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The table below summarizes our contractual commitments under leases, debt instruments and employment contracts over the next five years, as of December 31, 2006.  We have no fixed commitments to purchase inventory or materials, and no commitment extends beyond 2012.



|                                      | 2007       | 2008       | 2009       | 2010       | 2011    
|------------------------------------- | ---------- | ---------- | ---------- | ---------- | --------
|Solectron                             | $227,107   |            |            |            |         
|Dialog4                               | 84,240     | $84,240    | $84,240    | $21,060    |         
|Avocet                                | 27,367     |            |            |            |         
|Note to private investor              |            |            |            | 200,000    |         
|Vendor notes                          | 677,569    |            |            |            |         
|Employee note                         |            |            |            |            |         
|Orban acquisition note to shareholder | 180,000    |            |            |            |         
|Harman                                | 537,498    | 731,883    | 1,070,644  |            |         
|Employment Agreements                 | 800,833    | 755,000    | 658,750    | 590,000    | $112,500
|Equipment and property leases         | 547,802    | 470,336    | 482,461    | 474,689    | 124,337 
|Total                                 | $3,082,420 | $2,041,459 | $2,296,095 | $1,285,749 | $236,837



Accounts receivable were approximately $1,203,000 at June 30, 2007 compared to approximately $831,000 at December 31, 2006 representing a net increase of approximately $372,000 or 45%.  The increase is primarily due to increased sales in the month of June 2007.



Total inventories were approximately $2,886,000 at June 30, 2007 compared to total inventories of approximately $2,586,000 at December 31, 2006.  The increase of $300,000 or 12% is due in part to an increase in materials and work in process to reduce our backlog.



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



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









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RISK FACTORS



Investing in our common stock involves a high degree of risk.  You should carefully consider the material risk factors listed below and all other information contained in this prospectus before investing in our common stock.  You should also keep these risk factors in mind when you read the forward-looking statements.  The risks and uncertainties described below are not the only ones facing us.  Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.

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

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

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

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

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









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Our ability to obtain an outside line of credit is subject to the approval of our current creditors and, if such approval is withheld, our ability to compete effectively in our industry could be jeopardized.

Under the terms of our agreements with Harman, we are bound by certain covenants that prevent us from obtaining additional credit facilities without the prior written approval of Harman.  This limitation on our ability to obtain lines of credit may curtail our ability to make strategic acquisitions and to conduct research and development.  This in turn could jeopardize our competitive position within our industry.  In addition, our obligation to Harman is secured by a security interest in substantially all of our assets.  Our inability to grant a security interest to other lenders is another factor that may limit our ability to obtain third party financing.

Foreign currency fluctuations could adversely affect our results of operations.

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

In 2006 and 2005, we derived approximately 4% of our total revenues from our Orban Europe operations.  This percentage may increase in future years as we further develop and expand our operations in Europe.  We cannot predict the effects of exchange rate fluctuations on our operating results.  We do not currently intend to engage in foreign currency exchange hedging transactions to manage our foreign currency exposure.  If and when we do engage in foreign currency exchange hedging transactions, we cannot assure you that our strategies will adequately protect our operating results from the effects of exchange rate fluctuations.

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

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

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

While audio processing has been and will continue to be our core business, we are using our existing technologies to enter the emerging markets of digital audio broadcasting, cable television and



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

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

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



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

Charles J. Brentlinger, our President, Chief Executive Officer and Chairman of the Board, currently controls 2,287,915 shares of our common stock and controls options (held by a family limited partnership which he manages), to purchase approximately 1,365,005 additional shares.  Based on a total of 8,648,459 shares of our common stock issued and outstanding as of August 14, 2007, if Mr. Brentlingers family limited partnership exercises all of its options he will own of record and beneficially approximately 36.48% of our issued and outstanding shares.  This figure includes the anti-dilution provision provided to Harman pursuant to the debt restructuring.This means that Mr. Brentlinger exercises, and will continue to exercise, significant control over the business and affairs of our company.  Mr. Brentlingers exercise of this control may, in certain circumstances, deter or delay a merger, tender offers, other possible takeover attempts or changes in our management which may be favored by some or all of our minority shareholders.



We depend on a few key management persons.

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

Consolidating our Orban manufacturing facility into our Tempe manufacturing facility subjects us to a number of risks that are beyond our control which could result in production interruptions.

Our business depends on the efficient and uninterrupted production of our audio processing equipment and other products.  The consolidation of our U. S. manufacturing facilities into our Tempe



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

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

Pursuant to Rule 3a51-1 of the Securities Exchange Act of 1934, as amended, our common stock is considered "penny stock," and as such, certain sales restrictions apply to these securities.  The SEC rules and regulations require that broker-dealers, prior to effecting any transaction in a penny stock, satisfy certain disclosure and procedural requirements with respect to the prospective customer.  These requirements include delivery to the customer of an SEC-prepared risk disclosure schedule explaining the nature and risks of the penny stock market, disclosure to the customer of the commissions payable to both the broker-dealer and any other salesperson in connection with the transaction, and disclosure to the customer of the current quotations for the stock to be purchased.  In addition, if the broker-dealer is the sole market maker, it must disclose this fact and the broker-dealers presumed control over the market.  Finally, prior to effecting any penny stock transaction, broker-dealers must make individualized written suitability determinations and obtain a written agreement from customers verifying the terms of the transaction.  Subsequent to any sale of penny stock, broker-dealers must send monthly statements disclosing recent price information for the penny stock held in the customers account and certain other information relating to the limited market in penny stocks.  These rules, regulations and procedural requirements may restrict the ability of broker-dealers to sell our common stock or discourage them from doing so.  As a result, purchasers may find it more difficult to dispose of, or to obtain accurate quotations for, our common stock.



Because our success depends in part on our ability to protect our intellectual property, infringement on our proprietary rights could lead to costly litigation and decreased revenues.

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









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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.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements.  Forward-looking statements include indications regarding our intent, belief or current expectations.  Discussions in this prospectus under the headings Summary, Risk Factors, Managements Discussion and Analysis of Financial Conditions and Results of Operations and Business, as well as in other parts of this prospectus include forward-looking statements.  These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations, prospects and intentions, markets in which we participate and other statements in this prospectus that are not historical facts.  Forward-looking statements are based on managements beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to management.  When used in this prospectus, the words expect, project, may, will, should, anticipate, believe, estimate, intend, objective, plan, seek and similar words and expressions, or the negatives of these words or expressions, are generally intended to identify forward-looking statements.  Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements.  Factors that could contribute to these differences include those discussed in Risk Factors and in other sections of this prospectus.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus.  We qualify any forward-looking statements entirely by these cautionary factors.

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



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Commission.  In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their most recent evaluations.



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



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





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PART  II  -  OTHER INFORMATION



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







None.















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: August 14, 2007



By:/s/ Robert W. McMartin

Robert W. McMartin

Executive 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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