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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 
 FORM
10-KSB/A
 Amendment
No.1
 
  þ
    
    ANNUAL REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 
 OR
 o
    
    TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-11353
 CIRCUIT RESEARCH LABS, INC.
  Arizona
    
    86-0344671(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 
 
  
   
   Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $.10 per share
    
    None
 o
 þ o
 o
 o þ




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Explanatory
Note




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##### 



PagePART I
    
    
    
    
    1ITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    
    1ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    
    13ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    13ITEM 4.
    
    SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    13PART II
    
    
    
    
    14ITEM 5.
    
    MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
    
    
    14ITEM 6.
    
    MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    15ITEM 7.
    
    FINANCIAL STATEMENTS
    
    
    30ITEM 8.
    
    CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    57ITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    
    57ITEM 8B.
    
    OTHER INFORMATION
    
    
    57PART III
    
    
    
    
    58ITEM 9.
    
    DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
    
    
    58ITEM 10.
    
    EXECUTIVE COMPENSATION
    
    
    61ITEM 11.
    
    SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
    
    
    65ITEM 12.
    
    CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    68PART IV
    
    
    
    
    70ITEM 13.
    
    EXHIBITS
    
    
    70ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    72Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 Overview and Debt Restructure in April 2005.
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2




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3




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Industry Overview
 Audio Processing
    The Internet
   4




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Business Plan and Growth Strategy
  Stream-line Operations.
 Manufacturing.
   Focus on Core Audio Processing Business.
 
    
    We believe that we are a leading producer of broadcast transmission audio processing
equipment for the broadcast industry;
    
    Although there has been consolidation in the radio industry in the U.S., it is our
experience, based upon our sales trends, that demand continues to be strong for quality
audio processing equipment, although there is no trade or industry group that maintains
this type of data;
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
    
    Based on replacement equipment orders, we estimate that the average useful life of
audio processing equipment is less than five years, and improvements in audio
processing equipment cause some radio and television stations to replace equipment
before the end of its useful life; and
    
    We believe that our product depth, technical superiority, and strong distribution
channels have positioned us to increase our market share, especially in burgeoning
international markets where growth is being spurred by increased radio station usage
and the issuance of new radio licenses;
 Develop New Products and Acquire Additional Product Lines.
 Increase Penetration in Emerging Markets.
 Principal Products
   The FM Series of Products
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Optimod-FM 8500.
 Optimod-FM 8300.
 Other Optimod Processors.
 CRL Amigo-FM.
 Other FM products.
 The AM Series of Products
 Optimod-AM 9400.
 Optimod-AM 9200.
 7




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Optimod-HF 9200.
 Optimod-AM 9100B2.
 CRL Amigo-AM.
 Other AM Products.
 Television Products
 Optimod-TV 6200.
 Optimod-TV 8382.
 Other Optimod-TV Products.
 CRL TVS Processors.
 CRL Amigo-TV.
 Avocet Pro-Line 102A.
 Avocet TV-2.
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Avocet AV100.
 Other Products
 Optimod 6200S.
 Optimod-DAB 6200.
 Audicy
 Opticodec.
 Opticodec-PC.
 ® ®
 Other.
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Marketing and Customers
    Competition
   Intellectual Property and Proprietary Rights
   10




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
    
    United States Patent No. 4,837,824, entitled Stereophonic Image Widening Circuit
Grant Date: June 6, 1989, expires in 2009
    
    United States Patent No. 5,050,217, entitled Dynamic Noise Reduction and
Spectral Restoration SystemGrant Date: September 17, 1991, expires in 2011
    
    United States Patent No. 5,444,788, entitled Audio Compressor Combining
Feedback and Feedforward Sidechain ProcessingGrant Date: August 22, 1995, expires in 2015
    
    United States Patent No. 5,737,434, entitled Multi-Band Audio Compressor with
Look-Ahead ClipperGrant Date: April 7, 1998, expires in 2018
    
    United States Patent No. 6,337,999, entitled Oversampled Differential Clipper
Grant Date: January 8, 2002, expires in 2022
    
    United States Patent No. 6,937,912, entitled Anti-aliased clipping by
band-limited modulation with step functionsGrant Date: August 30, 2005, expires in 2025
   Vendors
  11




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Employees
  Recent Events
       12




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ITEM 2. DESCRIPTION OF PROPERTY
     
 ITEM 3. LEGAL PROCEEDINGS.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
   Calendar Quarter
    
    High
    
    Low2004First Quarter
    
    $
    1.70
    
    
    $
    0.49Second Quarter
    
    
    1.25
    
    
    
    0.62Third Quarter
    
    
    1.30
    
    
    
    0.55Fourth Quarter
    
    
    0.90
    
    
    
    0.552005First Quarter
    
    
    0.70
    
    
    
    0.30Second Quarter
    
    
    0.75
    
    
    
    0.30Third Quarter
    
    
    1.20
    
    
    
    0.38Fourth Quarter
    
    
    2.11
    
    
    
    0.85
  Recent Sales of Unregistered Securities
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ITEM 6. 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 6, Managements
Discussion and Analysis or Plan of Operation We qualify any forward-looking statements entirely
by these cautionary factors.
 Overview
   15




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Results of Operations
  Year Ended December 31,2005
    
    
    2004Revenues:Net sales
    
    $
    15,189,848
    
    
    $
    13,242,024Other income
    
    2,119,065
    
    
    0Total revenues
    
    $
    17,308,913
    
    
    $
    13,242,024Gross profit on net sales
    
    
    8,768,527
    
    
    $
    7,201,204Gross profit margin
    
    
    58
    %
    
    
    54
    %Net cash provided by operating activities
    
    
    1,230,349
    
    
    
    682,237Net cash used in investing activities
    
    
    (116,729
    )
    
    
    (167,342
    )Net cash used in financing activities
    
    
    (1,084,365
    )
    
    
    (629,038
    )Net income (loss)
    
    $
    2,583,906
    
    
    
    ($1,506,917
    )Net income (loss) as a percent of net sales
    
    
    17
    %
    
    
    (11
    %)Income (loss) per share  basic
    
    $
    0.38
    
    
    $
    (0.36
    )Income (loss) per share  diluted
    
    $
    0.24
    
    
    $
    (0.36
    )
  Year Ended December 31, 2005 Compared To Year Ended December 31, 2004
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Liquidity and Capital Resources
    18




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2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011Solectron
    
    $
    227,107Dialog4
    
    
    566,159
    
    
    $
    84,240
    
    
    $
    84,240
    
    
    $
    84,240
    
    
    $
    21,060Avocet
    
    
    27,367Note to private investor
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000Vendor notes
    
    
    190,663Employee note
    
    
    2,000Orban acquisition note to
stockholder
    
    
    
    
    
    
    180,000Harman
    
    
    487,500
    
    
    
    462,498
    
    
    
    737,576
    
    
    
    1,064,956Employment Agreements
    
    
    1,075,000
    
    
    
    1,075,000
    
    
    
    1,075,000
    
    
    
    1,075,000
    
    
    
    447,900Equipment and property leases
    
    758,278
    
    
    410,816
    
    
    412,563
    
    
    308,550
    
    
    317,262
    
    
    325,974Total
    
    $
    3,334,008
    
    
    $
    2,212,554
    
    
    $
    2,309,379
    
    
    $
    2,532,746
    
    
    $
    986,222
    
    
    $
    325,974
   21




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Sales to Major Customers and Export Sales
    Region
    
    2005
    
    
    %
    
    
    2004
    
    
    %Europe
    
    $
    3,900,907
    
    
    
    58
    %
    
    $
    4,453,434
    
    
    
    54
    %Pacific Rim
    
    
    1,397,436
    
    
    
    21
    
    
    
    2,064,585
    
    
    
    25Latin and South America
    
    
    846,475
    
    
    
    13
    
    
    
    848,466
    
    
    
    10Canada and Mexico
    
    
    461,520
    
    
    
    7
    
    
    
    584,072
    
    
    
    7Other
    
    96,730
    
    
    1
    
    
    311,721
    
    
    4Total
    
    $
    6,703,002
    
    
    100
    %
    
    $
    8,262,278
    
    
    100
    %
      22




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Recent
Accounting Pronouncements
 Share-Based Payment , Accounting for Stock-Based
Compensation, Accounting for Stock Issued to Employees
  Inventory Costs
 Accounting Changes and Error Corrections Accounting Changes, Reporting Accounting Changes in Interim Financial
Statements
 Accounting for Certain Hybrid Instruments. Accounting for Derivative Instruments
and Hedging Activities, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.
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RISK FACTORS
 Investing in our common stock involves a high degree of risk. You should carefully consider
the material risk factors listed below and all other information contained in this prospectus
before investing in our common stock. You should also keep these risk factors in mind when you
read the forward-looking statements. The risks and uncertainties described below are not the only
ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently
deem immaterial, also may become important factors that affect us.
 If any of the following risks occur, our business, our quarterly and annual operating results or
our financial condition could be materially and adversely affected. In that case, the market price
of our common stock could decline or become substantially volatile, and you could lose some or all
of your investment.
 As a result of our outstanding debt obligations, we have significant ongoing debt service
requirements which may adversely affect our financial and operating flexibility.
  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.
  Foreign currency fluctuations could adversely affect our results of operations.
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We serve a market in which there are a limited number of customers and our financial well-being is
directly tied to the financial health of these customers.
  We must adapt to rapid technological change and increased competition if we are going to be able to
compete effectively in our industry.
  We depend on a number of vendors to supply us with component parts that are necessary to the
production of our audio processing and post-production equipment.
  Our President, Chief Executive Officer and Chairman of the Board exercises significant control over
us.
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We depend on a few key management persons.
  Consolidating our Orban manufacturing facility into our Tempe manufacturing facility subjects us to
a number of risks that are beyond our control which could result in production interruptions.
  The liquidity of our common stock could be restricted because our common stock falls within the
definition of a Penny Stock.
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Because our success depends in part on our ability to protect our intellectual property,
infringement on our proprietary rights could lead to costly litigation and decreased revenues.
  The market price of our common stock has been volatile and the value of your investment may
decline.
  
    
    changes in general conditions in the economy or the financial markets;
    
    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.
 Our independent auditors have included a going concern paragraph in their report on our financial
statements.
  27




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Adoption
of SFAS 123R
 Share-Based Payment , Accounting for Stock-Based
Compensation, Accounting for Stock Issued to Employees
  FORWARD-LOOKING STATEMENTS
  28




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ITEM 7. FINANCIAL STATEMENTS
 INDEX
 Audited Financial Statements:
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    33Consolidated Balance Sheets 
December 31, 2005 and 2004
    
    
    35Consolidated Statements of Operations 
For the Years Ended December 31, 2005 and 2004
    
    
    37Consolidated Statements of Stockholders Equity (Deficit) 
For the Years Ended December 31, 2005 and 2004
    
    
    38Consolidated Statements of Cash Flows 
For the Years Ended December 31, 2005 and 2004
    
    
    39Notes to Consolidated Financial Statements
    
    
    44
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 
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INDEPENDENT AUDITORS CONSENT
   
 
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CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
 ASSETS
 2005
    
    
    2004CURRENT ASSETS:Cash
    
    $
    137,743
    
    
    $
    108,488Accounts receivable, trade, net of
allowance for doubtful accounts of
$33,361 in 2005 and in 2004
    
    
    700,175
    
    
    
    577,571Inventories
    
    
    2,687,585
    
    
    
    2,372,676Other current assets
    
    
    162,188
    
    
    
    159,984Total current assets
    
    
    3,687,691
    
    
    
    3,218,719PROPERTY, PLANT AND EQUIPMENT  Net
    
    
    418,525
    
    
    
    501,793OTHER ASSETS:Goodwill
    
    
    7,476,008
    
    
    
    7,476,008Other
    
    
    358,468
    
    
    
    362,9137,834,476
    
    
    
    7,838,921TOTAL
    
    $
    11,940,692
    
    
    $
    11,559,433LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    1,248,944
    
    
    $
    1,228,545Note payable to stockholders
    
    
    720,000
    
    
    
    730,000Notes payable
    
    
    487,500
    
    
    
    512,500Current portion of long-term debt
    
    
    1,013,398
    
    
    
    885,127Accrued salaries and benefits
    
    
    586,826
    
    
    
    506,892Customer deposits
    
    
    268,213
    
    
    
    244,885Other accrued expenses and liabilities
    
    
    992,678
    
    
    
    753,466Total current liabilities
    
    
    5,317,559
    
    
    
    4,861,415LONG-TERM DEBT, LESS CURRENT PORTION
    
    
    3,162,270
    
    
    
    9,009,890Total liabilities
    
    
    8,479,829
    
    
    
    13,871,305
 
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CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004   continued
 2005
    
    
    2004STOCKHOLDERS EQUITY (DEFICIT)Preferred stock, $100 par value 
authorized, 500,000 shares, None
issuedCommon stock, $.10 par value 
authorized, 20,000,000 shares,
7,946,337 and 4,332,533 shares
issued and outstanding at December
31, 2005 and 2004
    
    
    794,634
    
    
    
    433,254Additional paid-in capital
    
    
    8,426,947
    
    
    
    5,599,498Accumulated equity (deficit)
    
    
    -5,760,718
    
    
    
    (8,344,624
    )Total
stockholders equity (deficit)
    
    
    3,460,863
    
    
    
    (2,311,872
    )TOTAL
    
    $
    11,940,692
    
    
    $
    11,559,433
 See Notes to Consolidated Financial Statements.
 
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CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005 and 2004
 2005
    
    
    2004NET SALES
    
    $
    15,189,848
    
    
    $
    13,242,024COST OF GOODS SOLD
    
    
    6,421,322
    
    
    
    6,040,820Gross profit
    
    
    8,768,527
    
    
    
    7,201,204OPERATING EXPENSESSelling, general and administrative
    
    
    5,967,352
    
    
    
    5,280,138Research and development
    
    
    1,615,579
    
    
    
    1,403,770Depreciation
    
    
    113,971
    
    
    
    148,034Total operating expenses
    
    
    7,696,902
    
    
    
    6,831,942INCOME FROM OPERATIONS
    
    
    1,071,624
    
    
    
    369,262OTHER (INCOME ) EXPENSE:Sundry
    
    
    22,958
    
    
    
    79,867Interest and convertible debt expense
    
    
    594,691
    
    
    
    1,115,177Gain on debt restructure
    
    
    (2,119,065
    )Resolution of business acquisition contingency
    
    
    0
    
    
    
    681,135Total other (income) expense
    
    
    (1,552,332
    )
    
    
    1,876,179INCOME (LOSS) BEFORE INCOME TAXES
    
    
    2,623,956
    
    
    
    (1,506,917
    )INCOME TAXES
    
    
    40,050
    
    
    
    0NET INCOME ( LOSS)
    
    $
    2,583,906
    
    
    
    ($1,506,917
    )NET INCOME (LOSS) PER COMMON SHAREBasic
    
    $
    0.38
    
    
    
    ($0.36
    )Diluted
    
    $
    0.24
    
    
    
    ($0.36
    )WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDINGBasic
    
    
    6,778,039
    
    
    
    4,233,893Diluted
    
    
    10,818,409
    
    
    
    4,233,893
 See Notes to Consolidated Financial Statements.
 
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CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
For the Years Ended December 31, 2005 and 2004
 CommonAdditionalPaid-in
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance , January 1, 2004
    
    
    4,153,574
    
    
    $
    415,358
    
    
    $
    5,555,932
    
    
    
    ($6,837,707
    )
    
    
    ($866,417
    )Issuance of common shares
    
    
    178,959
    
    
    
    17,896
    
    
    
    43,566
    
    
    
    
    
    
    
    61,462Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,506,917
    )
    
    
    (1,506,917
    )Balance, December 31, 2004
    
    
    4,332,533
    
    
    
    433,254
    
    
    
    5,599,498
    
    
    
    (8,344,624
    )
    
    
    (2,311,872
    )Issuance of common shares
    
    
    2,104,000
    
    
    
    210,400
    
    
    
    1,578,000
    
    
    
    
    
    
    
    1,788,400Issuance of common shares
    
    
    1,509,804
    
    
    
    150,980
    
    
    
    1,132,353
    
    
    
    
    
    
    
    1,283,333Issuance of convertible debt
    
    
    
    
    
    
    
    
    
    
    117,096
    
    
    
    
    
    
    
    117,096Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,583,906
    
    
    
    2,583,906Balance, December 31, 2005
    
    
    7,946,337
    
    
    $
    794,634
    
    
    $
    8,426,947
    
    
    
    ($5,760,718
    )
    
    $
    3,460,863
 See Notes to Consolidated Financial Statements.
 
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CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004
 2005
    
    
    2004OPERATING ACTIVITIES:Net Income (Loss)
    
    $
    2,583,906
    
    
    
    ($1,506,917
    )Adjustments to reconcile net income (loss)to
net cash provided by operating activitiesDepreciation and amortization
    
    
    199,996
    
    
    
    234,732Gain on debt restructure
    
    
    (2,119,065
    )Provision for inventories reserve
    
    
    100,000
    
    
    
    268,016Stock compensation
    
    
    
    
    
    
    61,462Expense for convertible debt
    
    
    117,096Variable accounting option expense
    
    
    388,300Changes in assets and liabilities:Accounts receivable
    
    
    (122,604
    )
    
    
    288,880Inventories
    
    
    (414,909
    )
    
    
    (528,078
    )Prepaid expenses and other assets
    
    
    2,241
    
    
    
    (2,498
    )Accounts payable, accrued expenses and deposits
    
    
    495,388
    
    
    
    1,866,640Net cash provided by operating activities
    
    
    1,230,349
    
    
    
    682,237INVESTING ACTIVITIES:Capital expenditures
    
    
    (116,729
    )
    
    
    (167,342
    )Net cash used in investing activities
    
    
    (116,729
    )
    
    
    (167,342
    )FINANCING ACTIVITIES:Proceeds from stockholder advances
    
    
    53,000
    
    
    
    750,000Repayment of stockholder advances
    
    
    (53,000
    )Proceeds from (repayment of ) loan
    
    
    200,000
    
    
    
    (112,500
    )Principal payments on long-term debt
    
    
    (1,284,365
    )
    
    
    (266,538
    )Principal payments on notes payable
    
    
    
    
    
    
    (1,000,000
    )Net cash used in financing activities
    
    
    (1,084,365
    )
    
    
    (629,038
    )NET INCREASE (DECREASE) IN CASH
    
    
    29,255
    
    
    
    (114,143
    )CASH AT BEGINNING OF YEAR
    
    
    108,488
    
    
    
    222,631CASH AT END OF YEAR
    
    $
    137,743
    
    
    $
    108,488
 
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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS  For
the Years Ended December 31, 2005 and 2004   continued
 2005
    
    
    2004SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the year for:Interest
    
    $
    310,885
    
    
    $
    766,128Income Taxes
    
    $
    50
    
    
    $
    938NON-CASH OPERATING AND FINANCING ACTIVITIES:Common stock issued for compensation
    
    $
    0
    
    
    $
    61,462Conversion of accounts payable to
notes payable and long-term debt
    
    $
    363,000
    
    
    $
    0
  See Notes to Consolidated Financial Statements.
 
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##### Table of Contents



CIRCUIT RESEARCH LABS, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
 1.
    
    DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of Consolidation
  a.
    
    Inventories are stated at the lower of cost (first-in, first-out method) or
market.b.
    
    Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related assets,
ranging from 3 to 7 years for furniture, fixtures, machinery and equipment. Leasehold
improvements are amortized over the term of the lease.c.
    
    Goodwill. The Company adopted SFAS 142, Goodwill and Other Intangible Assets
on January 1, 2002. SFAS 142 requires that goodwill be tested for impairment, at least
annually, and shall not be amortized. The goodwill impairment test is a two-step process.
The first step compares the fair value of a reporting unit with its carrying amount. If
the fair value exceeds the carrying amount, goodwill of the reporting unit is considered
not impaired and no further testing is necessary. If the fair value is less than the
carrying value, the second step must be performed to determine the amount of the
impairment. The second step compares the implied fair value of the reporting unit
goodwill with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess.The Company has determined the estimated fair value of the Company to assess whether the
goodwill has been impaired under SFAS 142. Management has concluded that the estimated fair
value of the Company was in excess of its carrying value as of December 31, 2005 and 2004.
The fair value has been estimated based on the market share price, customer base, cash
flows and existing product lines. As a result of these reviews the Company has determined
that no impairment loss is required to be recorded for the years ended December 31, 2005
and 2004.d.
    
    Long-lived assets  The Company reviews the carrying value of its long-lived
assets and identifiable intangibles for possible impairment whenever events or changes in
 
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circumstances indicate that the carrying amounts may not be recoverable. For assets to be
disposed of, the Company reports long-lived assets and certain identifiable intangibles at
the lower of carrying amount or fair value less cost to sell. No impairment losses were
recorded for the years ended December 31, 2005 and 2004.e.
    
    Warranty  Our warranty period is two years from the date of sale for our
digital products and one year from date of sale for our analog products. Warranty expense
was $107,094 and $56,376 for 2005 and 2004, respectively.
 2005
    
    
    2004Balance, beginning of year
    
    $
    122,000
    
    
    $
    122,000Warranty accrual
    
    
    107,094
    
    
    
    56,376Payments made
    
    
    (107,094
    )
    
    
    (56,376
    )Balance, end of year
    
    $
    122,000
    
    
    $
    122,000
 f.
    
    Revenue  In accordance with SFAS 48, Revenue Recognition When Right of
Return Exists, revenue is recognized on sales of products when title transfers to
customers, which is generally at the time of shipment. The Company sells its products
primarily through a network of wholesale distributors and dealers. Our primary payment
terms with its dealers and distributors are 5% prepayment with order net 30 after date of
shipment.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
indirect purchasers of our audio processing and post-production equipment. In 2005, our
largest customer, Harris Corporation, accounted for approximately 23% of net sales. In
2004, the same customer accounted for approximately 19% of net sales. Another one of our
largest customers, Broadcast Supply Worldwide, accounted for just over 12% of our net sales
for 2005 representing a decrease of 4% over 2004. Harris Corporation and Broadcast Supply
Worldwide are suppliers and distributors of broadcast equipment. We rely to a large extent
on replacement orders placed by existing customers. No other customer accounted for more
than 10% of net sales.Sales transactions with distributors occur at prices fixed at the sale date without
contingencies related to (i) the buyers resale of the product, (ii) the theft or damage of
the product or (iii) future Company performance obligations to effect the resale of the
product. Purchasers have economic substance separate from the Company and expected sales
returns can be reasonably estimated. Because the Company does not sell on consignment or
guarantee the resale of its products by its dealer or distributor network, the Company
records revenue at the time of shipment in accordance with SFAS 48.The Company grants trade credit to its customers. Receivables are valued at managements
estimate of the amount that will ultimately be collected. The allowance for doubtful
accounts is based on specific identification of uncollectible accounts and our historical
collection experience. Based on managements evaluation the allowance for doubtful accounts
was $33,361 at December 31, 2005 and 2004.
 
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g.
    
    Research and development costs, totaling $1,615,579 and $1,403,770 for the
years ended December 31, 2005 and 2004, respectively, are charged to expense as incurred.h.
    
    Income taxes  Income tax expense is calculated under the liability method as
required under SFAS No. 109, Accounting for Income Taxes. Under the liability method,
deferred tax assets and liabilities are determined based upon the differences between
financial statement carrying amounts and the tax bases of existing assets and liabilities,
and are measured at the tax rates that will be in effect when these differences reverse.
The benefit of our operating loss carryforwards has been reduced 100% by a valuation
allowance at December 31, 2005 and 2004.i.
    
    Financial instruments  SFAS No. 107 Disclosures About Fair Value of
Financial Instruments requires disclosures of the estimated fair value of certain
financial instruments. The Company has estimated the fair value of its financial
instruments using available market data. However, considerable judgment is required in
interpreting market data to develop estimates of fair value. The use of different market
assumptions or methodologies may have a material effect on the estimates of fair value.
The carrying values of cash, receivables, accounts payable, notes payable and debt
approximate fair values due to the short-term maturities or market rates of interest of
these instruments.j.
    
    Net loss per share  In calculating net income per share for the twelve
months ended December 31, 2005, the effects of 3,591,000 shares relating to options to
purchase common stock and 266,667 shares related to convertible debt as well as the
anti-dilution rights of a stockholder were used for computing diluted earnings per share
because the option exercise prices were lower than the market price of the common stock.
For the twelve months ended December 31, 2004, the effect of 2,915,005 shares relating to
options to purchase common stock were not used for computing diluted net loss per share
because the results would be anti-dilutive. Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share, establishes standards for computing and presenting
earnings per share. It also requires the dual presentation of basic and diluted earnings
per share on the face of the statement of operations. Earnings per share is calculated as
follows:
 For the Year EndedDecember 31,2005
    
    
    2004NumeratorNet income (loss)
    
    $
    2,583,906
    
    
    
    ($1,506,917
    )DenominatorWeighted average shares  basic
    
    
    6,778,039
    
    
    
    4,233,983Weighted average shares  diluted
    
    
    10,818,409
    
    
    
    4,233,983Basic income (loss) per share
    
    $
    0.38
    
    
    
    ($0.36
    )Diluted income (loss) per share
    
    $
    0.24
    
    
    
    ($0.36
    )
 
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k.
    
    Advertising Costs Advertising costs are expensed as incurred with the
exception of any expenses paid in connection with a sales event that has not yet taken
place. Those advertising costs are classified as prepaid expense items until after the
sales event. Advertising expense for the years ended December 31, 2005 and 2004 were
$84,767, and $54,170, respectively.l.
    
    Shipping and handling costs  It is our policy to classify shipping and
handling costs as part of selling, general and administrative expenses in the statement of
operations. Total delivery costs were $129,886 and $129,357 in 2005 and 2004,
respectively.m.
    
    New accounting pronouncementsSFAS No. 123, (Revised 2004) (SFAS No. 123(R)), Share-Based Payment, was issued in December
2004. SFAS No. 123(R) is a revision of FASB Statement 123, Accounting for Stock-Based
Compensation,and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance, which allowed companies to use the intrinsic
method of valuing share-based payment transactions. SFAS No. 123(R) focuses primarily on
accounting for transactions in which an entity obtains employee services in share-based
payment transactions. SFAS No. 123(R) requires a public entity with share-based payments to
employees, including grants of employee stock options, to be recognized in the financial
statements based on the fair-value method as defined in Statement 123. Pro forma
disclosure is no longer an alternative. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the award. This
statement is effective for the Company as of the interim reporting period that begins
January 2006.As permitted by Statement 123, we currently account for share-based payments to employees
using the intrinsic value method and, as such, generally recognize no compensation cost for
employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method
is expected to have an impact on our results of operations, although it will have no impact
on our overall financial condition. The impact upon adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted in
the future, the valuation model used to value the options and other variables.SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, was issued in
November 2004. SFAS No. 151 clarifies that abnormal amounts of idle facility expense,
freight, handling costs and spoilage should be expensed as incurred and not included in
overhead. Further, SFAS No. 151 requires that allocation of fixed and production
facilities overheads to conversion costs should be based on normal capacity of the
production facilities. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have a
material effect on our results of operations or financial condition.SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20, Accounting Changes,and Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, was issued in May 2005. SFAS No. 154 changes the requirements for
the accounting and reporting of a change in accounting
 
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principle. Previously, most voluntary changes in accounting principles were recognized by
way of a cumulative effect adjustment within net income during the period of the change.
SFAS No. 154 requires retrospective application to prior periods financial statements,
unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005. However, the Statement does not change the
transition provisions of any existing accounting pronouncements. We do not expect the
adoption of SFAS No. 154 to have a material effect on our results of operations or
financial condition.The FASB has issued FASB Statement No. 155, Accounting for Certain Hybrid Instruments.
This standard amends the guidance in FASB Statements No. 133, Accounting for Derivative
Instruments and Hedging Activities,and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.Statement 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole (eliminating the
need to bifurcate the derivative from its host) if the holder elects to account for the
whole instrument on a fair value basis. The Company does not engage in transactions that
would be affected by this statement.n.
    
    Use of estimates  The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting principles necessarily requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reported period.
Actual results could differ from these estimates.o.
    
    Concentration of Credit Risk.  Financial instruments that potentially
subject the Company to significant concentration of credit risk consist primarily of trade
accounts receivable.At December 31, 2005 and 2004, the Company had trade receivables with one and three
customers representing approximately 13% and 48% of the receivable balances.
 2.
    
    INVENTORIES
 Inventories consist of the following at December 31:
    

2005
    
    
    2004Raw materials and supplies
    
    $
    3,049,228
    
    
    $
    2,782,860Work in process
    
    
    935,212
    
    
    
    843,279Finished goods
    
    
    612,555
    
    
    
    555,947Total
    
    
    4,596,995
    
    
    
    4,182,086Less obsolescence reserve beginning of the year
    
    
    (1,809,410
    )
    
    
    (1,541,394
    )Additions to the obsolescence reserve
    
    
    (100,000
    )
    
    
    (268,016
    )Inventories, net
    
    $
    2,687,585
    
    
    $
    2,372,676
 
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3.
    
    PROPERTY AND EQUIPMENT
 Property and equipment consist of thefollowing at December 31:
    

2005
    
    
    2004Leasehold improvements
    
    $
    420,279
    
    
    $
    420,279Furniture and fixtures
    
    
    103,120
    
    
    
    103,120Computer equipment
    
    
    999,242
    
    
    
    944,087Machinery and equipment
    
    
    1,372,864
    
    
    
    1,311,2912,895,505
    
    
    
    2,778,777Less accumulated depreciation and amortization
    
    
    (2,476,980
    )
    
    
    2,276,984Property and equipment  net
    
    $
    418,526
    
    
    $
    501,793
  4.
    
    LONG-TERM DEBT
  2005
    
    
    2004Orban acquisition note to stockholder
    
    $
    180,000
    
    
    $
    180,000Avocet Instruments, Inc.
    
    
    27,367
    
    
    
    27,367Dialog4 Engineering GmbH (see Note 6)
    
    
    840,040
    
    
    
    1,386,200Solectron GmbH see (Note 6)
    
    
    227,107
    
    
    
    275,527Harman see (Note 5)
    
    
    2,752,530Harman accumulated interest, long-term portion
    
    
    243,460Note payable to private investor
    
    
    200,000Vendor notes
    
    
    190,663
    
    
    
    16,979Employee note
    
    
    2,000
    
    
    
    18,000Total long-term debt
    
    
    4,663,168
    
    
    
    1,904,073Less current portion Harman and others
    
    
    1,500,898
    
    
    
    885,127Total long-term debt, less current portion
    
    $
    3,162,270
    
    
    $
    1,018,946
  
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th
      2006
    
    $
    1,500,8982007
    
    
    848,7652008
    
    
    907,8402009
    
    
    1,184,6052010
    
    
    221,060$
    4,663,168
 5.
    
    NOTES PAYABLE
 Stockholders and Related Parties
  
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Harman
   
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47




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6.
    
    DIALOG4
     
 48




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49




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7.
    
    STOCKHOLDERS EQUITY (DEFICIT)
       8.
    
    STOCK OPTIONS
    
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2005
    
    
    2004Net income (loss) as reported
    
    $
    2,583,906
    
    
    
    ($1,506,917
    )Additional expense if options had been expensed
    
    
    (53,030
    )
    
    
    (958,000
    )Pro forma net income (loss)
    
    $
    2,530,876
    
    
    
    (2,464,917
    )2005 income (loss) per share diluted
    
    $
    0.27
    
    
    $
    (0.36
    )2005 income (loss) per share diluted, if
options had been expensed
    
    $
    0.27
    
    
    $
    (0.58
    )
 
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9.
    
    INCOME TAXES
  2005
    
    
    2004Federal tax (benefit) at statutory rates
    
    $
    904,400
    
    
    
    ($513,000
    )State tax at statutory rates
    
    
    129,200
    
    
    
    (91,000
    )Permanent items
    
    
    25,000
    
    
    
    15,100Other
    
    
    
    
    
    
    (10,800
    )Utilization
of net operating loss carryforward
    
    
    (1,058,600
    )Increase in valuation allowance
    
    
    
    
    
    
    599,700Alternative minimum tax
    
    
    40,050Total
    
    $
    40,050
    
    
    $
    0
  2005
    
    
    2004Current deferred taxes:Inventory cost capitalization
    
    $
    68,900
    
    
    $
    68,900Inventory obsolescence reserve
    
    
    763,800
    
    
    
    723,800Allowance for doubtful accounts
    
    
    13,300
    
    
    
    13,300Warranty and other reserves
    
    
    48,800
    
    
    
    48,800Interest on obligation subject to restructuring
    
    
    
    
    
    
    378,000Accrued expenses
    
    
    91,900
    
    
    
    109,500Variable option and debt conversion accruals
    
    
    202,200Deferred tax valuation allowance
    
    
    (1,188,900
    )
    
    
    (1,342,300
    )Total
    
    $
    0
    
    
    $
    0
 
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2005
    
    
    2004Non-current deferred taxes:Goodwill amortization
    
    
    ($618,400
    )
    
    
    ($374,800
    )Depreciation and amortization
    
    
    (60,700
    )
    
    
    (60,700
    )Operating loss carry forward
    
    
    2,431,700
    
    
    
    3,093,000Federal general business credit carry forward
    
    
    65,400
    
    
    
    65,400Deferred tax valuation allowance
    
    
    (1,818,000
    )
    
    
    (2,722,900
    )Total
    
    $
    0
    
    
    $
    0
  10.
    
    SEGMENT REPORTING, SALES TO MAJOR CUSTOMERS AND EXPORT SALES
     Region
    

2005
    
    

%
    
    

2004
    
    
%Europe
    
    $
    3,900,907
    
    
    
    58
    %
    
    $
    4,453,434
    
    
    
    54
    %Pacific Rim
    
    
    1,397,436
    
    
    
    21
    
    
    
    2,064,585
    
    
    
    25Latin and South America
    
    
    846,475
    
    
    
    13
    
    
    
    848,466
    
    
    
    10Canada and Mexico
    
    
    461,520
    
    
    
    7
    
    
    
    584,072
    
    
    
    7Other
    
    
    96,730
    
    
    
    1
    
    
    
    311,721
    
    
    
    4Total
    
    $
    6,703,002
    
    
    
    100
    %
    
    $
    8,262,278
    
    
    
    100
    %
 11.
    
    EMPLOYEE BENEFIT PLANS
   
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12.
    
    GOING CONCERN
    13.
    
    COMMITMENTS
     
 55




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Year
    
    Amount2006
    
    $
    758,2122007
    
    
    410,8162008
    
    
    4125632009
    
    
    308,5502010
    
    
    317,2622011
    
    
    325,974Thereafter
    
    
    27,227$
    2,560,604
 
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
  
 ITEM 8A. CONTROLS AND PROCEDURES
   57




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PART III
 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionsCharles Jayson Brentlinger
    
    
    51
    
    
    Chief Executive Officer, Chairman of
the Board and PresidentGary D. Clarkson
    
    
    53
    
    
    Secretary, Vice President and DirectorChristopher M. Kampmeier
    
    
    54
    
    
    DirectorRobert A. Orban
    
    
    60
    
    
    Vice President, Chief Engineer and
Director


Carl E. Matthusen
    
    
    62
    
    
    DirectorRobert W. McMartin
    
    
    44
    
    
    Executive Vice President, Treasurer
and Chief Financial OfficerPeter J. Lee
    
    
    51
    
    
    Vice President of Orban European
OperationsGreg J. Ogonowski
    
    
    50
    
    
    Vice President of New Product
DevelopmentPatricia Humke
    
    
    55
    
    
    Vice President of ManufacturingRebecca Valdez
    
    
    40
    
    
    Vice President of Human Resources and
Administration
 Directors
 Charles Jayson Brentlinger
 Gary D. Clarkson
 58




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Christopher M. Kampmeier
 Robert A. Orban
 Carl E. Matthusen
 Audit
Committee
  Executive Officers
 Robert W. McMartin
 Peter J. Lee
 59




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Greg J. Ogonowski
 Patricia Humke
 Section 16(a) Beneficial Ownership Reporting Compliance
  60




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ITEM 10. EXECUTIVE COMPENSATION.
  Summary Compensation Table
 Restricted
    
    SecuritiesFiscal
    
    
    
    
    
    
    
    
    
    Stock
    
    Underlying
    
    All OtherName and Principal Position
    
    Year
    
    Salary
    
    Bonus
    
    Awards($)(1)
    
    Options (#)
    
    CompensationCharles Jayson Brentlinger
    
    
    2005
    
    
    $
    177,611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,471
    (5)President, Chief Executive
    
    
    2004
    
    
    
    173,421
    
    
    
    42,422
    
    
    
    
    
    
    
    1,365,005
    (2)
    
    $
    20,425
    (3)Officer and Chairman of the
    
    
    2003
    
    
    
    173,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112,429
    (4)BoardRobert A. Orban
    
    
    2005
    
    
    $
    232,995
    
    
    
    
    
    
    
    
    
    
    
    50,000
    (7)
    
    
    24,229
    (8)Vice President and
    
    
    2004
    
    
    
    178,566
    
    
    
    
    
    
    
    
    
    
    
    50,000
    (7)
    
    
    189,677
    (6)Chief Engineer
    
    
    2003
    
    
    
    178,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,631
    (6)Phillip T. Zeni, Sr.
    
    
    2005
    
    
    $
    178,334
    
    
    
    
    
    
    
    
    
    
    
    200,000

(15)
    
    
    38,574
    (10)Executive Vice President
    
    
    2004
    
    
    
    164,903
    
    
    
    
    
    
    
    13,466
    (9)
    
    
    50,000
    (7)
    
    
    28,706
    (10)and Chief Operating Officer
    
    
    2003
    
    
    
    90,865
    
    
    
    
    
    
    
    154,227
    (9)
    
    
    
    
    
    
    26,306
    (11)Robert McMartin
    
    
    2005
    
    
    $
    163,750
    
    
    
    
    
    
    
    
    
    
    
    166,000
    (14)
    
    
    20,577
    (12)Vice President and
    
    
    2004
    
    
    $
    149,777
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    14,400
    (12)Chief Financial Officer
    
    
    2003
    
    
    
    125,826
    
    
    
    
    
    
    
    5,535
    
    
    
    
    
    
    
    Greg J. Ogonowski
    
    
    2005
    
    
    $
    157,258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice President of New
    
    
    2004
    
    
    $
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Product Development
    
    
    2003
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    (13)
 
 (1)
    
    The amounts shown in this column represent the dollar value of the grant of restricted stock
based on the value of our common stock on the grant date.(2)
    
    On December 29, 2004, the Board of Directors approved to extend Mr. Brentlingers options
that expired September 30, 2004. The new expiration date is December 29, 2009. The option
price was reducing from $1.00 per share to $0.70 per share. These options are in connection to
the Stock Purchase Agreement between Mr. Brentlinger and the Company. No options have been
exercised under this grant. For a discussion of the anti-dilution provisions of the option,
see Item 12. Certain Relationships and Related Transactions  Transactions with Management.(3)
    
    Represents car allowance; $12,625 was paid to Mr. Brentlinger and $7,800 was paid to Diamond
Head LLC, which is owned and controlled by Mr. Brentlinger.(4)
    
    Included $98,029 of compensation paid to Mr. Brentlinger for signing personal guarantees in
connection with the Diaolg4 Asset Sale and Purchase Agreement (the Dialo4 Agreement) and
the settlement agreement between Solectron and the Company (
the Solectron Agreement), see
Note 6 in Notes to Consolidated Financial Statements , and $14,400 of car allowance. 61




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##### Table of Contents



(5)
    
    Represents an expense and traveling allowance paid to Mr. Brentlinger.(6)
    
    Represents commissions earned on sales of company products pursuant to Mr. Orbans employment
agreement with the Company.(7)
    
    Represents options granted to this person by the Board of Directors on January 23, 2002. The
options, which vested immediately, were exercisable prior to January 23, 2005, at a purchase
price of $1.00 per share. On December 29, 2004, the Board of Directors extended the exercise
period to January 23, 2009, and reduced the purchase price to $0.70 per share, which the Board
determined was not less than the fair market value of the common stock on such date. No
Options have been exercised under this grant.(8)
    
    Represents accrued commissions plus interest paid to Mr. Orban.(9)
    
    Represents stock based compensation in lieu of cash.(10)
    
    Represents car and living allowance.(11)
    
    $26,306 represents restricted stock transferred as part of a loan transaction executed May
19, 2003. $7,500 represents cash consideration for the
previously discussed stockholder note. $9,306 represents interest accrued relating the same
note. Mr. Zeni received $9,000 for car allowance and $500 for 2002 board meeting fees.(12)
    
    Represents car allowance.(13)
    
    Represents consideration paid to Modulation Index, an engineering and consulting company
owned by Mr. Ogonowski, for services provided to CRL by Modulation.(14)
    
    66,000 options represent options received in connection to the
$33,000 loan made on March 3, 2005 and 100,000 options represent
options received in connection to the Harmon debt restructure. Please
refer to (Note 8) of the Consolidated Financial
Statements.(15)
    
    200,000 options represent options received in connection to
the Harmon debt restructure. Please refer to (Note 8) of the Consolidated Financial Statements. Stock Options
   Option/SAR Grants in Last Fiscal Year
 Individual Grant
 Number of
    
    % of TotalSecurities
    
    Options/SARsUnderlying
    
    Granted to
    
    Exercise orOptions/SARs
    
    Employees in
    
    Base PriceName
    
    Granted (#)
    
    Fiscal Year
    
    ($/Sh)
    
    Expiration DatePhillip T. Zeni, Sr.
    
    
    200,000
    
    
    
    48
    %
    
    $
    0.45
    
    
    April 29, 2007Robert W. McMartin
    
    
    66,000
    
    
    
    16
    %
    
    $
    0.30
    
    
    March 3, 2009Robert W. McMartin
    
    
    100,000
    
    
    
    24
    %
    
    $
    0.45
    
    
    April 29, 2007
 Option Exercises and Values at December 31, 2005
  Aggregated Option/SAR Exercises in the Last Fiscal Year
 and FY-End Option/SAR Values
 Number ofSecurities
    
    Value ofUnderlying
    
    UnexercisedUnexercised
    
    In-the-MoneyOptions/SARs
    
    Options/SARsat FY-End(#)
    
    at FY-End ($)Exercisable/
    
    Exercisable/Name
    
    Shares Acquired
    
    Values Realized
    
    Unexercisable
    
    UnexercisableCharles Jayson
Brentlinger and C
Jayson Brentlinger
Family limited
Partnership
    
    $
    0
    
    
    $
    0
    
    
    
    1,365,000 / 0
    
    
    
    $300,300 / $0Robert A. Orban
    
    $
    0
    
    
    $
    0
    
    
    
    50,000 / 0
    
    
    
    $11,000 / $0Phillip T. Zeni, Sr.
    
    $
    0
    
    
    $
    0
    
    
    
    250,000 / 0
    
    
    
    $105,000 / $0Robert W. McMartin
    
    $
    0
    
    
    $
    0
    
    
    
    166,000 / 0
    
    
    
    $87,920 / $0Greg J. Ogonowski
    
    $
    0
    
    
    $
    0
    
    
    
    0 / 0
    
    
    
    $0 / $0
 Compensation of Directors
  62




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Employment Contracts
       63




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64




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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
   Number of SharesBeneficially
    
    Percent ofName of Beneficial Owner
    
    Title of Class
    
    Owned(1)
    
    Class(2)Directors and Executive Officers:Charles
Jayson Brentlinger and C Jayson Brentlinger Family Limited
Partnership(3)(4)
    
    Common Stock
    
    
    4,841,481
    
    
    
    48.47
    %Gary D. Clarkson(6)
    
    Common Stock
    
    
    102,033
    
    
    
    1.17
    %Christopher M. Kampmeier
    
    Common Stock
    
    
    70,878
    
    
    
    0.82
    %Robert A. Orban(6)
    
    Common Stock
    
    
    66,600
    
    
    
    0.77
    %Carl E. Matthusen(6)
    
    Common Stock
    
    
    50,000
    
    
    
    0.58
    %Phillip T. Zeni, Sr.(6)
    
    Common Stock
    
    
    652,153
    
    
    
    7.35
    %Peter J. Lee
    
    Common Stock
    
    
    0
    
    
    
    *Robert W. McMartin
    
    Common Stock
    
    
    285,563
    
    
    
    3.25
    %Greg J. Ogonowski
    
    Common Stock
    
    
    6,666
    
    
    
    *All directors and executive officers as a
group (9 persons)
    
    Common Stock
    
    
    6,075,374
    
    
    
    57.02
    %5% Holders:Charles
Jayson Brentlinger and C Jayson Brentlinger Family Limited Partnership
    
    Common Stock
    
    
    3,476,481
    
    
    
    40.31
    %Dialog4 System Engineering GmbH(5)
    
    Common Stock
    
    
    1,250,000
    
    
    
    14.5
    %Cornelia Burkhardtsmaier(5)
    
    Common Stock
    
    
    1,250,000
    
    
    
    14.5
    %Friedrich Maier(5)
    
    Common Stock
    
    
    1,250,000
    
    
    
    14.5
    %Harman
International, Inc.
    
    Common Stock
    
    
    1,638,468
    
    
    
    19.0
    %
  
 *
    
    Less than 1%.(1)
    
    On July 7, 2000, our Board of Directors declared a one hundred percent stock dividend
effective as of August 15, 2000, payable to record holders of our common stock as of July 31,
2000. The
number of shares of our common stock beneficially owned by each shareholder listed reflects 65




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##### Table of Contents



this stock dividend. The inclusion herein of any shares of common stock does not constitute
an admission of beneficial ownership of such shares, but are included in accordance with
rules of the Securities and Exchange Commission.(2)
    
    On the basis of 8,623,470 shares of common stock outstanding
as of March 31, 2006.(3)
    
    Includes 1,365,005 shares subject to exercisable options granted to Mr. Brentlinger pursuant
to the Stock Purchase Agreement that we entered into with him on June 23, 1999. Under the
Stock Purchase Agreement, we granted Mr. Brentlinger a five-year option to purchase 1,000,000
shares of our common stock at an exercise price of $1.25 per share. This option was
exercisable upon its grant, and expires on September 30, 2004. No options have been exercised
under this grant. On January 16, 2002, Mr. Brentlinger assigned 200,000 of these options to
his father, Mr. Jayson Russell Brentlinger. Mr. Brentlinger has acquired an additional 565,005
options pursuant to anti-dilution modifications made to the Stock Purchase Agreement by the
Board of Directors on May 15, 2001. Such anti-dilution modifications are retroactive to June
23, 1999.(4)
    
    Mr. Brentlinger is deemed to have direct beneficial ownership of the shares owned by C.
Jayson Brentlinger Family Limited Partnership based on his status as General Partner and
Trustee of C. Jayson Brentlinger Family Limited Partnership. The address of C. Jayson
Brentlinger Family Limited Partnership is 7970 S. Kyrene Rd., Tempe, Arizona 85284.(5)
    
    Based on the information provided in the Schedule 13D/A, Amendment No. 1, filed jointly by
Dialog4 System Engineering GmbH (Dialog4) and Berthold Burkhardtsmaier, Cornelia
Burkhardtsmaier, and Friedrich Maier (collectively, the Shareholders) with the Securities
and Exchange Commission on January 6, 2003. The Shareholders are deemed to have direct
beneficial ownership of the shares owned by Dialog4 based on their status as controlling
shareholders of Dialog4. The address of Dialog4 and the Shareholders is Dialog4 System
Engineering GmbH, c/o Haver&Mailander, att. Dr. Kessler, Lenzhalde 83-85, Stuttgart, Germany
D-70182. For a discussion of our acquisition of the assets of Dialog4 and the shares issued
to Dialog4 in connection with the acquisition, see Item 1 Description of Business  Recent
Events.(6)
    
    Includes 50,000 shares subject to immediately exercisable options granted to this person by
the Board of Directors on January 23, 2002. The exercise period of the options expires on
December 29, 2009. The options have an exercise price of $0 .70 as share.(7)
    
    Includes 1,250,000 shares subject to immediately exercisable options granted to this person
by the Board of Directors on January 23, 2003. The options have an exercise price of $0.55
per share and expire on January 23, 2006. No options have been exercised under this grant.
The address of Mr. Jayson Russell Brentlinger is 7434 East Stetson Drive, Suite 245,
Scottsdale, Arizona 85251. EQUITY COMPENSATION PLAN INFORMATION
  66




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Common shares to be
    
    
    Weighted-average
    
    
    Common sharesissued upon exercise of
    
    
    exercise price of
    
    
    remaining available foroutstanding options,
    
    
    outstanding
    
    
    future issuance underwarrants and rights
    
    
    options, warrants
    
    
    equity compensationand rights
    
    
    plans (excluding sharesreflected in column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
Company
shareholders
    
    
    0
    
    
    $
    0
    
    
    None (Plan has expired)Equity compensation
plans not approved
by Company
shareholders
    
    
    3,591,000
    
    
    $
    0.61
    
    
    NoneTotals
    
    
    3,591,000
    
    
    $
    0.61
    
    
    None
  67




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##### Table of Contents



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 Transactions with Management
     68




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##### Table of Contents



Debt Restructure with Harman International
  Settlement Agreement with Dialog 4
  69




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PART IV
 
 ITEM 13. EXHIBITS AND REPORTS
  Financial Statements
 PageIndependent Auditors Report
    
    
    33Consolidated Financial Statements:Consolidated
Balance Sheets  December 31, 2005 and 2004
    
    
    35Consolidated
Statements of Operations  For the Years Ended December 31,
2005 and 2004
    
    
    37Consolidated
Statements of Stockholders Equity (Deficit)  For the Years Ended December 31,
2005 and 2004
    
    
    38Consolidated
Statements of Cash Flows  For the Years Ended December 31,
2005 and 2004
    
    
    39Notes to
Financial Statements  December 31, 2005 and 2004
    
    
    44
 Exhibit Index
 ExhibitNumber
    
    Description2.1(1)
    
    Asset Sale and Purchase Agreement, dated as of November 16, 2001, among
Dialog4 System Engineering GmbH, Berthold Burkhardtsmaier, Cornelia
Burkhardtsmaier, Friedrich Maier, Circuit Research Labs, Inc. and CRL
Systems, Inc.3.1 (2)
    
    Restated Articles of Incorporation of the Company3.1a (2)
    
    Articles of Amendment to the Companys Restated Articles of Incorporation3.1b (2)
    
    Articles of Amendment to the Companys Restated Articles of Incorporation3.2 (3)
    
    Bylaws of the Company10.1
    
    Circuit Research Labs, Inc CJB Stock Option Plan. (10)10.2
    
    Asset Sale Agreement, dated as of May 31, 2000, by and between CRL Systems, Inc. and Orban, Inc. (4)10.3.1
    
    Guarantee and Collateral Agreement, dated as of May 31, 2000, by and between Circuit Research Labs, Inc.,
as Parent, CRL Systems, Inc., as Borrower, and Orban, Inc., as Lender. (4)10.3.2
    
    First Amendment to Guarantee and Collateral Agreement by and among Circuit Research Labs, Inc., CRL
Systems, Inc, and Harman Pro North America, Inc. dated April 29, 2005. (14)10.4.1
    
    Credit Agreement, dated as of May 31, 2000, by and between CRL Systems, Inc., as Borrower, and Orban,
Inc., as Lender. (4)10.4.2
    
    Third Amendment to Credit Agreement by and among Circuit Research Labs, Inc., CRL Systems, Inc. and Harman
Pro North America, Inc. dated April 29, 2005. (8)
 70




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##### Table of Contents



ExhibitNumber
    
    Description10.5
    
    Employment Agreement, dated as of January 1, 2002, by and between Charles Jayson Brentlinger and Circuit
Research Labs, Inc. (6)10.6
    
    Employment Agreement, dates, as of June 1, 2005, by and between Gary D. Clarkson and Circuit Research
Labs, Inc.(11)10.7
    
    Employment Agreement, dated as of June 1, 2005, by and between Robert W. McMartin and Circuit Research
Labs, Inc.(11)10.8
    
    Employment Agreement, dated as of January 1, 2002, by and between Greg J. Ogonowski and Circuit Research
Labs, Inc. (6)10.9
    
    Employment Agreement dated as of May 31, 2005 by and between Robert A. Orban and Circuit Research Labs,
Inc.(11)10.10
    
    Assumption Agreement by CRL International, Inc. and Harman Pro North America, Inc. dated April 29, 2005.
(8)10.11
    
    Assumption Agreement by Orban Europe GmbH. and Harman Pro North America, Inc. dated April 29, 2005. (8)10.12
    
    Debt Restructuring Agreement by and among Circuit Research Labs, Inc., CRL Systems, Inc, and Harman Pro
North America, Inc. dated April 29, 2005. (8)10.13
    
    Amended and Restated Secured Promissory Note by CRL Systems, Inc. and Harman Pro North America, Inc. dated
April 29, 2005. (8)10.14
    
    Registration Rights Agreement by Circuit Research Labs, Inc. and Harman Pro North America, Inc. dated
April 29, 2005. (8)10.15
    
    Patent Security Agreement by CRL Systems, Inc. and Harman Pro North America, Inc. dated April 29, 2005.
(8)10.16
    
    Patent Security Agreement by Circuit Research Labs, Inc. and Harman Pro North America, Inc. dated April
29, 2005. (8)10.17
    
    Settlement Agreement and Release, dated April 15, 2005, between Dialog4 Systems Engineering GmbH, et al.
and the Registrant. (9)10.18
    
    Employment Agreement dated as of June 1, 2005 by and between Rebecca A. Valdez and Circuit Research Labs,
Inc.(11)10.19
    
    Employment Agreement dated as of June 1, 2005 by and between Patricia Humke and Circuit Research Labs,
Inc.(11)10.20
    
    Office Lease Agreement between Circuit Research Labs, Inc. and Phoenix Investors #9, L.L.C., dated
November 14, 2005 (12)10.21
    
    Demand Note between Circuit Research Labs, Inc. and Jayson Russell Brentlinger. (12)21.1
    
    Subsidiaries of Circuit Research Labs, Inc. (13)23.1
    
    Consent of Altschuler, Melvoin and Glasser LLP (included on page 32 of this report on Form 10-KSB).*31.1
    
    Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-B. *31.2
    
    Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-B. *32.1
    
    Certification of Chief Executive Officer pursuant to item 601(b)(32) of Regulation S-B. *32.2
    
    Certification of Chief Financial Officer pursuant to item 601(b)(32) of Regulation S-B. *
 
 71




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##### Table of Contents



*
    
    Filed herewith.(1)
    
    Incorporated by reference to the Registrants Report on Form 8-K dated February 4, 2002.(2)
    
    Incorporated by reference to the Registrants Registration Statement on Form SB-2 (File No.
333-69712) effective November 13, 2001.(3)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-18 (File No.
2-85779-LA) effective October 14, 1983.(4)
    
    Incorporated by reference to the Registrants Report on Form 8-K/A dated October 12, 2000.(5)
    
    Incorporated by reference to the Registrants Report on Form 10-KSB for the fiscal year ended
December 31, 2000.(6)
    
    Incorporated by reference to the Registrants Form 10-KSB for the fiscal year ended December
31, 2001.(7)
    
    Incorporated by reference to the Registrants Form 10-KSB for the fiscal year ended December
31, 2003.(8)
    
    Incorporated by reference to the Registrants Report on Form 8-K dated May 4, 2005.(9)
    
    Incorporated by reference to the Registrants Report on Form 8-K dated April 19, 2005.(10)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-8 (File No
333-50920).(11)
    
    Incorporated by reference to the Registrations Registration Statement on Form SB-2
(333-126233).(12)
    
    Incorporated by reference to the Registrants Report on Form 8-K dated April 6, 2006.(13)
    
    Incorporated by reference to the Registrants Form 10-KSB for the fiscal year ended December
31, 2005. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  CATEGORY
    
    2005
    
    
    2004Audit fees
    
    $
    94,500
    
    
    $
    89,500Audit-related fees
    
    
    14,800
    
    
    
    0Tax fees
    
    
    0
    
    
    
    0All other fees
    
    
    0
    
    
    
    2,450Total
    
    $
    109,300
    
    
    $
    91,950
 72




---



##### Table of Contents



73




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##### Table of Contents



SIGNATURES
 
  
 CIRCUIT RESEARCH LABS, INC.By:
    /s/ C. Jayson BrentlingerC. Jayson BrentlingerChief Executive Officer, President
and

Chairman of the Board 
  
 
 Signature
    
    Title
    
    Date/s/ C. Jayson Brentlinger

C. Jayson Brentlinger
    
    President, Chief Executive Officer and
Chairman of the Board
    
    April 21, 2006/s/          *

Gary D. Clarkson
    
    Vice President, Secretary and Director
    
    April 21, 2006/s/          *

Christopher M. Kampmeier
    
    Director
    
    April 21, 2006/s/          *

Robert A. Orban
    
    Vice President, Chief Engineer and Director
    
    April 21, 2006/s/          *

Carl E. Matthusen
    
    Director
    
    April 21, 2006/s/          *

Robert W. McMartin
    
    Vice President, Treasurer and Chief
Financial Officer (principal financial
officer)
    
    April 21, 2006
 
 
 * By:

/s/
Robert W. McMartinRobert W. McMartin(Attorney-in-fact for each person indicated) 
 74




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description2.1(1)
    
    Asset Sale and Purchase Agreement, dated as of November 16, 2001, among
Dialog4 System Engineering GmbH, Berthold Burkhardtsmaier, Cornelia
Burkhardtsmaier, Friedrich Maier, Circuit Research Labs, Inc. and CRL
Systems, Inc.3.1 (2)
    
    Restated Articles of Incorporation of the Company3.1a (2)
    
    Articles of Amendment to the Companys Restated Articles of Incorporation3.1b (2)
    
    Articles of Amendment to the Companys Restated Articles of Incorporation3.2 (3)
    
    Bylaws of the Company10.1
    
    Circuit Research Labs, Inc CJB Stock Option Plan. (10)10.2
    
    Asset Sale Agreement, dated as of May 31, 2000, by and between CRL Systems, Inc. and Orban, Inc. (4)10.3.1
    
    Guarantee and Collateral Agreement, dated as of May 31, 2000, by and between Circuit Research Labs, Inc.,
as Parent, CRL Systems, Inc., as Borrower, and Orban, Inc., as Lender. (4)10.3.2
    
    First Amendment to Guarantee and Collateral Agreement by and among Circuit Research Labs, Inc., CRL
Systems, Inc, and Harman Pro North America, Inc. dated April 29, 2005. (14)10.4.1
    
    Credit Agreement, dated as of May 31, 2000, by and between CRL Systems, Inc., as Borrower, and Orban,
Inc., as Lender. (4)10.4.2
    
    Third Amendment to Credit Agreement by and among Circuit Research Labs, Inc., CRL Systems, Inc. and Harman
Pro North America, Inc. dated April 29, 2005. (8)10.5
    
    Employment Agreement, dated as of January 1, 2002, by and between Charles Jayson Brentlinger and Circuit
Research Labs, Inc. (6)10.6
    
    Employment Agreement, dates, as of June 1, 2005, by and between Gary D. Clarkson and Circuit Research
Labs, Inc.(11)10.7
    
    Employment Agreement, dated as of June 1, 2005, by and between Robert W. McMartin and Circuit Research
Labs, Inc.(11)10.8
    
    Employment Agreement, dated as of January 1, 2002, by and between Greg J. Ogonowski and Circuit Research
Labs, Inc. (6)10.9
    
    Employment Agreement dated as of May 31, 2005 by and between Robert A. Orban and Circuit Research Labs,
Inc.(11)10.10
    
    Assumption Agreement by CRL International, Inc. and Harman Pro North America, Inc. dated April 29, 2005.
(8)10.11
    
    Assumption Agreement by Orban Europe GmbH. and Harman Pro North America, Inc. dated April 29, 2005. (8)10.12
    
    Debt Restructuring Agreement by and among Circuit Research Labs, Inc., CRL Systems, Inc, and Harman Pro
North America, Inc. dated April 29, 2005. (8)10.13
    
    Amended and Restated Secured Promissory Note by CRL Systems, Inc. and Harman Pro North America, Inc. dated
April 29, 2005. (8)10.14
    
    Registration Rights Agreement by Circuit Research Labs, Inc. and Harman Pro North America, Inc. dated
April 29, 2005. (8)10.15
    
    Patent Security Agreement by CRL Systems, Inc. and Harman Pro North America, Inc. dated April 29, 2005.
(8)
 75




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##### Table of Contents



ExhibitNumber
    
    Description10.16
    
    Patent Security Agreement by Circuit Research Labs, Inc. and Harman Pro North America, Inc. dated April
29, 2005. (8)10.17
    
    Settlement Agreement and Release, dated April 15, 2005, between Dialog4 Systems Engineering GmbH, et al.
and the Registrant. (9)10.18
    
    Employment Agreement dated as of June 1, 2005 by and between Rebecca A. Valdez and Circuit Research Labs,
Inc.(11)10.19
    
    Employment Agreement dated as of June 1, 2005 by and between Patricia Humke and Circuit Research Labs,
Inc.(11)10.20
    
    Office Lease Agreement between Circuit Research Labs, Inc. and Phoenix Investors #9, L.L.C., dated
November 14, 2005 (12)10.21
    
    Demand Note between Circuit Research Labs, Inc. and Jayson Russell Brentlinger. (12)21.1
    
    Subsidiaries of Circuit Research Labs, Inc. (13)23.1
    
    Consent of Altschuler, Melvoin and Glasser LLP (included on page 32 of this Report on Form 10-KSB).*31.1
    
    Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-B. *31.2
    
    Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-B. *32.1
    
    Certification of Chief Executive Officer pursuant to item 601(b)(32) of Regulation S-B. *32.2
    
    Certification of Chief Financial Officer pursuant to item 601(b)(32) of Regulation S-B. *
 
 
 *
    
    Filed herewith.(1)
    
    Incorporated by reference to the Registrants Report on Form 8-K dated February 4, 2002.(2)
    
    Incorporated by reference to the Registrants Registration Statement on Form SB-2 (File No.
333-69712) effective November 13, 2001.(3)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-18 (File No.
2-85779-LA) effective October 14, 1983.(4)
    
    Incorporated by reference to the Registrants Report on Form 8-K/A dated October 12, 2000.(5)
    
    Incorporated by reference to the Registrants Report on Form 10-KSB for the fiscal year ended
December 31, 2000.(6)
    
    Incorporated by reference to the Registrants Form 10-KSB for the fiscal year ended December
31, 2001.(7)
    
    Incorporated by reference to the Registrants Form 10-KSB for the fiscal year ended December
31, 2003.(8)
    
    Incorporated by reference to the Registrants Report on Form 8-K dated May 4, 2005.(9)
    
    Incorporated by reference to the Registrants Report on Form 8-K dated April 19, 2005.(10)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-8 (File No
333-50920). 76




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(11)
    
    Incorporated by reference to the Registrations Registration Statement on Form SB-2
(333-126233).(12)
    
    Incorporated by reference to the Registrants Report on Form 8-K dated April 6, 2006.(13)
    
    Incorporated by reference to the Registrants Form 10-KSB for the fiscal year ended December
31, 2005. 77