**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-KSB**





[X]
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      Fiscal Year Ended June
      30, 2006





Commission
      File Number 0-27106





**VISEON,
      INC.**


(Name
      of
      small business issuer in its charter)





Nevada


(State
      or
      other jurisdiction of incorporation or organization)





41-1767211


(I.R.S.
      Employer Identification No.)





17103
      Preston Road, Suite 150N


Dallas,
      Texas 75248


(972)
      220-1500 (Address, including zip code,


and


telephone
      number, including area code, of


registrant's
      principal executive offices)





Securities
      registered pursuant to Section 12(b) of the Act: NONE





Securities
      registered pursuant to Section 12(g) of the Act:





Title
      of
      Each Class


Common
      Stock, $.01 Par Value





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. YES [X] NO [ ]





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. [ ]





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). YES [ ] NO[X]





The
      issuer's revenues for the fiscal year ended June 30, 2006 were
      $7,150.





At
      September 12, 2006, the total aggregate market value of the shares
      of voting
      stock held by non-affiliates of the registrant was $1,592,734
      based upon the average of the closing bid and asked prices of the registrant’s
      Common Stock, $0.01 par value, as reported by the Over The Counter Bulletin
      Board on that date of $0.06 and $0.06 per share, respectively . The
      term
“affiliates” is deemed, for this purpose only, to refer to directors, officers
      and holders of 5% or more of the Common Stock of the registrant. The
      number of shares outstanding of the registrant's Common Stock as of September
      12, 2006 was 38,369,082.





Transitional
      Small Business Disclosure format (Check one): YES [ ] NO [X]





**Back
        to Table of Contents**




**INDEX**




Page
                NumberPART
                I.Item
                1.
            Description
                of Business
            3Item
                2.
            Description
                of Property
            16Item
                3.
            Legal
                Proceedings
            16Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            16PART
                II.Item
                5.
            Market
                for Common Equity and Related Stockholder Matters
            16Item
                6.
            Management's
                Discussion and Analysis or Plan of
                Operation
            17Item
                7.
            Financial
                Statements
            21Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            21Item
                8A.
            Controls
                and Procedures
            21Item
                8B.
            Other
                Information
            21PART
                III.Item
                9.
            Directors,
                Executive Officers, Promoters and Control
                Persons; Compliance with Section 16(a) of the Exchange
                Act
            22Item
                10.
            Executive
                Compensation
            23Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters.
            26Item
                12.
            Certain
                Relationships and Related
                Transactions
            28Item
                13.
            Exhibits
            28Item
                14.
            Principal
                Accountant Fees and Services
            31




-2-
 **Back
          to Table of Contents**




**ITEM
      1 . DESCRIPTION OF BUSINESS.**





**INTRODUCTION**




Viseon,
      Inc. (the "Company"), a Nevada corporation formerly known as "RSI Systems,
      Inc."
      was a developer and reseller of videoconferencing systems from its inception
      in
      1993 until January of 2003. These systems, which delivered near television
      quality audio and video communications over ISDN circuits were sold primarily
      to
      corporate, government and OEM customers including Philips. On July 25, 1995,
      we
      completed the initial public offering of our common stock, par value $0.01
      per
      share (the "Common Stock").




We
      changed our focus in 2003 to developing next generation broadband telephones
      for
      use with Voice over Internet Protocol (VoIP) services. These multi-media
      telephones, currently marketed under the VisiFone TM name,
      have been designed to provide consumers, corporate and government users of
      high
      speed internet connections with new features and functions not previously
      possible on low speed analog telephone networks. In addition to providing two
      way live video communications, the VisiFone provides users with new levels
      of
      digital audio quality, on-screen feature controls and enables network based
      services such as video mail and the ability to receive streamed content. In
      essence, the VisiFone was designed to deliver many of the same features found
      on
      a current generation cellular telephone that are not available on today’s analog
      home telephones.




Our
      efforts currently are focused on licensing our technology to IP/PBX vendors
      and
      consumer electronics manufacturers to lower their cost of entry into the
      videotelephone marketplace. In addition, we continue to target the sale of
      VisiFones to and through broadband and VoIP providers such as cable companies
      and regional bell operating companies for use by consumers. We also believe
      that
      there is a potentially significant market for sales of the VisiFone into various
      branches of the U.S. Government as well as the commercial marketplace.




The
      availability of low cost broadband access at home, new more powerful chipsets
      and the VisiFone’s patented technology allow consumers to experience television
      or near television quality video calls with friends, family or business
      associates across the street or around the world. The consumer prices for the
      VisiFone will be determined by the selling carrier or retailer. However, we
      expect the VisiFone to be sold in conjunction with VoIP services in a fashion
      similar to how wireless carriers sell a package of a handset with a term service
      commitment. In many cases this entails the carrier subsidizing the cost of
      the
      handset and selling it to consumers below their actual cost.




**Industry
      Background**





Traditional
      telecommunication networks use a fixed electrical path that travels through
      a
      series of switches across the network. These networks were designed solely
      to
      carry low-fidelity audio signals with a high level of reliability. Although
      these networks are indeed reliable for their initially intended use, they are
      not well suited to service the explosive growth of digital communications
      applications.




Traditional
      networks transmit data at very low rates and resolutions, making them poorly
      suited for delivering high-fidelity audio, entertainment-quality video or other
      rich multimedia content. Traditional networks are also expensive to build
      because each subscriber's telephone must be individually connected to the
      central office switch, which are usually several miles away from a typical
      subscriber's location. The digital component of the traditional
      telecommunications infrastructure is also less efficient than modern networks
      because it allots fixed bandwidth throughout the duration of each call, whether
      or not voice is actually being transmitted. Further, it is difficult for
      telecommunication service providers to provide new or differentiated services
      or
      functions, like video communications, that the network was not designed to
      accommodate.




In
      contrast to the traditional telecommunications infrastructure or public switched
      telephone network , data networks -- such as the Internet or a corporate LAN
      --
      utilize a "packet-switched" system in which information between two
      communicating terminals (for example, a PC downloading a page from a web server)
      is transmitted in the form of small data packets that travel through a series
      of
      switches, routers, and hubs across the network. Packet-switched networks have
      been built mainly for carrying non-real-time data. The advantages of such
      networks are their efficiency, flexibility and scalability. Bandwidth is only
      consumed when needed. Networks can be built in a variety of configurations
      to
      suit the number of users, client/server application requirements and desired
      availability of bandwidth. Furthermore, many terminals can share the same
      connection to the network. The exponential growth of the Internet in recent
      years has proven the scalability of these underlying packet networks. The most
      common protocol used for communicating on these packet networks is Internet
      Protocol (“IP”).


-3-
 **Back
          to Table of Contents**


As
      broadband connectivity has become more available and less expensive, it is
      now
      possible for service providers to offer voice and video services that run over
      these IP networks to businesses and consumers. Providing such services has
      the
      potential to both substantially lower the cost of telephone service and
      equipment costs to these customers and to increase the breadth of features
      available to the end-user. Services like full-motion, two-way video are now
      supported by the bandwidth spectrum commonly available to broadband customers,
      whether business or residential. To enable such new products to take hold,
      service and equipment suppliers need semiconductor products and software to
      connect input and output devices to the networks and the software that runs
      on
      the network that enables these input/output devices to be easily installed,
      operated, and managed, as well as to replace common functionalities of the
      legacy switched network, such as billing and operator/directory assistance.
      We
      believe that the network infrastructure at the consumer level is now in place
      to
      enable broad acceptance and deployment of consumer video telephony. We also
      believe that the projected growth of consumer adoption of VoIP will help drive
      adoption of consumer multi-media digital telephone devices such as those
      distributed and developed by us.





There
      are
      three basic categories of personal video communication devices in the consumer
      market. The most popular have been the PC-based systems that operate over
      dial-up or broadband connections using open standards such as H.323 or
      proprietary systems using a variety of protocols.





**PC-Based
      Systems; Software Codecs.** Low cost
      PC add-on systems utilizing Complimentary Metal Oxide Semiconductor cameras
      and
      Windows-based software compressor/de-compressors (codec) have gained reasonably
      broad acceptance. Commonly known as Web cams, these types of systems offer
      low-quality video with generally less than 10 frames per second, rendering
      the
      video and audio choppy, blurry and delayed. PC-based systems using software
      codecs are available at prices under $100 from companies including Logitech
      and
      many others. The VisiFone is expected to be fully compatible with most of this
      installed base when using Microsoft NetMeeting and a broadband connection.
      PC-based systems using software codecs lack an intuitive, familiar interface
      that resembles a telephone.





**PC-Based
      Systems; Hardware Codecs** .
      Certain
      systems available from VCON, Polycom, Scotty and others utilize an independent,
      dedicated microchip(s) for the codec function. It is housed either in an
      external module, which may include the camera, or on a card installed in a
      PC.
      Depending on the available bandwidth, these systems can offer corporate quality
      audio and video over either IP and/or traditional Integrated Switched Digital
      Networks (“ISDN”). They are, however, still limited in the size of the image on
      the PC display device, have a complicated user interface, and can suffer from
      instability issues due to the underlying PC platform. These systems are
      available at prices from $500 to $1,200. They also lack an intuitive, familiar
      interface that resembles a telephone.





**The
      Personal Videophone.** There
      are three types of personal videophones. The first of these is POTS (Plain
      Old
      Telephone Service) videophones, which operate over analog phone lines typically
      using International Telecommunications Standard (“ITU”) H.324 and have been
      marketed for years with little success. The lack of consumer acceptance is
      primarily due to their poor video quality. Due to the limited bandwidth of
      POTS,
      these systems generally deliver video at less than five frames per second.
      Examples include systems from AT&T, Panasonic and C-Phone, all of which
      failed to achieve reasonable sales volumes and have now been discontinued.
      Two
      models of POTS videophones currently being sold in the US market include a
      Korean made model retailing for approximately $300 and the Beamer from Vialta.
      The second type of personal videophone utilizes the ISDN telephone network.
      Various manufacturers have been producing this type of personal videophone
      for
      more than ten years, most of which focused their sales efforts on the corporate
      market for desktop use or to news organizations for the purpose of relaying
      information via satellite from remote locations. Several manufacturers produce
      videophones that operate on ISDN networks, including Tandberg of Norway, Motion
      Media of the UK and Aethra of Italy. The cost of ISDN is approximately $50
      per
      month per 128k circuit for a basic line plus approximately $10 to $100 per
      hour
      for domestic transport at speeds ranging between 128k and 384k. ISDN-based
      videophones retail at prices between $1,000 and $9,000 depending on the
      manufacturer, features and screen size. The third type of personal videophone
      uses the IP technology. IP-based videophones were generally introduced in 2000
      and currently retail at prices between $299 and $1,295. Recently several foreign
      manufacturers have introduced their brand of IP videophones to the U.S. market,
      but few are being delivered for a variety of reasons.





**Products
      and Services**





The
      current generation of the VisiFone that we offer for sale or license is
      available today in one basic model. The VisiFone is customized to incorporate
      certain feature sets requested by a particular VoIP provider. The VisiFone
      is a
      desktop telephone with a 5.6 inch color TFT/LCD screen with a corded handset
      and
      integrated full duplex speakerphone. It has input and output connectors which
      enable it to be connected to a variety of devices such as output to a television
      or VCR or DVD recorder. Its inputs allow for the connection of a digital camera,
      camcorder, document camera, external microphone and a headset. It
      also


-4-
 **Back
          to Table of Contents**


has
      USB
      ports to enable the connection of USB devices such as a card reader, keyboard,
      or digital camera. The design of the VisiFone is flexible. By programming the
      software embedded in the VisiFone, certain features and functions can be
      customized for specific applications requested by carriers or government or
      corporate customers. The VisiFone incorporates an HTML 4.0 browser functionality
      which is currently used primarily for the Graphical User Interface and may
      be
      used in the future to enable users to access information or media on the
      Internet.





As
      an
      example, the VisiFone could be utilized to show live weather, news, sports
      scores and stock quotes on its screen and enable consumers to receive
      information customized by the user. This content delivery mechanism can be
      as
      simple as accessing available Real Simple Syndication (“RSS”) feeds available
      from a number of websites and content providers such as Yahoo! A potential
      business model exists in which a consumer could receive content on the VisiFone
      at no cost due to the content being sponsored and paid for by advertiser
      messages integrated with the content. As the VisiFone is a “telephone”,
      consumers would be able to “interact” with the content and/or advertisers’
offers instantaneously by pushing a single button on the VisiFone base or
      handset. In a PC/Internet application this would be generally known as “click to
      dial.”





The
      VisiFone may be an attractive vehicle for content providers and advertisers
      to
      reach a consumer due not only to this interactive potential, but also because
      users can be targeted. Unlike a PC the VisiFone is “connected” and identified
      with a physical location address. Advertisers could create custom offers and
      messages targeted at specific consumers by utilizing a variety of demographic
      identifiers from publicly available databases such as home value, pet ownership
      or the brands of automobiles registered to a specific street address.




**Market
      and Marketing**





Corporate
      Market





Although
      it may be expected that broad adoption of our VisiFone products could be
      achieved in Fortune 1000 size companies, sales of our products in this market
      are not likely to generate substantial volume as compared to the consumer
      market. Larger corporations already have the option of utilizing desktop
      PC-based 384k IP video communication systems that can be managed by existing
      network management infrastructures. Numerous IP telephone system vendors are
      also providing IP telephone instruments that offer some of the functionality
      of
      the VisiFone. The corporate market for hardware-based video communications
      is
      currently dominated by a duopoly of suppliers, Polycom and TANDBERG. The
      technical support infrastructure for PC-based videoconferencing systems already
      exists within most major companies. We also expect that non-PC based desktop
      IP
      video telephony will be available for the corporate users in the next year
      as
      corporate IP phone system manufacturers enter this market including Cisco,
      Lucent and Nortel.





The
      primary corporate prospects for personal videophones will most likely be in
      the
      sub-Fortune 1000 size companies as well as in the 33 million telecommuters
      that
      work for companies of all sizes. The decline in prices of group
      videoconferencing systems has produced unit growth, yet the cost is still
      generally above $3,000 for an "entry" level system. Personal videophones can
      create a new price point for videoconferencing at less than $600 per
      endpoint.





Consumer
      Market





The
      potential consumer market for the VisiFone is by far the largest prospect base.
      Because it requires a minimum of 256k for transmission of video and audio,
      use
      of VisiFones will most likely be limited to those individuals with access to
      a
      broadband Internet connection, typically via DSL or Cable Modem.




Initially,
      it is expected that the sales of personal digital telephones in the consumer
      market will be made to existing broadband IP users. The "early adopters" have
      the income necessary to purchase a personal digital telephone outright, without
      financing, if necessary. We expect this would be followed by sales to those
      broadband customers who are attracted by broadband provider-based financing
      programs and eventually to those individuals who will see the availability
      of
      personal digital telephones as a reason to install broadband IP connectivity
      whether they have a home PC or not. We also expect that the VisiFone will become
      a part of the marketing efforts of various VoIP providers to
      consumers.





Business
      Development, Sales and Marketing





The
      current goals of our business development and sales departments are to build
      relationships that fall into four basic categories: consumer electronics
      manufacturing, technology and patent licensing, broadband provider relations
      and
      product sales.


-5-
 **Back
          to Table of Contents**




Consumer
      electronics manufacturing is focused on engaging major electronics manufacturers
      to participate with the Company in the future development and widespread
      distribution of our products and their products containing our intellectual
      property in the United States.





Technology
      and patent licensing involves both the business development area as well as
      our
      outside legal advisors who have been engaged to help the Company monetize its
      patents and other technology rights. Working with our legal advisors, the
      business development team is focused on identifying potentially infringing
      products and their manufacturers.





Broadband
      provider relations is focused on engaging cable television system operators,
      telephone companies and independent VoIP marketers on the merits of offering
      the
      VisiFone products and services to their subscribers and introducing them to
      the
      VisiFone. The
      Company intends to continue to search for additional broadband providers and
      VoIP marketers with which it can enter into similar agreements for sales of
      the
      VisiFone and its  future videotelephony products and services





Product
      sales are focused on engaging corporate, education and government related
      customers to purchase our products to communicate internally and externally
      between key departments, executives, locations and customers.





Independent
      consultants and the Company’s CEO are currently performing all of the functions
      of the business development and sales departments.





By
      outsourcing parts of the sales process to its outside consultants, the Company
      is able to minimize overhead costs by avoiding the need to pay salaries and
      to
      maintain facilities for a sales force.





**Approvals,
      Certifications and Regulation**




Government
      and telecommunications carrier approvals, safety certifications and
      Electromagnetic Compliance certifications are a key requirement for electronic
      systems that use the telephone network. The Company is required to obtain
      certain safety, EMI and telephone certifications for its family of consumer
      broadband videophone products as prerequisite to sale into the United States
      and
      other countries. The Company currently relies on its manufacturing suppliers
      to
      provide a product with the requisite approvals and certifications.





**Competition**





We
      intend
      to compete primarily in the next generation consumer telephone market and to
      a
      lesser degree within the corporate and government telephone and video
      conferencing equipment segment. We expect the consumer market will evolve
      rapidly and be intensely competitive. Competitive pressures created by any
      current or future competitors could materially adversely affect our business,
      prospects, financial condition and results of operations. We believe that the
      principal competitive factors in our markets will be brand recognition, price,
      product performance, reliability, range of functions, ease of use, and customer
      service. We intend to compete vigorously in all of these aspects. There are
      numerous existing competitors in the broadband video communications market,
      including, Aethra, D-Link, Innomedia, Leadtek, Motion Media, Polycom, Sony,
      Tandberg asa, VCON, VTEL Products Group and Worldgate. There are rumored to
      be
      many other videophone type devices in development in North America, Asia, Israel
      and Europe. In addition, the next generation consumer premise equipment market
      for personal communications products has many competitors including the plethora
      of companies which manufacture traditional analog home telephones. Some of
      these
      include Philips, Matsushita (Panasonic Brand), VTech, Thomson and dozens of
      other companies of all sizes. The corporate and government VoIP telephone space
      is also fiercely competitive including companies such as Cisco, Lucent, Nortel,
      Mitel and others.




**Intellectual
      Property and Proprietary Rights**





Our
      success depends in part on our proprietary information, technology and
      expertise. We rely on a combination of patents, trademarks, trade secrets,
      copyrights and confidentiality agreements to establish and protect our
      proprietary rights. In fiscal year 1998, we amended our U.S. utility patent
      application for our peripheral videoconferencing system, originally filed in
      September 1994, to narrow and refocus our claims. We received this amended
      patent on our system on September 1, 1998, a second patent on June 6, 2000,
      a
      third patent on May 28, 2002, a fourth patent on February 25, 2003, and a fifth
      patent on November 25, 2003. Our third patent, granted May 28, 2002 is currently
      undergoing a voluntary reexamination at the U.S. Patent and Trademark Office.
      We
      have received confirmation of issuance of seventeen European patents. We have
      also applied for numerous additional United States patents


-6-
 **Back
          to Table of Contents**




relating
      to our videoconferencing technology and methods of use of a multi-media digital
      telephone which have not been granted to date.





In
      the
      future, we intend to take additional steps to protect our patents from
      infringement by others, including demanding that suspected infringers cease
      their infringement and the filing of lawsuits seeking injunctions and monetary
      damages. We have no assurance that these actions will prove successful or serve
      to protect our patents.




We
      have
      trademarked the VisiFone name for our current generation product and have
      obtained a registered trademark on the name “Viseon”.




With
      respect to our technical employees and consultants, we require these employees
      and consultants to sign an agreement which obligates them to keep confidential
      certain trade secrets and information of ours and to assign to us any inventions
      arising from their work for us, to the extent permitted by law. Depending on
      the
      responsibilities of a particular employee, we may also consider having such
      an
      employee sign a non-compete agreement.




**Acquisitions**




We
      do not
      now intend to conduct an active acquisition program, but may consider select
      acquisitions on a case-by-case basis. We have not developed, nor do we currently
      intend to develop, a valuation model or a standardized transaction structure
      we
      will use. Instead, we anticipate considering each acquisition on a case-by-case
      basis. We expect that the purchase price for an acquisition candidate, if any,
      will be based on quantitative factors, including historical revenues,
      profitability, financial condition and contract backlog, as well as our
      qualitative evaluation of the candidate's management team, operational
      compatibility, future prospects and customer base.




Any
      acquisition is expected to be accounted for using the purchase method of
      accounting. Under this method of accounting, for each acquisition, a portion
      of
      the purchase price would be allocated to the tangible and identifiable
      intangible assets acquired and liabilities assumed based on their respective
      fair values on the acquisition date. This portion would include both (i) amounts
      allocated to in-process technology and immediately charged to operations and
      (ii) amounts may be allocated to completed technology and amortized on a
      straight-line basis over the estimated useful life of the technology of six
      months. The portion of the purchase price in excess of tangible and identifiable
      intangible assets and liabilities assumed would be allocated to goodwill and
      evaluated for impairment at least annually. The results of operations of the
      acquired entity would be consolidated with those of ours as of the date that
      we
      acquire effective control of the acquired entity, which generally would occur
      prior to the formal legal closing of the transaction and the physical exchange
      of acquisition consideration. In addition, we may grant stock options to
      employees of an acquired company to provide them with an incentive to contribute
      to the success of our overall organization. As a result of both the purchase
      accounting adjustments and charges for the stock options just described, we
      may
      incur significant non-cash expenses related to such acquisitions.




Acquisitions
      also involve a number of risks, including adverse effects on our reported
      operating results from increases in acquired in-process technology, stock
      compensation expense and increased compensation expenses resulting from newly
      hired employees, the diversion of management attention, risks associated with
      the subsequent integration of acquired businesses, potential disputes with
      the
      sellers of one or more acquired entities and the failure to retain key acquired
      personnel. Customer satisfaction or performance problems with an acquired firm
      could also materially and adversely affect our reputation as a whole, and any
      acquired company could significantly fail to meet our expectations. Due to
      all
      of the foregoing, any individual future acquisition may materially and adversely
      affect our business, results of operations, financial condition and cash flows.
      If we issue Common Stock in full or partial consideration of any future
      acquisitions, there will be ownership dilution to existing shareholders. In
      addition, to the extent that we choose to pay cash consideration in such
      acquisitions, we may be required to obtain additional financing and there can
      be
      no assurance that such financing will be available on favorable terms, if at
      all.




**Research
      and Development**





We
      incurred research and development expenses of $3,479,088 and $5,134,123 for
      the
      years ended June 30, 2006 and 2005, respectively. Our
      current development efforts focus principally on our VisiFone product. The
      design and development of this generation VisiFone is a cooperative effort
      between our technical support personnel and select third party businesses we
      have retained to assist in the design of the general appearance and
      functionality of our next generation VisiFone, as well as the design and
      development of the software, electronics and acoustics that will be integrated
      therein. All such design and development is performed in strict adherence to
      the
      specifications outlined by us under the supervision of our technical advisors
      and senior management. We maintain all rights to existing and new technologies
      and intellectual property designed or developed in this process pursuant to
      the
      terms of the arrangements reached with such third parties.


-7-
 **Back
          to Table of Contents**




**Employees**





On
      June
      30, 2006, we had seventeen full-time employees; two in administration and
      accounting, ten in research and development, two in product development, one
      in
      marketing and two executives. None of our employees is represented by a labor
      union. We believe our employee relations are good.




We
      outsource a variety of sales, marketing, technical and operational functions
      to
      third parties on an as-needed basis.





**RISK
      FACTORS**





In
      addition to the other information in this Annual Report, the following risk
      factors, among others, should be considered carefully in evaluating the Company
      and its business.





**Risks
      Related to Our Business**





OUR
      INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
      CONTINUE AS A GOING CONCERN.




The
      report of our independent registered public accounting firm for the year ended
      June 30, 2006, includes an explanatory paragraph stating that our losses from
      operations and our accumulated deficit of $54,334,630 raises substantial doubt
      about our ability to continue as a going concern. Such an opinion by our
      independent registered public accounting firm may impact our dealing with third
      parties, such as customers, suppliers and creditors, because of concerns about
      our financial condition. Any such impact could have a material adverse effect
      on
      our business, operating results and financial condition. No assurances can
      be
      given that the issues that led our independent registered public accounting
      firm
      to this conclusion will be addressed or that our business will continue to
      operate as a going concern.





WE
      HAVE A
      HISTORY OF LOSSES AND WE EXPECT FUTURE LOSSES.





We
      have a
      history of operating losses since our inception and have not achieved
      profitability. As of June 30, 2006, we had an accumulated deficit of
      $54,334,630. We expect losses to continue for the foreseeable future. The amount
      of any such loss will depend in part on any future product launch, our ability
      to achieve and maintain a sufficient level of growth in sales of our products
      and services and the rate of increase or decrease in our expenses. Several
      factors, including our inability to secure a license/OEM agreement with a retail
      partner, lack of consumer acceptance, retailer arrangements, competitive factors
      and our ability to successfully develop and market our products, make it
      impossible to predict when or if we will generate significant revenues or become
      profitable. Consequently, we may never generate revenues sufficient to achieve
      profitability and, even if we do, we may not sustain or increase profitability
      on a quarterly or annual basis at any time thereafter. Our ability to continue
      in business could be jeopardized if we are not able to realize a positive cash
      flow and achieve profitability or if we are not able to obtain financing on
      satisfactory terms as may be necessary in the future.




WE
      MAY
      NOT HAVE SUFFICIENT CAPITAL TO FUND OUR BUSINESS AND WE MAY BE UNABLE TO OBTAIN
      ADDITIONAL CAPITAL.





Despite
      the receipt of proceeds from our private placements completed in 2005 and 2004,
      we may need to seek additional third party investment in order to provide
      sufficient capital for our business. We cannot be certain that financing from
      third parties will be available on acceptable terms to us or at all. If we
      cannot raise sufficient funds, we will not be able to continue to develop
      our products or take advantage of future opportunities. In addition, if we
      are
      unable to secure such additional financing, we will have to curtail or suspend
      our business activities, we may not be able to continue to operate our
      business as a going concern and we may have to seek protection of the
      bankruptcy courts.





OUR
      FAILURE TO DEVELOP AND MARKET INITIAL AND FUTURE VERSIONS OF OUR PROPOSED
      PRODUCTS MAY PREVENT US FROM GENERATING SUFFICIENT REVENUES TO SUSTAIN OUR
      BUSINESS.





Our
      success highly depends on sale or license of our current VisiFone product,
      the
      successful development and introduction of future versions of our proposed
      proprietary consumer broadband digital telephone products and services and
      the
      continued development and timely introduction of new products and new models
      containing additional features at attractive price points thereafter. The
      success of our initial and future digital telephone products and services
      depends on a number of factors, including, but not limited to, strategic
      allocation of our limited financial and technical resources, accurate
      forecasting of consumer demand, timely completion of product development and
      introduction to market and market and industry acceptance of our products. To
      date
      the design and development of the VisiFone has been a cooperative effort between
      our technical support personnel


-8-
 **Back
          to Table of Contents**


and
      select third parties that assisted in the design and development of the
      software, electronics and acoustics. T here
      is
      no assurance that such design
      and development efforts will yield any new or technologically advanced products
      or that if successfully designed and developed these products will be made
      commercially available as expected or otherwise on a timely and cost-effective
      basis or that, if introduced, these products will achieve market acceptance.
      Furthermore, we cannot assure you that these products will not be rendered
      obsolete by changing technology or new product offerings by other companies.
      The
      success of some of our planned products may also require industry acceptance
      of
      our proprietary technologies, which may be hampered by any
      incompatibility of our products and proprietary technologies with existing
      products and technologies or the inability to adapt our products and
      technologies to accommodate the use of existing industry-accepted technologies.
      If we fail to develop and market our product offerings, we may not be able
      to
      sustain our business.





PRODUCT
      DEFECTS OR ERRORS MAY HAVE A NEGATIVE IMPACT ON OUR REVENUES, DAMAGE OUR
      REPUTATION AND DECREASE OUR ABILITY TO ATTRACT NEW CUSTOMERS.





Products
      as complex as those we are currently developing and intend to develop in the
      future often contain errors or defects, particularly when first introduced
      and
      when new versions or enhancements are released. Although we will strive to
      assure that our products have no errors or defects, there can be no assurance
      that (despite testing) our products will be devoid of defects and errors upon
      commencement of commercial shipments. Any defects or errors could result in
      damage to our reputation, the loss of sales, a diversion of our product
      development resources, or a delay in market acceptance and thereby materially
      adversely affect our business, operating results and financial condition.
      Furthermore, there can be no assurance that our products will meet all of the
      expectations and demands of our customers or licensors. The failure of our
      products to perform to customer expectations could also give rise to warranty
      claims. Any of these claims, even if not meritorious, could result in costly
      litigation or divert management's attention and resources. Any general liability
      insurance that we may carry could be insufficient to protect us from all
      liability that may be imposed under any asserted claims.





RECENT
      CHANGES IN OUR BUSINESS FOCUS PRESENT A NUMBER OF CHALLENGES; OUR LATEST
      STRATEGIES MAY NOT PROVE TO BE SUCCESSFUL OR CAUSE US TO BECOME
      PROFITABLE.





In
      January 2003, we changed our focus from being a manufacturer and reseller of
      group videoconferencing equipment to a desktop and consumer video communications
      manufacturer and reseller. We are now focused on licensing our intellectual
      property to third parties and developing proprietary consumer broadband digital
      telephone products and services, some of which may be based on our existing
      intellectual property. We plan to undertake the development of these products
      and services jointly with one or more suitable, established developers and
      manufacturers. We intend to continue forming new relationships with other
      companies to distribute their products alongside our own products.





Our
      primary marketing strategy targets residential broadband providers and VoIP
      marketers and to a lesser degree government and business entities with
      widespread operations across regional, national and international boundaries.
      Residential broadband consumers historically have not purchased video
      communication products. All of these developments have affected and will
      continue to affect our financial model in terms of margins, cash flow
      requirements and other areas. We have a limited operational history with respect
      to the current direction of our business. There can be no assurance that we
      will
      be able to succeed in implementing our strategy, or that we will be able to
      achieve positive cash flows or profitable operations as a result of these
      changes in our business.





OUR
      FAILURE TO PROPERLY PROTECT OUR PROPRIETARY INFORMATION, TECHNOLOGY AND
      EXPERTISE COULD SERIOUSLY HARM OUR BUSINESS.





We
      rely
      on a combination of patents, trade secrets, copyrights and confidentiality
      agreements to establish and protect our proprietary rights. There can be no
      assurance that our measures to protect our intellectual property will be
      successful, that we will be granted any patents in the future, or that any
      patents that have been or may be granted will be of value to us. In the absence
      of meaningful intellectual property protection, we may be vulnerable to
      competitors who could lawfully attempt to develop similar products or duplicate
      our products. Moreover, there can be no assurance that other competitors may
      not
      independently develop the same or similar technology or gain access to our
      intellectual property rights, disclose such technology in their patent
      application or design around our patents. In addition, we cannot assure you
      that
      any patent or registered trademark owned by us will not be invalidated,
      circumvented or challenged in the U.S. or foreign countries or that the rights
      granted thereunder will provide competitive advantages to us or that any of
      our
      pending or future patent applications will be issued with the scope of the
      claims sought by us, if at all. While we believe that we have all rights
      necessary to market and sell our system without infringement of intellectual
      property rights held by others, there can be no assurance that such conflicting
      rights do not exist. Litigation may be necessary to enforce


-9-
 **Back
          to Table of Contents**




our
      patents and other intellectual property rights, to protect our trade secrets,
      to
      determine the validity of and scope of the proprietary rights of others, or
      to
      defend against claims of infringement or invalidity.





We
      have
      from time to time received, and may in the future receive, communications from
      third parties alleging the ability to initiate litigation asserting patent
      or
      other intellectual property rights covering our products. We cannot assure
      you
      that we will prevail in any such litigation, that intellectual property claims
      will not be made against us in the future or that we will not be prohibited
      from
      using the technologies subject to any such claims or be required to obtain
      licenses and make corresponding royalty payments.





Any
      intellectual property litigation in which we become involved, either as a
      claimant or a defendant, could result in substantial costs and diversion of
      resources that could adversely affect our business. There can be no assurance
      that we will have sufficient funds to enforce or defend our intellectual
      property rights or that we would ultimately prevail in any such
      litigation.





INTENSE
      COMPETITION COULD SERIOUSLY HARM OUR BUSINESS.





We
      face
      significant competition in the markets in which we intend to offer our products
      from competitors that also offer high quality products. In addition, management
      expects that new competitors will attempt to enter the market and that existing
      competitors will improve the performance of their current products or introduce
      new products or new technologies that provide improved characteristics and
      performance. New product introductions by our competitors could cause a
      significant decline in sales or loss of market acceptance of our existing
      products and any products we develop in the future. We expect that most of
      our
      competitors will be well established, better known and significantly larger
      than
      we are with substantially greater technical, manufacturing, marketing,
      distribution, strategic and financial resources. The greater resources of many
      of our competitors may permit them to respond more rapidly to changes in
      technology than we can.





Our
      ability to compete in the market will depend upon a number of factors including
      the success of our marketing efforts and our continued ability to secure and
      maintain ongoing relationships with other companies in the industry that provide
      or support products we offer. In addition, the functionality of the VisiFone
      may
      face competition from PC-based Internet video and audio communication and
      offerings from mobile phone manufacturers. We believe one of the keys to
      establishing long-term success in this marketplace will be for us to favorably
      distinguish ourselves from our existing and future competition and to
      successfully enforce our patent rights. Another key will be the introduction
      of
      our VisiFone at competitive prices. There can be no assurance that we will
      be
      successful in favorably distinguishing our products, introducing our VisiFone
      at
      competitive prices (if at all), or successfully competing in this market. We
      expect to compete based upon the quality, reliability, flexibility and the
      ease
      of use of our products. We also expect to compete on value relative to the
      features our products offer. However, we have reduced prices in the past in
      order to expand the market for our products, and in the future, we may further
      reduce prices or introduce new products that carry lower margins in order to
      expand the market or stimulate demand for our products. While we cannot assure
      you that these actions would have the desired result, any of these actions
      could
      have an adverse impact on our product margins and profitability. Competitive
      pressures faced by us may materially adversely affect our business, prospects,
      financial condition and results of operations. Further, as a strategic response
      to changes in the competitive environment, we may from time to time make certain
      pricing, service or marketing decisions or acquisitions that could materially
      adversely affect our business, prospects, financial condition and results of
      operations. New technologies and the expansion of existing technologies may
      increase the competitive pressures on us, if not render our products
      obsolete.





OUR
      FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER
      RISKS ASSOCIATED WITH FUTURE RELIANCE ON INTERNATIONAL OPERATIONS.





Our
      current product offerings will be manufactured and assembled by ASUSTeK in
      China. In addition, we expect that our products will be tested by independent
      third parties in the Far East, possibly in China, Taiwan or South Korea. Because
      of our expected international operations and relationships and our expected
      reliance on foreign third-party manufacturing, assembly and testing operations,
      we are subject to the risks of conducting business outside of the United States,
      including:





*
            changes
                in political and strategic relations between the United States and
                the
                countries in which we do business;


*
            changes
                in foreign currency exchange rates;


*
            changes
                in a specific country or region's political or economic
                conditions;


.
            *
            trade
                protection measures and import or export licensing
                requirements;


*
            potentially
                negative consequences from changes in tax
                laws;


*
            difficulty
                in managing widespread sales and manufacturing operations;
                and


*
            less
                effective protection of intellectual
                property.




-10-
 **Back
          to Table of Contents**




Any
      adverse change in any of the matters described above or any other adverse
      international developments could materially adversely affect our business,
      results of operations and financial condition.





WE
      ARE
      SUBJECT TO CERTAIN LAWS AND REGULATIONS THAT COULD IMPACT OUR
      BUSINESS.





Because
      our products and services provide our customers with methods of electronic
      communication, it is difficult to predict the laws or regulations that will
      be
      applicable to our business. Therefore, it is difficult to anticipate the impact
      of current or future laws and regulations on our business. Among the many
      regulations that may be applicable to our business are the
      following:





*
            Federal
                Communications Commission regulations relating to the electronic
                emissions
                of consumer products;


*
            Federal
                Communications Commission regulations relating to consumer products
                that
                are connected to the public telephone
                network;


*
            Federal
                Communications Commission regulations relating to consumer products
                that
                are connected to the Internet; and


*
            copyright
                laws relating to the use of copyrighted audio and video
                media.





Changes
      in the regulatory climate or the enforcement or interpretation of existing
      laws
      could expose us to legal action if we fail to comply. In addition, any of these
      regulatory bodies could promulgate new regulations or interpret existing
      regulations in a manner that would cause us to incur significant compliance
      costs or force us to alter the features or functionality of our products and
      services.





We
      believe that we can successfully obtain all requisite certifications and
      approvals under the laws that regulate our business; however, there can be
      no
      assurance of our ability to procure those approvals in the future. Moreover,
      we
      cannot predict whether it will obtain necessary approvals and certifications
      for
      the systems and similar products or for future products in additional countries.
      Also, we cannot predict whether any change in applicable law or regulations
      might adversely affect the Company's ability to sell its products in a
      particular country.




OUR
      INABILITY TO MANAGE THE FUTURE GROWTH THAT WE ARE ATTEMPTING TO ACHIEVE COULD
      SEVERELY HARM OUR BUSINESS.





We
      believe that, given the right business opportunities, we may expand our
      operations rapidly and significantly. If rapid growth were to occur, it could
      place a significant strain on our management, operational and financial
      resources. To manage any significant growth of our operations, we will be
      required to undertake the following successfully:





*
            We
                will need to improve our operational and financial systems, procedures
                and
                controls to support our expected growth and any inability to do so
                will
                adversely impact our ability to grow our business. Our current and
                planned
                systems, procedures and controls may not be adequate to support our
                future
                operations and expected growth. Delays or problems associated with
                any
                improvement or expansion of our operational systems and controls
                could
                adversely impact our relationships with customers and harm our reputation
                and brand.


*
            We
                will need to attract and retain qualified personnel, and any failure
                to do
                so may impair our ability to offer new products or grow our business.
                Our
                success will depend on our ability to attract, retain and motivate
                managerial, technical, marketing, administrative and customer support
                personnel. Competition for such employees is intense, and we may
                be unable
                to successfully attract, integrate or retain sufficiently qualified
                personnel. If we are unable to hire, train, retain or manage the
                necessary
                personnel, we may be unable to successfully introduce new products
                or
                otherwise implement our business
                strategy.


*
            We
                will need to provide acceptable customer support and any inability
                to do
                so will impair our ability to develop consumer acceptance of our
                products.
                We expect that some of our customers will require significant support
                when
                evaluating and using our products. We do not have experience with
                widespread deployment of our products and services to a diverse customer
                base and in the future we may not have adequate personnel to provide
                the
                levels of support that our customers will require. Our failure to
                provide
                adequate customer support for our products or services will damage
                our
                reputation in the marketplace and strain our relationships with customers
                and strategic partners. This could prevent us from gaining new or
                retaining existing customers and could harm our reputation and
                brand.





If
      we are
      unable to manage growth effectively, our business, results of operations and
      financial condition could be materially adversely affected.


-11-
 **Back
          to Table of Contents**


THE
      ABSENCE OF ENHANCEMENT AND EXPANSION OF THE PRESENT COMMUNICATION
      INFRASTRUCTURE, CONTINUED DEVELOPMENT OF NEW TECHNOLOGIES OR A LACK IN
      ACCEPTANCE OF OUR TECHNOLOGY OFFERINGS COULD HARM THE SALE OF OUR
      PRODUCTS.





We
      believe that the success of the digital telephone products we are developing
      for
      sales or license is dependent upon the continued deployment of broadband
      services such as DSL and cable modem internet access by service providers.
      Additionally, we believe that the success of the digital telephone products
      we
      are currently trying to sell or license and the products we intend to develop
      and sell or license is also dependent upon the roll out of VoIP technologies
      and
      consumer acceptance of video communications. If use of the new technologies
      on
      which our current and future products is based is not widely accepted, or if
      such acceptance occurs more slowly than expected, we may not be able to sell
      or
      license certain of our products in significant volumes and our business may
      be
      adversely affected.





SALES
      OF
      OUR PRODUCTS MAY BE LIMITED BY THEIR FAILURE TO GAIN BROAD MARKET
      ACCEPTANCE.





Our
      success highly depends upon our achieving broad market acceptance of the
      products we currently sell or license and those planned for future development,
      which have yet to produce meaningful revenues. Market acceptance requires,
      among
      other things, that we





*
            educate
                consumers on the benefits of our
                products;


*
            commit
                a substantial amount of human and financial resources to secure strategic
                partnerships and otherwise support the retail and/or carrier distribution
                of our products;


*
            develop
                our own sales, marketing and support activities to consumers, broadband
                providers and retailers; and


*
            establish
                a sufficient number and locations of retailers carrying our
                products.





There
      can
      be no assurance that we will be able to achieve any or all of these objectives
      or whether the achievement of such objectives will result in sufficient
      acceptance of our products to achieve profitable operations. Consumers may
      perceive little or no benefit from our products. As a result, consumers may
      not
      value and may be unwilling to pay for our products and third parties may be
      unwilling to pay any license fees for our products. We also do not have an
      established brand image, nor do we expect to spend significant marketing
      expenses to build and promote a brand image. If our products do not achieve
      broad market acceptance, we may not be able to continue operating our
      business.





RAPID
      TECHNOLOGICAL CHANGES IN THE INDUSTRY IN WHICH WE OPERATE OUR BUSINESS OR THE
      MARKET IN WHICH WE ATTEMPT TO SELL AND LICENSE OUR PRODUCTS MAY RENDER OUR
      PRODUCTS OBSOLETE OR OTHERWISE HARM US COMPETITIVELY.





We
      operate in a highly technological industry segment that is subject to rapid
      and
      frequent changes in technology and market demand. Frequently, such changes
      can
      immediately and unexpectedly render existing technologies obsolete. Management
      expects that technology developed in the future will be superior to the
      technology that we (and others) now have. Our success depends on our ability
      to
      assimilate new technologies in our products and to quickly and properly train
      sales staff, distributors and resellers in the use of such products. The success
      of our future products depends on several factors, including proper new product
      definition, product cost, timely completion and market introduction of such
      products, differentiation of our future products from those of our competitors
      and market acceptance of these products. Additionally, we must properly address
      the complexities associated with DSL and cable modem compatibility, determine
      the adequate level of and provide necessary training for our sales force,
      resellers, and technical, sales and field support personnel, each of which,
      among other factors, may directly affect our success in this market. We are
      attempting to address these needs and the need to develop future products
      through our outsourced development efforts. Although we believe our product
      offerings will be designed to assimilate emergent technical advances, there
      can
      be no assurance that future technological advances available to or new or
      competitive products developed by others will not render our products less
      competitive or obsolete. Additionally, there is no assurance that competing
      technologies developed by others will not render our current technologies
      obsolete or noncompetitive. The failure of our new product development efforts
      and any inability to service or maintain the necessary third-party
      interoperability requirements we may face would have a detrimental effect on
      our
      business and results of operations.





-12-
 **Back
          to Table of Contents**
 **Risks
          Related to Our Common Stock**
 
 THERE
          ARE
          CERTAIN RULES APPLICABLE TO OUR COMMON STOCK AS A “PENNY STOCK,” AND THOSE RULES
          MAY LIMIT THE LIQUIDITY AND THE RESALE OF OUR COMMON STOCK.


The
      SEC
      has promulgated rules governing the trading in penny stocks, defined generally
      as low-priced (below $5), speculative securities of very small companies. While
      penny stocks generally trade over-the-counter, such as on the OTCBB or the
      Pink
      Sheets, they may also trade on securities exchanges, including foreign
      securities exchanges. Under these rules, our common stock is currently
      classified as a penny stock. As a penny stock, our common stock is currently
      subject to rules promulgated by the SEC that impose additional sales practice
      requirements on broker-dealers that might sell such securities to persons other
      than established customers and institutional accredited investors. For
      transactions covered by the rule, the broker-dealer must make a special
      suitability determination for the purchaser and receive the purchaser’s written
      consent to the transaction prior to completing a sale. Further, if the price
      of
      the stock is below $5 per share and the issuer does not have $2.0 million or
      more net tangible assets or is not listed on a registered national securities
      exchange or Nasdaq, sales of such stock in the secondary trading market are
      subject to certain additional rules promulgated by the SEC. Our Common Stock
      is
      currently subject to these additional rules. These rules generally require,
      among other things, that brokers engaged in secondary trading of penny stocks
      provide customers with written disclosure documents, monthly statements of
      the
      market value of penny stocks, disclosure of the bid and asked prices, and
      disclosure of the compensation to the broker-dealer and the salesperson working
      for the broker-dealer in connection with the transaction. These rules and
      regulations may affect the ability of broker-dealers to sell our Common Stock,
      thereby effectively limiting the liquidity of our Common Stock. These rules
      may
      also adversely affect the ability of persons that acquire our common stock
      to
      resell their securities in any trading market that may exist at the time of
      such
      intended sale. Furthermore, penny stocks, including our Common Stock, may trade
      infrequently, which means that it may be difficult to sell penny stock shares,
      including shares of our Common Stock, once you own them. Investors in penny
      stocks, including our Common Stock, should be prepared for the possibility
      that
      they may lose their whole investment.





SALES
      OF
      LARGE QUANTITIES OF OUR COMMON STOCK, INCLUDING THOSE SHARES ISSUABLE IN
      CONNECTION WITH PRIVATE
      PLACEMENT TRANSACTIONS COMPLETED IN 2004 AND 2005, COULD
      DEPRESS THE TRADING PRICE OF OUR COMMON STOCK.





In
      2004,
      we sold securities in unrelated private placement transactions resulting in
      the
      issuance of 4,182,422 shares of our Common Stock, 338 shares of our Series
      A
      Convertible Preferred Stock (each of which is currently convertible into 25,000
      shares of our Common Stock) and certain warrants to purchase 9,717,500 shares
      of
      our Common Stock. In 2005, we sold securities in private placement transactions
      resulting in the issuance of 350,000 shares of our Common Stock, 376 shares
      of
      our Series B Convertible Preferred Stock, (each of which is currently
      convertible into 25,000 shares of our Common Stock), and certain warrants to
      purchase 11,608,827 shares of o ur
      Common
      Stock. The resale of the shares of Common Stock sold in those private offerings,
      the shares of our Common Stock issuable upon the conversion of our Series A
      Convertible Preferred Stock and Series B Convertible Preferred Stock, the shares
      issued as dividends on that preferred stock and the shares that may be issued
      upon exercise of the related warrants is subject to currently effective
      registration statements filed by the Company on Form SB-2. An excess number
      of
      available shares on the market is likely to reduce our stock price.




After
      shares of our Common Stock are registered they may be sold in the public market,
      which could cause the market price of our Common Stock to drop by increasing
      the
      total number of shares offered for sale to the public. An overabundance of
      available shares in the market may limit the price growth potential of our
      Common Stock, even if our business is doing well, because the available supply
      may exceed the demand for our shares. This phenomenon may impair our ability
      to
      raise needed capital by reducing the price at which we could sell our Common
      Stock. In addition, the Company may seek future financings that involve the
      issuance of equity securities or instruments convertible into or exchangeable
      for equity securities and any such future financings may further reduce the
      price of our Common Stock.





OUR
      COMMON STOCK IS NOT LISTED ON A NATIONAL EXCHANGE; THE CURRENT PUBLIC MARKET
      FOR
      OUR COMMON STOCK IS LIMITED AND HIGHLY VOLATILE, WHICH GENERALLY AFFECTS THE
      PRICE OF OUR COMMON STOCK.





Our
      Common Stock trades in the United States only in the over-the-counter market
      on
      the OTC Electronic Bulletin Board, which is a reporting service and not a
      securities exchange. We
      cannot
      assure investors that the Common Stock will ever qualify for inclusion on any
      of
      the NASDAQ markets, the American Stock Exchange or any other national exchange
      or that more than a limited market will ever develop for our Common Stock.
      Trading volume
      of
      our stock remains limited. Moreover, thus far the prices at which our Common
      Stock has traded have fluctuated fairly widely on a percentage basis. There
      can
      be no assurance as to the prices at which our Common Stock will trade in the
      future, although they may continue to fluctuate significantly. Prices for our
      Common Stock will be determined in the marketplace and may be influenced by
      many
      factors, including the following:





*
            the
                depth and liquidity of the markets for our Common Stock;


*
            investor
                perception ofthe
                Companyand the industry in which we
                participate;


*
            general
                economic and market conditions;


*
            statements
                or changes in opinions, ratings or earnings estimates made by brokerage
                firms or industry analysts relating to the market in which we do
                business
                or relating to us specifically, as has occurred in the
                past;




-13-
 **Back
          to Table of Contents**




*
            the
                announcement of new products or product enhancements by our competitors
                or
                us;


*
            technological
                innovations by our competitors or
                us;


*
            quarterly
                variations in our results of
                operations;


*
            general
                market conditions or market conditions specific to technology industries;
                and


*
            domestic
                and international macroeconomic
                factors.





The
      trading activity in our Common Stock should be considered sporadic, illiquid
      and
      highly volatile. An active trading market for our Common Stock may not exist
      in
      the future. Even if a market for the Common Stock offered pursuant to this
      Memorandum continues to exist, investors may not be able to resell their Common
      Stock at or above the purchase price for which such investors purchased such
      shares.





In
      addition, the stock market has recently experienced extreme price and volume
      fluctuations. These fluctuations have had a substantial effect on the market
      prices for many high technology companies similar to us. These fluctuations
      are
      often unrelated to the operating performance of the specific companies. As
      a
      result of the factors identified above, a shareholder (due to personal
      circumstances) may be required to sell his shares of our Common Stock at a
      time
      when our stock price is depressed due to random fluctuations, possibly based
      on
      factors beyond our control.





WE
      MAY BE
      OBLIGATED, UNDER CERTAIN CIRCUMSTANCES, TO PAY LIQUIDATED DAMAGES TO HOLDERS
      OF
      OUR PREFERRED STOCK





We
      have
      entered into an agreement with the holders of our Series A Convertible Preferred
      Stock that requires us to continuously maintain as effective, a registration
      statement covering the underlying shares of Common Stock issuable upon
      conversion of our Series A Convertible Preferred Stock and the exercise of
      related warrants. Such a registration statement was declared effective on August
      16, 2004 and must continuously remain effective for a specified term. If we
      fail
      to continuously maintain such a registration statement as effective throughout
      the specified term, we may be required to pay liquidated damages to the holders
      of our Series A Convertible Preferred Stock as a group in an amount of as much
      as $253,500 per month.




We
      have
      entered into agreements with the holders of our Series B Convertible Preferred
      Stock that require us to continuously maintain as effective, a registration
      statement covering the underlying shares of Common Stock issuable upon
      conversion of our Series B Convertible Preferred Stock and the exercise of
      related warrants. Such a registration statement was declared effective on
      November 14, 2005 and must continuously remain effective for a specified term. If
      we
      fail to maintain a registration statement continually effective after it is
      declared effective by the SEC for the full period required for any reason,
      then
      for each 30 day period that such failure continues in any consecutive 12 month
      period, beyond a permitted 30 day period in such 12 month period, we shall
      pay
      to the holders of each issued and outstanding share of Series B Convertible
      Preferred Stock and, if previously converted, the Common Stock received upon
      the
      conversion thereof for which we have a continuing obligation to cause an
      effective registration statement to remain continuously effective an amount
      equal to (a) seven hundred fifty dollars for each issued and outstanding share
      of Series B Convertible Preferred Stock and (b) if previously converted, $0.03
      for each share of Common Stock received upon the conversion of any shares of
      Series B Convertible Preferred Stock; and thereafter for each full 30 day period
      within such 12-month period that a registration statement is not effective
      at
      the fault of the Company, we shall pay an amount equal to (a) $750 for each
      issued and outstanding share of Series B Convertible Preferred Stock and (b)
      if
      previously converted, $0.03 for each share of Common Stock received upon the
      conversion of any shares of Series B Convertible Preferred Stock.





OUR
      AUTHORIZED PREFERRED STOCK EXPOSES OUR SHAREHOLDERS TO CERTAIN
      RISKS.





Our
      Articles of Incorporation, as amended, authorize the issuance of up to 5,000,000
      shares of preferred stock, par value $0.01 per share. The authorized but
      unissued preferred stock constitutes what is commonly referred to as "blank
      check" preferred stock. This type of preferred stock may be issued by the Board
      of Directors from
      time to time on any number of occasions, without
      shareholder approval, as one or more separate series
      of shares comprised of any number of the authorized but unissued shares of
      preferred stock, designated by resolution of the Board of Directors stating
      the name
      and
      number of shares of each
      series and setting forth separately for such series the
      relative rights, privileges and preferences thereof, including, if any, the:
      (i)
      rate of dividends payable thereon; (ii) price, terms and conditions of
      redemption; (iii) voluntary and involuntary liquidation preferences; (iv)
      provisions of a sinking fund for redemption or repurchase; (v) terms of
      conversion to Common Stock, including conversion price and (vi) voting
      rights .
      Such
      preferred stock may provide our Board of Directors the ability to hinder or
      discourage any attempt to gain control of us by a merger, tender offer at a
      control premium price, proxy contest or otherwise. Consequently, the preferred
      stock could entrench our management. The market price of our Common Stock could
      be depressed to some extent by the existence of the preferred stock. As of
      June
      30, 2006, 9 5 shares
      of preferred stock, designated as Series A Convertible Preferred


-14-
 **Back
          to Table of Contents**




Stock
      and
      376 shares of preferred stock, designated as Series B Convertible Preferred
      Stock, were issued and outstanding a nd
      4,999,529 shares of preferred stock were authorized but not issued.




THE
      TERMS
      OF OUR SERIES A CONVERTIBLE PREFERRED STOCK, OUR SERIES B CONVERTIBLE PREFERRED
      STOCK AND THE WARRANTS ISSUED IN CONJUNCTION THEREWITH INCLUDE ANTI-DILUTION
      PROVISIONS THAT MAY INCREASE THE DILUTION OF OUR OTHER SHAREHOLDERS IF WE
      RAISE ADDITIONAL EQUITY CAPITAL





The
      terms
      of the Series A Convertible Preferred Stock include anti-dilution protection
      such that in the event that we issue additional stock for a price per share
      that
      is less than the then applicable conversion price (currently $1.00 per share)
      for the Series A Convertible Preferred Stock, then the applicable conversion
      price shall be reduced by an amount determined by a broad based weighted average
      formula.




The
      terms
      of our Series B Convertible Preferred Stock include a provision that provides
      for a reduction in the conversion price and the issuance of additional shares
      to
      the Holders of such stock in the event that any equity securities are issued
      at
      a price below the then applicable conversion price (currently $1.00 per share).
      If we were to trigger this anti-dilution provision by issuing shares at our
      September 12, 2006 Common Stock closing price of $0.06, then t he
      effect
      of this anti-dilution provision is that we would have to issue approximately
      157,000,000 additional shares of our Common Stock upon conversion of the Series
      B Convertible Preferred Stock.




The
      terms
      of the warrants issued in connection with the Series A Convertible Preferred
      Stock and Series B Convertible Preferred Stock (the “Preferred Warrants”)
      include price anti-dilution adjustments in case the Company issues additional
      stock for a price per share that is less than the applicable warrant exercise
      price. The Preferred Warrants issued to holders of Series A Convertible
      Preferred Stock provide for a broad based weighted average adjustment to the
      warrant exercise price, while the Preferred Warrants issued to holders of the
      Series B Convertible Preferred Stock provide for a full ratchet adjustment
      to the warrant excercise price. If
      we
      were to trigger this anti-dilution provision by issuing Common Stock at our
      September 12, 2006 Common Stock closing price of $0.06, then t he
      effect
      of this anti-dilution provision is that we would have to issue approximately
      162,000,000 additional shares of our Common Stock upon exercise of our Preferred
      Warrants.





WE
      HAVE
      CERTAIN OBLIGATIONS AND THE GENERAL ABILITY TO ISSUE ADDITIONAL SHARES OF COMMON
      STOCK IN THE FUTURE, AND SUCH FUTURE ISSUANCES MAY DEPRESS THE PRICE OF OUR
      COMMON STOCK.





We
      have
      various obligations and the ability to issue additional shares of Common Stock
      in the future. These obligations and abilities include the following at June
      30,
      2006:





*
            2,075,764
                shares of our Common Stock are available for issuance to outside
                consultants to compensate them for services
                provided.


*
            Options
                to purchase approximately 7,372,722 shares of Common Stock are
                outstanding.


*
            Warrants
                to purchase approximately 27,301,266 shares of Common Stock are
                outstanding.


*
            Dividends
                payable on our Series A Convertible Preferred Stock may be paid in
                shares
                of Common Stock at the option of the Company. The current amount
                of
                dividends payable on the outstanding shares of Series A Convertible
                Preferred Stock is $237,500 per year, payable quarterly. Given our
                closing
                price of $.06 per share at September 6, 2006, we would have to issue
                an
                additional 989,583 shares of Common Stock per quarter to satisfy
                the
                dividend requirement.


*
            Dividends
                payable on our Series B Convertible Preferred Stock may be paid in
                shares
                of Common Stock at the option of the Company. The current amount
                of
                dividends payable on the outstanding shares of Series B Convertible
                Preferred Stock is $940,000 per year, payable quarterly. Given our
                closing
                price of $.06 per share at September 12, 2006, we would have to issue
                an
                additional 3,916,666 shares of Common Stock per quarter to satisfy
                the
                dividend requirement.





The
      options and warrants described above permit the holders to purchase shares
      of
      Common Stock at specified prices. These purchase prices may be less than the
      then current market price of our Common Stock. Any shares of Common Stock issued
      pursuant to these options or warrants would further dilute the percentage
      ownership of existing shareholders. The terms on which we could obtain
      additional capital during the life of these options and warrants may be
      adversely affected because of such potential dilution. Finally, we may issue
      additional shares in the future other than as listed above. There are no
      preemptive rights in connection with our Common Stock. Thus, the percentage
      ownership of existing shareholders may be diluted if we issue additional shares
      in the future. For issuances of shares and grants of options to consultants,
      our
      Board of Directors will determine the timing and size of the issuances and
      grants and the consideration or services required therefore. Our Board of
      Directors intends to use its reasonable business judgment to fulfill its
      fiduciary obligations to our then existing shareholders in connection with
      any
      such issuance or grant. Nonetheless, future issuances of additional shares
      could
      cause immediate and substantial dilution to the net tangible book value of
      shares of Common Stock issued and outstanding immediately before such
      transaction. Any future decrease


-15-
 **Back
          to Table of Contents**




in
      the
      net tangible book value of such issued and outstanding shares could materially
      and adversely affect the market value of the shares.





**ITEM
      2. DESCRIPTION OF PROPERTY**




The
      Company now subleases 4,324 square feet of office space for its headquarters
      in
      Dallas, Texas under a lease agreement that expires on July 31, 2008. The Company
      believes its current space is sufficient for its current needs. Previously,
      the
      Company subleased 1,599 square feet of space for its headquarters in Irving,
      Texas under a lease agreement, which expired on June 30, 2006.





**ITEM
      3. LEGAL PROCEEDINGS**


There
        is
        no litigation known to be pending against the Company today. The Company
        does
        not have any litigation pending against any defendants. The Company is subject
        to certain litigation and claims arising in the ordinary course of business.
        We
        do not expect costs related to these claims, either individually or in the
        aggregate, to have a material adverse effect on our consolidated financial
        position or our results of operations.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**




None.






PART
      II.





**ITEM
      5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES**





Since
      December 20, 1999, the Common stock has been quoted on the OTC Bulletin Board
      System. The following table sets forth, for the fiscal quarters indicated,
      the
      high and low closing bid prices for the Common Stock as reported by the OTC
      Bulletin Board System. Such quotations represent interdealer prices, without
      adjustments for retail mark-up, mark-down or commission, and do not necessarily
      represent actual transactions.





HIGH
            
            LOW2005First
                Quarter
            
            
            1.44
            
            
            .69Second
                Quarter
            
            
            2.50
            
            
            1.01Third
                Quarter
            
            
            2.68
            
            
            1.10Fourth
                Quarter
            
            
            1.40
            
            
            1.022006First
                Quarter
            
            
            1.40
            
            
            .84Second
                Quarter
            
            
            .80
            
            
            .48Third
                Quarter
            
            
            .75
            
            
            .32Fourth
                Quarter
            
            
            .43
            
            
            .20





As
      of
      August 31, 2006 there were 38,430,385 shares of Common Stock outstanding, held
      of record by approximately 141 persons. On
      September 26, 2006, the closing price for our Common Stock was $0.03 per
      share.




In
        connection with certain private placement transactions completed by the Company
        prior to 2002, the Company had issued common stock warrants certain of the
        investors in those transactions, which were to expire by their terms during
        calendar year 2006. The warrants that were to expire in 2006 were exercisable
        for an aggregate 2,019,500 shares of Common Stock. The exercise prices for
        those
        warrants ranged from $0.30 to $0.70 per share. In February 2006, the Company
        sent a notice to the holders of the warrants that were to expire in 2006,
        in
        which it offered to extend the expiration date for those warrants by two
        years,
        in exchange for the warrant holder agreeing to an increase of $0.10 per share
        in
        the applicable exercise price for those warrants, the inclusion of a mandatory
        redemption provision for the warrants and the deletion of all cashless exercise
        provisions. The Company has the right to redeem any extended warrants for
        $0.10
        per share if at any time the closing market price for the Common Stock is
        over
        $1.50 for twenty consecutive trading days and the average daily volume of
        shares
        traded over that period is no less than 125,000 shares.
  The
        Company believes that the warrants represent a viable source of additional
        funding for its operations, if it is able to achieve financial results that
        lead
        to an increase in the price of its Common Stock. By extending the period
        of
        those warrants, increasing the applicable purchase price and eliminating
        the
        cashless exercise provision, the Company believes it improved the likelihood
        of
        those warrants being exercised before they expired, thereby raising the
        possibility of it receiving the benefit of the additional capital represented
        by
        those warrants. Holders of warrants that are exercisable for approximately
        1,924,500 shares of Common Stock accepted the Company’s offer and extended the
        terms of their warrants. As a result, those warrants would now be exercisable
        for shares of Common Stock upon payment of approximately $1,269,725, for
        an
        average exercise price of $0.66 per share. The remaining terms of the warrants
        are substantially the same as they were prior to being extended.


-16-
 **Back
          to Table of Contents**


**Dividends**
  The
        Company has not declared or paid any cash dividends on its Common Stock since
        its inception. The Company does not intend to pay any dividends on its Common
        Stock for the foreseeable future and intends to continue its present policy
        of
        retaining earnings for reinvestment in our operations.
 
 The
        Company is obligated to pay dividends payable on its Series A Convertible
        Preferred Stock. Such dividends may be paid in shares of Common Stock at
        the
        option of the Company. The current amount of dividends payable on the
        outstanding shares of Series A Convertible Preferred Stock is $237,500 per
        year,
        payable quarterly.
 
 The
        Company is obligated to pay dividends payable on its Series B Convertible
        Preferred Stock. Such dividends may be paid in shares of Common Stock at
        the
        option of the Company. The current amount of dividends payable on the
        outstanding shares of Series B Convertible Preferred Stock is $940,000 per
        year,
        payable quarterly.


**ITEM
        6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATIONS.**




**Overview**




The
      Company was founded in 1993, and changed its name from RSI Systems, Inc. to
      Viseon, Inc. on May 23, 2001. Historically, we had been a developer of our
      own group videoconferencing systems, which were primarily sold to corporate
      end
      users and OEM customers. In 2003, we recognized the need to modify our business
      model to achieve higher margins and benefit from our portfolio of
      U.S. patents. In January 2003, we completed our change in focus from being
      a group videoconferencing manufacturer and reseller to a desktop and consumer
      video communications manufacturer and reseller. This was accomplished by
      transferring our group videoconferencing services contract portfolio with its
      associated liabilities and obligations to Comlink Video and liquidating our
      remaining group videoconferencing assets.




The
      Company’s current marketing strategies target two diverse market segments:
      (i) corporations and government entities that have widespread operations
      across regional, national and international boundaries and (ii) residential
      consumers who have historically not purchased video communication products
      in
      the past. Distribution may include the utilization of arrangements with
      providers of broadband Internet access, such as cable Multi System Operators,
      telephone companies that provide DSL services and independent marketers of
      consumer VoIP services. In addition to this distribution strategy, we have
      also
      begun focusing our efforts on licensing our technology to IP/PBX vendors and
      consumer electronics manufacturers to lower their cost of entry into the
      videotelephone marketplace. All of these developments have affected and will
      continue to affect our financial model in terms of margins, cash flow
      requirements, and other areas. We have a limited history with respect to the
      direction our business is now taking. There can be no assurance that we will
      be
      able to succeed in implementing our strategy or that we will be able to achieve
      positive cash flow or profitable operations as a result of these changes in
      our
      business.




The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our consolidated financial
      statements and related notes included elsewhere in this report. In addition
      to
      historical information, the discussion in this report contains forward-looking
      statements that involve risks and uncertainties. Actual results could differ
      materially from those anticipated by these forward-looking statements due to
      factors including, but not limited to, those factors set forth under "Risk
      Factors" and elsewhere in this report.




**Results
      of Operations**


***Year
        Ended June 30, 2006 Compared to Year Ended June 30,
        2005.***




*Net
      Sales.* In
      fiscal year 2006, net sales were $7,150 compared to net sales of $239,660 for
      fiscal year 2005. Fiscal year 2006 sales resulted from shipments to a Broadband
      Carrier for lab trials. Our sales volumes in fiscal year 2005 reflected final
      sales of our older generation “H323” product.




*Gross
      Profit (Loss).* We
      generated a gross loss of $(19,076) (-266.8% of net sales) for fiscal year
      2006
      compared to a gross loss of ($45,086) (-18.8% of net sales) for fiscal year
      2005. The gross loss in both fiscal years was attributable to the sales of
      VisiFone near or below cost in order to promote the adoption of videophones
      by
      carriers, business entities and residential consumers as a customary mode of
      communication.


-17-
 **Back
          to Table of Contents**




*Research
      and Development Expenses.* Research
      and development expenses were $3,479,088 (48,658.6% of net sales) for fiscal
      year 2006 compared to $5,134,123 (2,142.3% of net sales) in fiscal year 2005.
      Included in R&D spending for fiscal year 2006 was $309,162 of production
      expenses. These expenses reflected the costs associated with the building
      prototype VisiFones. The decline in expenditures in fiscal year 2006 was due
      to
      the substantial technological completion of the VisiFone and our conscious
      decision to phase out our relationship with our outsourced development partner.
      We expect research and development expenses to decrease further in fiscal year
      2007, although should our customers or licensors require additional
      modifications to our products that are not currently forecasted, expenses could
      meet or exceed last year’s levels.




*Selling,
      General and Administrative Expenses.* Selling, general and administrative
      expenses were $3,228,191 (44,149.5% of net sales) for fiscal year 2006 compared
      to $2,815,881 (1,175.0% of net sales) for fiscal year 2005. SG&A expenses
      were higher in fiscal 2006 than in fiscal 2005 due to the addition of staffing
      as well as the cost of attending trade shows in an effort to create interest
      in
      our Product. Also included in SG&A expenses for fiscal 2006 was $334,478
      related to the impairment of our long-lived assets, including our patents.
      During fiscal years 2005 and 2006, we faced declining revenues related to our
      first generation VisiFone and had yet to recognize any meaningful revenues
      from
      our second generation VisiFone. Additionally, we learned during fiscal 2006
      that
      while indicators of demand existed for the VisiFone, issues regarding the length
      of the sales cycle, integration with Carrier VoIP networks and price sensitivity
      were preventing the VisiFone from achieving the market acceptance and resulting
      revenue that we had originally anticipated. Historically, we had relied on
      forecasts of future cash flows to support the value of our patents. However,
      we
      have not been able to attain our forecasted amounts. Based upon these factors,
      we believe that the value of our patents is impaired. Based on the projected
      negative short term cash flows related to the VisiFone, we elected to expense
      the remaining unamortized balance of our patents aggregating $308,834. The
      amortization expense, including the impairment loss, of $334,478 for the year
      was recorded as part of our SG & A expenses during fiscal 2006.




*Other
      Income and Expense.* Other
      income was $102,521 in fiscal year 2006 compared to other income of 46,077
      in
      fiscal year 2005. The income in both fiscal years 2006 and 2005 was due to
      interest income earned from money market investments. We also recognized a
      gain
      from the favorable settlement of a disputed obligation in the amount of $108,640
      in fiscal year 2006. In fiscal year 2006, we incurred $117,500 of interest
      expense resulting from the value of a warrant issued to a lender as
      consideration for a short term loan. The value of the warrant was expensed
      upon
      repayment.




*Preferred
      Stock Dividends.* We
      recorded preferred stock dividends of $5,763,264 in fiscal year 2006. Fiscal
      year 2006 Preferred Stock Dividends were $260,191 at the designated rate of
      10%
      per annum on the then outstanding Series A Convertible Preferred Stock, $806,833
      at the designated rate of 10% per annum on the outstanding shares of Series
      B
      Convertible Preferred Stock and $4,696,240 from amortization of beneficial
      conversion option on the Series B Convertible Preferred Stock. The amortization
      of the beneficial conversion option resulted from a favorable conversion price
      of the Company’s preferred stock. The conversion price was lower than the market
      price of the Company’s common stock on the issuance date of the preferred stock
      which is treated for financial reporting purposes as a direct charge to
      accumulated deficit (similar to a dividend) and a corresponding increase in
      additional paid-in capital.




*Stock-Based
      Compensation* *.* We
      account for stock-based compensation in accordance with Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and
      related interpretations and have presented the required disclosures of SFAS
      No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS
      No. 148, “Accounting for Stock-Based Compensation—Transition and
      Disclosure.” At June 30, 2006, we had stock-based compensation plans, which are
      described separately in Note 10 to the consolidated financial statements for
      the
      year ended June 30, 2006. We apply Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees” and related
      interpretations in accounting for our plans, and accordingly, no compensation
      cost has been recognized for our fixed stock-based compensation.




In
      December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment”
that focuses primarily on accounting for transactions in which an entity obtains
      employee services in share-based payment transactions. This statement replaces
      SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB
      Opinion No. 25, “Accounting for Stock Issued to Employees.” Beginning with
      our interim period that begins on July 1, 2006, we will be required to
      expense the fair value of employee stock options and similar awards. We have
      elected to utilize the modified prospective transitional method in accounting
      for share-based employee payment transactions.




**Liquidity
      and Capital Resources.**




We
      raised
      $9,400,000 (prior to offering expenses) in private placement transactions in
      August 2005 from the sale of our Series B Convertible Preferred Stock with
      warrants. We raised an additional $240,000 through warrant exercises in fiscal
      year 2006. We spent $6.6 million on operating activities in fiscal year
      2006.




We
      raised
      $8,450,000 (prior to offering expenses) in a series of private placement
      transactions in March and April 2004 from the sale of our Series A
      Convertible Preferred Stock with warrants. We raised an additional $1,483,725
      through warrant and option exercises in fiscal 2005. We spent approximately
      $6.5
      million on operating activities in fiscal 2005.




Historically,
      we have generated losses from operations and negative cash flows. We plan to
      increase sales and improve operating results through (i) increased
      marketing and direct sales activities to licensors, as well as corporate and
      government customers, (ii) continued initiatives to gain acceptance of our
      product by consumer broadband providers and VOIP marketers for sale to their
      subscribers and (iii) initiatives to monetize our intellectual property
      rights. There can be no assurance that we will be successful in achieving these
      objectives and become profitable, nor is there any assurance that these
      activities will generate sufficient cash for us to remain in business. See
      “Description
      of Business-Risk Factors.”




As
      of
      June 30, 2006, our primary source of liquidity consisted of cash and cash
      equivalents that are highly liquid, are of high quality investment grade and
      have original maturities of less than three months.


-18-
 **Back
          to Table of Contents**


At
      June
      30, 2006, we had cash and cash equivalents of $1,887,585 as compared to cash
      and
      equivalents of $239,383 at June 30, 2005. Net cash used in operating activities
      was $6,591,833 for the 12 months ended June 30, 2006, as compared to $6,451,275
      used for the same period in 2005. The increase in net cash used for operations
      was primarily attributable to our increase in expenditures during the 12 months
      ended June 30, 2006 associated with the completion, launch and deployment
      of the next generation VisiFone.




Cash
      used
      for investing activities was primarily a result of investments in equipment
      for
      product development and manufacture as well as investments in our patent
      portfolio. For the 12 month periods ending June 30, 2006 and 2005, such
      investments were $208,035 and $88,106, respectively.




Cash
      provided by financing activities resulted primarily from the aforementioned
      private placements of our Company’s securities, through the exercise of warrants
      and through the exercise of employees’ and former employees’ stock options.
      During the 12 months ended June 30, 2006, these investments totaled $8,448,070
      compared to $1,453,371 provided during the same period in 2005.




To
      date,
      we have funded operations primarily through private sales of equity securities.
      As of June 30, 2006, we have no outstanding debt and none of our assets are
      pledged as collateral. We continue to evaluate the possibilities to obtain
      additional financing through public or private equity or debt offerings, bank
      debt financing, asset securitizations, or from other sources. Such additional
      financing would be subject to the risk of availability, may be dilutive to
      our shareholders, or could impose restrictions on operating activities. There
      can be no assurance that this additional financing will be available on terms
      acceptable to us, if at all.




The
      report of our registered independent public accounting firm for the year ended
      June 30, 2006 included an explanatory paragraph stating that our Company had
      suffered recurring losses from operations and had an accumulated deficit of
      $54,334,630, and these issues raised substantial doubt about our Company’s
      ability to continue as a going concern. Our short term cash requirements and
      obligations include inventory, accounts payable and capital expenditures from
      continuing operations, operating expenses, and the quarterly dividends on our
      outstanding preferred stock, although these dividends can be paid in shares
      of
      our Common Stock at our discretion.




We
      expect, based on our internal forecasts and assumptions relating to our
      operations (including among others, assumptions regarding our short term cash
      requirements) that we have sufficient cash on hand to meet our obligations
      into
      the third quarter of fiscal 2007.


-19-
 **Back
          to Table of Contents**




Our
      ability to generate cash is dependent upon our ability to license our technology
      and/or patents, sell our VisiFone product and obtain cash through capital
      markets. To date, our sales of the VisiFone product have been limited to lab
      trials for prospective customers. While we remain hopeful that this situation
      will improve, there can be no assurances that we will sell any VisiFones in
      the
      near future. In order to create additional revenue while the market for the
      VisiFones continues to develop, we have focused on licensing our technology
      and
      patents to IP/PBX manufacturers, consumer electronics manufacturers and
      distributors worldwide. Given that this represents a new product line in an
      underdeveloped market sector, no assurances can be given that sufficient license
      revenues, if any, will materialize.




The
      Company had the following contractual obligations or commercial commitments
      at
      June 30, 2006:




**Total**
            
            **1
                year or less**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **Over
                5 years**Operating
                Leases
            
            $
            103,596
            
            $
            49,726
            
            $
            53,870
            
            $
            0
            
            $
            0





**Critical
      Accounting Policies and Estimates**




The
      preparation of financial statements in accordance with United States generally
      accepted accounting principles requires us to make estimates and assumptions
      that affect the reported amounts of assets and liabilities at the date of the
      financial statements and the reported amounts of net revenues and expenses
      during the reporting period. We regularly evaluate our estimates and assumptions
      related to net revenues, allowances for doubtful accounts, sales returns and
      allowances and accounting for income taxes. We base our estimates and
      assumptions on historical experience and on various other factors that we
      believe to be reasonable under the circumstances, the results of which form
      the
      basis for making judgments about the carrying values of assets and liabilities
      that are not readily apparent from other sources. To the extent there are
      material differences between our estimates and the actual results, our future
      results of operations will be affected.




We
      believe the following critical accounting policies require us to make
      significant judgments and estimates in the preparation of our consolidated
      financial statements:




*Revenue
      Recognition.* We
      record sales revenue at the time merchandise is delivered. In November 1999,
      the
      SEC issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition”,
      as amended, which sets forth the SEC staff’s position regarding the point at
      which it is appropriate for a registrant to recognize revenue. The staff
      believes that revenue is realizable and earned when all of the following
      criteria are met: persuasive evidence of an arrangement exists, delivery has
      occurred or service has been rendered; the seller’s price to the buyer is fixed
      or determinable; and collectibility is reasonably assured. We use the above
      criteria to determine whether revenue can be recognized.




When
      product sales revenue is recognized, we establish an estimated allowance for
      future product returns based on historical returns experience. When price
      reductions are approved, we establish an estimated liability for price
      protection payable on inventories owned by product resellers. Should actual
      product returns or pricing adjustments exceed our estimates, additional
      reductions to revenues would result. Revenue from the licensing of patents
      is
      recognized at the time of a patent agreement is executed and the goods, services
      and/or cash consideration due the Company is received. Revenue from
      post-contract customer support and any other future deliverables is deferred
      and
      recognized over the support period or as contract elements are delivered. Our
      products typically carry a 90-day to one-year warranty. Although we engage
      in
      extensive product quality programs and processes, our warranty obligation is
      affected by product failure rates, use of materials or service delivery costs
      that differ from our estimates. As a result, additional warranty reserves could
      be required, which could reduce gross margins.




The
      Company has adopted EITF 05-4, *The
      Effect of Liquidated Damages Clause on a Freestanding Financial Instrument
      Subject to Issue No. 00-19,* View
      C ** to
      account for its registration rights agreements. The Company has entered into
      registration rights agreements in association with the issuance of preferred
      stock and warrants. View C of EITF 05-4 takes the position that the registration
      rights should be accounted for separately from the financial instrument as
      the
      payoff of the financial instruments is not dependent on the payoff of the
      registration rights agreement, and according to DIG K-1, registration rights
      agreements and the financial instruments do not meet the combining criteria
      as
      they relate to different risks. The Financial Accounting Standards Board (Board)
      has postponed further discussion on EITF 05-4. Since the Board has not reached
      a
      consensus, the Company’s accounting for the registration rights may change when
      the Board reaches a consensus.




*Accounting
      for Income Taxes.* We
      account for income taxes using the asset and liability method. Under the asset
      and liability method, deferred tax assets and liabilities are recognized at
      the
      enacted rates for the future tax consequences attributable to differences
      between the financial statement carrying amounts of existing tax assets and
      liabilities and their respective tax basis. The effect on deferred tax assets
      and liabilities of a change in tax rate is recognized in income in the period
      that includes the enactment date. Valuation allowances are established when
      necessary to reduce deferred tax assets to the amounts expected to be
      realized.


-20-
 **Back
          to Table of Contents**




**ITEM
      7. FINANCIAL STATEMENTS.**





Reference
      is made to the Index to our Consolidated Financial Statements and Report of
      Independent Registered Public Accounting Firm on page F-1 of this annual report
      on Form 10-KSB for a listing of our consolidated financial statements and
      related notes.





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE.**




None.





**ITEM
      8A. CONTROLS AND PROCEDURES.**





**Evaluation
      of Disclosure Controls and Procedures**





We
      carried out an evaluation of the effectiveness of the design and operation
      of
      our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15
      and
      15d-15 as of the end of June 30, 2006, the end of our fiscal year, which is
      the
      last period presented in this report. The evaluation was carried out under
      the
      supervision of our Chief Executive Officer and Chief Financial Officer and
      with
      the participation of our management group and our audit committee. Based upon
      that evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that our disclosure controls and procedures are effective in ensuring
      that information that is required to be included in our filings with
      the SEC is recorded, processed, summarized and reported within the time
      periods specified by the SEC, and that such information is accumulated and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate to allow timely decisions regarding required
      disclosure.





**Changes
      in Internal Control over Financial Reporting**




Our
      management evaluated our internal control over financial reporting and there
      have been no changes in our internal control over financial reporting during
      the
      year ended June 30, 2006, that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial reporting.





**ITEM
      8B. OTHER INFORMATION.**





**Subsequent
      Events**




On
      August
      25, 2006, Viseon accepted the resignation of Sean Belanger from its Board of
      Directors and as the President and Chief Executive Officer of Viseon. The
      remaining directors of Viseon appointed John Harris, the Chief Technical Officer
      of Viseon, to serve as the President and Chief Executive Officer, effective
      immediately. At this time, Viseon has not named a replacement to the Board
      of
      Directors seat vacated due to the resignation of Mr. Belanger.




In
      connection with Mr. Belanger’s resignation, he and Viseon entered into a
      Separation ,
      Release
      and Consulting Agreement, effective as of July 31, 2006, for the purpose of terminating his
      employment agreement and all compensation payable thereunder and to set forth
      the terms of a new agreement whereby Mr. Belanger would be providing certain
      consulting services to Viseon. The Separation ,
      Release
      and Consulting Agreement also contains a general release granted by Mr. Belanger in favor
      of
      Viseon, releasing the Company from any and all claims that he may have against
      it in connection with his employment and the terms of his employment agreement.
      Pursuant to the Separation ,
      Release
      and Consulting Agreement Mr. Belanger will provide certain advisory and consulting services
      to
      Viseon for a period of up to one year following July 31, 2006, which is the
      effective date of the termination of his employment agreement. As consideration
      for Mr. Belanger’s agreement to provide such consulting services, Viseon agreed
      to pay him $300,000 in twenty-four installments during the twelve month period
      beginning July 31, 2006. As consideration for Mr. Belanger’s release, Viseon
      agreed to pay the first four months of payments of consulting fees, in the
      amount of $100,000 (less any salary paid to him in August 2006), in a lump
      sum
      within two business days after the parties signed the Separation ,
      Release
      and Consulting Agreement and caused the 2,861,472 options granted to Mr. Belanger in May 2006,
      which have an exercise price of $0.32 per share, to be fully vested immediately.
      The terms of the underlying Stock Option Agreements require that 2,500,722
      of
      the vested options must be exercised on or before the date which is 90 days
      following the termination date and the remaining 360,750 of the vested options
      must be exercised on or before the date which is three years following the
      termination date. Mr. Belanger’s options will continue to be subject to the
      remaining terms of the relevant option agreements and company stock option
      plans.




-21-
 **Back
          to Table of Contents**




PART
      III.





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**





**Management**





The
      authorized number of directors of the Company is presently fixed at four. The
      term of office of directors are divided into three classes that expire at the
      annual meetings of stockholders between 2006 and 2008. Executive officers are
      appointed by the Board of Directors and serve until their successors are
      appointed.   The directors and executive officers of the Company are as
      follows:





Name
            
            Age
            
            PositionsJohn
                C. Harris
            
            45
            
            Chairman
                of the Board, Chief Executive Officer and President (1)Brian
                Day
            
            43
            
            Chief
                Financial OfficerGeoffrey
                Gerard
            
            61
            
            DirectorJohn
                O’Donnell
            
            51
            
            DirectorCharles
                Rey
            
            58
            
            Director





(1)
            Mr.
                Harris served as President and Chief Executive Officer from February
                2001
                through April 2006 and again from July 31, 2006 until present.
                Sean Belanger
                served as a director and the President and Chief Executive Officer
                from
                May 2006 through July 31,
                2006.







John
      Harris has been a director since February 2001 and served as Chief Executive
      Officer and President of the Company from February 2001 until May 2006 and
      again
      from July 2006 until present. From May until December 2000, Mr. Harris
      served as Chief Executive Officer of Diversified Technologies Group, Inc.,
      a
      company that provides enhanced fax services. From October 1999 until May 2000,
      Mr. Harris was Chief Executive Officer of CBQ, Inc., an e-business
      solutions provider. From March 1999 until joining CBQ, Inc., Mr. Harris
      served as President of Paragon Innovations, Inc., an embedded device design
      firm. From 1986 until 1998, Mr. Harris was President and CEO of CompuNet
      Support Systems, Inc. CompuNet provided networking, systems integration and
      business building applications.




-22-
 **Back
          to Table of Contents**




Brian
      Day
      was a director of the Company from October 2001 until July 2005. Mr. Day has
      served as Chief Financial Officer of the Company since September 2005.  Mr.
      Day joined Gomez, Inc. as Chief Financial Officer in September 2004. 
Mr. Day was the Chief Financial Officer of LifeHarbor, Inc. from June 2003
      until December 2003 and its President from December 2003 until the sale of
      the
      company in July 2004. Mr. Day was Chief Financial Officer and Chief
      Operating Officer of Octave Communications, Inc., an audio communications
      technology company, from June 1999 until its sale in January 2003. From
      September 1998 to June 1999, Mr. Day was Chief Financial Officer of
      Healthtrax Inc. and prior to that, Chief Financial Officer of Span Instruments,
      Inc.




Geoffrey
      Gerard has been a director of the Company since March 2005. Mr. Gerard has
      been
      in the private practice of law in Texas since 1978, specializing in business
      transactions. Mr. Gerard also serves on the Board of Directors of Overhill
      Farms, Inc., a publicly-held company supplying high quality frozen foods to
      airline, foodservice and retail customers.




John
      O’Donnell has been a director of the Company since his appointment in September
      2004. Mr. O’Donnell has been Chief Executive Officer of Avteq, Inc. (formerly
      known as Comlink Technologies, LLC) since 2001. Prior to forming Avteq, Inc.,
      Mr. O’Donnell was President of NuVision Technologies, Inc., a wholly owned
      subsidiary of TANDBERG, asa from 1995 to 1999.




Charles
      Rey has been a director of the Company since October 2001 and has been Chief
      Executive Officer of Lifetime Marketing, Inc. since 1991. Mr. Rey is also
      Chairman of the Board of POPS Direct, a consumer Internet marketing
      company.




Ashton
      Peery served as a director of the Company from July 2005 until August 2006.
      Mr.
      Peery is a consultant to technology and telecom businesses and was formerly
      Chief Strategy Officer of Lucent and General Partner of Lucent Venture Partners.
      Mr. Peery served on the Viseon Advisory Board from October 2003 until July
      2005.




None
      of
      the officers or directors has any family relationship with each other. None
      of
      the directors hold directorships in other reporting companies, except for Mr.
      Gerard who is a director of Overhill Farms, Inc., a publicly-held company
      supplying high quality frozen foods to airline, food service and retail
      customers.




The
      Board
      of Directors has established an Audit Committee. The Audit Committee supervises
      the financial affairs of the Company and generally reviews the results and
      scope
      of the audit and other services provided by the Company’s independent
      accountants and reports the results of their review to the Board and to the
      Company’s management. In fiscal years 2005 and 2006, Messrs. Ashton Peery and
      Gerard were members of the Audit Committee. The
      Board
      of Directors previously determined that Mr. Peery was both independent and
      an
      audit committee finance expert, as determined by SEC guidelines.Since
      Mr. Peery’s resignation in August 2006, Messrs. Gerard and Rey have been the
      members of the Audit Committee. None of the current members of the Audit
      Committee are audit committee financial experts, as determined by SEC
      guidelines. The
      Board
      of Directors has not been successful in retaining a new member of the Board
      who
      would satisfy the financial expert requirements, but it continues to search
      for
      a director to file that role.




**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires the Company’s executive
      officers and directors, and persons who beneficially own more than 10% of the
      Common Stock, to file reports of ownership with the SEC. Based upon a review
      of
      the copies of such reports furnished to the Company, the Company believes that
      all Section 16(a) filing requirements applicable to its executive officers,
      directors and greater than 10% beneficial owners were met during the fiscal
      year
      ended June 30, 2006, except
      for the following transactions, which were reported late: (1) Form 4 filed
      by
      Charles Rey, our director, on July 27, 2006 with respect to transactions
      occurring on May 2, 2006, (2)
      a
      Form 3 and Form 4 filed by Sean Belanger, our former President and Chief
      Executive Officer and a director, on June 21, 2006, with respect to his initial
      appointment in those capacities and the grant of certain stock options to him,
      respectively, which were both effective as of May 1, 2006, (3) a Form 3 filed
      by
      Brian Day, our Chief Financial Officer and a former director, on June 14, 2006,
      with respect to his initial appointment to the Board of Directors as of October
      17, 2001, and (4) Form 4s filed by Messrs. Gerard, O’Donnell, Day and Rey, on
      October 6, 2006, with respect to the grant of stock options to them for serving
      as directors of the Company on May 19, 2005.





**Code
      of Ethics**





Our
      Board
      of Directors has adopted a code of ethics that applies to our Chief Executive
      Officer (our principal executive officer) and our Chief Financial Officer (our
      principal financial officer and principal accounting officer), and all other
      employees as required by applicable securities regulations.





**ITEM
      10. EXECUTIVE COMPENSATION.**





**Summary
      Compensation Table**




The
      following table sets forth the compensation paid by the Company to (i)
      the
      two individuals who served asChief Executive Officer during
      the last fiscal year and (ii) the Company’s most highly compensated executive
      officers other than the Chief Executive Officeras of June 30, 2006,
      for services in all capacities to the Company during fiscal years ended
      June 30, 2006, 2005 and 2004 (for purposes hereof, the “Named Executive
      Officers”).


-23-
 **Back
          to Table of Contents**




**SUMMARY
                COMPENSATION TABLE**Long
                Term CompensationAnnual
                Compensation
            
            Awards
            
            Payouts(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)Other
            
            Restricted
            
            Securities
            
            
            
            AllAnnual
            
            Stock
            
            Underlying
            
            LTIP
            
            OtherName
                and
            
            
            
            
            
            
            
            Compensation
            
            Awards
            
            Options/
            
            Payouts
            
            CompensationPrincipal
                Position
            
            Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            ($)
            
            ($)
            
            SARs
                (#)
            
            ($)
            
            ($)Sean
                E. Belanger (1)
              Chief
                ExecutiveOfficer
              and
                President
            
            
            2006
            
            
            25,000
            
            
            
            
            
            
            
            
            
            
            
            2,861,472John
                C. Harris (2)
            
            
            2003
            
            
            130,000Chief
                Executive
            
            
            2004
            
            
            151,667
            
            
            310,000
                (3
            )
            
            
            
            
            
            
            
            300,000Officer
                and President
            
            
            2005
            
            
            195,000Chief
                Tech. Officer
            
            
            2006
            
            
            240,000
            
            
            
            
            
            
            
            
            
            
            
            600,000Robert
                A. Wolf (4)
            
            
            2004
            
            
            45,000Chief
                Financial Officer
            
            
            2005
            
            
            100,000
            
            
            
            
            
            
            
            
            
            
            
            300,0002006
            
            
            12,500
            
            
            94,000Brian
                R. Day (5)
            
            
            2006
            
            
            175,000
            
            
            50,000
            
            
            
            
            
            
            
            
            450,000Chief
                FinancialOfficer





(1)
            Mr.
                Belanger became President and Chief Executive Officer on May 1, 2006.


(2)
            Mr.
                Harris was Chief Executive Officer and President until May 1, 2006
                and
                again after August 2006. From May 1 2006 until August 2006 he was
                Chief
                Technology Officer.


(3)
            Consists
                of a cash payment in the amount of $50,000 and the grant of
                200,000 shares of the Company’s common stock to Mr. Harris in
                consideration of his past performance and his oral agreement to continue
                his employment with the Company. The shares were valued at $1.05
                per
                share, the closing bid per share on the date of issuance (June 24,
                2004
                for a total fair market value of $210,000). Mr. Harris had previously
                earned a performance bonus in the amount of fifty thousand
                dollars.


(4)
            Mr. Wolf
                became Chief Financial Officer in March 2004 and served in that capacity
                until August 2005.


(5)
            Mr.
                Day became Chief Financial Officer in September 2005.




**Option/SAR
      Grants Table**




**Option
      Grants in Last Fiscal Year**


(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)**Number
                of**
            
            **%
                of Total****Securities
                Underlying**
            
            **Options/SARs****Options/SARs**
            
            **Granted
                to Employees**
            
            **Exercise
                or Base**
            
            **Expiration**Name
            
            **Granted
                (#)**
            
            **in
                Fiscal Year**
            
            **Price
                ($/Sh)**
            
            **Date**Sean
                E. Belanger
              Chief
                Executive Officer
            
            
            2,861,472
            
            
            52.05
            %
            $
            0.32
            
            
            April
                2016John
                C. Harris
              CTO,
                CEO
            
            
            600,000
            
            
            10.91
            %
            
            0.32
            
            
            April
                2016Brian
                R. Day
              Chief
                Financial Officer
            
            
            450,000
            
            
            8.19
            %
            
            0.32
            
            
            April
                2016





(1)
            The
                Company has never granted any SARS.


(2)
            The
                aggregate number of options granted in fiscal year 2006 was
                5,497,472.


(3)
                Mr.
                    Belanger’s options vest according to the following schedule: 238,446 per
                    quarter commencing June 30 2006. Mr. Harris’ options were fully vested at
                    June 30 2006. Mr. Day’s options vest according to the following schedule:
                    315,000 at June 30 2006, 33,750 per quarter thereafter.




-24-
 **Back
          to Table of Contents**




**Aggregated
      Option/SAR** **Exercises** **and Fiscal Year-End Option** **/** **SAR** **Value** **Table**





The
      Named
      Executive Officers did not
      exercise any stock options during the fiscal year ended June 30, 2006. The
      Company has not granted any SAR’s of any kind. The following table sets forth
      the number of securities underlying options exercisable at June 30, 2006, and the
      value at June 30, 2006 of
      exercisable in-the-money options remaining outstanding as to the N amed
      Executive Officers .





(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)Number
                of
            
            Value
                ofSecurities
                Underlying
            
            UnexercisedUnexercised
            
            In-the-MoneyOptions
                / SARs at
            
            Options
                / SARs atShares
                Acquired
            
            
            
            June
                30, 2005 (#)
            
            June
                30, 2005 ($)Name
            
            on
                Exercise (#)
            
            Value
                Realized ($)
            
            Exercisable
            
            Unexercisable
            
            Exercisable
            
            UnexercisableSean
                E. Belanger
            
            
            
            
            
            
            
            
            238,456
            
            
            2,623,016
            
            $
            0
            
            $
            0John
                C. Harris
            
            
            
            
            
            
            
            
            1,150,000
            
            
            -0-
            
            $
            0
            
            $
            0Brian
                R. Day
            
            
            
            
            
            
            
            
            397,500
            
            
            152,500
            
            $
            0
            
            $
            0





(1)
            Based
                upon the closing bid price of the Common Stock quoted on the OTC
                Bulletin
                Board on June 30, 2006, which was $0.25 per share, and the exercise
                price
                of the options (between $0.32 and $1.62 per
                share).





**Director
      Compensation**




The
      Board
      of Directors of the Company has established the following compensation policies
      for non-employee directors of the Company. Under the Company’s 1994 Stock Plan,
      each non-employee director is granted, upon election to the Board, an option
      to
      purchase 20,000 shares of Common Stock, exercisable at market value on
      the date of grant, vesting in equal increments of 25% every three months and
      expiring 10 years from the date of grant. After the year of election, each
      non-employee director will also receive annually an option to
      purchase 5,000 shares of Common Stock exercisable at market value on
      the date of grant, vesting in equal increments of 25% every three months and
      expiring ten years from the date of grant. Directors who are employees of the
      Company receive no additional compensation for serving as directors. During
      fiscal year 2005, the Company granted directors 213,000 shares of Common Stock
      for their service, the Company also granted directors options to purchase
      230,000 shares of Common Stock. During fiscal year 2006, no options were granted
      to non-employee directors





**Compensation
      Agreements with Key Personnel**




The
      Company has executed employment agreements with John C. Harris and Brian R.
      Day. Under
      the
      terms of both executive’s employment agreements, each of the named executives is
      entitled to annualized base salary (in the case of Mr. Harris - $240,000, in
      the
      case of Mr. Day - $210,000) plus benefits. The
      employment of the named executives may be terminated at any time by the Company,
      with cause or without cause. The executive may resign his position with the
      Company upon thirty days’ prior written notice to the Company for any reason. If
      employment is terminated by the Company for cause, or by the executive without
      good reason, in such case, the executive shall receive his base salary through
      the date of termination. If employment is terminated by the Company without
      cause, or by the executive for good reason, then the executive shall receive
      a
      termination payment equal to his current base salary for a twelve month period
      following termination (the “Severance Period’). In addition, all options granted
      to him shall immediately vest, and he shall receive all other benefits that
      would otherwise be due to him under the Employment Agreement during the
      Severance Period.




On
      July
      24, 2006, John C. Harris and the Company agreed to modify the terms of Mr.
      Harris’ existing employment agreement by reducing the severance amounts that are
      payable by Viseon following certain termination events. The terms of the
      employment agreement were revised such that Viseon is no longer required to
      pay
      twelve months of Mr. Harris’ base salary upon a termination of his employment
      (a) by Viseon for any reason other than “cause,” “disability,” voluntary
      resignation or death, or (b) by Mr. Harris for “good reason”. If Mr. Harris’
employment is terminated for any of those reasons, then Viseon would still
      be
      obligated to make payments to Mr. Harris equal to a prorated amount of any
      bonuses earned, plus all accrued but unused vacation, sick and personal days,
      and all stock options granted to him would become fully vested. Viseon paid
      Mr.
      Harris approximately $72,700 in consideration for his agreement to modify the
      severance payments under the employment


-25-
 **Back
          to Table of Contents**




agreement.
      In addition, Viseon agreed to pay another $64,816.78 to Mr. Harris upon the
      earlier of (i) Viseon completing a “qualified financing” transaction, and (ii)
      the date on which his employment is terminated without “cause” or as a result of
      his death or disability. Viseon shall have no obligation to pay the additional
      amount to Mr. Harris if his employment is terminated for “cause” prior to the
      closing of a qualified financing.




On
      July
      31, 2006, Brian R. Day and the Company agreed to modify the terms of Mr. Day’s
      existing employment agreement by reducing the severance amounts that are payable
      by Viseon following certain termination events. The terms of the employment
      agreement were revised such that Viseon is no longer required to pay twelve
      months of Mr. Day’s base salary upon a termination of his employment (a) by
      Viseon for any reason other than “cause,” “disability,” voluntary resignation or
      death, or (b) by Mr. Day for “good reason”. If Mr. Day’s employment is
      terminated for any of those reasons, then Viseon would still be obligated to
      make payments to Mr. Day equal to a prorated amount of any bonuses earned,
      plus
      all accrued but unused vacation, sick and personal days, and all stock options
      granted to him would become fully vested. Viseon paid Mr. Day approximately
      $75,000 in consideration for his agreement to modify the severance payments
      under the employment agreement. In addition, Viseon agreed to pay another
      $62,500.00 to Mr. Day upon the date on which his employment is terminated
      without “cause” or as a result of his death or disability. Viseon shall have no
      obligation to pay the additional amount to Mr. Day if his employment is
      terminated for “cause”.





**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**




The
      following table sets forth as of August 31, 2006, the number of shares of the
      Common Stock beneficially owned by (i) each director of the Company;
      (ii) each of the Named Executive Officers; (iii) each person known by
      the Company to beneficially own more than 5% of the outstanding shares of Common
      Stock; and (iv) all executive officers and directors as a group. Unless
      otherwise indicated, each person has sole voting, investment and dispositive
      power over such shares. Shares not outstanding but deemed beneficially owned
      by
      virtue of the right of a person or member of a group to acquire them within
      60 days are treated as outstanding only when determining the amount and
      percent owned by such group or person. The address for all directors and
      officers of the Company is Viseon, Inc., 17103 Preston Road, Suite 150N,
      Dallas, TX 75248.




**Name
                and Address of**
            
            **Beneficial
                Ownership****Beneficial
                Owner**
            
            **Number**
            
            **Percent**Brian
                Day
            
            
            511,250
            (1)
            
            
            1.3
            %Geoffrey
                Gerard
            
            
            41,000
            (2)
            
            
            *John
                Harris
            
            
            1,350,000
            (3)
            
            
            3.4
            %John
                O’Donnell
            
            
            330,869
            (4)
            
            
            *
            %Charles
                Rey
            
            
            137,521
            (5)
            
            
            *
            %All
                Current Executive Officers and Directors as a Group
                (5 persons)
            
            
            2,370,640
            
            
            
            5.8
            %Digital
                Investors, LLC
            
            
            1,909,024
            (6)
            
            
            4.7
            %16901 N. Dallas
                Parkway,Suite 230Addison,
                TX 75001Richard
                Craven
            
            
            2,053,652
            (7)
            
            
            5.0
            %5200
                Wilson Road #200Edina,
                MN 55424Henry
                F. Harris, Sr.
            
            
            4,605,225
            (8)
            
            
            10.7
            %575 E. Evergreen
                AvenueWyndmoor,
                Pennsylvania 19038Schottenfeld
                Qualified Associates, LP
            
            
            3,623,503
            (9)
            
            
            9.9
            %399
                Park AvenueNew
                York, NY 10022Albert
                B. Greco16901
                N. Dallas Parkway
            
            
            1,458,783
            (10)
            
            
            3.7
            %Suite
                230Addison,
                TX 75001Kingdon
                Capital Management, LLC
            
            
            2,992,258
            (11)
            
            
            8.8
            %152
                West 57th Street
              50th
                Floor
              New
                York, NY 10019




-26-
 **Back
          to Table of Contents**





*
            Indicates
                ownership of less than 1%.


(1)
            Includes
                77,500 shares owned outright and 70,000 shares that may be
                acquired within 60 days upon the exercise of stock options.(2)
            Includes
                26,000 shares owned outright and 5,000 shares that may be
                acquired within 60 days upon the exercise of stock
                options.(3)
            Includes
                200,000 shares owned outright and512,500 shares
                that may be acquired within 60 days upon the exercise of stock
                options.(4)
            Includes
                30,000 shares owned outright, 20,869 shares owned indirectly through
                Avteq, Inc., 25,000 shares that may be acquired within 60 days upon
                the
                exercise of stick options and 250,000 shares owned indirectly through
                JOD Enterprises, LLC that may be purchased pursuant to warrants currently
                exercisable.(5)
            Includes
                37,500 shares owned outright, 57,521 owned by Mr. Rey’s sons and
                75,000 shares that may be acquired within 60 days upon the
                exercise of stock options.(6)
            Includes
                1,057,360 shares owned outright and 851,664 shares that may be
                acquired within 60 days upon the exercise of stock warrants.(7)
            Includes
                1,998,652 shares owned outright and 55,000 shares that may be
                acquired within 60 days upon the exercise of stock options.(8)
            Includes
                2,605,225 shares owned outright or through trusts,
                1,000,000 shares that may be acquired upon the conversion of the
                Company’s Series A Convertible Preferred Stock, which is currently
                convertible and 1,000,000 shares that may be purchased pursuant to
                warrants currently exercisable.(9)
            Includes
                538,923 shares owned outright, 500,000 shares that may be acquired
                upon the conversion of shares of the Company’s Series A and Series B
                Preferred Stock, 1,516,666 shares that may be acquired upon the
                exercise of warrants; also includes 15,781 shares owned outright
                by
                Richard Schottenfeld, Managing Member of Schottenfeld Qualified
                Associates, LP, 150,000 shares that may be acquired by upon the
                conversion of shares of the Company’s Series A Preferred Stock by Mr.
                Schottenfeld, 381,320 shares that may be acquired by
                Mr. Schottenfeld upon the exercise of warrants and
                148,000 shares owned outright by Schottenfeld Group LLC.
                Mr. Schottenfeld is the Managing Member of the general partner of
                Schottenfeld Qualified Associates, LP and controls voting and disposition
                of the shares held by this stockholder. Mr. Schottenfeld is a member
                of Schottenfeld Group LLC and shares control of voting and disposition
                of
                the shares held by this stockholder. Holdings also include
                627,519 shares of Common Stock owned outright, 875,000 shares
                that may be acquired upon the conversion of shares of the Company’s
                Preferred Stock and 1,269,824 shares that may be acquired upon the
                exercise of warrants held by eight individuals and entities who may
                be
                deemed to constitute a group with one another, Schottenfeld Qualified
                Associates, LP, Richard Schottenfeld and Schottenfeld Group LLC.
                The terms
                of various convertible securities held by the various reporting persons
                limit the combined beneficial ownership of the reporting persons
                to 9.99%,
                subject to waiver of such limitation by the reporting persons upon
                sixty-five days notice to the Company.(10)
            Includes
                901,040 shares of Common Stock owned outright, 556,916 shares that
                may be
                acquired upon the exercise of warrants currently exercisable. In
                addition
                to his personal holdings, Mr. Greco, as the sole manager of Digital
                Investors, LLC, has sole dispositive authority over all shares of
                Common
                Stock and warrants owned by Digital Investors, LLC (see note 6).(11)
            Includes
                1,971,258 shares owned outright, 2,000,000 shares that may be acquired
                upon the exercise of warrants currently exercisable and 2,000,000
                shares
                that may be acquired upon the conversion of shares of the Company’s Series
                A Preferred Stock by M. Kingdon Offshore M.V., 219,200 shares owned
                outright, 225,000 shares that may be acquired upon the exercise of
                warrants currently exercisable and 225,000 shares that may be acquired
                upon the conversion of shares of the Company’s Series A Preferred Stock by
                Kingdon Partners, 134,200 shares owned outright, 125,000 shares that
                may
                be acquired upon the exercise of warrants currently exercisable and
                125,000 shares that may be acquired upon the conversion of shares
                of the
                Company’s Series A Preferred Stock by Kingdon Family Partnership, LP and
                668,300 shares owned outright, 650,000 shares that may be acquired
                upon
                the exercise of warrants currently exercisable and 650,000 shares
                that may
                be acquired upon the conversion of shares of the Company’s Series A
                Preferred Stock by Kingdon Associates. The terms of various convertible
                securities held by the various reporting persons limit the combined
                beneficial ownership of the reporting persons to 4.99%, subject to
                waiver
                of such limitation by the reporting persons upon sixty-five days
                notice to
                the Company.




-27-
 **Back
          to Table of Contents**




**Equity
      Compensation Plan Information**




Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted
                average exercise price of outstanding options, warrants and
                rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plansEquity
                compensation plans approved by security holders
            
            
            7,141,722
            
            $
            0.60
            
            
            313,278Equity
                compensation plans not approved by security holders
            
            
            231,000
            
            $
            2.81
            
            
            N/ATotal
            
            
            7,372,722





The options granted under
      the
      equity compensation plan that was not approved by our shareholders was
      originally granted between 1997 and 1998. All of such
      options were issued with exercise prices ranging from $2.81 to $3.00, expire
      10
      years from the date
      of issuance and are fully vested.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS.**




Mr.
      O'Donnell is the majority owner and controlling member of Comlink Technologies,
      LLC. From September 1, 2001 through June 30, 2003, Viseon purchased an aggregate
      of approximately $1.7 million in inventory from Comlink, consisting primarily
      of
      group videoconferencing equipment and related peripherals. The purchases were
      made in the ordinary course of Viseon's business. From September 1, 2002 through
      June 30, 2003, Viseon purchased approximately $366,000 in equipment and
      peripherals from Comlink. No purchases have been made since June 30, 2003.
      In
      December 2003, Viseon issued 20,869 shares of its Common Stock to Comlink in
      settlement of accounts payable of $23,997 related to the purchases. Comlink's
      20,869 shares of Viseon Common Stock were registered for resale under Viseon's
      registration statement on Form SB-2/A, which was declared effective by the
      Securities and Exchange Commission on August 13, 2004.




PART
      IV.





**ITEM
      13. EXHIBITS.**





The
      following exhibits are filed with this Annual Report or are incorporated herein
      by reference:




**EXHIBIT
      INDEX**




ExhibitNumber
              
              Description3.1
              
              Articles
                  of Incorporation of Viseon, Inc. (filed as Exhibit 3.1 to the Company’s
                  S-2/ A Registration Statement dated July 25, 2001 and incorporated
                  herein
                  by reference).3.2
              
              Certificate
                  of Amendment of Articles of Incorporation (filed as Exhibit 3.1
                  to the
                  Company’s S-2 Registration Statement dated July 25, 2001 and incorporated
                  herein by reference).3.3
              
              Bylaws
                  of Viseon, Inc. (filed as Exhibit 3.1 to the Company’s S-2/ A Registration
                  Statement dated July 25, 2001 and incorporated herein by reference).3.4
              
              Certificate
                  of Amendment of Articles of Incorporation (filed as Exhibit 3.4
                  to the
                  Company’s SB-2 Registration Statement filed on May 6, 2004 and
                  incorporated herein by reference).4.1
              
              Form
                  of Warrant granted to RSI Marketing, LLC. (Filed as Exhibit A to
                  Exhibit
                  10.36 to the Company’s March 31, 2001 10-QSB and incorporated herein by
                  reference).4.2
              
              Form
                  of Warrant granted to Active Management, LLC. (filed as Exhibit
                  A to
                  Exhibit 10.38 to the Company’s March 31, 2001 10-QSB and incorporated
                  herein by reference).4.3
              
              Certificate
                  of Designation Establishing the Series A Preferred Stock of Viseon,
                  Inc.
                  (filed as Exhibit 4.1 to the Company’s Form 8-K dated March 18, 2004 and
                  incorporated herein by reference).




-28-
 **Back
          to Table of Contents**


4.4
              
              Form
                  of Series A-1 Common Stock Purchase Warrant (filed as Exhibit 4.2
                  to the
                  Company’s Form 8-K dated March 18, 2004 and incorporated herein by
                  reference).4.5
              
              Form
                  of Series A-2 Common Stock Purchase Warrant (filed as Exhibit 4.3
                  to the
                  Company’s Form 8-K dated March 18, 2004 and incorporated herein by
                  reference).10.1
              
              1994
                  Stock Plan. (filed as Exhibit 4.1 to the Company’s Registration Statement
                  on Form S-8 (SEC File No. 33-62573) dated August 31, 1998 and incorporated
                  herein by reference).10.2
              
              Manufacturing
                  Agreement with Altron, Inc. dated August 10, 1996 (filed as Exhibit
                  10.21
                  to the Form 10-KSB Annual Report of the Company for 1996, File
                  No.
                  000-27106 (the “Company’s 1996 10-KSB”) and incorporated herein by
                  reference).10.3
              
              Registration
                  Rights Agreement by and between Company and Digital Investors,
                  LLC, dated
                  as of February 23, 2001 (filed as Exhibit 10.35 to Company’s March 2001
                  10-QSB the Form 10-QSB Report of the Company for Period ended March
                  31,
                  2001, File No. 000-27106 (the “Company’s March 2001 10-QSB” and
                  incorporated herein by reference).10.4
              
              Registration
                  Rights Agreement by and between Company and RSI Marketing, LLC,
                  dated as
                  of February 23, 2001 (filed as Exhibit 10.37 to Company’s March 2001
                  10-QSB and incorporated herein by reference).10.5
              
              Registration
                  Rights Agreement by and between Company and Active Management,
                  LLC, dated
                  as of February 23, 2001 (filed as Exhibit 10.39 to Company’s March 2001
                  10-QSB and incorporated herein by reference).10.6
              
              Exclusive
                  Distribution Agreement (filed as Exhibit 10.61 to the Company’s 2002
                  10-KSB and incorporated herein by reference).10.7
              
              Promissory
                  Note between the Company and EXIM Corporation (filed as Exhibit
                  23.3 to
                  the Company’s SB-2/ A Registration Statement dated August 1, 2003 and
                  incorporated herein by reference).10.8
              
              Promissory
                  Note between the Company and Henry Mellon dated (filed as Exhibit
                  23.4 to
                  the Company’s SB-2/ A Registration Statement dated August 1, 2003 and
                  incorporated herein by reference).10.9
              
              Assignment
                  of Note and Liens (filed as Exhibit 10.24 to the Form 10-KSB Annual
                  Report
                  of the Company for 2003 File No. 000-27106 (the “Company’s 2003 10-KSB”)
                  and incorporated herein by reference).10.10
              
              Third
                  Amendment to Loan Agreement (filed as Exhibit 10.25 to the Company’s 2003
                  10-KSB and incorporated herein by reference).10.11
              
              Warrant
                  in favor of Henry Mellon (filed as Exhibit 10.26 to the Company’s 2003
                  10-KSB and incorporated herein by reference).10.12
              
              Warrant
                  in favor of EXIM Corporation (filed as Exhibit 10.27 to the Company’s 2003
                  10-KSB and incorporated herein by reference).10.13
              
              Warrant
                  in favor of EXIM Corporation (filed as Exhibit 10.28 to the Company’s 2003
                  10-KSB and incorporated herein by reference).10.14
              
              Registration
                  Rights Agreement in favor of Henry Mellon (filed as Exhibit 10.29
                  to the
                  Company’s 2003 10-KSB and incorporated herein by reference).10.15
              
              Registration
                  Rights Agreement in favor of EXIM Corporation (filed as Exhibit
                  10.30 to
                  the Company’s 2003 10-KSB and incorporated herein by reference).10.16
              
              Piggyback
                  Registration Rights Agreement in favor of Henry Mellon (filed as
                  Exhibit
                  10.31 to the Company’s 2003 10-KSB and incorporated herein by reference).10.17
              
              Piggyback
                  Registration Rights Agreement in favor of EXIM Corporation (filed
                  as
                  Exhibit 10.32 to the Company’s 2003 10-KSB and incorporated herein by
                  reference).10.18
              
              Agreement
                  with Comlink Video regarding purchase of group videoconferencing
                  assets
                  (filed as Exhibit 10.61 to the Company’s 2003 10-KSB and incorporated
                  herein by reference).




-29-
 **Back
          to Table of Contents**





10.19
            
            Warrant
                in favor of Henry Mellon (filed as Exhibit 10.33 to the Company’s 2003
                10-KSB and incorporated herein by reference).10.20
            
            Promissory
                Note between the Company and Judas, Inc. dated June 30, 2002 (filed
                as
                Exhibit 10.34 to the Company’s 2003 10-KSB and incorporated herein by
                reference).10.21
            
            Agreement
                Amending Promissory Note between the Company and Judas, Inc. (filed
                as
                Exhibit 10.35 to the Company’s 2003 10-KSB and incorporated herein by
                reference).10.22
            
            Warrant
                in favor of Judas, Inc. (filed as Exhibit 10.36 to the Company’s 2003
                10-KSB and incorporated herein by reference).10.23
            
            Warrant
                in favor of Judas, Inc. (filed as Exhibit 10.37 to the Company’s 2003
                10-KSB and incorporated herein by reference).10.24
            
            Piggyback
                Registration Rights Agreement in favor of Judas, Inc. (filed as Exhibit
                10.39 to the Company’s 2003 10-KSB and incorporated herein by reference).10.25
            
            Promissory
                Note between the Company and Michelle Norwood dated June 30, 2002
                (filed
                as Exhibit 10.40 to the Company’s 2003 10-KSB and incorporated herein by
                reference).10.26
            
            Agreement
                Amending Promissory Note between the Company and Michelle Norwood
                (filed
                as Exhibit 10.41 to the Company’s 2003 10-KSB and incorporated herein by
                reference).10.27
            
            Warrant
                in favor of Michelle Norwood (filed as Exhibit 10.42 to the Company’s 2003
                10-KSB and incorporated herein by reference).10.28
            
            Warrant
                in favor of Michelle Norwood (filed as Exhibit 10.43 to the Company’s 2003
                10-KSB and incorporated herein by reference).10.29
            
            Piggyback
                Registration Rights Agreement in favor of Michelle Norwood (filed
                as
                Exhibit 10.44 to the Company’s 2003 10-KSB and incorporated herein by
                reference).10.30
            
            Agreement
                to Convert Short-Term Debt to Long-Term Note between the Company
                and
                Carbone Holdings, L.L.C. dated May 31, 2003 (filed as Exhibit 10.45
                to the
                Company’s 2003 10-KSB and incorporated herein by reference).10.31
            
            Promissory
                Note between the Company and Carbone Holdings, L.L.C. dated May 31,
                2003
                (filed as Exhibit 10.46 to the Company’s 2003 10-KSB and incorporated
                herein by reference).10.32
            
            Agreement
                to Convert Short-Term Debt to Long-Term Note between the Company
                and
                Active Management, L.L.C. dated May 31, 2003 (filed as Exhibit 10.47
                to
                the Company’s 2003 10-KSB and incorporated herein by reference).10.33
            
            Promissory
                Note between the Company and Active Management, L.L.C. dated May
                31, 2003
                (filed as Exhibit 10.48 to the Company’s 2003 10-KSB and incorporated
                herein by reference).10.34
            
            Form
                of Series A Convertible Preferred Stock and Warrants Purchase Agreement
                (filed as Exhibit 4.1 to the Company’s Form 8-K dated April 19, 2004 and
                incorporated herein by reference).10.35
            
            Form
                of Registration Rights Agreement (filed as Exhibit 4.2 to the Company’s
                Form 8-K dated April 19, 2004 and incorporated herein by reference).21.1
            
            List
                of Subsidiaries (filed herewith).23.1
            
            Consent
                of Independent Registered Public Accounting Firm - Virchow, Krause
&
                Company, LLP31(a)
            
            Certification
                from John Harris, President and Chief Executive Officer of the Registrant,
                pursuant to 1 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a) (filed
                herewith).31(b)
            
            Certification
                from Brian R. Day, Chief Financial Officer of the Registrant, pursuant
                to
                1 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a) (filed
                herewith).32(a)
            
            Certification
                of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
                Section
                906 of the Sarbanes-Oxley Act of 2002 (filed
                herewith).




-30-
 **Back
          to Table of Contents**




32
                  (b)
              
              Certification
                  of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
                  Section
                  906 of the Sarbanes-Oxley Act of 2002 (filed herewith).99.1
              
              The
                  Company’s Year 2003 Consultant Compensation Plan (filed as Exhibit 4.1
                  to
                  the Company’s Registration Statement on Form S-8 (SEC File No. 333-102551)
                  filed January 16, 2003.99.2
              
              The
                  Company’s 1994 Stock Plan (filed as Exhibit 4.1 to the Company’s
                  Registration Statement on Form S-8 (SEC File No. 333-62573).The
                Company’s 2005 Stock Plan (filed as Exhibit.)




**ITEM
      14.  PRINCIPAL ACCOUNTANT FEES AND
      SERVICES.**




Virchow,
      Krause & Company, LLP, Certified Public Accountants, are the Company's
      independent auditors to examine the financial statements of the Company for
      the
      fiscal year ended June 30, 2006 and 2005. Virchow, Krause & Company, LLP has
      performed the following services and has been paid the following fees for those
      fiscal years.





Audit
      Fees





Virchow,
      Krause & Company, LLP was paid aggregate fees of $77,140 and $52,756 during
      the fiscal years ended June 30, 2006 and 2005, respectively for professional
      services rendered for the audit of the Company's annual financial statements
      and
      for the reviews of the consolidated financial statements included in Company's
      quarterly reports on Form 10-QSB during those fiscal years.





Audit-Related
      Fees





Virchow,
      Krause & Company, LLP was paid aggregate fees of $12,650 and $17,550 during
      the fiscal years ended June 30, 2006 and June 30, 2005, respectively for
      services related to Form SB-2.





Tax
      Fees





Virchow,
      Krause & Company, LLP was paid aggregate fees of $8,945 and $11,700 during
      the fiscal years ended June 30, 2006 and 2005, respectively for professional
      services rendered for tax compliance, tax advice and tax planning.





Other
      Fees





Virchow,
      Krause & Company, LLP was paid no other fees during the fiscal years ended
      June 30, 2006 and 2005, respectively for other professional
      services.




The
      policy of the Company's audit committee is to review and pre-approve both audit
      and non-audit services to be provided by the independent auditors (other than
      with de minimis exceptions permitted by the Sarbanes-Oxley Act of 2002). This
      duty may be delegated to one or more designated members of the audit committee
      with any such approval reported to the committee at its next regularly scheduled
      meeting. Approval of non-audit services shall be disclosed to investors in
      periodic reports required by section 13(a) of the Securities Exchange Act of
      1934. 100% of the fees paid to Virchow Krause were pre-approved by the audit
      committee for the fiscal year ended June 30, 2006.




No
      services in connection with appraisal or valuation services, fairness opinions
      or contribution-in-kind reports were rendered by Virchow Krause. Furthermore,
      no
      work of Virchow Krause with respect to its services rendered to the Company
      was
      performed by anyone other than Virchow Krause.


-31-
 **Back
          to Table of Contents**






**VISEON,
      INC. AND SUBSIDIARIES**




Dallas,
      Texas





June
      30,
      2006 and 2005






CONSOLIDATED
      FINANCIAL STATEMENTS




Including
      Report of Independent Registered Public Accounting Firm




TABLE
      OF CONTENTS





**Report
                of Independent Registered Public Accounting
                Firm**
            F-1**Consolidated
                Financial Statements**Consolidated
                Balance Sheets
            F-2Consolidated
                Statements of Operations
            F-3Consolidated
                Statements of Stockholders' Equity
                (Deficit)
            F-4Consolidated
                Statements of Cash Flows
            F-5Notes
                to Consolidated Financial
                Statements
            F-6




-32-
 **Back
          to Table of Contents**




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Stockholders,
      Audit Committee and Board of Directors


Viseon,
      Inc.




We
      have
      audited the accompanying consolidated balance sheets of Viseon, Inc. and
      subsidiaries as of June 30, 2006 and 2005, and the related consolidated
      statements of operations, stockholders’ equity (deficit) and cash flows for
      the years then ended. These consolidated financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements based on our
      audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Viseon, Inc.
      and subsidiaries as of June 30, 2006 and 2005, and the results of their
      operations and their cash flows for the years then ended, in conformity with
      U.S. generally accepted accounting principles.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 2 to the financial
      statements, the Company has suffered recurring losses and negative cash flows
      from operating activities and requires additional working capital to support
      future operations. This raises substantial doubt about the Company’s ability to
      continue as a going concern. Management’s plans in regard to these matters are
      also described in Note 2. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.






/s/
                VIRCHOW, KRAUSE & COMPANY, LLP


Minneapolis,
      Minnesota


September
      14, 2006


F-1
 **Back
          to Table of Contents**


**VISEON,
        INC. AND SUBSIDIARIES**


CONSOLIDATED
      BALANCE SHEETS


June
      30,
      2006 and 2005


***ASSETS***2006
            
            2005**CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            1,887,585
            
            $
            239,383Accounts
                receivable, net of allowance for doubtful accounts of $0
            
            
            0
            
            
            16,541Inventories
            
            
            0
            
            
            3,758Prepaid
                expenses
            
            
            87,537
            
            
            379,291Total
                Current Assets
            
            
            1,975,122
            
            
            638,973**PROPERTY
                AND EQUIPMENT, NET**
            
            
            122,765
            
            
            26,428**INTANGIBLE
                ASSETS, NET**
            
            
            0
            
            
            266,358**TOTAL
                ASSETS**
            
            $
            2,097,887
            
            $
            931,579***LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)*****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            446,583
            
            
            1,230,041Accrued
                expenses
            
            
            413,090
            
            
            336,287Net
                liabilities of discontinued operations
            
            
            204,976
            
            
            723,475Total
                Current Liabilities
            
            
            1,064,649
            
            
            2,289,803**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS'
                EQUITY (DEFICIT)**Convertible
                preferred stock, $.01 par value per share5,000,000
                shares authorizedSeries
                A convertible preferred stock, 97 and 125 sharesissued
                and outstanding (liquidation preference of $2,425,000 and$3,125,000)
            
            
            1
            
            
            1Series
                B convertible preferred stock, 376 and 0 sharesissued
                and outstanding (liquidation preference of $9,400,000and
                $0)
            
            
            4
            
            
            0Common
                stock, $.01 par value per share100,000,000
                shares authorized36,715,081
                and 32,849,070 issued and outstanding
            
            
            367,151
            
            
            328,491Additional
                paid in capital
            
            
            55,000,712
            
            
            40,056,336Accumulated
                deficit
            
            
            (54,334,630
            )
            
            (41,742,872
            )Total
                Stockholders' Equity (Deficit)
            
            
            1,033,238
            
            
            (1,358,044
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            2,097,887
            
            $
            931,759


See
        accompanying notes to consolidated financial statements.
 F-2
 **Back
            to Table of Contents**
  **VISEON,
        INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF OPERATIONS


Years
      Ended June 30, 2006 and 2005


2006
            
            2005**NET
                SALES**
            
            $
            7,150
            
            $
            239,660**COST
                OF GOODS SOLD**
            
            
            26,226
            
            
            284,746Gross
                Profit (Loss)
            
            
            (19,076
            )
            
            (45,086
            )**RESEARCH
                AND DEVELOPMENT**
            
            
            3,479,088
            
            
            5,134,123**SELLING,
                GENERAL AND ADMINISTRATIVE**
            
            
            2,850,135
            
            
            2,774,745**DEPRECIATION
                AND AMORTIZATION**
            
            
            378,056
            
            
            41,136Operating
                Loss
            
            
            (6,726,355
            )
            
            (7,995,090
            )**OTHER
                INCOME (EXPENSE)**Interest
                income
            
            
            102,521
            
            
            46,077Interest
                expense
            
            
            (117,500
            )
            
            —Other
                Income (Expense), net
            
            
            (14,979
            )
            
            46,077**LOSS
                FROM CONTINUING OPERATIONS**
            
            
            (6,741,334
            )
            
            (7,949,013
            )**GAIN
                FROM DISCONTINUED OPERATIONS**
            
            
            108,640
            
            
            6,107**NET
                LOSS**
            
            
            (6,632,694
            )
            
            (7,942,906
            )**Preferred
                Stock Dividends**
            
            
            (5,763,264
            )
            
            (550,034
            )**NET
                LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS**
            
            $
            (12,395,958
            )
            $
            (8,492,940
            )Basic
                and diluted earnings (loss) per share:Loss
                from continuing operations
            
            $
            (0.36
            )
            $
            (0.29
            )Gain
                from discontinued operations
            
            $
            —
            
            $
            —Net
                loss attributable to common stockholders
            
            $
            (0.35
            )
            $
            (0.29
            )Weighted
                average common shares outstanding:****Basic
                and diluted****
            
            
            35,089,272
            
            
            29,122,280


See
        accompanying notes to consolidated financial statements.
 F-3
 **Back
            to Table of Contents**
  **VISEON,
        INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY
      (DEFICIT)


Years
      Ended June 30, 2006 and 2005


**Preferred
                Stock**
            
            **Common
                Stock**
            
            ******Additional
                Paid-In**
            
            **Accumulated****Share**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Total****BALANCES,
                June 30, 2004**
            
            
            338
            
            $
            3
            
            
            24,682,907
            
            $
            246,829
            
            $
            37,732,562
            
            $
            (33,249,932
            )
            $
            4,729,462Convert
                preferred stock to common stock
            
            
            (213
            )
            
            (2
            )
            
            5,325,000
            
            
            53,250
            
            
            (53,248
            )
            
            
            
            
            —Convertible
                preferred stock issuance costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (43,972
            )
            
            
            
            
            (43,972
            )Preferred
                stock dividends
            
            
            
            
            
            
            
            
            587,689
            
            
            5,877
            
            
            629,351
            
            
            (550,034
            )
            
            85,194Common
                stock issued for services rendered
            
            
            
            
            
            
            
            
            284,807
            
            
            2,848
            
            
            327,604
            
            
            
            
            
            330,452Exercise
                of common stock options
            
            
            
            
            
            
            
            
            45,000
            
            
            450
            
            
            33,050
            
            
            
            
            
            33,500Exercise
                of common stock warrants for cash
            
            
            
            
            
            
            
            
            1,573,834
            
            
            15,739
            
            
            1,434,487
            
            
            
            
            
            1,450,226Exercise
                of common stock warrants (cashless)
            
            
            
            
            
            
            
            
            349,833
            
            
            3,498
            
            
            (3,498
            )
            
            
            
            
            —Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,942,906
            )
            
            (7,942,906
            )**BALANCES,
                June 30, 2005**
            
            
            125
            
            $
            1
            
            $
            32,849,070
            
            $
            328,491
            
            $
            40,056,336
            
            $
            (41,742,872
            )
            $
            (1,358,044
            )Convertible
                preferred stock and common stock warrants issued for cash
            
            
            376
            
            
            4
            
            
            
            
            
            
            
            
            9,399,996
            
            
            
            
            
            9,400,000Convertible
                preferred stock issuance costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,191,846
            )
            
            
            
            
            (1,191,846
            )Accretion
                of beneficial conversion option for convertible preferred
                stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,696,240
            
            
            (4,696,240
            )Convert
                preferred stock into common stock
            
            
            (28
            )
            
            —
            
            
            700,000
            
            
            7,000
            
            
            (7,000
            )Preferred
                stock dividends
            
            
            
            
            
            
            
            
            1,983,433
            
            
            19,834
            
            
            902,174
            
            
            (1,067,029
            )
            
            (145,021
            )Common
                stock issued for services rendered
            
            
            
            
            
            
            
            
            470,674
            
            
            4,707
            
            
            369,068
            
            
            
            
            
            373,775Common
                stock warrants issued for services rendered
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            542,862
            
            
            (195,794
            )
            
            347,068Exercise
                of common stock warrants for cash
            
            
            
            
            
            
            
            
            450,000
            
            
            4,500
            
            
            235,500
            
            
            
            
            
            240,000Exercise
                of common stock warrants (cashless)
            
            
            
            
            
            
            
            
            261,904
            
            
            2,619
            
            
            (2,619
            )Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,632,694
            )
            
            (6,632,694
            )**BALANCES,
                June 30, 2006**
            
            
            473
            
            $
            5
            
            $
            36,715,081
            
            $
            367,151
            
            $
            55,000,711
            
            $
            (54,334,629
            )
            $
            1,033,238


See
        accompanying notes to consolidated financial statements.


F-4
 **Back
          to Table of Contents**


**VISEON,
        INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Years
      Ended June 30, 2006 and 200 5


2006
            
            2005**Cash
                flows from operating activities:**Net
                loss
            
            $
            (6,632,694
            )
            $
            (7,942,906
            )Adjustments
                to reconcile net loss to netcash
                flows from operating activities:Depreciation
                and amortization
            
            
            378,056
            
            
            41,136Amortization
                of original issue discount
            
            
            117,500
            
            
            —Compensation
                related to stock options
            
            
            —
            
            
            —Compensation
                related to common stock warrants
            
            
            —
            
            
            —Common
                stock issued for services rendered
            
            
            38,122
            
            
            330,450Common
                stock warrants issued for services rendered
            
            
            155,361
            
            
            —Loss
                on retirement of equipment
            
            
            —
            
            
            —Gain
                from discontinued operations
            
            
            (108,640
            )
            
            (6,107
            )Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            16,541
            
            
            26,848Inventories,
                net
            
            
            3,758
            
            
            10,842Prepaid
                expenses
            
            
            291,754
            
            
            90,498Accounts
                payable
            
            
            (783,458
            )
            
            816,368Accrued
                expenses
            
            
            (68,133
            )
            
            181,596Net
                cash flows used in operating activities
            
            
            (6,591,833
            )
            
            (6,451,275
            )**Cash
                flows from investing activities:**Purchases
                of property and equipment
            
            
            (139,915
            )
            
            (5,401
            )Payments
                for intangible assets
            
            
            (68,120
            )
            
            (82,705
            )Net
                cash flows from investing activities
            
            
            (208,035
            )
            
            (88,106
            )**Cash
                flows from financing activities:**Payments
                on short-term notes payable
            
            
            (250,000
            )
            
            —Proceeds
                from short-term notes payable and warrants issued with note
                payable
            
            
            250,000
            
            
            —Proceeds
                from exercise of common stock options
            
            
            —
            
            
            33,500Proceeds
                from exercise of common stock warrants
            
            
            —
            
            
            1,450,226Proceeds
                from sales of common stock warrants
            
            
            240,000
            
            
            —Proceeds
                from issuance of convertible preferred stock and warrants
            
            
            9,400,000
            
            
            —Payments
                of convertible preferred stock and warrants issuance costs
            
            
            (1,191,846
            )
            
            (26,863
            )Dividends
                on convertible preferred stock
            
            
            (84
            )
            
            (3,492
            )Net
                cash flows from financing activities
            
            
            8,448,070
            
            
            1,453,371Change
                in cash and cash equivalents from discontinued operations
            
            
            —
            
            
            (14,000
            )**Increase
                in cash and cash equivalents**
            
            
            1,648,202
            
            
            (5,100,010
            )Cash
                and cash equivalents, beginning of year
            
            
            239,383
            
            
            5,339,393Cash
                and cash equivalents, end of year
            
            $
            1,887,581
            
            $
            239,383


See
      accompanying notes to consolidated financial statements.


F-5
 **Back
          to Table of Contents**


**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


**NOTE
      1 - Description of Business**




Viseon,
      Inc. (the “Company”), a Nevada corporation, was incorporated on
      December 21, 1993 and historically had been a developer of its own group
      videoconferencing systems sold primarily to corporate end users and OEM
      customers. On July 25, 1995, it completed its initial public offering of
      its common stock, par value $0.01 per share (the “Common Stock”).




In
      January 2003, the Company changed its focus from being a group
      videoconferencing systems manufacturer and reseller to a desktop and consumer
      broadband communications systems developer and reseller. The only measurable
      revenues that the Company is currently realizing are as a result of sales of
      the
      VisiFone TM ,
      the
      Company’s personal videophone which operates on broadband networks. Therefore,
      the Company has classified the net assets and operations related to the group
      videoconferencing business as discontinued operations in the accompanying
      consolidated financial statements.




The
      VisiFone products are low-cost broadband communication devices, which can be
      used by both consumers and businesses for audio and audio/ video calling over
      high speed internet connections. The VisiFone is a self-contained system that
      does not require a PC or any external equipment for its operation. It will
      utilize virtually any broadband connection and home or office network including
      high-speed Internet connections via DSL or cable modem.




The
      first
      generation of VisiFone was available to customers, primarily for testing, from
      2003 through early 2005. It was available as an ITU Standard, H.323 compliant
      system which was compatible with most corporate video conferencing
      systems.




The
      second generation of VisiFone has been developed by the Company based on input
      from various broadband carriers and VoIP marketers. It is available as a
      Session-Initiation-Protocol (SIP) compliant device, and is compatible with
      most of the Voice over Internet Protocol (VoIP) telephony networks. Lab
      shipments to prospective customers began during the second quarter of fiscal
      2006. This generation VisiFone can be used in corporate, government and
      educational applications and is priced such that it also has significant
      potential to be sold to residential consumers who have subscribed to broadband
      Internet access via cable modem or DSL.


**NOTE
      2 - Summary of Significant Accounting Policies**





*Liquidity
      and Going Concern Considerations*





The
      accompanying financial statements are prepared assuming the Company will
      continue as a going concern. During the years ended June 30, 2006 and 2005,
      the
      Company incurred operating losses of $6,726,355 and $7,995,090, respectively.
      During the years ended June 30, 2006 and 2005, the Company used $6,591,833
      and
      $6,451,275 in operating activities, respectively. As of June 30, 2006, the
      Company had an accumulated deficit of $54,334,630 and total shareholders’ equity
      of $1,033,238.





The
      Company plans to try to increase sales, improve operations and generate cash
      through 1) continued initiatives with IP/PBX manufacturers, consumer electronics
      manufacturers and other potential licensees of the product, 2) continued
      initiatives to gain acceptance of its product by broadband carriers for sale
      to
      their subscribers, 3) continued measures to minimize overhead, and 4)
      initiatives to monetize intellectual property rights. The Company believes
      that
      current cash funds and funds generated from operations will be sufficient to
      cover cash needs into the third quarter of fiscal 2007, although there can
      be no
      assurance in this regard. In the event sales or license revenues do not
      materialize at the expected rates or the Company does not achieve planned gross
      margins, management would seek additional financing or would conserve cash
      by
      further reducing expenses. There can be no assurance that the Company will
      be
      successful in achieving these objectives or becoming profitable. The
      Company’s ability to continue as a going concern is dependent on it achieving
      profitability and generating cash flow to fund operations.


F-6
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


*Principles
      of Consolidation*





The
      consolidated financial statements include the accounts of Viseon, Inc. and
      its
      wholly-owned subsidiaries. All significant intercompany transactions and
      balances have been eliminated in consolidation.





*Cash
      and Cash Equivalents*





The
      Company considers investments in highly liquid debt securities having an initial
      maturity of three months or less to be cash equivalents. The Company maintains
      its cash in high quality financial institutions. The balances may exceed
      federally insured limits.





*Accounts
      Receivable*





The
      Company reviews customers' credit history before extending unsecured credit
      and
      establishes an allowance for uncollectible accounts based upon factors
      surrounding the credit risk of specific customers and other information.
      Invoices are due 30 days after presentation. Accounts receivable over 30 days
      are considered past due. The Company does not accrue interest on past due
      accounts receivable. Receivables are written off only after all collection
      attempts have failed and are based on individual credit evaluation and specific
      circumstances of the customer. Accounts receivable are shown net of an allowance
      for uncollectible accounts of $0 at June 30, 2006 and 2005.





*Inventories*





Inventories
      at June 30, 2006 and 2005 were $0 and $3,758. At June 30, 2005, inventory
      consisted of finished goods consisting principally of videophones and related
      peripherals. Inventories are stated at the lower of cost (first-in, first-out
      method) or market.





*Property
      and Equipment*





Property
      and equipment are recorded at cost. Depreciation is provided for using the
      straight-line method over their estimated useful lives, which range from two
      to
      three years. Leasehold improvements are amortized over the shorter of their
      estimated useful life or the term of the lease. Maintenance, repairs and minor
      renewals are expensed when incurred.





*Revenue
      Recognition*




The
      Company records sales revenue at the time merchandise is shipped. In November
      1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, “Revenue
      Recognition.” SAB No. 101, as amended, sets forth the SEC staff’s position
      regarding the point at which it is appropriate for a registrant to recognize
      revenue. The staff believes that revenue is realizable and earned when all
      of
      the following criteria are met: persuasive evidence of an arrangement exists,
      delivery has occurred or service has been rendered, the seller’s price to the
      buyer is fixed or determinable and collectibility is reasonably
      assured.




The
      Company believes it meets all of the requirements for revenue recognition under
      SFAS 48 and SAB 101. The Company recognizes revenue on shipment and
      records a reserve for potential returns based upon historical experience
      rates.




The
      Company offers an unconditional 30-day right of return on the sale of its
      VisiFone products. The Company recognizes revenue on shipment and records a
      reserve for potential returns. The Company’s warranty policy during the first
      year after the sale includes an obligation to replace during the first
      30 days and to repair during the next 11 months. The Company has a
      one-year warranty with the manufacturer, so there is little, if any, cost to
      the
      Company for warranty claims. No warranty reserve has been recorded to date,
      although the Company will record a reserve if warranty activity increases and
      there are unrecoverable costs to the Company.




In
      May
      2003, the Company entered into an agreement with a supplier pursuant to which
      the earlier-generation VisiFone was manufactured under private label for the
      Company. In most instances, the Company assumed the risks and rewards of
      ownership of the inventory purchased from the supplier and, accordingly,
      recorded revenue on a gross basis. In some cases, the Company did not purchase
      the inventory from the supplier and did not assume the


F-7
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


risks
      and
      rewards of ownership and recorded revenue on a net basis. Substantially all
      revenues in fiscal 2005 were from sales of the VisiFone purchased from this
      supplier.




*Shipping
      and Handling Costs*





In
      accordance with Emerging Issues Task Force (EITF) Issue 00-10, "Accounting
      for
      Shipping and Handling Fees and Costs," the Company is including shipping and
      handling revenues in sales and shipping and handling costs in cost of goods
      sold.





*Research
      and Development Costs*





Research
      and development costs are charged to operations when incurred.





*Advertising
      Costs*





All
      costs
      related to advertising the Company's products are expensed in the period
      incurred. Advertising expense for the years ended June 30, 2006 and 2005 was
      $92,181 and $183,205.




*Impairment
      of Intangible and Long-Lived Assets*




Since
      goodwill and other intangible assets with indefinite lives are no longer
      required to be amortized under SFAS No. 142, *“Goodwill
      and Other Intangible Assets,”* the
      Company reviews its goodwill and these intangible assets for possible impairment
      on an annual basis, or whenever specific events warrant. Events that may create
      an impairment review include, but are not limited to: significant and sustained
      decline in the Company’s stock price or market capitalization, significant
      underperformance of operating units and significant changes in market conditions
      and trends. Viseon uses a two-step process and a discounted cash flow model
      to
      evaluate its assets for impairment. If the carrying amount of the goodwill
      or
      asset exceeds its implied fair value, an impairment loss is recognized in an
      amount equal to the excess during that fiscal period. Intangible assets that
      are
      not deemed to have indefinite lives will continue to be amortized over their
      useful lives and are tested for impairment in accordance with SFAS No. 144, *“Accounting
      for the Impairment or Disposal of Long-Lived Assets.”*




In
      accordance with SFAS No. 144, Viseon reviews and evaluates its intangible
      and long-lived assets for impairment whenever events or changes in circumstances
      indicate that their net book value may not be recoverable. When such factors
      and
      circumstances exist, including those noted above, the Company compares the
      assets’ carrying amounts against the estimated undiscounted cash flows to be
      generated by those assets over their estimated useful lives. If the carrying
      amounts are greater than the fair value of those assets, the excess is recorded
      as an impairment in that fiscal period.




*Net
      Loss Per Share*





Basic
      and
      diluted loss per share is computed by dividing net loss attributable to common
      stockholders by the weighted average number of common shares outstanding during
      each period. Dilutive common equivalent shares have not been included in the
      computation of diluted loss per share because their inclusion would be
      antidilutive. Antidilutive common equivalent shares issuable based on future
      exercise of stock options or warrants could potentially dilute basic and diluted
      loss per share in subsequent years. All outstanding options and warrants
      totaling 34,673,988 and 18,913,022 at June 30, 2006 and 2005 respectively,
      were
      antidilutive.





In
      calculating the loss per share from continuing operations and the net loss
      per share attributable to common stockholders for fiscal years 2005 and 2006,
      i ncome
      available to common stockholders is computed by deducting the dividends declared
      in the respective years on the Series A and Series B Convertible Preferred
      Stock
      (including the accretion of the beneficial conversion option from the Series
      B
      Convertible Preferred Stock in 2006 totaling $4,696,240) from
      income from continuing operations and
      also
      from net income.





*Stock-Based
      Compensation*





In
      accordance with Accounting Principles Board (APB) Opinion No. 25 and related
      interpretations, the Company uses the intrinsic value-based method for measuring
      stock-based compensation cost which measures compensation cost as the excess,
      if
      any, of quoted market price of the Company's common stock at the grant date
      over
      the amount the


F-8
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


employees
      must pay for the stock. The Company's general policy is to grant stock options
      at fair value at the date of grant. Options and warrants issued to non-employees
      are recorded at fair value, as required by Statement of Financial Accounting
      Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", using
      the
      Black Scholes pricing method.





The
      Company has adopted the disclosure only provisions of Statement of Financial
      Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation.”
Had compensation cost been recognized based on the fair values of options at
      the
      grant dates consistent with the provisions of SFAS No. 123, the Company's net
      loss and basic diluted net loss per common share would have been changed to
      the
      following pro forma amounts:





2006
            
            2005Loss
                attributable to common stockholdersAs
                reported
            
            $
            (12,395,958
            )
            $
            (8,492,940
            )Pro
                forma
            
            $
            (13,424,160
            )
            $
            (8,937,689
            )Basic
                and diluted loss per share:As
                reported
            
            $
            (0.35
            )
            $
            (0.29
            )Pro
                forma
            
            $
            (0.38
            )
            $
            (0.31
            )Stock
                based compensation:As
                reported
            
            $
            —
            
            $
            —Pro
                forma
            
            $
            1,028,202
            
            $
            444,749





The
      fair
      value of each option grant is estimated on the date of the grant using the
      Black-Scholes option pricing model with the following weighted average
      assumptions used for grants in 2006 and 2005 : risk-free interest rates of 4.5% and 4.1%, expected option lives of 10 years
      and
      10 years, expected volatility of 117.95% and 42.17% and expected dividend yield
      of 0% and 0%.





*Use
      of Estimates*





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, disclosure of contingent assets and liabilities at the date of
      financial statements and the reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from these
      estimates.





*Fair
      Value of Financial Instruments*





The
      carrying amount for all financial instruments approximates fair value. The
      carrying amount of cash and cash equivalents, accounts receivable, accounts
      payable and accrued expenses approximates fair value because of the short
      maturity of these instruments.





*Segment
      Reporting*





The
      Company was an international seller of videoconferencing systems in the United
      States and the United Kingdom/Europe. The Company discontinued selling in the
      United Kingdom/Europe in August 2002. Management believes the Company meets
      the
      criteria for aggregating its operating segments into a single reporting
      segment.





*Recent
      Accounting Pronouncements*




In
      November 2004, FASB issued SFAS No. 151 “Inventory Costs” amends the guidance in
      ARB No. 43, Chapter 4 “Inventory Pricing,” to clarify the accounting for
      abnormal amounts of idle facility expense, freight, handling costs, and wasted
      material (spoilage). Paragraph
      5 pf ARB 43, Chapter 4, previously
      stated that under some circumstances, items such as idle facility expense,
      excessive spoilage, double freight, and rehandling costs may be so abnormal
      as
      to require treatment as current period charges.” SFAS No. 151 requires that
      those items be recognized as current-period charges regardless of whether they
      meet the criterion of “so abnormal.” In addition, SFAS No, 151 requires that
      allocation of fixed production overheads to the costs of conversion be based
      on
      the normal capacity of the production facilities. SFAS No. 151 shall be
      effective for inventory costs incurred during fiscal years beginning
      after


F-9
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


June
      15,
      2005. SFAS No. 151 shall be applied prospectively. Adoption of SFAS No. 151
      did
      not have a material effect on the Company’s financial statements.




In
      December 2004, FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets” amends
      APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” APB No. 29 is
      based on the principle that exchanges of nonmonetary assets should be measured
      based on the fair value of the assets exchanged. The guidance in that Opinion,
      however, included certain exceptions to that principle. SFAS No. 153 amends
      APB No. 29 to
      eliminate the exception for nonmonetary exchanges of similar productive assets
      and replaces it with a general exception for exchanges of nonmonetary assets
      that do not have commercial substance. A nonmonetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. SFAS No. 153 shall be effective
      for
      nonmonetary asset exchanges occurring in fiscal periods beginning after June
      15,
      2005. SFAS No. 153 shall be applied prospectively. Adoption of SFAS No. 153
      did
      not have a material effect on the Company’s financial statements.




In
      December 2004, the Financial Accounting Standard Board issued SFAS No. 123R
      “ *Share-Based
      Payment,”* which
      supersedes Accounting Principle Board (“APB”) Opinion No. 25, *“Accounting
      for Stock Issued to Employees,”* and SFAS
      No. 123, *“Accounting
      for Stock-Based Compensation.”* This
      pronouncement eliminates the ability to account for share-based compensation
      transactions using APB Opinion No. 25 and requires share-based compensation
      to
      employees, including employee stock options and similar awards, to be measured
      at their fair value on the awards’ grant date using either the Black-Scholes or
      a binomial option-pricing model. The value of the awards is recognized as
      compensation expense on the statement of operations over the vesting period
      of
      the awards. Viseon currently does not expense its share-based compensation
      based
      upon the fair value method, but discloses the effect of these items as required
      by SFAS No. 123 and SFAS No. 148 (see “Stock Based Compensation” above and Note
      10). Beginning with the quarterly period that begins after July 1, 2006, the
      Company will be required to expense the fair value of employee stock options
      and
      similar awards. The Company has elected to utilize the “modified prospective”
transitional method in accounting for share-based employee payment transactions.
      The “modified prospective” method requires compensation cost to be recognized
      beginning with the effective date 1) according to FAS 123R for all share-based
      payments granted after the effective date and 2) according to FAS123 for all
      awards granted to employees prior to the effective date of FAS 123R that were
      unvested on the effective date. Based on current stock options granted,
      management will continue using the Black-Scholes model to estimate the fair
      value of its options and anticipates it will incur compensation expense of
      approximately $165,000 during fiscal year 2007 upon adoption of this standard.




In
      June
      2005, the Financial Accounting Standards Board (FASB) issued Statement of
      Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error
      Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The
      statement applies to all voluntary changes in accounting principle, and changes
      the requirements for accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
      is
      impracticable. SFAS No. 154 is effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. Earlier
      application is permitted for accounting changes and corrections of errors made
      occurring in fiscal years beginning after June 1, 2005. The statement does
      not
      change the transition provisions of any existing accounting pronouncements,
      including those that are in a transition phase as of the effective date of
      this
      statement. The adoption of SFAS No. 154 has not had a material effect on the
      Company’s financial statements.







**NOTE
      3 - Prepaid Expenses**




Prepaid
      expenses consisted of the following at June 30:





Prepaid
                Expenses
            
            2006
            
            2005Prepaid
                Insurance
            
            $
            50,813
            
            $
            59,994Vendor
                Deposits
            
            
            —
            
            
            250,000Other
            
            
            36,724
            
            
            69,297Prepaid
                Expenses
            
            $
            87,537
            
            $
            379,291




F-10
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005
 
 **NOTE
      4 - Property and Equipment, Net**




Property
      and equipment consisted of the following at June 30:





Property
                and Equipment
            
            2006
            
            2005Furniture,
                equipment and software
            
            $
            188,642
            
            $
            48,727Less:
                accumulated depreciation and amortization
            
            
            (65,877
            )
            
            (22,299
            )Property
                and Equipment, net
            
            $
            122,765
            
            $
            26,428





Depreciation
      and amortization expense was $43,578 and $14,633 for the years ended June 30,
      2006 and 2005.







**NOTE
      5 - Intangible Assets/Asset Impairment**




Intangible
      assets consisted of the following at June 30:





2006
            
            2005Patents
            
            $
            410,424
            
            $
            342,304Less:
                accumulated amortization
            
            
            (410,424
            )
            
            (75,946
            )Intangible
                assets, net
            
            $
            0
            
            $
            266,358




During
      fiscal years 2005 and 2006, the Company faced declining revenues related to
      its
      first generation VisiFone and had yet to recognize any meaningful revenues
      from
      its second generation VisiFone. Additionally, management learned during fiscal
      2006 that while indicators of demand existed for the VisiFone, issues regarding
      the length of the sales cycle, integration with Carrier VoIP networks and price
      sensitivity were preventing the VisiFone from achieving the market acceptance
      and resulting revenue that management had originally anticipated. Historically,
      the Company had relied on forecasts of future cash flows to support the value
      of
      its patents. However, the Company has not been able to attain its forecasted
      amounts. Based
      upon these factors, the Company believes that the value of its patents is
      impaired.




Pursuant
      to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets,” Viseon evaluated the recoverability of its long-lived assets, including
      its patents. Based on the projected negative short term cash flows related
      to
      the VisiFone, Viseon elected to expense the remaining unamortized balance of
      its
      patents aggregating $303,834. The amortization expense, including the
      impairment loss of $334,478 for the year was recorded as part of continuing
      operations on the Consolidated Statement of Operations.


F-11
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


**NOTE
      6 - Accrued Expenses**




Accrued
      expenses consisted of the following at June 30:





2006
            
            2005Accrued
                preferred dividends
            
            $
            197,085
            
            $
            52,148Deferred
                revenue
            
            
            —
            
            
            —Accrued
                compensation and vacation
            
            
            55,706
            
            
            38,792Accrued
                late registration fee
            
            
            76,625
            
            
            101,625Accrued
                legal fees
            
            
            15,478
            
            
            87,768Other
                accrued liabilities
            
            
            68,196
            
            
            55,954Accrued
                Expenses
            
            $
            413,090
            
            $
            336,287





**NOTE
      7 - Debt**




On
      August
      9, 2005 the Company issued a Promissory Note in the amount of $250,000 to a
      lender. The Note carried interest at 8% per annum and was due at the earlier
      of
      the closing and funding of the Series B Convertible Preferred Stock offering
      or
      October 8, 2005. As additional consideration, the Company issued a five year
      warrant to the lender to purchase 250,000 shares of its Common Stock at a price
      of $1.26 per share. The loan was repaid upon the closing and funding of the
      Series B Convertible Preferred Stock offering and the entire amount of the
      original issue discount was charged to interest expense as a
      result.







**NOTE
      8 - Commitments and Contingencies**





*Operating
      Leases*





The
      Company leases office space under a noncancelable operating lease with an
      original term of two years expiring in July, 2008.





Future
      minimum rental payments due under the noncancelable operating lease is as
      follows for the fiscal years ending June 30:


2007
            
            $
            58,1992008
            
            
            60,3602009
            
            
            5,045Total
            
            $
            123,604




Total
      rent expense was $36,077 and $101,484 for the years ended June 30, 2006 and
      2005.




*Manufacturing
      Agreement*





On
      August
      28, 1996, the Company entered into a manufacturing agreement with a third party
      custom manufacturer (Manufacturer). Pursuant to this agreement, the Manufacturer
      agreed to produce the Company's group videoconferencing products and warranted
      that all products would be free from defects in material and workmanship


F-12
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


for
      twelve months from the date the Company ships to the customer or fifteen months
      from the date the Manufacturer ships to the Company, whichever comes
      first.





As
      of
      June 30, 2003, both parties agreed that the Company would no longer place orders
      for the group videoconferencing product line from the Manufacturer. The
      agreement has been terminated. On
      September 30, 2005, the Company entered into a settlement agreement with the
      Manufacturer in order to settle the dispute regarding amounts alleged to be
      owed
      to the Manufacturer by the Company. The terms of the settlement included the
      Company’s agreement to issue 350,000 shares of common stock and a four year
      warrant to purchase 600,000 shares at $1.26 per share to the order of the
      Manufacturer in full and final settlement of the disputed debt. As a result
      of
      the settlement, the Company recognized a gain from discontinued operations
      of
      $108,640.





*Distributor
      and Dealer Agreements*




In
      May
      2003, the Company entered into an agreement with a supplier pursuant to which
      the supplier manufactured and private labeled the earlier-generation VisiFone
      for the Company. In most instances, the Company assumed the risks and rewards
      of
      ownership of the inventory purchased from the supplier and, accordingly,
      recorded revenue on a gross basis. Substantially all revenues in fiscal 2005
      were from sales of the VisiFone purchased from this supplier.





*Major
      Customers and Concentration of Credit Risk*





Sales
      to
      one customer represented 100% of net sales for the year ended June 30, 2006
      with
      no accounts receivable from this customer at June 30, 2006. Sales to one
      customer represented approximately 65% of net sales and sales to a different
      customer represented approximated 27% of net sales for the year ended June
      30,
      2005 with no accounts receivable from either customer at June 30, 2005.





*Legal
      Proceedings*




The
      Company is involved in legal actions in the ordinary course of its
      business.







**NOTE
      9 - Income Taxes**




The
      Company utilizes the liability method of accounting for income taxes. Deferred
      tax assets and liabilities are recognized for the expected future tax
      consequences attributable to temporary differences between the financial
      statement and income tax reporting bases of assets and liabilities. The Company
      has incurred cumulative net operating losses for both financial statement and
      income tax reporting purposes. At June 30, 2006, the Company had Federal and
      State net operating loss carryforwards of approximately $45,200,000 and research
      and development credit carryforwards of approximately $345,400. If not used,
      these carryforwards will begin to expire in 2010. During 1996, a change in
      ownership occurred pursuant to Section 382 of the Internal Revenue Code that
      limits the use of loss carryforwards in any one year. Subsequent ownership
      changes may further limit the use of these net operating loss carryforwards.





2006
            
            2005Deferred
                income tax assets:Net
                operating loss carryforwards
            
            $
            17,971,700
            
            $
            15,230,900Asset
                valuation reserves and other
            
            
            102,300
            
            
            304,900Research
                and development credit carryforwards
            
            
            345,400
            
            
            291,90018,419,400
            
            
            15,827,700Less:
                valuation allowance
            
            
            (18,419,400
            )
            
            (15,827,700
            )Deferred
                income tax liabilities:Depreciation
                and amortization
            
            
            —
            
            
            —Net
                deferred income tax assets
            
            $
            —
            
            $
            —




F-13
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


The
      Company has recorded a full valuation allowance against its deferred tax asset
      due to the uncertainty of realizing the related benefits. The change in the
      valuation allowance was $2,538,100 and $4,172,800 for the years ended June
      30,
      2006 and 2005.





Income
      tax computed at the U.S. federal statutory rate reconciled to the effective
      tax
      rate is as follows for the years ended June 30:





2006
            
            2005Federal
                statutory tax rate benefits
            
            
            (35.0)
            %
            
            (35.0)
            %State
                tax, net of federal benefit
            
            
            (5.0)
            %
            
            (5.0)
            %Change
                in valuation allowance
            
            
            40.0
            %
            
            40.0
            %Effective
                tax rate
            
            
            —
            %
            
            —
            %





**NOTE
      10 - Stockholders' Equity (Deficit)**





*Series
      A Convertible Preferred Stock with Warrants*




In
      March
      and April 2004, the Company sold, in private placement transactions, a total
      of
      338 shares of Series A Convertible Preferred Stock in prepackaged units which
      included one Series A-1 Warrant and one Series A-2 Warrant for each share of
      Series A Convertible Preferred Stock (collectively referred to as the
      "Securities"). The private placement of the Securities resulted in gross
      proceeds to the Company of $8,450,000, prior to offering expenses. In total,
      holders of the 338 shares of Series A Convertible Preferred Stock may acquire
      16,900,000 shares of the Company’s common stock (8,450,000 shares of common
      stock upon conversion and 8,450,000 shares upon exercise of warrants). The
      Company's placement agent received an aggregate placement fee of $845,000 and
      warrants to purchase 1,267,500 shares of common stock.





Each
      share of Series A Convertible Preferred Stock is convertible, at the initial
      conversion price of $1.00, into 25,000 shares of common stock, subject to
      adjustment under certain conditions. Holders of the Series A Convertible
      Preferred Stock are entitled to dividends at the rate of 10% per annum payable
      quarterly in either cash or, at the option of the Company, registered shares
      of
      common stock valued at fair market value. Shares of Series A Convertible
      Preferred Stock are convertible into shares of common stock at the holders'
      option at any time and will automatically convert to shares of common stock
      if
      certain trading volume and closing price targets on the Company's common stock
      are met at various intervals. In addition, shares of the Series A Convertible
      Preferred Stock participate on an as-if converted basis in any dividends paid
      on
      Common Stock. Holders of shares of Series A Convertible Preferred Stock are
      entitled to voting rights together with the Common Stock, on an as-if converted
      basis.





The
      conversion price of the Series A Convertible Preferred Stock is subject to
      appropriate adjustment in the event of stock splits, stock dividends, reverse
      stock splits, capital reorganizations, recapitalizations, reclassifications,
      and similar
      occurrences as well as the issuance of common stock in consideration of an
      amount less than the then-effective conversion price.





The
      holder of each Series A-1 Warrant is entitled to purchase 12,500 shares of
      common stock at an exercise price of $1.08 per share for a term of five years
      from the date of issuance. The holder of each Series A-2 Warrant is entitled
      to
      purchase 12,500 shares of Common Stock at an exercise price of $1.26 per share
      for a term of five years from the date of issuance. The exercise price of the
      Series A-1 and Series A-2 Warrants is subject to adjustment for the issuance
      of
      common stock in consideration of an amount less than the then effective exercise
      price.





The
      shares of common stock underlying the Securities are currently subject to an
      effective registration statement under Form SB-2 under the Securities Act of
      1933, as amended. The Company has agreed to cause this registration statement
      to
      continuously remain effective until all such common stock may be sold without
      regard to an effective registration statement. Failure to maintain a
      continuously effective registration statement will subject the Company to
      liability to certain holders of shares of Series A Convertible Preferred Stock
      in the form of liquidated damages totaling as high as $253,500 per
      month.





In
      addition to a placement fee paid in cash, the Company's placement agent received
      warrants to purchase a total of 1,267,500 shares of common stock at a purchase
      price of $1.00 per share for a term of five years from the date of issuance
      (the "Series A-1-AGENT Warrants"). The exercise price of the Series A-1-AGENT
      Warrants is subject to adjustment for the issuance of common stock in
      consideration of an amount less than the then effective exercise
      price.


F-14
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


*Series
      B Convertible Preferred Stock with Warrants*





In
      August, 2005, the Company completed the private placement of an aggregate 376
      shares of Series B Convertible Preferred Stock, $0.01 par value
      (“Series B Preferred”), and five year common stock purchase warrants
      (“Series B Warrants”) exercisable for an aggregate 9,400,000 shares of
      Common Stock. The sale of the preferred stock units was made pursuant to a
      series of Securities Purchase Agreements that were entered into between the
      Company and certain accredited investors on or about August 22, 2005. The
      Company issued 376 units in the offering at a purchase price equal to $25,000
      per unit, resulting in gross proceeds of $9,400,000 prior to offering expenses.





Each
      share of Series B Preferred is convertible, at the initial conversion price
      of
      $1.00, into 25,000 shares of Common Stock, subject to adjustment under certain
      conditions. Holders of the Series B Preferred are entitled to dividends at
      the
      rate of 10% per annum payable quarterly in either cash or, at the Company’s
      option, registered shares of Common Stock valued at fair market value. Shares
      of
      Series B Preferred Stock are convertible into shares of Common Stock at the
      holders' option at any time and will automatically convert to shares of Common
      Stock if certain trading volume and a closing price target on the Company’s
      Common Stock are met after February 16, 2006. In addition, shares of the Series
      B Preferred participate on an as-if converted basis in any dividends paid on
      Common Stock. Holders of shares of Series B Preferred are entitled to voting
      rights together with the Common Stock, on an as-if converted basis.





The
      conversion price of the Series B Preferred is subject to appropriate adjustment
      in the event of stock splits, stock dividends, reverse stock splits, capital
      reorganizations, recapitalizations, reclassifications, and similar occurrences
      as well as the issuance of Common Stock in consideration of an amount less
      than
      the then-effective conversion price.





The
      holder of each Series B Warrant is entitled to purchase 25,000 shares of Common
      Stock at an exercise price of $1.15 per share for a term of five years from
      the
      date of issuance. The exercise price of the Series B Warrants is subject to
      adjustment for the issuance of Common Stock in consideration of an amount less
      than the then effective exercise price.





The
      shares of Common Stock underlying the Series B Preferred and related warrants
      are currently subject to an effective registration statement on Form SB-2 under
      the Securities Act of 1933, as amended. The Company has agreed to cause this
      registration statement to continuously remain effective until the earlier of
      (i) the sale pursuant to a registration statement of all of the Common
      Stock receivable as dividends or upon conversion or exercise of all of the
      Series B Preferred and the Series B Warrants, or
      (ii) August 21, 2012. If the Company fails to maintain a continuously
      effective registration statement, the Company will be subject to liability
      to
      certain holders of shares of Series B Preferred in the form of liquidated
      damages totaling as high as $282,000 per month. Liquidated
      damages are payable only to the then current holders of issued and outstanding
      shares of Series B Preferred (or Common Stock received by such holders upon
      the
      conversion of such Series B Preferred) at the time of the occurrence giving
      rise
      to the Company’s obligation to pay such liquidated damages and shall be payable
      thereon until such time as, with respect to any such share, the Company is
      not
      required to (i) file a registration statement or (ii) cause an effective
      registration statement to remain continuously effective.





In
      connection with the offering, the Company issued its placement agent a warrant
      to purchase 282,000 shares of Common Stock at an exercise price of $1.15 per
      share with a term of five years from the date of issuance (the "Series B-AGENT
      Warrants") and paid it a placement fee equal to $658,000, plus the reimbursement
      of certain expenses. The exercise price of the Series B-AGENT Warrants is
      subject to adjustment for the issuance of Common Stock in consideration of
      an
      amount less than the then effective exercise price.





The
      Series B Warrants and Series B-Agent Warrants each contain provisions allowing
      the Company to repurchase the warrants from the holders upon 15 days notice
      at
      $0.10 per warrant share if certain trading volume and closing price targets
      on
      its Common Stock are met. The closing price targets are $3.00 per share and
      the
      trading volume target is an average of 100,000 shares per day over a consecutive
      20-day period during which the applicable closing price target has been met
      or
      exceeded.





*Consultant
      Compensation Plan*





During
      fiscal 2003, the Board of Directors reserved 5,000,000 shares of common stock
      for a consultant compensation plan. Consultants may be issued or sold shares
      of
      common stock for services.





During
      fiscal 2006 and 2005, the Company issued 120,674 and 284,807 shares of common
      stock for consulting services. At June 30, 2006, there were 2,075,764 shares
      available for issuance.


F-15
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


*Stock
      Warrants*




As
      of
      June 30, 2006, warrants to purchase a total of 27,301,266 shares of common
      stock
      were outstanding at exercise prices ranging from $0.25 to $1.65 per share and
      expiring through June 2014.





WeightedAverageExercisePrice
                perWarrants
            
            ShareOutstanding
                at June 30, 2004
            
            
            19,295,159
            
            $
            0.86Granted
            
            
            —
            
            
            —Exercised
            
            
            (2,109,054
            )
            
            0.30Canceled
            
            
            (333,333
            )
            
            0.60Outstanding
                at June 30, 2005
            
            
            16,852,772
            
            
            0.88Granted
            
            
            11,326,827
            
            
            1.16Exercised
            
            
            (783,333
            )
            
            0.43Canceled
            
            
            (95,000
            )
            
            0.70Outstanding
                at June 30, 2006
            
            
            27,301,266
            
            $
            1.00





*Stock
      Options*





The
      Company has a 1994 Stock Plan which permits the granting of stock options,
      including incentive stock options as defined under Section 422 of the Internal
      Revenue Code of 1986, nonqualified stock options and restricted stock. The
      exercise price for options granted under the stock plan shall be at a price
      determined at the sole discretion of the compensation committee of the Company's
      board of directors provided, however, that incentive stock options granted
      under
      the plan shall be granted at exercise prices equal to the fair market value
      on
      the date of grant (110% for a stockholder holding 10% or more of the outstanding
      shares of common stock). The Company has reserved 2,500,000 shares of common
      stock for issuance under this plan.




On
      March
      24, 2005, the Company adopted the Viseon, Inc. 2005 Stock Plan (the “Incentive
      Plan”), subject to the approval of the stockholders of the Company. The
      Incentive Plan is an unfunded plan which provides for the granting of incentive
      stock options, non-qualified stock options, restricted shares of Common Stock,
      stock appreciation rights, and other forms of incentive compensation
      (collectively, “Awards”) to officers, directors and employees of the Company, as
      well as to consultants that perform services for the Company. The Company has
      reserved 5,000,000 shares of common stock for issuance under the plan.




At
      June
      30, 2006, 60,000 shares remained available for grant under 1994 Stock Plan,
      and
      253,278 shares remained available for grant under 2005 Stock Plan. Options
      issued become exercisable over varying periods as provided in the individual
      plan agreements and have a term of five or ten years.


F-16
 **Back
          to Table of Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


A
      summary
      of changes in common stock options during the years ended June 30, 2006 and
      2005
      is as follows:





WeightedAverageExercisePrice
                perOptions
            
            ShareOutstanding
                at June 30, 2004
            
            
            1,184,250
            
            $
            1.23Granted
            
            
            730,000
            
            
            1.18Exercised
            
            
            (45,000
            )
            
            0.74Canceled
                or Expired
            
            
            (40,000
            )
            
            6.25Outstanding
                at June 30, 2005
            
            
            1,829,250
            
            
            1.12Granted
            
            
            8,512,472
            
            
            0.58Exercised
            
            
            —
            
            
            —Canceled
                or Expired
            
            
            (3,200,000
            )
            
            1.00Outstanding
                at June 30, 2006
            
            
            7,141,722
            
            $
            0.53Exercisable
                at June 30, 2006
            
            
            4,188,160
            
            $
            0.80Exercisable
                at June 30, 2005
            
            
            1,462,583
            
            $
            1.12




As
      of
      June 30, 2006, the Company has granted 231,000 options outside the Plans with
      a
      weighted average exercise price of $2.81 and a weighted average remaining
      contractual life of 1.0 years. During fiscal year 2005, 110,000 options with
      a
      weighted average exercise price of $8.00 per share expired and no options
      outside the Plans were exercised. No options were issued outside the Plans
      in
      fiscal 2006 or 2005.





The
      following table summarizes information about stock options outstanding as of
      June 30, 2006, including those issued outside the Plans:





Options
                Outstanding
            
            Options
                ExercisableWeighted-Average
            
            Weighted-
            
            
            
            Weighted-Range
                of
            
            
            
            Remaining
            
            Average
            
            
            
            AverageExercise
            
            Number
            
            Contractual
            
            Exercise
            
            Number
            
            ExercisePrices
            
            Outstanding
            
            Life
            
            Price
            
            Exercisable
            
            Price$0.22-0.52
            
            
            5,100,472
            
            
            9.94
            
            $
            0.32
            
            
            2,025,495
            
            $
            0.32$0.58-0.75
            
            
            645,000
            
            
            6.59
            
            
            0.66
            
            
            626,250
            
            
            0.66$1.00-1.50
            
            
            1,147,500
            
            
            7.48
            
            
            1.08
            
            
            1,056,665
            
            
            1.08$1.62-2.19
            
            
            220,000
            
            
            6.45
            
            
            1.83
            
            
            220,000
            
            
            1.83$2.81-3.00
            
            
            259,750
            
            
            1.11
            
            
            2.83
            
            
            259,750
            
            
            2.83$0.22-3.00
            
            
            7,372,722
            
            
            8.85
            
            $
            0.60
            
            
            4,188,160
            
            $
            0.80





The
      weighted average fair values of options granted in 2006 and 2005 were as
      follows:





Fiscal
                2006 grants
            
            $
            0.34Fiscal
                2005 grants
            
            $
            0.80




F-17
 **Back
          to Table of Contents**




**VISEON,
      INC. AND SUBSIDIARIES**




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


June
      30,
      2006 and 2005





**NOTE
      11 - Retirement Savings Plan**




The
      Company has a pre-tax salary reduction/profit-sharing plan under the provisions
      of section 401(K) of the Internal Revenue Code, which covers employees meeting
      certain eligibility requirements. Profit sharing contributions by the Company
      are completely discretionary. The Company made no contributions during the
      years
      ended June 30, 2006 and 2005.







**NOTE
      12 - Supplemental Disclosure of Cash Flow Information**





**Supplemental
                cash flow information:**
            
            2006
            
            2005Cash
                paid for interest, net of original issue discount
            
            $
            —
            
            $
            —Noncash
                investing and financing activities:Common
                stock issued for accounts payable
            
            $
            304,500
            
            
            —Accounts
                Payable converted to common stock warrants
            
            
            105,360
            
            
            —Accrued
                preferred stock dividends converted to common stock
            
            $
            791,415
            
            $
            409,187Common
                stock issued for preferred stock dividends
            
            $
            315,831
            
            $
            149,841Conversion
                of preferred stock to common stock
            
            $
            7,000
            
            $
            48,250Cashless
                exercise of warrants
            
            $
            2,619
            
            $
            3,498Accretion
                of Beneficial Conversion Option
            
            $
            4,696,240
            
            
            —





**NOTE
      13 - Discontinued Operations** 
  In
        January 2003, the Company decided to change its focus from being a group
        videoconferencing manufacturer and reseller to a desktop and consumer video
        communications manufacturer and reseller. This has been accomplished by the
        transfer to a third party of its group videoconferencing services contract
        portfolio and the liquidation of its remaining group videoconferencing assets.
        The only measurable revenues the Company is now receiving result from the
        sales
        of the VisiFone. Therefore, the Company has classified the net assets and
        operations related to the group videoconferencing business as discontinued
        operations in the accompanying consolidated financial statements.
  The
        only
        significant operating activities of the discontinued operations for the year
        ended June 30, 2005 was the settlement of certain liabilities in amounts
        less
        than the Company had accrued, resulting in a gain of $6,017. The settlement
        of
        certain liabilities resulted in a gain of $108,640 for the year ended June
        30,
        2006. The only significant assets and liabilities of the discontinued operations
        at June 30, 2006 and 2005 consisted of certain accounts payable in the
        amount of $204,976 and $743,582.
 F-18
 **Back
            to Table of
            Contents**




**VISEON,
        INC. AND SUBSIDIARIES**
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006 and 2005


**NOTE
      14 - Subsequent Events**




On
      August
      25, 2006, Viseon accepted the resignation of Sean Belanger from its Board of
      Directors and as the President and Chief Executive Officer of Viseon.




In
      connection with Mr. Belanger’s resignation, he and Viseon entered into the
      Separation Agreement, in order to provide for the termination of his employment
      agreement and his compensation under that agreement, which was made effective
      as
      of July 31, 2006, and to set forth the parties’ agreement with respect to the
      termination of his employment. The Separation Agreement includes a release
      by
      Mr. Belanger of claims that he may have against Viseon in connection with his
      employment and under the terms of his employment agreement. The parties also
      agreed in the Separation Agreement that Mr. Belanger would provide certain
      advisory and consulting services to Viseon for a period of up to one year after
      July 31, 2006, which is the effective date for the termination of his employment
      agreement. As consideration for Mr. Belanger’s release, consulting services and
      other commitments under the Separation Agreement, Viseon agreed to pay him
      $300,000 in twenty-four installments during the twelve month period beginning
      July 31, 2006, with the first four months of payments, in the amount of $100,000
      (less any salary paid to him in August 2006), being paid in a lump sum within
      two business days after the parties signed the Separation Agreement. In
      addition, Viseon caused the 2,861,472 options granted to Mr. Belanger in May
      2006, which have an exercise price of $0.32 per share, to be fully vested
      immediately. Per the terms of the underlying Stock Option Agreements, 2,500,722
      of the vested options must be exercised on or before the date which is 90 days
      following the termination date and the remaining 360,750 of the vested options
      must be exercised on or before the date which is three years following the
      termination date. Mr. Belanger’s options will continue to be subject to the
      remaining terms of the relevant option agreements and company stock option
      plans.


F-19
 **Back
          to Table of Contents**




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this annual report on Form 10-KSB to be
      signed on its behalf by the undersigned, thereunto duly authorized, in the
      City
      of Irving, State of Texas on September 28, 2006.




**VISEON,
              INC.**By:
            /s/ JOHN
              C.
              HARRISName:  
                John C. Harris
              Title:    
                Chief Executive Officer and President
              (Principal
                Executive Officer)




By:
            /s/ BRIAN
              R.
              DAYName:  
                Brian R. Day
              Title:    
                Chief Financial Officer
              (Principal Financial Officer and Principal Accounting
                Officer)




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this annual report
      on Form 10-KSB has been signed by the following persons in the capacities and
      on
      the dates indicated.




**Name**
            
            **Title**
            
            **Date**/s/
                JOHN C. HARRIS
            
            Director;
                Chief Executive Officer
                and President;
            
            September
                28, 2006John
                C. Harris
            
            (Principal
                Executive Officer)/s/
                BRIAN DAY
            
            Chief
                Financial Officer
            
            September
                28, 2006Brian
                Day
            
            (Principal
                Financial Officerand
                Principal Accounting Officer)/s/
                GEOFFREY GERARD
            
            Director
            
            September
                28, 2006Geoffrey
                Gerard/s/
                JOHN O’DONNELL
            
            Director
            
            September
                28, 2006John
                O’Donnell/s/
                CHARLES REY
            
            Director
            
            September
                28, 2006Charles
                Rey




-33-