----

----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-K**

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

**OR**

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

**000-17219**

**CLEARONE      COMMUNICATIONS, INC.**

| **Utah**                                                                                     |   | **87-0398877**                                                     |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|
| (State                or other jurisdiction of incorporation                or organization) |   | (I.R.S.                Employer Identification                No.) |

**1825      Research Way**

**Salt      Lake City, Utah 84119**

**(801)      975-7200**

**Securities      registered under Section 12(b) of the Act: None**

**Securities      registered under Section 12(g) of the Act: Common Stock, $0.001 par      value**

----

----

----

**APPLICABLE      ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY **

**PROCEEDINGS      DURING THE PRECEDING FIVE YEARS**

**(APPLICABLE      ONLY TO CORPORATE REGISTRANTS)**

**DOCUMENTS      INCORPORATED BY REFERENCE**

*e.g.*
*e.g.*

----

**INDEX**

|                                                                              |                                                                                                                                                             | **PAGE**  |
|-----------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| **DISCLOSURE                REGARDING FORWARD-LOOKING                STATEMENTS** | 4                                                                                                                                                                |
|                                                                              |                                                                                                                                                             |           |
| **PART                I.**                                                        |                                                                                                                                                             |           |
| ITEM                1.                                                            | BUSINESS                                                                                                                                                         | 4              |
| ITEM                1A.                                                           | RISK                FACTORS                                                                                                                                      | 16             |
| ITEM                1B.                                                           | UNRESOLVED                STAFF                COMMENTS                                                                                                          | 21             |
| ITEM                2.                                                            | PROPERTIES                                                                                                                                                       | 22             |
| ITEM                3.                                                            | LEGAL                PROCEEDINGS                                                                                                                                 | 23             |
| ITEM                4.                                                            | SUBMISSION                OF MATTERS TO A VOTE OF SECURITY                HOLDERS                                                                                | 24             |
|                                                                              |                                                                                                                                                             |           |
| **PART                II.**                                                       |                                                                                                                                                             |           |
| ITEM                5.                                                            | MARKET                FOR REGISTRANT’S COMMON EQUITY,                RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY                SECURITIES | 25        |
| ITEM                6.                                                            | SELECTED                FINANCIAL DATA                                                                                                                           | 26             |
| ITEM                7.                                                            | MANAGEMENT’S                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                AND RESULTS OF OPERATIONS                                        | 29             |
| ITEM                7A.                                                           | QUANTITATIVE                AND QUALITATIVE DISCLOSURES ABOUT                MARKET RISK                                                                         | 45             |
| ITEM                8.                                                            | FINANCIAL                STATEMENTS AND SUPPLEMENTAL                DATA                                                                                         | 47             |
| ITEM                9.                                                            | CHANGE                IN AND DISAGREEMENTS WITH ACCOUNTANTS                ON ACCOUNTING AND FINANCIAL DISCLOSURE                                                | 47             |
| ITEM                9A.                                                           | CONTROLS                AND PROCEDURES                                                                                                                           | 47             |
| ITEM                9B.                                                           | OTHER                INFORMATION                                                                                                                                 | 48             |
|                                                                              |                                                                                                                                                             |           |
| **PART                III.**                                                      |                                                                                                                                                             |           |
| ITEM                10.                                                           | DIRECTORS                AND EXECUTIVE OFFICERS OF THE                REGISTRANT                                                                                 | 49             |
| ITEM                11.                                                           | EXECUTIVE                COMPENSATION                                                                                                                            | 49             |
| ITEM                12.                                                           | SECURITY                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS                AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                                     | 49             |
| ITEM                13.                                                           | CERTAIN                RELATIONSHIPS AND RELATED                TRANSACTIONS                                                                                     | 49             |
| ITEM                14.                                                           | PRINCIPAL                ACCOUNTANT FEES AND                SERVICES                                                                                             | 49             |
|                                                                              |                                                                                                                                                             |           |
| **PART                IV.**                                                       |                                                                                                                                                             |           |
| ITEM                15.                                                           | EXHIBITS                AND FINANCIAL STATEMENT                SCHEDULES                                                                                         | 50             |
|                                                                              |                                                                                                                                                             |           |
| **SIGNATURES**                                                                    |                                                                                                                                                             | 52             |

----

**DISCLOSURE      REGARDING FORWARD-LOOKING      STATEMENTS**

**PART I**

**ITEM      1. BUSINESS**

**Overview      **

----

**Business      Strategy**

*Provide      a superior conferencing experience*

*Offer      greater value to our customers*

*Leverage      and extend ClearOne technology leadership and innovation*

*Expand      and strengthen sales channels*

----

*Broaden      our product offerings *

| ·   | Professionally                installed audio conferencing systems that are used in executive                boardrooms, courtrooms, hospitals, and                auditoriums |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Premium                conferencing systems that integrate with video and web conferencing                systems |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

| ·   | Tabletop                conferencing phones used in conference rooms and                offices |
|--------------------|-------------------------------------------------------------------------------------------------|

| ·   | Personal                conferencing devices that enable hands-free audio communications                in new                ways that have never before been                possible |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Develop      strategic partnerships*

*Strengthen      existing customer relationships through dedicated support*

**Markets      and Products **

***Products      Overview***

| ·   | Increasing                availability of easy-to-use audio conferencing                equipment |
|--------------------|---------------------------------------------------------------------------------------------------|

| ·   | Improving                voice quality of audio conferencing systems compared to telephone                handset                speakerphones |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Trending                expansion of global, regional, and local corporate                enterprises |
|--------------------|-------------------------------------------------------------------------------------------------------|

----

| ·   | Availability                of a wider range of affordable audio conferencing products for small                businesses and home offices |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Growth                of distance learning and corporate training                programs |
|--------------------|-------------------------------------------------------------------------------------------|

| ·   | Trend                toward deploying greater numbers of                teleworkers |
|--------------------|-------------------------------------------------------------------------------------|

| ·   | Decreases                in the amount of travel within most enterprises for routine                meetings |
|--------------------|--------------------------------------------------------------------------------------------------------------|

| ·   | Transition                to the Internet Protocol (“IP”) network from the traditional public                switched telephone network (“PSTN”) and the deployment of Voice over                Internet Protocol (“VoIP”)                applications |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Professional      Audio Conferencing Products**

----

**Premium      Conferencing Systems**

**Tabletop      Conferencing Phones **

**Personal      Conferencing Products**

----

| PCs                & Macs                      | VoIP                telephony applications such as Skype & Vonage; enterprise softphones,                audio for web-based videoconferencing applications; gaming; audio                playback  |
|---------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Cell                phones                         | Connects                to the 2.5mm headset jack for hands-free, full-duplex audio                conferencing                                                                                         |
| Telephones                                         | Connects                to the headset jack (certain phone models) for hands-free, full-duplex                audio conferencing                                                                        |
| iPods                & MP3 players             | For                full-bandwidth audio playback                                                                                                                                                        |
| Desktop                video conferencing systems  | For                hands-free, full-duplex audio conferencing                                                                                                                                           |

**Other      Products**

**Marketing      and Sales**

----

***Distributors***

***Independent      Integrators, Dealers, and Resellers***

***General      Marketing & Public Relations Activities***

*PC      Magazine*
*Popular      Science, BusinessWeek, VAR Business,USA Today, *
*Bootcamp*
*Into      Tomorrow*

***Trade      Shows and Industry Forums***

| ·   | InfoComm                - the AV industry’s largest trade show. In June 2005, we launched our new                brand with the simultaneous release of our new website, product                collateral, and InfoComm booth. We received positive attention for                this                re-branding effort. In June 2006, we again had a strong presence                at                InfoComm, where we highlighted a significant number of new products,                including our new Converge Pro professional conferencing platform,                Chat                50, and Chat 150, MAXAttach IP and MAX IP, and the Tabletop Controller                for                XAP. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | National                Systems Contractors Association (“NSCA”) - this show focuses on the sound                reinforcement industry, and we highlight our professional conferencing                products. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Customers**

**Competition      **

----

**Regulatory      Environment**

**Seasonality**

----

**Product      Development **

**Manufacturing      **

| ·   | Avoidance                of a significant investment in upgrading our manufacturing                infrastructure; |
|--------------------|--------------------------------------------------------------------------------------------------------------------|

| ·   | Achievement                of a rapid International Standards Organization certification of                our                products by partnering with an outsource manufacturer that was                International Standards Organization                certified; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | RoHS-compliant                manufacturing facilities; |
|--------------------|---------------------------------------------------------|

| ·   | Scalability                in our manufacturing process without major investment or major                restructuring costs; and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------|

| ·   | Achievement                of future cost reductions on manufacturing costs and inventory costs                based                upon increased economies of scale in material and                labor. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Intellectual      Property and Other Proprietary Rights **

**Employees**

|                                 | **Employees                of as** |
|--------------------------------------|------------------------------------|
|                                 | **June                30, 2006**   | **June                30, 2005** | **June                30, 2004** |
| Sales,                marketing, and |                               |   |   |
| customer                support      | 44                                 | 45 | 51 |
| Product                development   | 49                                 | 43 | 41 |
| Operations                support    | 17                                 | 20 | 40 |
| Administration                       | 17                                 | 18 | 29 |
| Conferencing                services | -                                  | - | 76 |
| OM                Video              | -                                  | - | 27 |
| Total                                | 127                                | 126 | 264 |

**Dispositions**

***Sale      of Assets to Burk Technology.***

----

***Sale      of our U.S. Audiovisual Integration Services.***

***Sale      of our Conferencing Services***
**.**
*** ***

***Sale      of OM Video - Canadian Audiovisual Integration      Services***
**.      **

----

**ITEM      1A. RISK FACTORS **

*Investors      should carefully consider the risks described below. The risks described below      are not the only ones we face and there are risks that we are not presently      aware of or that we currently believe are immaterial that may also impair our      business operations. Any of these risks could harm our business. The trading      price of our common stock could decline significantly due to any of these risks,      and investors may lose all or part of their investment. In assessing these      risks, investors should also refer to the other information contained or      incorporated by reference in this Annual Report on Form 10-K, including our      June      30, 2006 consolidated financial statements and related notes.*

***Risks      Relating to Our Business***

*We      face intense competition in all markets for our products and services; our      operating results will be adversely affected if we cannot compete effectively      against other companies.*

*Difficulties      in estimating customer demand in our products segment could harm our profit      margins.*

*Our      sales depend to a certain extent on government funding and      regulation.*

*Environmental      laws and regulations subject us to a number of risks and could result in      significant costs and impact on revenue*

----

*Product      development delays or defects could harm our competitive position and reduce      our      revenues.*

| ·   | meeting                required specifications and regulatory standards; |
|--------------------|--------------------------------------------------------------------------|

| ·   | meeting                market expectations for                performance; |
|--------------------|----------------------------------------------------------------------------|

| ·   | hiring                and keeping a sufficient number of skilled developers; |
|--------------------|------------------------------------------------------------------------------|

| ·   | obtaining                prototype products at anticipated cost                levels; |
|--------------------|----------------------------------------------------------------------------------------|

| ·   | having                the ability to identify problems or product defects in the development                cycle; and |
|--------------------|------------------------------------------------------------------------------------------------------------------------|

| ·   | achieving                necessary manufacturing efficiencies. |
|--------------------|----------------------------------------------------------------|

*Our      profitability may be adversely affected by our continuing dependence on our      distribution channels.*

----

*Reporting      of channel inventory by certain distributors.*

*We      depend on an outsourced manufacturing strategy.*

*Product      obsolescence could harm demand for our products and could adversely affect      our      revenues and our results of operations.*

----

*If      we      are unable to protect our intellectual property rights or have insufficient      proprietary rights, our business would be materially impaired.*

*International      sales account for a significant portion of our net revenue and risks inherent      in      international sales could harm our business.*

| ·   | unexpected                changes in, or the imposition of, additional legislative or regulatory                requirements; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------|

| ·   | unique                environmental regulations; |
|--------------------|--------------------------------------------------|

| ·   | fluctuating                exchange rates; |
|--------------------|--------------------------------------------|

| ·   | tariffs                and other barriers; |
|--------------------|--------------------------------------------|

| ·   | difficulties                in staffing and managing foreign sales operations; |
|--------------------|--------------------------------------------------------------------------------|

| ·   | import                and export restrictions; |
|--------------------|------------------------------------------------|

| ·   | greater                difficulties in accounts receivable collection and longer payment                cycles; |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

| ·   | potentially                adverse tax consequences; |
|--------------------|------------------------------------------------------|

| ·   | potential                hostilities and changes in diplomatic and trade                relationships; |
|--------------------|--------------------------------------------------------------------------------------------------------|

| ·   | disruption                in services due to natural disaster, economic or political difficulties,                quarantines, transportation, or other restrictions associated with                infectious diseases. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*We      may not be able to hire and retain qualified key and highly-skilled technical      employees, which could affect our ability to compete effectively and may cause      our revenue and profitability to decline.*

*Our      reliance on third-party technology or license agreements.*

*We      may have difficulty in collecting outstanding receivables.*

*Interruptions      to our business could adversely affect our operations.*

----

***Risks      Relating to Our Company***

*Our      stock price fluctuates as a result of the conduct of our business and stock      market fluctuations.*

| ·   | 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; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | disparity                between our reported results and the projections of                analysts; |
|--------------------|-------------------------------------------------------------------------------------------------------|

| ·   | the                shift in sales mix of products that we currently sell to a sales                mix of                lower-gross profit product                offerings; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                level and mix of inventory levels held by our                distributors; |
|--------------------|-----------------------------------------------------------------------------------------------|

| ·   | the                announcement of new products or product enhancements by us or our                competitors; |
|--------------------|------------------------------------------------------------------------------------------------------------------|

| ·   | technological                innovations by us or our                competitors; |
|--------------------|-----------------------------------------------------------------------------------|

| ·   | success                in meeting targeted availability dates for new or redesigned                products; |
|--------------------|--------------------------------------------------------------------------------------------------------------|

| ·   | the                ability to profitably and efficiently manage our supplies of products                and                key components; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                ability to maintain profitable relationships with our                customers; |
|--------------------|----------------------------------------------------------------------------------------------------|

| ·   | the                ability to maintain an appropriate cost                structure; |
|--------------------|--------------------------------------------------------------------------------------|

| ·   | quarterly                variations in our results of                operations; |
|--------------------|----------------------------------------------------------------------------------|

| ·   | general                consumer confidence or general market conditions or market conditions                specific to technology industries; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | domestic                and international economic                conditions; |
|--------------------|-------------------------------------------------------------------------------|

| ·   | the                adoption of the new accounting standard, SFAS No. 123R, “Share-Based                Payments,” which requires us to record compensation expense for certain                options issued before July 1, 2005 and for all options issued or                modified                after June 30, 2005; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | our                ability to report financial information in a timely manner;                and |
|--------------------|---------------------------------------------------------------------------------------------------|

| ·   | the                markets in which our stock is                traded. |
|--------------------|-------------------------------------------------------------------------|

*We      have previously identified material weaknesses in our internal      controls.*

*Our      directors and officers own 19.0 percent of the Company and may exert significant      influence over us.*

**ITEM      1B. UNRESOLVED      STAFF      COMMENTS**

----

**ITEM      2.**
**PROPERTIES**

| **Location**                                                                                                                | **Operations**                                            | **Square                Footage** | **Status**                             | **Expiration                of Lease Agreement** |
|-----------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------|-----------------------------------|----------------------------------------|--------------------------------------------------|
|                                                                                                                        |                                                      |                              |                                   |                                             |
| **Active                Leases at June 30, 2006**                                                                           |                                                      |                              |                                   |
| Salt                Lake City, UT                                                                                           | Company                headquarters                       | 39,760                            | Continuing                             | October                2006                      |
| Salt                Lake City, UT                                                                                           | Manufacturing                facility                     | 12,000                            | Previously                subleased    | October                2006                      |
| Champlin,                MN                                                                                                 | Furniture                manufacturing                    | 17,520                            | Continuing                             | September                2007                    |
| Berkshire,                                                                                                                  |                                                      |                              |                                   |                                             |
| United                Kingdom                                                                                               | Sales                office                               | 250                               | Continuing                             | 90                days notice                    |
|                                                                                                                        |                                                      |                              |                                   |                                             |
| **Future                Leases**                                                                                            |                                                      |                              |                                   |                                             |
| Salt                Lake City, UT                                                                                           | Company                headquarters                       | 36,279                            | Beginning                November 2006 | December                2013                     |
|                                                                                                                        |                                                      |                              |                                   |                                             |
| **Terminated                Leases, i.e., per contract terms, sale of entity, or through early                termination** |                                                      |
| Woburn,                MA                                                                                                   | ClearOne,                Inc. acquisition                 | 2,206                             | Early                buyout            | September                2003                    |
| Golden                Valley, MN                                                                                            | U.S.                audiovisual installation services     | 25,523                            | Early                buyout            | June                2004                         |
| Westmont,                IL                                                                                                 | U.S.                audiovisual installation services     | 2,608                             | Lease                expired           | July                2004                         |
| Nuremberg,                Germany                                                                                           | Sales                office                               | 2,153                             | Early                buyout            | December                2004                     |
| Ottawa,                Canada                                                                                               | Canadian                audiovisual installation services | 16,190                            | Sold                entity             | March                2005                        |

----

**ITEM      3.**
**LEGAL      PROCEEDINGS**

**The      Shareholder Derivative Actions. **

----

**The      Insurance Coverage Action. **

**U.S.      Attorney’s Investigation. **

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

----

**PART      II**

**ITEM      5.**
**MARKET      FOR REGISTRANT’S COMMON EQUITY, RELATED      STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY      SECURITIES**

**Market      Information**

|                          |   | **2006** |   | **2005** |   |
|-------------------------------|--------|----------|--------|----------|--------|
|                          |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
|                          |   |     |   |     |   |   |   |   |   |
| First                Quarter  |   | $        | 4.10   |     | $      | 2.20 |   | $ | 5.70 |   | $ | 3.50 |   |
| Second                Quarter |   |     | 2.50   |     |   | 1.95 |   |   | 4.80 |   |   | 3.55 |   |
| Third                Quarter  |   |     | 3.60   |     |   | 2.25 |   |   | 4.30 |   |   | 3.00 |   |
| Fourth                Quarter |   |     | 4.25   |     |   | 3.50 |   |   | 3.65 |   |   | 2.25 |   |

**Shareholders**

**Dividends**

**Securities      Authorized for Issuance under Equity Compensation Plans**

----

|                                 | **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 plans (excluding securities reflected in column                (a))** |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 | **(a)**                                                                                                                                       | **(b)**                                                                                                       | **(c)**                                                                                                                                                                                      |
| Equity                compensation   |                                                                                                                                          |                                                                                                          |                                                                                                                                                                                         |
| plans                approved by     |                                                                                                                                          |                                                                                                          |                                                                                                                                                                                         |
| security                holders      | 1,237,920                                                                                                                                     | $6.12                                                                                                         | 959,956                                                                                                                                                                                      |
| Equity                compensation   |                                                                                                                                          |                                                                                                          |                                                                                                                                                                                         |
| plans                not approved by |                                                                                                                                          |                                                                                                          |                                                                                                                                                                                         |
| security                holders      | -                                                                                                                                             | -                                                                                                             | -                                                                                                                                                                                            |
| Total                                | 1,237,920                                                                                                                                     | $6.12                                                                                                         | 959,956                                                                                                                                                                                      |

**Recent      Sales of Unregistered Securities: Use of Proceeds from Registered      Securities.**

**Issuer      Purchases of Equity Securities.**

**Stock      Buy-Back Program.**

**Employee      Stock Purchase Program.**

**ITEM      6.**
**SELECTED      FINANCIAL DATA **

----

**SELECTED      CONSOLIDATED FINANCIAL DATA**

**(in      thousands of dollars, except per share data)**

|                                                                |   | **Years                Ended June 30,** |       |
|---------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                |   | **2006**                                |       | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
|                                                                |   |                                    |       |   |   |   |   |   |   |   |   |
| **Operating                results:**                               |   |                                    |       |   |   |   |   |   |   |   |   |
| Revenue                                                             |   | $                                       | 37,632     |   | $ | 31,645 |   | $ | 27,966 |   | $ | 28,566 |   | $ | 26,253 |   |
| Costs                and expenses:                                  |   |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost                of goods sold                                   |   |                                    | 19,284     |   |   | 14,951 |   |   | 16,379 |   |   | 18,115 |   |   | 13,884 |   |
| Marketing                and selling                                |   |                                    | 7,866      |   |   | 9,070 |   |   | 8,497 |   |   | 7,070 |   |   | 7,010 |   |
| Research                and product development                     |   |                                    | 8,299      |   |   | 5,305 |   |   | 4,237 |   |   | 3,281 |   |   | 3,810 |   |
| General                and administrative                           |   |                                    | 5,108      |   |   | 5,489 |   |   | 6,767 |   |   | 5,915 |   |   | 4,376 |   |
| Settlement                in shareholders' class action             |   |                                    | (1,205     | ) |   | (2,046 | ) |   | 4,080 |   |   | 7,325 |   |   | - |   |
| Impairment                losses                                    |   |                                    | -          |   |   | 180 |   |   | - |   |   | 5,102 |   |   | 7,115 |   |
| Restructuring                charge                                 |   |                                    | -          |   |   | 110 |   |   | - |   |   | - |   |   | - |   |
| Operating                loss                                       |   |                                    | (1,720     | ) |   | (1,414 | ) |   | (11,994 | ) |   | (18,242 | ) |   | (9,942 | ) |
| Other                income (expense), net                          |   |                                    | 1,016      |   |   | 318 |   |   | (261 | ) |   | 48 |   |   | 288 |   |
| Loss                from continuing operations before income taxes  |   |                                    | (704       | ) |   | (1,096 | ) |   | (12,255 | ) |   | (18,194 | ) |   | (9,654 | ) |
| Benefit                (provision) for income taxes                 |   |                                    | 870        |   |   | 3,248 |   |   | 736 |   |   | 1,352 |   |   | 173 |   |
| Income                (loss) from continuing operations             |   |                                    | 166        |   |   | 2,152 |   |   | (11,519 | ) |   | (16,842 | ) |   | (9,481 | ) |
| Income                (loss) from discontinued operations           |   |                                    | 1,930      |   |   | 13,923 |   |   | 1,632 |   |   | (19,130 | ) |   | 2,820 |   |
| Net                income (loss)                                    |   | $                                       | 2,096      |   | $ | 16,075 |   | $ | (9,887 | ) | $ | (35,972 | ) | $ | (6,661 | ) |
|                                                                |   |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Earnings                (loss) per common share:**                |   |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings (loss) from continuing operations     |   | $                                       | 0.02       |   | $ | 0.19 |   | $ | (1.04 | ) | $ | (1.50 | ) | $ | (0.99 | ) |
| Diluted                earnings (loss) from continuing operations   |   | $                                       | 0.01       |   | $ | 0.17 |   | $ | (1.04 | ) | $ | (1.50 | ) | $ | (0.99 | ) |
| Basic                earnings (loss) from discontinued operations   |   | $                                       | 0.16       |   | $ | 1.25 |   | $ | 0.15 |   | $ | (1.71 | ) | $ | 0.30 |   |
| Diluted                earnings (loss) from discontinued operations |   | $                                       | 0.16       |   | $ | 1.13 |   | $ | 0.15 |   | $ | (1.71 | ) | $ | 0.30 |   |
| Basic                earnings (loss)                                |   | $                                       | 0.18       |   | $ | 1.44 |   | $ | (0.89 | ) | $ | (3.21 | ) | $ | (0.69 | ) |
| Diluted                earnings (loss)                              |   | $                                       | 0.17       |   | $ | 1.30 |   | $ | (0.89 | ) | $ | (3.21 | ) | $ | (0.69 | ) |
| **Weighted                average shares outstanding:**             |   |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                               |   |                                    | 11,957,756 |   |   | 11,177,406 |   |   | 11,057,896 |   |   | 11,183,339 |   |   | 9,588,118 |   |
| Diluted                                                             |   |                                    | 12,206,618 |   |   | 12,332,106 |   |   | 11,057,896 |   |   | 11,183,339 |   |   | 9,588,118 |   |
|                                                                |   |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                     |   | **As                  of June 30,**     |
|                                                                |   |                                    | **2006**   |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |   | **2002** |   |
|                                                                |   |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Financial                data:**                                  |   |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current                assets                                       |   | $                                       | 39,589     |   | $ | 34,879 |   | $ | 27,202 |   | $ | 29,365 |   | $ | 52,304 |   |
| Property,                plant and equipment, net                   |   |                                    | 1,647      |   |   | 2,805 |   |   | 4,027 |   |   | 4,320 |   |   | 4,678 |   |
| Total                assets                                         |   |                                    | 41,405     |   |   | 38,021 |   |   | 32,156 |   |   | 35,276 |   |   | 63,876 |   |
| Long-term                debt, net of current maturities            |   |                                    | -          |   |   | - |   |   | 240 |   |   | 931 |   |   | - |   |
| Capital                leases, net of current maturities            |   |                                    | -          |   |   | - |   |   | 2 |   |   | 9 |   |   | 41 |   |
| Total                shareholders' equity                           |   |                                    | 30,412     |   |   | 24,911 |   |   | 9,006 |   |   | 18,743 |   |   | 53,892 |   |

----

**Quarterly      Financial Data (Unaudited) **

|                                                                        |   | **Fiscal                2006 Quarters Ended**                       |   |                       |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                        |   | **(in                thousands of dollars, except per share data)** |   |                       |   |
|                                                                        |   | **Sept.                30**                                         |   | **Dec.                31** |   | **Mar.                31** |   | **June                30** |   | **Total** |   |
| Revenue                                                                     |   | $                                                                   | 9,527  |                       | $      | 9,675 |   | $ | 8,700 |   | $ | 9,730 |   | $ | 37,632 |   |
| Cost                of goods sold                                           |   |                                                                | (4,645 | )                          |   | (4,943 | ) |   | (4,625 | ) |   | (5,071 | ) |   | (19,284 | ) |
| Marketing                and selling                                        |   |                                                                | (1,812 | )                          |   | (1,810 | ) |   | (1,920 | ) |   | (2,324 | ) |   | (7,866 | ) |
| Research                and product development                             |   |                                                                | (1,799 | )                          |   | (1,778 | ) |   | (2,201 | ) |   | (2,521 | ) |   | (8,299 | ) |
| General                and administrative                                   |   |                                                                | (1,771 | )                          |   | (1,457 | ) |   | (1,060 | ) |   | (820 | ) |   | (5,108 | ) |
| Settlement                in shareholders' class action                     |   |                                                                | 1,205  |                       |   | - |   |   | - |   |   | - |   |   | 1,205 |   |
| Other                income (expense), net                                  |   |                                                                | 166    |                       |   | 191 |   |   | 237 |   |   | 422 |   |   | 1,016 |   |
| (Loss)                income from continuing operations before income taxes |   |                                                                | 871    |                       |   | (122 | ) |   | (869 | ) |   | (584 | ) |   | (704 | ) |
| Benefit                (provision) for income taxes                         |   |                                                                | 178    |                       |   | 109 |   |   | 763 |   |   | (180 | ) |   | 870 |   |
| (Loss)                income from continuing operations                     |   |                                                                | 1,049  |                       |   | (13 | ) |   | (106 | ) |   | (764 | ) |   | 166 |   |
| Income                from discontinued operations                          |   |                                                                | 938    |                       |   | 94 |   |   | 646 |   |   | 252 |   |   | 1,930 |   |
| Net                income                                                   |   | $                                                                   | 1,987  |                       | $      | 81 |   | $ | 540 |   | $ | (512 | ) | $ | 2,096 |   |
|                                                                        |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                income (loss) earnings per common share:               |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing                operations                                        |   | $                                                                   | 0.09   |                       | $      | - |   | $ | (0.01 | ) | $ | (0.06 | ) | $ | 0.02 |   |
| Discontinued                operations                                      |   |                                                                | 0.08   |                       |   | 0.01 |   |   | 0.05 |   |   | 0.02 |   |   | 0.16 |   |
| Basic                income (loss) earnings per common share                |   | $                                                                   | 0.18   |                       | $      | 0.01 |   | $ | 0.04 |   | $ | (0.04 | ) | $ | 0.18 |   |
| Diluted                income (loss) earnings per common share:             |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing                operations                                        |   | $                                                                   | 0.09   |                       | $      | - |   | $ | (0.01 | ) | $ | (0.06 | ) | $ | 0.01 |   |
| Discontinued                operations                                      |   |                                                                | 0.08   |                       |   | 0.01 |   |   | 0.05 |   |   | 0.02 |   |   | 0.16 |   |
| Diluted                income (loss) earnings per common share              |   | $                                                                   | 0.16   |                       | $      | 0.01 |   | $ | 0.04 |   | $ | (0.04 | ) | $ | 0.17 |   |

|                                                                        |   | **Fiscal                2005 Quarters Ended**                       |   |                       |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                        |   | **(in                thousands of dollars, except per share data)** |   |                       |   |
|                                                                        |   | **Sept.                30**                                         |   | **Dec.                31** |   | **Mar.                31** |   | **June                30** |   | **Total** |   |
| Revenue                                                                     |   | $                                                                   | 6,747  |                       | $      | 8,692 |   | $ | 7,103 |   | $ | 9,103 |   | $ | 31,645 |   |
| Cost                of goods sold                                           |   |                                                                | (3,797 | )                          |   | (3,948 | ) |   | (3,180 | ) |   | (4,026 | ) |   | (14,951 | ) |
| Marketing                and selling                                        |   |                                                                | (2,086 | )                          |   | (2,341 | ) |   | (2,151 | ) |   | (2,492 | ) |   | (9,070 | ) |
| Research                and product development                             |   |                                                                | (1,105 | )                          |   | (1,282 | ) |   | (1,423 | ) |   | (1,495 | ) |   | (5,305 | ) |
| General                and administrative                                   |   |                                                                | (1,435 | )                          |   | (1,388 | ) |   | (1,287 | ) |   | (1,379 | ) |   | (5,489 | ) |
| Settlement                in shareholders' class action                     |   |                                                                | 1,020  |                       |   | 734 |   |   | 855 |   |   | (563 | ) |   | 2,046 |   |
| Impairment                losses                                            |   |                                                                | -      |                       |   | - |   |   | - |   |   | (180 | ) |   | (180 | ) |
| Restructuring                charge                                         |   |                                                                | -      |                       |   | - |   |   | - |   |   | (110 | ) |   | (110 | ) |
| Other                income (expense), net                                  |   |                                                                | 34     |                       |   | 64 |   |   | 95 |   |   | 125 |   |   | 318 |   |
| (Loss)                income from continuing operations before income taxes |   |                                                                | (622   | )                          |   | 531 |   |   | 12 |   |   | (1,017 | ) |   | (1,096 | ) |
| Benefit                (provision) for income taxes                         |   |                                                                | 232    |                       |   | (198 | ) |   | (5 | ) |   | 3,219 |   |   | 3,248 |   |
| (Loss)                income from continuing operations                     |   |                                                                | (390   | )                          |   | 333 |   |   | 7 |   |   | 2,202 |   |   | 2,152 |   |
| Income                from discontinued operations                          |   |                                                                | 13,346 |                       |   | 73 |   |   | 388 |   |   | 116 |   |   | 13,923 |   |
| Net                income                                                   |   | $                                                                   | 12,956 |                       | $      | 406 |   | $ | 395 |   | $ | 2,318 |   | $ | 16,075 |   |
|                                                                        |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                income (loss) earnings per common share:               |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing                operations                                        |   | $                                                                   | (0.04  | )                          | $      | 0.03 |   | $ | - |   | $ | 0.20 |   | $ | 0.19 |   |
| Discontinued                operations                                      |   |                                                                | 1.20   |                       |   | 0.01 |   |   | 0.03 |   |   | 0.01 |   |   | 1.25 |   |
| Basic                income (loss) earnings per common share                |   | $                                                                   | 1.16   |                       | $      | 0.04 |   | $ | 0.03 |   | $ | 0.21 |   | $ | 1.44 |   |
| Diluted                income (loss) earnings per common share:             |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing                operations                                        |   | $                                                                   | (0.03  | )                          | $      | 0.02 |   | $ | - |   | $ | 0.18 |   | $ | 0.17 |   |
| Discontinued                operations                                      |   |                                                                | 1.08   |                       |   | 0.01 |   |   | 0.03 |   |   | 0.01 |   |   | 1.13 |   |
| Diluted                income (loss) earnings per common share              |   | $                                                                   | 1.05   |                       | $      | 0.03 |   | $ | 0.03 |   | $ | 0.19 |   | $ | 1.30 |   |

----

|                                                               |   | **Fiscal                2004 Quarters Ended**                       |   |                       |   |
|--------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|----------------------------|--------|
|                                                               |   | **(in                thousands of dollars, except per share data)** |   |                       |   |
|                                                               |   | **Sept.                30**                                         |   | **Dec.                31** |   | **Mar.                31** |   | **June                30** |   | **Total** |   |
| Revenue                                                            |   | $                                                                   | 7,737  |                       | $      | 6,715 |   | $ | 6,652 |   | $ | 6,862 |   | $ | 27,966 |   |
| Cost                of goods sold                                  |   |                                                                | (5,165 | )                          |   | (3,278 | ) |   | (4,392 | ) |   | (3,544 | ) |   | (16,379 | ) |
| Marketing                and selling                               |   |                                                                | (2,012 | )                          |   | (2,004 | ) |   | (2,129 | ) |   | (2,352 | ) |   | (8,497 | ) |
| Research                and product development                    |   |                                                                | (925   | )                          |   | (829 | ) |   | (1,112 | ) |   | (1,371 | ) |   | (4,237 | ) |
| General                and administrative                          |   |                                                                | (1,583 | )                          |   | (1,639 | ) |   | (1,738 | ) |   | (1,807 | ) |   | (6,767 | ) |
| Settlement                in shareholders' class action            |   |                                                                | -      |                       |   | (2,100 | ) |   | (3,240 | ) |   | 1,260 |   |   | (4,080 | ) |
| Other                income (expense), net                         |   |                                                                | 1      |                       |   | (65 | ) |   | (2 | ) |   | (195 | ) |   | (261 | ) |
| Loss                from continuing operations before income taxes |   |                                                                | (1,947 | )                          |   | (3,200 | ) |   | (5,961 | ) |   | (1,147 | ) |   | (12,255 | ) |
| Benefit                for income taxes                            |   |                                                                | 123    |                       |   | 109 |   |   | 426 |   |   | 78 |   |   | 736 |   |
| Loss                from continuing operations                     |   |                                                                | (1,824 | )                          |   | (3,091 | ) |   | (5,535 | ) |   | (1,069 | ) |   | (11,519 | ) |
| Income                (loss) from discontinued operations          |   |                                                                | 661    |                       |   | (66 | ) |   | 690 |   |   | 347 |   |   | 1,632 |   |
| Net                loss                                            |   | $                                                                   | (1,163 | )                          | $      | (3,157 | ) | $ | (4,845 | ) | $ | (722 | ) | $ | (9,887 | ) |
|                                                               |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                (loss) earnings per common share:             |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing                operations                               |   | $                                                                   | (0.16  | )                          | $      | (0.28 | ) | $ | (0.50 | ) | $ | (0.10 | ) | $ | (1.04 | ) |
| Discontinued                operations                             |   |                                                                | 0.06   |                       |   | - |   |   | 0.06 |   |   | 0.03 |   |   | 0.15 |   |
| Basic                (loss) earnings per common share              |   | $                                                                   | (0.10  | )                          | $      | (0.28 | ) | $ | (0.44 | ) | $ | (0.07 | ) | $ | (0.89 | ) |
| Diluted                (loss) earnings per common share:           |   |                                                                |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing                operations                               |   | $                                                                   | (0.16  | )                          | $      | (0.28 | ) | $ | (0.50 | ) | $ | (0.10 | ) | $ | (1.04 | ) |
| Discontinued                operations                             |   |                                                                | 0.06   |                       |   | - |   |   | 0.06 |   |   | 0.03 |   |   | 0.15 |   |
| Diluted                (loss) earnings per common share            |   | $                                                                   | (0.10  | )                          | $      | (0.28 | ) | $ | (0.44 | ) | $ | (0.07 | ) | $ | (0.89 | ) |

**ITEM      7. **
**MANAGEMENT'S      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS      OF OPERATIONS**

*The      following discussion should be read in conjunction with our June 30, 2006      Consolidated Financial Statements and related Notes to Consolidated Financial      Statements included in Item 8 of this Annual Report on Form 10-K. This      discussion contains forward-looking statements based on current expectations      that involve risks and uncertainties, such as our plans, objectives,      expectations, and intentions, as set forth under “Disclosure Regarding      Forward-Looking Statements.” Our actual results and the timing of events could      differ materially from those anticipated in these forward-looking statements      as      a result of various factors, including those set forth in the following      discussion and under the caption “Risk Factors” in Item 1A and elsewhere in this      Annual Report on Form 10-K. Unless otherwise indicated, all references to a      year      reflect our fiscal year that ends on June 30.*

**CRITICAL      ACCOUNTING POLICIES**

**Revenue      and Associated Allowances for Revenue Adjustments and Doubtful      Accounts**

----

|                              |   | **Deferred                Revenue** |   | **Deferred                Cost of Goods Sold** |   | **Deferred                Gross Profit** |   |
|-----------------------------------|--------|-------------------------------------|--------|------------------------------------------------|--------|------------------------------------------|--------|
|                              |   |                                |   |                                           |   |                                     |   |
| June                30, 2006      |   | $                                   | 5,871  |                                           | $      | 2,817                                    |   | $ | 3,054 |   |
| March                31, 2006     |   |                                | 5,355  |                                           |   | 2,443                                    |   |   | 2,912 |   |
| December                31, 2005  |   |                                | 4,936  |                                           |   | 2,199                                    |   |   | 2,737 |   |
| September                30, 2005 |   |                                | 4,848  |                                           |   | 2,373                                    |   |   | 2,475 |   |
| June                30, 2005      |   |                                | 5,055  |                                           |   | 2,297                                    |   |   | 2,758 |   |
| March                31, 2005     |   |                                | 5,456  |                                           |   | 2,321                                    |   |   | 3,135 |   |
| December                31, 2004  |   |                                | 4,742  |                                           |   | 1,765                                    |   |   | 2,977 |   |
| September                30, 2004 |   |                                | 5,617  |                                           |   | 1,920                                    |   |   | 3,697 |   |
| June                30, 2004      |   |                                | 6,107  |                                           |   | 2,381                                    |   |   | 3,726 |   |

**Goodwill      and Purchased Intangibles**

| ·   | Significant                underperformance relative to projected future operating                results; |
|--------------------|------------------------------------------------------------------------------------------------------------|

| ·   | Significant                changes in the manner of our use of the acquired assets or the strategy                for our overall business; and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Significant                negative industry or economic                trends. |
|--------------------|---------------------------------------------------------------------------------|

----

**Impairment      of Long-Lived Assets**

**Accounting      for Income Taxes **

**Lower-of-Cost      or Market Adjustments and Reserves for Excess and Obsolete      Inventory**

----

**Share-Based      Payment**

**SEASONALITY**

**BUSINESS      OVERVIEW**

----

**DISCUSSION      OF OPERATIONS**

**Results      of Operations **

|                                                               |   | **Year                Ended June 30,**       |   |
|--------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                               |   | **(in                thousands of dollars)** |   |
|                                                               |   | **2006**                                     |   | **2005** |   | **2004** |   |
|                                                               |   |                                         |   | **%                of****Revenue** |   |   |   | **%                of****Revenue** |   |   |   | **%                of****Revenue** |   |
|                                                               |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                            |   | $                                            | 37,632 |   |   | 100.0% |   | $ | 31,645 |   |   | 100.0% |   | $ | 27,966 |   |   | 100.0% |   |
| Cost                of goods sold                                  |   |                                         | 19,284 |   |   | 51.2% |   |   | 14,951 |   |   | 47.2% |   |   | 16,379 |   |   | 58.6% |   |
| Gross                profit                                        |   |                                         | 18,348 |   |   | 48.8% |   |   | 16,694 |   |   | 52.8% |   |   | 11,587 |   |   | 41.4% |   |
| Operating                expenses (benefit):                       |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marketing                and selling                               |   |                                         | 7,866  |   |   | 20.9% |   |   | 9,070 |   |   | 28.7% |   |   | 8,497 |   |   | 30.4% |   |
| Research                and product development                    |   |                                         | 8,299  |   |   | 22.1% |   |   | 5,305 |   |   | 16.8% |   |   | 4,237 |   |   | 15.2% |   |
| General                and administrative                          |   |                                         | 5,108  |   |   | 13.6% |   |   | 5,489 |   |   | 17.3% |   |   | 6,767 |   |   | 24.2% |   |
| Settlement                in shareholders' class action            |   |                                         | (1,205 | ) |   | -3.2% |   |   | (2,046 | ) |   | -6.5% |   |   | 4,080 |   |   | 14.6% |   |
| Impairment                losses                                   |   |                                         | -      |   |   | 0.0% |   |   | 180 |   |   | 0.6% |   |   | - |   |   | 0.0% |   |
| Restructuring                charge                                |   |                                         | -      |   |   | 0.0% |   |   | 110 |   |   | 0.3% |   |   | - |   |   | 0.0% |   |
| Total                operating expenses                            |   |                                         | 20,068 |   |   | 53.3% |   |   | 18,108 |   |   | 57.2% |   |   | 23,581 |   |   | 84.3% |   |
| Operating                loss                                      |   |                                         | (1,720 | ) |   | -4.6% |   |   | (1,414 | ) |   | -4.5% |   |   | (11,994 | ) |   | -42.9% |   |
| Other                income (expense), net                         |   |                                         | 1,016  |   |   | 2.7% |   |   | 318 |   |   | 1.0% |   |   | (261 | ) |   | -0.9% |   |
| Loss                from continuing operations before income taxes |   |                                         | (704   | ) |   | -1.9% |   |   | (1,096 | ) |   | -3.5% |   |   | (12,255 | ) |   | -43.8% |   |
| Benefit                for income taxes                            |   |                                         | 870    |   |   | 2.3% |   |   | 3,248 |   |   | 10.3% |   |   | 736 |   |   | 2.6% |   |
| Income                (loss) from continuing operations            |   |                                         | 166    |   |   | 0.4% |   |   | 2,152 |   |   | 6.8% |   |   | (11,519 | ) |   | -41.2% |   |
| Income                from discontinued operations, net of tax     |   |                                         | 1,930  |   |   | 5.1% |   |   | 13,923 |   |   | 44.0% |   |   | 1,632 |   |   | 5.8% |   |
| Net                income (loss)                                   |   | $                                            | 2,096  |   |   | 5.6% |   | $ | 16,075 |   |   | 50.8% |   | $ | (9,887 | ) |   | -35.4% |   |

----

**Fiscal      Year Ended June 30, 2006 (“Fiscal 2006”)**

**Compared      to Fiscal Year Ended June 30, 2005 (“Fiscal 2005”)**

**Revenue**

|                                             | **Year                Ended June 30,**  |
|--------------------------------------------------|-----------------------------------------|
|                                             | **(by                individual unit)** |
|                                             | **2006**                                | **2005** |
| Professional                audio conferencing   | 13,212                                  | 10,786 |
| Premium                and tabletop conferencing | 25,283                                  | 11,782 |

**Costs      of Goods Sold and Gross Profit**

|                              |   | **Year                Ended June 30,**       |   |
|-----------------------------------|--------|----------------------------------------------|--------|
|                              |   | **(in                thousands of dollars)** |   |
|                              |   | **2006**                                     |   | **2005** |   |
|                              |   |                                         |   | **%                of****Revenue** |   |   |   | **%                of****Revenue** |   |
|                              |   |                                         |   |   |   |   |   |   |   |
| Cost                of goods sold |   | $                                            | 19,284 |   |   | 51.2% |   | $ | 14,951 |   |   | 47.2% |   |
|                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Gross                profit       |   | $                                            | 18,348 |   |   | 48.8% |   | $ | 16,694 |   |   | 52.8% |   |

----

**Operating      Expenses**

**Marketing      and selling expenses**
***.***

**Research      and product development expenses**
***.***

----

**General      and administrative expenses**
***.***

|                                                                           |   | **Year                Ended June 30,**       |   |
|--------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                           |   | **(in                thousands of dollars)** |   |
|                                                                           |   | **2006**                                     |   | **2005** |   |
|                                                                           |   |                                         |   |   |   |
| Total                G&A before discontinued operations                    |   | $                                            | 5,108  |   | $ | 5,742 |   |
| OM                Video G&A                                                |   |                                         | -      |   |   | (253 | ) |
| Total                G&A from continuing operations                        |   | $                                            | 5,108  |   | $ | 5,489 |   |
|                                                                           |   |                                         |   |   |   |   |   |
| Professional                fees (SEC investigation and subsequent litigation) |   | $                                            | 493    |   | $ | 997 |   |
| Professional                fees (Other)                                       |   |                                         | 1,797  |   |   | 1,993 |   |
| Compensation                cost related to SFAS No. 123R                      |   |                                         | 756    |   |   | - |   |
| Severance                payments to executives                                |   |                                         | 93     |   |   | - |   |
| Other                general and administrative expense                        |   |                                         | 1,969  |   |   | 2,499 |   |
| Total                G&A from continuing operations                        |   | $                                            | 5,108  |   | $ | 5,489 |   |

**Settlement      in shareholders’ class action expense (benefit)**
**.**

**Operating      loss.**

**Other      income (expense), net.**

----

**Loss      from continuing operations before income taxes**
***.***

**Benefit      for income taxes**
*Accounting      for Income Taxes*

**Income      from discontinued operations, net of tax. **

**Fiscal      Year Ended June 30, 2005 (“Fiscal 2005”)**

**Compared      to Fiscal Year Ended June 30, 2004 (“Fiscal 2004”)**

**Revenue**

|                             |   | **Year                Ended June 30,**       |   |
|----------------------------------|--------|----------------------------------------------|--------|
|                             |   | **(in                thousands of dollars)** |   |
|                             |   | **2005**                                     |   | **2004** |   |
|                             |   |                                         |   | **%                of****Revenue** |   |   |   | **%                of****Revenue** |   |
| Product                          |   | $                                            | 31,645 |   |   | 100.0% |   | $ | 27,836 |   |   | 99.5% |   |
| Business                services |   |                                         | -      |   |   | 0.0% |   |   | 130 |   |   | 0.5% |   |
| Total                            |   | $                                            | 31,645 |   |   | 100.0% |   | $ | 27,966 |   |   | 100.0% |   |

----

**Product**
***.***

|                                             | **Year                Ended June 30,**  |
|--------------------------------------------------|-----------------------------------------|
|                                             | **(by                individual unit)** |
|                                             | **2005**                                | **2004** |
| Professional                audio conferencing   | 10,786                                  | 10,576 |
| Premium                and tabletop conferencing | 11,782                                  | 9,813 |

**Business      Services**
***.***

**Total      Revenue**
***.***

**Costs      of Goods Sold and Gross Profit**

----

|                              |   | **Year                Ended June 30,**       |   |
|-----------------------------------|--------|----------------------------------------------|--------|
|                              |   | **(in                thousands of dollars)** |   |
|                              |   | **2005**                                     |   | **2004** |   |
|                              |   |                                         |   | **%                of****Revenue** |   |   |   | **%                of****Revenue** |   |
| Cost                of goods sold |   |                                         |   |   |   |   |   |   |   |
| Product                           |   | $                                            | 14,951 |   |   | 47.2% |   | $ | 16,379 |   |   | 58.6% |   |
| Business                services  |   |                                         | -      |   |   | 0.0% |   |   | - |   |   | 0.0% |   |
| Total                             |   | $                                            | 14,951 |   |   | 47.2% |   | $ | 16,379 |   |   | 58.6% |   |
|                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Gross                profit       |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Product                           |   | $                                            | 16,694 |   |   | 52.8% |   | $ | 11,457 |   |   | 41.0% |   |
| Business                services  |   |                                         | -      |   |   | 0.0% |   |   | 130 |   |   | 0.4% |   |
| Total                             |   | $                                            | 16,694 |   |   | 52.8% |   | $ | 11,587 |   |   | 41.4% |   |

**Operating      Expenses**

----

**Marketing      and selling expenses**
***.***

**Research      and product development expenses**
***.***

**General      and administrative expenses**
***.***

|                                                                           |   | **Year                Ended June 30,**       |   |
|--------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                           |   | **(in                thousands of dollars)** |   |
|                                                                           |   | **2005**                                     |   | **2004** |   |
|                                                                           |   |                                         |   |   |   |
| Total                G&A before discontinued operations                    |   | $                                            | 5,742  |   | $ | 9,703 |   |
| OM                Video G&A                                                |   |                                         | (253   | ) |   | (1,113 | ) |
| Conferencing                services G&A                                   |   |                                         | -      |   |   | (1,036 | ) |
| U.S.                business services G&A                                  |   |                                         | -      |   |   | (787 | ) |
| Total                G&A from continuing operations                        |   | $                                            | 5,489  |   | $ | 6,767 |   |
|                                                                           |   |                                         |   |   |   |   |   |
| Professional                fees (SEC investigation and subsequent litigation) |   | $                                            | 997    |   | $ | 936 |   |
| Professional                fees (Other)                                       |   |                                         | 1,993  |   |   | 1,944 |   |
| Severance                payments to executives                                |   |                                         | -      |   |   | 544 |   |
| Other                general and administrative expense                        |   |                                         | 2,499  |   |   | 3,343 |   |
| Total                G&A from continuing operations                        |   | $                                            | 5,489  |   | $ | 6,767 |   |

----

**Settlement      in shareholders’ class action expense**
**.**

**Impairment      and Restructuring charges**
**.      **

**Operating      loss.**

**Other      income (expense), net.**

**Net      loss from continuing operations before income taxes**
***.***

**Benefit      for income taxes**
*Accounting      for Income Taxes*

**Income      from discontinued operations, net of tax. **

----

**SUBSEQUENT      EVENTS**

**Sale      of our Document and Educational Camera Manufacturing and Sales      Business.**

**LIQUIDITY      AND CAPITAL RESOURCES**

----

|                                   |   | Payments                Due by Period |   |
|----------------------------------------|--------|---------------------------------------|--------|
| Contractual                Obligations |   | Total                                 |   | One                yearor                less |   | Two                toThree                Years |   | Four                toFive                Years |   | AfterFive                Years |   |
|                                   |   |                                  |   |   |   |   |   |   |   |   |   |
| Operating                Leases        |   | $                                     | 4,847  |   | $ | 646 |   | $ | 1,306 |   | $ | 1,287 |   | $ | 1,608 |   |
|                                   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                Contractual       |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                Obligations        |   | $                                     | 4,847  |   | $ | 646 |   | $ | 1,306 |   | $ | 1,287 |   | $ | 1,608 |   |

----

**ISSUED      BUT NOT YET ADOPTED ACCOUNTING PRONOUNCEMENTS **

**Accounting      for Asset Retirement Obligations in the European Union**

**Inventory      Costs**

----

**Accounting      Changes and Error Corrections**

**Other-Than-Temporary      Impairment**

**Accounting      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.      109**

**ITEM      7A. **
**QUANTITATIVE      AND QUALITATIVE DISCLOSURES ABOUT MARKET      RISK**

----

----

**ITEM      8. FINANCIAL STATEMENTS      AND SUPPLEMENTAL DATA**

**ITEM      9. CHANGE IN AND DISAGREEMENTS      WITH ACCOUNTANTS ON      ACCOUNTING AND FINANCIAL DISCLOSURE**

**ITEM      9A. CONTROLS AND PROCEDURES**

| ·   | *Ineffective                financial statement close process*.                We have a material weakness in the timeliness of the monthly close                process                to effect a timely financial statement close. Accounting personnel                have                not been able to focus full attention to correcting this weakness                due to                their focus on the preparation, audit, and issuance for the restated                fiscal 2001, restated fiscal 2002, and fiscal 2003, 2004, and 2005                consolidated financial statements as well as the interim fiscal 2006                condensed consolidated financial                statements. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Evaluation                of the staffing, organizational structure, systems, policies and                procedures, and other reporting processes, to improve the timeliness                of                closing these accounts and to enhance the timely review and                supervision. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**ITEM      9B. OTHER INFORMATION**

----

**PART      III**

**ITEM      10.**
**DIRECTORS      AND EXECUTIVE OFFICERS OF THE      REGISTRANT**

**ITEM      11.**
**EXECUTIVE      COMPENSATION**

**ITEM      12.**
**SECURITY      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED      S****TOCKHOLDER      MATTERS**

**ITEM      13.**
**CERTAIN      RELATIONSHIPS AND RELATED      TRANSACTIONS**

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

----

**PART      IV**

**ITEM      15.**
**EXHIBITS      AND FINANCIAL STATEMENT      SCHEDULES**

**(a)**
**1.**
**Financial      Statements**

**2.**
**Financial      Statement Schedules**

**3.**
**Exhibits**

| Exhibit | SEC                Ref. |                                                                                                                                                                                                                                                |                                 |
|---------|-------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|
| No.     |  No.               | Title                of Document                                                                                                                                                                                                                    | Location                             |
| 3.1     | 3                       | Articles                of Incorporation and amendments thereto                                                                                                                                                                                     | Incorp.                by reference1 |
| 3.2     | 3                       | Bylaws                                                                                                                                                                                                                                              | Incorp.                by reference2 |
| 10.1    | 10                      | Employment                Separation Agreement between ClearOne Communications, Inc. and Frances                Flood, dated December 5, 2003.*                                                                                                     | Incorp.                by reference5 |
| 10.2    | 10                      | Employment                Separation Agreement between ClearOne Communications, Inc. and Susie                Strohm, dated December 5, 2003.*                                                                                                      | Incorp.                by reference5 |
| 10.6    | 10                      | Joint                Prosecution and Defense Agreement dated April 1, 2004 between ClearOne                Communications, Inc. Parsons Behle & Latimer, Edward Dallin Bagley and                Burbidge & Mitchell, and amendment thereto | Incorp.                by reference5 |
| 10.7    | 10                      | Asset                Purchase Agreement dated May 6, 2004 between ClearOne Communications,                Inc.                and M:SPACE, Inc.                                                                                                     | Incorp.                by reference5 |
| 10.8    | 10                      | Asset                Purchase Agreement among Clarinet, Inc., American Teleconferencing                Services, Ltd. doing business as Premiere Conferencing, and ClearOne                Communications, Inc., dated July 1, 2004                 | Incorp.                by reference8 |
| 10.9    | 10                      | Stock                Purchase Agreement dated March 4, 2005 between 6351352 Canada Inc.                and                Gentner Ventures, Inc., a wholly owned subsidiary of ClearOne                Communications, Inc.                         | Incorp.                by reference5 |
| 10.10   | 10                      | Settlement                Agreement and Release between ClearOne Communications, Inc. and DeLonie                Call dated February 20, 2006*                                                                                                      | Incorp.                by reference7 |
| 10.11   | 10                      | 1990                Incentive Plan                                                                                                                                                                                                                  | Incorp.                by reference3 |
| 10.12   | 10                      | 1998                Stock Option Plan                                                                                                                                                                                                               | Incorp.                by reference4 |

----

| 10.13 | 10 | Employment                Settlement Agreement and Release between ClearOne Communications,                Inc. and                Gregory Rand dated February 27, 2004* | Incorp.                by reference5 |
|-------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|
| 10.14 | 10 | Employment                Settlement Agreement and Release between ClearOne Communications,                Inc. and                George Claffey dated April 6, 2004*   | Incorp.                by reference5 |
| 10.15 | 10 | Employment                Settlement Agreement and Release between ClearOne Communications,                Inc. and                Michael Keough dated June 16, 2004*   | Incorp.                by reference5 |
| 10.16 | 10 | Employment                Settlement Agreement and Release between ClearOne Communications,                Inc. and                Angelina Beitia dated July 15, 2004*  | Incorp.                by reference5 |
| 10.17 | 10 | Manufacturing                Agreement between ClearOne Communications, Inc. and Inovar, Inc.                dated                August 1, 2005                         | Incorp.                by reference6 |
| 10.18 | 10 | Mutual                Release and Waiver between ClearOne Communications, Inc. and Burk                Technology, Inc. dated August 22, 2005                            | Incorp.                by reference6 |
| 10.19 | 10 | Office                Lease between Edgewater Corporate Park, LLC and ClearOne Communications,                Inc. dated June 5, 2006                                    | This                filing           |
| 14.1  | 14 | Code                of Ethics, approved by the Board of Directors on August 23,                2006                                                                      | This                filing           |
| 21.1  | 21 | Subsidiaries                of the registrant                                                                                                                            | This                filing           |
| 31.1  | 31 | Section                302 Certification of Chief Executive Officer                                                                                                      | This                filing           |
| 31.2  | 31 | Section                302 Certification of Interim Chief Financial Officer                                                                                              | This                filing           |
| 32.1  | 32 | Section                1350 Certification of Chief Executive Officer                                                                                                     | This                filing           |
| 32.2  | 32 | Section                1350 Certification of Interim Chief Financial Officer                                                                                             | This                filing           |
| 99.1  | 99 | Audit                Committee Charter, adopted November 18, 2004                                                                                                        | Incorp.                by reference5 |

**______________**

----

** **
**SIGNATURES**

|                              | CLEARONE                COMMUNICATIONS, INC. |
|-----------------------------------|----------------------------------------------|
|                              |                                         |   |
|                              |                                         |   |
| September                14, 2006 | By:                                          | /s/                Zeynep Hakimoglu |
|                              |                                         | Zeynep                Hakimoglu |
|                              |                                         | President,                Chief Executive Officer, and                Director |

| Signature                               | Title                                                           | Date                              |
|-----------------------------------------|-----------------------------------------------------------------|-----------------------------------|
|                                    |                                                            |                              |
| /s/                Zeynep Hakimoglu     | President,                Chief Executive Officer, and Director | September                14, 2006 |
| Zeynep                Hakimoglu         | (Principal                Executive Officer)                    |                              |
|                                    |                                                            |                              |
| /s/                Craig E. Peeples     | Interim                Chief Financial Officer                  | September                14, 2006 |
| Craig                E. Peeples         | (Principal                Financial and Accounting Officer)     |                              |
|                                    |                                                            |                              |
| /s/                Edward Dallin Bagley | Chairman                of the Board of Directors               | September                14, 2006 |
| Edward                Dallin Bagley     |                                                            |                              |
|                                    |                                                            |                              |
| /s/                Brad R. Baldwin      | Director                                                        | September                14, 2006 |
| Brad                R. Baldwin          |                                                            |                              |
|                                    |                                                            |                              |
| /s/                Larry R. Hendricks   | Director                                                        | September                14, 2006 |
| Larry                R. Hendricks       |                                                            |                              |
|                                    |                                                            |                              |
| /s/                Scott M. Huntsman    | Director                                                        | September                14, 2006 |
| Scott                M. Huntsman        |                                                            |                              |
|                                    |                                                            |                              |
| /s/                Harry Spielberg      | Director                                                        | September                14, 2006 |
| Harry                Spielberg          |                                                            |                              |

----

**ITEM      8. FINANCIAL STATEMENTS**

**Index      to Consolidated Financial Statements**

|                                                                                                                                                                                                 | **Page**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| Report                  of Independent Registered Public Accounting Firm -                  Hansen Barnett & Maxwell                                                                        | F-2       |
| Report                  of Independent Registered Public Accounting Firm -                  KPMG LLP                                                                                            | F-3       |
| Consolidated                  Balance Sheets as of June 30, 2006 and                  2005                                                                                                      | F-4       |
| Consolidated                  Statements of Operations and                  Comprehensive Income (Loss) for fiscal years ended June 30, 2006,                  2005,                  and 2004  | F-5       |
| Consolidated                  Statements of Shareholders' Equity for fiscal                  years ended June 30, 2006, 2005, and 2004                                                          | F-7       |
| Consolidated                  Statements of Cash Flows for fiscal years                  ended June 30, 2006, 2005, and 2004                                                                    | F-8       |
| Notes                  to Consolidated Financial Statements                                                                                                                                     | F-10      |

----

Hansen      Barnett & Maxwell

----

KPMG      LLP

----

**CLEARONE      COMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

**(in      thousands of dollars, except per share amounts)**

|                                                                                                                   |   | **June                30,** |    |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                                                   |   | **2006**                    |    | **2005** |   |
|                                                                                                                   |   |                        |    |   |   |
| **ASSETS**                                                                                                             |   |                        |    |   |   |
| Current                assets:                                                                                         |   |                        |    |   |   |
| Cash                and cash equivalents                                                                               |   | $                           | 1,240   |   | $ | 1,892 |   |
| Marketable                securities                                                                                   |   |                        | 20,550  |   |   | 15,800 |   |
| Accounts                receivable, net of allowance for doubtful accounts of                $49 and $46, respectively |   |                        | 7,784   |   |   | 6,859 |   |
| Inventories,                net                                                                                        |   |                        | 7,025   |   |   | 5,806 |   |
| Income                tax receivable                                                                                   |   |                        | 2,607   |   |   | 3,952 |   |
| Deferred                income taxes, net                                                                              |   |                        | 128     |   |   | 270 |   |
| Prepaid                expenses                                                                                        |   |                        | 255     |   |   | 300 |   |
| Total                current assets                                                                                    |   |                        | 39,589  |   |   | 34,879 |   |
|                                                                                                                   |   |                        |    |   |   |   |   |
| Property                and equipment, net                                                                             |   |                        | 1,647   |   |   | 2,805 |   |
| Intangibles,                net                                                                                        |   |                        | 154     |   |   | 322 |   |
| Other                assets                                                                                            |   |                        | 15      |   |   | 15 |   |
| Total                assets                                                                                            |   | $                           | 41,405  |   | $ | 38,021 |   |
|                                                                                                                   |   |                        |    |   |   |   |   |
| **LIABILITIES                AND SHAREHOLDERS' EQUITY**                                                                |   |                        |    |   |   |   |   |
| Current                liabilities:                                                                                    |   |                        |    |   |   |   |   |
| Accounts                payable                                                                                        |   | $                           | 2,597   |   | $ | 2,163 |   |
| Accrued                liabilities                                                                                     |   |                        | 2,397   |   |   | 5,622 |   |
| Deferred                product revenue                                                                                |   |                        | 5,871   |   |   | 5,055 |   |
| Total                current liabilities                                                                               |   |                        | 10,865  |   |   | 12,840 |   |
|                                                                                                                   |   |                        |    |   |   |   |   |
| Deferred                income taxes, net                                                                              |   |                        | 128     |   |   | 270 |   |
| Total                liabilities                                                                                       |   |                        | 10,993  |   |   | 13,110 |   |
|                                                                                                                   |   |                        |    |   |   |   |   |
| Commitments                and contingencies (see Notes 7 and 10)                                                      |   |                        |    |   |   |   |   |
|                                                                                                                   |   |                        |    |   |   |   |   |
| Shareholders'                equity:                                                                                   |   |                        |    |   |   |   |   |
| Common                stock, 50,000,000 shares authorized, par value $0.001,                                           |   |                        |    |   |   |   |   |
| 12,184,727                and 11,264,233 shares issued and outstanding, respectively                                   |   |                        | 12      |   |   | 11 |   |
| Additional                paid-in capital                                                                              |   |                        | 52,764  |   |   | 49,393 |   |
| Deferred                compensation                                                                                   |   |                        | -       |   |   | (33 | ) |
| Accumulated                deficit                                                                                     |   |                        | (22,364 | ) |   | (24,460 | ) |
| Total                shareholders' equity                                                                              |   |                        | 30,412  |   |   | 24,911 |   |
| Total                liabilities and shareholders' equity                                                              |   | $                           | 41,405  |   | $ | 38,021 |   |
|                                                                                                                   |   |                        |    |   |   |   |   |
| See                accompanying notes to consolidated financial                statements                              |

----

**CLEARONE      COMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF OPERATIONS AND COMPREHENSIVE      INCOME (LOSS)**

**(in      thousands of dollars, except per share amounts)**

|                                                                                              |   | **Years                Ended June 30,** |   |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                              |   | **2006**                                |   | **2005** |   | **2004** |   |
|                                                                                              |   |                                    |   |   |   |   |   |
| Revenue:                                                                                          |   |                                    |   |   |   |   |   |
| Product                                                                                           |   | $                                       | 37,632 |   | $ | 31,645 |   | $ | 27,836 |   |
| Business                services                                                                  |   |                                    | -      |   |   | - |   |   | 130 |   |
| Total                revenue                                                                      |   |                                    | 37,632 |   |   | 31,645 |   |   | 27,966 |   |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Cost                of goods sold:                                                                |   |                                    |   |   |   |   |   |   |   |   |
| Product                                                                                           |   |                                    | 18,603 |   |   | 14,701 |   |   | 13,683 |   |
| Product                inventory write-offs                                                       |   |                                    | 681    |   |   | 250 |   |   | 2,696 |   |
| Total                cost of goods sold                                                           |   |                                    | 19,284 |   |   | 14,951 |   |   | 16,379 |   |
| Gross                profit                                                                       |   |                                    | 18,348 |   |   | 16,694 |   |   | 11,587 |   |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Operating                expenses:                                                                |   |                                    |   |   |   |   |   |   |   |   |
| Marketing                and selling                                                              |   |                                    | 7,866  |   |   | 9,070 |   |   | 8,497 |   |
| Research                and product development                                                   |   |                                    | 8,299  |   |   | 5,305 |   |   | 4,237 |   |
| General                and administrative                                                         |   |                                    | 5,108  |   |   | 5,489 |   |   | 6,767 |   |
| Settlement                in shareholders' class action                                           |   |                                    | (1,205 | ) |   | (2,046 | ) |   | 4,080 |   |
| Impairment                losses (see Note 20)                                                    |   |                                    | -      |   |   | 180 |   |   | - |   |
| Restructuring                charge (see Note 20)                                                 |   |                                    | -      |   |   | 110 |   |   | - |   |
| Total                operating expenses                                                           |   |                                    | 20,068 |   |   | 18,108 |   |   | 23,581 |   |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Operating                loss                                                                     |   |                                    | (1,720 | ) |   | (1,414 | ) |   | (11,994 | ) |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Other                income (expense), net:                                                       |   |                                    |   |   |   |   |   |   |   |   |
| Interest                income                                                                    |   |                                    | 813    |   |   | 425 |   |   | 52 |   |
| Interest                expense                                                                   |   |                                    | -      |   |   | (104 | ) |   | (183 | ) |
| Other,                net                                                                         |   |                                    | 203    |   |   | (3 | ) |   | (130 | ) |
| Total                other income (expense), net                                                  |   |                                    | 1,016  |   |   | 318 |   |   | (261 | ) |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Loss                from continuing operations before income taxes                                |   |                                    | (704   | ) |   | (1,096 | ) |   | (12,255 | ) |
| Benefit                for income taxes                                                           |   |                                    | 870    |   |   | 3,248 |   |   | 736 |   |
| Income                (loss) from continuing operations                                           |   |                                    | 166    |   |   | 2,152 |   |   | (11,519 | ) |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Discontinued                operations:                                                           |   |                                    |   |   |   |   |   |   |   |   |
| Income                from discontinued operations                                                |   |                                    | -      |   |   | 225 |   |   | 2,813 |   |
| Gain                (loss) on disposal of discontinued operations                                 |   |                                    | 2,726  |   |   | 17,851 |   |   | (183 | ) |
| Income                tax provision                                                               |   |                                    | (796   | ) |   | (4,153 | ) |   | (998 | ) |
| Income                from discontinued operations                                                |   |                                    | 1,930  |   |   | 13,923 |   |   | 1,632 |   |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Net                income (loss)                                                                  |   | $                                       | 2,096  |   | $ | 16,075 |   | $ | (9,887 | ) |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Comprehensive                income (loss):                                                       |   |                                    |   |   |   |   |   |   |   |   |
| Net                income (loss)                                                                  |   | $                                       | 2,096  |   | $ | 16,075 |   | $ | (9,887 | ) |
| Foreign                currency translation adjustments                                           |   |                                    | -      |   |   | 112 |   |   | (8 | ) |
| Less:                reclassification adjustments for foreign currency                translation |   |                                    |   |   |   |   |   |   |   |   |
| adjustments                included in net income (loss)                                          |   |                                    | -      |   |   | (1,301 | ) |   | - |   |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| Comprehensive                income (loss):                                                       |   | $                                       | 2,096  |   | $ | 14,886 |   | $ | (9,895 | ) |
|                                                                                              |   |                                    |   |   |   |   |   |   |   |   |
| See                accompanying notes to consolidated financial                statements         |

----

**CLEARONE      COMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)      (CONTINUED)**

**(in      thousands of dollars, except per share amounts)**

|                                                                                              |   | **Years                Ended June 30,** |       |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                                              |   | **2006**                                |       | **2005** |   | **2004** |   |
|                                                                                              |   |                                    |       |   |   |   |   |
| Basic                earnings (loss) per common share from continuing                operations   |   | $                                       | 0.02       |   | $ | 0.19 |   | $ | (1.04 | ) |
| Diluted                earnings (loss) per common share from continuing                operations |   | $                                       | 0.01       |   | $ | 0.17 |   | $ | (1.04 | ) |
|                                                                                              |   |                                    |       |   |   |   |   |   |   |   |
| Basic                earnings per common share from discontinued operations                       |   | $                                       | 0.16       |   | $ | 1.25 |   | $ | 0.15 |   |
| Diluted                earnings per common share from discontinued operations                     |   | $                                       | 0.16       |   | $ | 1.13 |   | $ | 0.15 |   |
|                                                                                              |   |                                    |       |   |   |   |   |   |   |   |
| Basic                earnings (loss) per common share                                             |   | $                                       | 0.18       |   | $ | 1.44 |   | $ | (0.89 | ) |
| Diluted                earnings (loss) per common share                                           |   | $                                       | 0.17       |   | $ | 1.30 |   | $ | (0.89 | ) |
|                                                                                              |   |                                    |       |   |   |   |   |   |   |   |
| Basic                weighted average shares outstanding                                          |   |                                    | 11,957,756 |   |   | 11,177,406 |   |   | 11,057,896 |   |
| Diluted                weighted average shares outstanding                                        |   |                                    | 12,206,618 |   |   | 12,332,106 |   |   | 11,057,896 |   |
|                                                                                              |   |                                    |       |   |   |   |   |   |   |   |
| See                accompanying notes to consolidated financial                statements         |

----

**CLEARONE      COMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF SHAREHOLDERS’EQUITY**

**(in      thousands of dollars, except per share amounts)**

|                                                                                      |   |                            |       |        |   |           |   |              |   | **Accumulated** |   |              |   |       |   |
|-------------------------------------------------------------------------------------------|--------|---------------------------------|------------|-------------|--------|----------------|--------|-------------------|--------|-----------------|--------|-------------------|--------|------------|--------|
|                                                                                      |   |                            |       |        |   | **Additional** |   |              |   | **Other**       |   |              |   | **Total**  |   |
|                                                                                      |   | **Common                Stock** |       | **Paid-In** |   | **Deferred**   |   | **Comprehensive** |   | **Accumulated** |   | **Shareholders'** |   |
|                                                                                      |   | **Shares**                      |       | **Amount**  |   | **Capital**    |   | **Compensation**  |   | **Income**      |   | **Deficit**       |   | **Equity** |   |
|                                                                                      |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |
| Balances                at June 30, 2003                                                  |   |                            | 11,086,733 |        | $      | 11             |   | $                 | 48,258 |            | $      | (75               | )      | $          | 1,197  |   | $ | (30,648 | ) | $ | 18,743 |   |
|                                                                                      |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| Repurchase                and retirement of Common                                        |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| Shares                per settlement agreements with                                      |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| former                executive officers                                                  |   |                            | (50,500    | )           |   | -              |   |              | (63    | )               |   | -                 |   |       | -      |   |   | - |   |   | (63 | ) |
| Compensation                expense resulting                                             |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| from                the modification of stock options                                     |   |                            | -          |        |   | -              |   |              | 200    |            |   | -                 |   |       | -      |   |   | - |   |   | 200 |   |
| Amortization                of deferred compensation                                      |   |                            | -          |        |   | -              |   |              | -      |            |   | 21                |   |       | -      |   |   | - |   |   | 21 |   |
| Foreign                currency translation adjustments                                   |   |                            | -          |        |   | -              |   |              | -      |            |   | -                 |   |       | (8     | ) |   | - |   |   | (8 | ) |
| Net                loss                                                                   |   |                            | -          |        |   | -              |   |              | -      |            |   | -                 |   |       | -      |   |   | (9,887 | ) |   | (9,887 | ) |
| Balances                at June 30, 2004                                                  |   |                            | 11,036,233 |        |   | 11             |   |              | 48,395 |            |   | (54               | )      |       | 1,189  |   |   | (40,535 | ) |   | 9,006 |   |
|                                                                                      |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| Issuance                of Common Shares related                                          |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| to                shareholder settlement agreement                                        |   |                            | 228,000    |        |   | -              |   |              | 957    |            |   | -                 |   |       | -      |   |   | - |   |   | 957 |   |
| Compensation                expense resulting from                                        |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| the                modification of stock options                                          |   |                            | -          |        |   | -              |   |              | 41     |            |   | -                 |   |       | -      |   |   | - |   |   | 41 |   |
| Amortization                of deferred compensation                                      |   |                            | -          |        |   | -              |   |              | -      |            |   | 21                |   |       | -      |   |   | - |   |   | 21 |   |
| Foreign                currency translation adjustments                                   |   |                            | -          |        |   | -              |   |              | -      |            |   | -                 |   |       | (1,189 | ) |   | - |   |   | (1,189 | ) |
| Net                income                                                                 |   |                            | -          |        |   | -              |   |              | -      |            |   | -                 |   |       | -      |   |   | 16,075 |   |   | 16,075 |   |
| Balances                at June 30, 2005                                                  |   |                            | 11,264,233 |        |   | 11             |   |              | 49,393 |            |   | (33               | )      |       | -      |   |   | (24,460 | ) |   | 24,911 |   |
|                                                                                      |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| Issuance                of Common Shares related to                                       |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| shareholder                settlement agreement                                           |   |                            | 920,494    |        |   | 1              |   |              | 2,263  |            |   | -                 |   |       | -      |   |   | - |   |   | 2,264 |   |
| Compensation                expense resulting from the                                    |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| modification                of stock options                                              |   |                            | -          |        |   | -              |   |              | 16     |            |   | -                 |   |       | -      |   |   | - |   |   | 16 |   |
| Compensation                cost associated with                                          |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| SFAS                No. 123R                                                              |   |                            | -          |        |   | -              |   |              | 1,092  |            |   | -                 |   |       | -      |   |   | - |   |   | 1,092 |   |
| SFAS                No. 123R transition expense                                           |   |                            | -          |        |   | -              |   |              | -      |            |   | 33                |   |       | -      |   |   | - |   |   | 33 |   |
| Net                income                                                                 |   |                            | -          |        |   | -              |   |              | -      |            |   | -                 |   |       | -      |   |   | 2,096 |   |   | 2,096 |   |
| Balances                at June 30, 2006                                                  |   |                            | 12,184,727 |        | $      | 12             |   | $                 | 52,764 |            | $      | -                 |   | $          | -      |   | $ | (22,364 | ) | $ | 30,412 |   |
|                                                                                      |   |                            |       |        |   |           |   |              |   |            |   |              |   |       |   |   |   |   |   |   |   |   |
| See                accompanying notes to consolidated financial                statements |

----

**CLEARONE      COMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(in      thousands of dollars, except per share amounts)**

|                                                                                             |   | **Years                Ended June 30,** |    |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                                             |   | **2006**                                |    | **2005** |   | **2004** |   |
| Cash                flows from operating activities:                                             |   |                                    |    |   |   |   |   |
| Net                income (loss) from continuing operations                                      |   | $                                       | 166     |   | $ | 2,152 |   | $ | (11,519 | ) |
| Adjustments                to reconcile net income (loss) from continuing operations             |   |                                    |    |   |   |   |   |   |   |   |
| to                net cash provided by operations:                                               |   |                                    |    |   |   |   |   |   |   |   |
| Loss                on impairment of long-lived assets, goodwill, and                intangibles |   |                                    | -       |   |   | 180 |   |   | - |   |
| Depreciation                and amortization expense                                             |   |                                    | 1,557   |   |   | 2,366 |   |   | 1,934 |   |
| Deferred                income taxes                                                             |   |                                    | -       |   |   | - |   |   | 3,079 |   |
| Stock-based                compensation                                                          |   |                                    | 1,140   |   |   | 62 |   |   | 221 |   |
| Write-off                of inventory                                                            |   |                                    | 681     |   |   | 250 |   |   | 2,696 |   |
| (Gain)                loss on disposal of assets and fixed assets write-offs                     |   |                                    | (237    | ) |   | (12 | ) |   | 154 |   |
| Provision                for doubtful accounts                                                   |   |                                    | 3       |   |   | 46 |   |   | 24 |   |
| Purchase                accounting adjustment                                                    |   |                                    | -       |   |   | 395 |   |   | - |   |
| Changes                in operating assets and liabilities:                                      |   |                                    |    |   |   |   |   |   |   |   |
| Accounts                receivable                                                               |   |                                    | (928    | ) |   | (692 | ) |   | (6,140 | ) |
| Inventories                                                                                      |   |                                    | (1,900  | ) |   | 15 |   |   | (31 | ) |
| Prepaid                expenses and other assets                                                 |   |                                    | 45      |   |   | 220 |   |   | (296 | ) |
| Accounts                payable                                                                  |   |                                    | 434     |   |   | 233 |   |   | 399 |   |
| Restructuring                charge                                                              |   |                                    | -       |   |   | 110 |   |   | - |   |
| Accrued                liabilities                                                               |   |                                    | (960    | ) |   | (4,237 | ) |   | 2,300 |   |
| Income                taxes                                                                      |   |                                    | 1,345   |   |   | (585 | ) |   | (609 | ) |
| Deferred                product revenue                                                          |   |                                    | 816     |   |   | (1,052 | ) |   | 6,107 |   |
| Net                change in other assets/liabilities                                            |   |                                    | -       |   |   | 11 |   |   | 1 |   |
| Net                cash provided by (used in) continuing operating activities                    |   |                                    | 2,162   |   |   | (538 | ) |   | (1,680 | ) |
| Net                cash provided by discontinued operating activities                            |   |                                    | -       |   |   | 168 |   |   | 2,764 |   |
| Net                cash provided by (used in) operating activities                               |   |                                    | 2,162   |   |   | (370 | ) |   | 1,084 |   |
|                                                                                             |   |                                    |    |   |   |   |   |   |   |   |
| Cash                flows from investing activities:                                             |   |                                    |    |   |   |   |   |   |   |   |
| Restricted                cash                                                                   |   |                                    | -       |   |   | - |   |   | 200 |   |
| Purchase                of property and equipment                                                |   |                                    | (224    | ) |   | (1,136 | ) |   | (1,685 | ) |
| Proceeds                from the sale of property and equipment                                  |   |                                    | 230     |   |   | 8 |   |   | 5 |   |
| Purchase                of marketable securities                                                 |   |                                    | (14,800 | ) |   | (47,100 | ) |   | (3,350 | ) |
| Sale                of marketable securities                                                     |   |                                    | 10,050  |   |   | 33,050 |   |   | 3,500 |   |
| Net                cash used in continuing investing activities                                  |   |                                    | (4,744  | ) |   | (15,178 | ) |   | (1,330 | ) |
| Net                cash provided by (used in) discontinued investing                activities   |   |                                    | 1,930   |   |   | 14,173 |   |   | (147 | ) |
| Net                cash (used in) investing activities                                           |   |                                    | (2,814  | ) |   | (1,005 | ) |   | (1,477 | ) |
|                                                                                             |   |                                    |    |   |   |   |   |   |   |   |
| Cash                flows from financing activities:                                             |   |                                    |    |   |   |   |   |   |   |   |
| Principal                payments on capital lease obligations                                   |   |                                    | -       |   |   | (8 | ) |   | (32 | ) |
| Principal                payments on note payable                                                |   |                                    | -       |   |   | (932 | ) |   | (652 | ) |
| Purchase                and retirement of Common Shares                                          |   |                                    | -       |   |   | - |   |   | (63 | ) |
| Net                cash used in continuing financing activities                                  |   |                                    | -       |   |   | (940 | ) |   | (747 | ) |
| Net                cash used in discontinued financing activities                                |   |                                    | -       |   |   | - |   |   | (770 | ) |
| Net                cash used in financing activities                                             |   |                                    | -       |   |   | (940 | ) |   | (1,517 | ) |
|                                                                                             |   |                                    |    |   |   |   |   |   |   |   |
| Net                decrease in cash and cash equivalents                                         |   |                                    | (652    | ) |   | (2,315 | ) |   | (1,910 | ) |
| Effect                of foreign exchange rates on cash and cash equivalents                     |   |                                    | -       |   |   | - |   |   | (7 | ) |
| Cash                and cash equivalents at the beginning of the year                            |   |                                    | 1,892   |   |   | 4,207 |   |   | 6,124 |   |
| Cash                and cash equivalents at the end of the year                                  |   | $                                       | 1,240   |   | $ | 1,892 |   | $ | 4,207 |   |
|                                                                                             |   |                                    |    |   |   |   |   |   |   |   |
| See                accompanying notes to consolidated financial                statements        |

----

**CLEARONE      COMMUNICATIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS (CONTINUED)**

**(in      thousands of dollars, except per share amounts)**

|                                                                                      |   | **Years                Ended June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                      |   | **2006**                                |   | **2005** |   | **2004** |   |
|                                                                                      |   |                                    |   |   |   |   |   |
| Supplemental                disclosure of cash flow information:                          |   |                                    |   |   |   |   |   |
| Cash                paid for interest                                                     |   | $                                       | -      |   | $ | 104 |   | $ | 282 |   |
| Cash                paid (received) for income taxes                                      |   |                                    | (1,419 | ) |   | 1,117 |   |   | (2,189 | ) |
|                                                                                      |   |                                    |   |   |   |   |   |   |   |   |
| Supplemental                disclosure of non-cash financing activities:                  |   |                                    |   |   |   |   |   |   |   |   |
| Value                of common shares issued in shareholder settlement                    |   | $                                       | 2,264  |   | $ | 957 |   | $ | - |   |
|                                                                                      |   |                                    |   |   |   |   |   |   |   |   |
| See                accompanying notes to consolidated financial                statements |

----

**CLEARONE      COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(in      thousands of dollars, except per share amounts)**

| **1.  ** | **Organization                -****Nature                of Operations** |
|--------------------|--------------------------------------------------------------------------|

| **2.  ** | **Summary                of Significant Accounting                Policies** |
|--------------------|------------------------------------------------------------------------------|

*Consolidation*

*Pervasiveness      of Estimates*

*Fair      Value of Financial Instruments*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*Foreign      Currency Translation *

*Concentration      Risk*

*Cash      Equivalents*

*Marketable      Securities*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*Accounts      Receivable*

| Description                               |   | Balance                  atBeginning                  ofPeriod |   | Charged                  to Costs                  andExpenses |   | Deductions |   | Balance                  atEnd                  ofPeriod |   |
|-------------------------------------------|--------|----------------------------------------------------------------|--------|----------------------------------------------------------------|--------|------------|--------|----------------------------------------------------------|--------|
|                                      |   |                                                           |   |                                                           |   |       |   |                                                     |   |
| Year                  ended June 30, 2005 |   | $                                                              | 24     |                                                           | $      | 46         |   | $                                                        | (24    | ) | $ | 46 |   |
|                                      |   |                                                           |   |                                                           |   |       |   |                                                     |   |   |   |   |   |
| Year                  ended June 30, 2006 |   | $                                                              | 46     |                                                           | $      | 3          |   | $                                                        | -      |   | $ | 49 |   |

*Inventories*

*Property      and Equipment*

*Intangibles*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*Impairment      of Long-Lived Assets*

*Revenue      Recognition*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                         |   | **Deferred                Revenue** |   | **Deferred                Cost of Goods Sold** |   | **Deferred                Gross Profit** |   |
|------------------------------|--------|-------------------------------------|--------|------------------------------------------------|--------|------------------------------------------|--------|
|                         |   |                                |   |                                           |   |                                     |   |
| June                30, 2006 |   | $                                   | 5,871  |                                           | $      | 2,817                                    |   | $ | 3,054 |   |
| June                30, 2005 |   |                                | 5,055  |                                           |   | 2,297                                    |   |   | 2,758 |   |
| June                30, 2004 |   |                                | 6,107  |                                           |   | 2,381                                    |   |   | 3,726 |   |

*Shipping      and Handling Costs*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*Warranty      Costs*

|                                            |   | **Years                Ended June 30,** |   |
|-------------------------------------------------|--------|-----------------------------------------|--------|
|                                            |   | **2006**                                |   | **2005** |   |
|                                            |   |                                    |   |   |   |
| Balance                at the beginning of year |   | $                                       | 126    |   | $ | 108 |   |
| Accruals/additions                              |   |                                    | 356    |   |   | 174 |   |
| Usage                                           |   |                                    | (313   | ) |   | (156 | ) |
| Balance                at end of year           |   | $                                       | 169    |   | $ | 126 |   |

*Advertising      *

*Research      and Product Development Costs*

*Income      Taxes*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*Earnings      Per Share*

|                                                                          |   | **Years                Ended June 30,** |       |
|-------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                          |   | **2006**                                |       | **2005** |   | **2004** |   |
| Numerator:                                                                    |   |                                    |       |   |   |   |   |
| Income                (loss) from continuing operations                       |   | $                                       | 166        |   | $ | 2,152 |   | $ | (11,519 | ) |
| Income                from discontinued operations, net of tax                |   |                                    | -          |   |   | 173 |   |   | 1,747 |   |
| Gain                (loss) on disposal of discontinued operations, net of tax |   |                                    | 1,930      |   |   | 13,750 |   |   | (115 | ) |
| Net                income (loss)                                              |   | $                                       | 2,096      |   | $ | 16,075 |   | $ | (9,887 | ) |
| Denominator:                                                                  |   |                                    |       |   |   |   |   |   |   |   |
| Basic                weighted average shares                                  |   |                                    | 11,957,756 |   |   | 11,177,406 |   |   | 11,057,896 |   |
| Dilutive                common stock equivalents using treasury stock method  |   |                                    | 248,862    |   |   | 1,154,700 |   |   | - |   |
| Diluted                weighted average shares                                |   |                                    | 12,206,618 |   |   | 12,332,106 |   |   | 11,057,896 |   |
|                                                                          |   |                                    |       |   |   |   |   |   |   |   |
| Basic                earnings (loss) per common share:                        |   |                                    |       |   |   |   |   |   |   |   |
| Continuing                operations                                          |   | $                                       | 0.02       |   | $ | 0.19 |   | $ | (1.04 | ) |
| Discontinued                operations                                        |   |                                    | -          |   |   | 0.02 |   |   | 0.16 |   |
| Disposal                of discontinued operations                            |   |                                    | 0.16       |   |   | 1.23 |   |   | (0.01 | ) |
| Net                income (loss)                                              |   |                                    | 0.18       |   |   | 1.44 |   |   | (0.89 | ) |
| Diluted                earnings (loss) per common share:                      |   |                                    |       |   |   |   |   |   |   |   |
| Continuing                operations                                          |   | $                                       | 0.01       |   | $ | 0.17 |   | $ | (1.04 | ) |
| Discontinued                operations                                        |   |                                    | -          |   |   | 0.01 |   |   | 0.16 |   |
| Disposal                of discontinued operations                            |   |                                    | 0.16       |   |   | 1.12 |   |   | (0.01 | ) |
| Net                income (loss)                                              |   |                                    | 0.17       |   |   | 1.30 |   |   | (0.89 | ) |

*Share-Based      Payment*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                                                                           |   | **Years                Ended June 30,** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                           |   | **2005**                                |   | **2004** |   |
| Net                income (loss):                                              |   |                                    |   |   |   |
| As                reported                                                     |   | $                                       | 16,075 |   | $ | (9,887 | ) |
| Stock-based                employee compensation expense included in           |   |                                    |   |   |   |   |   |
| reported                net loss, net of income taxes                          |   |                                    | 13     |   |   | 13 |   |
| Stock-based                employee compensation expense determined            |   |                                    |   |   |   |   |   |
| under                the fair-value method for all awards, net of income taxes |   |                                    | (866   | ) |   | (439 | ) |
| Pro                forma                                                       |   | $                                       | 15,222 |   | $ | (10,313 | ) |
|                                                                           |   |                                    |   |   |   |   |   |
| Basic                earnings (loss) per common share:                         |   |                                    |   |   |   |   |   |
| As                reported                                                     |   | $                                       | 1.44   |   | $ | (0.89 | ) |
| Pro                forma                                                       |   |                                    | 1.36   |   |   | (0.93 | ) |
| Diluted                earnings (loss) per common share:                       |   |                                    |   |   |   |   |   |
| As                reported                                                     |   | $                                       | 1.30   |   | $ | (0.89 | ) |
| Pro                forma                                                       |   |                                    | 1.23   |   |   | (0.93 | ) |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*Recent      Accounting Pronouncements*

Accounting      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.      109

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*Reclassifications*

| **3.  ** | **Discontinued                Operations** |
|--------------------|--------------------------------------------|

|                                                                                                |   | **Years                Ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                |   | **2006**                                |   | **2005** |   | **2004** |   |
|                                                                                                |   |                                    |   |   |   |   |   |
| Income                (loss) from discontinued operations                                           |   |                                    |   |   |   |   |   |
| U.S.                audiovisual integration services                                                |   | $                                       | -      |   | $ | - |   | $ | (360 | ) |
| Conferencing                services business                                                       |   |                                    | -      |   |   | - |   |   | 2,800 |   |
| OM                Video                                                                             |   |                                    | -      |   |   | 225 |   |   | 373 |   |
| Total                income from discontinued operations                                            |   |                                    | -      |   |   | 225 |   |   | 2,813 |   |
|                                                                                                |   |                                    |   |   |   |   |   |   |   |   |
| Gain                (loss) on disposal of discontinued operations                                   |   |                                    |   |   |   |   |   |   |   |   |
| U.S.                audiovisual integration services                                                |   | $                                       | -      |   | $ | - |   | $ | (276 | ) |
| Conferencing                services business                                                       |   |                                    | 1,030  |   |   | 17,369 |   |   | - |   |
| OM                Video                                                                             |   |                                    | 350    |   |   | 295 |   |   | - |   |
| Burk                Technology                                                                      |   |                                    | 1,346  |   |   | 187 |   |   | 93 |   |
| Total                gain (loss) on disposal of discontinued operations                             |   |                                    | 2,726  |   |   | 17,851 |   |   | (183 | ) |
|                                                                                                |   |                                    |   |   |   |   |   |   |   |   |
| Income                tax (provision) benefit                                                       |   |                                    |   |   |   |   |   |   |   |   |
| U.S.                audiovisual integration services                                                |   | $                                       | -      |   | $ | - |   | $ | 237 |   |
| Conferencing                services business                                                       |   |                                    | (301   | ) |   | (3,991 | ) |   | (1,044 | ) |
| OM                Video                                                                             |   |                                    | (102   | ) |   | (119 | ) |   | (156 | ) |
| Burk                Technology                                                                      |   |                                    | (393   | ) |   | (43 | ) |   | (35 | ) |
| Total                income tax (provision) benefit                                                 |   |                                    | (796   | ) |   | (4,153 | ) |   | (998 | ) |
|                                                                                                |   |                                    |   |   |   |   |   |   |   |   |
| Total                income (loss) from discontinued operations, net of income                taxes |   |                                    |   |   |   |   |   |   |   |   |
| U.S.                audiovisual integration services                                                |   | $                                       | -      |   | $ | - |   | $ | (399 | ) |
| Conferencing                services business                                                       |   |                                    | 729    |   |   | 13,378 |   |   | 1,756 |   |
| OM                Video                                                                             |   |                                    | 248    |   |   | 401 |   |   | 217 |   |
| Burk                Technology                                                                      |   |                                    | 953    |   |   | 144 |   |   | 58 |   |
| Total                income from discontinued operations, net of income taxes                       |   | $                                       | 1,930  |   | $ | 13,923 |   | $ | 1,632 |   |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*U.S.      Audiovisual Integration Services *

|                                                                  |   | **Year                Ended June 30,** |   |
|-----------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                  |   | **2004**                               |   |
|                                                                  |   |                                   |   |
| Revenue                - business services                            |   | $                                      | 3,597  |   |
| Cost                of goods sold - business services                 |   |                                   | 2,648  |   |
| Gross                profit                                           |   |                                   | 949    |   |
| Marketing                and selling expenses                         |   |                                   | 522    |   |
| General                and administrative expenses                    |   |                                   | 787    |   |
| Impairment                losses                                      |   |                                   | -      |   |
| Loss                before income taxes                               |   |                                   | (360   | ) |
| Loss                on disposal of discontinued operations            |   |                                   | (276   | ) |
| Benefit                for income taxes                               |   |                                   | 237    |   |
| Loss                from discontinued operations, net of income taxes |   | $                                      | (399   | ) |

*Conferencing      Services*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                                                                    |   | **Years                Ended June 30,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                    |   | **2006**                                |   | **2005** |   | **2004** |   |
|                                                                    |   |                                    |   |   |   |   |   |
| Revenue                - conferencing services                          |   | $                                       | -      |   | $ | - |   | $ | 15,578 |   |
| Cost                of goods sold - conferencing services               |   |                                    | -      |   |   | - |   |   | 7,844 |   |
| Gross                profit                                             |   |                                    | -      |   |   | - |   |   | 7,734 |   |
| Marketing                and selling expenses                           |   |                                    | -      |   |   | - |   |   | 3,799 |   |
| General                and administrative expenses                      |   |                                    | -      |   |   | - |   |   | 1,036 |   |
| Other                expense, net                                       |   |                                    | -      |   |   | - |   |   | 99 |   |
| Income                before income taxes                               |   |                                    | -      |   |   | - |   |   | 2,800 |   |
| Gain                on disposal of discontinued operations              |   |                                    | 1,030  |   |   | 17,369 |   |   | - |   |
| Provision                for income taxes                               |   |                                    | (301   | ) |   | (3,991 | ) |   | (1,044 | ) |
| Income                from discontinued operations, net of income taxes |   | $                                       | 729    |   | $ | 13,378 |   | $ | 1,756 |   |

*OM      Video*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                                                                    |   | **Years                Ended June 30,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                    |   | **2006**                                |   | **2005** |   | **2004** |   |
|                                                                    |   |                                    |   |   |   |   |   |
| Revenue                - business services                              |   | $                                       | -      |   | $ | 3,805 |   | $ | 5,928 |   |
| Cost                of goods sold - business services                   |   |                                    | -      |   |   | 3,038 |   |   | 4,052 |   |
| Gross                profit                                             |   |                                    | -      |   |   | 767 |   |   | 1,876 |   |
| Marketing                and selling expenses                           |   |                                    | -      |   |   | 289 |   |   | 390 |   |
| General                and administrative expenses                      |   |                                    | -      |   |   | 253 |   |   | 1,113 |   |
| Income                before income taxes                               |   |                                    | -      |   |   | 225 |   |   | 373 |   |
| Gain                on disposal of discontinued operations              |   |                                    | 350    |   |   | 295 |   |   | - |   |
| Provision                for income taxes                               |   |                                    | (102   | ) |   | (119 | ) |   | (156 | ) |
| Income                from discontinued operations, net of income taxes |   | $                                       | 248    |   | $ | 401 |   | $ | 217 |   |

*Burk      Technology*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **4.  ** | **Inventories** |
|--------------------|-----------------|

|                               |   | **As                of June 30,** |   |
|------------------------------------|--------|-----------------------------------|--------|
|                               |   | **2006**                          |   | **2005** |   |
|                               |   |                              |   |   |   |
| Raw                materials       |   | $                                 | 600    |   | $ | 1,804 |   |
| Finished                goods      |   |                              | 3,608  |   |   | 1,705 |   |
| Consigned                inventory |   |                              | 2,817  |   |   | 2,297 |   |
| Total                inventory     |   | $                                 | 7,025  |   | $ | 5,806 |   |

| **5.  ** | **Property                and Equipment** |
|--------------------|-------------------------------------------|

|                                                     |   | **Estimated**                   |                         | **As                of June 30,** |   |
|----------------------------------------------------------|--------|---------------------------------|------------------------------|-----------------------------------|--------|
|                                                     |   | **useful                lives** |                         | **2006**                          |   | **2005** |   |
|                                                     |   |                            |                         |                              |   |   |   |
| Office                furniture and equipment            |   |                            | 3                to 10 years |                              | $      | 7,458 |   | $ | 7,522 |   |
| Leasehold                improvements                    |   |                            | 2                to 5 years  |                              |   | 974 |   |   | 924 |   |
| Manufacturing                and test equipment          |   |                            | 2                to 10 years |                              |   | 1,184 |   |   | 1,049 |   |
|                                                     |   |                            |                         |                              |   | 9,616 |   |   | 9,495 |   |
| Accumulated                depreciation and amortization |   |                            |                         |                              |   | (7,969 | ) |   | (6,690 | ) |
| Property                and equipment, net               |   |                            |                         |                              | $      | 1,647 |   | $ | 2,805 |   |

| **6.  ** | **Other                Intangible Assets** |
|--------------------|--------------------------------------------|

*Acquired      Intangibles*

|    |   |                           |                   | **As                of June 30,** |   |
|---------|--------|--------------------------------|------------------------|-----------------------------------|--------|
|    |   |                           |                   | **2006**                          |   | **2005** |   |
|    |   |                           |                   | **Gross**                         |   | **Accumulated** |   | **Gross** |   | **Accumulated** |   |
|    |   | **Useful                Life** |                   | **Value**                         |   | **Amortization** |   | **Value** |   | **Amortization** |   |
| Patents |   |                           | 5                years |                              | $      | 1,060 |   | $ | (906 | ) | $ | 1,060 |   | $ | (738 | ) |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **Years                Ending June 30,**            |   |   |   |
|-----------------------------------------------------|--------|--------|--------|
| 2007                                                |   | $      | 154    |   |
| Thereafter                                          |   |   | -      |   |
| Total                estimated amortization expense |   | $      | 154    |   |

| **7.  ** | **Leases** |
|--------------------|------------|

| **Years                Ending June 30,**    |   |   |   |
|---------------------------------------------|--------|--------|--------|
| 2007                                        |   | $      | 646    |   |
| 2008                                        |   |   | 663    |   |
| 2009                                        |   |   | 643    |   |
| 2010                and thereafter          |   |   | 2,895  |   |
| Total                minimum lease payments |   | $      | 4,847  |   |

| **8.  ** | **Note                Payable** |
|--------------------|---------------------------------|

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**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **9.  ** | **Accrued                Liabilities** |
|--------------------|----------------------------------------|

|                                                   |   | **As                of June 30,** |   |
|--------------------------------------------------------|--------|-----------------------------------|--------|
|                                                   |   | **2006**                          |   | **2005** |   |
| Accrued                salaries and other compensation |   | $                                 | 1,150  |   | $ | 977 |   |
| Other                accrued liabilities               |   |                              | 1,247  |   |   | 1,049 |   |
| Class                action settlement                 |   |                              | -      |   |   | 3,596 |   |
| Total                                                  |   | $                                 | 2,397  |   | $ | 5,622 |   |

| **10.  ** | **Commitments                and Contingencies** |
|---------------------|--------------------------------------------------|

*Outsource      Manufacturer.*

*Legal      Proceedings.*

*The      SEC Action*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*U.S.      Attorney’s Investigation*
* *

*The      Whistleblower Action*
** **

*The      Shareholders’ Class Action*

*The      Shareholder Derivative Actions*

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*Employment      Separation Agreements*

*Indemnification      of Officers and Directors*

*The      Insurance Coverage Action. *

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

*The      Pacific Technology & Telecommunications Collection Action*

| **11.  ** | **Shareholders’                Equity** |
|---------------------|-----------------------------------------------|

*Private      Placement*

*Stock      Repurchase Program*

*Stock      Buy-Back Program*

| **12.  ** | **Share-Based                Payment** |
|---------------------|----------------------------------------|

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                                              | **Fiscal                Year Ended** |
|---------------------------------------------------|--------------------------------------|
|                                              | **June                30,**          | **June                30,** | **June                30,** |
|                                              | **2006**                             | **2005** | **2004** |
| Risk-free                interest rate, average   | 4.4%                                 | 4.0% | 3.2% |
| Expected                option life, average      | 5.9                years             | 5.8                years | 5.2                years |
| Expected                price volatility, average | 87.2%                                | 91.8% | 91.2% |
| Expected                dividend yield            | 0.0%                                 | 0.0% | 0.0% |
| Expected                annual forfeiture rate    | 10.0%                                | 0.0% | 0.0% |

|                                                               |   | **Year                Ended June 30, 2006** |   |
|--------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                               |   | **(in                thousands)**           |   |
|                                                               |   |                                        |   |   |   |
|                                                               |   |                                        |   | **SFAS** |   |
|                                                               |   |                                        |   | **No.                123R** |   |
|                                                               |   |                                        |   | **Compensation** |   |
|                                                               |   | **As                Reported**              |   | **Expense** |   |
|                                                               |   |                                        |   |   |   |
| Revenue                                                            |   | $                                           | 37,632 |   | $ | - |   |
| Cost                of goods sold                                  |   |                                        | 19,284 |   |   | (49 | ) |
| Gross                profit                                        |   |                                        | 18,348 |   |   | 49 |   |
| Operating                expenses:                                 |   |                                        |   |   |   |   |   |
| Marketing                and selling                               |   |                                        | 7,866  |   |   | (99 | ) |
| Research                and product development                    |   |                                        | 8,299  |   |   | (203 | ) |
| General                and administrative                          |   |                                        | 5,108  |   |   | (756 | ) |
| Settlement                in shareholders' class action            |   |                                        | (1,205 | ) |   | - |   |
| Total                operating expenses                            |   |                                        | 20,068 |   |   | (1,058 | ) |
| Operating                loss                                      |   |                                        | (1,720 | ) |   | 1,107 |   |
| Other                income, net                                   |   |                                        | 1,016  |   |   | 34 |   |
| Loss                from continuing operations before income taxes |   |                                        | (704   | ) |   | 1,141 |   |
| Benefit                for income taxes                            |   |                                        | 870    |   |   | (264 | ) |
| Income                from continuing operations                   |   |                                        | 166    |   |   | 877 |   |
| Income                from discontinued operations, net of tax     |   |                                        | 1,930  |   |   | - |   |
| Net                income                                          |   | $                                           | 2,096  |   | $ | 877 |   |
|                                                               |   |                                        |   |   |   |   |   |
| Basic                earnings (loss) per common share:             |   |                                        |   |   |   |   |   |
| Continuing                operations                               |   | $                                           | 0.02   |   | $ | 0.07 |   |
| Discontinued                operations                             |   |                                        | 0.16   |   |   | - |   |
| Net                income                                          |   |                                        | 0.18   |   |   | 0.07 |   |
| Diluted                earnings (loss) per common share:           |   |                                        |   |   |   |   |   |
| Continuing                operations                               |   | $                                           | 0.01   |   | $ | 0.07 |   |
| Discontinued                operations                             |   |                                        | 0.16   |   |   | - |   |
| Net                income                                          |   |                                        | 0.17   |   |   | 0.07 |   |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **Stock                Options**            |   | **Number                of Shares** |      | **Weighted                Average Exercise Price** |    | **Weighted                Remaining Contractual Term (years)** |   | **Aggregate                Intrinsic Value** |                     |
|---------------------------------------------|--------|-------------------------------------|-----------|----------------------------------------------------|---------|----------------------------------------------------------------|--------|----------------------------------------------|--------------------------|
|                                        |   |                                |      |                                               |    |                                                           |   |                                         |                     |
| Outstanding                at June 30, 2003 |   |                                | 1,972,756 |                                               | $       | 6.12                                                           |   |                                         |                     |   |   |   |   |
|                                        |   |                                |      |                                               |    |                                                           |   |                                         |                     |   |   |   |   |
| Granted                                     |   |                                | 1,118,250 |                                               |    | 4.37                                                           |   |                                         |                     |   |   |   |   |
| Expired                and canceled         |   |                                | (813,137  | )                                                  |    | 3.47                                                           |   |                                         |                     |   |   |   |   |
| Forfeited                prior to vesting   |   |                                | (844,682  | )                                                  |    | 5.93                                                           |   |                                         |                     |   |   |   |   |
| Exercised                                   |   |                                | -         |                                               |    | -                                                              |   |                                         |                     |   |   |   |   |
| Outstanding                at June 30, 2004 |   |                                | 1,433,187 |                                               |    | 6.37                                                           |   |                                         |                     |   |   |   |   |
|                                        |   |                                |      |                                               |    |                                                           |   |                                         |                     |   |   |   |   |
| Granted                                     |   |                                | 450,500   |                                               |    | 4.77                                                           |   |                                         |                     |   |   |   |   |
| Expired                and canceled         |   |                                | (87,600   | )                                                  |    | 2.71                                                           |   |                                         |                     |   |   |   |   |
| Forfeited                prior to vesting   |   |                                | (302,975  | )                                                  |    | 5.88                                                           |   |                                         |                     |   |   |   |   |
| Exercised                                   |   |                                | -         |                                               |    | -                                                              |   |                                         |                     |   |   |   |   |
| Outstanding                at June 30, 2005 |   |                                | 1,493,112 |                                               |    | 6.21                                                           |   |                                         |                     |   |   |   |   |
|                                        |   |                                |      |                                               |    |                                                           |   |                                         |                     |   |   |   |   |
| Granted                                     |   |                                | 29,000    |                                               |    | 2.63                                                           |   |                                         |                     |   |   |   |   |
| Expired                and canceled         |   |                                | (118,353  | )                                                  |    | 3.55                                                           |   |                                         |                     |   |   |   |   |
| Forfeited                prior to vesting   |   |                                | (165,839  | )                                                  |    | 8.11                                                           |   |                                         |                     |   |   |   |   |
| Exercised                                   |   |                                | -         |                                               |    | -                                                              |   |                                         |                     |   | $ | - |   |
| Outstanding                at June 30, 2006 |   |                                | 1,237,920 |                                               | $  | 6.12                                                           |   |                                         | 5.8                years |   | $ | 135 |   |
| Exercisable                                 |   |                                | 917,696   |                                               | $       | 6.18                                                           |   |                                         | 5.2                years |   | $ | 90 |   |

|                                |   | Options                Outstanding |      | Options                Exercisable             |   |
|-------------------------------------|--------|------------------------------------|-----------|------------------------------------------------|--------|
| Exercise                Price Range |   | Number                of Shares    |      | Weighted                Average Exercise Price |   | Weighted                Average Contractual Term (Years) |   | Options                Exercisable |   | Weighted                Average Exercise Price |   |
|                                |   |                               |      |                                           |   |   |   |   |   |   |   |
| $0.00                to $4.00       |   |                               | 592,839   |                                           | $      | 3.38 |   |   | 6.2                years |   |   | 461,116 |   | $ | 3.39 |   |
| $4.01                to $8.00       |   |                               | 395,744   |                                           |   | 5.80 |   |   | 7.0                years |   |   | 273,379 |   |   | 5.87 |   |
| $8.01                to $12.00      |   |                               | 89,941    |                                           |   | 11.13 |   |   | 3.8                years |   |   | 38,004 |   |   | 10.89 |   |
| $12.01                to $16.00     |   |                               | 156,961   |                                           |   | 14.23 |   |   | 2.2                years |   |   | 143,354 |   |   | 14.33 |   |
| $16.01                to $20.00     |   |                               | 2,435     |                                           |   | 17.66 |   |   | 1.9                years |   |   | 1,843 |   |   | 17.60 |   |
| Total                               |   |                               | 1,237,920 |                                           | $      | 6.12 |   |   | 5.8                years |   |   | 917,696 |   | $ | 6.18 |   |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **Non-vested                Shares**       |   | **Number                of Shares** |     | **Weighted                Average Grant Date Fair Value** |   |
|--------------------------------------------|--------|-------------------------------------|----------|-----------------------------------------------------------|--------|
|                                       |   |                                |     |                                                      |   |
| Non-vested                at June 30, 2005 |   |                                | 802,400  |                                                      | $      | 4.73 |   |
|                                       |   |                                |     |                                                      |   |   |   |
| Granted                                    |   |                                | 29,000   |                                                      |   | 1.96 |   |
| Vested                                     |   |                                | (345,337 | )                                                         |   | 4.23 |   |
| Forfeited                prior to vesting  |   |                                | (165,839 | )                                                         |   | 5.93 |   |
| Non-vested                at June 30, 2006 |   |                                | 320,224  |                                                      | $      | 4.39 |   |

| **13.  ** | **Significant                Customers** |
|---------------------|------------------------------------------|

| **Product                Segment Revenues** |
|---------------------------------------------|
|                                        | **2006** | **2005** | **2004** |
| Customer                A                   | 24.6% | 28.0% | 27.4% |
| Customer                B                   | 16.6% | 19.2% | 18.3% |
| Customer                C                   | 15.0% | 16.0% | 18.6% |
| Total                                       | 56.2% | 63.2% | 64.3% |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **Gross                Accounts Receivable** |
|----------------------------------------------|
|                                         | **2006** | **2005** |
| Customer                A                    | 19.4% | 29.4% |
| Customer                B                    | 16.1% | 18.7% |
| Customer                C                    | 11.9% | 13.9% |
| Total                                        | 47.4% | 62.0% |

| **14.  ** | **Severance                Charges** |
|---------------------|--------------------------------------|

| **15.  ** | **Retirement                Savings and Profit Sharing Plan** |
|---------------------|---------------------------------------------------------------|

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **16.  ** | **Income                Taxes** |
|---------------------|---------------------------------|

|     |   | **Years                Ended June 30,** |   |
|----------|--------|-----------------------------------------|--------|
|     |   | **2006**                                |   | **2005** |   | **2004** |   |
|     |   |                                    |   |   |   |   |   |
| U.S.     |   | $                                       | (752   | ) | $ | (1,148 | ) | $ | (12,438 | ) |
| Non-U.S. |   |                                    | 48     |   |   | 52 |   |   | 183 |   |
|     |   | $                                       | (704   | ) | $ | (1,096 | ) | $ | (12,255 | ) |

|                                                         |   | **Years                Ended June 30,** |   |
|--------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                         |   | **2006**                                |   | **2005** |   | **2004** |   |
|                                                         |   |                                    |   |   |   |   |   |
| Current:                                                     |   |                                    |   |   |   |   |   |
| U.S.                Federal                                  |   | $                                       | 770    |   | $ | 2,845 |   | $ | 3,698 |   |
| U.S.                State                                    |   |                                    | 102    |   |   | 423 |   |   | 163 |   |
| Non-U.S.                                                     |   |                                    | (2     | ) |   | (20 | ) |   | (46 | ) |
| Total                current                                 |   | $                                       | 870    |   | $ | 3,248 |   | $ | 3,815 |   |
|                                                         |   |                                    |   |   |   |   |   |   |   |   |
| Deferred:                                                    |   |                                    |   |   |   |   |   |   |   |   |
| U.S.                Federal                                  |   |                                    | (619   | ) |   | (2,236 | ) |   | 666 |   |
| U.S.                State                                    |   |                                    | 73     |   |   | (337 | ) |   | 440 |   |
| Non-U.S.                                                     |   |                                    | -      |   |   | - |   |   | - |   |
| Change                in deferred before valuation allowance |   |                                    | (546   | ) |   | (2,573 | ) |   | 1,106 |   |
| Decrease                (increase) in valuation allowance    |   |                                    | 546    |   |   | 2,573 |   |   | (4,185 | ) |
| Total                deferred                                |   |                                    | -      |   |   | - |   |   | (3,079 | ) |
|                                                         |   |                                    |   |   |   |   |   |   |   |   |
| Benefit                for income taxes                      |   | $                                       | 870    |   | $ | 3,248 |   | $ | 736 |   |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                                                                       |   | **Years                Ended June 30,** |   |
|----------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                       |   | **2006**                                |   | **2005** |   | **2004** |   |
|                                                                       |   |                                    |   |   |   |   |   |
| U.S.                federal statutory income tax rate at 34.0 percent      |   | $                                       | 240    |   | $ | 373 |   | $ | 4,167 |   |
| State                income tax (provision) benefit, net of federal income |   |                                    |   |   |   |   |   |   |   |   |
| tax                effect                                                  |   |                                    | 67     |   |   | (3 | ) |   | 75 |   |
| Research                and development credit                             |   |                                    | 72     |   |   | 188 |   |   | 108 |   |
| Foreign                earnings or losses taxed at different rates         |   |                                    | 14     |   |   | (3 | ) |   | (10 | ) |
| Non-deductible                SFAS No. 123R compensation expense           |   |                                    | (143   | ) |   | - |   |   | - |   |
| Change                in valuation allowance                               |   |                                    | 546    |   |   | 2,573 |   |   | (4,185 | ) |
| Valuation                allowance change attributable to state tax impact |   |                                    |   |   |   |   |   |   |   |   |
| and                other                                                   |   |                                    | (105   | ) |   | - |   |   | 436 |   |
| Non-deductible                items and other                              |   |                                    | 179    |   |   | 120 |   |   | 145 |   |
|                                                                       |   |                                    |   |   |   |   |   |   |   |   |
| Benefit                for income taxes                                    |   | $                                       | 870    |   | $ | 3,248 |   | $ | 736 |   |

|                                                             |   | **As                of June 30,** |   |
|------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                             |   | **2006**                          |   | **2005** |   |
| Deferred                income tax assets:                       |   |                              |   |   |   |
| Deferred                revenue                                  |   | $                                 | 1,191  |   | $ | 1,086 |   |
| Basis                difference in intangible assets             |   |                              | 885    |   |   | 922 |   |
| Inventory                reserve                                 |   |                              | 873    |   |   | 757 |   |
| Net                operating loss carryforwards                  |   |                              | 799    |   |   | 786 |   |
| Accumulated                research and development credits      |   |                              | 591    |   |   | 333 |   |
| Alternative                minimum tax credits                   |   |                              | 409    |   |   | 355 |   |
| Accrued                liabilities                               |   |                              | 321    |   |   | 1,649 |   |
| Deductible                SFAS No. 123R compensation expense     |   |                              | 268    |   |   | - |   |
| Allowance                for sales returns and doubtful accounts |   |                              | 19     |   |   | 18 |   |
| Installment                sale of discontinued operations       |   |                              | -      |   |   | 172 |   |
| Other                                                            |   |                              | 281    |   |   | 266 |   |
| Subtotal                                                         |   |                              | 5,637  |   |   | 6,344 |   |
| Valuation                allowance                               |   |                              | (5,369 | ) |   | (5,909 | ) |
| Deferred                income tax assets                        |   |                              | 268    |   |   | 435 |   |
|                                                             |   |                              |   |   |   |   |   |
| Deferred                income tax liabilities:                  |   |                              |   |   |   |   |   |
| Difference                in property and equipment basis        |   |                              | (268   | ) |   | (435 | ) |
| Deferred                income tax liabilities                   |   |                              | (268   | ) |   | (435 | ) |
|                                                             |   |                              |   |   |   |   |   |
| Net                deferred income tax assets                    |   | $                                 | -      |   | $ | - |   |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                                                     |   | **As                of June 30,** |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|
|                                                     |   | **2006**                          |   | **2005** |   |
|                                                     |   |                              |   |   |   |
| Current                deferred income tax assets        |   | $                                 | 128    |   | $ | 270 |   |
| Long-term                deferred income tax assets      |   |                              | -      |   |   | - |   |
| Current                deferred income tax liabilities   |   |                              | -      |   |   | - |   |
| Long-term                deferred income tax liabilities |   |                              | (128   | ) |   | (270 | ) |
| Net                deferred income tax assets            |   | $                                 | -      |   | $ | - |   |

*“Accounting      for Income Taxes,”*

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**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **17.  ** | **Related-Party                Transactions** |
|---------------------|-----------------------------------------------|

*The      Insurance Coverage Action.*

| **18.  ** | **Segment                and Geographic Information** |
|---------------------|-------------------------------------------------------|

|                               |   | **Years                Ended June 30,** |   |
|------------------------------------|--------|-----------------------------------------|--------|
|                               |   | **2006**                                |   | **2005** |   | **2004** |   |
|                               |   |                                    |   |   |   |   |   |
| United                States       |   | $                                       | 26,911 |   | $ | 23,464 |   | $ | 21,654 |   |
| All                other countries |   |                                    | 10,721 |   |   | 8,181 |   |   | 6,312 |   |
| Total                              |   | $                                       | 37,632 |   | $ | 31,645 |   | $ | 27,966 |   |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                        |   | **Product** |   | **Business                Services** |   | **Total** |   |
|-----------------------------|--------|-------------|--------|--------------------------------------|--------|-----------|--------|
| 2006:                       |   |        |   |                                 |   |      |   |
| Revenue                     |   | $           | 37,632 |                                 | $      | -         |   | $ | 37,632 |   |
| Gross                profit |   |        | 18,348 |                                 |   | -         |   |   | 18,348 |   |
|                        |   |        |   |                                 |   |      |   |   |   |   |
| 2005:                       |   |        |   |                                 |   |      |   |   |   |   |
| Revenue                     |   | $           | 31,645 |                                 | $      | -         |   | $ | 31,645 |   |
| Gross                profit |   |        | 16,694 |                                 |   | -         |   |   | 16,694 |   |
|                        |   |        |   |                                 |   |      |   |   |   |   |
| 2004:                       |   |        |   |                                 |   |      |   |   |   |   |
| Revenue                     |   | $           | 27,836 |                                 | $      | 130       |   | $ | 27,966 |   |
| Gross                profit |   |        | 11,457 |                                 |   | 130       |   |   | 11,587 |   |

|                                                    |   | **Year                Ended June 30, 2006** |   |
|---------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                    |   | **Product**                                 |   | **Corporate** |   | **Total** |   |
|                                                    |   |                                        |   |   |   |   |   |
| Gross                profit                             |   | $                                           | 18,348 |   | $ | - |   | $ | 18,348 |   |
| Marketing                and selling expense            |   |                                        | (7,866 | ) |   | - |   |   | (7,866 | ) |
| Research                and product development expense |   |                                        | (8,299 | ) |   | - |   |   | (8,299 | ) |
| General                and administrative expense       |   |                                        | -      |   |   | (5,108 | ) |   | (5,108 | ) |
| Settlement                in shareholders' class action |   |                                        | -      |   |   | 1,205 |   |   | 1,205 |   |
| Interest                income                          |   |                                        | -      |   |   | 813 |   |   | 813 |   |
| Other                income (expense), net              |   |                                        | -      |   |   | 203 |   |   | 203 |   |
| Benefit                for income taxes                 |   |                                        | -      |   |   | 870 |   |   | 870 |   |
| Total                income from continuing operations  |   | $                                           | 2,183  |   | $ | (2,017 | ) | $ | 166 |   |
|                                                    |   |                                        |   |   |   |   |   |   |   |   |
| Depreciation                and amortization expense    |   | $                                           | 1,557  |   | $ | - |   | $ | 1,557 |   |
|                                                    |   |                                        |   |   |   |   |   |   |   |   |
| Identifiable                assets                      |   | $                                           | 16,866 |   | $ | 24,539 |   | $ | 41,405 |   |

----

**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

|                                                    |   | **Year                Ended June 30, 2005** |   |
|---------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                    |   | **Product**                                 |   | **Corporate** |   | **Total** |   |
|                                                    |   |                                        |   |   |   |   |   |
| Gross                profit                             |   | $                                           | 16,694 |   | $ | - |   | $ | 16,694 |   |
| Marketing                and selling expense            |   |                                        | (9,070 | ) |   | - |   |   | (9,070 | ) |
| Research                and product development expense |   |                                        | (5,305 | ) |   | - |   |   | (5,305 | ) |
| General                and administrative expense       |   |                                        | -      |   |   | (5,489 | ) |   | (5,489 | ) |
| Settlement                in shareholders' class action |   |                                        | -      |   |   | 2,046 |   |   | 2,046 |   |
| Impairment                charge (see Note 20)          |   |                                        | (180   | ) |   | - |   |   | (180 | ) |
| Restructuring                charge (see Note 20)       |   |                                        | (110   | ) |   | - |   |   | (110 | ) |
| Interest                income                          |   |                                        | -      |   |   | 425 |   |   | 425 |   |
| Interest                expense                         |   |                                        | -      |   |   | (104 | ) |   | (104 | ) |
| Other                income (expense), net              |   |                                        | -      |   |   | (3 | ) |   | (3 | ) |
| Benefit                for income taxes                 |   |                                        | -      |   |   | 3,248 |   |   | 3,248 |   |
| Total                income from continuing operations  |   | $                                           | 2,029  |   | $ | 123 |   | $ | 2,152 |   |
|                                                    |   |                                        |   |   |   |   |   |   |   |   |
| Depreciation                and amortization expense    |   | $                                           | 2,366  |   | $ | - |   | $ | 2,366 |   |
|                                                    |   |                                        |   |   |   |   |   |   |   |   |
| Identifiable                assets                      |   | $                                           | 16,092 |   | $ | 21,929 |   | $ | 38,021 |   |

|                                                    |   | **Year                Ended June 30, 2004** |   |
|---------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                    |   | **Product**                                 |   | **Business                Services** |   | **Corporate** |   | **Total** |   |
|                                                    |   |                                        |   |   |   |   |   |   |   |
| Gross                profit                             |   | $                                           | 11,457 |   | $ | 130 |   | $ | - |   | $ | 11,587 |   |
| Marketing                and selling expense            |   |                                        | (8,497 | ) |   | - |   |   | - |   |   | (8,497 | ) |
| Research                and product development expense |   |                                        | (4,237 | ) |   | - |   |   | - |   |   | (4,237 | ) |
| General                and administrative expense       |   |                                        | -      |   |   | - |   |   | (6,767 | ) |   | (6,767 | ) |
| Settlement                in shareholders' class action |   |                                        | -      |   |   | - |   |   | (4,080 | ) |   | (4,080 | ) |
| Interest                income                          |   |                                        | -      |   |   | - |   |   | 52 |   |   | 52 |   |
| Interest                expense                         |   |                                        | -      |   |   | - |   |   | (183 | ) |   | (183 | ) |
| Other                income (expense), net              |   |                                        | -      |   |   | - |   |   | (130 | ) |   | (130 | ) |
| Benefit                for income taxes                 |   |                                        | -      |   |   | - |   |   | 736 |   |   | 736 |   |
| Total                income from continuing operations  |   | $                                           | (1,277 | ) | $ | 130 |   | $ | (10,372 | ) | $ | (11,519 | ) |
|                                                    |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                and amortization expense    |   | $                                           | 1,934  |   | $ | - |   | $ | - |   | $ | 1,934 |   |
|                                                    |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| Identifiable                assets                      |   | $                                           | 17,732 |   | $ | - |   | $ | 9,951 |   | $ | 27,683 |   |

| **19.  ** | **Closing                of Germany Office** |
|---------------------|----------------------------------------------|

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**CLEARONE            COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**

**(in            thousands of dollars, except per share amounts)**

| **20.  ** | **Manufacturing                Transition** |
|---------------------|---------------------------------------------|

|                                      |   | **Severance** |   | **Manufacturing                Facilities Lease** |   | **Total** |   |
|-------------------------------------------|--------|---------------|--------|---------------------------------------------------|--------|-----------|--------|
|                                      |   |          |   |                                              |   |      |   |
| Balance                at 06/30/2004      |   | $             | -      |                                              | $      | -         |   | $ | - |   |
| Restructuring                charge       |   |          | 70     |                                              |   | 40        |   |   | 110 |   |
| Utilized                                  |   |          | -      |                                              |   | -         |   |   | - |   |
| Balance                at 06/30/2005      |   | $             | 70     |                                              | $      | 40        |   | $ | 110 |   |
|                                      |   |          |   |                                              |   |      |   |   |   |   |
| Utilized                                  |   |          | (70    | )                                                 |   | (107      | )      |   | (177 | ) |
| Sublease                payments received |   |          | -      |                                              |   | 110       |   |   | 110 |   |
| Balance                at 06/30/2006      |   | $             | -      |                                              | $      | 43        |   | $ | 43 |   |

| **21.  ** | **Subsequent                Events (Unaudited)** |
|---------------------|--------------------------------------------------|

*Sale      of our Document and Educational Camera Manufacturing and Sales      Business.*