**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**


(Mark
      One)





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





For
      the
      fiscal year ended June 30, 2004





**OR**





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





For
      the
      transition period from ________ to ________





Commission
      file number **0-17219**





**CLEARONE
      COMMUNICATIONS, INC.**


(Exact
      name of registrant as specified in its charter)





**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**


(Address
      of principal executive offices, including zip code)





**(801)
      975-7200**


(Registrant’s
      telephone number, including area code)





**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**





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes  ̈ No x





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of the Form 10-K or any amendment to
      this
      Form 10-K.  ̈





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Securities Exchange Act of 1934, as amended).  ̈





The
      aggregate market value of the 10,415,587 shares of voting common stock held
      by
      non-affiliates is approximately $22,914,291 at November 30, 2005, based on
      the
      $2.20 closing price for the Company’s common stock on the Pink Sheets on such
      date. The number of shares of ClearOne common stock outstanding as of June
      30,
      2004 and November 30, 2005, were 11,036,233 and 12,184,727,
      respectively.










1





**APPLICABLE
      ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**





Indicate
      by check mark whether the registrant has filed all documents and reports
      required to be filed by Section 12, 13, or 15(d) of the Securities Exchange
      Act
      of 1934 subsequent to the distribution of securities under a plan confirmed
      by a
      court. Yes  ̈ No  ̈





**DOCUMENTS
      INCORPORATED BY REFERENCE**





List
      hereunder the following documents if incorporated by reference and the part
      of
      the Form 10-K ( *e.g.* ,
      Part I,
      Part II, etc.) into which the document is incorporated: (1) any annual report
      to
      security holders; (2) any proxy or information statement; and (3) any prospectus
      filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The
      listed documents should be clearly described for identification purposes
      ( *e.g.* ,
      annual
      report to security holders for fiscal year ended December 24,
      1980).





None.





2





**DISCLOSURE
      REGARDING FORWARD-LOOKING STATEMENTS**





This
      report contains forward-looking statements as defined in the Private Securities
      Litigation Reform Act of 1995. These statements reflect our views with respect
      to future events based upon information available to us at this time. These
      forward-looking statements are subject to uncertainties and other factors that
      could cause actual results to differ materially from these statements.
      Forward-looking statements are typically identified by the use of the words
      “believe,” “may,” “could,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“project,” “propose,” “plan,” “intend,” and similar words and expressions.
      Examples of forward-looking statements are statements that describe the proposed
      development, manufacturing, and sale of our products; statements that describe
      our results of operations, pricing trends, the markets for our products, our
      anticipated capital expenditures, our cost reduction and operational
      restructuring initiatives, and regulatory developments; statements with regard
      to the nature and extent of competition we may face in the future; statements
      with respect to the sources of and need for future financing; and statements
      with respect to future strategic plans, goals and objectives. Forward-looking
      statements are contained in this report under “Description of Business” included
      in Item 1 of Part I, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” and “Qualitative and Quantitative
      Disclosures About Market Risk” included in Items 7 and 7A of Part II of this
      Annual Report on Form 10-K. The forward-looking statements are based on present
      circumstances and on our predictions respecting events that have not occurred,
      that may not occur, or that may occur with different consequences and timing
      than those now assumed or anticipated. Actual events or results may differ
      materially from those discussed in the forward-looking statements as a result
      of
      various factors, including the risk factors discussed in this report under
      the
      caption “Description of Business: Risk Factors.” These cautionary statements are
      intended to be applicable to all related forward-looking statements wherever
      they appear in this report. The cautionary statements contained or referred
      to
      in this report should also be considered in connection with any subsequent
      written or oral forward-looking statements that may be issued by us or persons
      acting on our behalf. Any forward-looking statements are made only as of the
      date of this report and ClearOne assumes no obligation to update forward-looking
      statements to reflect subsequent events or circumstances.





CAUTIONARY
      STATEMENT REGARDING THE FILING DATE OF THIS REPORT AND THE ANTICIPATED FUTURE
      FILINGS OF ADDITIONAL PAST-DUE REPORTS





This
      Annual Report on Form 10-K for the fiscal year ended June 30, 2004 is first
      being filed in December 2005. The Company is in the process of preparing its
      Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and plans
      to
      file such report at the earliest practicable date. Shareholders and others
      are
      cautioned that the financial statements included in this report are over one
      year old and are not necessarily indicative of the operating results that may
      be
      expected for the year ending June 30, 2005. Shareholders and others should
      also
      be aware that the staff of the Salt Lake District Office of the Securities
      and
      Exchange Commission (“SEC”) has advised the Company that it intends to recommend
      to the Commission that administrative proceedings be instituted to revoke the
      registration of the Company’s common stock based on the Company’s failure to
      timely file annual and quarterly reports with the Commission. The Company has
      provided the staff with a so-called “Wells Submission” setting forth its
      position with respect to the staff’s intended recommendation, which submission
      would be considered by the Commission in determining whether or not to authorize
      an administrative proceeding. There can be no assurance that the Company will
      be
      successful in convincing the Commission not to initiate an administrative
      proceeding or that the Company would prevail if an administrative proceeding
      were initiated.





**PART
      I**





References
      in this Annual Report on Form 10-K to “ClearOne,” “we,” “us,” or “the Company”
refer to ClearOne Communications, Inc., a Utah corporation, and, unless the
      context otherwise requires or is otherwise expressly stated, its
      subsidiaries.





**ITEM
                1.**
            **DESCRIPTION
                OF BUSINESS**





**Overview**





We
      are an
      audio conferencing products company. We develop, manufacture, market, and
      service a comprehensive line of audio conferencing products, which range from
      tabletop conferencing phones to professionally installed audio systems. We
      also
      manufacture and sell document and education cameras and conferencing furniture.
      We have a strong history of product innovation and plan to continue to apply
      our
      expertise in audio engineering to developing innovative new products. We believe
      the performance and reliability of our high-quality audio products create a
      natural communication environment, which saves organizations of all sizes time
      and money by enabling more effective and efficient communication between
      geographically separated businesses, employees, and customers.





3





Our
      products are used by organizations of all sizes to accomplish effective group
      communication. Our end-users range from some of the world’s largest and most
      prestigious companies and institutions to small and medium-sized businesses,
      educational institutions, and government organizations. We sell our products
      to
      these end-users primarily through a distribution network of independent
      distributors who in turn sell our products to dealers, systems integrators,
      and
      value-added resellers. The Company also sells products on a limited basis
      directly to dealers, systems integrators, value-added resellers, and end-users.





We
      were
      incorporated in Utah on July 8, 1983 under the name “Insular, Inc.” On March 26,
      1985, we acquired all of the stock of Gentner Electronics Corporation
      (“Gentner”) in a transaction treated as a reverse acquisition for accounting
      purposes. Gentner Electronics Corporation was incorporated in Utah in 1981.
      In
      connection with the acquisition of Gentner, we changed our name to Gentner
      Electronics Corporation. On July 1, 1991, we changed our name to Gentner
      Communications Corporation. On January 1, 2002, we changed our name to ClearOne
      Communications, Inc. Our principal executive offices are located at 1825
      Research Way, Salt Lake City, Utah 84119, and our telephone number at this
      location is (801) 975-7200. Our Internet website address is www.clearone.com .
      Our
      annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
      on
      Form 8-K, and amendments to such reports are available, free of charge, on
      our
      Internet website under “ClearOne Info—Investor Relations—SEC,” as soon as
      reasonably practicable after we file electronically such material with, or
      furnish it to, the SEC. Information on our website does not constitute a part
      of
      this Annual Report on Form 10-K or other periodic reports we file with the
      SEC.
      The public may also read and copy any materials we file with the SEC at the
      SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549.
      The public may also obtain information on the operation of the Public Reference
      Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
      website ( www.sec.gov )
      that
      contains reports, proxy and information statements, and other information
      regarding ClearOne that we file electronically with the SEC.





For
      a
      discussion of certain risks applicable to our business, financial condition,
      and
      results of operations, see the risk factors described in “Risk Factors”
below.





**Significant
      Events**





***Restatement
      of Previously Issued Financial Statements.*** **** A
      comprehensive review of our previously issued consolidated financial statements
      was undertaken during fiscal 2003 after it was determined that the statements
      were not prepared in accordance with U.S. generally accepted accounting
      principles (“U.S. GAAP”). As a result of this review, we restated our previously
      reported consolidated financial statements for the fiscal years ended June
      30,
      2002 and 2001 as well as our previously reported consolidated financial
      statements for the first quarter of fiscal 2003 (“Previously Reported
      Statements”). The restated consolidated financial statements include
      restatements of revenue, impairments of goodwill, other intangible assets and
      property, plant and equipment, and other adjustments made in connection with
      our
      review. Our restated fiscal 2002 and fiscal 2001 consolidated financial
      statements are contained in our Annual Report on Form 10-K for fiscal 2003
      filed
      with the SEC on August 18, 2005. The restated fiscal 2002 and fiscal 2001
      financial statements were audited by KPMG LLP (“KPMG”), who replaced Ernst &
Young LLP (“Ernst & Young”) as our external auditors in December
      2003.





***Potential
      SEC Administrative Action.*** ClearOne
      has been advised by the staff of the Salt Lake District Office of the SEC that
      the staff intends to recommend to the Commission that administrative proceedings
      be instituted to revoke the registration of the Company’s common stock based on
      the Company’s failure to timely file annual and quarterly reports with the
      Commission. The Company has provided the staff with a so-called “Wells
      Submission” setting forth its position with respect to the staff’s intended
      recommendation, which submission would be considered by the Commission in
      determining whether or not to authorize an administrative proceeding. There
      can
      be no assurance that the Company will be successful in convincing the Commission
      not to initiate an administrative proceeding or that the Company would prevail
      if an administrative proceeding were initiated.





4





***Changes
      to Management and Board of Directors.*** Since
      January 2003, we have changed all but one member of our executive management
      team. Three of our former directors are no longer serving in such positions
      and
      we have appointed two new directors, both of whom are independent directors
      who
      serve on our audit committee. In January 2003, Frances Flood, our former
      Chairman and Chief Executive Officer, and Susie Strohm, our former Chief
      Financial Officer, were placed on administrative leave and they subsequently
      resigned from their positions. Michael Keough was then appointed as our Chief
      Executive Officer, Gregory Rand was appointed as our President and Chief
      Operating Officer, and George Claffey was appointed as our Chief Financial
      Officer. All three subsequently resigned for personal reasons at various times
      during 2004 and on July 8, 2004, Zeynep “Zee” Hakimoglu  was
      appointed as our President and Chief Executive Officer and Donald Frederick
      was
      appointed as our Chief Financial Officer. Mr. Frederick resigned on September
      15, 2005 and on September 20, 2005, Craig Peeples, our Corporate Controller,
      was
      appointed as our Interim Chief Financial Officer.





***The
      SEC Action.*** ClearOne’s
      Previously Reported Statements were the subject of a civil action filed by
      the
      SEC on January 15, 2003 against ClearOne and the persons then acting as its
      chief executive and chief financial officers. The complaint generally alleged
      that the defendants had engaged in a program of inflating ClearOne’s revenues,
      net income, and accounts receivable by engaging in improper revenue recognition.
      On December 4, 2003, we settled the SEC action by entering into a consent decree
      in which, without admitting or denying the allegations of the complaint, we
      consented to the entry of a permanent injunction prohibiting future securities
      law violations. No fine or penalty was assessed against ClearOne as part of
      the
      settlement.





***Securities
      Delisted from NASDAQ Stock Market.*** **** Our
      common stock was delisted from the NASDAQ National Market System on April 21,
      2003 and since that time has been quoted on the National Quotation Bureau’s Pink
      Sheets.





***The
      Shareholder Class Action.*** On
      June
      30, 2003, a consolidated complaint was filed against ClearOne, eight of our
      present or former officers and directors, and our former auditor, Ernst &
Young, by a class consisting of purchasers of the Company’s common stock during
      the period from April 17, 2001 through January 15, 2003. The allegations in
      the
      complaint were essentially the same as those contained in the SEC action
      described above. On December 4, 2003, we, on behalf of the Company and all
      other
      defendants with the exception of Ernst & Young, entered into a settlement
      agreement with the class pursuant to which we agreed to pay the class $5.0
      million and issue the class 1.2 million shares of our common stock. The cash
      payment was made in two equal installments, the first on November 10, 2003
      and
      the second on January 14, 2005. On May 23, 2005, the court order was amended
      to
      provide that odd-lot numbers of shares (99 or fewer shares) would not be issued
      from the settlement fund and claimants who would otherwise be entitled to
      receive 99 or fewer shares would be paid cash in lieu of such odd-lot numbers
      of
      shares. On September 29, 2005, we completed our obligations under the settlement
      agreement by issuing a total of 1,148,494 shares of our common stock to the
      plaintiff class, including 228,000 shares previously issued in November 2004,
      and paying an aggregate of $126,705 in cash in lieu of shares to those members
      of the class who would otherwise have been entitled to receive an odd-lot number
      of shares or who resided in states in which there was no exemption available
      for
      the issuance of shares. The cash payments were calculated on the basis of $2.46
      per share which was equal to the higher of (i) the closing price for our common
      stock as reported by the Pink Sheets on the business day prior to the date
      the
      shares were mailed or (ii) the average closing price over the five trading
      days
      prior to such mailing date.





***Changes
      in Type and Scope of Operations***





**Acquisitions
      of ClearOne, Inc. and Ivron Systems, Ltd** **.** We have
      been manufacturing and marketing audio conferencing products since 1989, which
      has been our core competency. During fiscal 2001 and fiscal 2002, we attempted
      to expand our operations through the acquisitions of ClearOne, Inc. and Ivron
      Systems, Ltd., both of which were involved in the development and sale of video
      conferencing technology and products. Such acquisitions proved unsuccessful
      and,
      as discussed in more detail in Item 1. Description of Business. *Acquisitions
      and Dispositions* ,
      we
      recorded impairment charges related to such acquisitions in the aggregate amount
      of approximately $7.1 million in the fiscal 2002 consolidated financial
      statements.





**Acquisitions
      of E.mergent, Inc. and OM Video** **.** During
      fiscal 2002 and fiscal 2003, we entered the audiovisual integration services
      business through the acquisitions of E.mergent, Inc. and Stechyson Electronics,
      Ltd., doing business as OM Video (“OM Video”). Our management at that time
      believed such acquisitions would complement our existing operations and our
      core
      competencies and allow us to acquire market share in the audiovisual integration
      services industry. However, our entry into the services business was perceived
      as a threat by our systems integrators and value-added resellers, since we
      began
      competing against many of them for sales. The acquisitions were not successful
      and the remaining operations were sold in fiscal 2004 and fiscal 2005. As
      discussed in more detail in Item 1. Description of Business. *Acquisitions
      and Dispositions* ,
      we
      recorded impairment charges related to such acquisitions in the aggregate amount
      of approximately $26.0 million in the fiscal 2003 consolidated financial
      statements.





5





**Sale
      of our U.S. Audiovisual Integration Services** **.** **** On
      May 6,
      2004, we sold certain assets of our U.S. audiovisual integration services
      operations (a portion of E.mergent, Inc.) to M:Space, Inc. (“M:Space”) for no
      cash compensation. M:Space is a privately held audiovisual integration services
      company. In exchange for M:Space assuming obligations for completion of certain
      customer contracts and satisfying maintenance contract obligations to existing
      customers, we transferred to M:Space certain assets including inventory valued
      at $573,000. The operations of the U.S. audiovisual integration services have
      been classified as discontinued operations in the fiscal 2004 consolidated
      financial statements.





**Sale
      of Conferencing Services Business** **.** On July
      1, 2004, we sold our conferencing services business segment to Clarinet, Inc.,
      an affiliate of American Teleconferencing Services, Ltd. doing business as
      Premiere Conferencing (“Premiere”) for $21.3 million. Of the purchase price $1.0
      million was placed into an 18-month Indemnity Escrow account and an additional
      $300,000 was placed into a working capital escrow account. We received the
      $300,000 working capital escrow funds approximately 90 days after the execution
      date of the contract. The conferencing services operations have been classified
      as discontinued operations in the fiscal 2004 consolidated financial
      statements.





**Sale
      of OM Video** **.** On
      March
      4, 2005, we sold all of the issued and outstanding stock of our Canadian
      subsidiary, ClearOne Communications of Canada, Inc. (“ClearOne Canada”) to
      6351352 Canada Inc., a Canada corporation (the “OM Purchaser”). ClearOne Canada
      owned all the issued and outstanding stock of Stechyson Electronics Ltd., which
      conducts business under the name OM Video. We agreed to sell the stock of
      ClearOne Canada for $200,000 in cash; a $1.3 million note receivable which
      is
      due over a 15-month period, with interest accruing on the unpaid balance at
      the
      rate of 5.3 percent per year; and contingent consideration ranging from 3
      percent to 4 percent of related gross revenues over a five-year period. The
      Company expects to present all OM Video activities in discontinued operations
      in
      the fiscal 2005 consolidated financial statements. As of June 30, 2004, the
      assets of the Canada audiovisual integration business were classified as held
      and used. In June 2005, we were advised that the OM Purchaser had settled an
      action brought by the former employer of certain of OM Purchaser’s owners and
      employees alleging violation of non-competition agreements. The settlement
      reportedly involved a cash payment and an agreement not to sell certain products
      for a period of one year. To date, OM Purchaser has made all payments required
      under the note and we are continuing to evaluate what impact, if any, this
      settlement may have on the OM Purchaser’s ability to make the payment required
      under the note.





Following
      the disposition of operations in the video conferencing technology and products,
      audiovisual integration services, and conferencing services businesses, we
      returned to our core competency of developing, manufacturing, and marketing
      audio conferencing products, which is where we intend to keep our focus for
      the
      foreseeable future.





**Business
      Strategy**





Our
      goal
      is to maintain market leadership in the installed segment of the conferencing
      systems market and to achieve market leadership in group conferencing
      environments through the development of new, competitive products that offer
      superior quality and ease-of-use. The principal components of our strategy
      to
      achieve this goal are:





*Provide
      a superior conferencing experience*





We
      have
      been developing audio technologies since 1981 and we believe we have established
      a reputation for providing some of the highest quality group audio conferencing
      solutions in the industry. Our proprietary digital signal processing
      technologies have been the core of our installed conferencing products and
      are
      the foundation for our new product development. We plan to build upon our
      reputation of being a market leader and continue to provide the highest quality
      products and technologies to the customers and markets we serve. We hold
      numerous registered trademarks including “Distributed Echo Cancellation”,
“Gentner”, and “You’re Virtually There.”




6




*Provide
      greater value to our customers*




To
      provide our customers with audio conferencing products that deliver high value,
      we are leveraging advances in emerging technology trends and applying these
      advances specifically to group conferencing environments. By offering high
      quality products that are designed to solve conferencing ease-of-use issues
      and
      are easy to install, configure, and maintain, we believe we can provide greater
      value to our customers and reduce their total cost of ownership.





*Be
      a
      leader in audio conferencing innovation*





We
      have
      sharpened our focus on developing cutting edge audio conferencing products
      and
      are committed to incorporating the latest technologies into our new and existing
      product lines. Key to this effort is adopting emerging technologies such as
      Voice over Internet Protocol (“VoIP”), international standards-based
      conferencing protocols, wireless connectivity, and the convergence of voice
      and
      data networks.





*Develop
      strong sales channels*





We
      have
      made significant efforts to develop strong domestic and international sales
      channels through the addition of key distributors and dealers. We plan to
      continue to add new distribution partners, with specific emphasis on bolstering
      distribution to the information technology and telecommunications channels,
      where we see opportunity for our MAX® tabletop audio conferencing products; our
      RAVTM audio conferencing systems; our conferencing peripherals, including the
      AccuMic® product line; and other products currently in development.





*Broaden
      our product offerings*





We
      offer
      a full range of audio conferencing products, from high-end, professionally
      installed audio conferencing systems to conferencing-specific telephones. We
      plan to continue to broaden our product offerings to meet the evolving needs
      of
      our customers, address changes in the markets we currently serve, and
      effectively target new markets for our products.





*Develop
      strategic partnerships*





To
      stay
      on the leading edge of product development, we plan to continue to identify
      partners with technology and expertise in areas strategic to our growth
      objectives. We will also work to develop partnerships with leaders in markets
      complimentary to conferencing who can benefit from our audio products and
      technologies and through whom we can access new market growth opportunities.





*Strengthen
      existing customer relationships through dedicated support*





We
      have
      developed outstanding technical and sales support teams that are dedicated
      to
      providing customers with the best available service and support. We believe
      our
      technical support is recognized as among the best in the industry and we will
      continue to invest in the necessary resources to ensure that our customers
      have
      access to the information and support they need to be successful using our
      products.





**Markets
      and Products**





We
      currently conduct most of our operations in the conferencing products industry.
      We also previously operated in the conferencing services segment until July
      1,
      2004 (fiscal 2005), when we sold our conferencing services business to American
      Teleconferencing Services, Ltd., and in the business services segment until
      March 4, 2005 (fiscal 2005), when we sold the remaining operations in that
      area
      to 6351352 Canada Inc. For additional financial information about our segments,
      see Notes to Consolidated Financial Statements, which are included in this
      report.





***Products
      Segment***





The
      performance and reliability of our high-quality conferencing products enable
      effective and efficient communication between geographically separated
      businesses, employees, and customers. We offer a full range of audio
      conferencing products, from high-end, professionally installed audio
      conferencing systems used in executive boardrooms, courtrooms, classrooms,
      and
      auditoriums, to conferencing-specific telephones used in small conference rooms
      and offices. Our products feature our proprietary Gentner® Distributed Echo
      Cancellation® and noise cancellation technologies to enhance communication
      during a conference call by eliminating echo and background noise. They also
      feature proprietary audio processing technologies such as adaptive modeling
      and
      first-microphone priority, which combine to enable natural communication between
      distant conferencing participants similar to that of being in the same room.





7





We
      believe the principal drivers of demand for audio conferencing products are:
      the
      increasing availability of easy-to-use audio conferencing equipment; the
      improving voice quality of audio conferencing systems compared to desktop
      speakerphones; and the trend of global, regional, and local corporate expansion.
      Other factors that we expect to have a significant impact on the demand for
      audio conferencing systems are the availability of a wider range of affordable
      audio conferencing products for small businesses and home offices; the growth
      of
      distance learning and corporate training programs and the number of teleworkers;
      the decrease in the amount of travel within most enterprises for routine
      meetings; and the transition to the Internet Protocol (“IP”) network from the
      traditional public switched telephone network (“PSTN”). We expect these growth
      factors to be offset slightly by direct competition from high-end desktop
      speakerphones, the technological volatility of IP-based products, and continued
      pressures on enterprises to reduce spending.





**Professional
      Audio Conferencing Products**





We
      have
      been developing high-end, professionally installed audio conferencing products
      since 1991 and believe we have established strong brand recognition for these
      Professional Audio Conferencing products.





Our
      Professional Audio Conferencing products include the XAP® and PSR1212 product
      lines. The XAP® line includes our most powerful, feature-rich products, with the
      latest advances in technology and functionality. It has more processing power
      than our legacy Audio Perfect® products and contains noise cancellation
      technology in addition to our Gentner® Distributed Echo Cancellation® technology
      found in the Audio Perfect® product line. The PSR1212 is a digital matrix mixer
      that provides advanced audio processing, microphone mixing, and routing for
      local sound reinforcement.





The
      XAP®
and PSR1212 products are comprehensive audio control systems designed to excel
      in the most demanding acoustical environments and routing configurations. These
      products are also used for integrating high-quality audio with video
      conferencing systems.





On
      March
      30, 2005, we formalized our decision to discontinue our Audio Perfect® product
      line. The last orders for our Audio Perfect® products were received on June 30,
      2005 and the last build of Audio Perfect® products was during the first quarter
      of fiscal 2006. We will continue to inventory parts for warranty and warranty
      repair service and will continue to service these products for a five-year
      period based on a two-year warranty and three-year repair period based on parts
      availability.





**Out-of-the-Box
      Premium Conferencing Systems**





In
      fiscal
      2004, we introduced our RAVTM audio conferencing system. RAVTM is a complete,
      out-of-the-box system that includes an audio mixer, loudspeakers, microphones,
      and a wireless control device. In fiscal 2005, we introduced a wired control
      device as a part of our RAVTM audio conferencing system offering. It uniquely
      combines the sound quality of a professionally installed audio system with
      the
      simplicity of a conferencing-specific telephone and can be easily connected
      to
      industry common rich-media devices, such as video or web conferencing systems,
      to deliver enhanced audio performance.





RAVTM
      offers many powerful audio processing technologies from our Professional Audio
      Conferencing products without the need for professional installation and
      programming. It features Gentner® Distributed Echo Cancellation®, noise
      cancellation, microphone gating, and a drag-and-drop graphical user interface
      for easy system setup, control, and management.





**Table
      Top Conferencing Phone Systems**





In
      fiscal
      2003, we developed our MAX® line of tabletop conferencing phones. These phones
      incorporate the high-end echo cancellation, noise cancellation, and audio
      processing technologies found in our industry leading professional audio
      conferencing products.





8





The
      MAX®
product line is comprised of the MAX® EX, MAX® Wireless, MAXAttach and MAXAttach
      wireless tabletop conferencing phones. MAX® Wireless was one of the industry’s
      first wireless conferencing phone on the market. Designed for use in executive
      offices or small conference rooms with multiple participants, MAX® Wireless can
      be moved from room to room within 150 feet of its base station. MAXAttach is
      a
      wired conferencing phone with unique expansion capabilities. Instead of just
      adding extension microphones for use in larger rooms, MAXAttach links up to
      four
      complete phones together. This provides even distribution of microphones,
      loudspeakers, and controls for better sound quality and improved user access
      in
      medium to large conference rooms. The MAXAttach wireless is believed to be
      the
      industry’s first dual unit wireless conference phone.





**Other
      Products**





We
      complement our audio conferencing products with microphones, document and
      education cameras, and conferencing-specific furniture. Our microphones are
      designed to improve the audio quality in audio, video, and web conferencing
      applications. They feature echo cancellation and audio processing technologies
      and can be used with personal computers, video conferencing systems, or
      installed audio conferencing systems. Our cameras can be used in professional
      conferencing or educational settings. They make possible the presentation of
      materials and images such as full-color documents, 3-D objects and images from
      a
      variety of sources, including computers, microscopes, and multimedia devices.
      Our wide selection of wood, metal, and laminate conferencing furniture features
      audiovisual carts, plasma screen carts and pedestals, video conferencing carts,
      tables, cabinets, and podiums. We also provide custom conferencing furniture
      design.





**Marketing
      and Sales**





We
      use a
      two-tier distribution model, in which, we primarily sell our products directly
      to a worldwide network of independent audiovisual, information technology,
      and
      telecommunications distributors, who then sell our products to independent
      systems integrators, dealers, and value-added resellers, who in turn work
      directly with the end-users of our products on product fulfillment and
      installation. We also sell our products on a limited basis directly to certain
      dealers, systems integrators, value-added resellers, and end-users. In addition,
      we regularly participate in conferencing forums, trade shows, and industry
      promotions.





In
      fiscal
      2004, approximately $21.7 million, or 77.8 percent, of our total product sales
      were generated in the United States and product sales of approximately $6.2
      million, or 22.2 percent, were generated outside the United States. Revenue
      from
      product and business services customers outside of the United States accounted
      for approximately 36.1 percent of our total sales from continuing operations
      for
      fiscal 2004, 43.2 percent for fiscal 2003, and 16.1 percent for fiscal 2002.
      We
      sell our products in more than 70 countries worldwide. We anticipate that the
      portion of our total revenue from international sales will continue to increase
      as we further enhance our focus on developing new products, establishing new
      channel partners, strengthening our presence in key growth areas, and improving
      product localization with country-specific product documentation and marketing
      materials.





***Distributors***





We
      sell
      our products directly to approximately 70 distributors throughout the world.
      Distributors buy our products at a discount to list price and resell them on
      a
      non-exclusive basis to independent systems integrators, dealers, and value-added
      resellers. Our distributors maintain their own inventory and accounts receivable
      and are required to provide technical and non-technical support for our products
      to the next level of distribution participants. We work with our distributors
      to
      establish appropriate inventory stocking levels. We also work with our
      distributors to maintain relationships with our existing systems integrators,
      dealers, and value-added resellers and to establish new distribution participant
      relationships.





***Independent
      Integrators and Resellers***





Our
      distributors sell our products worldwide to approximately 750 independent
      systems integrators, dealers, and value-added resellers on a non-exclusive
      basis. While dealers, resellers, and systems integrators all sell our products
      directly to the end-users, systems integrators typically add significant value
      to each sale by combining our products with products from other manufacturers
      as
      part of a complex audiovisual system installation. Dealers and value-added
      resellers usually buy our products in large volumes and may bundle our products
      with products from other manufacturers for resale to the end-user. We maintain
      close working
      ties with our distribution participants and offer them education and training
      on
      our all of our products.





9





***Trade
      Shows and Industry Forums***





We
      regularly attend industry forums and exhibit our products at trade shows to
      ensure our products remain highly visible to distributors and dealers and to
      keep abreast of market trends.





**Customers**





No
      end-user accounted for more than 10 percent of our total revenue during fiscal
      2004, 2003, or 2002. In fiscal 2004, revenues in our product segment included
      sales to three distributors that represented approximately 64.6 percent of
      the
      segment’s revenues. (For additional financial information about our segments or
      geographic areas, see Note 25 to Consolidated Financial Statements, which are
      included in this report.) As discussed above, these distributors facilitate
      product sales to a large number of end-users, none of which is known to account
      for more than 10 percent of our revenues from product sales. Nevertheless,
      the
      loss of one or more distributors could reduce revenues and have a material
      adverse effect on our business and results of operations. As of June 30, 2004,
      our shipped orders on which we had not recognized revenues was $6.2 million.





**Competition**





The
      conferencing products market is characterized by intense competition and rapidly
      evolving technology. We have no single competitor for all of our product and
      service offerings, but we compete with various companies with respect to
      specific products and services. We believe we compete successfully as a result
      of the high quality of our products and technical support services as well
      as
      the strength of our brand.





With
      respect to our products, we believe the principal factors driving sales are
      product design, quality and functionality of products, establishment of brand
      name recognition, pricing, access to and penetration of distribution channels,
      quality of customer support, and a significant customer base.





In
      the
      audio conferencing systems market, our competitors include Aethra, Biamp
      Systems, Cisco, Polycom, Sony, Sound Control, and other companies that offer
      audio conferencing systems. According to industry sources, during the 2003
      calendar year, we had the largest share of the installed segment of the
      conferencing systems market, which we target with our Professional Audio
      Conferencing products. Our microphones compete with the products of Audio
      Technica, Global Media, Shure, and others. In the markets for our document
      cameras, competitors include Elmo, Ken-a-Vision, Samsung, Sony, Wolfvision,
      and
      other manufacturers. Our conferencing furniture products compete primarily
      with
      the products of Accuwood, Comlink, and Video Furniture
      International.





In
      each
      of the markets in which we compete, most of our competitors may have access
      to
      greater financial, technical, manufacturing, and marketing resources, and as
      a
      result they could respond more quickly or effectively to new technologies and
      changes in customer preferences. No assurances can be given that we can continue
      to compete effectively in the markets we serve.





**Seasonality**





Our
      audio
      conferencing products revenue has historically been strongest during the second
      and fourth quarters. Our camera product line revenue is usually strongest during
      the third and fourth quarters. Our Canadian audiovisual integration services
      business revenue is typically strongest during the third quarter due to the
      large number of government contracts and their related fiscal spending
      schedules. There can be no assurance that any historic sales patterns will
      continue and, as a result, sales for any prior quarter are not necessarily
      indicative of the sales to be expected in any future quarter.





**Product
      Development**





We
      are
      committed to research and development, and view our continued investment in
      research and development as a key ingredient to our long-term business success.
      Our research and development expenditures were approximately $3.9 million in
      fiscal 2004, $3.0 million in fiscal 2003, and $3.8 million in fiscal
      2002.





10





Our
      core
      competencies in research and development include many audio technologies,
      including telephone echo cancellation, acoustic echo cancellation, and noise
      cancellation. Our ability to use digital signal processing technology to perform
      audio processing operations is also a core competency. Our research and
      development efforts are supported by an internal computer aided design team
      that
      creates electrical schematics, printed circuit board designs, mechanical
      designs, and manufacturing documentation. We believe the technology developed
      through this interactive process is critical to the performance of our products.
      We also believe that ongoing development of our core technological competencies
      is vital to maintaining and increasing future sales of our products and to
      enhancing new and existing products.





**Manufacturing**





Prior
      to
      June 20, 2005, we manufactured and assembled most of our products in our
      manufacturing facility located at our corporate headquarters in Salt Lake City,
      Utah and bought most of our assembly components from distributors and a limited
      amount of such components directly from fabricators located near our
      manufacturing facilities. We subcontracted and continue to subcontract the
      manufacture of our MAX product line to a third-party contract manufacturer
      located in Southeast Asia. We continue to manufacture our furniture product
      line
      in our manufacturing facility located in Champlin, Minnesota.





On
      June
      20, 2005, we began transitioning the manufacture of most of our products to
      a
      third-party manufacturer, Inovar, Inc., a Utah-based electronics manufacturing
      services provider (“Inovar”). On August 1, 2005, we entered into a Manufacturing
      Agreement with Inovar pursuant to which we agreed to outsource our Salt Lake
      City manufacturing operations to Inovar. The agreement is for an initial term
      of
      three years, which shall automatically be extended for successive and additional
      terms of one year each unless terminated by either party upon 120 days advance
      notice at any time after the second anniversary of the agreement. The agreement
      generally provides, among other things, that Inovar shall: (i) furnish the
      necessary personnel, material, equipment, services, and facilities to be the
      exclusive manufacturer of substantially all the products that were previously
      manufactured at our Salt Lake City, Utah manufacturing facility and the
      non-exclusive manufacturer of a limited number of products, provided that the
      total cost to ClearOne (including price, quality, logistic cost, and terms
      and
      conditions of purchase) is competitive; (ii) provide repair service, warranty
      support, and proto-type services for new product introduction on terms to be
      agreed upon by the parties; (iii) purchase certain items of our manufacturing
      equipment; (iv) lease certain other items of our manufacturing equipment and
      have a one-year option to purchase such leased items; (v) have the right to
      lease our former manufacturing employees from a third-party employee leasing
      company; and (vi) purchase the parts and materials on hand and in transit at
      our
      cost for such items with the purchase price payable on a monthly basis when
      and
      if such parts and materials are used by Inovar. The parties also entered into
      a
      one-year sublease for approximately 12,000 square feet of manufacturing space
      located in our headquarters in Salt Lake City, Utah, which sublease may be
      terminated by either party upon 90 days notice. The agreement provides that
      products shall be manufactured by Inovar pursuant to purchase orders submitted
      by us at purchase prices to be agreed upon by the parties, subject to adjustment
      based upon such factors as volume, long range forecasts, change orders, etc.
      We
      also granted Inovar a right of first refusal to manufacture new products
      developed by us at a cost to ClearOne (including price, quality, logistic cost,
      and terms and conditions of purchase) that is competitive.





For
      risks
      associated with our manufacturing strategy please see “Risk Factors” in Item
      1.





**Intellectual
      Property and Other Proprietary Rights**





We
      believe that our success depends in part on our ability to protect our
      proprietary rights. We rely on a combination of patent, copyright, trademark,
      and trade secret laws and confidentiality procedures to protect our proprietary
      rights. The laws of foreign countries may not protect our intellectual property
      to the same degree as the laws of the United States.





We
      generally require our employees, customers, and potential distribution
      participants to enter into confidentiality and non-disclosure agreements before
      we disclose any confidential aspect of our technology, services, or business.
      In
      addition, our employees are routinely required to assign to us any proprietary
      information, inventions, or other technology created during the term of their
      employment with us. These precautions may not be sufficient to protect us from
      misappropriation or infringement of our intellectual property.





We
      currently have several patents issued or pending that cover our conferencing
      products and technologies. The expiration dates of issued patents range from
      2009 to 2010. We hold registered trademarks for ClearOne, XAP, MAX, AccuMic,
      Audio Perfect, Distributed Echo Cancellation, Gentner, and others. We have
      also
      filed for trademarks for RAV and others.





11





**Employees**





As
      of
      June 30, 2004, we had 264 employees, 262 of whom were employed on a full-time
      basis, with 68 in sales, marketing, and customer support; 41 in product
      development; 40 in manufacturing; 59 in our conference call center, 29 in
      administration, including finance, and 27 at OM Video.





As
      of
      November 30, 2005, following the sale of our conferencing services business,
      OM
      Video, and the outsourcing of our Salt Lake City manufacturing operations,
      we
      had 124 employees, 121 of whom were employed on a full-time basis, with 44
      in
      sales, marketing, and customer support; 45 in product development; 20 in
      manufacturing support; and 15 in administration, including finance. None of
      our
      employees are subject to a collective bargaining agreement and we believe our
      relationship with our employees is good.





**Acquisitions
      and Dispositions**





During
      the fiscal year ended June 30, 2001, we completed the acquisition of ClearOne,
      Inc., a developer of video conferencing technology and audio conferencing
      products. We also completed the sale of the assets of the remote control portion
      of our RFM/Broadcast division to Burk Technology, Inc. During the fiscal year
      ended June 30, 2002, we completed the acquisitions of Ivron Systems, Ltd.,
      a
      developer of video conferencing technology and product; E.mergent, Inc., an
      audiovisual integration services provider and manufacturer of cameras and
      conferencing furniture; and the sale of our court conferencing customer list
      and
      all contracts relating to our court conferencing services to CourtCall LLC.
      During the fiscal year ended June 30, 2003, we sold our
      broadcast telephone interface products, including the digital hybrid and TS-612
      product lines, to Comrex Corp oration
      and completed the acquisition of Stechyson Electronics Ltd., doing business
      as
      OM Video, an audiovisual integration services company. During fiscal 2004,
      we
      sold our U.S. audiovisual integration services business to M:Space, Inc. During
      fiscal 2005, we sold our conferencing services segment to Premiere and we sold
      our Canadian audiovisual integration services business to 6351352 Canada Inc.
      The total consideration for each acquisition was based on negotiations between
      ClearOne and the acquired company or its shareholders that took into account
      a
      number of factors of the business, including historical revenues, operating
      history, products, intellectual property, and other factors. Each acquisition
      was accounted for under the purchase method of accounting. Each acquisition
      is
      summarized below and is discussed in more detail in the footnotes to the audited
      consolidated financial statements included in this report.





***ClearOne,
      Inc. Acquisition.*** We
      entered into an agreement to purchase substantially all of the assets of
      ClearOne, Inc., a developer of video conferencing technology and audio
      conferencing products, for $3.6 million consisting of $1.8 million of cash
      and
      129,871 shares of restricted common stock valued at $13.97 per share. The
      acquisition was consummated on July 5, 2000.





As
      of the
      acquisition date, we acquired tangible assets consisting of property and
      equipment of $473,000, deposits of $59,000, and inventory of $299,000. In
      conjunction with a third-party valuation firm, we determined the useful lives
      and amounts of the developed technologies, trademarks and distribution
      agreements. We
      recorded $924,000 of identifiable intangibles, $728,000 of in-process research
      and development, and $1.2 million in goodwill, resulting from the difference
      between the purchase price plus acquisition costs and the net assets acquired. The
      developed technologies, trademarks and distribution agreement had estimated
      useful lives of three years. Goodwill was being amortized on a straight-line
      basis over four years until the adoption of Statement
      of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other
      Intangible Assets.” on
      July
      1, 2002. We
      amortized goodwill of $1.2 million on a straight-line basis over four years
      until the adoption of  SFAS No. 142 on July 1, 2002. Amortization of
      goodwill was $297,000 for each of the fiscal years ended June 30, 2002 and
      2001.





We
      charged $728,000 to expense during fiscal 2001 representing acquired in-process
      research and development that had not yet reached technological feasibility.
      We
      anticipated the technology would require an additional 18 to 20 months of
      development at a minimum cost of $1.2 million. The technology had no alternative
      future use. After the acquisition, we initially continued to develop the
      technology; however, it experienced significant difficulties in completing
      the
      development of the video conferencing technologies and subsequently determined
      that the technology was not viable and never brought the in-process video
      conferencing technology to market.





We
      continued to sell the acquired teleconferencing product until the fourth quarter
      of the fiscal year ended June 30, 2002. Due to declining sales, negative margins
      beginning in the fourth quarter of the fiscal year ended June 30, 2002, and
      our
      decision to stop investing in the acquired teleconferencing product, we
      determined that a triggering event had occurred in the fourth quarter of the
      fiscal year ended June 30, 2002. We performed an impairment test and determined
      that an impairment loss on the ClearOne long-lived assets of approximately
      $901,000 should be recognized.





12





***Sale
      of Assets to Burk Technology.*** On April
      12, 2001, we sold the assets of the remote control portion of our RFM/Broadcast
      division to Burk Technology, Inc. (“Burk”), a privately held developer and
      manufacturer of broadcast facility control systems products, for $750,000 in
      cash at closing, $1.8 million in the form of a seven-year promissory note,
      with
      interest at the rate of 9.0 percent per year, and up to $700,000 as a commission
      over a period of up to seven years. We realized a gain on the sale, net of
      tax,
      of $58,000 for fiscal 2004, $200,000 for fiscal 2003, and $176,000 for fiscal
      2002. As of June 30, 2004, $1.5 million of the promissory note remained
      outstanding and we had received $20,000 in commissions.





On
      August
      22, 2005, we entered into a Mutual Release and Waiver Agreement with Burk
      pursuant to which Burk paid us $1.3 million in full satisfaction of the
      promissory note, which included a discount of approximately $120,000. As part
      of
      the Mutual Release and Waiver Agreement, we waived any right to future
      commission payments from Burk and we granted mutual releases to one another
      with
      respect to claims and liabilities. Subsequent to June 30, 2004, we anticipate
      recognizing a pre-tax gain on the sale of approximately $1.5
      million.





***Ivron
      Systems, Ltd. Acquisition.*** On
      October 3, 2001, we purchased all of the issued and outstanding shares of Ivron.
      Ivron was located in Dublin, Ireland. Under the terms of the original agreement,
      the shareholders of Ivron received $6.0 million of cash at closing of the
      purchase. As part of the purchase, all outstanding options to purchase Ivron
      shares were cancelled in consideration for an aggregate cash payment of
      $650,000.




As
      of the
      acquisition date, we acquired tangible assets consisting of cash of $297,000,
      accounts receivable of $92,000, inventory of $337,000, and property and
      equipment of $22,000. We assumed liabilities consisting of trade accounts
      payable of $174,000 and accrued compensation and other accrued liabilities
      of
      $264,000.





Under
      the
      original agreement, former Ivron shareholders would be entitled to receive
      up to
      429,000 shares of common stock after June 30, 2002 if certain video development
      contingencies were achieved and up to approximately $17.0 million of additional
      cash and stock consideration provided that certain agreed upon earnings per
      share targets were achieved by us during fiscal years 2003 and 2004. In
      addition, former optionees of Ivron who remained with us were eligible to
      participate in a cash bonus program of up to approximately $1.0 million paid
      by
      us, based on our combined performance with Ivron in the fiscal years ending
      June
      30, 2003 and 2004. On April 8, 2002, an amendment to the original purchase
      agreement was finalized which revised the performance targets and reduced the
      contingent consideration that the Ivron shareholders would be entitled to
      receive to a maximum of 109,000 shares of common stock. No performance targets
      were met and accordingly no contingent consideration was or will be
      paid.





Based
      on
      the modified purchase price determined under the terms of the amendment and
      with
      the assistance of a third-party valuation firm and after considering the facts
      and circumstances surrounding our intentions, we recorded intangible assets
      of
      $5.3 million related to developed technology, $1.1 million related to
      intellectual property, and goodwill of $218,000. The developed technologies
      had
      estimated useful lives of three to fifteen years and the patents had an
      estimated useful life of fifteen years. Amortization expense of $446,000 was
      recorded for the developed technology for the period from October 3, 2001 to
      June 30, 2002. No amortization expense was recorded for goodwill.





After
      the
      acquisition, we experienced significant difficulties in selling the acquired
      video conferencing products. Due to the phasing-out of a product line occasioned
      by technological difficulties and negative projected cash flows, we determined
      that a triggering event had occurred during the fourth quarter of the fiscal
      year ended June 30, 2002. We performed an impairment test and determined that
      an
      impairment loss on the Ivron assets of approximately $6.2 million should be
      recognized. During early fiscal 2004, we discontinued selling the “V-There” and
“Vu-Link” set-top video conferencing products.





***E.mergent
      Acquisition.*** On
      May
      31, 2002, we completed our acquisition of E.mergent pursuant to the terms of
      an
      Agreement and Plan of Merger dated January 21, 2002 whereby we paid
      $7.3 million of cash and issued 868,691 shares of common stock valued at $16.55
      per share to former E.mergent stockholders.





13





In
      addition to the shares of our common stock issued, we assumed all options to
      purchase E.mergent common stock that were vested and outstanding on the
      acquisition date. These options were converted into rights to acquire a total
      of
      4,158 shares of our common stock at a weighted average exercise price of $8.48
      per share. A value of approximately $49,000 was assigned to these options using
      the Black-Scholes option pricing model with the following assumptions: expected
      dividend yield of 0 percent, risk-free interest rate of 2.9 percent, expected
      volatility of 81.8 percent, and an expected life of two years.





As
      of the
      acquisition date, we acquired tangible assets consisting of cash of $68,000,
      accounts receivable of $2.2 million, inventory of $3.3 million, property and
      equipment of $475,000 and other assets of $1.3 million. We assumed liabilities
      consisting of accounts payable of $1.3 million, line of credit borrowings of
      $484,000, unearned maintenance revenue of $873,000, accrued compensation (other
      than severance) and other accrued liabilities of $656,000. We incurred severance
      costs of approximately $468,000 related to the termination of four E.mergent
      executives and seven other E.mergent employees as a result of duplication of
      positions upon consummation of the acquisition. In June 2002, $52,000 was paid
      to such individuals. The severance accrual of $416,000 as of June 30, 2002
      was
      paid during the fiscal year ended June 30, 2003.





With
      the
      assistance of a third-party valuation firm and after considering the facts
      and
      circumstances surrounding the acquisition, we recorded intangible assets related
      to customer relationships, patents, a non-compete agreement, and goodwill.
      Amortization expense of $437,000 was recorded for customer relationships,
      patents, and a non-compete agreement during fiscal 2003. Customer relationships
      had estimated useful lives of 18 months to three years and patents had estimated
      useful lives of fifteen years. The term of the non-compete agreement was three
      years. In accordance with SFAS No. 142, no amortization expense was recorded
      for
      goodwill.





Our
      management, at the time, believed the E.mergent acquisition would complement
      our
      existing operations and that core competencies would allow us to acquire market
      share in the audiovisual integration industry. However, our entry into the
      services business was perceived as a threat by its systems integrators and
      value-added resellers, since we began competing against many of them for sales.
      In order to avoid this conflict and to maintain good relationships with its
      systems integrators and value-added resellers, we decided to stop pursuing
      new
      services contracts in the fourth quarter of the fiscal year ended June 30,
      2003
      which was considered a triggering event for evaluation of impairment.
      Ultimately, we exited the U.S. audiovisual integration market and subsequently
      sold its U.S. audiovisual integration business to M:Space in May 2004. (See *Sale
      of our U.S. Audiovisual Integration Services* below.)
      Although we continue to sell camera and furniture products acquired from
      E.mergent, our decision to exit the U.S. integration services market adversely
      affected future cash flows. We determined that a triggering event occurred
      in
      the fourth quarter of the fiscal year ended June 30, 2003. We performed an
      impairment test and determined that an impairment loss on the integration
      services-related E.mergent assets of approximately $12.5 million should be
      recognized. We also determined that an impairment loss on other acquired
      E.mergent assets of approximately $5.1 million should be recognized. The U.S.
      audiovisual integration business operations and related net assets are included
      in discontinued operations in the accompanying consolidated financial
      statements.





***Sale
      of Court Conferencing Assets.*** As
      part
      of our conferencing services segment, our court conferencing customers engaged
      in the audio and/or video conferencing of legal proceedings including remote
      appearances in state and federal courts and/or administrative tribunals within
      the United States. On October 26, 2001, we sold our court conferencing customer
      list, including all contracts relating to its court conferencing services to
      CourtCall LLC and recognized a gain of $250,000.





***Sale
      of Broadcast Telephone Interface Business to Comrex.*** On
      August 23, 2002, we entered into an agreement with Comrex Corporation
      (“Comrex”), pursuant to which Comrex agreed to pay ClearOne $1.3 million in
      exchange for certain inventory associated with our broadcast telephone interface
      product line and the provision of a perpetual software license to use our
      technology related to broadcast telephone interface products along with one
      free
      year of maintenance and support, and transition services for 90 days following
      the effective date of the agreement. The transition services included training,
      engineering assistance, consultation, and development services. We recognized
      approximately $1.1 million in revenue related to this transaction in fiscal
      2003
      and an additional $130,000 in revenue in fiscal 2004.





We
      also
      entered into a manufacturing agreement to continue to manufacture additional
      product for Comrex until August 2003 on a when-and-if needed basis. Comrex
      agreed to pay the Company for any additional product on a per item basis of
      cost
      plus 30 percent. During fiscal 2004 and fiscal 2003, we have recognized $387,000
      and $783,000, respectively, in revenue related to the manufacture of additional
      product from Comrex.





14





***OM
      Video Acquisition.*** On
      August
      27, 2002, we purchased all of the outstanding shares of OM Video, headquartered
      in Ottawa, Canada. Under the terms of the agreement, the shareholders of OM
      Video received $6.3 million in cash at closing. During the fiscal years ended
      June 30, 2003 and 2004, we paid an additional $500,000 of a potential $600,000
      that was held pending certain representations and warranties associated with
      the
      acquisition. During the second quarter of fiscal 2003, we also paid $750,000
      of
      a potential $800,000 earn-out provision. The earn-out provision not considered
      as part of the original purchase price allocation was recorded as additional
      consideration and booked to goodwill. No further payment related to the holdback
      or contingent consideration will be paid. Accordingly, the total cash payments
      associated with the acquisition were approximately $7.5 million.





As
      of the
      acquisition date, we acquired tangible assets consisting of cash of $193,000,
      accounts receivable of $470,000, inventory of $122,000, property and equipment
      of $145,000, and prepaid expenses of $6,000. We assumed liabilities consisting
      primarily of accrued liabilities of $378,000 and accrued tax liabilities of
      $221,000. We obtained a non-compete agreement with a term of two years from
      a
      former owner of OM Video.





Our
      management, at the time, believed the OM Video acquisition would complement
      the
      Company’s existing operations and that core competencies would allow the Company
      to acquire market share in the audiovisual integration industry. However, our
      entry into the services business was perceived as a threat by its systems
      integrators and value-added resellers, since we began competing against many
      of
      them for sales. In order to avoid this conflict and to maintain good
      relationships with its systems integrators and value-added resellers, we
      deemphasized the audiovisual integration market serving the Ottawa Canada region
      beginning in the fourth quarter of the fiscal year ended June 30, 2003. This
      decision was considered a triggering event for evaluation of impairment. On
      June
      30, 2003, we performed an impairment test and determined that an impairment
      loss
      on the OM Video assets of approximately $8.4 million should be recognized.
      On
      March 4, 2005, we sold all of our Canadian audiovisual integration business.
      (See *Subsequent
      Dispositions* below.)





***Sale
      of our U.S. Audiovisual Integration Services.*** On
      May 6,
      2004, we sold certain assets of our U.S. audiovisual integration services
      operations to M:Space, Inc. (“M:Space”) for no cash compensation. M:Space is a
      privately held audiovisual integration services company. In exchange for M:Space
      assuming obligations for completion of certain customer contracts, and
      satisfying maintenance contract obligations to existing customers, we
      transferred to M:Space certain assets including inventory valued at $573,000.
      The operations of our U.S. audiovisual integration services are classified
      as
      discontinued operations in the fiscal 2004 consolidated financial statements.
      We
      continue to manufacture and sell the camera and furniture lines acquired with
      the E.mergent acquisition.





***Subsequent
      Dispositions.***





**Conferencing
      Services** **.** ****** In
      April
      2004, our Board of Directors appointed a committee to explore sales
      opportunities to sell the conferencing services business segment. We decided
      to
      sell this segment primarily because of decreasing margins and investments in
      equipment that would have been required in the near future. Conferencing
      services revenues, reported in discontinued operations, for the years ended
      June
      30, 2004, 2003, and 2002 were $15.6 million, $15.3 million, and $15.6 million,
      respectively. Conferencing services pretax income, reported in discontinued
      operations, for the years ended June 30, 2004, 2003, and 2002, were $2.8
      million, $3.4 million, and $4.0 million, respectively.





On
      July
      1, 2004, we sold our conferencing services business segment to Premiere.
      Consideration for the sale consisted of $21.3 million in cash. Of the purchase
      price $1.0 million was placed into an 18-month Indemnity Escrow account and
      an
      additional $300,000 was placed into a working capital escrow account. We
      received the $300,000 working capital escrow funds approximately 90 days after
      the execution date of the contract. Additionally, $1.4 million of the proceeds
      was utilized to pay off equipment leases pertaining to assets being conveyed
      to
      Premiere. The Company expects to realize a pre-tax gain on the sale of
      approximately $17.5 million during fiscal 2005. As of November 30, 2005, the
      $1.0 million remained in the Indemnity Escrow account.





**OM
      Video - Canadian Audiovisual Integration Services** **.** During
      the fourth quarter of the fiscal year ended June 30, 2003, we deemphasized
      the
      audiovisual integration market serving the Ottawa, Canada region and impaired
      the OM Video acquired business services assets. We did not prepare any formal
      disposition plan. During fiscal 2005, we decided to sell all the issued and
      outstanding stock of our Canadian subsidiary because many of our existing
      systems integrators and value-added resellers perceived our entry into the
      business services arena as a threat since we began competing against these
      same
      customers for sales, as well as our desire to return to our core competency
      in
      the audio conferencing products segment. OM Video audiovisual integration
      services revenues for the years ended June 30, 2004 and 2003 were $5.9 million
      and $6.1 million, respectively. OM Video audiovisual integration services pretax
      income (loss), reported in continuing operations, for the years ended June
      30,
      2004 and 2003, were $372,000 and ($8.1 million), respectively.





15





On
      March
      4, 2005, we sold all of the issued and outstanding stock of our Canadian
      subsidiary, ClearOne Canada to 6351352 Canada Inc., a Canada corporation.
      ClearOne Canada owned all the issued and outstanding stock of Stechyson
      Electronics, Ltd., which conducts business under the name OM Video. We agreed
      to
      sell the stock of ClearOne Canada for $200,000 in cash; a $1.3 million note
      payable over a 15-month period, with interest accruing on the unpaid balance
      at
      the rate of 5.3 percent per year; and contingent consideration ranging from
      3.0
      percent to 4.0 percent of related gross revenues over a five-year period. We
      expect that the operations of the Canada audiovisual integration services will
      be classified as discontinued operations in the fiscal year 2005 consolidated
      financial statements. As of June 30, 2004, the assets of the Canada audiovisual
      integration business were classified as held and used.  In
      June
      2005, we were advised that the OM Purchaser had settled an action brought by
      the
      former employer of certain of OM Purchaser’s owners and employees alleging
      violation of non-competition agreements. The settlement reportedly involved
      a
      cash payment and an agreement not to sell certain products for a period of
      one
      year. To date, OM Purchaser has made all payments required under the note and
      we
      are continuing to evaluate what impact, if any, this settlement may have on
      the
      OM Purchaser’s ability to make the payment required under the
      note.





**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
      consolidated financial statements and related notes.*





***Risks
      Relating to Our Business***





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





As
      described in more detail in the section entitled “Competition,” the markets for
      our products and services are characterized by intense competition and pricing
      pressures and rapid technological change. We compete with businesses having
      substantially greater financial, research and development, manufacturing,
      marketing, and other resources. If we are not able to continually design,
      manufacture, and successfully introduce new or enhanced products or services
      that are comparable or superior to those provided by our competitors and at
      comparable or better prices, we could experience pricing pressures and reduced
      sales, profit margins, profits, and market share, each of which could have
      a
      materially adverse effect on our business.





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





Orders
      from our distributors and other distribution participants are based on demand
      from end-users. Prospective end-user demand is difficult to measure. This means
      that our revenues in any fiscal quarter could be adversely impacted by low
      end-user demand, which could in turn negatively affect orders we receive from
      distributors and dealers. Our expectations for both short- and long-term future
      net revenues are based on our own estimates of future demand.





Revenues
      for any particular time period are difficult to predict with any degree of
      certainty. We usually ship products within a short time after we receive an
      order; so consequently, unshipped backlog has not been a good indicator of
      future revenues. We believe that the current level of backlog will fluctuate
      dependent in part on our ability to forecast revenue mix and to plan our
      manufacturing accordingly. A significant portion of our customers’ orders are
      received in the last month of the quarter. We budget the amount of our expenses
      based on our revenue estimates. If our estimates of sales are not accurate
      and
      we experience unforeseen variability in our revenues and operating results,
      we
      may be unable to adjust our expense levels accordingly and our profit margins
      will be adversely affected.




16




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




We
      market
      our products primarily through a network of distributors
      who in turn sell our products to systems integrators, dealers, and value-added
      resellers .
      All of
      our agreements with such distributors
      and other distribution participants are
      non-exclusive, terminable at will by either party and generally short-term.
      No
      assurances can be given that any or all such distributors or other distribution
      participants will continue their relationship with us. Distributors and to
      a
      lesser extent systems integrators, dealers, and value-added resellers cannot
      easily be replaced and the loss of revenues and our inability to reduce expenses
      to compensate for the loss of revenues could adversely affect our net revenues
      and profit margins.





Although
      we rely on our distribution channels to sell our products, our distributors
      and
      other distribution participants are not obligated to devote any specified amount
      of time, resources, or efforts to the marketing of our products or to sell
      a
      specified number of our products. There are no prohibitions on distributors
      or
      other resellers offering products that are competitive with our products and
      most do offer competitive products. The support of our products by distributors
      and other distribution participants may depend on the competitive strength
      of
      our products and the price incentives we offer for their support. If our
      distributors and other distribution participants are not committed to our
      products, our revenues and profit margins may be adversely affected.





*We
      depend on an outsource manufacturing strategy.*





In
      August
      2005, we entered into a manufacturing agreement with Inovar, a domestic
      manufacturing services provider, to be the exclusive manufacturer of
      substantially all the products that were previously manufactured at our Salt
      Lake City, Utah manufacturing facility. Inovar is currently the primary
      manufacturer of substantially all of our products, except our MAX ®
product
      line and our furniture product line, and if Inovar experiences difficulties
      in
      obtaining sufficient supplies of components, component prices become
      unreasonable, an interruption in its operations, or otherwise suffers capacity
      constraints, we would experience a delay in shipping these products which would
      have a negative impact on our revenues. Currently, we have no second source
      of
      manufacturing for substantially all of our products.





We
      have
      an agreement with an international manufacturer for the manufacture of our
      MAX®
product line. We use a facility in China. Should there be any disruption in
      services due to natural disaster, economic or political difficulties in China,
      quarantines or other restrictions associated with infectious diseases, or other
      similar events, or any other reason, such disruption would have a material
      adverse effect on our business. A delay in shipping these products due to an
      interruption in the manufacturer’s operations would have a negative impact on
      our revenues. Operating in the international environment exposes us to certain
      inherent risks, including unexpected changes in regulatory requirements and
      tariffs, and potentially adverse tax consequences, which could materially affect
      our results of operations.





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





Our
      industry is subject to rapid and frequent technological innovations that could
      render existing technologies in our products obsolete and thereby decrease
      market demand for such products. If any of our products become slow-moving
      or
      obsolete and the recorded value of our inventory is greater than its market
      value, we will be required to write-down the value of our inventory to its
      fair
      market value, which would adversely affect our results of operations. In limited
      circumstances, we are required to purchase components that our outsourced
      manufacturers use to produce and assemble our products. Should technological
      innovations render these components obsolete, we will be required to write-down
      the value of this inventory, which could adversely affect our results of
      operations.





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





We
      have,
      in the past, and may again experience, technical difficulties and delays with
      the development and introduction of new products. Many of the products we
      develop contain sophisticated and complicated components and utilize
      manufacturing techniques involving new technologies. Potential difficulties
      in
      the development process that could be experienced by us include difficulty
      in:





·
            meeting
                required specifications and regulatory standards;





·
            meeting
                market expectations for
                performance;





·
            hiring
                and keeping a sufficient number of skilled developers;





17





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





·
            achieving
                necessary manufacturing efficiencies.





Once
      new
      products reach the market, they may have defects, which could adversely affect
      market acceptance of these products and our reputation. If we are not able
      to
      manage and minimize such potential difficulties, our business could be
      negatively affected.





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





We
      currently rely primarily on a combination of trade secrets, copyrights,
      trademarks, patents, and nondisclosure agreements to establish and protect
      our
      proprietary rights in our products. No assurances can be given that others
      will
      not independently develop similar technologies, or duplicate or design around
      aspects of our technology. In addition, we cannot assure you that any patent
      or
      registered trademark owned by us will not be invalidated, circumvented or
      challenged or that the rights granted thereunder will provide competitive
      advantages to us. Litigation may be necessary to enforce our intellectual
      property rights. We believe our products and other proprietary rights do not
      infringe upon any proprietary rights of third parties; however, we cannot assure
      you that third parties will not assert infringement claims in the future. Our
      industry is characterized by vigorous protection of intellectual property
      rights. Such claims and litigation are expensive and could divert management’s
      attention, regardless of their merit. In the event of a claim, we might be
      required to license third-party technology or redesign our products, which
      may
      not be possible or economically feasible.





We
      currently hold only a limited number of patents. To the extent that we have
      patentable technology for which we have not filed patent applications, others
      may be able to use such technology or even gain priority over us by patenting
      such technology themselves.





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





International
      sales represent a significant portion of our total sales from continuing
      operations. For example, international sales represented 36.1 percent of our
      total sales from continuing operations for fiscal 2004, 43.2 percent for fiscal
      2003, and 16.1 percent for fiscal 2002. We anticipate that the portion of our
      total revenue from international sales will continue to increase as we further
      enhance our focus on developing new products, establishing new distribution
      partners, strengthening our presence in key growth areas, and improving product
      localization with country-specific product documentation and marketing
      materials. Our international business is subject to the financial and operating
      risks of conducting business internationally, including:





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





·
            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; and





·
            potential
                hostilities and changes in diplomatic and trade
                relationships.





Our
      sales
      in the international market are denominated in U.S. Dollars, with the exception
      of sales through our wholly owned subsidiary, OM Video, whose sales were
      denominated in Canadian Dollars until March 4, 2005, when the subsidiary was
      sold to a third party. Consolidation of OM Video’s financial statements with
      ours, under U.S. GAAP, required remeasurement of the amounts stated in OM
      Video’s financial statements to U.S. Dollars, which was subject to exchange rate
      fluctuations. We did not undertake hedging activities that might protect us
      against such risks.





18





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





We
      depend
      on highly skilled technical personnel to research and develop, market, and
      service new and existing products. To succeed, we must hire and retain employees
      who are highly skilled in the rapidly changing communications and Internet
      technologies. Individuals who have the skills and can perform the services
      we
      need to provide our products and services are in great demand. Because the
      competition for qualified employees in our industry is intense, hiring and
      retaining employees with the skills we need is both time-consuming and
      expensive. We might not be able to hire enough skilled employees or retain
      the
      employees we do hire. Our inability to hire and retain employees with the skills
      we seek could hinder our ability to sell our existing products, systems, or
      services or to develop new products, systems, or services with a consequent
      adverse effect on our business.





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





We
      have
      licensing agreements with various suppliers for software and hardware
      incorporated into our products. These third-party licenses may not continue
      to
      be available to us on commercially reasonable terms, if at all. The termination
      or impairment of these licenses could result in delays of current product
      shipments or delays or reductions in new product introductions until equivalent
      designs could be developed, licensed, and integrated, if at all possible, which
      would have a material adverse effect on our business.





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





In
      the
      audio conferencing products market, the revenues generated from sales of our
      audio conferencing products for distance learning and courtroom facilities
      are
      dependent on government funding. In the event government funding for such
      initiatives was reduced or became unavailable, our sales could be negatively
      impacted. Additionally, many of our products are subject to governmental
      regulations. New regulations could significantly impact sales in an adverse
      manner.





*Environmental
      laws and regulations subject us to a number of risks and could result in
      significant liabilities and costs.*





The
      European Parliament has published a directive on the Restriction on Use of
      Hazardous Substances Directive (the “RoHS Directive”), which restricts the use
      of certain hazardous
      substances in electrical and electronic equipment beginning July 1, 2006. We
      may
      need to redesign products containing hazardous substances regulated under the
      RoHS Directive to reduce or eliminate those regulated hazardous substances
      in
      our products. The European Parliament has also published a directive on
      Electronic and Electrical Waste Management (the “WEEE Directive”), which makes
      producers of certain electrical and electronic equipment financially responsible
      for collection, reuse, recycling, treatment, and disposal of equipment placed
      on
      the European Union market after August 13, 2005. We are in the process of
      evaluating the impact of these directives on our business and have not yet
      estimated the potential costs of compliance.





*We
      may have difficulty in collecting outstanding receivables.*





We
      grant
      credit without requiring collateral to substantially all of our customers.
      In
      times of economic uncertainty, the risks relating to the granting of such credit
      would typically increase. Although we monitor and mitigate the risks associated
      with our credit policies, we cannot assure you that such mitigation will be
      effective. We have experienced losses due to customers failing to meet their
      obligations. Future losses could be significant and, if incurred, could harm
      our
      business and have a material adverse effect on our operating results and
      financial condition.




19




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




As
      with
      any company, our operations are at risk of being interrupted by earthquake,
      fire, flood, and other natural and human-caused disasters, including terrorist
      attacks and disease. Our operations are also at risk of power loss,
      telecommunications failure, and other infrastructure and technology based
      problems. To help guard against such risks, we carry business interruption
      loss
      insurance with coverage of up to $5.4 million to help compensate us for losses
      that may occur.





***Risks
      Relating to Our Company***





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





The
      market price of our common stock has experienced significant fluctuations and
      may continue to fluctuate significantly. The market price of our common stock
      may be significantly affected by a variety of factors, including:





·
            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-margin 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;





·
            quarterly
                variations in our results of
                operations;





·
            general
                market conditions or market conditions specific to technology industries;





·
            domestic
                and international economic
                conditions;





·
            The
                adoption of the new accounting standard, SFAS123R, “Share-Based Payments”
                which will require us to record compensation expense for options
                issued
                under our “1998” Stock Option Plan beginning with options issued after
                July 1, 2005;





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





·
            the
                markets in which our stock is
                traded.





*Many
      of our officers and key personnel have recently joined the company or have
      only
      worked together for a short period of time.*





We
      have
      recently made several significant changes to our senior management team. In
      July
      2004, we named a new President and Chief Executive Officer, who had been serving
      as our Vice-President of Product Development since December 2003. In addition,
      we hired a new Chief Financial Officer in July 2004, a Vice-President of
      Worldwide Sales and Marketing in November 2004, and a Vice-President of
      Operations in January 2005. In January 2005, we named a new Vice-President
      of
      Product Line Management, who had been serving as our Director of Research and
      Development. In September 2005, our Chief Financial Officer resigned his
      position and our Corporate Controller was named our Interim Chief Financial
      Officer. As a result of these recent changes in senior management, many of
      our
      officers and other key personnel have only worked together for a short period
      of
      time. The failure to successfully integrate senior management could have an
      adverse impact on our business operations, including reduced sales, confusion
      with our channel partners, and delays in new product introductions.





*Our
      directors and officers own 18.7 percent of the Company and may exert control
      over us.*





Our
      officers and directors together have beneficial ownership of approximately
      18.7
      percent of our common stock (including options that are currently exercisable
      or
      exercisable within 60 days of November 30, 2005). With this significant holding
      in the aggregate, the officers and directors, acting together, could exert
      a
      significant degree of control over us and may be able to delay or prevent a
      change in control.





20





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





Our
      principal administrative, sales, marketing, customer support, and research
      and
      development facility is located in our headquarters in Salt Lake City, Utah.
      Most of our warehousing operations are also located in our Salt Lake City
      headquarters. We currently occupy a 51,760 square-foot facility under the terms
      of an operating lease expiring in October 2006. Of the 51,760 square feet,
      we
      sublet 12,000 square feet to Inovar, as discussed below. We believe the facility
      will be reasonably adequate to meet our needs through October 2006; however,
      we
      are currently evaluating our needs for fiscal 2007 and beyond. Prior to the
      sale
      of our conferencing service business, this segment conducted its business from
      our Salt Lake City headquarters.





From
      July
      1, 2004 through February 28, 2005, we sublet 5,416 square feet of space in
      our
      headquarters building to Premiere Conferencing, the purchaser of our
      conferencing services business. On August 1, 2005, we entered into a one-year
      sublease with Inovar with respect to the 12,000 square foot manufacturing
      facility in our headquarters building in connection with the outsourcing of
      our
      manufacturing operations. Inovar pays rent in the amount of $11,040 per month
      and either party may terminate the lease for any reason upon 90 days written
      notice or 60 days written notice to the other party of material breach of the
      agreement. Such space had been provided to Inovar on a rent-free basis from
      June
      20 to July 31, 2005, pending execution of definitive agreements.





Our
      conference furniture manufacturing and warehousing operations are conducted
      from
      a facility totaling 17,520 square feet located in Champlin, Minnesota. We lease
      this facility under a lease agreement that expires in September 2007. We believe
      the facility will be reasonably adequate to meet our needs for the next 12
      months.




Our
      wholly owned United Kingdom subsidiary, ClearOne Communications Limited, rents
      an office in Oxfordshire, England, consisting of 250 square feet. The office
      space is rented under a managed office arrangement which requires 90 days notice
      to terminate the agreement.





Our
      wholly owned subsidiary, Gentner Communications Limited, leased an office in
      Dublin, Ireland for research and development related to video conferencing.
      The
      facility consisted of 431 square meters, of which we sublet 129 square meters
      to
      a third party effective July 2002. We negotiated an early buyout of the lease
      effective November 2002.





We
      leased
      an office in Woburn, Mass. that we initially acquired through the purchase
      of
      ClearOne, Inc. in July 2000. The facility consisted of 2,206 square feet. We
      negotiated an early buyout of the lease effective September 2003.





Our
      U.S.
      audiovisual integration services operations were conducted from a facility
      totaling 25,523 square feet located in Golden Valley, Minnesota. We leased
      these
      facilities under a lease agreement that expired in December 2004. We negotiated
      an early buyout of the lease effective June 2004.





We
      previously rented sales offices located in Des Moines, Iowa on a month-to-month
      basis but such leases were terminated in December 2002. We also leased a sales
      office in Westmont, Illinois pursuant to a lease that expired in July 2004.





Our
      wholly owned subsidiary, ClearOne Communications EuMEA, GmbH, leased an office
      in Nuremberg, Germany, consisting of 200 square meters. This office was closed
      in December 2004 and the lease was terminated.





Our
      wholly owned subsidiary, ClearOne Communications of Canada, Inc. doing business
      as OM Video, leased a facility in Ottawa, Canada consisting of 16,190 square
      feet, in which our Canadian audiovisual integration services operations were
      conducted. We leased this facility under a lease agreement that expired in
      July
      2005. As discussed herein, we sold this subsidiary in March 2005.




21


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




In
      addition to the legal proceedings described below, we are also involved from
      time to time in various claims and other legal proceedings which arise in the
      normal course of our business. Such matters are subject to many uncertainties
      and outcomes that are not predictable. However, based on the information
      available to us today and after discussions with legal counsel, we do not
      believe any such other proceedings will have a material, adverse effect on
      our
      financial condition or results of operations, except as described
      below.





**The
      SEC Action.** On
      January 15, 2003, the SEC filed a civil complaint against ClearOne; Frances
      Flood, then ClearOne’s Chairman, Chief Executive Officer, and President; and
      Susie Strohm, then ClearOne’s Chief Financial Officer, in the U.S. District
      Court for the District of Utah, Central Division. The complaint alleged that
      from the quarter ended March 31, 2001, the defendants engaged in a program
      of
      inflating ClearOne’s revenues, net income, and accounts receivable by engaging
      in improper revenue recognition in violation of GAAP and Section 17(a) of the
      Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities
      Exchange Act of 1934 and various regulations promulgated thereunder. Following
      the filing of the complaint, we placed Ms. Flood and Ms. Strohm on
      administrative leave and they subsequently resigned from their positions with
      the Company. On December 4, 2003, we settled the SEC action by entering into
      a
      consent decree in which, without admitting or denying the allegations of the
      complaint, we consented to the entry of a permanent injunction prohibiting
      future securities law violations. No fine or penalty was assessed against the
      Company as part of the settlement.





On
      February 20, 2004, Ms. Flood and Ms. Strohm settled the SEC action by entering
      into consent decrees wherein, without admitting or denying the allegations
      of
      the complaint, they each consented to the entry of a permanent injunction
      prohibiting future violations of the antifraud, reporting, and issuer books
      and
      records requirements of the federal securities laws. The order against Ms.
      Flood
      also provided for disgorgement in the amount of $71,000 along with prejudgment
      interest of $2,882, a civil penalty in the amount of $71,000, and prohibited
      Flood from acting as an officer or director of any issuer that has a class
      of
      securities registered pursuant to Section 12 of the Exchange Act or that is
      required to file reports pursuant to Section 15(d) of the Exchange Act. The
      order against Ms. Strohm also provided for disgorgement in the amount of $25,000
      together with prejudgment interest in the amount of $1,015 and a civil penalty
      in the amount of $25,000. The final settlement of the SEC action as to Ms.
      Flood
      and Ms. Strohm satisfied the condition precedent contained in the employment
      separation agreements entered into by the Company with each of such persons
      on
      December 5, 2003 (See Item 11. Executive Compensation: Employment Contracts
      and
      Termination of Employment and Change-in-Control Arrangements).





**U.S.
      Attorney’s Investigation.** As
      previously announced on January 28, 2003, the Company has been advised that
      the
      U.S. Attorney’s Office for the District of Utah has begun an investigation
      stemming from the complaint in the SEC action described above. No pleadings
      have
      been filed to date and the Company is cooperating fully with the U.S. Attorney’s
      Office.





**The
      Whistleblower Action.** On
      February 11, 2003, our former vice president of sales filed a whistleblower
      claim with the Occupational Safety and Health Administration (“OSHA”) under the
      employee protection provisions of the Sarbanes-Oxley Act alleging that the
      Company had wrongfully terminated his employment for reporting the Company’s
      alleged improper revenue recognition practices to the SEC in December 2002,
      which precipitated the SEC action against the Company. In February 2004, OSHA
      issued a preliminary order in favor of the former officer, ordering that he
      be
      reinstated with back pay, lost benefits, and attorney’s fees. The former officer
      had also filed a separate lawsuit against the Company in the United States
      District Court for the District of Utah, Central Division, alleging various
      employment discrimination claims. In May 2004, the Administrative Law Judge
      approved a settlement agreement with the former officer pursuant to which he
      released the Company from all claims asserted by him in the OSHA proceeding
      and
      the federal court action in exchange for a cash payment by the Company. The
      settlement did not have a material impact on the Company's results of operations
      or financial condition. ****





22





**The
      Shareholders’ Class Action.** On
      June
      30, 2003, a Consolidated Complaint was filed in the U.S. District Court for
      the
      District of Utah, Central Division, against the Company, eight present or former
      officers and directors of the Company, and Ernst & Young LLP (“Ernst &
Young”), the Company’s former independent public accountants, by a class
      consisting of purchasers of the Company’s common stock during the period from
      April 17, 2001 through January 15, 2003. The action followed the consolidation
      of several previously filed class action complaints and the appointment of
      lead
      counsel for the class. The allegations in the complaint were essentially the
      same as those contained in the SEC complaint described above. On December 4,
      2003, the Company, on behalf of itself and all other defendants with the
      exception of Ernst & Young, entered into a settlement agreement with the
      class pursuant to which we agreed to pay the class $5.0 million and issue the
      class 1.2 million shares of our common stock. The cash payment was made in
      two
      equal installments, the first on November 10, 2003 and the second on January
      14,
      2005. On May 23, 2005, the court order was amended to provide that odd-lot
      numbers of shares (99 or fewer shares) would not be issued from the settlement
      fund and claimants who would otherwise be entitled to receive 99 or fewer shares
      would be paid cash in lieu of such odd-lot number of shares. On September 29,
      2005, we completed our obligations under the settlement agreement by issuing
      a
      total of 1,148,494 shares of our common stock to the plaintiff class, including
      228,000 shares previously issued in November 2004, and we paid an aggregate
      of
      $126,705 in cash in lieu of shares to those members of the class who would
      otherwise have been entitled to receive an odd-lot number of shares or who
      resided in states in which there was no exemption available for the issuance
      of
      shares. The cash payments were calculated on the basis of $2.46 per share which
      was equal to the higher of (i) the closing price for our common stock as
      reported by the Pink Sheets on the business day prior to the date the shares
      were mailed or (ii) the average closing price over the five trading days prior
      to such mailing date.





**The
      Shareholder Derivative Actions.** Between
      March and August 2003, four shareholder derivative actions were filed in the
      Third Judicial District Court of Salt Lake County, State of Utah, by certain
      shareholders of the Company against various present and past officers and
      directors of the Company and against Ernst & Young. The complaints asserted
      allegations similar to those asserted in the SEC complaint and shareholders’
class action described above and also alleged that the defendant directors
      and
      officers violated their fiduciary duties to the Company by causing or allowing
      the Company to recognize revenue in violation of GAAP and to issue materially
      misstated financial statements and that Ernst & Young breached its
      professional responsibilities to the Company and acted in violation of GAAP
      and
      generally accepted accounting standards by failing to identify or prevent the
      alleged revenue recognition violations and by issuing unqualified audit opinions
      with respect to the Company’s fiscal 2002 and 2001 financial statements. One of
      these actions was dismissed without prejudice on June 13, 2003. As to the other
      three actions, our board of directors appointed a special litigation committee
      of independent directors to evaluate the claims. That committee determined
      that
      the maintenance of the derivative proceedings against the individual defendants
      was not in the best interest of the Company. Accordingly, on December 12, 2003,
      we moved to dismiss those claims. In March 2004, our motions were granted,
      and
      the derivative claims were dismissed with prejudice as to all defendants except
      Ernst & Young. The Company was substituted as the plaintiff in the action
      and is now pursuing in its own name the claims against Ernst & Young.





**The
      Insurance Coverage Action.** On
      February 9, 2004, ClearOne and Edward Dallin Bagley (“Bagley”), a director and
      significant shareholder of ClearOne, jointly filed an action in the United
      States District Court for the District of Utah, Central Division, against
      National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National
      Union”) and Lumbermens Mutual Insurance Company of Berkeley Heights, New Jersey
      (“Lumbermens Mutual”), the carriers of certain prior period directors and
      officers’ liability insurance policies, to recover the costs of defending and
      resolving claims against certain of our present and former directors and
      officers in connection with the SEC complaint, the shareholders’ class action,
      and the shareholder derivative actions described above, and seeking other
      damages resulting from the refusal of such carriers to timely pay the amounts
      owing under such liability insurance policies. This action has been consolidated
      into a declaratory relief action filed by one of the insurance carriers on
      February 6, 2004 against ClearOne and certain of its current and former
      directors. In this action, the insurers assert that they are entitled to rescind
      insurance coverage under our directors and officers’ liability insurance
      policies, $3.0 million of which was provided by National Union and $2.0 million
      which was provided by Lumbermens Mutual, based on alleged misstatements in
      our
      insurance applications. In February 2005, we entered into a confidential
      settlement agreement with Lumbermens Mutual pursuant to which ClearOne and
      Bagley received a lump-sum cash amount and the plaintiffs agreed to dismiss
      their claims against Lumbermens Mutual with prejudice. The cash settlement
      is
      held in a segregated account until the claims involving National Union have
      been
      resolved, at which time the amounts received in the action will be allocated
      between the Company and Bagley. The amount distributed to the Company and Bagley
      will be determined based on future negotiations between the Company and Bagley.
      The Company cannot currently estimate the amount of the settlement which it
      will
      ultimately receive. Upon determining the amount of the settlement which the
      Company will ultimately receive, the Company will record this as a contingent
      gain. On October 21, 2005, the court granted summary judgment in favor of
      National Union on its rescission defense and accordingly entered a judgment
      dismissing all of the claims asserted by ClearOne and Mr. Bagley. The Company
      and Mr. Bagley have filed a notice of appeal concerning this adverse judgment
      and intend to vigorously pursue the appeal and any follow-up proceedings
      regarding their claims against National Union, although no assurances can be
      given that they will be successful. The Company and Mr. Bagley have entered
      into
      a Joint Prosecution and Defense Agreement in connection with the action and
      the
      Company is paying all litigation expenses except litigation expenses which
      are
      solely related to Mr. Bagley’s claims in the litigation. (See “Item 13. Certain
      Relationships and Related Transactions” for additional discussion.)





23





**Wells
      Submission.** We
      have
      been advised by the staff of the Salt Lake District Office of the SEC that
      the
      staff intends to recommend to the Commission that administrative proceedings
      be
      instituted to revoke the registration of our common stock based on our failure
      to timely file annual and quarterly reports with the Commission. We have
      provided the staff with a so-called “Wells Submission” setting forth our
      position with respect to the staff’s intended recommendation, which submission
      would be considered by the Commission in determining whether or not to authorize
      an administrative proceeding. There can be no assurance that the Company will
      be
      successful in convincing the Commission not to initiate an administrative
      proceeding or that the Company would prevail if an administrative proceeding
      were initiated.





**The
      Pacific Technology & Telecommunications Collection Action.** On
      August
      12, 2003, we initiated a commercial arbitration proceeding against Pacific
      Technology & Telecommunications (“PT&T”), a former distributor, seeking
      to collect approximately $1.8 million that PT&T owed ClearOne for inventory
      it purchased and received but did not pay for. PT&T denied our claim and
      asserted counterclaims. Subsequently, on April 20, 2004, PT&T filed for
      protection under Chapter 7 of the United States Bankruptcy Code, which had
      the
      effect of staying the proceeding. Following PT&T’s bankruptcy filing, the
      Company successfully negotiated a settlement with the bankruptcy trustee. Under
      the settlement, which has been approved by the bankruptcy court, the Company
      paid $25,000 and obtained the right to recover all unsold ClearOne inventory
      held by PT&T and the right to pursue on the basis of an assignment any
      claims that PT&T may have against any of its own officers or directors,
      subject, however, to a maximum recovery of $800,000. The Company is currently
      in
      the process of investigating whether any such claims exist and, if so, whether
      it would be in the Company’s best interest to pursue them given the anticipated
      legal expenses and the uncertainties of being able to collect any resulting
      favorable judgment. The settlement also resulted in the release and dismissal
      with prejudice of all of PT&T’s claims against the Company. To date, the
      Company has not recovered any inventory held by PT&T.





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





No
      matter
      was submitted to a vote of our security holders during fiscal 2004.





24





**PART
      II**





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





**Market
      Information**





Our
      common stock traded under the symbol CLRO on the NASDAQ National Market System
      (“NASDAQ”) until April 21, 2003. Our shares were delisted from NASDAQ effective
      as of the opening of trading on April 21, 2003, due to our failure to timely
      file SEC reports and public interest concerns relating to the SEC complaint
      filed on January 15, 2003. Since April 21, 2003, our common stock has been
      traded on the National Quotation Bureau’s Pink Sheets under the symbol “CLRO.”
The following table sets forth the high and low bid quotations for the common
      stock for the last two fiscal years as provided by Pink Sheets LLC.





2004
            
            
            
            
            High
            
            LowFirst
                Quarter
            
            
            Pink
                Sheets
            
            $
            2.15
            
            $
            1.70Second
                Quarter
            
            
            Pink
                Sheets
            
            
            4.35
            
            
            1.78Third
                Quarter
            
            
            Pink
                Sheets
            
            
            7.96
            
            
            3.70Fourth
                Quarter
            
            
            Pink
                Sheets
            
            
            6.50
            
            
            4.402003
            
            
            
            
            
            
            High
            
            
            LowFirst
                Quarter
            
            
            NASDAQ
            
            $
            13.76
            
            $
            3.41Second
                Quarter
            
            
            NASDAQ
            
            
            5.23
            
            
            2.94Third
                Quarter
            
            
            NASDAQ/Pink
                Sheets
            
            
            4.53
            
            
            1.52Fourth
                Quarter
            
            
            Pink
                Sheets
            
            
            2.75
            
            
            0.61





On
      November 30, 2005, the high and low sales prices for our common stock on the
      Pink Sheets were both $2.20.





**Shareholders**





As
      of
      November 30, 2005, there were 12,184,727 shares of our common stock issued
      and
      outstanding and held by approximately 665 shareholders of record. This number
      counts each broker dealer and clearing corporation, who hold shares for their
      customers, as a single shareholder.





**Dividends**





We
      have
      not paid a cash dividend on our common stock and do not anticipate doing so
      in
      the foreseeable future. We intend to retain earnings to fund future working
      capital requirements, growth, and product development.





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





We
      currently have two equity compensation plans in effect, our 1990 Incentive
      Plan
      (the “1990 Plan”) and our 1998 Stock Option Plan (the “1998 Plan”), both of
      which provide for the grant of stock options to employees, directors and
      consultants. As of June 30, 2004, there were 30,750 options outstanding under
      the 1990 Plan with no additional options available for grant under such plan,
      and 1,402,437 options outstanding under the 1998 Plan with 796,439 options
      available for grant in the future. The Company has determined not to permit
      the
      exercise of stock options granted under the 1990 Plan or the 1998 Plan until
      such time as we are current in the filing of periodic reports with the SEC.
      The
      Company also provided for an extension of the exercise period of certain options
      to prevent them from expiring without the holder having had the opportunity
      to
      exercise them.





The
      following table sets forth information as of June 30, 2004 with respect to
      compensation plans under which equity securities of ClearOne are authorized
      for
      issuance.





25




**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
            
            
            1,433,187
            
            
            $6.37
            
            
            795,439Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            1,433,187
            
            
            $6.37
            
            
            795,439





**Recent
      Sales of Unregistered Securities: Use of Proceeds from Registered
      Securities.** No sales
      of equity securities occurred during fiscal 2004 that were not registered under
      the Securities Act of 1933.





On
      December 11, 2001, we completed a private placement of 1,500,000 shares of
      our
      common stock, from which we received net proceeds of approximately $23.8
      million, after deducting costs and expenses associated with the private
      placement. In connection with the offering, we issued warrants to the placement
      agent entitling it to purchase up to 150,000 shares of our common stock at
      the
      exercise price of $17.00 per share through November 27, 2006.





**Issuer
      Purchases of Equity Securities.** During
      the fiscal year ended June 30, 2004, ClearOne did not purchase any of its equity
      securities except as discussed below under *Cancellation
      of Shares of Executive Officers* .





**Cancellation
      of Shares of Executive Officers.** As
      discussed herein in “Item 11: Executive Compensation: Employment Contracts and
      Termination of Employment and Change-in-Control Arrangements,” on December 5,
      2003, the Company entered into employment separation agreements with each of
      Frances Flood, the Company’s former Chairman, Chief Executive Officer, and
      President, and Susie Strohm, the Company’s former Chief Financial Officer, which
      generally provided that such persons would resign from their positions and
      employment with the Company, and the Company would make one-time, lump-sum
      payments to such persons in consideration of their surrender and delivery to
      the
      Company of shares of the Company’s common stock and Company stock options and
      their release of claims against the Company. Ms. Flood surrendered and returned
      35,000 shares of the Company’s common stock and 706,434 stock options (461,433
      of which were vested) and Ms. Strohm surrendered and returned 15,500 shares
      of
      the Company’s common stock and 268,464 stock options (171,963 of which were
      vested) to the Company. These shares were retired in May 2004 and were valued
      by
      the Company at $63,000 in the fiscal 2004 consolidated statement of
      shareholders’ equity.





**Employee
      Stock Purchase Program.** We have
      an Employee Stock Purchase Program (“ESPP”). A total of 500,000 shares of common
      stock were reserved for issuance under the ESPP. During the fiscal year ended
      June 30, 2004, no shares of common stock were issued under the ESPP and
      compensation expense was $0. The program was suspended during fiscal 2003 due
      to
      the Company’s failure to remain current in its filing of periodic reports with
      the SEC.





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





The
      following selected financial data has been derived from our fiscal years ended
      June 30, 2004, 2003, 2002, and 2001 audited consolidated financial statements.
      The selected financial data for the fiscal year ended June 30, 2000 in the
      table
      below is presented on an unaudited basis to reflect prior period adjustments
      resulting from the re-audit of subsequent fiscal years. The results presented
      below for the fiscal year ended June 30, 2000 have not been re-audited and
      are
      unaudited. For the fiscal years ended June 30, 2004, 2003, 2002, 2001, and
      2000,
      the data in the table below has been adjusted to reflect discontinued operations
      of a portion of our business services segment and our conferencing services
      segment as held for sale. The information set forth below is not necessarily
      indicative of results of future operations, and should be read in conjunction
      with “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” and the consolidated financial statements and related notes thereto
      included elsewhere in this Form 10-K.





26





**SELECTED
      CONSOLIDATED FINANCIAL DATA**


**(in
      thousands, except share data)**





**Years
                Ended June 30,****2004**
            
            **2003**
            
            **2002**
            
            **2001**
            
            **2000****(unaudited)**Operating
                results:Revenue
            
            $
            33,894
            
            $
            34,677
            
            $
            26,253
            
            $
            22,448
            
            $
            22,027Costs
                and expenses:Cost
                of goods sold
            
            
            20,431
            
            
            22,170
            
            
            13,884
            
            
            9,204
            
            
            8,237Marketing
                and selling
            
            
            8,269
            
            
            6,880
            
            
            7,010
            
            
            5,273
            
            
            4,467General
                and administrative
            
            
            12,907
            
            
            15,398
            
            
            4,376
            
            
            2,612
            
            
            2,258Research
                and product development
            
            
            3,908
            
            
            2,995
            
            
            3,810
            
            
            2,747
            
            
            1,271Impairment
                losses
            
            
            -
            
            
            13,528
            
            
            7,115
            
            
            -
            
            
            -Purchased
                in-process research and development
            
            
            -
            
            
            -
            
            
            -
            
            
            728
            
            
            -Operating
                (loss) income
            
            
            (11,621
            )
            
            (26,294
            )
            
            (9,942
            )
            
            1,884
            
            
            5,794Other
                (expense) income, net
            
            
            (261
            )
            
            49
            
            
            288
            
            
            188
            
            
            153(Loss)
                Income from continuing operations before income taxes
            
            
            (11,882
            )
            
            (26,245
            )
            
            (9,654
            )
            
            2,072
            
            
            5,947Benefit
                (provision) for income taxes
            
            
            580
            
            
            1,321
            
            
            173
            
            
            (403
            )
            
            (2,130
            )(Loss)
                income from continuing operations
            
            
            (11,302
            )
            
            (24,924
            )
            
            (9,481
            )
            
            1,669
            
            
            3,817Income
                (loss) from discontinued operations
            
            
            1,415
            
            
            (11,048
            )
            
            2,820
            
            
            1,949
            
            
            592Net
                (loss) income
            
            $
            (9,887
            )
            $
            (35,972
            )
            $
            (6,661
            )
            $
            3,618
            
            $
            4,409Earnings
                (loss) per common share:Basic
                earnings (loss) from continuing operations
            
            $
            (1.02
            )
            $
            (2.22
            )
            $
            (0.99
            )
            $
            0.19
            
            $
            0.46Diluted
                earnings (loss) from continuing operations
            
            $
            (1.02
            )
            $
            (2.22
            )
            $
            (0.99
            )
            $
            0.18
            
            $
            0.44Basic
                earnings from discontinued operations
            
            $
            0.13
            
            $
            (0.99
            )
            $
            0.30
            
            $
            0.23
            
            $
            0.07Diluted
                earnings from discontinued operations
            
            $
            0.13
            
            $
            (0.99
            )
            $
            0.30
            
            $
            0.21
            
            $
            0.07Basic
                earnings (loss)
            
            $
            (0.89
            )
            $
            (3.21
            )
            $
            (0.69
            )
            $
            0.42
            
            $
            0.53Diluted
                earnings (loss)
            
            $
            (0.89
            )
            $
            (3.21
            )
            $
            (0.69
            )
            $
            0.39
            
            $
            0.50Weighted
                average shares outstanding:Basic
            
            
            11,057,896
            
            
            11,183,339
            
            
            9,588,118
            
            
            8,593,725
            
            
            8,269,941Diluted
            
            
            11,057,896
            
            
            11,183,339
            
            
            9,588,118
            
            
            9,194,009
            
            
            8,740,209





**As
                of June 30,****2004**
            
            **2003**
            
            **2002**
            
            **2001**
            
            **2000****(unaudited)**Financial
                data:Current
                assets
            
            $
            27,152
            
            $
            29,365
            
            $
            52,304
            
            $
            20,264
            
            $
            14,101Property,
                plant and equipment, net
            
            
            4,077
            
            
            4,320
            
            
            4,678
            
            
            3,021
            
            
            3,050Total
                assets
            
            
            32,156
            
            
            35,276
            
            
            63,876
            
            
            25,311
            
            
            18,220Long-term
                debt, net of current maturities
            
            
            240
            
            
            931
            
            
            -
            
            
            -
            
            
            -Capital
                leases, net of current maturities
            
            
            2
            
            
            9
            
            
            41
            
            
            48
            
            
            230Total
                shareholders' equity
            
            
            9,006
            
            
            18,743
            
            
            53,892
            
            
            20,728
            
            
            15,073





**Quarterly
      Financial Data (Unaudited)**





The
      following table is a summary of the unaudited quarterly financial information
      for the years ended June 30, 2004 and 2003.





27




**Fiscal
                  2004 Quarters Ended****(in
                  thousands)****As
                  of Sept. 30**
              
              **As
                  of Dec. 31**
              
              **As
                  of Mar. 31**
              
              **As
                  of June 30**
              
              **Total**Net
                  revenue
              
              $
              8,944
              
              $
              7,619
              
              $
              9,429
              
              $
              7,902
              
              $
              33,894Cost
                  of goods sold
              
              
              (5,926
              )
              
              (3,914
              )
              
              (6,403
              )
              
              (4,188
              )
              
              (20,431
              )Operating
                  expenses
              
              
              (4,895
              )
              
              (6,963
              )
              
              (8,616
              )
              
              (4,610
              )
              
              (25,084
              )Other
                  income (expense)
              
              
              1
              
              
              (65
              )
              
              (2
              )
              
              (195
              )
              
              (261
              )Loss
                  from continuing operations before income taxes
              
              
              (1,876
              )
              
              (3,323
              )
              
              (5,592
              )
              
              (1,091
              )
              
              (11,882
              )Benefit
                  for income taxes
              
              
              92
              
              
              162
              
              
              273
              
              
              53
              
              
              580Loss
                  from continuing operations
              
              
              (1,784
              )
              
              (3,161
              )
              
              (5,319
              )
              
              (1,038
              )
              
              (11,302
              )Income
                  (loss) from discontinued operations
              
              
              621
              
              
              4
              
              
              474
              
              
              316
              
              
              1,415Net
                  loss
              
              $
              (1,163
              )
              $
              (3,157
              )
              $
              (4,845
              )
              $
              (722
              )
              $
              (9,887
              )Basic
                  (loss) earnings per common share:Continuing
                  operations
              
              $
              (0.16
              )
              $
              (0.29
              )
              $
              (0.48
              )
              $
              (0.09
              )
              $
              (1.02
              )Discontinued
                  operations
              
              
              0.06
              
              
              -
              
              
              0.04
              
              
              0.03
              
              
              0.13Basic
                  (loss) earnings per common share
              
              $
              (0.10
              )
              $
              (0.29
              )
              $
              (0.44
              )
              $
              (0.06
              )
              $
              (0.89
              )Diluted
                  (loss) earnings per common share:Continuing
                  operations
              
              $
              (0.16
              )
              $
              (0.29
              )
              $
              (0.48
              )
              $
              (0.09
              )
              $
              (1.02
              )Discontinued
                  operations
              
              
              0.06
              
              
              -
              
              
              0.04
              
              
              0.03
              
              
              0.13Diluted
                  (loss) earnings per common share
              
              $
              (0.10
              )
              $
              (0.29
              )
              $
              (0.44
              )
              $
              (0.06
              )
              $
              (0.89
              )


**Fiscal
                2003 Quarters Ended****(in
                thousands)****As
                of Sept. 30**
            
            **As
                of Dec. 31**
            
            **As
                of Mar. 31**
            
            **As
                of June 30**
            
            **Total**Net
                revenue
            
            $
            8,451
            
            $
            8,291
            
            $
            9,753
            
            $
            8,182
            
            $
            34,677Cost
                of goods sold
            
            
            (9,008
            )
            
            (2,740
            )
            
            (7,155
            )
            
            (3,267
            )
            
            (22,170
            )Operating
                expenses
            
            
            (4,507
            )
            
            (11,154
            )
            
            (4,944
            )
            
            (4,668
            )
            
            (25,273
            )Impairment
                charges
            
            
            -
            
            
            -
            
            
            -
            
            
            (13,528
            )
            
            (13,528
            )Other
                income (expense)
            
            
            26
            
            
            (3
            )
            
            24
            
            
            2
            
            
            49Loss
                from continuing operations before income taxes
            
            
            (5,038
            )
            
            (5,606
            )
            
            (2,322
            )
            
            (13,279
            )
            
            (26,245
            )Benefit
                for income taxes
            
            
            447
            
            
            456
            
            
            241
            
            
            177
            
            
            1,321Loss
                from continuing operations
            
            
            (4,591
            )
            
            (5,150
            )
            
            (2,081
            )
            
            (13,102
            )
            
            (24,924
            )Income
                (loss) from discontinued operations
            
            
            280
            
            
            225
            
            
            199
            
            
            (11,752
            )
            
            (11,048
            )Net
                loss
            
            $
            (4,311
            )
            $
            (4,925
            )
            $
            (1,882
            )
            $
            (24,854
            )
            $
            (35,972
            )Basic
                (loss) per common share:Continuing
                operations
            
            $
            (0.41
            )
            $
            (0.45
            )
            $
            (0.19
            )
            $
            (1.17
            )
            $
            (2.22
            )Discontinued
                operations
            
            
            0.03
            
            
            0.02
            
            
            0.02
            
            
            (1.06
            )
            
            (0.99
            )Basic
                (loss) per common share
            
            $
            (0.38
            )
            $
            (0.43
            )
            $
            (0.17
            )
            $
            (2.23
            )
            $
            (3.21
            )Diluted
                (loss) per common share:Continuing
                operations
            
            $
            (0.41
            )
            $
            (0.45
            )
            $
            (0.19
            )
            $
            (1.17
            )
            $
            (2.22
            )Discontinued
                operations
            
            
            0.03
            
            
            0.02
            
            
            0.02
            
            
            (1.06
            )
            
            (0.99
            )Diluted
                (loss) per common share
            
            $
            (0.38
            )
            $
            (0.43
            )
            $
            (0.17
            )
            $
            (2.23
            )
            $
            (3.21
            )





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





*The
      following discussion should be read in conjunction with our 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 1. Description of Business 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.*




28




**CRITICAL
      ACCOUNTING POLICIES**




Our
      discussion and analysis of our results of operations and financial position
      are
      based upon our consolidated financial statements, which have been prepared
      in
      conformity with U.S. GAAP. We review the accounting policies used in reporting
      our financial results on a regular basis. The preparation of these financial
      statements requires management to make estimates and assumptions that affect
      the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenses during the reporting period. We evaluate our
      assumptions and estimates on an ongoing basis and may employ outside experts
      to
      assist in our evaluations. We believe that the estimates we use are reasonable;
      however, actual results could differ from those estimates. Our significant
      accounting policies are described in Note 2 to the consolidated financial
      statements included elsewhere in this Annual Report on Form 10-K. We believe
      the
      following critical accounting policies affect our more significant assumptions
      and estimates that we used to prepare our consolidated financial
      statements.





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





Included
      in continuing operations are two sources of revenue: (i) product revenue,
      primarily from product sales to distributors, dealers, and end-users; and (ii)
      business services revenue, which includes technical services such as designing,
      constructing, and servicing of conference systems and maintenance
      contracts.





Product
      revenue is recognized when (i) the products are shipped, (ii) persuasive
      evidence of an arrangement exists, (iii) the price is fixed and determinable,
      and (iv) collection is reasonably assured. Beginning in 2001, we modified our
      sales channels to include distributors. These distributors were generally thinly
      capitalized with little or no financial resources and did not have the
      wherewithal to pay for these products when delivered by us. Furthermore, in
      a
      substantial number of cases, significant amounts of inventories were returned
      or
      never paid for and the payment for product sold (to both distributors and
      non-distributors) was regularly subject to a final negotiation with our
      customers. As a result of such negotiations, we routinely agreed to significant
      concessions from the originally invoiced amounts to facilitate collection.
      These
      practices continued to exist through the fiscal year ended June 30,
      2003.





Accordingly,
      amounts charged to both distributors and non-distributors were not considered
      fixed and determinable or reasonably collectible until cash was collected and
      thus, there was a delay in our recognition of revenue and related cost of goods
      sold from the time of product shipment until invoices were paid. As a result,
      the June 30, 2003 balance sheet reflects no accounts receivable or deferred
      revenue related to product sales. During the fiscal year ended June 30, 2004,
      we
      recognized $5.2 million in revenues and $1.7 million in cost of goods sold
      that
      were deferred in prior periods since cash had not been collected as of the
      end
      of the fiscal year ended June 30, 2003.





During
      the fiscal year ended June 30, 2004, we had in place improved credit policies
      and procedures, an approval process for sales returns and credit memos,
      processes for managing and monitoring channel inventory levels, better trained
      staff, and discontinued the practice of frequently granting significant
      concessions from the originally invoiced amount. As a result of these improved
      policies and procedures, we extend credit to customers who we believe have
      the
      wherewithal to pay.





We
      provide a right of return on product sales to distributors. Currently, we do
      not
      have sufficient historical return experience with our distributors that is
      predictive of future events given historical excess levels of inventory in
      the
      distribution channel. Accordingly, revenue from product sales to distributors
      is
      not recognized until the return privilege has expired, which approximates when
      product is sold-through to customers of the Company’s distributors (dealers,
      system integrators, value-added resellers, and end-users). Although, certain
      distributors provide certain channel inventory amounts, we make judgments and
      estimates with regard to the amount of inventory in the entire channel, for
      all
      customers and for all channel inventory items, and the appropriate revenue
      and
      cost of goods sold associated with those channel products. Although these
      assumptions and judgments regarding total channel inventory revenue and cost
      of
      goods sold could differ from actual amounts, we believe that our calculations
      are indicative of actual levels of inventory in the distribution channel. As
      of
      June 30, 2004, we deferred $6.2 million in revenue and $2.4 million in cost
      of
      goods sold related to invoices sold where return rights had not
      lapsed.





We
      offer
      rebates and market development funds to certain of our distributors based upon
      volume of product purchased by such distributors. We record rebates as a
      reduction of revenue in accordance with Emerging Issues Task Force (“EITF”)
      Issue No. 00-22, “Accounting for Points and Certain Other Time-Based or
      Volume-Based Sales Incentive Offers, and Offers for Free Products or Services
      to
      Be Delivered in the Future.” Beginning January 1, 2002, we adopted EITF Issue
      No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer
      (Including a Reseller of the Vendor’s Products).” We continue to record rebates
      as a reduction of revenue.





29





We
      provide advance replacement units to end-users on defective units of certain
      products within 90 days of purchase date from the dealer. We record a receivable
      from the end-user until the defective unit has been returned. We maintain an
      allowance for these estimated returns which has been reflected as a reduction
      to
      accounts receivable. The allowance for estimated advance replacement returns
      was
      $91,000 as of June 30, 2004 and $5,000 as of June 30, 2003.





We
      offer
      credit terms on the sale of our products to a majority of our customers and
      perform ongoing credit evaluations of our customers’ financial condition. We
      maintain an allowance for doubtful accounts for estimated losses resulting
      from
      the inability or unwillingness of our customers to make required payments based
      upon our historical collection experience and expected collectibility of all
      accounts receivable. Our actual bad debts in future periods may differ from
      our
      current estimates and the differences may be material, which may have an adverse
      impact on our future accounts receivable and cash position.





**Goodwill
      and Purchased Intangibles**





We
      assess
      the impairment of goodwill and other identifiable intangibles annually or
      whenever events or changes in circumstances indicate that the carrying value
      may
      not be recoverable. Some factors we consider important which could trigger
      an
      impairment review include the following:





·
            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.





If
      we
      determine that the carrying value of goodwill and other identified intangibles
      may not be recoverable based upon the existence of one or more of the above
      indicators of impairment, we would typically measure any impairment based on
      a
      projected discounted cash flow method using a discount rate determined by us
      to
      be commensurate
      with the risk inherent in our current business model. We evaluate goodwill
      for
      impairment at least annually.





On
      July
      1, 2002, we completed our transitional goodwill and purchased intangibles
      impairment tests outlined under SFAS 142, which required the assessment of
      goodwill and purchased intangibles for impairment, and in the fourth quarter
      of
      fiscal 2003, we completed our annual impairment tests. As of June 30, 2003,
      we
      determined that our goodwill assets and purchased intangible assets were
      impaired and we recorded an impairment charge of $25.5 million related to these
      assets. We plan to conduct our annual impairment tests in the fourth quarter
      of
      every fiscal year, unless impairment indicators exist sooner. Screening for
      and
      assessing whether impairment indicators exist or if events or changes in
      circumstances have occurred, including market conditions, operating
      fundamentals, competition, and general economic conditions, requires significant
      judgment. Additionally, changes in the high-technology industry occur frequently
      and quickly. Therefore, there can be no assurance that a charge to operations
      will not occur as a result of future purchased intangible impairment
      tests.





**Accounting
      for Income Taxes**





We
      are
      subject to income taxes in both the United States and in certain non-U.S.
      jurisdictions. We estimate our current tax position together with our future
      tax
      consequences attributable to temporary differences resulting from differing
      treatment of items, such as deferred revenue, depreciation, and other reserves
      for tax and accounting purposes. These temporary differences result in deferred
      tax assets and liabilities. We must then assess the likelihood that our deferred
      tax assets will be recovered from future taxable income, prior year carryback,
      or future reversals of existing taxable temporary differences. To the extent
      we
      believe that recovery is not more likely than not, we establish a valuation
      allowance against these deferred tax assets. Significant management judgment
      is
      required in determining our provision for income taxes, our deferred tax assets
      and liabilities, and any valuation allowance recorded against our deferred
      tax
      assets. To the extent we establish a valuation allowance in a period, we must
      include and expense the allowance within the tax provision in the consolidated
      statement of operations.




30




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





We
      account for our inventory on a first-in, first-out (“FIFO”) basis, and make
      appropriate adjustments on a quarterly basis to write-down the value of
      inventory to the lower-of-cost or market.





In
      order
      to determine what, if any, inventory needs to be written down, we perform a
      quarterly analysis of obsolete and slow-moving inventory. In general, we
      write-down our excess and obsolete inventory by an amount that is equal to
      the
      difference between the cost of the inventory and its estimated market value
      if
      market value is less than cost, based upon assumptions about future product
      life-cycles, product demand, and market conditions. Those items that are found
      to have a supply in excess of our estimated demand are considered to be
      slow-moving or obsolete and the appropriate reserve is made to write-down the
      value of that inventory to its realizable value. These charges are recorded
      in
      cost of goods sold. At the point of the loss recognition, a new, lower-cost
      basis for that inventory is established and subsequent changes in facts and
      circumstances do not result in the restoration or increase in that newly
      established cost basis. If there were to be a sudden and significant decrease
      in
      demand for our products, or if there were a higher incidence of inventory
      obsolescence because of rapidly changing technology and customer requirements,
      we could be required to increase our inventory allowances, and our gross profit
      could be adversely affected.





**BUSINESS
      OVERVIEW**





We
      are an
      audio conferencing products company. We develop, manufacture, market, and
      service a comprehensive line of audio conferencing products, which range from
      tabletop conferencing phones to professionally installed audio systems. We
      have
      a strong history of product innovation and plan to continue to apply our
      expertise in audio engineering to developing innovative new products. The
      performance and reliability of our high-quality solutions create a natural
      communication environment, which saves organizations of all sizes time and
      money
      by enabling more effective and efficient communication between geographically
      separated businesses, employees, and customers.





**DISCUSSION
      OF OPERATIONS**





**Results
      of Operations**





The
      following table sets forth certain items from our consolidated statements of
      operations (in thousands) for the fiscal years ended June 30, 2004, 2003, and
      2002, together with the percentage of total revenue which each such item
      represents:





**Year
                Ended June 30,****2004**
            
            **2003**
            
            **2002****%
                of Revenue**
            
            
            
            **%
                of Revenue**
            
            
            
            **%
                of Revenue**Revenue
            
            $
            33,894
            
            
            100.0
            %
            $
            34,677
            
            
            100.0
            %
            $
            26,253
            
            
            100.0
            %Cost
                of goods sold
            
            
            20,431
            
            
            60.3
            %
            
            22,170
            
            
            63.9
            %
            
            13,884
            
            
            52.9
            %Gross
                profit
            
            
            13,463
            
            
            39.7
            %
            
            12,507
            
            
            36.1
            %
            
            12,369
            
            
            47.1
            %Operating
                expenses:Marketing
                and selling
            
            
            8,269
            
            
            24.4
            %
            
            6,880
            
            
            19.8
            %
            
            7,010
            
            
            26.7
            %General
                and administrative
            
            
            12,907
            
            
            38.1
            %
            
            15,398
            
            
            44.4
            %
            
            4,376
            
            
            16.7
            %Research
                and product development
            
            
            3,908
            
            
            11.5
            %
            
            2,995
            
            
            8.6
            %
            
            3,810
            
            
            14.5
            %Impairment
                losses
            
            
            -
            
            
            0.0
            %
            
            13,528
            
            
            39.0
            %
            
            7,115
            
            
            27.1
            %Total
                operating expenses
            
            
            25,084
            
            
            74.0
            %
            
            38,801
            
            
            111.9
            %
            
            22,311
            
            
            85.0
            %Operating
                loss
            
            
            (11,621
            )
            
            -34.3
            %
            
            (26,294
            )
            
            -75.8
            %
            
            (9,942
            )
            
            -37.9
            %Other
                (expense) income, net
            
            
            (261
            )
            
            -0.8
            %
            
            49
            
            
            0.1
            %
            
            288
            
            
            1.1
            %Loss
                from continuing operations before income taxes
            
            
            (11,882
            )
            
            -35.1
            %
            
            (26,245
            )
            
            -75.7
            %
            
            (9,654
            )
            
            -36.8
            %Benefit
                for income taxes
            
            
            580
            
            
            1.7
            %
            
            1,321
            
            
            3.8
            %
            
            173
            
            
            0.7
            %Loss
                from continuing operations
            
            
            (11,302
            )
            
            -33.3
            %
            
            (24,924
            )
            
            -71.9
            %
            
            (9,481
            )
            
            -36.1
            %Discontinued
                operations, net of tax
            
            
            1,415
            
            
            4.2
            %
            
            (11,048
            )
            
            -31.9
            %
            
            2,820
            
            
            10.7
            %Net
                loss
            
            $
            (9,887
            )
            
            -29.2
            %
            $
            (35,972
            )
            
            -103.7
            %
            $
            (6,661
            )
            
            -25.4
            %




31





Our
      revenue increased 29.1 percent over the three-year period from $26.3 million
      in
      fiscal 2002 to $33.9 million in fiscal 2004. During the fiscal years ended
      June
      30, 2004, 2003, and 2002, we introduced several new products in our products
      segment. During this period, we changed our business mix through four
      acquisitions and one disposition. Additionally, we reclassified our conferencing
      services segment and our U.S. audiovisual integration services business segment
      to discontinued operations.





The
      following is a discussion of our results of operations for our fiscal years
      ended June 30, 2004, 2003, and 2002. For each of our business segments, we
      discuss revenue and gross profit. All other items are discussed on a
      consolidated basis.





**Revenue**





For
      the
      fiscal years ended June 30, 2004, 2003, and 2002, revenues by business segment
      were as follows (in thousands):





**Year
                Ended June 30,**
              **(in
                thousands)****2004**
            
            **2003**
            
            **2002****%
                of Revenue**
            
            
            
            **%
                of Revenue**
            
            
            
            **%
                of Revenue**Product
            
            $
            27,836
            
            
            82.1
            %
            $
            27,512
            
            
            79.3
            %
            $
            26,253
            
            
            100.0
            %Business
                services
            
            
            6,058
            
            
            17.9
            %
            
            7,165
            
            
            20.7
            %
            
            -
            
            
            0.0
            %Total
            
            $
            33,894
            
            
            100.0
            %
            $
            34,677
            
            
            100.0
            %
            $
            26,253
            
            
            100.0
            %





**Product** ***.*** Product
      revenue increased $324,000, or 1.2 percent, in fiscal 2004 compared to fiscal
      2003 and increased $1.3 million, or 4.8 percent, in fiscal 2003 compared to
      fiscal 2002. The increase in revenue was primarily due to introducing new
      product lines, which include the MAX, RAV, and XAP® products. During fiscal
      2002, we also introduced additional product offerings through the acquisition
      of
      E.mergent, Inc. in fiscal 2002, which includes our camera and furniture product
      lines.





During
      the fiscal year ended June 30, 2004, we recognized $5.2 million in revenues
      and
      $1.7 million in cost of goods sold that were deferred in prior periods since
      cash had not been collected as of the end of the fiscal year ended June 30,
      2003. As of June 30, 2004, we deferred $6.2 million in revenues and $2.4 million
      in cost of goods sold related to invoices sold where return rights had not
      lapsed.





**Business
      Services** ***.*** Business
      services revenue decreased $1.1 million, or 15.5 percent, in fiscal 2004
      compared to fiscal 2003. During fiscal 2003, we recognized revenue due to the
      sale of a software license associated with our telephone interface products
      to
      Comrex with a value of $1.1 million while we recognized $130,000 in fiscal
      2004.
      Excluding the Comrex revenue, the audiovisual integration services revenue
      was
      consistent from fiscal 2003 to fiscal 2004. Prior to fiscal 2003, we did not
      have continuing operations in the business services segment.





**Total
      Revenue** ***.*** Total
      revenue decreased $783,000, or 2.3 percent, in fiscal 2004 compared to fiscal
      2003 and increased $8.4 million, or 32.1 percent, in fiscal 2003 compared to
      fiscal 2002. The overall decrease in revenue during fiscal 2004 was primarily
      attributable to a one-time sale of $1.1 million of software license in our
      business services segment during fiscal 2003. The increase in revenue during
      fiscal 2003 over fiscal 2002 was primarily attributable to revenue from business
      services which increased $6.1 million as a result of the acquisition of OM
      Video
      in early fiscal 2003.





Revenue
      from sales outside of the United States accounted for 36.1 percent of total
      revenue for fiscal 2004, 43.2 percent of total revenue for fiscal 2003, and
      16.1
      percent of total revenue for the fiscal 2002.





**Costs
      of Goods Sold and Gross Profit**





Costs
      of
      goods sold (“COGS”) from the product segment includes expenses associated with
      the manufacture of our products, including material and direct labor, our
      manufacturing organization, tooling amortization, warranty expense, freight
      expense, royalty payments, and the allocation of overhead expenses. COGS from
      the business services segment includes expenses associated with operating our
      installations services, including material and direct labor, depreciation,
      and
      an allocation of overhead expenses.





32




**Year
                Ended June 30,**
              **(in
                thousands)****2004**
            
            **2003**
            
            **2002****%
                of Revenue**
            
            
            
            **%
                of Revenue**
            
            
            
            **%
                of Revenue**Cost
                of goods soldProduct
            
            $
            16,379
            
            
            48.3
            %
            $
            18,115
            
            
            52.2
            %
            $
            13,884
            
            
            52.9
            %Business
                services
            
            
            4,052
            
            
            12.0
            %
            
            4,055
            
            
            11.7
            %
            
            -
            
            
            0.0
            %Total
            
            $
            20,431
            
            
            60.3
            %
            $
            22,170
            
            
            63.9
            %
            $
            13,884
            
            
            52.9
            %Gross
                profitProduct
            
            $
            11,457
            
            
            33.8
            %
            $
            9,397
            
            
            27.1
            %
            $
            12,369
            
            
            47.1
            %Business
                services
            
            
            2,006
            
            
            5.9
            %
            
            3,110
            
            
            9.0
            %
            
            -
            
            
            0.0
            %Total
            
            $
            13,463
            
            
            39.7
            %
            $
            12,507
            
            
            36.1
            %
            $
            12,369
            
            
            47.1
            %





COGS
      decreased by approximately $1.8 million, or 7.8 percent, to $20.4 million in
      fiscal 2004 compared with fiscal 2003, and increased by $8.3 million, or 59.7
      percent, to $22.2 million in fiscal 2003 compared with $13.9 million in fiscal
      2002.





Our
      gross
      profit from continuing operations was 39.7 percent in fiscal 2004 compared
      to
      36.1 percent in fiscal 2003, and 47.1 percent in fiscal 2002. The increase
      in
      gross profit from 36.1 percent in fiscal 2003 to 39.7 percent in fiscal 2004
      is
      primarily due to reduced inventory write-offs and scrap, outside processing
      expenses, and warranty costs. The decrease in gross profit from 47.1 percent
      in
      fiscal 2002 to 36.1 percent in fiscal 2003 is primarily due to the write-down
      of
      excess, obsolete, and slow-moving inventory, proportionately higher integration
      business service revenues resulting from the E.mergent and OM Video acquisitions
      that carry a lower gross profit percentage, proportionally higher camera and
      furniture product revenues resulting from the E.mergent acquisition that carry
      a
      lower gross profit percentage, lower conferencing services gross profit margins
      as a result of increased price competition, and general pricing pressures
      resulting from difficult economic conditions.





**Operating
      Expenses**





Our
      operating expenses were $25.1 million in fiscal 2004, a decrease of $13.7
      million, or 35.4 percent, from $38.8 million in fiscal 2003. Our operating
      expenses were $38.8 million in fiscal 2003, an increase of $16.5 million or
      73.9
      percent, from $22.3 million in fiscal 2002. The decrease in operating expenses
      from fiscal 2003 to fiscal 2004 is primarily related to a decrease in impairment
      losses and SEC investigation and subsequent litigation-related expenses
      partially offset by increased marketing and selling and research and product
      development expenses. The increase in operating expenses from fiscal 2002 to
      fiscal 2003 is primarily related to increased SEC investigation and subsequent
      litigation-related expenses, increased other general and administrative
      expenses, and increased impairment losses partially offset by decreased research
      and product development and marketing and selling expenses. The following is
      a
      more detailed discussion of expenses related to marketing and selling, general
      and administrative, research and product development, and impairment
      losses.





**Marketing
      and selling expenses** ***.*** Marketing and selling expenses include selling, customer service, and marketing
      expenses such as employee-related costs, allocations of overhead expenses,
      trade
      shows, and other advertising and selling expenses. Total marketing and selling
      expenses increased $1.4 million, or 20.2 percent, to $8.3 million in fiscal
      2004
      compared with fiscal 2003 expenses of $6.9 million. Total marketing and selling
      expenses decreased $130,000, or 1.9 percent, to $6.9 million in fiscal 2003
      compared with fiscal 2002 expenses of $7.0 million. As a percentage of revenues,
      marketing and selling expenses were 24.4 percent in fiscal 2004, 19.8 percent
      in
      fiscal 2003, and 26.7 percent in fiscal 2002. The increase in marketing and
      selling expenses from fiscal 2003 to fiscal 2004 was primarily attributable
      to
      an increase in our United Kingdom sales operations, as well as an increase
      in
      U.S. employee-related expenses due to an increase of nine employees in the
      marketing and sales departments at the end of fiscal 2004 over fiscal 2003.
      Marketing and selling expenses remained relatively flat from fiscal 2002 to
      fiscal 2003 in absolute dollars but decreased 6.9 percent as a percentage of
      revenue.





33





**General
      and administrative expenses** ***.*** General
      and administrative (“G&A”) expenses include employee-related costs,
      professional service fees, allocations of overhead expenses, litigation costs,
      including costs associated with the SEC investigation and subsequent litigation,
      and corporate administrative costs, including finance and human resources.
      Total
      G&A expenses decreased $2.5 million, or 16.2 percent, to $12.9 million in
      fiscal 2004 compared with fiscal 2003 expenses of $15.4 million. Total G&A
      expenses increased $11.0 million, or 251.9 percent, to $15.4 million in fiscal
      2003 compared with fiscal 2002 expenses of $4.4 million. As a percentage of
      revenues, G&A expenses were 38.1 percent in fiscal 2004, 44.4 percent in
      fiscal 2003, and 16.7 percent in fiscal 2002.





**Year
                Ended June 30,**
              **(in
                thousands)****2004**
            
            **2003**
            
            **2002**Settlement
                in shareholders' class action
            
            $
            4,080
            
            $
            7,325
            
            $
            -Professional
                fees (SEC investigation and subsequent litigation)
            
            
            936
            
            
            1,844
            
            
            -Professional
                fees (Other)
            
            
            1,944
            
            
            1,270
            
            
            586Other
                general and administrative expense
            
            
            7,770
            
            
            7,574
            
            
            4,758Total
                G&A before discontinued operations
            
            $
            14,730
            
            $
            18,013
            
            $
            5,344Allocation
                of G&A to conferencing services
            
            
            (1,036
            )
            
            (974
            )
            
            (809
            )Allocation
                of G&A to business services
            
            
            (787
            )
            
            (1,641
            )
            
            (159
            )Total
                G&A from continuing operations
            
            $
            12,907
            
            $
            15,398
            
            $
            4,376




We
        attribute the decrease in G&A as a percentage of revenues from 44.4 percent
        in 2003 to 38.1 percent in 2004 mainly to a $3.2 million reduction in costs
        associated with the shareholders’ class action settlement and a $908,000
        reduction in professional fees associated with the SEC investigation and
        subsequent litigation. These G&A expense reductions were partially offset by
        an increase in other professional fees, including accounting and audit fees,
        of
        $674,000. Additionally, other G&A expenses increased $196,000 including
        $544,000 in severance payments to previous Company officers, an increase
        of
        $231,000 in directors and officers insurance premiums, and an increase of
        $110,000 related to increased payments to directors related to an increase
        in
        the number of meetings and additional interaction with the Company offset
        by
        decreases in the day-to-day operations associated with our U.S. operations
        of
        $258,000, the Ireland office of $237,000, and the OM Video office of $157,000.
        The $4.1 million in settlement in shareholders’ class action expenses during
        fiscal 2004 related to a quarterly mark-to-market of the liability associated
        with the 1.2 million shares of common stock to be issued to class members
        and
        their legal counsel as part of the December 2003 settlement agreement. This
        mark-to-market of the stock to reflect the current liability amount associated
        with the 1.2 million shares based upon the closing price of the Company’s common
        stock at the end of each quarter will continue on a quarterly basis until
        the
        shares are actually issued.





We
      attribute the increase in G&A as a percentage of revenues from 16.7 percent
      in 2002 to 44.4 percent in 2003 to the following: costs associated with the
      SEC
      investigation and subsequent litigation, including a settlement payment
      associated with the shareholders’ class action lawsuit in the amount of $5.0
      million in cash, $2.5 million of which was paid in January 2005, and $2.5
      million in stock and professional fees associated with these lawsuits in the
      amount of $1.8 million, as well as writing off all costs associated with our
      shelf registration in the amount of $328,000, payments for the early buyout
      of
      our leases in Woburn, MA and Ireland in the total amount of $305,000, an
      increase in accounting fees over the previous year of $210,000, an increase
      in
      legal fees in the amount of $130,000, increased salary expense of $459,000
      over
      the previous fiscal year due primarily to the increase in the number of
      employees as a result of the E.mergent acquisition and an increase in overall
      G&A expense of $1.3 million due to the OM Video acquisition and the costs
      associated with their day-to-day operations.





**Research
      and product development expenses** ***.*** Research
      and product development expenses include research and development, product
      management, engineering services, and test and application expenses, including
      employee-related costs, outside services, expensed materials, depreciation,
      and
      an allocation of overhead expenses. Total research and product development
      expenses increased $913,000, or 30.5 percent, to $3.9 million in fiscal 2004
      compared with fiscal 2003 expenses of $3.0 million. Total research and product
      development expenses decreased $815,000, or 21.4 percent, to $3.0 million in
      fiscal 2003 compared with fiscal 2002 expenses of $3.8 million. As a percentage
      of revenues, research and product development expenses were 11.5 percent in
      fiscal 2004, 8.6 percent in fiscal 2003, and 14.5 percent in fiscal 2002. The
      increase in product development expenses from fiscal 2003 to fiscal 2004 was
      due
      to increased salaries and expenses associated with additional personnel and
      development costs associated with new audio conferencing product development,
      including products in the XAP, RAV, and MAX families, as well as the next
      generation ceiling document camera. The decrease in research and product
      development expenses during fiscal 2003 was due to decreased salaries and
      expenses associated with a reduction in personnel related to the closing of
      the
      Dublin, Ireland office of the acquired Ivron subsidiary. Also, as a percentage
      of total revenue, research and product development expenses dropped from 14.5
      percent in fiscal 2002 to 8.6 percent in fiscal 2003 due to the addition of
      business services revenue in fiscal 2003 that required little or no additional
      research-related expenses.





34





**Impairment
      losses** ***.*** In
      fiscal 2003, impairment charges related to the conferencing furniture
      manufacturing business and Canadian audiovisual integration services business
      totaled $323,000 for property and equipment and $13.2 million for goodwill
      and
      intangible assets. We entered into the conferencing furniture manufacturing
      business through the E.mergent acquisition. We entered into the Canadian
      audiovisual integration services business through the OM Video acquisition.
      The
      estimated fair value of the reporting unit, for purposes of evaluating goodwill
      for impairment, was less than its carrying values. Additionally, the estimated
      undiscounted future cash flows generated by certain other long-lived assets,
      excluding goodwill, was less than its carrying value. The impairment analysis
      performed in accordance with SFAS No. 142 and SFAS No. 144, resulted in an
      impairment loss of $5.1 million for the fiscal year ended June 30, 2003.
      Management estimated the fair value of reporting unit using third-party
      appraisals. Management estimated the fair market value of the long-lived assets,
      excluding goodwill, using the present value of expected future discounted cash
      flows.





We
      entered into the audiovisual integration services through the E.mergent and
      OM
      Video acquisitions. At the time of the acquisitions, management believed that
      the audiovisual integration services would complement existing core competencies
      and allow us to acquire market share in this market segment. However, our entry
      into the audiovisual integration services business was perceived as a threat
      by
      our systems integrators and value-added resellers, since we began competing
      against many of them for sales. During the fourth quarter of the fiscal year
      ended June 30, 2003, we decided to stop pursuing new U.S. business service
      contracts and to de-emphasize the audiovisual integration market serving the
      Ottawa, Canada region.





These
      changes in facts and circumstances as well as the change in our business
      environment constituted a triggering event requiring an impairment analysis
      to
      be performed in accordance with SFAS No. 142 and SFAS No. 144. The estimated
      fair value of the reporting units, for purposes of evaluating goodwill for
      impairment, was less than their carrying values. Additionally, the estimated
      undiscounted future cash flows generated by certain other long-lived assets,
      excluding goodwill, was less than their carrying values. The impairment analyses
      performed in accordance with SFAS No. 142 and SFAS No. 144, resulted in an
      impairment loss of $8.4 million for the fiscal year ended June 30, 2003 related
      to the OM Video acquisition. Management estimated the fair value of reporting
      units using third-party appraisals. Management estimated the fair market value
      of the long-lived assets, excluding goodwill, using the present value of
      expected future discounted cash flows.





In
      fiscal
      2002, impairment charges related to the ClearOne and Ivron acquisitions totaled
      $72,000 for property and equipment and approximately $7.0 million for goodwill
      and intangible assets. During the fiscal year ended June 30, 2002, we
      experienced declining sales from the teleconferencing products acquired in
      the
      ClearOne acquisition. Although sales declined throughout the year, through
      March
      31, 2002, gross margins and cash flows remained positive. However, during the
      fourth quarter of the fiscal year ended June 30, 2002, the gross margins and
      cash flows became negative as sales continued to decline. Additionally, in
      the
      fourth quarter of fiscal 2002, we also made a decision to stop investing in
      the
      acquired teleconferencing products. Furthermore, during the fourth quarter
      of
      the fiscal year ended June 30, 2002, we experienced difficulties in selling
      the
      acquired video conferencing products acquired in the Ivron acquisition. The
      difficulties were due to the phasing-out of an older product line occasioned
      by
      technological difficulties of product implementation. Such triggering events
      required an impairment analysis to be performed in accordance with SFAS No.
      121.
      The estimated undiscounted future cash flows generated by the long-lived asset
      groupings related to ClearOne and Ivron were less than their carrying values.
      Management estimated the fair market value of the long-lived assets using the
      present value of expected future discounted cash flows. The analysis resulted
      in
      an impairment loss of $7.1 million for the fiscal year ended June 30, 2002.





**Operating
      loss** ***.*** For
      fiscal 2004, our operating loss decreased $14.7 million, or 55.8 percent, to
      $11.6 million on revenue of $33.9 million, from an operating loss of $26.3
      million on revenue of $34.7 million in fiscal 2003. The factors affecting this
      decrease in operating loss were a decrease in impairment charges for goodwill
      and other long-lived assets of $13.5 million, a decrease in general and
      administrative expenses of $2.5 million, and an increase in gross profit of
      $956,000, partially offset by an increase in marketing and selling expenses
      of
      $1.4 million and an increase in research and product development expenses of
      $913,000.





35





For
      fiscal 2003, our operating loss increased $16.4 million, or 164.5 percent,
      to
      $26.3 million on revenues of $34.7 million, from an operating loss of $9.9
      million on revenues of $26.3 million in fiscal 2002. The factors affecting
      this
      increase in operating loss were an increase in impairment charges for goodwill
      and other long-lived assets of $6.4 million and an increase in general and
      administrative expenses of $11.0 million, partially offset by a reduction in
      research and product development expenses of $815,000, an increase in gross
      profit of $138,000, and a decrease in marketing and selling expenses of
      $130,000.





**Other
      income (expense), net.** Other
      income (expense), net, includes our interest income, interest expense, capital
      gains, gain (loss) on the disposal of assets, and currency gain (loss). Other
      expense was ($261,000) in fiscal 2004, an increase of $310,000, or 632.7
      percent, from income of $49,000 in fiscal 2003. Other income was $49,000 in
      fiscal 2003, a decrease of $239,000, or 83.0 percent, from other income of
      $288,000 in fiscal 2002. The increase in other expense in fiscal 2004 was
      primarily due to an increase in interest expense related to our Oracle
      system-related note payable and an approximate $113,000 loss on disposal of
      certain property and equipment. The decrease in other expense in fiscal 2003
      was
      primarily due to a reduction of interest income based on lower cash and cash
      equivalents partially offset by increased interest expense related to our Oracle
      system-related note payable.





**Net
      loss from continuing operations before income taxes** ***.*** Net loss
      from continuing operations decreased $14.3 million, or 54.7 percent to $11.9
      million in fiscal 2004 compared with fiscal 2003 net loss from continuing
      operations of $26.2 million. Net loss from continuing operations increased
      $16.5
      million, or 171.9 percent, to $26.2 million in fiscal 2003 compared with fiscal
      2002 net loss from continuing operations of $9.7 million. As a percentage of
      revenues, net loss from continuing operations was 35.1 percent in fiscal 2004,
      75.7 percent in fiscal 2003, and 36.8 percent in fiscal 2002. We attribute
      the
      change in loss to the results of operations as described above.





**Benefit
      for income taxes** .
      Benefit
      for income taxes from continuing operations was $580,000 in fiscal 2004, $1.3
      million in fiscal 2003, and $173,000 in fiscal 2002. The benefit for income
      taxes from fiscal 2004 and 2003 resulted primarily from losses from continuing
      operations that were available for carryback for tax refunds from prior years
      and from offsetting the current year income from discontinued operations. The
      benefit for income taxes from fiscal 2002 resulted from offsetting losses from
      continuing operations against income from discontinued operations. Certain
      expenses in our consolidated statements of operations are not deductible for
      income tax purposes. These expenses include impairment charges, certain meals
      and entertainment expenses, and certain goodwill amortization. In addition,
      we
      increased our deferred tax asset valuation allowance attributable to losses
      for
      which no tax benefit is recorded. The combined effects of the non-deductible
      expenses and the increased valuation allowance were the primary reasons for
      our
      tax benefit being different from the expected tax (expense) benefit. Given
      the
      Company’s history of three consecutive years of operating losses, we followed
      the guidance of SFAS 109, “Accounting for Income Taxes,” and recorded a
      valuation allowance against certain deferred tax assets where it is not
      considered more likely than not that the deferred tax assets will be realized.
      As of June 30, 2004, we fully reserved against our net deferred tax assets.





**(Loss)
      income from discontinued operations, net of tax.** (Loss)
      income from discontinued operations, net of tax, includes our conferencing
      services segment which was sold on July 1, 2004, our U.S. audiovisual
      integration services business which was sold on May 6, 2004, and payments
      received on our note receivable and commissions related to the sale of our
      remote control product line to Burk Technology in April 2001. The income from
      discontinued operations was $1.4 million in fiscal 2004, an increase of $12.4
      million or 112.8 percent, from ($11.0 million) loss in fiscal 2003. Conferencing
      services revenue were $15.6 million in fiscal 2004, an increase of $310,000,
      from revenue of $15.3 million in fiscal 2003. Conferencing services income,
      net
      of tax, was $1.8 million for fiscal 2004, a decrease of $354,000, from income,
      net of tax, of $2.1 million in fiscal 2003. U.S. audiovisual integration
      services business revenue were $3.6 million in fiscal 2004, a decrease of $4.0
      million, from revenue of $7.6 million in fiscal 2003. U.S. audiovisual
      integration services business loss, net of tax, was ($399,000) in fiscal 2004,
      a
      decrease of $13.0 million, from a loss, net of tax, of ($13.4) million in fiscal
      2003. The decrease in the loss was mostly due to an impairment charge of $12.5
      million in fiscal 2003 not being repeated in fiscal 2004 and a reduction in
      new
      U.S. business services contracts being pursued. We realized a gain, net of
      tax,
      on the Burk sale of $58,000 for fiscal 2004, a decrease of $142,000, from a
      gain, net of tax, of $200,000 in fiscal 2003. The decrease was due to Burk
      deferring payments on the promissory note based on their quarterly net sales
      not
      meeting levels established within the agreement.





36





The
      loss
      from discontinued operations was ($11.0 million) in fiscal 2003, an increase
      of
      $13.8 million or 491.8 percent, from income from discontinued operations of
      $2.8
      million in fiscal 2002. Conferencing services revenue were $15.3 million in
      fiscal 2003, a decrease of $315,000, from revenue of $15.6 million in fiscal
      2002. Conferencing services income, net of tax, was $2.1 million for fiscal
      2003, a decrease of $372,000, from income, net of tax, of $2.5 million in fiscal
      2002. U.S. audiovisual integration services business revenue were $7.6 million
      in fiscal 2003, an increase of $6.1 million, from revenue of $1.5 million in
      fiscal 2002. The increase was due to our acquisition of E.mergent on May 31,
      2002 and recognizing revenue for twelve months in fiscal 2003 rather than one
      month as in fiscal 2002. U.S. audiovisual integration services business loss,
      net of tax, was ($13.4 million) in fiscal 2003, a decrease of $13.5 million,
      from income, net of tax, of $162,000 in fiscal 2002. The increase in the loss
      was mostly due to impairment charges of $12.5 million in fiscal 2003. We
      realized income, net of tax, on the Burk sale of $200,000 for fiscal 2003,
      an
      increase of $24,000, from income, net of tax, of $176,000 in fiscal 2002. The
      increase was associated with a commission payment and a partial note payment
      received during fiscal 2003.





**EFFECT
      ON THE COMPANY FROM ACQUISITIONS AND SUBSEQUENT RELATED
      DISPOSITIONS**





During
      the fiscal years ended June 30, 2003, 2002, and 2001, we acquired four different
      companies with the intention of expanding our operations to include the
      development, manufacture, and distribution of video conferencing products as
      well as adding an audiovisual integration business services segment to our
      business. See Item 1. Description of Business. *Acquisitions
      and Dispositions* for more
      details. Total consideration paid in cash and through the issuance of common
      stock to acquire these companies was approximately $39.9 million.





As
      a
      result of the impairment tests performed effective as of the end of fiscal
      2003
      and fiscal 2002 according to SFAS No. 121, 142, and 144, we recorded impairment
      charges for all goodwill, a portion of purchased intangibles, and substantially
      all property and equipment for each entity. Impairment losses totaled
      approximately $33.1 million on our statements from continuing and discontinued
      operations. Between the end of fiscal 2002 and the third quarter of fiscal
      2005,
      we had disposed of or abandoned substantially all the assets and operations
      of
      the four acquired companies due to technology issues and the lack of market
      success. We experienced a significant decrease in revenue associated with the
      dispositions and related cost and expenses. See Item 1. Description of Business. *Subsequent
      Events* and *Discontinued
      Operations* below
      for more details.





We
      have
      refocused our organization on our original core competency, which is where
      we
      intend to keep our focus for the foreseeable future. Our current plans are
      to
      invest in research and product development to release new products that are
      in-line with our core competencies and that complement our existing product
      lines.





**DISCONTINUED
      OPERATIONS**





**Burk
      Technology, Inc.**





On
      April
      12, 2001, we sold the assets of the remote control portion of our RFM/Broadcast
      division to Burk Technology, Inc. (“Burk”) for $750,000 in cash at closing, $1.8
      million in the form of a seven-year promissory note, with interest at the rate
      of 9.0 percent per year, and up to $700,000 as a commission over a period of
      up
      to seven years. The payments on the promissory note could be deferred based
      upon
      Burk not meeting net quarterly sales levels established within the agreement.
      We
      realized a gain, net of tax, on the sale of $58,000 for fiscal 2004, $200,000
      for fiscal 2003, and $176,000 for fiscal 2002. As of June 30, 2004, $1.5 million
      of the promissory note remained outstanding and we had received $20,000 in
      commissions.





On
      August
      22, 2005, we entered into a Mutual Release and Waiver Agreement with Burk
      pursuant to which Burk paid us $1.3 million in full satisfaction of the
      promissory note, which included a discount of approximately $120,000. As part
      of
      the Mutual Release and Waiver Agreement, we waived any right to future
      commission payments from Burk and we granted mutual releases to one another
      with
      respect to claims and liabilities. Subsequent to June 30, 2004, we anticipate
      recognizing a pre-tax gain on the sale of approximately $1.5
      million.




37




**M:Space,
      Inc. - U.S. Audiovisual Integration Services**




During
      the fourth quarter of the fiscal year ended June 30, 2003, we decided to stop
      pursuing new U.S. business services contracts and impaired the U.S. acquired
      business services assets. We did not prepare any formal disposition plan and
      existing customers continued to be serviced. We decided to sell the U.S.
      audiovisual integrations services because many of our existing systems
      integrators and value-added resellers perceived our entry into the business
      services arena as a threat since we began competing against these same customers
      for sales, as well as our desire to return to our core competency in the audio
      conferencing products segment. U.S. audiovisual integration services revenue,
      reported in discontinued operations, were $3.6 million in fiscal 2004, $7.6
      million in fiscal 2003, and $1.5 million in fiscal 2002. U.S. audiovisual
      integration services pretax (loss) income, reported in discontinued operations,
      were ($360,000) for the year ended June 30, 2004, ($14.1 million) for the year
      ended June 30, 2003, and $258,000 for the year ended June 30, 2002.





On
      May 6,
      2004, we sold certain assets of our U.S. audiovisual integration services
      operations to M:Space, Inc. (“M:Space”) for no cash compensation. M:Space is a
      privately held audiovisual integration services company. In exchange for M:Space
      assuming obligations for completion of certain customer contracts, and
      satisfying maintenance contract obligations to existing customers, we
      transferred to M:Space certain assets including inventory valued at $573,000.
      We
      realized a pre-tax loss on the sale of $276,000 for the fiscal year ended June
      30, 2004.





**Conferencing
      Services**





In
      April
      2004, our Board of Directors appointed a committee to explore sales
      opportunities to sell the conferencing services business segment. We decided
      to
      sell this segment primarily because of decreasing margins and investments in
      equipment that would have been required in the near future. The proceeds from
      the sale will be used to fund product development as we return to our core
      competency in the audio conferencing products segment. Conferencing services
      revenue, reported in discontinued operations, were $15.6 million in fiscal
      2004,
      $15.3 million in fiscal 2003, and $15.6 million in fiscal 2002. Conferencing
      services pretax income, reported in discontinued operations, were $2.8 million
      for the year ended June 30, 2004, $3.4 million for the year ended June 30,
      2003,
      and $4.0 million for the year ended June 30, 2002.





On
      July
      1, 2004, we sold our conferencing services business segment to Premiere.
      Consideration for the sale consisted of $21.3 million in cash. Of the purchase
      price $1.0 million was placed into an 18-month Indemnity Escrow account and
      an
      additional $300,000 was placed into a working capital escrow account. We
      received the $300,000 working capital escrow funds approximately 90 days after
      the execution date of the contract. Additionally, $1.4 million of the proceeds
      was utilized to pay off equipment leases pertaining to assets being conveyed
      to
      Premiere. We expect to realize a pre-tax gain on the sale of approximately
      $17.5
      million during the fiscal year ended June 30, 2005. As of November 30, 2005,
      the
      $1.0 million remained in the Indemnity Escrow account.





**SALE
      OF OTHER ASSETS**





**Sale
      of Court Conferencing Assets**





As
      part
      of our conferencing services operating segment, our court conferencing customers
      engaged in the audio and/or video conferencing of legal proceedings including
      remote appearances in state and federal courts and/or administrative tribunals
      within the United States. On October 26, 2001, we sold our court conferencing
      customer list, including all contracts relating to our court conferencing
      services to CourtCall LLC and recognized a gain of $250,000.





**Sale
      of Broadcast Telephone Interface Product Line**





On
      August
      23, 2002, we entered into an agreement with Comrex Corporation (“Comrex”). In
      exchange for $1.3 million, Comrex received certain inventory associated with
      our
      broadcast telephone interface product line, a perpetual software license to
      use
      our technology related to broadcast telephone interface products along with
      one
      free year of maintenance and support, and transition services for 90 days
      following the effective date of the agreement. The transition services included
      training, engineering assistance, consultation, and development services. We
      recognized $130,000 in fiscal 2004 and $1.1 million in fiscal 2003 in revenue
      related to this transaction.





38





We
      also
      entered into a manufacturing agreement to continue to manufacture additional
      product for Comrex for one year following the agreement described above on
      a
      when-and-if needed basis. Comrex agreed to pay us for any additional product
      on
      a per item basis of cost plus 30 percent. Given the future revenue stream
      associated with each unit produced, revenue will be recognized when-and-if
      received. During fiscal 2004 and fiscal 2003, we have recognized $387,000 and
      $783,000, respectively, in revenue related to the manufacture of additional
      product from Comrex.





**SUBSEQUENT
      EVENTS**





**Sale
      of Conferencing Services Business** ***.*** On July
      1, 2004, we sold our conferencing services business segment to Premiere for
      $21.3 million. Of the purchase price $1.0 million was placed into an 18-month
      Indemnity Escrow account and an additional $300,000 was placed into a working
      capital account. We received the $300,000 working capital escrow funds
      approximately 90 days after the execution date of the contract. Additionally,
      $1.4 million of the proceeds was utilized to pay off equipment leases pertaining
      to assets being conveyed to Premiere. From
      July
      1, 2004 through February 28, 2005, we sublet 5,416 square feet of space in
      our
      headquarters building to Premiere Conferencing, the purchaser of our
      conferencing services business. We
      classified the conferencing services operations as discontinued operations
      in
      the consolidated financial statements.





**Settlement
      Agreement and Release** ***.*** **** In
      connection with the sale of our conferencing services business, we entered
      into
      a severance agreement with Angelina Beitia, our former Vice-President, on July
      15, 2004, which provided for a lump-sum payment of $100,000. In addition, Ms.
      Beitia surrendered and delivered to us all outstanding vested and unvested
      options.





**Pre-payment
      of Note Payable.** We
      pre-paid the balance of our note payable related to our Oracle Enterprise
      Resource Planning implementation in the amount of $769,000 in October
      2004.





**Closing
      of Germany Office** ***.*** During
      December 2004, we closed our Germany office and consolidated those activities
      with our United Kingdom office. Costs associated with closing the Germany office
      in fiscal 2005 totaled $305,000 and included operating leases and severance
      payments.





**Sale
      of OM Video.** On
      March
      4, 2005, we sold all of the issued and outstanding stock of our Canadian
      subsidiary, ClearOne Communications of Canada, Inc. (“ClearOne Canada”) to
      6351352 Canada Inc., a Canada corporation (the “OM Purchaser”). ClearOne Canada
      owned all the issued and outstanding stock of Stechyson Electronics, Ltd.,
      which
      conducts business under the name OM Video. We agreed to sell the stock of
      ClearOne Canada for $200,000 in cash; a $1.3 million note payable over a
      15-month period, with interest accruing on the unpaid balance at the rate of
      5.3
      percent per year; and contingent consideration ranging from 3.0 percent to
      4.0
      percent of related gross revenues over a five-year period. We expect to present
      all OM Video activities in discontinued operations in the fiscal year 2005
      consolidated financial statements. As of June 30, 2004, the assets of the Canada
      audiovisual integration business were classified as held and used.  In
      June
      2005, we were advised that the OM Purchaser had settled an action brought by
      the
      former employer of certain of OM Purchaser’s owners and employees alleging
      violation of non-competition agreements. The settlement reportedly involved
      a
      cash payment and an agreement not to sell certain products for a period of
      one
      year. To date, OM Purchaser has made all payments required under the note and
      we
      are continuing to evaluate what impact, if any, this settlement may have on
      the
      OM Purchaser’s ability to make the payment required under the
      note.





**The
      Shareholders’ Class Action.** On
      January 14, 2005, we paid the second cash payment of $2.5 million as agreed
      to
      in the settlement agreement dated December 4, 2003. On May 23, 2005, the court
      order was amended to require us to pay cash in lieu of stock to those members
      of
      the class who would otherwise have been entitled to receive fewer than 100
      shares of stock. On September 29, 2005, we completed our obligations under
      the
      settlement agreement by issuing a total of 1,148,494 shares of our common stock
      to the plaintiff class, including 228,000 shares previously issued in November
      2004, and we paid an aggregate of $127,000 in cash in lieu of shares to those
      members of the class who would otherwise have been entitled to receive an
      odd-lot number of shares or who resided in states in which there was no
      exemption available for the issuance of shares. The cash payments were
      calculated on the basis of $2.46 per share which was equal to the higher of
      (i)
      the closing price for our common stock as reported by the Pink Sheets on the
      business day prior to the date the shares were mailed, or (ii) the average
      closing price over the five trading days prior to such mailing
      date.





39





**Third-Party
      Manufacturing Agreement** ***.*** On
      August 1, 2005, we entered into a Manufacturing Agreement with Inovar, Inc.,
      a
      Utah-based electronics manufacturing services provider (“Inovar”), pursuant to
      which we agreed to outsource our Salt Lake City manufacturing operations to
      Inovar. The agreement is for an initial term of three years, which shall
      automatically be extended for successive and additional terms of one year each
      unless terminated by either party upon 120 days advance notice at any time
      after
      the second anniversary of the agreement. The agreement generally provides,
      among
      other things, that Inovar shall: (i) furnish the necessary personnel, material,
      equipment, services, and facilities to be the exclusive manufacturer of
      substantially all the products that were previously manufactured at our Salt
      Lake City, Utah manufacturing facility, and the non-exclusive manufacturer
      of a
      limited number of products, provided that the total cost to ClearOne (including
      price, quality, logistic cost, and terms and conditions of purchase) is
      competitive; (ii) provide repair service, warranty support, and proto-type
      services for new product introduction on terms to be agreed upon by the parties;
      (iii) purchase certain items of our manufacturing equipment; (iv) lease certain
      other items of our manufacturing equipment and have a one-year option to
      purchase such leased items; (v) have the right to lease our former manufacturing
      employees from a third-party employee leasing company; and (vi) purchase the
      parts and materials on hand and in transit at our cost for such items with
      the
      purchase price payable on a monthly basis when and if such parts and materials
      are used by Inovar. The parties also entered into a one-year sublease for
      approximately 12,000 square feet of manufacturing space located in our
      headquarters in Salt Lake City, Utah, which sublease may be terminated by either
      party upon 90 days notice. The agreement provides that products shall be
      manufactured by Inovar pursuant to purchase orders submitted by us at purchase
      prices to be agreed upon by the parties, subject to adjustment based upon such
      factors as volume, long range forecasts, change orders, etc. We also granted
      Inovar a right of first refusal to manufacture new products developed by us
      at a
      cost to ClearOne (including price, quality, logistic cost, and terms and
      conditions of purchase) that is competitive. Costs associated with outsourcing
      our manufacturing totaled approximately $425,000 including severance payments,
      facilities we no longer use, and fixed assets that will be disposed
      of.





**Payoff
      of Burk Note Receivable** ***.*** On
      August 22, 2005 we entered into a Mutual Release and Waiver with Burk pursuant
      to which Burk paid us $1.3 million in full satisfaction of the promissory note,
      which included a discount of approximately $120,000. As part of the Mutual
      Release and Waiver Agreement, we waived any right to future commission payments
      from Burk and we granted mutual releases to one another with respect to claims
      and liabilities. Subsequent to June 30, 2004, we anticipate recognizing a
      pre-tax gain on the sale of approximately $1.5 million.





**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      June 30, 2004, our cash and cash equivalents were approximately $4.2 million
      and
      our marketable securities were approximately $1.8 million, which represented
      an
      overall decrease of $2.3 million in our balances from June 30, 2003 which were
      cash and cash equivalents of approximately $6.1 million, restricted cash of
      approximately $200,000 and our marketable securities of approximately $1.9
      million. We had an overall decrease of $5.9 million in our balances at June
      30,
      2002, which were cash and cash equivalents of approximately $1.7 million and
      marketable securities totaling approximately $12.4 million.




Net
          cash
          flows provided by operating activities were $1.1 million in fiscal 2004,
          a
          decrease of $1.4 million, from the net cash flows provided by operating
          activities of $2.5 million in fiscal 2003. The decrease was attributable
          to a
          decrease of $11.8 million in non-cash expenses from fiscal 2003, a decrease
          of
          $2.4 million in cash provided by changes in working capital, and a $815,000
          decrease in cash provided by discontinued operations, partially offset
          by a
          decrease in net loss from continuing operations of $13.6 million.
 
 Net
          cash
          flows provided by operating activities were $2.5 million in fiscal 2003,
          an
          increase of $2.0 million, from the net cash flows provided by operating
          activities of $515,000 in fiscal 2002. The increase was attributable to
          an
          increase of $6.3 million in cash provided from changes in working capital,
          an
          increase of $10.4 million in non-cash expenses, and a $836,000 increase in
          cash provided by discontinued operations, partially offset by an increase
          in net
          loss from continuing operations of $15.4 million.
 
 Net
        cash
        flows used in investing activities were ($1.5 million) in fiscal 2004, a
        decrease of $2.8 million, from the net cash flows provided by investing
        activities of $1.3 million in fiscal 2003. The decrease was primarily
        attributable to a reduction in the net sales of marketable securities of
        $10.3
        million off set by a reduction in cash paid for acquisitions of $7.4
        million.
 
 Net
        cash
        flows provided by investing activities were $1.3 million in fiscal 2003,
        an
        increase of $30.6 million, from the net cash flows used in investing activities
        of ($29.3 million) in fiscal 2002. The increase was mostly attributable to
        net
        purchases of marketable securities decreased by $22.9 million and a reduction
        of
        cash used in discontinued investing activities of $4.4 million partially
        offset
        by cash paid for acquisitions of $2.5 million.
 
 Net
        cash
        flows used in financing activities were ($1.5 million) in fiscal 2004, a
        decrease of $2.0 million, from the net cash flows provided by financing
        activities of $465,000 in fiscal 2003. This decreased was primarily attributable
        to a decrease in new borrowings related to our Oracle Enterprise Resource
        Planning implementation of $2.0 million partially offset by an increase of
        payments on long-term debt and capital leases of $209,000.


40





Net
        cash
        flows provided by financing activities were $465,000 in fiscal 2003, a decrease
        of $23.2 million, from the net cash flows provided by financing activities
        of
        $23.7 million in fiscal 2002. This decrease was primarily attributable to
        a
        decrease in proceeds from the sale of common shares, including the exercise
        of
        stock options and the issuance of common stock under the employee stock purchase
        plan partially offset by new borrowings in fiscal 2003 received under a note
        payable of $2.0 million used for our Oracle Enterprise Resource Planning
        implementation.


At
      June
      30, 2004, we had open purchase orders related to our contract manufacturers
      and
      other contractual obligations of approximately $98,000 primarily related to
      inventory purchases.





We
      have
      no off-balance-sheet financing arrangements with related parties and no
      unconsolidated subsidiaries. Contractual obligations related to our capital
      leases and operating leases at June 30, 2004 are summarized below (in
      thousands):





Payments
                Due by PeriodContractual
                Obligations
            
            Total
            
            One
                year
              or
                less
            
            Two
                to
              Three
                Years
            
            Four
                to
              Five
                Years
            
            After
              Five
                YearsNote
                Payable
            
            $
            970
            
            $
            728
            
            $
            242
            
            $
            -
            
            $
            -Capital
                Leases
            
            
            9
            
            
            7
            
            
            2
            
            
            -
            
            
            -Operating
                Leases
            
            
            1,341
            
            
            676
            
            
            642
            
            
            23
            
            
            -Total
                Contractual Cash Obligations
            
            $
            2,320
            
            $
            1,411
            
            $
            886
            
            $
            23
            
            $
            -




As
      detailed elsewhere in this filing, on July 1, 2004, we sold our conferencing
      services business segment to Clarinet, Inc. an affiliate of American
      Teleconferencing Services, Ltd. doing business as Premiere Conferencing
      (“Premiere”) for $21.3 million. Of the purchase price $1.0 million was placed
      into an 18-month Indemnity Escrow account and an additional $300,000 was placed
      into a working capital escrow account. We received the $300,000 working capital
      escrow funds approximately 90 days after the execution date of the
      contract.





As
      previously discussed, on March 4, 2005, we sold all of the issued and
      outstanding stock of our Canadian subsidiary, ClearOne Communications of Canada,
      Inc. (“ClearOne Canada”) to 6351352 Canada Inc., a Canada corporation. ClearOne
      Canada owned all the issued and outstanding stock of Stechyson Electronics,
      Ltd., which conducts business under the name OM Video. We agreed to sell the
      stock of ClearOne Canada for $200,000 in cash; a $1.3 million note payable
      over
      a 15-month period, with interest accruing on the unpaid balance at the rate
      of
      5.3 percent per year; and contingent consideration ranging from 3.0 percent
      to
      4.0 percent of related gross revenues over a five-year period.  In
      June
      2005, we were advised that the OM Purchaser had settled an action brought by
      the
      former employer of certain of OM Purchaser’s owners and employees alleging
      violation of non-competition agreements. The settlement reportedly involved
      a
      cash payment and an agreement not to sell certain products for a period of
      one
      year. To date, OM Purchaser has made all payments required under the note and
      we
      are continuing to evaluate what impact, if any, this settlement may have on
      the
      OM Purchaser’s ability to make the payment required under the
      note.





As
      discussed herein, on April 12, 2001, we sold the assets of the remote control
      portion of our RFM/Broadcast division to Burk Technology, Inc. (“Burk”) for
      $750,000 in cash at closing, $1.8 million in the form of a seven-year promissory
      note, with interest at the rate of 9.0 percent per year, and up to $700,000
      as a
      commission over a period of up to seven years. The payments on the promissory
      note may be deferred based upon Burk not meeting net quarterly sales levels
      established within the agreement. We realized a gain on the sale, net of tax,
      of
      $58,000 for fiscal 2004, $200,000 for fiscal 2003, and $176,000 for fiscal
      2002.
      Subsequent to June 30, 2004, we anticipate recognizing a pre-tax gain of
      approximately $1.5 million.





Beginning
      in January 2003 and continuing through the date of this report, we have incurred
      significant costs with respect to the defense and settlement of legal
      proceedings and the audits of our consolidated financial statements. Restatement
      of fiscal 2002 and fiscal 2001 consolidated financial statements and the fiscal
      2003 audit have been significantly more complex, time consuming, and expensive
      than we originally anticipated. The extended time commitment required to
      complete the restatement of financial information continues to be costly and
      divert our resources, as well as have a material effect on our results of
      operations. We paid $2.5 million in fiscal 2004, $2.5 million in fiscal 2005,
      and $127,000 in fiscal 2006 in cash to settle the shareholders’ class action
      lawsuit. We have incurred legal fees in the amount of approximately $1.8 million
      from January 2003 through the date hereof and we have incurred audit and tax
      fees in the amount of approximately $3.0 million from January 2004 through
      the
      date hereof.





41





Notwithstanding
      the foregoing, as of the date of this filing, we believe that our working
      capital and cash flows from operating activities will be sufficient to satisfy
      our operating and capital expenditure requirements through calendar
      2006.





**ISSUED
      BUT NOT YET ADOPTED ACCOUNTING PRONOUNCEMENTS**





**Variable
      Interest Entities**





In
      January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable
      Interest Entities.” This interpretation establishes new guidelines for
      consolidating entities in which a parent company may not have majority voting
      control, but bears residual economic risks or is entitled to receive a majority
      of the entity’s residual returns, or both. As a result, certain subsidiaries
      that were previously not consolidated under the provisions of Accounting
      Research Bulletin No. 51 may now require consolidation with the parent company.
      This interpretation applies in the first year or interim period beginning after
      June 15, 2003, to variable interest entities in which an enterprise holds a
      variable interest that it acquired before February 1, 2003. We have evaluated
      this interpretation but do not expect that it will have a material effect on
      our
      business, results of operations, financial position, or liquidity.





In
      December 2003, the FASB issued a revision to Interpretation No. 46,
“Consolidation of Variable Interest Entities” (“FIN46R”). FIN46R clarifies the
      application of ARB No. 51, “Consolidated Financial Statements” to certain
      entities in which equity investors do not have the characteristics of a
      controlling financial interest or do not have sufficient equity at risk for
      the
      entity to finance its activities without additional subordinated financial
      support. FIN46R requires the consolidation of these entities, known as variable
      interest entities, by the primary beneficiary of the entity. The primary
      beneficiary is the entity, if any, that will absorb a majority of the entity's
      expected losses, receive a majority of the entity's expected residual returns,
      or both.





Among
      other changes, the revisions of FIN46R (a) clarified some requirements of the
      original FIN46, which had been issued in January 2003, (b) eased some
      implementation problems, and (c) added new scope exceptions. FIN46R deferred
      the
      effective date of the Interpretation for public companies, to the end of the
      first reporting period ending after March 15, 2004. The adoption of this
      interpretation did not have a material effect on our business, results of
      operations, financial position, or liquidity.





**Financial
      Instruments**





In
      May
      2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
      Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”).
      SFAS 150 establishes standards for how an issuer classifies and measures certain
      financial instruments with characteristics of both liabilities and equity.
      It
      requires that an issuer classify a financial instrument that is within its
      scope
      as a liability (or an asset in some circumstances). Many of those instruments
      were previously classified as equity. SFAS 150 is effective for financial
      instruments entered into or modified after May 31, 2003, and otherwise is
      effective at the beginning of the first interim period beginning after June
      15,
      2003. We have evaluated this statement and do not expect that it will have
      a
      material effect on our business, results of operations, financial position,
      or
      liquidity.





**Other-Than-Temporary
      Impairment**





In
      March
      2004, the FASB issued EITF No. 03-01, “The Meaning of Other-Than-Temporary
      Impairment and its Application to Certain Investments,” which provides new
      guidance for assessing impairment losses on debt and equity investments. The
      new
      impairment model applies to investments accounted for under the cost or equity
      method and investments accounted for under SFAS 115, “Accounting for Certain
      Investments in Debt and Equity Securities.” EITF No. 03-01 also includes new
      disclosure requirements for cost method investments and for all investments
      that
      are in an unrealized loss position. In September 2004, the FASB delayed the
      accounting provisions of EITF No. 03-01; however the disclosure requirements
      remain effective. We will evaluate the effect, if any, of adopting EITF 03-01.





**Inventory
      Costs**





In
      November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs - an
      amendment of ARB No. 43” (“SFAS 151”), which is the result of its efforts to
      converge U.S. accounting standards for inventories with International Accounting
      Standards. SFAS No. 151 requires idle facility expenses, freight, handling
      costs, and wasted material (spoilage) costs to be recognized as current-period
      charges. It also requires that allocation of fixed production overheads to
      the
      costs of conversion be based on the normal capacity of the production
      facilities. SFAS No. 151 will be effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005. We do not anticipate that the
      implementation of this standard will have a significant impact on our
      consolidated results of operations, financial condition, or cash
      flows.




42




**Share-Based
      Payment**





In
      December 2004, FASB issued Financial Accounting Standard No. 123R (“SFAS 123R”),
“Share-Based Payment.” SFAS 123R is a revision of SFAS 123. SFAS 123R
      establishes standards for the accounting for transactions in which an entity
      exchanges its equity instruments for goods or services. Primarily, SFAS 123R
      focuses on accounting for transactions in which an entity obtains employee
      services in share-based payment transactions. It also addresses transactions
      in
      which an entity incurs liabilities in exchange for goods or services that are
      based on the fair value of the entity’s equity instruments or that may be
      settled by the issuance of those equity instruments.





SFAS
      123R
      requires us to measure the cost of employee services received in exchange for
      an
      award of equity instruments based on the grant-date fair value of the award
      (with limited exceptions). That cost will be recognized over the period during
      which an employee is required to provide service in exchange for the award
      - the
      requisite service period (usually the vesting period). No compensation cost
      is
      recognized for equity instruments for which employees do not render the
      requisite service. Therefore, if an employee does not ultimately render the
      requisite service, the costs recognized related to unvested options will be
      reversed.





In
      accordance with Staff Accounting Bulletin 107, SFAS 123R is effective as of
      the
      beginning of the annual reporting period that begins after June 15, 2005. Under
      these guidelines, we will adopt SFAS 123R as of the beginning of the first
      quarter of fiscal year 2006 starting July 1, 2005. We expect this statement
      to
      have an adverse impact on our future results of operations.





**Accounting
      Changes and Error Corrections**





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
      a Replacement of APB Opinion No. 20 and FASB Statement No. 3” in order to
      converge U.S. Accounting Standards with International Accounting Standards.
      SFAS
      No. 154 changes the requirements for the accounting for and reporting of a
      change in accounting principle. Previously, most voluntary changes in accounting
      principles required recognition of a cumulative effect adjustment within net
      income of the period of the change. SFAS No. 154 requires retrospective
      application to prior periods’ financial statements, unless it is impracticable
      to determine either the period-specific effects or the cumulative effect of
      the
      change. SFAS No. 154 is effective for accounting changes made in fiscal years
      beginning after December 15, 2005; however, it does not change the transition
      provisions of any existing accounting pronouncements. We do not believe the
      adoption of SFAS No. 154 will have a material effect on our business, results
      of
      operations, financial position, or liquidity.





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





In
      June
      2005, the FASB issued a FASB Staff Position (“FSP”) interpreting SFAS No. 143,
“Accounting for Asset Retirement Obligations,” specifically FSP
      143-1 ,
      “Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”). FSP
      143-1addresses the accounting for obligations associated with Directive 2002/96/EC,
      Waste Electrical and Electronic Equipment, which was adopted by the European
      Union (“EU”). The FSP provides guidance on how to account for the effects of the
      Directive but only with respect to historical waste associated with products
      placed on the market on or before August 13, 2005. FSP
      143-1is
      effective the later of the first reporting period ending after June 8, 2005,
      or
      the date of the adoption of the law by the applicable EU-member country. Management
      is currently evaluating the impact ofFSP
      143-1.




43


**ITEM
                7A.**
            **Qualitative
                and Quantitative Disclosures About Market
                Risk**




Market
      risk represents the risk of changes in the value of a financial instrument,
      derivative or non-derivative, caused by fluctuations in interest rates, foreign
      exchange rates, and equity prices. Changes in these factors could cause
      fluctuations in the results of our operations and cash flows. In the ordinary
      course of business, we are exposed to foreign currency and interest rate risks.
      These risks primarily relate to the sale of products and services to foreign
      customers and changes in interest rates on our note payable and capital leases.





We
      currently have limited market risk-sensitive instruments related to interest
      rates. Our note payable and capital lease obligations totaled approximately
      $940,000 at June 30, 2004. We do not have significant exposure to changing
      interest rates on the note payable and capital leases because interest rates
      on
      the note payable and for the majority of the capital leases are fixed. We have
      not undertaken any additional actions to cover market interest rate market
      risk
      and are not a party to any other interest rate market risk management
      activities. We do not purchase or hold any derivative financial instruments.
      A
      hypothetical 10 percent change in market interest rates over the next year
      would
      not have a material effect on our business, results of operations, financial
      condition, or cash flows as the interest rates on the note payable and the
      majority of the capital leases are fixed.





Although
      our subsidiaries enter into transactions in currencies other than their
      functional currency, foreign currency exposures arising from these transactions
      are not material. The greatest foreign currency exposure arises from the
      remeasurement of our net equity investment in our subsidiaries to U.S. dollars.
      The primary currency to which we have exposure is the Canadian Dollar. We sold
      our Canadian subsidiary on March 4, 2005 to a private investment group. The
      fair
      value of our net foreign investments would not be materially affected by a
      10
      percent adverse change in foreign currency exchange rates from the June 30,
      2004
      levels.





**Market
      Risk for Investment Securities**





Investment
      securities consist of shares in triple-A rated short-term money market funds
      that typically invest in U.S. Treasury, U.S. government agency, and highly
      rated
      corporate securities. Since these funds are managed in a manner designed to
      maintain a $1.00 per share market value, we do not expect any material changes
      in market values as a result of increase or decrease in interest rates. A
      hypothetical one percent change in market interest rates over the next year
      on
      our marketable securities of $1.8 million at June 30, 2004 would not have a
      material effect on our business, results of operations, financial condition,
      or
      cash flows.





44





**ITEM
                8.**
            **FINANCIAL
                STATEMENTS.**





The
      response to this item is submitted as a separate section of this Form 10-K
      beginning on page F-1.





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





**KPMG**





On
      October 28, 2005, KPMG LLP (“KPMG”) was dismissed as principal accountants for
      the Company effective upon the completion of the audit of the Company’s
      consolidated financial statements as of and for the fiscal year ended June
      30,
      2004 and the issuance of its report thereon. These financial statements are
      included in this Form 10-K beginning on page F-1.





KPMG’s
      report on the Company’s consolidated financial statements as of and for the
      fiscal year ended June 30, 2004 did not contain an adverse opinion or disclaimer
      of opinion and was not qualified or modified as to uncertainty, audit scope,
      or
      accounting principles. KPMG’s report on the Company’s consolidated financial
      statements as of and for the fiscal years ended June 30, 2003 and 2002 did
      not
      contain an adverse opinion or disclaimer of opinion and was not qualified or
      modified as to uncertainty, audit scope, or accounting principles, except as
      follows:





KPMG’s
      report on the consolidated financial statements of the Company as of and for
      the
      years ended June 30, 2003 and 2002 contained a separate paragraph stating “as
      discussed in Note 3 to the accompanying consolidated financial statements,
      the
      consolidated balance sheets as of June 30, 2002 and 2001, and the related
      consolidated statements of operations, stockholders’ equity, and cash flows for
      each of the years then ended, have been restated.” KPMG’s report on the
      consolidated financial statements of the Company as of and for the years ended
      June 30, 2004, 2003, and 2002 contained a separate paragraph stating “as
      discussed in Note 2 to the consolidated financial statements, the Company
      changed, effective July 1, 2002, its method of accounting for goodwill and
      other
      intangible assets as required by Statement of Financial Accounting Standards
      No.
      142, Goodwill and Other Intangible Assets, Statement of Financial Accounting
      Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
      Assets, and Statement of Financial Accounting Standard No. 141, Business
      Combinations.”




In
        connection with its audit for the fiscal years ended June 30, 2004 and 2003,
        and
        during the course of KPMG’s audit of fiscal year ended June 30, 2004 and the
        subsequent interim period through November 28, 2005, there were (1) no
        disagreements with KPMG on any matter of accounting principles or practices,
        financial statement disclosure, or auditing scope or procedures, which
        disagreements, if not resolved to the satisfaction of KPMG, would have caused
        KPMG to make reference to the subject matter of the disagreements in connection
        with its report, and (2) no events of the type listed in paragraphs (A) through
        (D) of Item 304(a)(1)(v) of Regulation S-K, except that 1) KPMG reported
        in a
        letter to the Company's Audit Committee dated December 15, 2005 that during
        its
        audit of the Company's consolidated financial statements as of and for the
        fiscal year ended June 30, 2004, it noted material weaknesses in internal
        controls related to: accounting for revenue recognition and related sales
        returns, credit memos, and allowances; accounting for cutoff and period-end
        close adjustments related to accrued liabilities and prepaid assets; the
        tracking and valuation of inventory; accounting for non-routine transactions;
        the timeliness and adequacy of the monthly close process; and the lack of
        personnel with adequate experience in preparing financial statements and
        related
        footnotes in accordance with U.S. generally accepted accounting principles,
        and
        2) KPMG reported in a letter to the Company's Audit Committee dated August
        16,
        2005 that during its audit of the Company's consolidated financial statements
        as
        of and for the fiscal years ended June 30, 2003 and 2002, it noted material
        weaknesses in internal controls related to: accounting for revenue recognition
        and related sales returns, credit memos, and allowances; accounting for cutoff
        and period-end close adjustments related to accrued liabilities and prepaid
        assets; the tracking and valuation of inventory; accounting for leases;
        accounting for non-routine transactions; and the lack of personnel with adequate
        experience in preparing financial statements and related footnotes in accordance
        with U.S. generally accepted accounting principles. The Audit Committee and
        the
        Company's management discussed such material weaknesses in internal controls
        with KPMG, and the Company has authorized KPMG to respond fully to the inquiries
        of the Company’s new principal accountant with respect
        thereto.




45




Hansen, Barnett & Maxwell




On
      October 28, 2005, the Company engaged Hansen, Barnett & Maxwell, A
      Professional Corporation (“HBM”), as its new principal accountants to audit the
      Company’s financial statements for the fiscal year ended June 30, 2005. The
      Audit Committee of the Company’s Board of Directors recommended and approved the
      engagement of HBM.




During
      the Company’s two most recent fiscal years and through October 28, 2005, the
      Company did not consult HBM with respect to (i) the application of accounting
      principles to a specified transaction, either completed or proposed; or the
      type
      of audit opinion that might be rendered on the Company's consolidated financial
      statements; or (ii) any matter that was either the subject of a disagreement
      (as
      defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions
      to
      that Item) or a reportable event (as described in Item 304(a)(1)(v) of
      Regulation S-K).




The
        dismissal of KPMG and engagement of HBM as the Company’s principal accountants
        were discussed on a November 2, 2005 Form 8-K.


**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**





We
      maintain disclosure controls and procedures designed to ensure that information
      required to be disclosed in our reports filed under the Securities Exchange
      Act
      of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized,
      and reported within the required time periods and that such information is
      accumulated and communicated to our management, including our Chief Executive
      Officer and Interim Chief Financial Officer, as appropriate, to allow for timely
      decisions regarding required disclosure.





As
      required by Rule 13a-15 under the Exchange Act, we have completed an evaluation,
      under the supervision and with the participation of our management, including
      the Chief Executive Officer and the Interim Chief Financial Officer, of the
      effectiveness and the design and operation of our disclosure controls and
      procedures. This evaluation has allowed us to make conclusions in 2005, as
      set
      forth below, regarding the state of our disclosure controls and procedures
      as of
      June 30, 2004. In conducting this evaluation, we considered matters relating
      to
      actions taken by us within the past two years to identify and enhance the
      effectiveness of our disclosure controls and procedures and our internal
      controls over financial reporting. In connection with the restatement process,
      we also identified the internal controls over financial reporting that could
      or
      should have prevented or mitigated the errors. See Form 10-K for the year ended
      June 30, 2003, Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations. *Restatements
      and Reclassifications of Previously Issued Consolidated Financial
      Statements.*





We
      concluded that as of June 30, 2004, the following material weaknesses in our
      internal controls existed:





·
            We
                have a material weakness with respect to accounting for revenue
                recognition and related sales returns, credit memos, and allowances.
                Accounting policies and practices over revenue recognition and sales
                returns were inconsistent with United States GAAP. As a result, we
                improperly accelerated revenue recognition. Policies and practices
                did not
                properly consider the ability to estimate
                returns.





·
            We
                have a material weakness related to accounting for cutoff and period-end
                close adjustments related to accrued liabilities and prepaid assets.
                Accounting policies and practices over cutoff and period-end close
                adjustments related to accrued liabilities and prepaid assets were
                inconsistent with U.S. GAAP. This material weakness resulted in recording
                accruals and amortizing certain prepaid assets to operating
                expenses in improper periods.





·
            We
                have a material weakness related to the tracking and valuation of
                inventory, including controls to identify and properly account for
                obsolete inventory. Accounting policies and practices over tracking
                and
                valuation of inventory, including controls to identify and properly
                account for slow-moving or obsolete inventory were inconsistent with
                U.S.
                GAAP. This material weakness resulted in misstatements in the recording
                and presentation of inventories, including consigned inventory, obsolete
                and slow-moving inventories, errors in the capitalization of overhead
                expenses, errors in recording inventories at the lower-of-cost or
                market,
                and errors for inventory shrinkage.





·
            We
                have a material weakness in accounting for non-routine transactions,
                which
                include discontinued operations, and evaluation and recognition of
                impairment charges. Accounting policies and practices over accounting
                for
                such non-routine transactions were inconsistent with U.S. GAAP. This
                material weakness resulted in improper amortization and depreciation
                of
                long-lived assets, improper identification and recording of activities
                related to discontinued operations, improper recording and reporting
                the sale of business units, and improper evaluation of triggering
                events associated with impairment of long-lived assets.





·
            We
                have a material weakness in the timeliness and adequacy of the monthly
                close process. We lack personnel with adequate experience in accounting
                matters to analyze and interpret accounting data in a timely
                manner.




46




·
            We
                have a material weakness in financial reporting. We lack personnel
                with
                adequate experience in preparing financial statements and related
                footnotes in accordance with U.S.
                GAAP.





The
      following actions have been commenced since December 2003 in response to the
      inadequacies noted above:





·
            Termination
                or resignation of Company officers and various financial and accounting
                personnel.





·
            Hiring
                of accounting personnel with experience in accounting matters and
                financial reporting.





·
            Implementation
                of policies imposing limits on shipments to distributors based on
                an
                evaluation of their credit and inventory stocking levels.





·
            Initiation
                of an evaluation and remediation process with respect to internal
                controls
                over financial reporting and related processes designed to identify
                internal controls that mitigate financial reporting risk and identify
                control gaps that may require further
                remediation.





·
            Reevaluation
                of prior policies and procedures and the establishment of new policies
                and
                procedures for such matters as non-routine and complex transactions,
                account reconciliation procedures, and contract management
                procedures.





·
            On-going
                training and monitoring by management to ensure operation of controls
                as
                designed.





·
            Adoption
                of a Code of Ethics.





·
            Establishment
                of a Disclosure Committee of members of Company management with the
                purpose of reviewing disclosures to be made to the investment community
                or
                to shareholders to gauge that the disclosures are accurate and complete
                and that the disclosures fairly present the Company’s financial condition
                and results of operations in all material
                respects.





We
      have
      committed considerable resources to date, to the reviews and remedies described
      above, although certain of such items are on-going as of this filing date,
      and
      it will take time to realize all the benefits. Additional efforts will be
      required to remediate all of these material weaknesses in our controls. In
      addition, the effectiveness of any system of disclosure controls and procedures
      is subject to certain limitations, including the exercise of judgment in
      designing, implementing, and evaluating the controls and procedures, the
      assumptions used in identifying the likelihood of future events, and the
      inability to eliminate improper conduct completely. As a result, there can
      be no
      assurance that our disclosure controls and procedures will detect all errors
      or
      fraud.





Other
      than as described above, since the evaluation date, there has been no change
      in
      our internal controls over financial reporting that has materially affected,
      or
      is reasonably likely to materially affect, our internal controls over financial
      reporting.





47





**PART
      III**





**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS**





**Directors
      and Executive Officers**





***Directors***





The
      following individuals are directors of ClearOne as of the date of this
      report:





**Name**
            
            **Principal
                Occupation during Past Five Years**
            
            **Age**
            
            **Director**
              **Since**Edward
                Dallin Bagley
            
            Edward
                Dallin Bagley joined our Board of Directors in April 1994 and was
                named
                Chairman of the Board in February 2004. Mr. Bagley also served as
                a
                Director from April 1987 to July 1991. He also currently serves as
                a
                Director of Tunex International. Mr. Bagley has been licensed to
                practice
                law in Utah since 1965 and holds a Juris Doctorate Degree from the
                University of Utah College of Law. For in excess of the past five
                years,
                Mr. Bagley has managed his own investments and served as a consultant
                from
                time to time.
            
            66
            
            1994Brad
                R. Baldwin
            
            Brad
                R. Baldwin joined our Board of Directors in 1988. Mr. Baldwin is
                an
                attorney licensed to practice in Utah. Since April 2001, he has been
                engaged in the commercial real estate business with Commerce CRG
                in Salt
                Lake City, Utah. From February 2000 to March 2001, Mr. Baldwin was
                an
                executive with Idea Exchange Inc. From October 1994 to January 2000,
                he
                served as President and Chief Executive Officer of Bank One, Utah,
                a
                commercial bank headquartered in Salt Lake City, Utah. Mr. Baldwin
                holds a
                Degree in Finance from the University of Utah and a Juris Doctorate
                Degree
                from the University of Washington.
            
            49
            
            1988Larry
                R. Hendricks
            
            Larry
                R. Hendricks joined our Board of Directors in June 2003. Mr. Hendricks
                is
                a Certified Public Accountant who retired in December 1992 after
                serving
                as Vice-President of Finance and General Manager of Daily Foods,
                Inc., a
                national meat processing company. During his 30-year career in accounting,
                he was also a self-employed CPA and worked for the international
                accounting firm Peat Marwick & Mitchell. Mr. Hendricks currently
                serves on the Board of Directors for Tunex International and has
                served on
                the boards of eight other organizations, including Habitat for Humanity,
                Daily Foods, and Skin Care International. He earned a Bachelor's
                Degree in
                Accounting from Utah State University and a Master of Business
                Administration Degree from the University of Utah. Mr. Hendricks
                is
                currently a member of the American Institute of Certified Public
                Accountants and the Utah Association of Certified Public
                Accountants.
            
            62
            
            2003Scott
                M. Huntsman
            
            Scott
                M. Huntsman joined our Board of Directors in June 2003. Mr. Huntsman
                has
                served as President and Chief Executive Officer of GlobalSim, a private
                technology and simulation company, since February 2003 and Chief
                Financial
                Officer from April 2002 to February 2003. Prior to GlobalSim, he
                spent 11
                years on Wall Street as an investment banker, where he focused on
                mergers,
                acquisitions, and corporate finance transactions. From August 1996
                to
                2000, Mr. Huntsman served at Donaldson, Lufkin and Jenrette Securities
                Corporation until their merger with Credit Suisse First Boston where
                he
                served until January 2002. Mr. Huntsman earned a Bachelor's Degree
                from
                Columbia University and a Master of Business Administration Degree
                from
                The Wharton School at the University of Pennsylvania. He also studied
                at
                the London School of Economics as a Kohn Fellowship
                recipient.
            
            39
            
            2003





48




Harry
                Spielberg
            
            Harry
                Spielberg joined our Board of Directors in January 2001. Since January
                1996, Mr. Spielberg has been the Director of Cosentini Information
                Technologies’ Audiovisual Group, a division of the consulting engineering
                firm Cosentini Associates. Prior to 1996, Mr. Spielberg served as
                Vice-President, Engineering for Media Facilities Corp. and Barsky
&
                Associates. Mr. Spielberg received a Bachelor’s Degree in Psychology from
                the State University of New York.
            
            53
            
            2001





David
      Weiner was a member of our Board of Directors until January 2005 when he
      resigned his position.





***Director
      Committees***





Our
      Board
      of Directors currently has two standing committees; namely, the audit and
      compensation committees.





**The
      Audit Committee** **.** The
      audit
      committee assists the board in its general oversight of our financial reporting,
      internal controls, and audit functions and is directly responsible for the
      appointment, retention, compensation, and oversight of our independent auditor.
      The audit committee is currently composed of Brad R. Baldwin, Scott M. Huntsman,
      and Larry R. Hendricks (Chair). The board has determined that Mr. Hendricks
      is a
      financial expert and is independent within the meaning of NASDAQ Rule
      4200(a)(15).





**The
      Compensation Committee** **.** The
      compensation committee makes recommendations to the Board of Directors regarding
      remuneration of our executive officers and directors and administers the
      incentive plans for our directors, officers, and employees. The compensation
      committee is currently composed of Brad R. Baldwin, Scott M. Huntsman, and
      Edward Dallin Bagley (Chair).





***Meetings
      of the Board of Directors and Committees***





The
      Board
      of Directors held twelve meetings during fiscal 2004. The audit committee held
      21 meetings during fiscal 2004. The compensation committee held 2 meetings
      during fiscal 2004. In 2004, each director attended at least 75 percent of
      the
      meetings of the Board of Directors and the committees on which they served.





**Nomination
      of Director Candidates** **:** Security
      holders may recommend candidates for nomination as directors. Any such
      recommendations should include the nominee’s name, home and business addresses
      and other contact information, detailed biographical data, and qualifications
      for board membership, along with information regarding any relationships between
      the candidate and ClearOne within the last three fiscal years. Any such
      recommendations should be sent to:





ClearOne
      Communications, Inc.


1825
      Research Way


Salt
      Lake
      City, Utah 84119


Attention:
      Corporate Secretary





***Executive
      Officers***





Our
      executive officers as of the date of this filing are as follows:





Name
            
            Age
            
            PositionZeynep
                “Zee” Hakimoglu
            
            52
            
            President
                and Chief Executive OfficerCraig
                E. Peeples
            
            38
            
            Interim
                Chief Financial Officer and Corporate ControllerTracy
                A. Bathurst
            
            41
            
            Vice-President
                of Product Line ManagementDeLonie
                N. Call
            
            52
            
            Vice-President
                of Human Resources and Corporate SecretaryWerner
                H. Pekarek
            
            56
            
            Vice-President
                of OperationsJoseph
                P. Sorrentino
            
            50
            
            Vice-President
                of Worldwide Sales and Marketing




49




Zee
                Hakimoglu
            
            Zee
                Hakimoglu joined us in December 2003 with more than 15 years of executive
                and senior-level, high-tech management experience and was appointed
                as
                President and Chief Executive Officer in July 2004. She served in
                a
                variety of executive business development, product marketing, and
                engineering roles including Vice-President of Product Line Management
                for
                ClearOne from December 2003 to July 2004; Vice-President of Product
                Line
                Management for Oplink Communications, a publicly traded developer
                of fiber
                optic subsystems and components from December 2001 to December 2002;
                President of OZ Optics USA, a manufacturer of fiber optic test equipment
                and components from August 2000 to November 2001; and various management
                positions including Vice-President of Wireless Engineering and wireless
                business unit Vice-President for Aydin Corp., a telecommunications
                equipment company, formerly traded on the New York Stock Exchange
                from May
                1982 until it was acquired in September 1996. Her business unit at
                Aydin
                was the largest provider of digital microwave radios to the US Army,
                which
                used the radios in Desert Storm and a variety of NATO operations.
                She also
                was Vice-President of Business Development for Kaifa Technology from
                October 1998 to August 2000 and was instrumental in its acquisition
                by
                E-Tek Dynamics, then again acquired by JDS Uniphase. Through these
                acquisitions, she held the role of Deputy General Manager of the
                Kaifa
                business unit. Ms. Hakimoglu earned a Bachelor of Science Degree
                in
                Physics from California State College, Sonoma, and a Master’s Degree in
                Physics from Drexel University.Craig
                Peeples
            
            Craig
                Peeples joined us in August 2005 as our Corporate Controller with
                more
                than 15 years of diverse financial experience and was appointed as
                Interim
                Chief Financial Officer in September 2005. From May 2001 to August
                2005,
                Mr. Peeples held various positions at Mrs. Fields Famous Brands,
                a public
                reporting franchisor/retailer of premium snack foods, including Director
                of Compliance & Audits and TCBY Controller. Mr. Peeples was the
                Vice-President and Corporate Controller for TenFold Corporation,
                a public,
                software company, from March 2000 to March 2001. From September 1993
                to
                March 2000, Mr. Peeples worked in the assurance and business advisory
                practice of Arthur Andersen LLP, at the time a "Big-6" public accounting
                firm, most recently with the title Experienced Manager. Mr. Peeples
                is a
                graduate of the Marriott School of Management at Brigham Young University
                where he earned his Master of Accountancy and cum Laude Bachelor
                of
                Science degrees concurrently. Mr. Peeples is a Utah-state licensed
                certified public accountant and a member of the American Institute
                of
                Certified Public Accountants.Tracy
                Bathurst
            
            TracyBathurstjoined
                us in September 1988 and held several positions with us until he
                was named
                Vice-President of Product Line Management in January 2005. He was
                most
                recently ClearOne’s Director of Research and Development and has nearly 20
                years experience in defining and developing communications-related
                products and technology. Mr. Bathurst has lead the design and development
                of ClearOne’s high performance audio and telecommunications equipment. He
                earned a Bachelor of Science degree in Industrial Technology from
                Southern
                Utah University.DeLonie
                Call
            
            DeLonie
                Call joined us in October 2001 with nearly 15 years experience in
                management and executive-level human resources positions. She currently
                serves as Vice-President of Human Resources. From April 2000 to September
                2001, Ms. Call was Director of Human Resources for Iomega Corp. and
                from
                June 1996 to November 2000 she was Vice-President of Human Resources
                for
                Vitrex Corp., a start-up technology company. Ms. Call graduated from
                Weber
                State University with a Bachelor of Science Degree in Business Management
                and Economics.Werner
                Pekarek
            
            Werner
                Pekarek joined us in January 2005 with more than 15 years of executive
                level operations experience, including responsibility for process
                development, production planning and implementation, purchasing,
                supply
                chain management and customer service. Mr. Pekarek was Vice-President
                of
                Operations for start-up high tech companies Break Points from July
                2002 to
                December 2004 and Optical Micro Machines from November 2000 to June
                2002.
                Mr. Pekarek also held executive operations roles with Siemens
                Communications including Vice-President of Operations for Siemens
                Communications Devices, Consumer Products from 1997 to 2000,
                Vice-President of Operations for Siemens Information & Communications
                Networks, Networking Gear from 1992 to 1997, Vice-President of Operations
                for Siemens Wireless, Consumer Products from 1989 to 1992, and various
                other management positions for Siemens from 1980 to 1989. His expertise
                includes low-volume, high-mix networking gear and high-volume consumer
                wireless and cordless phone products. Mr. Pekarek earned a Bachelor
                of
                Science Degree in Electrical Engineering from the University of Paderborn
                in Germany.




50




Joseph
                Sorrentino
            
            Joseph
                Sorrentino joined us in November 2004 with more than 25 years experience
                in various executive management and sales-related positions. From
                April
                2002 to November 2004, Mr. Sorrentino was Vice-President of Sales
                for
                Polycom’s voice communications division. Prior to Polycom, he served as
                Vice-President of Worldwide Sales for 3Ware, a start-up storage company
                from July 1999 to August 2001, and for IBM’s storage systems division from
                October 1997 to February 1999, where he managed the company’s largest
                storage customers. He has also worked for Motorola, Seagate, and
                Adaptec.
                Mr. Sorrentino earned a Bachelor of Science Degree from San Jose
                State
                University.





**Compliance
      with Section 16(a) of the Exchange Act (Beneficial Ownership Reporting
      Compliance)**





Section
      16(a) of the Exchange Act, as amended, requires our directors and executive
      officers, and persons who own more than 10 percent of a registered class of
      our
      equity securities to file with the SEC initial reports of ownership on Form
      3
      and reports of changes of ownership of our equity securities on Forms 4 and
      5.
      Officers, directors, and greater than 10 percent shareholders are required
      to
      furnish us with copies of all Section 16(a) reports they file.




Based
      solely on a review of the reports and amendments to reports furnished to us,
      we
      believe that all reports required by Section 16(a) were filed on a timely basis,
      except that the following reports were filed late: (i) the Form 3 dated November
      14, 2003 for Charles A. Callis, former Vice-President of International
      Operations; (ii) the Form 3 dated July 27, 2004 for David Hubbard, former
      Vice-President of Operations; and (iii) the Form 3 dated July 27, 2004 for
      Donald E. Frederick, former Chief Financial Officer.





**Code
      of Ethics**





On
      November 18, 2004, the Board of Directors adopted a code of ethics that applies
      to our Board of Directors, executive officers, and employees. A copy of our
      code
      of ethics is included as an exhibit to this report. Copies may also be
      requested, free of charge, from our Corporate Secretary at the following
      address:





ClearOne
      Communications, Inc.


1825
      Research Way


Salt
      Lake
      City, Utah 84119


Attention:
      Corporate Secretary





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





**Summary
      Compensation**





The
      following table sets forth for the periods indicated the compensation paid
      to or
      accrued for the benefit of each person who served as our Chief Executive Officer
      during fiscal 2004, our next four most highly compensated executive officers
      who
      were serving as executive officers on June 30, 2004 and two additional persons
      who had served as executive officers during a portion of 2004 but were no longer
      serving in such positions on June 30, 2004 (collectively referred to herein
      as
      the “named executive officers”). The position identified in the table for each
      person is the position they held with us as of June 30, 2004.




51




**SUMMARY
      COMPENSATION TABLE**




Annual
                  Compensation
              
              Long-Term
                  CompensationAwards
              
              PayoutsName
                  and Position
              
              Fiscal
                Year
              
              Salary
              
              Paid
                Bonus
              
              Other
                Annual
                Compen-
                sation1
              
              Securities
                Under-
                lying
                Options
                /SARS
              
              All
                Other
                Compen-
                sation2**Chief
                  Executive Officers During Fiscal 2004**Michael
                  Keough
              
              2004
              
              $203,457
              
              $41,000
              
              -
              
              150,000
              
              $46,154Chief
                  Executive Officer and President32003
              
              $119,230
              
              -
              
              -
              
              50,000
              
              -Frances
                  M. Flood
              
              2004
              
              $115,385
              
              -
              
              -
              
              -
              
              $306,000President
                  and Chief Executive Officer42003
              
              $231,199
              
              -
              
              -
              
              300,000
              
              $1,0952002
              
              $179,615
              
              $76,006
              
              -
              
              100,000
              
              $2,148**Executive
                  Officers as of June 30, 2004**Charles
                  A. Callis
              
              2004
              
              $140,000
              
              $41,200
              
              -
              
              105,000
              
              -Vice
                  President52003
              
              $75,385
              
              -
              
              -
              
              -
              
              -Angelina
                  Beitia
              
              2004
              
              $135,000
              
              $27,675
              
              -
              
              105,000
              
              $810Vice
                  President62003
              
              $116,226
              
              -
              
              $400
              
              15,000
              
              -2002
              
              $118,462
              
              $5,000
              
              $2,005
              
              -
              
              $3,900DeLonie
                  N. Call
              
              2004
              
              $100,000
              
              $20,500
              
              -
              
              105,000
              
              $600Vice
                  President2003
              
              $97,660
              
              -
              
              -
              
              15,000
              
              $9462002
              
              $62,308
              
              $2,000
              
              -
              
              25,000
              
              $900Zee
                  Hakimoglu
              
              2004
              
              $75,293
              
              $2,359
              
              -
              
              50,000
              
              $388Vice-President7**Former
                  Executive Officers**Gregory
                  L. Rand
              
              2004
              
              $106,672
              
              $30,750
              
              -
              
              72,000
              
              $75,000President
                  and Chief Operating Officer82003
              
              $130,256
              
              -
              
              -
              
              50,000
              
              -George
                  E. Claffey
              
              2004
              
              $127,949
              
              $30,750
              
              -
              
              120,000
              
              $61,192Chief
                  Financial Officer92003
              
              $60,000
              
              -
              
              -
              
              -
              
              -


____________





1
            The
                Company did not pay or provide perquisites or other benefits during
                the
                periods indicated by any named executive officer in an aggregate
                amount
                exceeding $50,000.


2
            These
                amounts reflect our contributions to our deferred compensation plan,
                401(k) plan, or severance compensation on behalf of the named executive
                officers.


3
            Mr.
                Keough was employed as an executive officer from November 18, 2002
                to June
                16, 2004. Mr. Keough served as our Chief Executive Officer from January
                21, 2003 to June 16, 2004. Mr. Keough received a total severance
                payment
                of $46,154.





52





4
            Ms.
                Flood was on paid administrative leave from January 21, 2003 to December
                5, 2003. Ms. Flood’s employment and position as an executive officer
                terminated on December 5, 2003. As discussed herein, Ms. Flood entered
                into an employment separation agreement with the Company pursuant
                to which
                she received a total payment of $350,000 and she returned to the
                Company
                for cancellation 35,000 shares of the Company’s common stock valued by the
                Company at $44,000 and 706,434 stock options (461,433 of which were
                vested). The Company booked $306,000 of the $350,000 as severance
                compensation.


5
            Mr.
                Callis was employed as an executive officer from December 9, 2002
                to
                September 17, 2004. He served as our Vice-President of International
                Operations from December 9, 2002 to January 22, 2004 and as our
                Vice-President of Worldwide Sales from January 22, 2004 to September
                17,
                2004.


6
            Ms.
                Beitia’s employment and position as an executive officer terminated on
                July 1, 2004 in connection with the sale of our conferencing services
                business segment to Premiere.


7
            Ms.
                Hakimoglu served as our Vice-President of Product Line Management
                from
                December 2003 to July 8, 2004. On July 8, 2004, Ms. Hakimoglu was
                named as
                our President and Chief Executive
                Officer.


8
            Mr.
                Rand was employed as an executive officer on from August 12, 2002
                to
                February 27, 2004. Mr. Rand received a total severance payment of
                $75,000.


9
            Mr.
                Claffey was employed as an executive officer on from January 28,
                2003 to
                April 6, 2004. Mr. Claffey received a total severance payment of
                $61,192.





**Options/SAR
      Grants in Last Fiscal Year**





The
      following table sets forth the stock option grants made to the named executive
      officers for fiscal 2004. We did not grant any stock appreciation rights, or
      SARs, to the named executive officers during fiscal 2004.





The
      exercise price per share of each option granted was equal to the closing price
      of our common stock on the date of grant.





**OPTION
      GRANTS IN FISCAL YEAR ENDED JUNE 30, 2004**


**(INDIVIDUAL
      GRANTS)**




Number
                  of
                Securities
                Underlying
                Options
              
              Percent
                  of
                Total
                  Options
                Granted
                to
                  Employees
              
              Exercise
                or
                  Base
              
              Expiration
              
              Potential
                  Realizable
                Value
                  of Assumed
                Annual
                  Rate of
                Stock
                  Price
                Appreciation
                  for
                Option
                  Term4Name
                  and Position
              
              Granted
                  (#)
              
              in
                  Fiscal Year1
              
              Price
                  ($/Sh)
              
              Date
              
              5%($)
              
              10%($)**Chief
                  Executive Officer During Fiscal 2004**Michael
                  Keough
              
              90,0002
              
              8%
              
              $2.80
              
              11/12/2013
              
              $179,006
              
              $466,98560,0002
              
              6%
              
              $6.40
              
              3/24/2014
              
              $272,770
              
              $711,597Frances
                  M. Flood
              
              -
              
              -
              
              $-
              
              -
              
              $-
              
              $-**Executive
                  Officers as of June 30, 2004**Charles
                  A. Callis
              
              63,0003
              
              6%
              
              $2.80
              
              11/12/2013
              
              $125,301
              
              $326,89042,0003
              
              4%
              
              $6.40
              
              3/24/2014
              
              $190,939
              
              $498,118Angelina
                  Beitia
              
              63,0003
              
              6%
              
              $2.80
              
              11/12/2013
              
              $125,301
              
              $326,89042,0003
              
              4%
              
              $6.40
              
              3/24/2014
              
              $190,939
              
              $498,118DeLonie
                  N. Call
              
              63,0003
              
              6%
              
              $2.80
              
              11/12/2013
              
              $125,301
              
              $326,89042,0003
              
              4%
              
              $6.40
              
              3/24/2014
              
              $190,939
              
              $498,118Zee
                  Hakimoglu
              
              50,0002
              
              5%
              
              $6.40
              
              3/24/2014
              
              $227,309
              
              $592,997**Former
                  Executive Officers**Gregory
                  L. Rand
              
              72,0003
              
              7%
              
              $2.80
              
              11/12/2013
              
              $143,204
              
              $373,588George
                  E. Claffey
              
              72,0003
              
              7%
              
              $2.80
              
              11/12/2013
              
              $143,204
              
              $373,58848,0003
              
              4%
              
              $6.40
              
              3/24/2014
              
              $218,216
              
              $569,227




53


____________





1.
            Based
                on aggregate of 1,087,500 shares subject to options granted to our
                employees in 2004, including the named executive
                officers.





2.
            The
                options have a ten-year term and vest over a three-year period with
                one-third vesting on the first anniversary of the grant date and
                the
                remaining two-thirds vesting in equal monthly installments over the
                remaining 24-month period. The options vest immediately upon a change
                of
                control as defined in the plan or our Board of Directors has authority
                to
                accelerate vesting in the event of certain specified corporate
                transactions.





3.
            The
                options have a ten-year term and vest over a four-year period with
                one-fourth vesting on the first anniversary of the grant date and
                the
                remaining three-fourths vesting in equal monthly installments over
                the
                remaining 36-month period. The options vest immediately upon a change
                of
                control as defined in the plan or our Board of Directors has authority
                to
                accelerate vesting in the event of certain specified corporate
                transactions.





4.
            Potential
                realizable values are computed by (1) multiplying the number of shares
                of
                common stock subject to a given option by the per-share assumed stock
                value compounded at the annual 5 percent or 10 percent appreciation
                rate
                shown in the table for the entire ten-year term of the option and
                (2)
                subtracting from that result the aggregate option exercise price.
                The 5
                percent and 10 percent assumed annual rates of stock price appreciation
                are mandated by the rules of the SEC and do not represent our estimate
                or
                projection of the future prices of our common stock. Actual gains,
                if any,
                on stock option exercises are dependent on our future financial
                performance, overall market conditions, and the named executive officer’s
                continued employment through the vesting periods. The actual value
                realized may be greater or less than the potential realizable value
                set
                forth in the table.





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





The
      following table sets forth information concerning stock options exercised by
      the
      named executive officers during fiscal 2004 and the year-end value of
      in-the-money, unexercised options:





**AGGREGATED
      OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 2004**


**AND
      FISCAL YEAR-END OPTION VALUES**





Name
                and Position
            
            Shares
              Acquired
              on
                Exercise (#)
            
            Value
              Realized
                ($)1
            
            Number
                of
              Securities
              Underlying
              Unexercised
              Options
              at
                FY-End (#)
              Exercisable/
              Unexercisable
            
            Value
                of
              Unexercised
              In-the-Money
              Options
              at
                FY-End ($)
              Exercisable/
              Unexercisable2**Chief
                Executive Officers During Fiscal 2004**Michael
                Keough3
            
            -
            
            $-
            
            18,749/-
            
            $32,811/$-Frances
                M. Flood4
            
            -
            
            $-
            
            -/-
            
            $-/$-**Executive
                Officers as of June 30, 2004**Charles
                A. Callis
            
            -
            
            $-
            
            -/105,000
            
            $-/$170,100Angelina
                Beitia5
            
            -
            
            $-
            
            10,624/134,376
            
            $12,186/$187,164DeLonie
                N. Call
            
            -
            
            $-
            
            9,749/135,251
            
            $12,186/$187,614Zee
                Hakimoglu
            
            -
            
            $-
            
            -/50,000
            
            $-/$-**Former
                Executive Officers**Gregory
                L. Rand3
            
            -
            
            $-
            
            25,000/-
            
            $48,750/$-George
                E. Claffey
            
            -
            
            $-
            
            -/-
            
            $-/$-




54


____________





1
            Based
                upon the market price of the purchased shares on the exercise date
                less
                the option exercise price paid for such
                shares.





2
            Based
                on the market price of $5.50 per share, which was the closing selling
                price of our common stock on the Pink Sheets on the last business
                day of
                our 2004 fiscal year, less the option exercise price payable per
                share.





3
            In
                February 2003, we determined not to permit the exercise of stock
                options
                granted under the 1990 Plan or the 1998 Plan until such time as we
                have
                become current in the filing of periodic reports with the SEC. We
                provided
                for an extension of the exercise period of certain options to prevent
                them
                from expiring without the holder having had the opportunity to exercise
                them. Currently, Mr. Keough holds 18,749 vested stock options and
                Mr. Rand
                holds 25,000 vested stock options.





4
            As
                discussed herein, on December 5, 2003, we entered into an employment
                separation agreement with Frances Flood, our former Chief Executive
                Officer, which generally provided that she would resign from her
                positions
                and employment with the Company. Under the agreement, Ms. Flood delivered
                to us for cancellation 706,434 stock options (461,433 of which were
                vested). No options remain outstanding for Ms.
                Flood.





5
            As
                discussed herein, on July 15, 2004, we entered into an employment
                settlement agreement and release with Angelina Beitia. In connection
                with
                such agreement, she surrendered and delivered to us all outstanding
                vested
                and unvested options.





**Director
      Compensation**





All
      of
      our directors serve until their successors are elected and have qualified to
      serve as directors. We pay the chairman of the board $4,000 per month and all
      other directors $2,000 per month for their services to us as directors.




Dal
      Bagley, a director, served as a consultant to the Company from November 2002
      through January 2004 and was paid $5,000 per month for his services. He
      consulted with Company’s management on mergers and financial matters on an as
      needed basis. Mr. Bagley’s services were performed pursuant to an oral
      agreement, the terms of which were approved by the Board of
      Directors.





**Employment
      Contracts and Termination of Employment and Change-in-Control
      Arrangements**





***Employment
      Agreement.*** ** On
      October 24, 2002, we entered into a three-year employment agreement with Frances
      Flood, which was terminated on December 5, 2003 pursuant to the employment
      separation agreement discussed below.





***Employment
      Separation Agreements.*** ** On
      December 5, 2003, the Company entered into employment separation agreements
      with
      each of Frances Flood, the Company’s former Chairman, Chief Executive Officer,
      and President, and Susie Strohm, the Company’s former Chief Financial Officer,
      which generally provided that such persons would resign from their positions
      and
      employment with the Company, and the Company would make one-time, lump-sum
      payments to such persons in consideration of their surrender and delivery to
      the
      Company of shares of the Company’s common stock and Company stock options and
      their release of claims against the Company. Such persons also agreed to
      cooperate with the Company in the SEC action and related proceedings and the
      Company agreed to continue to indemnify such persons for attorneys fees incurred
      in the SEC action and related proceedings, subject to the limitations imposed
      by
      Utah law. The Company also released any existing claims against such persons
      except such claims as to which indemnification would not be permitted by Utah
      law. The agreement with Ms. Flood provided for a payment to her of $350,000
      and
      her surrender and delivery to the Company of 35,000 shares of the Company’s
      common stock and 706,434 stock options (461,433 of which were vested). The
      agreement with Ms. Strohm provided for a payment to her of $75,000 and her
      surrender and delivery to the Company of 15,500 shares of the Company’s common
      stock and 268,464 stock options (171,963 of which were vested).





55





As
      of the
      end of fiscal 2004, no other named executive officer was party to an employment
      or severance agreement with us, and each named executive officer’s employment
      was on an “at-will” basis.





***Settlement
      Agreements and Releases.*** ** We
      entered into settlement agreements and releases with four former executive
      officers in connection with the cessation of their employment, which generally
      provided for their resignations from their positions and employment with the
      Company, the payment of severance in increments in accordance with the regular
      payroll schedule, and a general release of claims against the Company by each
      of
      such persons. On February 27, 2004, an agreement was entered into with Greg
      Rand, the Company’s former President and Chief Operating Officer, which
      generally provided for a severance payment of $75,000 and an accelerated vesting
      of 25,000 stock options. On April 6, 2004, an agreement was entered into with
      George Claffey, the Company’s former Chief Financial Officer, which generally
      provided for a severance payment of $61,192. On June 16, 2004, an agreement
      was
      entered into with Mike Keough, the Company’s former Chief Executive Officer,
      which generally provided for a severance payment of $46,154 and vested options
      totaling 18,749 stock options. On July 15, 2004, an agreement was entered into
      with Angelina Beitia, the Company’s former Vice-President, which generally
      provided for a lump-sum payment of $100,000. In addition Ms. Beitia surrendered
      and delivered to the Company all outstanding vested and unvested options. In
      accordance with the terms of our stock option plans, any unvested stock options
      terminated on the date of termination of such persons’ employment with the
      Company.





***Stock
      Option Plans.*** ** Under
      the
      1998 Stock Option Plan, our Board of Directors has the authority to
      automatically accelerate the vesting of each outstanding option granted to
      a
      named executive officer in the event of specified corporate transactions,
      including a change in control whether or not the outstanding option is assumed
      or substituted in connection with the corporate transaction or change in
      control. All options outstanding under the 1990 Stock Option Plan are fully
      vested and there are no additional options available for grant.





**Compensation
      Committee Interlocks and Insider Participation**





The
      Compensation Committee during fiscal 2004 was composed of Brad R. Baldwin,
      Scott
      M. Huntsman, and Edward Dallin Bagley. This same composition exists today.
      Mr.
      Bagley also served as a consultant to the Company from November 2002 through
      January 2004 and was paid $5,000 monthly for his services. No interlocking
      relationships exist between any member of the Company’s Board of Directors or
      Compensation Committee and any member of the board of directors or compensation
      committee of any other company nor has any such interlocking relationship
      existed in the past. No member of the Compensation Committee is or was formerly
      an executive officer or an employee of the Company or its
      subsidiaries.





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





The
      following table sets forth certain information regarding ownership of our common
      stock as of November 30, 2005 by (i) each person known to us to be the
      beneficial owner of more than 5 percent of our outstanding common stock, (ii)
      each director, (iii) the named executive officers, and (iv) all of our executive
      officers and directors as a group. Each person has sole investment and voting
      power with respect to the shares indicated, subject to community property laws
      where applicable, except as otherwise indicated below. The address for each
      director and officer is in care of ClearOne Communications, Inc., 1825 Research
      Way, Salt Lake City, Utah 84119.





56




Names
              of
                Beneficial Owners
            
            Amount
                of
              Beneficial
                Ownership
            
            Percentage
              of
                Class1**Directors
                and****Executive
                Officers**Edward
                Dallin Bagley2
            
            1,809,601
            
            14.1%Brad
                R. Baldwin3
            
            186,666
            
            1.5%DeLonie
                N. Call4
            
            87,228
            
            0.7%Zee
                Hakimoglu5
            
            80,555
            
            0.6%Harry
                Spielberg6
            
            64,000
            
            0.5%Tracy
                A. Bathurst7
            
            63,100
            
            0.5%Larry
                R. Hendricks8
            
            30,500
            
            0.2%Scott
                M. Huntsman9
            
            30,500
            
            0.2%Joseph
                P. Sorrentino10
            
            21,388
            
            0.2%Werner
                Pekarek11
            
            15,000
            
            0.1%Directors
                and Executive Officers as a Group(11
                people)12
            
            2,388,538
            
            18.7%





1
            For
                each individual included in the table, the calculation of percentage
                of
                beneficial ownership is based on 12,184,727 shares of common stock
                outstanding as of November 30, 2005 and shares of common stock that
                could
                be acquired by the individual within 60 days of November 30, 2005,
                upon
                the exercise of options or
                otherwise.





2
            Includes
                126,166 shares held by Mr. Bagley’s spouse with respect to which he
                disclaims beneficial ownership and options to purchase 139,000 shares
                that
                are exercisable within 60 days after November 30,
                2005.





3
            Includes
                88,666 shares held in the Baldwin Family Trust; 9,000 shares owned
                directly, which are held in an IRA under the name of Mr. Baldwin;
                and
                options to purchase 89,000 shares that are exercisable within 60
                days
                after November 30, 2005.





4
            Includes
                options to purchase 86,853 shares that are exercisable within 60
                days
                after November 30, 2005.





5
            Includes
                options to purchase 80,555 shares that are exercisable within 60
                days
                after November 30, 2005.





6
            Includes
                options to purchase 64,000 shares that are exercisable within 60
                days
                after November 30, 2005.





7
            Includes
                options to purchase 62,602 shares that are exercisable within 60
                days
                after November 30, 2005.





8
            Includes
                options to purchase 30,500 shares that are exercisable within 60
                days
                after November 30, 2005.





9
            Includes
                options to purchase 30,500 shares that are exercisable within 60
                days
                after November 30, 2005.





10
            Includes
                options to purchase 21,388 shares that are exercisable within 60
                days
                after November 30, 2005.





11
            Includes
                options to purchase 15,000 shares that are exercisable within 60
                days
                after November 30, 2005.





12
            Includes
                options to purchase a total of 619,398 shares that are exercisable
                within
                60 days after November 30, 2005 by executive officers and directors.





57





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





**Indemnification
      of Officers and Directors.** The
      Company’s by-laws and the Utah Revised Business Corporation Act provide for
      indemnification of directors and officers against reasonable expenses incurred
      by such persons in connection with civil or criminal actions or proceedings
      to
      which they have been made parties because they are or were directors or officers
      of the Company or its subsidiaries. Indemnification is permitted if the person
      satisfies the required standards of conduct. Certain of the litigation matters
      described in “Item 3. Legal Proceedings” involved certain of the Company’s
      current and former directors and officers, all of whom are covered by the
      aforementioned indemnity and if applicable, certain prior period insurance
      policies. The Company has indemnified such persons for legal expenses incurred
      by them in such actions and has sought reimbursement from its insurance
      carriers. The Company cannot predict with certainty the extent to which the
      Company will recover the indemnification payments from its insurers. The Company
      has made payments to the law firms representing such current and former
      directors and officers in the aggregate amount of approximately $1.7 million
      during the period from January 2003 through September 30, 2005.





**Joint
      Prosecution and Defense Agreement.** In
      connection with the Insurance Coverage Action described herein under the caption
      “Item 3. Legal Proceedings,” the Company and its counsel entered into a Joint
      Prosecution and Defense Agreement dated as of April 1, 2004 with Edward Dallin
      Bagley, Chairman of the Board of Directors, and his counsel, which generally
      provides that ClearOne and Mr. Bagley will jointly prosecute their claims
      against the carriers of certain prior period directors and officers liability
      insurance policies and jointly defend the claims made by the insurance carriers
      in order to reduce litigation expenses. In the litigation, ClearOne is generally
      pursuing claims to recover the policy limits of certain officer and director
      liability insurance policies and Mr. Bagley is pursuing related claims to
      recover losses he incurred as a result of such carriers’ refusal to pay the
      policy limits which refusals caused ClearOne to enter into a settlement
      agreement in the class action litigation that diluted Mr. Bagley’s shareholdings
      in ClearOne. The agreement, as amended, provides that the two law firms shall
      jointly represent ClearOne and Mr. Bagley, the parties shall cooperate in
      connection with the conduct of the litigation and that ClearOne shall pay all
      litigation expenses, including attorneys’ fees of its counsel and Mr. Bagley’s
      counsel, except litigation expenses which are solely related to Mr. Bagley’s
      claims in the litigation. In February 2005, we entered into a confidential
      settlement agreement with Lumbermens Mutual pursuant to which ClearOne and
      Mr.
      Bagley received a lump-sum cash amount and the plaintiffs agreed to dismiss
      their claims against Lumbermens Mutual with prejudice. The cash settlement
      will
      be held in a segregated account until the claims involving National Union have
      been resolved, at which time the amounts received in the action will be
      allocated among the Company and Mr. Bagley. The Joint Prosecution and Defense
      Agreement does not explain any allocation method and no allocation discussions
      have occurred.





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





ClearOne
      engaged KPMG in December 2003 to replace Ernst & Young as its independent
      registered public accountants. ClearOne engaged KPMG to audit its financial
      statements for its 2004 and 2003 fiscal years and to reaudit its consolidated
      financial statements for its 2002 and 2001 fiscal years, as well as to perform
      quarterly reviews on the quarters within each of these fiscal years. Since
      KPMG
      was engaged for a multi-year audit engagement, it is not practicable to separate
      fees incurred into the specific audit period covered by the multi-period
      fees.




The
        fees
        for the audits and quarterly reviews related to the June 30, 2003, 2002,
        and
        2001 financial statements, audit-related fees, taxes, and other fees provided
        by
        KPMG were as follows:
 
 Audit
                  Fees
              
              $
              2,204,109Audit-Related
                  Fees
              
              
              13,029Tax
                  Fees
              
              
              126,106Total
              
              $
              2,343,244




ClearOne
        also engaged KPMG to audit its financial statements for fiscal 2004 as well
        as
        to perform quarterly reviews on the quarters within this fiscal year. The
        fees
        for the audit and quarterly reviews related to June 30, 2004 financial
        statements, audit-related fees, taxes and other fees provided by KPMG were
        as
        follows:
 
 Audit
                  Fees
              
              $
              906,918Other
              
              
              27,110Total
              
              $
              934,028




58




“Audit
        Fees” consisted of fees billed for services rendered for the audit or reaudit of
        ClearOne’s annual financial statements, Statement on Audit Standards (“SAS”) 100
        reviews of quarterly financial information included herein, and other services
        normally provided in connection with statutory and regulatory filings.
“Audit-Related Fees” consisted of fees billed for consents on audit opinions for
        acquirees of the Company. “Tax Fees” consisted of fees billed for tax payment
        planning and tax preparation services. “Other” consisted of fees billed for
        document production related to legal proceedings.





Our
      Audit
      Committee Charter provides for pre-approval of non-audit services performed
      by
      our independent registered public accountants. All of the services performed
      by
      KPMG described above under the captions "Audit-Related Fees" and "Tax Fees"
      were
      approved in advance by our Audit Committee.





59





**PART
      IV**





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


**(a)  1.**
              **Financial
                  Statements**
 
 The
        following financial statements are filed as part of this report in a separate
        section of this Form 10-K beginning on page F-1.
 
 Report
        of
        Independent Registered Public Accounting Firm
 Consolidated
        Balance Sheets as of June 30, 2004 and 2003
 Consolidated
        Statements of Operations and Comprehensive Loss for fiscal years ended June
        30,
        2004, 2003, and 2002
 Consolidated
        Statements of Shareholders’ Equity for fiscal years ended June 30, 2004, 2003,
        and 2002
 Consolidated
        Statements of Cash Flows for fiscal years ended June 30, 2004, 2003, and
        2002
 Notes
        to
        Consolidated Financial Statements
 
 **2.**
              **Financial
                  Statement Schedules**
 
 All
        schedules are omitted as the required information is inapplicable or the
        information is presented in the consolidated financial statements and notes
        thereto.
 
 **3.**
              **Exhibits**
 
 The
        following documents are included as exhibits to this report.


Exhibit
              No.
            
            SEC
                Ref.
              No.
            
            Title
                of Document
            
            Location3.1
            
            3
            
            Articles
                of Incorporation and amendments thereto
            
            Incorp.
                by reference13.2
            
            3
            
            Bylaws
            
            Incorp.
                by reference210.1
            
            10
            
            Employment
                Separation Agreement between ClearOne Communications, Inc. and Frances
                Flood, dated December 5, 2003.*
            
            Incorp.
                by reference810.2
            
            10
            
            Employment
                Separation Agreement between ClearOne Communications, Inc. and Susie
                Strohm, dated December 5, 2003.*
            
            Incorp.
                by reference810.3
            
            10
            
            Share
                Purchase Agreement between ClearOne Communications, Inc. and ClearOne
                Communications of Canada, Inc. and 3814149 Canada, Inc., 3814157
                Canada,
                Inc., Stechyson Family Trust, Jim Stechyson, Norm Stechyson, and
                Heather
                Stechyson Family Trust, dated as of August 16, 2002
            
            Incorp.
                by reference810.4
            
            10
            
            Asset
                Purchase Agreement between ClearOne Communications, Inc. and Comrex
                Corp.,
                dated as of August 23, 2002.
            
            Incorp.
                by reference810.5
            
            10
            
            Agreement
                and Plan of Merger dated January 21, 2003, between ClearOne
                Communications, Inc., Tundra Acquisitions Corporation, and E.mergent,
                Inc., and the related Voting Agreement with E.mergent
                shareholders
            
            Incorp.
                by reference310.6
            
            10
            
            Share
                Purchase Agreement among ClearOne Communications, Inc. (then named
                Gentner
                Communications Corporation), Gentner Ventures, Inc., and the shareholders
                of Ivron Systems, Ltd. dated October 3, 2001, and amendment
                thereto
            
            Incorp.
                by reference410.7
            
            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 reference8




60




10.8
            
            10
            
            Asset
                Purchase Agreement dated May 6, 2004 between ClearOne Communications,
                Inc.
                and M:SPACE, Inc.
            
            Incorp.
                by reference810.9
            
            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 reference510.10
            
            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 reference810.11
            
            10
            
            1998
                Stock Option Plan
            
            Incorp.
                by reference610.12
            
            10
            
            1990
                Incentive Plan
            
            Incorp.
                by reference710.13
            
            10
            
            Employment
                Settlement Agreement and Release between ClearOne Communications,
                Inc. and
                Gregory Rand dated February 27, 2004.*
            
            Incorp.
                by reference810.14
            
            10
            
            Employment
                Settlement Agreement and Release between ClearOne Communications,
                Inc. and
                George Claffey dated April 6, 2004.*
            
            Incorp.
                by reference810.15
            
            10
            
            Employment
                Settlement Agreement and Release between ClearOne Communications,
                Inc. and
                Michael Keough dated June 16, 2004.*
            
            Incorp.
                by reference810.16
            
            10
            
            Employment
                Settlement Agreement and Release between ClearOne Communications,
                Inc. and
                Angelina Beitia dated July 15, 2004.*
            
            Incorp.
                by reference810.17
            
            10
            
            Manufacturing
                Agreement between ClearOne Communications, Inc. and Inovar, Inc.
                dated
                August 1, 2005
            
            This
                filing910.18
            
            10
            
            Mutual
                Release and Waiver between ClearOne Communications, Inc. and Burk
                Technology, Inc. dated August 22, 2005
            
            This
                filing14.1
            
            14
            
            Code
                of Ethics, approved by the Board of Directors on November 18,
                2004
            
            Incorp.
                by reference821.1
            
            21
            
            Subsidiaries
                of the registrant
            
            This
                filing31.1
            
            31
            
            Section
                302 Certification of Chief Executive Officer
            
            This
                filing31.2
            
            31
            
            Section
                302 Certification of Interim Chief Financial Officer
            
            This
                filing32.1
            
            32
            
            Section
                1350 Certification of Chief Executive Officer
            
            This
                filing32.2
            
            32
            
            Section
                1350 Certification of Interim Chief Financial Officer
            
            This
                filing99.1
            
            99
            
            Audit
                Committee Charter, adopted November 18, 2004
            
            Incorp.
                by reference8


______________


*Constitutes
      a management contract or compensatory plan or arrangement.





1
            Incorporated
                by reference to the Registrant’s Annual Reports on Form 10-K for the
                fiscal years ended June 30, 1989 and June 30,
                1991.


2
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
                year ended June 30, 1993.


3
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed February
                6, 2003


4
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed October
                18, 2001 and the Current Report on Form 8-K filed April 10,
                2002.


5
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed July 1,
                2004.


6
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-KSB for the
                fiscal year ended June 30, 1998.


7
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-KSB for the
                fiscal year ended June 30, 1996.


8
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
                year ended June 30, 2003.


9
            The
                exhibits to the Manufacturing Agreement are not included in the foregoing
                exhibits. The Registrant undertakes to furnish supplementally to
                the
                Commission copies of any omitted items on
                request.




61





**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





CLEARONE
                COMMUNICATIONS, INC.December
                16, 2005
            
            By:
            
            /s/
                Zeynep HakimogluZeynep
                HakimogluPresident
                and Chief Executive Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





Signature
            
            Title
            
            Date/s/
                Zeynep Hakimoglu
            
            President
                and Chief Executive Officer
            
            December
                16, 2005Zeynep
                Hakimoglu
            (Principal
                Executive Officer)/s/
                Craig E. Peeples
            
            Interim
                Chief Financial Officer
            
            December
                16, 2005Craig
                E. Peeples
            (Principal
                Financial and Accounting Officer)/s/
                Edward Dallin Bagley
            
            Chairman
                of the
            
            December
                16, 2005Edward
                Dallin Bagley
            
            Board
                of Directors/s/
                Brad R. Baldwin
            
            Director
            
            December
                16, 2005Brad
                R. Baldwin/s/
                Larry R. Hendricks
            
            Director
            
            December
                16, 2005Larry
                R. Hendricks/s/
                Scott M. Huntsman
            
            Director
            
            December
                16, 2005Scott
                M. Huntsman/s/
                Harry Spielberg
            
            Director
            
            December
                16, 2005Harry
                Spielberg




62




**ITEM
                8.**
              **FINANCIAL
                  STATEMENTS**
   **Index
        to Consolidated Financial Statements**
  **Page**Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets as of June 30, 2004 and 2003
              F-3Consolidated
                  Statements of Operations and Comprehensive Loss for fiscal years
                  ended
                  June 30, 2004, 2003, and 2002
              F-4Consolidated
                  Statements of Shareholders' Equity for fiscal years ended June
                  30, 2004,
                  2003, and 2002
              F-6Consolidated
                  Statements of Cash Flows for fiscal years ended June 30, 2004,
                  2003, and
                  2002
              F-7Notes
                  to Consolidated Financial Statements
              F-9
  
  Report
        of
        Independent Registered Public Accounting Firm
   The
        Board
        of Directors and Shareholders
 ClearOne
        Communications, Inc.:
  We
        have
        audited the accompanying consolidated balance sheets of ClearOne Communications,
        Inc. and subsidiaries as of June 30, 2004 and 2003, and the related consolidated
        statements of operations and comprehensive loss, shareholders’ equity, and cash
        flows for each of the years in the three-year period ended June 30, 2004.
        These
        consolidated financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of ClearOne Communications,
        Inc. and subsidiaries as of June 30, 2004 and 2003 and the results of their
        operations and their cash flows for each of the years in the three-year period
        ended June 30, 2004 in conformity with U.S. generally accepted accounting
        principles.
  As
        discussed in Note 2 to the consolidated financial statements, the Company
        changed, effective July 1, 2002, its method of accounting for goodwill and
        other
        intangible assets as required by Statement of Financial Accounting Standards
        No.
        142, Goodwill and Other Intangible Assets, Statement of Financial Accounting
        Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
        Assets, and Statement of Financial Accounting Standard No. 141, Business
        Combinations.
  KPMG
        LLP
 
 Salt
        Lake
        City, Utah
 December
        15, 2005
  F-2
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(in
        thousands, except share amounts)**
 
 **June
                  30,****2004**
              
              **2003****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              4,207
              
              $
              6,124Restricted
                  cash
              
              
              -
              
              
              200Marketable
                  securities
              
              
              1,750
              
              
              1,900Accounts
                  receivable, net of allowance for doubtful accounts of $24 and $0,
                  respectively
              
              
              7,225
              
              
              858Inventories,
                  net
              
              
              6,297
              
              
              8,877Income
                  tax receivable
              
              
              3,446
              
              
              2,433Deferred
                  income tax assets
              
              
              401
              
              
              2,531Prepaid
                  expenses
              
              
              532
              
              
              420Assets
                  held for sale
              
              
              3,294
              
              
              6,022Total
                  current assets
              
              
              27,152
              
              
              29,365Property
                  and equipment, net
              
              
              4,077
              
              
              4,320Intangibles,
                  net
              
              
              901
              
              
              1,018Deferred
                  income tax assets, net
              
              
              -
              
              
              548Other
                  assets
              
              
              26
              
              
              25Total
                  assets
              
              $
              32,156
              
              $
              35,276**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  liabilities:Capital
                  lease obligations
              
              $
              6
              
              $
              32Note
                  payable
              
              
              692
              
              
              652Accounts
                  payable
              
              
              2,234
              
              
              1,714Accrued
                  liabilities
              
              
              10,764
              
              
              8,510Deferred
                  product revenue
              
              
              6,107
              
              
              -Billings
                  in excess of costs on uncompleted contracts
              
              
              375
              
              
              296Liabilities
                  held for sale
              
              
              2,329
              
              
              4,389Total
                  current liabilities
              
              
              22,507
              
              
              15,593Capital
                  lease obligations, net of current portion
              
              
              2
              
              
              9Note
                  payable, net of current portion
              
              
              240
              
              
              931Deferred
                  income taxes, net
              
              
              401
              
              
              -Total
                  liabilities
              
              
              23,150
              
              
              16,533Commitments
                  and contingencies (see Notes 12 and 16)Shareholders'
                  equity:Common
                  stock, 50,000,000 shares authorized, par value $0.001, 11,036,233
                  and
                  11,086,733 shares issued and outstanding, respectively
              
              
              11
              
              
              11Additional
                  paid-in capital
              
              
              48,395
              
              
              48,258Deferred
                  compensation
              
              
              (54
              )
              
              (75
              )Accumulated
                  other comprehensive income
              
              
              1,189
              
              
              1,197Accumulated
                  deficit
              
              
              (40,535
              )
              
              (30,648
              )Total
                  shareholders' equity
              
              
              9,006
              
              
              18,743Total
                  liabilities and shareholders' equity
              
              $
              32,156
              
              $
              35,276
 
 See
        accompanying notes to consolidated financial statements.
 F-3
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**
 **(in
        thousands, except share amounts)**
 
 **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**Revenue:Product
              
              $
              27,836
              
              $
              27,512
              
              $
              26,253Business
                  services
              
              
              6,058
              
              
              7,165
              
              
              -Total
                  revenue
              
              
              33,894
              
              
              34,677
              
              
              26,253Cost
                  of goods sold:Product
              
              
              13,683
              
              
              15,940
              
              
              10,939Product
                  inventory write-offs
              
              
              2,696
              
              
              2,175
              
              
              2,945Business
                  services
              
              
              4,052
              
              
              4,055
              
              
              -Total
                  cost of goods sold
              
              
              20,431
              
              
              22,170
              
              
              13,884Gross
                  profit
              
              
              13,463
              
              
              12,507
              
              
              12,369Operating
                  expenses:Marketing
                  and selling
              
              
              8,269
              
              
              6,880
              
              
              7,010General
                  and administrative
              
              
              12,907
              
              
              15,398
              
              
              4,376Research
                  and product development
              
              
              3,908
              
              
              2,995
              
              
              3,810Impairment
                  losses
              
              
              -
              
              
              13,528
              
              
              7,115Total
                  operating expenses
              
              
              25,084
              
              
              38,801
              
              
              22,311Operating
                  loss
              
              
              (11,621
              )
              
              (26,294
              )
              
              (9,942
              )Other
                  income (expense), net:Interest
                  income
              
              
              52
              
              
              85
              
              
              293Interest
                  expense
              
              
              (183
              )
              
              (91
              )
              
              (23
              )Other,
                  net
              
              
              (130
              )
              
              55
              
              
              18Total
                  other income (expense), net
              
              
              (261
              )
              
              49
              
              
              288Loss
                  from continuing operations before income taxes
              
              
              (11,882
              )
              
              (26,245
              )
              
              (9,654
              )Benefit
                  for income taxes
              
              
              580
              
              
              1,321
              
              
              173Loss
                  from continuing operations
              
              
              (11,302
              )
              
              (24,924
              )
              
              (9,481
              )Discontinued
                  operations:(Loss)
                  income from discontinued operations
              
              
              2,440
              
              
              (10,761
              )
              
              4,217(Loss)
                  gain on disposal of discontinued operations
              
              
              (183
              )
              
              318
              
              
              280Income
                  tax (provision) benefit
              
              
              (842
              )
              
              (605
              )
              
              (1,677
              )(Loss)
                  income from discontinued operations
              
              
              1,415
              
              
              (11,048
              )
              
              2,820Net
                  loss
              
              $
              (9,887
              )
              $
              (35,972
              )
              $
              (6,661
              )Comprehensive
                  Loss:Net
                  loss
              
              $
              (9,887
              )
              $
              (35,972
              )
              $
              (6,661
              )Foreign
                  currency translation adjustments
              
              
              (8
              )
              
              1,197
              
              
              -Comprehensive
                  loss
              
              $
              (9,895
              )
              $
              (34,775
              )
              $
              (6,661
              )
 
 See
        accompanying notes to consolidated financial statements.
 F-4
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
        (CONTINUED)**
 **(in
        thousands, except share amounts)**
 
 **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**Basic
                  loss per common share from continuing operations
              
              $
              (1.02
              )
              $
              (2.22
              )
              $
              (0.99
              )Diluted
                  loss per common share from continuing operations
              
              $
              (1.02
              )
              $
              (2.22
              )
              $
              (0.99
              )Basic
                  (loss) earnings per common share from discontinued
                  operations
              
              $
              0.13
              
              $
              (0.99
              )
              $
              0.30Diluted
                  (loss) earnings per common share from discontinued
                  operations
              
              $
              0.13
              
              $
              (0.99
              )
              $
              0.30Basic
                  loss per common share
              
              $
              (0.89
              )
              $
              (3.21
              )
              $
              (0.69
              )Diluted
                  loss per common share
              
              $
              (0.89
              )
              $
              (3.21
              )
              $
              (0.69
              )
 
 See
        accompanying notes to consolidated financial statements.
 F-5
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**
 **(in
        thousands, except share amounts)**
 
 **Common
                  Stock**
              
              **Additional
                  Paid-In**
              
              **Deferred**
              
              **Accumulated
                  Other Comprehensive**
              
              **Retained
                  Earnings (Accumulated**
              
              **Total
                  Shareholders'****Shares**
              
              **Amount**
              
              **Capital**
              
              **Compensation**
              
              **Income**
              
              **Deficit)**
              
              **Equity**Balances
                  at June 30, 2001
              
              
              8,612,978
              
              $
              9
              
              $
              8,856
              
              $
              (122
              )
              $
              -
              
              $
              11,985
              
              $
              20,728Sales
                  of Common Shares pursuant to exercises of stock options
              
              
              195,999
              
              
              -
              
              
              1,020
              
              
              -
              
              
              -
              
              
              -
              
              
              1,020Income
                  tax benefits from stock option exercises and dispositions
              
              
              -
              
              
              -
              
              
              452
              
              
              -
              
              
              -
              
              
              -
              
              
              452Issuances
                  of Common Shares under Employee Stock Purchase Plan
              
              
              724
              
              
              -
              
              
              13
              
              
              -
              
              
              -
              
              
              -
              
              
              13Issuance
                  of Common Shares and warrants for cash
              
              
              1,500,000
              
              
              1
              
              
              23,834
              
              
              -
              
              
              -
              
              
              -
              
              
              23,835Issuance
                  of Common Shares and options in a purchase of business
              
              
              868,691
              
              
              1
              
              
              14,426
              
              
              -
              
              
              -
              
              
              -
              
              
              14,427Deferred
                  compensation resulting from the modification of stock
                  options
              
              
              -
              
              
              -
              
              
              103
              
              
              (103
              )
              
              -
              
              
              -
              
              
              -Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              78
              
              
              -
              
              
              -
              
              
              78Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,661
              )
              
              (6,661
              )Balances
                  at June 30, 2002
              
              
              11,178,392
              
              
              11
              
              
              48,704
              
              
              (147
              )
              
              -
              
              
              5,324
              
              
              53,892Sales
                  of Common Shares pursuant to exercises of stock options
              
              
              31,500
              
              
              -
              
              
              86
              
              
              -
              
              
              -
              
              
              -
              
              
              86Issuances
                  of Common Shares under Employee Stock Purchase Plan
              
              
              1,841
              
              
              -
              
              
              8
              
              
              -
              
              
              -
              
              
              -
              
              
              8Repurchase
                  and retirement of Common Shares
              
              
              (125,000
              )
              
              -
              
              
              (430
              )
              
              -
              
              
              -
              
              
              -
              
              
              (430
              )Deferred
                  compensation resulting from the modification of stock
                  options
              
              
              -
              
              
              -
              
              
              (110
              )
              
              110
              
              
              -
              
              
              -
              
              
              -Net
                  reversal of previously amortized deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              (38
              )
              
              -
              
              
              -
              
              
              (38
              )Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,197
              
              
              -
              
              
              1,197Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (35,972
              )
              
              (35,972
              )Balances
                  at June 30, 2003
              
              
              11,086,733
              
              
              11
              
              
              48,258
              
              
              (75
              )
              
              1,197
              
              
              (30,648
              )
              
              18,743Repurchase
                  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
              
              
              -
              
              
              -
              
              
              -
              
              
              200Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              21
              
              
              -
              
              
              -
              
              
              21Foreign
                  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
 
 See
        accompanying notes to consolidated financial statements.
 F-6
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(in
        thousands)**
 **Years
                      Ended June 30,****2004**
                  
                  **2003**
                  
                  **2002**Cash
                      flows from operating activities:Net
                      loss from continuing operations
                  
                  $
                  (11,302
                  )
                  $
                  (24,924
                  )
                  $
                  (9,481
                  )Adjustments
                      to reconcile net loss to net cash provided by operations:Loss
                      on impairment of long-lived assets, goodwill and
                      intangibles
                  
                  
                  -
                  
                  
                  13,528
                  
                  
                  7,115Depreciation
                      and amortization expense
                  
                  
                  1,952
                  
                  
                  2,083
                  
                  
                  2,176Deferred
                      taxes
                  
                  
                  3,079
                  
                  
                  2,224
                  
                  
                  (2,920
                  )Stock-based
                      compensation
                  
                  
                  221
                  
                  
                  (38
                  )
                  
                  78Income
                      tax benefits from stock option exercises
                  
                  
                  -
                  
                  
                  -
                  
                  
                  452Write-off
                      of inventory
                  
                  
                  2,696
                  
                  
                  2,175
                  
                  
                  2,945Gain
                      on sale of assets
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (250
                  )Loss
                      (gain) on disposal of assets and fixed assets write-offs
                  
                  
                  154
                  
                  
                  (2
                  )
                  
                  (4
                  )Provision
                      for doubtful accounts
                  
                  
                  24
                  
                  
                  -
                  
                  
                  -Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  (6,391
                  )
                  
                  (372
                  )
                  
                  1,098Inventories
                  
                  
                  (491
                  )
                  
                  1,597
                  
                  
                  (5,395
                  )Prepaid
                      expenses and other assets
                  
                  
                  (111
                  )
                  
                  (123
                  )
                  
                  248Accounts
                      payable
                  
                  
                  520
                  
                  
                  (415
                  )
                  
                  819Accrued
                      liabilities
                  
                  
                  2,248
                  
                  
                  5,749
                  
                  
                  (308
                  )Income
                      taxes
                  
                  
                  (911
                  )
                  
                  (2,893
                  )
                  
                  1,137Deferred
                      revenue
                  
                  
                  6,569
                  
                  
                  265
                  
                  
                  -Net
                      change in other assets/liabilities
                  
                  
                  1
                  
                  
                  48
                  
                  
                  -Net
                      cash (used in) continuing operating activities
                  
                  
                  (1,742
                  )
                  
                  (1,098
                  )
                  
                  (2,290
                  )Net
                      cash provided by discontinued operating activities
                  
                  
                  2,826
                  
                  
                  3,641
                  
                  
                  2,805Net
                      cash provided by operating activities
                  
                  
                  1,084
                  
                  
                  2,543
                  
                  
                  515Cash
                      flows from investing activities:Restricted
                      cash
                  
                  
                  200
                  
                  
                  (200
                  )
                  
                  -Purchase
                      of property and equipment
                  
                  
                  (1,753
                  )
                  
                  (1,519
                  )
                  
                  (2,633
                  )Proceeds
                      from the sale of property and equipment
                  
                  
                  5
                  
                  
                  4
                  
                  
                  10Proceeds
                      from the sale of assets
                  
                  
                  -
                  
                  
                  80
                  
                  
                  160Purchase
                      of marketable securities
                  
                  
                  (3,350
                  )
                  
                  (18,500
                  )
                  
                  (30,600
                  )Sale
                      of marketable securities
                  
                  
                  3,500
                  
                  
                  29,000
                  
                  
                  18,200Cash
                      paid for acquisitions, net of cash received
                  
                  
                  -
                  
                  
                  (7,444
                  )
                  
                  (9,947
                  )Net
                      cash (used in) provided by continuing investing activities
                  
                  
                  (1,398
                  )
                  
                  1,421
                  
                  
                  (24,810
                  )Net
                      cash used in discontinued investing activities
                  
                  
                  (79
                  )
                  
                  (104
                  )
                  
                  (4,484
                  )Net
                      cash (used in) provided by investing activities
                  
                  
                  (1,477
                  )
                  
                  1,317
                  
                  
                  (29,294
                  )Cash
                      flows from financing activities:Borrowings
                      under note payable
                  
                  
                  -
                  
                  
                  1,998
                  
                  
                  -Principal
                      payments on capital lease obligations
                  
                  
                  (32
                  )
                  
                  (61
                  )
                  
                  (210
                  )Principal
                      payments on note payable
                  
                  
                  (652
                  )
                  
                  (414
                  )
                  
                  (484
                  )Proceeds
                      from sales of Common Shares
                  
                  
                  -
                  
                  
                  95
                  
                  
                  24,869Purchase
                      and retirement of Common Shares
                  
                  
                  (63
                  )
                  
                  (430
                  )
                  
                  -Net
                      cash (used in) provided by continuing financing activities
                  
                  
                  (747
                  )
                  
                  1,188
                  
                  
                  24,175Net
                      cash used in discontinued financing activities
                  
                  
                  (770
                  )
                  
                  (723
                  )
                  
                  (503
                  )Net
                      cash (used in) provided by financing activities
                  
                  
                  (1,517
                  )
                  
                  465
                  
                  
                  23,672Net
                      (decrease) increase in cash and cash equivalents
                  
                  
                  (1,910
                  )
                  
                  4,325
                  
                  
                  (5,107
                  )Effect
                      of foreign exchange rates on cash and cash equivalents
                  
                  
                  (7
                  )
                  
                  55
                  
                  
                  -Cash
                      and cash equivalents at the beginning of the year
                  
                  
                  6,124
                  
                  
                  1,744
                  
                  
                  6,851Cash
                      and cash equivalents at the end of the year
                  
                  $
                  4,207
                  
                  $
                  6,124
                  
                  $
                  1,744
 
 See
          accompanying notes to consolidated financial statements.
 F-7
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (CONTINUED)**
 **(in
        thousands)**
 
 Supplemental
                  disclosure of cash flow information:Cash
                  paid for interest
              
              $
              282
              
              $
              211
              
              $
              170Cash
                  paid (received) for income taxes
              
              
              (2,189
              )
              
              (79
              )
              
              3,529Supplemental
                  disclosure of non-cash investing and financing activities:Equipment
                  acquired under capital lease
              
              $
              -
              
              $
              -
              
              $
              1,155Supplemental
                  disclosure of acquisition activity:Fair
                  value of assets acquired
              
              $
              -
              
              $
              8,235
              
              $
              33,712Liabilities
                  assumed
              
              
              -
              
              
              (599
              )
              
              (4,484
              )Value
                  of common shares issued
              
              
              -
              
              
              -
              
              
              (14,427
              )Cash
                  paid for acquisition
              
              $
              -
              
              $
              7,636
              
              $
              14,801
 
 See
        accompanying notes to consolidated financial statements.
  F-8
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands except share and per share amounts)**
  **1.**
              **Organization
                  - Nature of Operations**
  ClearOne
        Communications, Inc., a Utah corporation, and its subsidiaries (collectively,
        the “Company”) develop, manufacture, market, and service a comprehensive line of
        audio conferencing products, which range from tabletop conferencing phones
        to
        professionally installed audio systems. The Company’s solutions create a natural
        communication environment, designed to save organizations time and money
        by
        enabling more effective and efficient communication between geographically
        separated businesses, employees, and customers.
  The
        Company’s end-user customers include some of the world’s largest companies and
        institutions, government organizations, educational institutions, and small
        and
        medium-sized businesses. The Company mostly sells its products to these end-user
        customers through a two-tier distribution network of independent distributors
        who then sell the products to dealers, including independent systems integrators
        and value-added resellers. The Company also sells its products on a limited
        basis directly to certain dealers, system integrators, value-added resellers,
        and end-users.
  During
        the fiscal year ended June 30, 2004, the Company decided to discontinue
        operations of a portion of its business services segment and its conferencing
        services segment. As discussed in Note 4, in May 2004, the Company sold certain
        assets of its U.S. audiovisual integration services operations to M:Space,
        Inc.
        (“M:Space”). In July 2004 and subsequent to the fiscal year ended June 30, 2004,
        the Company sold its conferencing services segment to Clarinet, Inc., an
        affiliate of American Teleconferencing Services, Ltd. doing business as Premiere
        Conferencing (“Premiere”). Both of these operations and related net assets are
        presented in discontinued operations and assets and liabilities held for
        sale in
        the accompanying consolidated financial statements.
  Subsequent
        to the fiscal year ended June 30, 2004, the Company sold all of the issued
        and
        outstanding shares of its Canadian subsidiary, ClearOne Communications of
        Canada, Inc. to 6351352 Canada Inc., which is a portion of its business services
        segment. The related net assets are shown as held and used at the end of
        fiscal
        2004. Following these dispositions of operations, the Company has returned
        to
        its core competency of developing, manufacturing, and, marketing audio
        conferencing products.
  **2.**
              **Summary
                  of Significant Accounting
                  Policies**
  *Consolidation* - These
        consolidated financial statements include the financial statements of ClearOne
        Communications, Inc. and its wholly-owned subsidiaries, ClearOne Communications
        EuMEA GmbH, ClearOne Communications Limited UK, ClearOne Communications of
        Canada, Inc., E.mergent, Inc., Gentner Communications Ltd. - Ireland, and
        OM
        Video. All intercompany accounts and transactions have been eliminated in
        consolidation.
  *Pervasiveness
        of Estimates* - The
        preparation of financial statements in conformity with generally accepted
        accounting principles in the United States of America requires management
        to
        make estimates and assumptions that affect the reported amounts of assets
        and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of sales and expenses during
        the reporting periods. Key estimates in the accompanying consolidated financial
        statements include, among others, revenue recognition, allowances for doubtful
        accounts and product returns, provisions for obsolete inventory, valuation
        of
        long-lived assets including goodwill, and deferred income tax asset valuation
        allowances. Actual results could differ materially from these estimates.
  *Fair
        Value of Financial Instruments* - The
        carrying values of cash equivalents, marketable securities, accounts receivable,
        accounts payable, and accrued liabilities all approximate fair value due
        to the
        relatively short-term maturities of these assets and liabilities. The carrying
        values of long-term debt also approximate fair value because applicable interest
        rates either fluctuate based on market conditions or approximate the Company’s
        borrowing rate. **
  F-9
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  *Foreign
        Currency Translation* -
        The
        functional currency for OM Video is the Canadian Dollar. Adjustments resulting
        from the translation of OM Video amounts are recorded as accumulated other
        comprehensive income in the accompanying consolidated balance sheets. The
        functional currency for the Company’s other foreign subsidiaries is the U.S.
        Dollar. The results of operations for the Company’s other subsidiaries are
        recorded by the subsidiaries in Euro and British Pound and remeasured in
        the
        U.S. Dollar. Assets and liabilities are translated or remeasured into U.S.
        dollars at the exchange rate prevailing on the balance sheet date or the
        historical rate, as appropriate. Revenue and expenses are translated or
        remeasured at average rates of exchange prevailing during the period. The
        impact
        from remeasurement of all other foreign subsidiaries is recorded in the
        accompanying consolidated statements of operations.
  *Cash
        Equivalents* - The
        Company considers all highly liquid investments with a maturity of three
        months
        or less, when purchased, to be cash equivalents. As of June 30, 2004 and
        2003
        cash equivalents totaled $3,898 and $5,049, respectively, and consisted
        primarily of money market funds. The Company places its temporary cash
        investments with high quality financial institutions. At times, including
        at
        June 30, 2004 and 2003, such investments may be in excess of the Federal
        Deposit
        Insurance Corporation insurance limit of $100.
  *Restricted
        Cash* - The
        Company’s restricted cash relates to obligations from the acquisition of OM
        Video. The funds were held until OM Video met certain requirements as outlined
        in the purchase agreement. In February 2004, the restricted cash was paid
        to the
        former shareholders of OM Video.
  *Marketable
        Securities* - The
        Company’s marketable securities are classified as available-for-sale securities
        and are comprised of municipal government auction rate notes and auction
        preferred stock that have original maturities of greater than one year.
        Management determines the appropriate classifications of investments at the
        time
        of purchase and reevaluates such designation as of each balance sheet date.
        Unrealized holding gains and losses, net of the related tax effect on
        available-for-sale securities, are excluded from earnings and are reported
        as a
        separate component of other comprehensive income until realized.
        Available-for-sale securities are carried at fair value which approximated
        cost.
  The
        Company considers highly liquid marketable securities with an effective maturity
        to the Company of less than one year to be current assets. The Company defines
        effective maturity as the shorter of the original maturity to the Company
        or the
        effective maturity as a result of periodic auction or optional redemption
        features of certain of its investments. Such investments are expected to
        be
        realized in cash or sold or consumed during the normal operating cycles of
        the
        business. As of June 30, 2004 and 2003, all marketable securities were
        classified as current assets and consisted of municipal government auction
        rate
        notes.
  The
        Company regularly monitors and evaluates the value of its marketable securities.
        When assessing marketable securities for other-than-temporary declines in
        value,
        the Company considers such factors, among other things, as how significant
        the
        decline in value is as a percentage of the original cost, how long the market
        value of the investment has been less than its original cost, the collateral
        supporting the investments, insurance policies which protect the Company’s
        investment position, the interval between auction periods, whether or not
        there
        have been any failed auctions, and the credit rating issued for the securities
        by one or more of the major credit rating agencies. A decline in the market
        value of any available-for-sale security below cost that is deemed to be
        other-than-temporary results in a reduction in carrying amount to fair value.
        The impairment is charged to earnings and a new cost basis for the security
        is
        established.
  For
        each
        of the fiscal years ended June 30, 2004, 2003, and 2002 realized gains and
        losses upon the sale of available-for-sale securities were insignificant.
        Unrealized gains and losses on available-for-sale securities are insignificant
        for all periods and accordingly have not been recorded as a component of
        other
        comprehensive income. The specific identification method is used to compute
        the
        realized gains and losses.
  *Sources
        of Supplies* - The
        Company depends on an outsource manufacturing strategy for its products.
        In
        August 2005, the Company entered into a manufacturing agreement with Inovar,
        a
        domestic manufacturing services provider, to be the exclusive manufacturer
        of
        substantially all the products that were previously manufactured at the
        Company’s Salt Lake City, Utah manufacturing facility (see Note 26). As of
        August 2005, Inovar became the primary manufacturer of substantially all
        of the
        Company’s products, except its MAX ®
product
        line, and if Inovar experiences difficulties in obtaining sufficient supplies
        of
        components, component prices become unreasonable, an interruption in its
        operations, or otherwise suffers capacity constraints, the Company would
        experience a delay in shipping these products which would have a negative
        impact
        on its revenues. Currently, the Company has no second source of manufacturing
        for substantially all of its products.
  F-10
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        Company has an agreement with an international manufacturer in China for
        the
        manufacture of its MAX® product line. Should there be any disruption in services
        due to natural disaster, economic or political difficulties in China,
        quarantines or other restrictions associated with infectious diseases, or
        other
        similar events, or any other reason, such disruption would have a material
        adverse effect on the Company’s business. A delay in shipping these products due
        to an interruption in the manufacturer’s operations would have a negative impact
        on the Company’s revenues. Operating in the international environment exposes
        the Company to certain inherent risks, including unexpected changes in
        regulatory requirements and tariffs, and potentially adverse tax consequences,
        which could materially affect the Company’s results of operations.
  *Accounts
        Receivable* -
        Accounts receivable are recorded at the invoiced amount. Credit is granted
        to
        customers without requiring collateral. The allowance for doubtful accounts
        is
        the Company’s best estimate of the amount of probable credit losses in the
        Company’s existing accounts receivable. Management regularly analyzes accounts
        receivable including historical write-off experience, customer concentrations,
        customer creditworthiness, and current economic trends when evaluating the
        adequacy of the allowance for doubtful accounts. If the assumptions that
        are
        used to determine the allowance for doubtful accounts change, the Company
        may
        have to provide for a greater level of expense in the future periods or reverse
        amounts provided in prior periods.
  The
        Company’s allowance for doubtful accounts activity for the fiscal years ended
        June 30, 2004 and 2003 were as follows:
 
 Description
              
              Balance
                  at Beginning ofPeriod
              
              Charged
                  to Costs andExpenses
              
              Deductions
              
              Balance
                  at End ofPeriodYear
                  ended June 30, 2003
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Year
                  ended June 30, 2004
              
              $
              -
              
              $
              24
              
              $
              -
              
              $
              24
  *Inventories* -
        Inventories are valued at the lower of cost or market computed on a first-in,
        first-out (“FIFO”) basis. Inventoried costs include material, direct engineering
        and production costs, and applicable overhead, not in excess of estimated
        realizable value. Consideration is given to obsolescence, excessive levels,
        deterioration, direct selling expenses, and other factors in evaluating net
        realizable value. Consigned inventory includes product that has been delivered
        to customers for which revenue recognition criteria have not been met. During
        the fiscal years ended June 30, 2004, 2003, and 2002, the Company recorded
        inventory write-offs of $2.7 million, $2.2 million, and $2.9 million,
        respectively.
  *Property
        and Equipment* -
        Property and equipment are stated at cost less accumulated depreciation.
        Costs
        associated with internally developed software are capitalized in accordance
        with
        Statement of Position 98-1 (“SOP 98-1”), “Accounting for the Costs of Computer
        Software Developed or Obtained for Internal Use.” Expenditures that materially
        increase values or capacities or extend useful lives of property and equipment
        are capitalized. Routine maintenance, repairs, and renewal costs are expensed
        as
        incurred. Gains or losses from the sale or retirement of property and equipment
        are recorded in current operations and the related book value of the property
        is
        removed from the fixed assets and the related accumulated depreciation and
        amortization accounts.
  Estimated
        useful lives are generally two to ten years. Depreciation and amortization
        are
        calculated over the estimated useful lives of the respective assets using
        the
        straight-line method. Leasehold improvement amortization is computed using
        the
        straight-line method over the shorter of the lease term or the estimated
        useful
        life of the related assets.
  F-11
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  *Goodwill* -
        Goodwill represents the excess of costs over fair value of the net assets
        of
        businesses acquired. The Company amortized goodwill related to the ClearOne,
        Inc. (“ClearOne”) acquisition from the acquisition date through June 30, 2002.
        Accordingly, during the fiscal year ended June 30, 2002, goodwill amortization
        was $297 and was reported in general and administrative expenses. In June
        2001,
        the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
        Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”
SFAS No. 142 eliminates amortization of goodwill and intangible assets with
        indefinite lives and instead sets forth methods to periodically evaluate
        goodwill for impairment. The non-amortization and amortization provisions
        of
        SFAS No. 142 were effective immediately for goodwill and intangible assets
        acquired after June 30, 2001. The Company adopted the amortization provisions
        of
        SFAS No. 142 with respect to its fiscal year 2002 acquisitions of Ivron Systems,
        Ltd. (“Ivron”) and E.mergent, Inc. (“E.mergent”) and its fiscal year 2003
        acquisition of OM Video. With respect to goodwill and intangible assets acquired
        prior to July 1, 2001, the Company adopted this statement effective July
        1,
        2002.
  The
        following unaudited pro forma results of operations data for the year ended
        June
        30, 2002 is presented as if the provisions of SFAS No. 142 had been in effect
        for all periods presented:
  **Year
                  Ended June 30, 2002**Reported
                  net loss
              
              $
              (6,661
              )Goodwill
                  amortization, net of income tax
              
              
              186Adjusted
                  net loss
              
              $
              (6,475
              )Basic
                  loss per common share:As
                  reported
              
              $
              (0.69
              )Goodwill
                  amortization
              
              
              0.02As
                  adjusted
              
              $
              (0.67
              )Diluted
                  loss per common share:As
                  reported
              
              $
              (0.69
              )Goodwill
                  amortization
              
              
              0.02As
                  adjusted
              
              $
              (0.67
              )
  On
        July
        1, 2002, the Company adopted all remaining provisions of SFAS No. 142, including
        the annual impairment evaluation provisions, and established its annual review
        for impairment as June 30. Upon adoption of SFAS No. 142, there was no
        impairment of the Company’s gross goodwill balance of $17.1 million from the
        E.mergent, Inc. acquisition. Although goodwill is tested at least annually
        for
        impairment, it is tested more frequently if events and circumstances indicate
        that the asset might be impaired. An impairment loss is recognized to the
        extent
        that the carrying amount exceeds the asset’s fair value. The impairment testing
        is performed at the reporting unit level in two steps: (i) the Company
        determines the fair value of a reporting unit and compares it to its carrying
        amount, and (ii) if the carrying amount of a reporting unit exceeds its fair
        value, an impairment loss is recognized for any excess of the carrying amount
        of
        the reporting unit’s goodwill over the implied fair value of that goodwill. The
        implied fair value of goodwill is determined by allocating the fair value
        of the
        reporting unit in a manner similar to a purchase price allocation in accordance
        with SFAS No. 141, Business Combinations.
  Prior
        to
        the adoption of SFAS No. 142, the Company evaluated impairment of goodwill
        under
        the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived
        Assets and for Long-Lived Assets to be Disposed of.”
  *Intangibles* -
        Definite-lived intangibles are subject to amortization. The Company uses
        the
        straight-line method over the estimated useful life of the asset. All of
        the
        Company’s intangible assets, consisting of patents and a non-compete agreement,
        as of June 30, 2004 and 2003 were determined to be definite-lived intangible
        assets.
  *Impairment
        of Long-Lived Assets* -
        Through June 30, 2002, the Company accounted for long-lived assets, including
        intangible assets with definite lives, in accordance with SFAS No.
        121.
  F-12
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  As
        of
        July 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment
        or Disposal of Long-Lived Assets,” whereby long-lived assets, such as property,
        equipment, and definite-lived intangibles subject to amortization, are reviewed
        for impairment whenever events or changes in circumstances indicate that
        the
        carrying value of an asset may not be recoverable. Recoverability of assets
        to
        be held and used is measured by a comparison of the carrying amount of an
        asset
        or asset group to estimated future undiscounted net cash flows of the related
        asset or group of assets over their remaining lives. If the carrying amount
        of
        an asset exceeds its estimated future undiscounted cash flows, an impairment
        charge is recognized for the amount by which the carrying amount exceeds
        the
        estimated fair value of the asset. Impairment of long-lived assets is assessed
        at the lowest levels for which there are identifiable cash flows that are
        independent of other groups of assets. The impairment of long-lived assets
        requires judgments and estimates. If circumstances change, such estimates
        could
        also change. Assets held for sale are reported at the lower of the carrying
        amount or fair value, less the estimated costs to sell.
  *Revenue
        Recognition* -
        Included in continuing operations are two sources of revenue: (i) product
        revenue, primarily from product sales to distributors, dealers, and end-users;
        and (ii) business services revenue which includes technical services such
        as
        designing, constructing, and servicing of conference systems and maintenance
        contracts.
  Product
        revenue is recognized when (i) the products are shipped, (ii) persuasive
        evidence of an arrangement exists, (iii) the price is fixed and determinable,
        and (iv) collection is reasonably assured. Beginning in 2001, the Company
        modified its sales channels to include distributors. These distributors were
        generally thinly capitalized with little or no financial resources and did
        not
        have the wherewithal to pay for these products when delivered by the Company.
        Furthermore, in a substantial number of cases, significant amounts of
        inventories were returned or never paid for and the payment for product sold
        (to
        both distributors and non-distributors) was regularly subject to a final
        negotiation between the Company and its customers. As a result of such
        negotiations, the Company routinely agreed to significant concessions from
        the
        originally invoiced amounts to facilitate collection. These practices continued
        to exist through the fiscal year ended June 30, 2003.
  Accordingly,
        amounts charged to both distributors and non-distributors were not considered
        fixed and determinable or reasonably collectible until cash was collected
        and
        thus, there was a delay in the Company’s recognition of revenue and related cost
        of goods sold from the time of product shipment until invoices were paid.
        As a
        result, the June 30, 2003 balance sheet reflects no accounts receivable or
        deferred revenue related to product sales. During the fiscal year ended June
        30,
        2004, the Company recognized $5.2 million in revenues and $1.7 million in
        cost
        of goods sold that were deferred in prior periods since cash had not been
        collected as of the end of the fiscal year ended June 30, 2003.
  During
        the fiscal year ended June 30, 2004, the Company had in place improved credit
        policies and procedures, an approval process for sales returns and credit
        memos,
        processes for managing and monitoring channel inventory levels, better trained
        staff, and discontinued the practice of frequently granting significant
        concessions from the originally invoiced amount. As a result of these improved
        policies and procedures, the Company extends credit to customers who it believes
        have the wherewithal to pay.
  The
        Company provides a right of return on product sales to distributors. Currently,
        the Company does not have sufficient historical return experience with its
        distributors that is predictive of future events given historical excess
        levels
        of inventory in the distribution channel. Accordingly, revenue from product
        sales to distributors is not recognized until the return privilege has expired,
        which approximates when product is sold-through to customers of the Company’s
        distributors (dealers, system integrators, value-added resellers, and
        end-users). As of June 30, 2004, the Company deferred $6.2 million in revenue
        and $2.4 million in cost of goods sold related to invoices sold where return
        rights had not lapsed.
  The
        Company offers rebates and market development funds to certain of its
        distributors based upon volume of product purchased by such distributors.
        The
        Company records rebates as a reduction of revenue in accordance with Emerging
        Issues Task Force (“EITF”) Issue No. 00-22, “Accounting for Points and Certain
        Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
        Products or Services to Be Delivered in the Future.” Beginning January 1, 2002,
        the Company adopted EITF Issue No. 01-9, “Accounting for Consideration Given by
        a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” The
        Company continues to record rebates as a reduction of revenue.
  F-13
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        Company provides advance replacement units to end-users on defective units
        of
        certain products within 90 days of purchase date from the dealer. The Company
        records a receivable from the end-user until the defective unit has been
        returned. The Company maintains an allowance for these estimated returns
        which
        has been reflected as a reduction to accounts receivable. The allowance for
        estimated advance replacement returns was $91 and $5, as of June 30, 2004
        and
        2003, respectively.
  Business
        services activities involve designing and constructing conference systems
        under
        fixed-price contracts. Revenues from fixed-priced construction contracts
        are
        recognized on the completed-contract method. This method is used because
        the
        typical contract is completed in three months or less and the financial position
        and results of operations do not vary significantly from those which would
        result from use of the percentage-of-completion method. A contract is considered
        complete when all costs except insignificant items have been incurred and
        the
        installation is operating according to specification or has been accepted
        by the
        customer. Contract costs include all direct material and labor costs. Provisions
        for estimated losses on uncompleted contracts are made in the period in which
        such losses are determined.
  Revenue
        from maintenance contracts on conference systems is recognized on a
        straight-line basis over the maintenance period pursuant to FASB Technical
        Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and
        Product Maintenance Contracts.”
  Conferencing
        services revenue, which has been classified in discontinued operations,
        primarily from full service conference calling and on-demand, reservationless
        conference calling is recognized at the time of customer usage, and is based
        upon minutes used. On July 1, 2004, the Company sold its conferencing services
        business segment to Premiere as discussed in Note 4.
  *Shipping
        and Handling Costs* -
        Shipping and handling billed to customers is recorded as revenue. Shipping
        and
        handling costs are included in cost of goods sold.
  *Warranty
        Costs* - The
        Company accrues for warranty costs based on estimated warranty return rates
        and
        estimated costs to repair. Factors that affect the Company’s warranty liability
        include the number of units sold, historical and anticipated rates of warranty
        returns, and repair cost. The Company reviews the adequacy of its recorded
        warranty accrual on a quarterly basis.
  Changes
        in the Company’s warranty accrual during the fiscal years ended June 30, 2004
        and 2003 were as follows:
  **Years
                  Ended June 30,****2004**
              
              **2003**Balance
                  at the beginning of year
              
              $
              80
              
              $
              55Accruals/additions
              
              
              206
              
              
              203Usage
              
              
              (178
              )
              
              (178
              )Balance
                  at end of year
              
              $
              108
              
              $
              80
  *Advertising* -
        The
        Company expenses advertising costs as incurred. Advertising expenses consist
        of
        trade shows and magazine advertisements. Advertising expenses for the fiscal
        years ended June 30, 2004, 2003, and 2002 totaled $716, $361, and $693,
        respectively, and are included in the caption Marketing and Selling.
  *Research
        and Product Development Costs* - The
        Company expenses research and product development costs as incurred.
  *Income
        Taxes* - The
        Company uses the asset and liability method of accounting for income taxes.
        Under the asset and liability method, deferred tax assets and liabilities
        are
        recognized for the future tax consequences attributable to temporary differences
        between the financial statement carrying amounts of existing assets and
        liabilities and their respective tax bases, and operating loss and tax credit
        carry-forwards. These temporary differences will result in taxable or deductible
        amounts in future years when the reported amounts of the assets or liabilities
        are recovered or settled. Deferred tax assets and liabilities are measured
        using
        enacted tax rates expected to apply to taxable income in the years in which
        those temporary differences are expected to be recovered or settled. The
        effect
        on deferred tax assets and liabilities of a change in tax rates is recognized
        in
        income in the period that includes the enactment date. A valuation allowance
        is
        provided when it is more likely than not that some or all of the deferred
        tax
        assets may not be realized. The Company evaluates the realizability of its
        net
        deferred tax assets on a quarterly basis and valuation allowances are provided,
        as necessary. Adjustments to the valuation allowance will increase or decrease
        the Company’s income tax provision or benefit.
  F-14
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  *Earnings
        Per Share* - The
        following table sets forth the computation of basic and diluted earnings
        (loss)
        per common share:
  **Year
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**Numerator:Loss
                  from continuing operations
              
              $
              (11,302
              )
              $
              (24,924
              )
              $
              (9,481
              )(Loss)
                  income from discontinued operations, net of tax
              
              
              1,530
              
              
              (11,248
              )
              
              2,644(Loss)
                  gain on disposal of discontinued operations, net of tax
              
              
              (115
              )
              
              200
              
              
              176Net
                  loss
              
              $
              (9,887
              )
              $
              (35,972
              )
              $
              (6,661
              )Denominator:Basic
                  weighted average shares
              
              
              11,057,896
              
              
              11,183,339
              
              
              9,588,118Dilutive
                  common stock equivalents using treasury stock method
              
              
              -
              
              
              -
              
              
              -Diluted
                  weighted average shares
              
              
              11,057,896
              
              
              11,183,339
              
              
              9,588,118Basic
                  and diluted earnings (loss) per common share:Continuing
                  operations
              
              $
              (1.02
              )
              $
              (2.22
              )
              $
              (0.99
              )Discontinued
                  operations
              
              
              0.14
              
              
              (1.01
              )
              
              0.28Disposal
                  of discontinued operations
              
              
              (0.01
              )
              
              0.02
              
              
              0.02Net
                  loss
              
              
              (0.89
              )
              
              (3.21
              )
              
              (0.69
              )
  Options
        to purchase 1,433,187, 1,972,756, and 1,518,956 shares of common stock were
        outstanding as of June 30, 2004, 2003, and 2002, respectively, but were not
        included in the computation of diluted earnings per share as the effect would
        be
        anti-dilutive. Warrants to purchase 150,000 shares of common stock were
        outstanding as of June 30, 2004, 2003, and 2002, but were not included in
        the
        computation of diluted earnings per share as the effect would be anti-dilutive.
        During fiscal 2004, the Company entered into a settlement agreement related
        to
        the shareholders’ class action and agreed to issue 1.2 million shares of its
        common stock; however, certain of these shares were settled in cash in lieu
        of
        common stock (see Note 16). The Company issued 228,000 shares in November
        2004
        and 920,494 shares in September 2005. These shares are not included in the
        weighted average share calculations as their inclusion would have been
        anti-dilutive.
  *Stock-Based
        Compensation* - The
        Company accounts for stock-based compensation issued to directors, officers,
        and
        employees in accordance with the provisions of Accounting Principles Board
        (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
        interpretations. Under APB No. 25, compensation expense is recognized if
        an
        option’s exercise price on the measurement date is below the fair market value
        of the Company’s common stock. The compensation expense, if any, is amortized to
        expense over the vesting period.
  SFAS
        No.
        123, “Accounting for Stock-Based Compensation,” requires pro forma information
        regarding net income (loss) as if the Company had accounted for its stock
        options granted under the fair value method prescribed by SFAS No. 123. The
        fair
        value of the options and employee stock purchase rights is estimated using
        the
        Black-Scholes option pricing model. For purposes of the pro forma disclosures,
        the estimated fair value of the stock options is amortized over the vesting
        periods of the respective stock options.
  In
        December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
        Compensation - Transition and Disclosure, an amendment of FASB Statement
        No.
        123.” This Statement amends SFAS No. 123, to provide alternative methods of
        transition for a voluntary change to the fair value method of accounting
        for
        stock-based employee compensation. In addition, this Statement amends the
        disclosure requirements of Statement No. 123 to require prominent disclosures
        in
        both annual and interim financial statements. Certain of the disclosure
        modifications are required for fiscal years ending after December 15, 2002. The
        following is the pro forma disclosure and the related impact on the net loss
        attributable to common shareholders and net loss per common share for the
        years
        ended June 30, 2004, 2003, and 2002.
  F-15
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**Net
                  loss:As
                  reported
              
              $
              (9,887
              )
              $
              (35,972
              )
              $
              (6,661
              )Stock-based
                  employee compensation expense included in reported net loss, net
                  of income
                  taxes
              
              
              13
              
              
              (24
              )
              
              49Stock-based
                  employee compensation expense determined under the fair-value method
                  for
                  all awards, net of income taxes
              
              
              (439
              )
              
              (966
              )
              
              (1,003
              )Pro
                  forma
              
              $
              (10,313
              )
              $
              (36,962
              )
              $
              (7,615
              )Basic
                  earnings (loss) per common share:As
                  reported
              
              
              (0.89
              )
              $
              (3.21
              )
              $
              (0.69
              )Pro
                  forma
              
              
              (0.93
              )
              
              (3.31
              )
              
              (0.79
              )Diluted
                  earnings (loss) per common share:As
                  reported
              
              $
              (0.89
              )
              $
              (3.21
              )
              $
              (0.69
              )Pro
                  forma
              
              
              (0.93
              )
              
              (3.31
              )
              
              (0.79
              )
 
 *Recent
        Accounting Pronouncements*
  Variable
        Interest Entities
  In
        January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable
        Interest Entities.” This interpretation establishes new guidelines for
        consolidating entities in which a parent company may not have majority voting
        control, but bears residual economic risks or is entitled to receive a majority
        of the entity’s residual returns, or both. As a result, certain subsidiaries
        that were previously not consolidated under the provisions of Accounting
        Research Bulletin No. 51, “Consolidated Financial Statements,” may now require
        consolidation with the parent company. This interpretation applies in the
        first
        year or interim period beginning after June 15, 2003, to variable interest
        entities in which an enterprise holds a variable interest that it acquired
        before February 1, 2003.
  In
        December 2003, the FASB issued a revision to Interpretation No. 46,
“Consolidation of Variable Interest Entities” (“FIN46R”). FIN46R clarifies the
        application of ARB No. 51, to certain entities in which equity investors do
        not have the characteristics of a controlling financial interest or do not
        have
        sufficient equity at risk for the entity to finance its activities without
        additional subordinated financial support. FIN46R requires the consolidation
        of
        these entities, known as variable interest entities, by the primary beneficiary
        of the entity. The primary beneficiary is the entity, if any, that will absorb
        a
        majority of the entity's expected losses, receive a majority of the entity's
        expected residual returns, or both.
  Among
        other changes, the revisions of FIN46R (a) clarified some requirements of
        the original FIN46, which had been issued in January 2003, (b) eased
        some implementation problems, and (c) added new scope exceptions. FIN46R
        deferred the effective date of the Interpretation for public companies, to
        the
        end of the first reporting period ending after March 15, 2004. The adoption
        of this interpretation did not have a material effect on the Company’s business,
        results of operations, financial position, or liquidity.
  Financial
        Instruments
  In
        May
        2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
        Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150
        establishes standards for how an issuer classifies and measures certain
        financial instruments with characteristics of both liabilities and equity.
        It
        requires that an issuer classify a financial instrument that is within its
        scope
        as a liability (or an asset in some circumstances). Many of those instruments
        were previously classified as equity. The Company’s adoption of this statement
        on July 1, 2003 did not have a material effect on its business, results of
        operations, financial position, or liquidity.
  F-16
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  Other-Than-Temporary
        Impairment
  In
        March
        2004, the FASB issued EITF No. 03-01, “The Meaning of Other-Than-Temporary
        Impairment and its Application to Certain Investments,” which provides new
        guidance for assessing impairment losses on debt and equity investments.
        The new
        impairment model applies to investments accounted for under the cost or equity
        method and investments accounted for under SFAS 115, “Accounting for Certain
        Investments in Debt and Equity Securities.” EITF No. 03-01 also includes new
        disclosure requirements for cost method investments and for all investments
        that
        are in an unrealized loss position. In September 2004, the FASB delayed the
        accounting provisions of EITF No. 03-01; however the disclosure requirements
        remain effective. The Company does not expect the adoption of this EITF to
        have
        a material impact on its operations.
  Inventory
        Costs
  In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an Amendment of
        ARB No. 43”, which is the result of its efforts to converge U.S. accounting
        standards for inventories with International Accounting Standards. SFAS No.
        151
        requires idle facility expenses, freight, handling costs, and wasted material
        (spoilage) costs to be recognized as current-period charges. It also requires
        that allocation of fixed production overheads to the costs of conversion
        be
        based on the normal capacity of the production facilities. SFAS No. 151 will
        be
        effective for inventory costs incurred during fiscal years beginning after
        June
        15, 2005. The Company does not anticipate that the implementation of this
        standard will have a significant impact on its business, results of operations,
        financial position, or liquidity.
  Share-Based
        Payment
  In
        December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.”
SFAS 123R is a revision of SFAS 123. SFAS 123R establishes standards for
        the
        accounting for transactions in which an entity exchanges its equity instruments
        for goods or services. Primarily, SFAS 123R focuses on accounting for
        transactions in which an entity obtains employee services in share-based
        payment
        transactions. It also addresses transactions in which an entity incurs
        liabilities in exchange for goods or services that are based on the fair
        value
        of the entity’s equity instruments or that may be settled by the issuance of
        those equity instruments.
  SFAS
        123R
        requires the Company to measure the cost of employee services received in
        exchange for an award of equity instruments based on the grant-date fair
        value
        of the award (with limited exceptions). That cost will be recognized over
        the
        period during which an employee is required to provide service in exchange
        for
        the award - the requisite service period (usually the vesting period). No
        compensation cost is recognized for equity instruments for which employees
        do
        not render the requisite service. Therefore, if an employee does not ultimately
        render the requisite service, the costs recognized related to unvested options
        will be reversed.
  In
        accordance with Staff Accounting Bulletin 107, SFAS 123R is effective as
        of the
        beginning of the annual reporting period that begins after June 15, 2005.
        Under these guidelines, the Company will adopt SFAS 123R as of the beginning
        of
        the first quarter of fiscal year 2006 starting July 1, 2005. The Company
        expects
        this statement to have a significant adverse impact on its future results
        of
        operations.
  Accounting
        Changes and Error Corrections
  In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
        a Replacement of APB Opinion No. 20 and FASB Statement No. 3” in order to
        converge U.S. Accounting Standards with International Accounting Standards.
        SFAS
        No. 154 changes the requirements for the accounting for and reporting of
        a
        change in accounting principle. Previously, most voluntary changes in accounting
        principles required recognition of a cumulative effect adjustment within
        net
        income of the period of the change. SFAS No. 154 requires retrospective
        application to prior periods’ financial statements, unless it is impracticable
        to determine either the period-specific effects or the cumulative effect
        of the
        change. SFAS No. 154 is effective for accounting changes made in fiscal years
        beginning after December 15, 2005; however, it does not change the transition
        provisions of any existing accounting pronouncements. The Company does not
        believe the adoption of SFAS No. 154 will have a material effect on its
        business, results of operations, financial position, or
        liquidity.
  F-17
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  Accounting
        for Asset Retirement Obligations in the European Union
  In
        June
        2005, the FASB issued a FASB Staff Position (“FSP”) interpreting SFAS No. 143,
“Accounting for Asset Retirement Obligations,” specifically FSP
        143-1 ,
        “Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”). FSP
        143-1addresses the accounting for obligations associated with Directive 2002/96/EC,
        Waste Electrical and Electronic Equipment, which was adopted by the European
        Union (“EU”). The FSP provides guidance on how to account for the effects of the
        Directive but only with respect to historical waste associated with products
        placed on the market on or before August 13, 2005. FSP
        143-1is
        effective the later of the first reporting period ending after June 8, 2005,
        or
        the date of the adoption of the law by the applicable EU-member country. Management
        of the Company is currently evaluating the impact ofFSP
        143-1.
  *Reclassifications*
  Certain
        reclassifications have been made to the prior years’ consolidated financial
        statements and notes to consolidated financial statements to conform to the
        current year’s presentation.
  **3.**
              **Acquisitions**
  During
        the fiscal year ended June 30, 2001, the Company completed the acquisition
        of
        ClearOne, Inc. (“ClearOne”), a developer of video conferencing technology and
        audio conferencing products. During the fiscal year ended June 30, 2002,
        the
        Company completed the acquisitions of Ivron Systems, Ltd. (“Ivron”), a developer
        of video conferencing technology and product, and E.mergent, Inc.,
        (“E.mergent”), a manufacturer of cameras and conferencing furniture and an
        audiovisual integration services provider. During the fiscal year ended June
        30,
        2003, the Company completed the acquisition of Stechyson Electronics Ltd.,
        doing
        business as OM Video (“OM Video”), an audiovisual integration services company.
        The total consideration for each acquisition was based on negotiations between
        the Company and the acquired company’s shareholders that took into account a
        number of factors of the business, including historical revenues, operating
        history, products, intellectual property, and other factors. Each acquisition
        was accounted for under the purchase method of accounting. The operations
        of
        each acquisition are included in the accompanying statements of operations
        for
        the period since the date of each acquisition.
  Accounting
        for the acquisition of a business requires an allocation of the purchase
        price
        to the assets acquired and the liabilities assumed in the transaction at
        their
        respective estimated fair values. The Company used information available
        at the
        date of the acquisitions to estimate the individual fair values of properties,
        equipment, identifiable intangible assets, and liabilities to make these
        fair
        value determinations and, for significant business acquisitions, engaged
        third-party valuation firms to assist in the fair value determinations of
        the
        acquired net assets. The following summarizes the consideration and purchase
        price allocations of each acquisition:
  F-18
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **ClearOne**
              
              **Ivron**
              
              **E.mergent**
              
              **OM
                  Video**Cash
              
              $
              1,758
              
              $
              6,650
              
              $
              7,300
              
              $
              6,276Holdback
                  account
              
              
              -
              
              
              -
              
              
              -
              
              
              600Common
                  stock and fully-vested options
              
              
              1,814
              
              
              -
              
              
              14,427
              
              
              -Direct
                  acquisition costs
              
              
              98
              
              
              248
              
              
              603
              
              
              110Total
                  consideration
              
              $
              3,670
              
              $
              6,898
              
              $
              22,330
              
              $
              6,986Net
                  tangible assets acquired
              
              $
              831
              
              $
              310
              
              $
              3,591
              
              $
              337Intangible
                  assets:In-process
                  research and development
              
              
              728
              
              
              -
              
              
              -
              
              
              -Developed
                  technologies
              
              
              680
              
              
              5,260
              
              
              -
              
              
              -Patents
                  and trademarks
              
              
              207
              
              
              1,110
              
              
              1,060
              
              
              -Customer
                  relationships
              
              
              37
              
              
              -
              
              
              392
              
              
              -Non-compete
                  agreements
              
              
              -
              
              
              -
              
              
              215
              
              
              574Goodwill
              
              
              1,187
              
              
              218
              
              
              17,072
              
              
              6,075Total
                  purchase price allocation
              
              $
              3,670
              
              $
              6,898
              
              $
              22,330
              
              $
              6,986
  *ClearOne*
  The
        Company entered into an agreement to purchase substantially all of the assets
        of
        ClearOne for $3.6 million consisting of $1.8 million of cash and 129,871
        shares
        of restricted common stock valued at $13.97 per share. The acquisition was
        consummated on July 5, 2000.
  As
        of the
        acquisition date, the Company acquired tangible assets consisting of property
        and equipment of $473, deposits of $59, and inventory of $299.
  In
        conjunction with a third-party valuation firm, the Company determined the
        useful
        lives and amounts of the developed technologies, trademarks and distribution
        agreements. The developed technologies, trademarks and distribution agreement
        had estimated useful lives of three years. Goodwill was being amortized on
        a
        straight-line basis over four years until the adoption of SFAS No. 142 on
        July
        1, 2002.
  The
        Company charged $728 to expense representing acquired in-process research
        and
        development that had not yet reached technological feasibility. The Company
        anticipated the technology would require an additional 18 to 20 months of
        development at a minimum cost of $1.2 million. The technology had no alternative
        future use. After the acquisition, the Company initially continued to develop
        the technology; however, it experienced significant difficulties in completing
        the development of the video conferencing technologies and subsequently
        determined that the technology was not viable and never brought the in-process
        video conferencing technology to market.
  The
        Company continued to sell the acquired teleconferencing product until the
        fourth
        quarter of the fiscal year ended June 30, 2002. Due to declining sales, negative
        margins beginning in the fourth quarter of the fiscal year ended June 30,
        2002,
        and management’s decision to stop investing in the acquired teleconferencing
        product, the Company determined that a triggering event had occurred in the
        fourth quarter of the fiscal year ended June 30, 2002. The Company performed
        an
        impairment test and determined that an impairment loss on the ClearOne assets
        of
        approximately $901 should be recognized (see Note 10).
  *Ivron*
  On
        October 3, 2001, the Company purchased all of the issued and outstanding
        shares
        of Ivron. Ivron was located in Dublin, Ireland. Under the terms of the original
        agreement, the shareholders of Ivron received $6.0 million of cash at closing
        of
        the purchase. As part of the purchase, all outstanding options to purchase
        Ivron
        shares were cancelled in consideration for an aggregate cash payment of $650.
  F-19
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  As
        of the
        acquisition date, the Company acquired tangible assets consisting of cash
        of
        $297, accounts receivable of $92, inventory of $337, and property and equipment
        of $22. The Company assumed liabilities consisting of trade accounts payable
        of
        $174 and accrued compensation and other accrued liabilities of $264.
  Under
        the
        original agreement, former Ivron shareholders would be entitled to receive
        up to
        429,000 shares of common stock and up to approximately $17.0 million of
        additional cash and stock consideration provided that certain agreed upon
        earnings per share targets were achieved by the Company during fiscal years
        2003
        and 2004. In addition, former optionees of Ivron who remained with the Company
        were eligible to participate in a cash bonus program of up to approximately
        $1.0
        million paid by the Company, based on the Company’s combined performance with
        Ivron in the fiscal years ending June 30, 2003 and 2004. On April 8, 2002,
        an
        amendment to the original purchase agreement was finalized which revised
        the
        contingent consideration that the Ivron shareholders would be entitled to
        receive up to 109,000 shares of common stock. No performance targets were
        met
        and accordingly no contingent consideration was or will be paid.
  Based
        on
        the modified purchase price determined under the terms of the amendment and
        with
        the assistance of a third-party valuation firm and after considering the
        facts
        and circumstances surrounding the Company’s intentions, the Company recorded
        intangible assets of $5.3 million related to developed technology, $1.1 million
        related to intellectual property, and goodwill of $218. The developed
        technologies had estimated useful lives of three to fifteen years and the
        patents had an estimated useful life of fifteen years. Amortization expense
        of
        $446 was recorded for the developed technology for the period from October
        3,
        2001 to June 30, 2002. No amortization expense was recorded for
        goodwill.
  After
        the
        acquisition, the Company experienced significant difficulties in selling
        the
        acquired video conferencing products. Due to the phasing-out of a product
        line
        occasioned by technological difficulties and negative projected cash flows,
        the
        Company determined that a triggering event had occurred during the fourth
        quarter of the fiscal year ended June 30, 2002. The Company performed an
        impairment test and determined that an impairment loss on the Ivron assets
        of
        approximately $6.2 million should be recognized (see Note 10). During early
        fiscal 2004, the Company discontinued selling the “V-There” and “Vu-Link”
set-top video conferencing products.
  *E.mergent*
  On
        May
        31, 2002, the Company completed its acquisition of E.mergent pursuant to
        the
        terms of an Agreement and Plan of Merger dated January 21, 2002 where by
        the
        Company paid $7.3 million of cash and issued 868,691 shares of common stock
        valued at $16.55 per share to former E.mergent stockholders.
  In
        addition to the shares of the Company’s common stock issued, the Company assumed
        all options to purchase E.mergent common stock that were vested and outstanding
        on the acquisition date. These options were converted into rights to acquire
        a
        total of 4,158 shares of the Company’s common stock at a weighted average
        exercise price of $8.48 per share. A
        value
        of approximately $49 was assigned to these options using the Black-Scholes
        option pricing model with the following assumptions: expected dividend yield
        of
        0 percent, risk-free interest rate of 2.9 percent, expected volatility of
        81.8
        percent, and an expected life of two years.
  As
        of the
        acquisition date, the Company acquired tangible assets consisting of cash
        of
        $68, accounts receivable of $2.2 million, inventory of $3.3 million, property
        and equipment of $475 and other assets of $1.3 million. The Company assumed
        liabilities consisting of accounts payable of $1.3 million, line of credit
        borrowings of $484, unearned maintenance revenue of $873, accrued compensation
        (other than severance) and other accrued liabilities of $656. The Company
        incurred severance costs of approximately $468 related to the termination
        of
        four E.mergent executives and seven other E.mergent employees as a result
        of
        duplication of positions upon consummation of the acquisition. In June 2002,
        $52
        was paid to such individuals. The severance accrual of $416 as of June 30,
        2002
        was paid during the fiscal year ended June 30, 2003.
  With
        the
        assistance of a third-party valuation firm and after considering the facts
        and
        circumstances surrounding the acquisition, the Company recorded intangible
        assets related to customer relationships, patents, a non-compete agreement,
        and
        goodwill. Amortization expense of $437 was recorded for customer relationships,
        patents, and a non-compete agreement. Customer relationships had estimated
        useful lives of 18 months to three years and patents had estimated useful
        lives
        of fifteen years. The term of the non-compete agreement was three years.
  F-20
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        Company’s management, at the time, believed the E.mergent acquisition would
        complement the Company’s existing operations and that core competencies would
        allow the Company to acquire market share in the audiovisual integration
        industry. However, the Company’s entry into the services business was perceived
        as a threat by its systems integrators and value-added resellers, since the
        Company began competing against many of them for sales. In order to avoid
        this
        conflict and to maintain good relationships with its systems integrators
        and
        value-added resellers, the Company decided to stop pursuing new services
        contracts in the fourth quarter of the fiscal year ended June 30, 2003 which
        was
        considered a triggering event for evaluation of impairment. Ultimately, the
        Company exited the U.S. audiovisual integration market and subsequently sold
        its
        U.S. audiovisual integration business to M:Space in May 2004 (see Note 4).
        Although the Company continues to sell camera and furniture products acquired
        from E.mergent, its decision to exit the U.S. integration services market
        adversely affected future cash flows. The Company determined that a triggering
        event occurred in the fourth quarter of the fiscal year ended June 30, 2003.
        The
        Company performed an impairment test and determined that an impairment loss
        on
        the integration services-related E.mergent assets of approximately $12.5
        million
        should be recognized. The Company also determined that an impairment loss
        on
        other acquired E.mergent assets of approximately $5.1 million should be
        recognized (see Note 10). The U.S. audiovisual integration business operations
        and related net assets are included in discontinued operations in the
        accompanying consolidated financial statements.
  *OM
        Video*
  On
        August
        27, 2002, the Company purchased all of the outstanding shares of OM Video,
        headquartered in Ottawa, Canada. Under the terms of the agreement, the
        shareholders of OM Video received $6.3 million in cash at closing. During
        the
        fiscal years ended June 30, 2003 and 2004, the Company paid an additional
        $500
        of a potential $600 that was held pending certain representations and warranties
        associated with the acquisition. During the second quarter of fiscal 2003,
        the
        Company also paid $750 of a potential $800 earn-out provision. The earn-out
        provision not considered as part of the original purchase price allocation
        was
        recorded as additional consideration and booked to goodwill. No further payment
        related to the holdback or contingent consideration will be paid. Accordingly,
        the total cash payments associated with the acquisition were approximately
        $7.5
        million.
  As
        of the
        acquisition date, the Company acquired tangible assets consisting of cash
        of
        $193, accounts receivable of $470, inventory of $122, property and equipment
        of
        $145, and prepaid expenses of $6. The Company assumed liabilities consisting
        primarily of accrued liabilities of $378 and accrued tax liabilities of $221.
        The Company obtained a non-compete agreement with a term of two years from
        a
        former owner of OM Video.
  The
        Company’s management, at the time, believed the OM Video acquisition would
        complement the Company’s existing operations and that core competencies would
        allow the Company to acquire market share in the audiovisual integration
        industry. However, the Company’s entry into the services business was perceived
        as a threat by its systems integrators and value-added resellers, since the
        Company began competing against many of them for sales. In order to avoid
        this
        conflict and to maintain good relationships with its systems integrators
        and
        value-added resellers, the Company deemphasized the audiovisual integration
        market serving the Ottawa Canada region beginning in the fourth quarter of
        the
        fiscal year ended June 30, 2003. This decision was considered a triggering
        event
        for evaluation of impairment. On June 30, 2003, the Company performed an
        impairment test and determined that an impairment loss on the OM Video assets
        of
        approximately $8.4 million should be recognized (see Note 10). On March 4,
        2005,
        the Company sold all of its Canadian audiovisual integration business (see
        Note
        26).
  *Pro
        Forma Financial Information*
  The
        following unaudited pro forma combined financial information reflects operations
        as if the acquisitions of Ivron, E.mergent, and OM Video, that are not included
        in discontinued operations, had occurred as of July 1, 2001. The unaudited
        pro
        forma combined financial information is presented for illustrative purposes
        only
        and is not indicative of what the Company’s actual results of operations may
        have been had the acquisitions been consummated on July 1, 2001, respectively.
  F-21
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **2003**
              
              **2002**Revenue
                  from continuing operations
              
              $
              35,819
              
              $
              43,012Loss
                  from continuing operations
              
              
              (24,931
              )
              
              (9,636
              )Net
                  loss
              
              
              (35,979
              )
              
              (6,816
              )Basic
                  and diluted loss per common share from continuing
                  operations
              
              $
              (2.23
              )
              $
              (1.01
              )Basic
                  and diluted loss per common share from net loss
              
              
              (3.22
              )
              
              (0.71
              )
 
  **4.**
              **Discontinued
                  Operations**
  During
        fiscal 2004, the Company completed the sale of its U.S. audiovisual integration
        services to M:Space. During fiscal 2005, the Company completed the sale of
        its
        conferencing services business component to Premiere. Accordingly, the results
        of operations and the financial position of each of these components have
        been
        reclassified in the accompanying consolidated financial statements as
        discontinued operations. Additionally, during fiscal 2001 the Company sold
        certain assets whose sales proceeds are included with discontinued operations
        (see Note 5). The following reconciles the financial position of the components
        to the reported amounts as of June 30, 2004 and 2003.
  **As
                  of June 30,****2004**
              
              **2003**Assets
                  held for sale:U.S.
                  audiovisual integration services
              
              $
              -
              
              $
              1,869Conferencing
                  services business
              
              
              3,294
              
              
              4,153Total
                  assets held for sale
              
              $
              3,294
              
              $
              6,022Liabilities
                  held for sale:U.S.
                  audiovisual integration services
              
              $
              -
              
              $
              1,516Conferencing
                  services business
              
              
              2,329
              
              
              2,873Total
                  liabilities held for sale
              
              $
              2,329
              
              $
              4,389
 F-22
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  Summary
          operating results of the discontinued operations are as follows:
 **Year
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**(Loss)
                  income from discontinued operationsU.S.
                  audiovisual integration services
              
              $
              (360
              )
              $
              (14,127
              )
              $
              258Conferencing
                  services business
              
              
              2,800
              
              
              3,366
              
              
              3,959Total
                  (loss) income from discontinued operations
              
              
              2,440
              
              
              (10,761
              )
              
              4,217(Loss)
                  gain on disposal of discontinued operationsU.S.
                  audiovisual integration services
              
              $
              (276
              )
              $
              -
              
              $
              -Burk
                  (see Note 5)
              
              
              93
              
              
              318
              
              
              280Total
                  (loss) gain on disposal of discontinued operations
              
              
              (183
              )
              
              318
              
              
              280Income
                  tax benefit (provision)U.S.
                  audiovisual integration services
              
              $
              237
              
              $
              769
              
              $
              (96
              )Conferencing
                  services business
              
              
              (1,044
              )
              
              (1,256
              )
              
              (1,477
              )Burk
                  (see Note 5)
              
              
              (35
              )
              
              (118
              )
              
              (104
              )Total
                  income tax benefit (provision)
              
              
              (842
              )
              
              (605
              )
              
              (1,677
              )Total
                  (loss) income from discontinued operations, net of income
                  taxesU.S.
                  audiovisual integration services
              
              $
              (399
              )
              $
              (13,358
              )
              $
              162Conferencing
                  services business
              
              
              1,756
              
              
              2,110
              
              
              2,482Burk
                  (see Note 5)
              
              
              58
              
              
              200
              
              
              176Total
                  (loss) income from discontinued operations, net of income
                  taxes
              
              $
              1,415
              
              $
              (11,048
              )
              $
              2,820
  *M:Space*
  During
        the fourth quarter of the fiscal year ended June 30, 2003, the Company decided
        to stop pursuing new U.S. business services contracts and impaired the U.S.
        acquired business services assets. The Company did not prepare any formal
        disposition plan at that time and existing customers continued to be serviced.
        During the fourth quarter of fiscal 2004, the Company decided to sell this
        component as many of the existing Company systems integrators and value-added
        resellers perceived the Company’s entry into the business services arena as a
        threat since the Company began competing against these same customers for
        sales,
        as well as the Company’s desire to return to its core competency in the audio
        conferencing products segment. U.S. audiovisual integration services revenues,
        reported in discontinued operations, for the years ended June 30, 2004, 2003,
        and 2002 were $3.6 million, $7.6 million, and $1.5 million, respectively.
        The
        U.S. audiovisual integration services pre-tax income (loss), reported in
        discontinued operations, for the years ended June 30, 2004, 2003, and 2002,
        were
        ($360), ($14.1 million), and $258, respectively.
  On
        May 6,
        2004, the Company sold certain assets of its U.S. audiovisual integration
        services operations to M:Space for no cash compensation. M:Space is a privately
        held audiovisual integration services company. In exchange for M:Space assuming
        obligations for completion of certain customer contracts, and satisfying
        maintenance contract obligations to existing customers, the Company transferred
        to M:Space certain assets including inventory valued at $573. The Company
        realized a pre-tax loss on the sale of $276 for the fiscal year ended June
        30,
        2004.
  The
        assets and liabilities of the discontinued operations are presented separately
        under the captions “Assets Held for Sale” and “Liabilities Held for Sale,”
respectively, in the accompanying balance sheets as of June 30, 2003, and
        consist of the following:
  F-23
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **As
                  of June 30, 2003**Assets
                  held for sale:Accounts
                  receivable
              
              $
              1,775Inventories
              
              
              90Prepaid
                  expenses
              
              
              4Total
                  assets held for sale
              
              $
              1,869Liabilities
                  held for sale:Accounts
                  payable
              
              $
              76Deferred
                  maintenance
              
              
              794Billings
                  in excess of costs
              
              
              320Accrued
                  liabilities
              
              
              326Total
                  liabilities held for sale
              
              $
              1,516
 
  Summary
        operating results of the discontinued operations are as follows:
  **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**Revenue
                  - business services
              
              $
              3,597
              
              $
              7,640
              
              $
              1,526Cost
                  of goods sold - business services
              
              
              2,648
              
              
              5,227
              
              
              978Gross
                  profit
              
              
              949
              
              
              2,413
              
              
              548Marketing
                  and selling expenses
              
              
              522
              
              
              2,426
              
              
              131General
                  and administrative expenses
              
              
              787
              
              
              1,641
              
              
              159Impairment
                  losses
              
              
              -
              
              
              12,473
              
              
              -(Loss)
                  income before income taxes
              
              
              (360
              )
              
              (14,127
              )
              
              258Loss
                  on disposal of discontinued operations
              
              
              (276
              )
              
              -
              
              
              -Benefit
                  (provision) for income taxes
              
              
              237
              
              
              769
              
              
              (96
              )(Loss)
                  income from discontinued operations, net of income taxes
              
              $
              (399
              )
              $
              (13,358
              )
              $
              162
  *Conferencing
        Services*
  In
        April
        2004, the Company’s Board of Directors appointed a committee to explore sales
        opportunities to sell the conferencing services business component. The Company
        decided to sell this component primarily because of decreasing margins and
        investments in equipment that would have been required in the near future.
        Conferencing services revenues, reported in discontinued operations, for
        the
        years ended June 30, 2004, 2003, and 2002 were $15.6 million, $15.3 million,
        and
        $15.6 million, respectively. Conferencing services pre-tax income, reported
        in
        discontinued operations, for the years ended June 30, 2004, 2003, and 2002,
        were
        $2.8 million, $3.4 million, and $4.0 million, respectively.
  On
        July
        1, 2004, the Company sold its conferencing services business component to
        Premiere. Consideration for the sale consisted of $21.3 million in cash.
        Of the
        purchase price $1.0 million was placed into an 18-month Indemnity Escrow
        account
        and an additional $300 was placed into a working capital escrow account.
        The
        Company received the $300 working capital escrow funds approximately 90 days
        after the execution date of the contract. Additionally, $1.4 million of the
        proceeds was utilized to pay off equipment leases pertaining to assets being
        conveyed to Premiere. The Company expects to realize a pre-tax gain on the
        sale
        of approximately $17.5 million during the fiscal year ended June 30, 2005.
        As of
        October 31, 2005, the $1.0 million remained in the Indemnity Escrow account.
  F-24
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        assets and liabilities of the discontinued operations are presented separately
        under the captions “Assets Held for Sale” and “Liabilities Held for Sale,”
respectively, in the accompanying balance sheets as of June 30, 2004 and
        2003,
        and consist of the following:
  **As
                  of June 30,****2004**
              
              **2003**Assets
                  held for saleAccounts
                  receivable
              
              $
              1,712
              
              $
              1,575Prepaid
                  expenses
              
              
              158
              
              
              130Property
                  and equipment, net
              
              
              1,424
              
              
              2,448Total
                  assets held for sale
              
              $
              3,294
              
              $
              4,153Liabilities
                  held for saleCapitalized
                  leases
              
              $
              1,206
              
              $
              1,975Accounts
                  payable
              
              
              287
              
              
              158Accrued
                  liabilities
              
              
              836
              
              
              740Total
                  liabilities held for sale
              
              $
              2,329
              
              $
              2,873
  Summary
        operating results of the discontinued operations are as follows:
  **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**Revenue
                  - conferencing services
              
              $
              15,578
              
              $
              15,268
              
              $
              15,583Cost
                  of goods sold - conferencing services
              
              
              7,844
              
              
              7,904
              
              
              7,310Gross
                  profit
              
              
              7,734
              
              
              7,364
              
              
              8,273Marketing
                  and selling expenses
              
              
              3,799
              
              
              2,881
              
              
              3,599General
                  and administrative expenses
              
              
              1,036
              
              
              972
              
              
              809Other
                  expense, net
              
              
              99
              
              
              145
              
              
              156Gain
                  on sale of assets
              
              
              -
              
              
              -
              
              
              (250
              )Income
                  from discontinued operations
              
              
              2,800
              
              
              3,366
              
              
              3,959Provision
                  for income taxes
              
              
              (1,044
              )
              
              (1,256
              )
              
              (1,477
              )Income
                  from discontinued operations, net of income taxes
              
              $
              1,756
              
              $
              2,110
              
              $
              2,482
 
  **5.**
              **Sale
                  of Assets**
  *Burk
        Technology, Inc.*
  On
        April
        12, 2001, the Company sold the assets of the remote control portion of the
        RFM/Broadcast division to Burk Technology, Inc. (“Burk”), a privately held
        developer and manufacturer of broadcast facility control systems products.
        The
        Company retained the accounts payable of the remote control portion of the
        RFM/Broadcast division. Burk assumed obligations for unfilled customer orders
        and satisfying warranty obligations to existing customers and for inventory
        sold
        to Burk. However, the Company retained certain warranty obligations to Burk
        to
        ensure that all of the assets sold to Burk were in good operating condition
        and
        repair.
  Consideration
        for the sale consisted of $750 in cash at closing, $1.8 million in the form
        of a
        seven-year promissory note, with interest at the rate of nine percent per
        year,
        and up to $700 as a commission over a period of up to seven years. The payments
        on the promissory note could be deferred based upon Burk not meeting net
        quarterly sales levels established within the agreement. The promissory note
        was
        secured by a subordinate security interest in the personal property of Burk.
        Based on an analysis of the facts and circumstances that existed on April
        12,
        2001, and considering the guidance from Topic 5U of the SEC Rules and
        Regulations, “Gain Recognition on the Sale of a Business or Operating Assets to
        a Highly Leveraged Entity,” the gain is being recognized as cash is collected
        (as collection was not reasonably assured and the Company had contingent
        liabilities to Burk). The commission was based upon future net sales of Burk
        over base sales established within the agreement. The Company realized a
        gain on
        the sale of $58 (net of applicable income taxes of $35), $200 (net of applicable
        income taxes of $119), and $176 (net of applicable income taxes of $104)
        for the
        fiscal years ended June 30, 2004, 2003, and 2002, respectively. As of
        June 30, 2004, $1.5 million of the promissory note remained outstanding and
        the Company had received $20 in commissions.
  F-25
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  On
        August
        22, 2005, the Company entered into a Mutual Release and Waiver Agreement
        with
        Burk pursuant to which Burk paid the Company $1.3 million in full satisfaction
        of the promissory note, which included a discount of approximately $120.
        As part
        of the Mutual Release and Waiver Agreement, the Company waived any right
        to
        future commission payments from Burk and Burk and the Company granted mutual
        releases to one another with respect to future claims and liabilities.
        Subsequent to June 30, 2004, the Company anticipates recognizing a pre-tax
        gain
        on the sale of approximately $1.5 million. Accordingly, the total pre-tax
        gain
        on the disposal of discontinued operations, related to Burk, will be
        approximately $3.0 million.
  *Court
        Conferencing*
  As
        part
        of the Company’s conferencing services operating segment, its court conferencing
        customers engaged in the audio and/or video conferencing of legal proceedings
        including remote appearances in state and federal courts and/or administrative
        tribunals within the United States. On October 26, 2001, the Company sold
        its
        court conferencing customer list, including all contracts relating to its
        court
        conferencing services to CourtCall LLC and recognized a gain of $250. This
        gain
        is included in the conferencing services portion of income from discontinued
        operations in the accompanying consolidated financial statements (see Note
        4).
  **6.**
              **Sale
                  of Broadcast Telephone
                  Interface**
  On
        August
        23, 2002, the Company entered into an agreement with Comrex Corporation
        (“Comrex”). In exchange for $1.3 million, Comrex received certain inventory
        associated with the broadcast telephone interface product line, a perpetual
        software license to use the Company’s technology related to broadcast telephone
        interface products along with one free year of maintenance and support, and
        transition services for 90 days following the effective date of the agreement.
        The transition services included training, engineering assistance, consultation,
        and development services.
  The
        software license included in the arrangement is more than incidental to the
        products and services as a whole. All products and services are considered
        software and software-related. Consequently, the agreement has been accounted
        for pursuant to Statement of Position 97-2, “Software Revenue Recognition,”
(“SOP 97-2”). As the software is essential to the functionality of other
        elements in the agreement and there is not vendor specific objective evidence
        for the fair value of the maintenance and support, the Company recognized
        the
        software license revenue, products, and services over time as services are
        performed, using the percentage-of-completion method of accounting based
        on a
        zero estimate of profit.
  As
        this
        is the first time the Company has licensed software in this manner, it was
        impractical to estimate the final outcome of the agreement except to assure
        that
        no loss will be incurred. Consequently, the Company recognized revenue equal
        to
        cost until maintenance and support was the only undelivered element of the
        agreement. Once maintenance and support was the only undelivered element
        of the
        agreement, the remaining revenue was recognized ratably over the remaining
        maintenance and support period in accordance with SOP 97-2. The Company
        recognized $130 and $1.1 million in revenue related to this transaction in
        the
        fiscal years ended June 30, 2004 and 2003, respectively. The revenue is included
        in business services revenue in the accompanying consolidated financial
        statements.
  The
        Company entered into a manufacturing agreement to continue to manufacture
        additional product for Comrex until August 2003 on a when-and-if needed basis.
        Comrex paid the Company for any additional product on a per item basis of
        cost
        plus 30 percent. Given the future revenue stream associated with each unit
        produced, revenue will be recognized when-and-if received. During fiscal
        2004
        and fiscal 2003, the Company has recognized $387 and $783, respectively,
        in
        revenue related to the manufacture of additional product from Comrex.
  F-26
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **7.**
              **Inventories**
  Inventories,
        net of reserves, consist of the following as of June 30, 2004 and 2003:
  **As
                  of June 30,****2004**
              
              **2003**Raw
                  materials
              
              $
              1,674
              
              $
              3,881Finished
                  goods
              
              
              2,242
              
              
              3,258Consigned
                  inventory
              
              
              2,381
              
              
              1,738Total
                  inventory
              
              $
              6,297
              
              $
              8,877
  Consigned
        inventory represents inventory at distributors and other customers where
        revenue
        recognition criteria have not been achieved.
  **8.**
              **Property
                  and Equipment**
  Major
        classifications of property and equipment and estimated useful lives are
        as
        follows as of June 30, 2004 and 2003:
  **Estimated**
              
              **As
                  of June 30,****useful
                  lives**
              
              **2004**
              
              **2003**Office
                  furniture and equipment
              
              3
                  to 10 years
              
              $
              8,078
              
              $
              7,265Manufacturing
                  and test equipment
              
              2
                  to 10 years
              
              
              2,532
              
              
              3,277Vehicles
              
              3
                  to 5 years
              
              
              9
              
              
              910,619
              
              
              10,551Accumulated
                  depreciation and amortization
              
              
              
              
              
              (6,542
              )
              
              (6,231
              )Property
                  and equipment, net
              
              
              
              
              $
              4,077
              
              $
              4,320
 
  **9.**
              **Goodwill
                  and Other Intangible
                  Assets**
  The
        Company had goodwill and definite-lived intangible assets related to the
        acquisition of ClearOne in 2001, the acquisitions of Ivron and E.mergent
        in
        2002, and the acquisition of OM Video in 2003.
  *Goodwill*
  The
        following presents details of the Company’s goodwill by operating segments for
        the years ended June 30, 2004, 2003, and 2002:
  F-27
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **Products**
              
              **Business
                  Services**
              
              **Total**Balances
                  as of June 30, 2001
              
              $
              890
              
              $
              -
              
              $
              890Amortization
                  of ClearOne goodwill
              
              
              (297
              )
              
              -
              
              
              (297
              )Acquisition
                  of Ivron
              
              
              218
              
              
              -
              
              
              218Impairment
                  of ClearOne and Ivron goodwill (see Note 10)
              
              
              (811
              )
              
              -
              
              
              (811
              )Acquisition
                  of E.mergent
              
              
              5,026
              
              
              12,046
              
              
              17,072Balances
                  as of June 30, 2002
              
              
              5,026
              
              
              12,046
              
              
              17,072E.mergent
                  goodwill purchase price adjustment
              
              
              -
              
              
              20
              
              
              20Acquisition
                  of OM Video
              
              
              -
              
              
              6,725
              
              
              6,725Foreign
                  currency translation related to OM Video goodwill
              
              
              -
              
              
              1,049
              
              
              1,049Impairment
                  of E.mergent and OM Video goodwill
              
              
              (5,026
              )
              
              (19,840
              )
              
              (24,866
              )Balances
                  as of June 30, 2003
              
              $
              -
              
              $
              -
              
              $
              -Balances
                  as of June 30, 2004
              
              $
              -
              
              $
              -
              
              $
              -
  *Acquired
        Intangibles*
  Amortization
        of intangible assets was $115, $680, and $787 for the years ended June 30,
        2004,
        2003, and 2002, respectively. Amortization of costs related to patents was
        reported in product cost of goods sold. Amortization of costs related to
        customer and partner relationships, and non-compete agreements was reported
        in
        marketing and selling expense and general and administrative expense,
        respectively.
  The
        following table presents the Company’s intangible assets as of June 30, 2004 and
        2003:
  **2004**
              
              **2003****Useful
                  Lives**
              
              **Gross****Value**
              
              **Accumulated****Amortization**
              
              **Gross****Value**
              
              **Accumulated****Amortization**Patents
              
              
              15/7
                  years
              
              $
              1,060
              
              $
              (175
              )
              $
              1,060
              
              $
              (75
              )Non-compete
                  agreements
              
              
              2
                  to 3 years
              
              
              52
              
              
              (36
              )
              
              52
              
              
              (19
              )Total
              
              
              
              
              $
              1,112
              
              $
              (211
              )
              $
              1,112
              
              $
              (94
              )
  During
        fiscal 2003, the Company recorded impairment losses related to an E.mergent
        customer relationship and a portion of the non-compete agreement with a former
        officer of E.mergent. During June 2004, the Company decided to no longer
        invest
        additional research and development related to the camera products, and a
        change
        was made to the estimated useful life of the camera-related patent from fifteen
        years to seven years. Estimated future amortization expense is as
        follows:
  F-28
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **Years
                  Ending June 30,**2005
              
              $
              1962006
              
              
              1802007
              
              
              1802008
              
              
              1802009
              
              
              165Thereafter
              
              
              -Total
                  estimated amortization expense
              
              $
              901
  **10.**
              **Impairments**
  During
        the fiscal year ended June 30, 2002, the Company experienced declining sales
        from the teleconferencing products acquired in the ClearOne acquisition.
        Although sales declined throughout the year, through March 31, 2002, gross
        margins and cash flows remained positive. However, during the fourth quarter
        of
        the fiscal year ended June 30, 2002, the gross margins and cash flows became
        negative as sales continued to decline. Additionally, in the fourth quarter
        of
        fiscal 2002, the Company also made a decision to stop investing in the acquired
        teleconferencing products. Furthermore, during the fourth quarter of the
        fiscal
        year ended June 30, 2002, the Company experienced difficulties in selling
        the
        acquired video conferencing products acquired in the Ivron acquisition. The
        difficulties were due to the phasing-out of an older product line occasioned
        by
        technological difficulties of product implementation. Such triggering events
        required an impairment analysis to be performed in accordance with SFAS No.
        121.
        The estimated undiscounted future cash flows generated by the long-lived
        asset
        groupings related to ClearOne and Ivron were less than their carrying values.
        Management estimated the fair market value of the long-lived assets using
        the
        present value of expected future discounted cash flows. The analysis resulted
        in
        an impairment loss of $7.1 million for the fiscal year ended June 30, 2002.
  The
        Company entered into the conferencing furniture manufacturing business through
        the E.mergent acquisition. The estimated fair value of the reporting unit,
        for
        purposes of evaluating goodwill for impairment, was less than its carrying
        values. Additionally, the estimated undiscounted future cash flows generated
        by
        certain other long-lived assets, excluding goodwill, was less than its carrying
        value. The impairment analysis performed in accordance with SFAS No. 142
        and
        SFAS No. 144, resulted in an impairment loss of $5.1 million for the fiscal
        year
        ended June 30, 2003. Management estimated the fair value of reporting unit
        using
        third-party appraisals. Management estimated the fair market value of the
        long-lived assets, excluding goodwill, using the present value of expected
        future discounted cash flows.
  The
        Company entered into the audiovisual integration services through the E.mergent
        and OM Video acquisitions. At the time of the acquisitions, management believed
        that the audiovisual integration services would complement existing core
        competencies and allow the Company to acquire market share in this market
        segment. However, the Company’s entry into the audiovisual integration services
        business was perceived as a threat by its systems integrators and value-added
        resellers, since the Company began competing against many of them for sales.
        During the fourth quarter of the fiscal year ended June 30, 2003, the Company
        decided to stop pursuing new U.S. business service contracts and to de-emphasize
        the audiovisual integration market serving the Ottawa, Canada region.
  These
        changes in facts and circumstances as well as the change in the Company’s
        business environment constituted a triggering event requiring an impairment
        analysis to be performed in accordance with SFAS No. 142 and SFAS No. 144.
        The
        estimated fair value of the reporting units, for purposes of evaluating goodwill
        for impairment, was less than their carrying values. Additionally, the estimated
        undiscounted future cash flows generated by certain other long-lived assets,
        excluding goodwill, was less than their carrying values. The impairment analyses
        performed in accordance with SFAS No. 142 and SFAS No. 144, resulted in an
        impairment loss of $20.9 million for the fiscal year ended June 30, 2003.
        Management estimated the fair value of reporting units using third-party
        appraisals. Management estimated the fair market value of the long-lived
        assets,
        excluding goodwill, using the present value of expected future discounted
        cash
        flows.
  F-29
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        impairment losses relate to the following:
  **2003**
              
              **2002**Goodwill:ClearOne
              
              $
              -
              
              $
              593Ivron
              
              
              -
              
              
              218E.mergent
                  - Products
              
              
              5,026
              
              
              -E.mergent
                  - Business Services (see Note 4)
              
              
              12,066
              
              
              -OM
                  Video
              
              
              7,774
              
              
              -24,866
              
              
              811Intangible
                  assets:ClearOne
              
              
              -
              
              
              308Ivron
              
              
              -
              
              
              5,924E.mergent
                  - Products
              
              
              18
              
              
              -E.mergent
                  - Business Services (see Note 4)
              
              
              195
              
              
              -OM
                  Video
              
              
              387
              
              
              -600
              
              
              6,232Property
                  and equipment:Ivron
              
              
              -
              
              
              72E.mergent
                  - Products
              
              
              58
              
              
              -E.mergent
                  - Business Services (see Note 4)
              
              
              212
              
              
              -OM
                  Video
              
              
              265
              
              
              -535
              
              
              72Total
              
              $
              26,001
              
              $
              7,115
  During
        fiscal 2003, the Company recorded impairment losses of $270 and $265 related
        to
        property and equipment associated with the E.mergent and the OM Video asset
        groupings, respectively. During fiscal 2002, the Company recorded impairment
        losses of $72 related to property and equipment associated with the Ivron
        asset
        grouping.
  The
        impairment charges related to ClearOne and Ivron are included in impairment
        losses in fiscal 2002. Approximately $12.5 million of the E.mergent impairment
        charges are included in discontinued operations and are related to the U.S.
        audiovisual integration services business in fiscal 2003 (see Note 4). An
        additional $5.1 million of the E.mergent impairment charges are included
        in
        impairment losses in fiscal 2003. The impairment charges related to OM Video
        are
        included in impairment losses in fiscal 2003. The Company completed the sale
        of
        OM Video during fiscal 2005, and expects to present all OM Video activity
        in
        discontinued operations in the fiscal 2005 consolidated financial
        statements.
  **11.**
              **Lines
                  of Credit**
  Through
        December 22, 2003, the Company maintained a revolving line of credit in the
        amount of $10.0 million with a commercial bank. Prior to November 22, 2002,
        the
        line of credit was in the amount of $5.0 million. The line of credit was
        secured
        by the Company’s accounts receivable and inventory. The interest rate on the
        line of credit was a variable interest rate (250 basis points over the London
        Interbank Offered Rate (“LIBOR”) or prime less 0.3 percent, at the Company’s
        option). The borrowing rate was 3.6 percent as of December 22, 2003, when
        the
        line of credit expired. The weighted average interest rate for fiscal 2004
        through December 22, 2003 and for the fiscal years ended June 30, 2003 and
        2002,
        was 3.6 percent, 4.0 percent, and 5.2 percent, respectively. The terms of
        the
        line of credit prohibited the payment of dividends and required the Company
        to
        maintain other defined financial ratios and restrictive covenants. The Company
        was not in compliance with the debt coverage ratio as of June 30, 2002 or
        June
        30, 2003, however the Company obtained a waiver from the lender under the
        revolving credit facility. No compensating balance arrangements were required.
        No amounts were outstanding under the line of credit as of June 30,
        2003.
  On
        May
        16, 2003, the bank froze the line of credit as the Company had not provided
        the
        bank with financial statements for the quarter ended December 31, 2002. The
        line
        of credit expired on December 22, 2003 and was not renewed.
  F-30
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **12.**
              **Leases**
  The
        Company has capital leases with finance companies which facilitated the purchase
        of equipment. Additionally, the Company has noncancelable operating leases
        related to facilities and vehicles.
  Property
        and equipment under capital leases are as follows:
  **As
                  of June 30,****2004**
              
              **2003**Office
                  furniture and equipment
              
              $
              28
              
              $
              28Accumulated
                  amortization
              
              
              (15
              )
              
              (10
              )Net
                  property and equipment under capital leases
              
              $
              13
              
              $
              18
 
 Depreciation
        expense for assets recorded under capital leases was $5, $5, and $5 for the
        years ended June 30, 2004, 2003, and 2002, respectively.
  On
        August
        1, 2005, the Company entered into a one-year sublease with Inovar with respect
        to the 12 square foot manufacturing facility in its headquarters building
        in
        connection with the outsourcing of its manufacturing operations. Either party
        may terminate the lease for any reason upon 90 days written notice or 60
        days
        written notice to the other party of material breach of the agreement. The
        subtenant pays $11 per month and the sublease expires on July 31, 2006.
  Certain
        operating leases contain rent escalation clauses based on the consumer price
        index. Rental expense is recognized on a straight-line basis. Rental expense,
        which was composed of minimum payments under operating lease obligations,
        was
        $1.8 million, $1.3 million, and $755 for the years ended June 30, 2004, 2003,
        and 2002, respectively.
  Future
        minimum lease payments under capital leases and noncancelable operating leases
        with initial terms of one year or more are as follows as of June 30,
        2004:
  **Capital**
              
              **Gross
                  Operating Leases**
              
              **Less
                  Sublease**
              
              **Net
                  Operating Leases**For
                  years ending June 30:2005
              
              $
              7
              
              $
              676
              
              $
              -
              
              $
              6762006
              
              
              2
              
              
              553
              
              
              (121
              )
              
              4322007
              
              
              -
              
              
              221
              
              
              (11
              )
              
              2102008
              
              
              -
              
              
              21
              
              
              -
              
              
              212009
                  and thereafter
              
              
              -
              
              
              2
              
              
              -
              
              
              2Total
                  minimum lease payments
              
              
              9
              
              $
              1,473
              
              $
              (132
              )
              $
              1,341Less
                  amount representing interest
              
              
              (1
              )Present
                  value of net minimum lease payments
              
              
              8Less
                  current portion
              
              
              (6
              )Long-term
                  capital lease obligations
              
              $
              2
  **13.**
              **Note
                  Payable**
  On
        October 14, 2002, the Company entered into a note payable in the amount of
        $2,000. The note payable encompassed previous expenditures related to our
        Oracle
        Enterprise Resource Planning implementation. The term of the note was 36
        months
        with monthly payments of $60 and an interest rate of 5.8 percent. The Company
        had $932 outstanding under the note payable as of June 30, 2004.
  F-31
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **14.**
              **Accrued
                  Liabilities**
  Accrued
        liabilities consist of the following as of June 30, 2004 and 2003:
  **As
                  of June 30,****2004**
              
              **2003**Accrued
                  salaries and bonuses
              
              $
              948
              
              $
              710Other
                  accrued liabilities
              
              
              760
              
              
              327Legal
                  contingencies
              
              
              43
              
              
              147Class
                  action settlement
              
              
              9,013
              
              
              7,326Total
              
              $
              10,764
              
              $
              8,510
 
  **15.**
              **Costs
                  and Estimated Earnings on Uncompleted
                  Contracts**
  Information
        with respect to uncompleted contracts is as follows as of June 30, 2004 and
        2003:
  **As
                  of June 30,****2004**
              
              **2003**Billings
                  on uncompleted contracts
              
              $
              757
              
              $
              634Less
                  costs incurred on uncompleted contracts
              
              
              (382
              )
              
              (338
              )$
              375
              
              $
              296
  The
        above
        amounts are reported in the consolidated balance sheet in billings in excess
        of
        costs on uncompleted contracts.
  **16.**
              **Commitments
                  and Contingencies**
  The
        Company establishes contingent liabilities when a particular contingency
        is both
        probable and estimable. For the contingencies noted below the Company has
        accrued amounts considered probable and estimable. The Company is not aware
        of
        pending claims or assessments, other than as described below, which may have
        a
        material adverse impact on the Company’s financial position or results of
        operations.
  *Ascalade
        Communications, Ltd.* On
        August 11, 2003, the Company entered into a manufacturing agreement with
        Ascalade Communications, Ltd. related to the outsourced manufacturing of
        certain
        of its products. The manufacturing agreement established annual volume
        commitments. In the event annual volume commitments are not met, the Company
        will be subject to a tooling amortization charge for the difference between
        the
        Company’s volume commitment and its actual product purchases. For the calendar
        year ended December 31, 2004, the Company did not meet its annual volume
        commitment and was required to pay $30 in amortization charges. The Company
        was
        also responsible for prepayment of $274 in certain raw material inventory
        related to the annual volume commitment.
  *Legal
        Proceedings.* In
        addition to the legal proceedings described below, the Company is also involved
        from time to time in various claims and other legal proceedings which arise
        in
        the normal course of business. Such matters are subject to many uncertainties
        and outcomes that are not predictable. However, based on the information
        available to the Company as of November 28, 2005 and after discussions with
        legal counsel, the Company does not believe any such other proceedings will
        have
        a material, adverse effect on its business, results of operations, financial
        position, or liquidity, except as described below.
  F-32
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  *The
        SEC Action* .
        On
        January 15, 2003, the SEC filed a civil complaint against the Company; Frances
        Flood, then the Company’s Chairman, Chief Executive Officer and President; and
        Susie Strohm, then the Company’s Chief Financial Officer. The complaint alleged
        that from the quarter ended March 31, 2001, the defendants engaged in a program
        of inflating the Company’s revenues, net income, and accounts receivable by
        engaging in improper revenue recognition in violation of generally accepted
        auditing standards (“GAAP”) and Section 17(a) of the Securities Act of 1933 and
        Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 and
        various regulations promulgated thereunder. Following the filing of the
        complaint, the Company placed Ms. Flood and Ms. Strohm on administrative
        leave
        and they subsequently resigned from their positions with the Company. On
        December 4, 2003, the Company settled the SEC action by entering into a consent
        decree in which, without admitting or denying the allegations of the complaint,
        it consented to the entry of a permanent injunction prohibiting future
        securities law violations. No fine or penalty was assessed against the Company
        as part of the settlement.
  *U.S.
        Attorney’s Investigation* . ** On
        January 28, 2003, the Company was advised that the U.S. Attorney’s Office for
        the District of Utah had begun an investigation stemming from the complaint
        in
        the SEC action described above. No pleadings have been filed to date and
        the
        Company is cooperating fully with the U.S. Attorney’s Office.
  *The
        Whistleblower Action* .
        On
        February 11, 2003, the Company’s former vice president of sales filed a
        whistleblower claim with the Occupational Safety and Health Administration
        (“OSHA”) under the employee protection provisions of the Sarbanes-Oxley Act
        alleging that the Company had wrongfully terminated his employment for reporting
        the Company’s alleged improper revenue recognition practices to the SEC in
        December 2002, which precipitated the SEC action against the Company. In
        February 2004, OSHA issued a preliminary order in favor of the former officer,
        ordering that he be reinstated with back pay, lost benefits, and attorney’s
        fees. The former officer had also filed a separate lawsuit against the Company
        in the United States District Court for the District of Utah, Central Division,
        alleging various employment discrimination claims. In May 2004, the
        Administrative Law Judge approved a settlement agreement with the former
        officer
        pursuant to which he released the Company from all claims asserted by him
        in the
        OSHA proceeding and the federal court action in exchange for a cash payment
        by
        the Company. The settlement did not have a material impact on the Company's
        results of operations or financial condition. ****
  *The
        Shareholders’ Class Action* .
        On
        June 30, 2003, a consolidated complaint was filed against the Company,
        eight present or former officers and directors of the Company, and Ernst
&
Young LLP (“Ernst & Young”), the Company’s former independent public
        accountants, by a class consisting of purchasers of the Company’s common stock
        during the period from April 17, 2001 through January 15, 2003. The action
        followed the consolidation of several previously filed class action complaints
        and the appointment of lead counsel for the class. The allegations in the
        complaint were essentially the same as those contained in the SEC complaint
        described above. On December 4, 2003, the Company, on behalf of itself and
        all
        other defendants with the exception of Ernst & Young, entered into a
        settlement agreement with the class pursuant to which the Company agreed
        to pay
        the class $5.0 million and issue the class 1.2 million shares of its common
        stock. The cash payment was made in two equal installments, the first on
        November 10, 2003 and the second on January 14, 2005. On May 23, 2005, the
        court
        order was amended to require the Company to pay cash in lieu of stock to
        those
        members of the class who would otherwise have been entitled to receive fewer
        than 100 shares of stock. On September 29, 2005, the Company completed its
        obligations under the settlement agreement by issuing a total of 1,148,494
        shares of the Company’s common stock to the plaintiff class, including 228,000
        shares previously issued in November 2004, and the Company paid an aggregate
        of
        $127 in cash in lieu of shares to those members of the class who would otherwise
        have been entitled to receive an odd-lot number of shares or who resided
        in
        states in which there was no exemption available for the issuance of shares.
        The
        cash payments were calculated on the basis of $2.46 per share which was equal
        to
        the higher of (i) the closing price for the Company’s common stock as reported
        by the Pink Sheets on the business day prior to the date the shares were
        mailed,
        or (ii) the average closing price over the five trading days prior to such
        mailing date.
  Expenses
        related to the SEC investigation and the shareholders’ class action lawsuit was
        $5.1 million and $9.2 million for the years ended June 30, 2004 and 2003,
        respectively, and are reported in general and administrative expenses. During
        fiscal 2004, the Company incurred an expense of approximately $4.1 million
        related to the 1.2 million shares of the Company’s common stock that were issued
        in November 2004 and September 2005. On a quarterly basis, the Company revalues
        the un-issued shares to the closing price of the stock on the last day of
        the
        quarter.
  *The
        Shareholder Derivative Actions* .
        Between
        March and August 2003, four shareholder derivative actions were filed by
        certain shareholders of the Company against various present and past officers
        and directors of the Company and against Ernst & Young. The complaints
        asserted allegations similar to those asserted in the SEC complaint and
        shareholders’ class action described above and also alleged that the defendant
        directors and officers violated their fiduciary duties to the Company by
        causing
        or allowing the Company to recognize revenue in violation of GAAP and to
        issue
        materially misstated financial statements and that Ernst & Young breached
        its professional responsibilities to the Company and acted in violation of
        GAAP
        by failing to identify or prevent the alleged revenue recognition violations
        and
        by issuing unqualified audit opinions with respect to the Company’s fiscal 2002
        and 2001 financial statements. One of these actions was dismissed without
        prejudice on June 13, 2003. As to the other three actions, the Company’s
        Board of Directors appointed a special litigation committee of independent
        directors to evaluate the claims. That committee determined that the maintenance
        of the derivative proceedings against the individual defendents was not in
        the
        best interest of the Company. Accordingly, on December 12, 2003, the Company
        moved to dismiss those claims. In March 2004, the Company’s motions were
        granted, and the derivative claims were dismissed with prejudice as to all
        defendants except Ernst & Young. The Company was substituted as the
        plaintiff in the action and is now pursuing in its own name the claims against
        Ernst & Young.
  F-33
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  *Employment
        Separation Agreements* .
        On
        December 5, 2003, the Company entered into employment separation agreements
        with
        Frances Flood, the Company’s former Chairman, Chief Executive Officer and
        President, and Susie Strohm, the Company’s former Chief Financial Officer, which
        generally provided that these individuals would resign from their positions
        and
        employment with the Company, and the Company would make one-time, lump-sum
        payments in consideration of their surrender and delivery to the Company
        of
        shares of the Company’s common stock and Company stock options and their release
        of claims against the Company. Ms. Flood and Ms. Strohm also agreed to cooperate
        with the Company in the SEC action and related proceedings and the Company
        agreed to continue to indemnify such persons for attorneys fees incurred
        in the
        SEC action and related proceedings, subject to the limitations imposed by
        Utah
        law. The Company also released any existing claims against such persons except
        such claims as to which indemnification would not be permitted by Utah law.
        The
        agreement with Ms. Flood provided for a payment to her of $350 and her surrender
        and delivery to the Company of 35,000 shares of the Company’s common stock and
        706,434 stock options (461,433 of which were vested). The agreement with
        Ms.
        Strohm provided for a payment to her of $75 and her surrender and delivery
        to
        the Company of 15,500 shares of the Company’s common stock and 268,464 stock
        options (171,963 of which were vested) (see Note 21).
  *Indemnification
        of Officers and Directors* .
        The
        Company’s by-laws and the Utah Revised Business Corporation Act provide for
        indemnification of directors and officers against reasonable expenses incurred
        by such persons in connection with civil or criminal actions or proceedings
        to
        which they have been made parties because they are or were directors or officers
        of the Company or its subsidiaries. Indemnification is permitted if the person
        satisfies the required standards of conduct. The litigation matters described
        above involved certain of the Company’s current and former directors and
        officers, all of whom are covered by the aforementioned indemnity and if
        applicable, certain prior period insurance policies. The Company has indemnified
        such persons for legal expenses incurred by them in such actions and, as
        discussed below, has sought reimbursement from its insurance carriers. However,
        as also discussed below the Company cannot predict with certainty the extent
        to
        which the Company will recover the indemnification payments from its insurers.
  *The
        Insurance Coverage Action.* On
        February 9, 2004, the Company and Edward Dallin Bagley, the Chairman of the
        Board of Directors and significant shareholder of the Company, jointly filed
        an
        action against National Union Fire Insurance Company of Pittsburgh, Pennsylvania
        (“National Union”) and Lumbermens Mutual Insurance Company of Berkeley Heights,
        New Jersey (“Lumbermens Mutual”), the carriers of certain prior period directors
        and officers’ liability insurance policies, to recover the costs of defending
        and resolving claims against certain of the Company’s present and former
        directors and officers in connection with the SEC complaint, the shareholders’
class action, and the shareholder derivative actions described above, and
        seeking other damages resulting from the refusal of such carriers to timely
        pay
        the amounts owing under such liability insurance policies. This action has
        been
        consolidated into a declaratory relief action filed by one of the insurance
        carriers on February 6, 2004 against the Company and certain of its current
        and
        former directors. In this action, the insurers assert that they are entitled
        to
        rescind insurance coverage under our directors and officers liability insurance
        policies, $3.0 million of which was provided by National Union and $2.0 million
        of which was provided by Lumbermens Mutual, based on alleged misstatements
        in
        the Company’s insurance applications. In February 2005, the Company entered into
        a confidential settlement agreement with Lumbermens Mutual pursuant to which
        the
        Company and Mr. Bagley received a lump-sum cash amount and the plaintiffs
        agreed
        to dismiss their claims against Lumbermens Mutual with prejudice. The cash
        settlement is held in a segregated account until the claims involving National
        Union have been resolved, at which time the amounts received in the action
        will
        be allocated between the Company and Mr. Bagley. The amount distributed to
        the
        Company and Mr. Bagley will be determined based on future negotiations between
        the Company and Mr. Bagley. The Company cannot currently estimate the amount
        of
        the settlement which it will ultimately receive. Upon determining the amount
        of
        the settlement which the Company will ultimately receive, the Company will
        record this as a contingent gain. On October 21, 2005, the court granted
        summary
        judgment in favor of National Union on its rescission defense and accordingly
        entered a judgment dismissing all of the claims asserted by ClearOne and
        Mr.
        Bagley. The Company and Mr. Bagley have filed a notice of appeal concerning
        this
        adverse judgment and intend to vigorously pursue the appeal and any follow-up
        proceedings regarding their claims against National Union. Although the Company
        and Mr. Bagley are optimistic about their appeal, no assurances can be given
        that they will be successful. The Company and Mr. Bagley have entered into
        a
        Joint Prosecution and Defense Agreement in connection with the action and
        the
        Company is paying all litigation expenses except litigation expenses which
        are
        solely related to Mr. Bagley’s claims in the litigation.
  F-34
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  *Wells
        Submission.* The
        Company has been advised by the staff of the Salt Lake District Office of
        the
        SEC that the staff intends to recommend to the Commission that administrative
        proceedings be instituted to revoke the registration of the Company’s common
        stock based on the Company’s failure to timely file annual and quarterly reports
        with the Commission. The Company has provided the staff with a so-called
“Wells
        Submission” setting forth its position with respect to the staff’s intended
        recommendation, which submission would be considered by the Commission in
        determining whether or not to authorize an administrative proceeding. There
        can
        be no assurance that the Company will be successful in convincing the Commission
        not to initiate an administrative proceeding or that the Company would prevail
        if an administrative proceeding were initiated.
  *The
        Pacific Technology & Telecommunications Collection Action* .
        On
        August 12, 2003, the Company initiated a commercial arbitration proceeding
        against Pacific Technology & Telecommunications (“PT&T”), a former
        distributor, seeking to collect approximately $1.8 million that PT&T owed
        the Company for inventory it purchased and received but did not pay for.
        PT&T denied the Company’s claim and asserted counterclaims. Subsequently, on
        April 20, 2004, PT&T filed for protection under Chapter 7 of the United
        States Bankruptcy Code, which had the effect of staying the proceeding.
        Following PT&T’s bankruptcy filing, the Company successfully negotiated a
        settlement with the bankruptcy trustee. Under the settlement, which has been
        approved by the bankruptcy court, the Company paid $25 and obtained the right
        to
        recover all unsold ClearOne inventory held by PT&T and the right to pursue
        on the basis of an assignment any claims that PT&T may have against any of
        its own officers or directors, subject, however, to a maximum recovery of
        $800.
        The Company is currently in the process of investigating whether any such
        claims
        exist and, if so, whether it would be in the Company’s best interest to pursue
        them given the anticipated legal expenses and the uncertainties of being
        able to
        collect any resulting favorable judgment. The settlement also resulted in
        the
        release and dismissal with prejudice of all of PT&T’s claims against the
        Company. To date, the Company has not recovered any inventory held by PT&T.
  **17.**
              **Shareholders’
                  Equity**
  *Private
        Placement*
  On
        December 11, 2001, the Company closed a private placement of 1,500,000 shares
        of
        common stock. Gross proceeds from the private placement were $25.5 million,
        before costs and expenses associated with this transaction, which totaled
        $1.7
        million.
  The
        Company also issued warrants to purchase 150,000 shares of its common stock
        at
        $17.00 per share to its financial advisor. Such warrants vested immediately
        and
        were valued at $1.6 million using the Black-Scholes option pricing model
        with
        the following assumptions: expected dividend yield of 0 percent, risk-free
        interest rate of 4.4 percent, expected price volatility of 68.0 percent,
        and
        contractual life of five years. The warrants expire on November 27, 2006.
        All
        warrants were outstanding as of June 30, 2004.
  *Stock
        Repurchase Program*
  During
        October 2002, the Company’s Board of Directors approved a stock repurchase
        program to purchase up to 1,000,000 shares of the Company’s common stock over
        the following 12 months on the open market or in private transactions. During
        the fiscal year ended June 30, 2003, the Company repurchased 125,000 shares
        on
        the open market for $430. All repurchased shares were immediately retired.
        The
        stock repurchase program expired in October 2003 and no additional shares
        were
        repurchased.
  F-35
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **18.**
              **Stock
                  Options**
  The
        Company’s 1990 Incentive Plan (the “1990 Plan”) has shares of common stock
        available for issuance to employees and directors. Provisions of the 1990
        Plan
        include the granting of stock options. Generally, stock options vest over
        a
        five-year period at 10 percent, 15 percent, 20 percent, 25 percent, and 30
        percent per year. Certain other stock options vest in full after eight years.
        As
        of June 30, 2004, there were 30,750 options outstanding under the 1990 Plan
        and
        no additional options were available for grant under such plan.
  The
        Company also has a 1998 Stock Option Plan (the “1998 Plan”). Provisions of the
        1998 Plan include the granting of stock options. Of the options granted through
        December 1999, 1,066,000 will cliff vest after 9.75 years; however, such
        vesting
        was accelerated for 637,089 of these options upon meeting certain earnings
        per
        share goals through the fiscal year ended June 30, 2003. Of the options granted
        subsequent to December 1999 through June 2002, 1,248,250 will cliff vest
        after
        six years; however, such vesting may be accelerated if earnings per share
        goals
        through the fiscal year ending June 30, 2005 are met. Under the 1998 Plan,
        2,500,000 shares were authorized for grant. The 1998 Plan expires June 10,
        2008,
        or when all the shares available under the plan have been issued if this
        occurs
        earlier. As of June 30, 2004, there were 1,402,437 options outstanding under
        the
        1998 Plan and 795,439 options available for grant in the future.
  Stock
        option information for the fiscal years ending June 30, 2004, 2003, and 2002
        with respect to the Company’s stock option plans is as follows:
  **Stock
                  Options**
              
              **Number
                  of Shares**
              
              **Weighted
                  Average Exercise Price**Outstanding
                  at June 30, 2001
              
              
              1,750,798
              
              $
              8.37Granted
              
              
              366,908
              
              
              13.24Expired
                  and canceled
              
              
              (402,751
              )
              
              13.04Exercised
              
              
              (195,999
              )
              
              5.21Outstanding
                  at June 30, 2002
              
              
              1,518,956
              
              
              8.71Granted
              
              
              835,500
              
              
              3.57Expired
                  and canceled
              
              
              (350,200
              )
              
              11.57Exercised
              
              
              (31,500
              )
              
              2.72Outstanding
                  at June 30, 2003
              
              
              1,972,756
              
              
              6.12Granted
              
              
              1,118,250
              
              
              4.37Expired
                  and canceled
              
              
              (1,657,819
              )
              
              4.72Exercised
              
              
              -
              
              
              -Outstanding
                  at June 30, 2004
              
              
              1,433,187
              
              $
              6.37
  F-36
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        following table summarizes information about stock options outstanding as
        of
        June 30, 2004:
  Options
                  Outstanding
              
              Options
                  ExercisableExercise
                  Price Range
              
              Options
                  Outstanding
              
              Weighted
                  Average Contractual Remaining Life
              
              Weighted
                  Average Exercise Price
              
              Options
                  Exercisable
              
              Weighted
                  Average Exercise Price$0.00
                  to $2.04
              
              
              30,750
              
              
              1.5
                  years
              
              $
              0.75
              
              
              30,750
              
              $
              0.75$2.05
                  to $4.09
              
              
              703,789
              
              
              6.9
                  years
              
              
              3.14
              
              
              278,229
              
              
              3.37$4.10
                  to $8.18
              
              
              355,581
              
              
              8.0
                  years
              
              
              6.43
              
              
              12,081
              
              
              6.67$8.19
                  to $10.22
              
              
              15,256
              
              
              5.3
                  years
              
              
              9.67
              
              
              11,144
              
              
              9.67$10.23
                  to $12.26
              
              
              78,340
              
              
              6.4
                  years
              
              
              11.37
              
              
              26,860
              
              
              11.39$12.27
                  to $14.31
              
              
              143,321
              
              
              6.0
                  years
              
              
              13.30
              
              
              78,714
              
              
              13.58$14.32
                  to $16.35
              
              
              78,500
              
              
              5.9
                  years
              
              
              15.25
              
              
              26,689
              
              
              15.25$16.36
                  to $18.40
              
              
              27,150
              
              
              6.0
                  years
              
              
              17.15
              
              
              5,005
              
              
              17.15$18.41
                  to $20.45
              
              
              500
              
              
              5.7
                  years
              
              
              19.63
              
              
              338
              
              
              19.63Total
              
              
              1,433,187
              
              
              6.9
                  years
              
              $
              6.37
              
              
              469,810
              
              $
              6.43
  The
        following are the options exercisable at the corresponding weighted average
        exercise price as of June 30, 2004, 2003, and 2002, respectively: 469,810
        at
        $6.43; 839,871 at $4.80; and 793,965 at $6.10.
  The
        grant
        date weighted average fair value of options granted during the years ended
        June
        30, 2004, 2003, and 2002 was $3.29, $2.50, and $9.33, respectively. The fair
        value of options was determined using the Black-Scholes option pricing model
        with the following weighted average assumptions for the fiscal years ended
        June
        30, 2004, 2003, and 2002: expected dividend yield, 0 percent for each year;
        risk-free interest rate was 3.2 percent, 2.5 percent, and 4.1 percent,
        respectively; expected price volatility, 91.2 percent, 90.0 percent, and
        81.2
        percent; and expected life of options, 5.2, 4.9, and 5.5 years.
  During
        the fiscal year ended June 30, 2001, the Company modified 25,000 options
        to
        reduce the exercise price of the award. The award is being accounted for
        as
        variable and the intrinsic value of the award is remeasured until the date
        the
        award is exercised, is forfeited, or expires unexercised. Compensation cost
        with
        respect to a variable award is being recognized on an accelerated basis in
        accordance with Financial Accounting Standards Board Interpretation No. 28,
        “Accounting for Stock Appreciation Rights and Other Variable Stock Option
        or
        Award Plans.”
  Due
        to
        the Company’s failure to remain current in its filing of periodic reports with
        the SEC, employees, executive officers, and directors are currently not allowed
        to exercise options under either the 1990 Plan or the 1998 Plan. Since December
        2003, individual grants that had been affected by this situation were modified
        to extend the life of the option through the date the Company becomes current
        in
        its filings with the SEC and options again become exercisable. These
        modifications include (i) the extension of the post-service exercise period
        of
        vested options held by persons who have ceased to serve the Company; (ii)
        the
        extension of the option exercise period for maturing options that were fully
        vested and unexercised; (iii) the acceleration of vesting schedule for certain
        key employees whose employment terminated due to the sale of the conferencing
        services business to Premiere; and (iv) the acceleration of vesting schedule
        of
        one former officer at termination. The Company booked compensation expense
        of
        $200 during fiscal 2004 due to these modifications.
  **19.**
              **Employee
                  Stock Purchase Plan**
  The
        Company has an Employee Stock Purchase Plan (“ESPP”). A total of 500,000 shares
        of common stock were reserved for issuance under the ESPP. The Company’s Board
        of Directors or a committee established by the Board of Directors administers
        the ESPP and has authority to interpret the terms of the ESPP and to determine
        eligibility. The ESPP is intended to qualify under Section 423 of the Internal
        Revenue Code. All employees are eligible after thirty days
        employment.
  F-37
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  Employees
        can purchase common stock through payroll deductions of up to 10 percent
        of
        their base pay. Amounts deducted and accumulated by the employees are used
        to
        purchase shares of common stock on the last day of each month. The Company
        directs a participating broker to conduct open market purchases of the common
        stock and the purchase price is the price of the employee’s shares. The Company
        contributes to the account of the employee one share of common stock for
        every
        nine shares purchased by the employee under the ESPP. An employee may end
        participation at any time. Participation in the ESPP ends upon termination
        of
        employment. During the fiscal years ended June 30, 2004, 2003, and 2002,
        0,
        1,841, and 724 shares of common stock were issued under the ESPP. The ESPP
        is
        compensatory under APB Opinion No. 25, “Accounting for Stock Issued to
        Employees” (“APB 25”). Compensation expense from the ESPP was $0, $8, and $13
        for the fiscal years ended June 30, 2004, 2003, and 2002, respectively. The
        program was suspended during fiscal 2003 due to the Company’s failure to remain
        current in its filing of periodic reports with the SEC.
  **20.**
              **Significant
                  Customers**
  During
        the fiscal years ended June 30, 2004, 2003, and 2002, revenues in the Company’s
        product segment included sales to different distributors that represented
        more
        than 10 percent each. During the fiscal year ended June 30, 2004, the Company
        had three distributors whose individual sales represented more than 10 percent
        of total revenue and whose combined sales represented 53.0 percent of total
        revenue. These same distributors each had balances of greater than 10 percent
        of
        the Company’s total accounts receivable aging as of June 30, 2004. Combined
        these distributors represented 54.9 percent of gross accounts receivable.
        During
        the fiscal year ended June 30, 2003, the Company had two distributors whose
        individual sales represented more than 10 percent of total revenue and whose
        combined sales represented 24.8 percent of total revenue. During the fiscal
        year
        ended June 30, 2002, the Company had one distributor whose individual sales
        represented 15.7 percent of its total revenues.
  These
        distributors facilitate product sales to a large number of end-users, none
        of
        which is known to account for more than 10 percent of the Company’s revenue from
        product sales. Nevertheless, the loss of one or more distributors could reduce
        revenues and have a material adverse effect on the Company’s business and
        results of operations.
  **21.**
              **Severance
                  Charges**
  During
        the fiscal year ended June 30, 2003, the Company recorded a total of $362
        in
        severance and other related costs associated with a reduction of 43 employees
        in
        the United States and Ireland. Such costs were included in operating expenses
        during the year ended June 30, 2003. The Company paid out this entire amount
        during the year ended June 30, 2003.
  During
        the fiscal year ended June 30, 2004, the Company recorded a total of $182
        in
        severance associated with settlement agreements and releases with three former
        executive officers in connection with the cessation of their employment.
        Such
        costs were included in operating expenses during the year ended June 30,
        2004.
        The Company paid these amounts during the years ended June 30, 2004 and 2005.
        In
        connection with the employment separation agreements between the Company
        and Ms.
        Flood and the Company and Ms. Strohm, the Company recorded compensation expense
        of $306 and $56, respectively (See Note 16).
  **22.**
              **Retirement
                  Savings and Profit Sharing Plan**
  The
        Company has a 401(k) retirement savings and profit sharing plan to which
        it
        makes discretionary matching contributions, as authorized by the Board of
        Directors. All full-time employees who are at least 21 years of age and have
        a
        minimum of sixty days of service with the Company are eligible to participate
        in
        the plan. Matching contributions are 20 percent up to 6 percent of the
        employee’s earnings, paid bi-weekly; however, prior to the fiscal year ended
        June 30, 2003, the Company paid matching contributions at fiscal year-end.
        The
        Company’s retirement plan contribution expense for the fiscal years ended June
        30, 2004, 2003, and 2002 totaled $30, $0, and $72,
        respectively.
  F-38
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **23.**
              **Income
                  Taxes**
  Income
        (loss) from continuing operations and before income taxes consisted of the
        following:
  **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**U.S.
              
              $
              (12,438
              )
              $
              (17,822
              )
              $
              (3,261
              )Non-U.S.
              
              
              556
              
              
              (8,423
              )
              
              (6,393
              )$
              (11,882
              )
              $
              (26,245
              )
              $
              (9,654
              )
 
  The
        benefit (provision) for income taxes on income from continuing operations
        consisted of the following:
  **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**Current:U.S.
                  Federal
              
              $
              3,698
              
              $
              3,460
              
              $
              (2,028
              )U.S.
                  State
              
              
              163
              
              
              132
              
              
              (245
              )Non-U.S.
              
              
              (202
              )
              
              (47
              )
              
              (22
              )Stock
                  option benefit credited to paid in capital
              
              
              -
              
              
              -
              
              
              (452
              )Total
                  current
              
              $
              3,659
              
              $
              3,545
              
              $
              (2,747
              )Deferred:U.S.
                  Federal
              
              
              666
              
              
              771
              
              
              3,714U.S.
                  State
              
              
              440
              
              
              613
              
              
              505Non-U.S.
              
              
              -
              
              
              -
              
              
              (1
              )Total
                  deferred
              
              
              1,106
              
              
              1,384
              
              
              4,218Total
                  current and deferred income taxes
              
              
              4,765
              
              
              4,929
              
              
              1,471Increase
                  in valuation allowance
              
              
              (4,185
              )
              
              (3,608
              )
              
              (1,298
              )Benefit
                  (provision) for income taxes
              
              $
              580
              
              $
              1,321
              
              $
              173
  F-39
 
 **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        following table presents the principal reasons for the difference between
        the
        actual effective income tax rate and the expected U.S. federal statutory
        income
        tax rate of 34.0 percent on income from continuing operations:
  **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**U.S.
                  federal statutory income tax rate at 34.0%
              
              $
              4,040
              
              $
              8,924
              
              $
              3,282State
                  income tax (provision) benefit, net of federal incometax effect
              
              
              75
              
              
              54
              
              
              (373
              )Extraterritorial
                  income exclusion
              
              
              -
              
              
              -
              
              
              79Research
                  and development credit
              
              
              108
              
              
              -
              
              
              46Foreign
                  earnings or losses taxes at different rates
              
              
              (10
              )
              
              (255
              )
              
              (132
              )Impairment
                  of investment in foreign subsidiary
              
              
              -
              
              
              (2,596
              )
              
              (2,112
              )Impairment
                  of E.mergent goodwill
              
              
              -
              
              
              (1,709
              )
              
              -Change
                  in valuation allowance
              
              
              (4,185
              )
              
              (3,608
              )
              
              (1,298
              )Valuation
                  allowance change attributable to state tax impactand other
              
              
              436
              
              
              661
              
              
              764Non-deductible
                  items and other
              
              
              116
              
              
              (150
              )
              
              (83
              )Total
              
              $
              580
              
              $
              1,321
              
              $
              173
  Deferred
        income taxes are determined based on the differences between the financial
        reporting and income tax bases of assets and liabilities using enacted income
        tax rates expected to apply when the differences are expected to be settled
        or
        realized. As of June 30, 2004 and 2003, significant components of the net
        U.S.
        deferred income tax assets and liabilities were as follows:
  **As
                    of June 30,****2004**
                
                **2003**Deferred
                    income tax assets:Net
                    operating loss carryforwards
                
                $
                1,838
                
                $
                724Accrued
                    liabilities
                
                
                3,865
                
                
                2,980Allowance
                    for sales returns and doubtful accounts
                
                
                9
                
                
                155Inventory
                    reserve
                
                
                1,019
                
                
                1,939Deferred
                    revenue
                
                
                1,455
                
                
                1,796Installment
                    sale
                
                
                178
                
                
                128Accumulated
                    research and development credits
                
                
                382
                
                
                142Alternative
                    minimum tax credits
                
                
                355
                
                
                -Basis
                    difference in intangible assets
                
                
                797
                
                
                852Other
                
                
                227
                
                
                162Subtotal
                
                
                10,125
                
                
                8,878Valuation
                    allowance
                
                
                (9,507
                )
                
                (5,252
                )Deferred
                    income tax assets
                
                
                618
                
                
                3,626Deferred
                    income tax liabilities:Basis
                    difference in fixed assets
                
                
                (618
                )
                
                (458
                )Other
                
                
                -
                
                
                (89
                )Deferred
                    income tax liabilities
                
                
                (618
                )
                
                (547
                )Net
                    deferred income tax assets
                
                $
                -
                
                $
                3,079
  F-40
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  Deferred
        income tax assets and liabilities were netted by income tax jurisdiction
        and
        were reported in the consolidated balance sheets as of June 30, 2004 and
        2003,
        as follows:
  **As
                  of June 30,****2004**
              
              **2003**Current
                  deferred income tax assets
              
              $
              401
              
              $
              2,531Long-term
                  deferred income tax assets
              
              
              -
              
              
              548Current
                  deferred income tax liabilities
              
              
              -
              
              
              -Long-term
                  deferred income tax liabilities
              
              
              (401
              )
              
              -Net
                  deferred income tax assets
              
              $
              -
              
              $
              3,079
  The
        Company has not provided for U.S. deferred income taxes or foreign withholding
        taxes on the undistributed earnings of its non-U.S. subsidiaries since these
        earnings are intended to be reinvested indefinitely and therefore, the foreign
        currency translation adjustment included in other comprehensive income has
        not
        been tax effected. It is not practical to estimate the amount of additional
        taxes that might be payable on such undistributed earnings. Total undistributed
        earnings from foreign subsidiaries were $559, $205, and $152 for the fiscal
        years ended June 30, 2004, 2003, and 2002, respectively.
  As
        of
        June 30, 2004 and 2003, the Company has a net operating loss (“NOL”), research
        credit, and alternative minimum tax credit carryforwards for U.S. federal
        income
        tax reporting purposes of $2.4 million, $313, and $355, respectively, which
        will
        begin to expire in 2021. Of these carryforwards, $697 of the NOL and $159
        of the
        research credit were generated by E.mergent before it was acquired by the
        Company and are subject to a full valuation allowance. When these carryforwards
        are subsequently recognized, the tax benefit will be credited to operations
        since the goodwill related to E.mergent was fully impaired at June 30, 2004.
        The
        Company also has state NOL and research and development tax credit carryforwards
        of approximately $20.4 million and $69, respectively, which expire depending
        on
        the rules of the various states to which the carryovers relate. The Company
        also
        has a NOL carryforward in its Irish subsidiary. However, the Company is in
        the
        process of closing its Irish subsidiary and does not anticipate ever being
        able
        to use these losses and has not separately reported these amounts. The Company
        also has a small amount of deferred tax assets, subject to a full valuation
        allowance, at its Canadian subsidiary. As discussed in Note 26, the Company
        has
        sold its Canadian subsidiary and therefore has not separately reported these
        amounts.
  The
        Internal Revenue Code contains provisions that reduce or limit the availability
        and utilization of NOL and credit carryforwards if certain changes in ownership
        have taken place. The Company has not determined if it has undergone an
        ownership change under these provisions. If the Company has undergone an
        ownership change under these rules, the Company’s ability to utilize its NOLs
        and credit carryovers may be limited. However, as a result of an ownership
        change associated with the acquisition of E.mergent, utilization of E.mergent’s
        NOL and research and development credit carryfowards arising prior to the
        ownership change date, will be limited to an amount not to exceed the value
        of
        E.mergent on the ownership change date multiplied by the Federal long-term
        tax-exempt rate. If the annual limitation of $1.1 million is not utilized
        in any
        particular year, it will remain available on a cumulative basis through the
        expiration date of the applicable NOL and credit carryforwards. Management
        does
        not believe that these rules will adversely impact the Company’s ability to
        utilize these losses. Certain states also have rules that could limit the
        Company’s ability to use its state NOL and research credit
        carryovers.
  SFAS
        No.
        109, *“Accounting
        for Income Taxes,”* requires
        that a valuation allowance be established when it is more likely than not
        that
        all or a portion of a deferred tax asset will not be realized. Valuation allowances were recorded in 2004 and 2003 due to the uncertainty
        of
        realization of the assets based upon a number of factors, including lack
        of
        profitability in 2004, 2003, and 2002 and the limited taxable income in
        carryback years as permitted by the tax law. For the year ended June 30,
        2003,
        the Company has recorded a valuation allowance against a portion of its net
        deferred tax assets. For the year ended June 30, 2004, the Company has recorded
        a valuation allowance against all of its net deferred tax assets. A full
        valuation allowance was recorded because none of the net deferred tax assets
        would generate a NOL that could be carried back to prior tax years. Based
        on the
        Company’s lack of profitability in recent years it is more likely than not that
        all of the net deferred tax assets will not be realized that cannot be carried
        back to prior tax years.
  F-41
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        net
        change in the Company’s domestic valuation allowance was an increase of $4.3
        million, $3.5 million, and $1.7 million for the years ended June 30, 2004,
        2003,
        and 2002, respectively.
  **24.**
              **Related-Party
                  Transactions**
  Edward
        Dallin Bagley, Chairman of the Board of Directors and significant shareholder
        of
        the Company, served as a consultant to the Company from November 2002 through
        January 2004 and was paid $5 per month for his services. He consulted with
        Company’s management on mergers and financial matters on an as needed basis. Mr.
        Bagley’s services were performed pursuant to an oral agreement, the terms of
        which were approved by the Board of Directors.
  The
        Company and Mr. Bagley jointly filed an action against National Union and
        Lumbermens Mutual. For additional discussion see Note 16 under *The
        Insurance Coverage Action.*
  **25.**
              **Segment
                  and Geographic Information**
  During
        the fiscal years ended June 30, 2004, 2003, and 2002, the Company included
        in
        continuing operations two operating segments - products and business services.
        The Company’s Chief Executive Officer and senior management rely on internal
        management reports that provide financial and operational information by
        operating segment. The Company’s management makes financial decisions and
        allocates resources based on the information it received from these internal
        management reports. The business services segment was established in fiscal
        2002
        as a result of the acquisition of E.mergent in late fiscal 2002 and includes
        certain operations of E.mergent and the operations of OM Video. During fiscal
        2004, the Company sold its business services-related E.mergent operations
        and
        accordingly these operations have been omitted from these disclosures (see
        Note
        4). Because of the changes in the Company’s operations and the information being
        provided to the Company’s Chief Executive Officer, the segment disclosures for
        fiscal 2003 and 2002 have been restated to incorporate these
        changes.
  The
        Company’s segments are strategic business units that offer products and services
        to satisfy different customer needs. They are managed separately because
        each
        segment requires focus and attention on its market and distribution channel.
        The
        products segment includes products for audio conferencing products, video
        conferencing products, and sound reinforcement products. The business services
        segment provided services in Canada, including technical services such as
        designing, constructing, and servicing of conference systems and maintenance
        contracts, and value-added services such as proactive field support, training,
        system consulting, and help desk.
  The
        accounting policies of the reportable segments are the same as those described
        in the summary of significant accounting policies. For operating segments,
        segment profit (loss) is measured based on income from continuing operations
        before provision (benefit) for income taxes. Other income (expense), net
        is
        unallocated.
  The
        United States was the only country to contribute more than 10 percent of
        total
        revenues in each fiscal year. Canada contributed more than 10 percent of
        total
        revenues in the fiscal years ended June 30, 2004 and 2003. The Company’s
        revenues are substantially denominated in U.S. dollars and are summarized
        geographically as follows (in thousands):
  **Years
                  Ended June 30,****2004**
              
              **2003**
              
              **2002**United
                  States
              
              $
              21,654
              
              $
              19,683
              
              $
              22,035Canada
              
              
              6,274
              
              
              6,316
              
              
              474All
                  other countries
              
              
              5,966
              
              
              8,678
              
              
              3,744Total
              
              $
              33,894
              
              $
              34,677
              
              $
              26,253
  The
        Company’s long-lived assets, net of accumulated depreciation, located outside of
        the United States are $83, $39, and $41, for the fiscal years ended June
        30,
        2004, 2003, and 2002, respectively.
  F-42
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  The
        following tables summarize the Company’s segment information:
  **Product**
              
              **Business
                  Services**
              
              **Product
                  Segment Transactions with the Business Services
                  Segment**
              
              **Total**2004:Revenue
              
              $
              27,879
              
              $
              6,058
              
              $
              (43
              )
              $
              33,894Gross
                  profit
              
              
              11,465
              
              
              2,006
              
              
              (8
              )
              
              13,4632003:Revenue
              
              $
              27,516
              
              $
              7,165
              
              $
              (4
              )
              $
              34,677Gross
                  profit
              
              
              9,405
              
              
              3,110
              
              
              (8
              )
              
              12,5072002:Revenue
              
              $
              26,253
              
              $
              -
              
              $
              -
              
              $
              26,253Gross
                  profit
              
              
              12,369
              
              
              -
              
              
              -
              
              
              12,369
  The
        reconciliation of segment information to the Company’s consolidated totals is as
        follows (in thousands):
  **Fiscal
                  Year Ended June 30, 2004****Product**
              
              **Business
                  Services**
              
              **Corporate**
              
              **Total**Gross
                  profit
              
              $
              11,457
              
              $
              2,006
              
              $
              -
              
              $
              13,463Marketing
                  and selling expense
              
              
              (7,879
              )
              
              (390
              )
              
              -
              
              
              (8,269
              )General
                  and administrative expense
              
              
              (406
              )
              
              (1,113
              )
              
              (11,388
              )
              
              (12,907
              )Research
                  and product development expense
              
              
              (3,908
              )
              
              -
              
              
              -
              
              
              (3,908
              )Interest
                  income
              
              
              -
              
              
              -
              
              
              52
              
              
              52Interest
                  expense
              
              
              -
              
              
              -
              
              
              (183
              )
              
              (183
              )Other
                  income (expense), net
              
              
              -
              
              
              -
              
              
              (130
              )
              
              (130
              )(Provision)
                  benefit for income taxes
              
              
              -
              
              
              -
              
              
              580
              
              
              580Total
                  income from continuing operations
              
              $
              (736
              )
              $
              503
              
              $
              (11,069
              )
              $
              (11,302
              )Depreciation
                  and amortization expense
              
              $
              1,934
              
              $
              18
              
              $
              -
              
              $
              1,952Identifiable
                  assets
              
              $
              17,732
              
              $
              1,302
              
              $
              9,828
              
              $
              28,862
  F-43
 
 **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  **Fiscal
                  Year Ended June 30, 2003****Product**
              
              **Business
                  Services**
              
              **Corporate**
              
              **Total**Gross
                  profit
              
              $
              9,397
              
              $
              3,110
              
              $
              -
              
              $
              12,507Marketing
                  and selling expense
              
              
              (6,468
              )
              
              (412
              )
              
              -
              
              
              (6,880
              )General
                  and administrative expense
              
              
              (365
              )
              
              (1,270
              )
              
              (13,763
              )
              
              (15,398
              )Research
                  and product development expense
              
              
              (2,995
              )
              
              -
              
              
              -
              
              
              (2,995
              )Impairment
                  losses
              
              
              (5,102
              )
              
              (8,426
              )
              
              -
              
              
              (13,528
              )Interest
                  income
              
              
              -
              
              
              -
              
              
              85
              
              
              85Interest
                  expense
              
              
              -
              
              
              -
              
              
              (91
              )
              
              (91
              )Other
                  income (expense), net
              
              
              -
              
              
              -
              
              
              55
              
              
              55(Provision)
                  benefit for income taxes
              
              
              -
              
              
              -
              
              
              1,321
              
              
              1,321Total
                  income from continuing operations
              
              $
              (5,533
              )
              $
              (6,998
              )
              $
              (12,393
              )
              $
              (24,924
              )Depreciation
                  and amortization expense
              
              $
              1,805
              
              $
              278
              
              $
              -
              
              $
              2,083Identifiable
                  assets
              
              $
              14,255
              
              $
              910
              
              $
              14,089
              
              $
              29,254
 
  **Fiscal
                  Year Ended June 30, 2002****Product**
              
              **Business
                  Services**
              
              **Corporate**
              
              **Total**Gross
                  profit
              
              $
              12,369
              
              $
              -
              
              $
              -
              
              $
              12,369Marketing
                  and selling expense
              
              
              (7,010
              )
              
              -
              
              
              -
              
              
              (7,010
              )General
                  and administrative expense
              
              
              (880
              )
              
              -
              
              
              (3,496
              )
              
              (4,376
              )Research
                  and product development expense
              
              
              (3,810
              )
              
              -
              
              
              -
              
              
              (3,810
              )Impairment
                  losses
              
              
              (7,115
              )
              
              -
              
              
              -
              
              
              (7,115
              )Interest
                  income
              
              
              -
              
              
              -
              
              
              293
              
              
              293Interest
                  expense
              
              
              -
              
              
              -
              
              
              (23
              )
              
              (23
              )Other
                  income (expense), net
              
              
              -
              
              
              -
              
              
              18
              
              
              18(Provision)
                  benefit for income taxes
              
              
              -
              
              
              -
              
              
              173
              
              
              173Total
                  income from continuing operations
              
              $
              (6,446
              )
              $
              -
              
              $
              (3,035
              )
              $
              (9,481
              )Depreciation
                  and amortization expense
              
              $
              2,176
              
              $
              -
              
              $
              -
              
              $
              2,176Identifiable
                  assets
              
              $
              23,497
              
              $
              -
              
              $
              19,760
              
              $
              43,257
  **26.**
              **Subsequent
                  Events**
  *Sale
        of Conferencing Services Business.* On July
        1, 2004, the Company sold its conferencing services business segment to Premiere
        for $21.3 million. Of the purchase price $1.0 million was placed into an
        18-month Indemnity Escrow account and an additional $300 was placed into
        a
        working capital escrow account. The Company received the $300 working capital
        escrow funds approximately 90 days after the execution date of the contract.
        Additionally, $1.4 million of the proceeds were utilized to pay off equipment
        leases pertaining to assets being conveyed to Premiere. From
        July
        1, 2004 through February 28, 2005, we sublet 5,416 square feet of space in
        our
        headquarters building to Premiere Conferencing, the purchaser of our
        conferencing services business. The
        Company classified the conferencing services operations as discontinued
        operations in the accompanying consolidated financial statements (see Note
        4).
  F-44
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  *Settlement
        Agreement and Release.* In
        connection with the Company’s sale of its conferencing services business, the
        Company entered into a severance agreement with Angelina Beitia, the Company’s
        former Vice-President, on July 15, 2004, which provided for a lump-sum payment
        of $100. In addition, Ms. Beitia surrendered and delivered to the Company
        all
        outstanding vested and unvested options.
  *Pre-payment
        of Note Payable* .
        The
        Company pre-paid the balance of the note payable, $769, in October 2004.
        (see
        Note 13).
  *Closing
        of Germany Office* .
        During
        December 2004, the Company closed its Germany office and consolidated its
        activity with the United Kingdom office. Costs associated with closing the
        Germany office totaled $305 in fiscal 2005 and included operating leases
        and
        severance payments.
  *Sale
        of OM Video.* On March
        4, 2005, the Company sold all of the issued and outstanding stock of its
        Canadian subsidiary, ClearOne Communications of Canada, Inc. (“ClearOne Canada”)
        to 6351352 Canada Inc., a Canada corporation. ClearOne Canada owned all the
        issued and outstanding stock of Stechyson Electronics, Ltd., which conducts
        business under the name OM Video. The Company agreed to sell the stock of
        ClearOne Canada for $200 in cash; a $1.3 million note payable over a 15-month
        period, with interest accruing on the unpaid balance at the rate of 5.3 percent
        per year; and contingent consideration ranging from 3.0 percent to 4.0 percent
        of related gross revenues over a five-year period. The Company expects to
        present all OM Video activities in discontinued operations in the fiscal
        year
        2005 consolidated financial statements. As of June 30, 2004, the assets of
        the
        Canada audiovisual integration business were classified as held and used.
        (see
        Note 3.)
  *The
        Shareholders’ Class Action* .
        On
        January 14, 2005, the second cash payment of $2.5 million was paid by the
        Company as agreed to in the settlement agreement dated December 4, 2003.
        On May
        23, 2005, the court order was amended to require the Company to pay cash
        in lieu
        of stock to those members of the class who would otherwise have been entitled
        to
        receive fewer than 100 shares of stock. On September 29, 2005, the Company
        completed its obligations under the settlement agreement by issuing a total
        of
        1,148,494 shares of the Company’s common stock to the plaintiff class, including
        228,000 shares previously issued in November 2004, and the Company paid an
        aggregate of $127 in cash in lieu of shares to those members of the class
        who
        would otherwise have been entitled to receive an odd-lot number of shares
        or who
        resided in states in which there was no exemption available for the issuance
        of
        shares. The cash payments were calculated on the basis of $2.46 per share
        which
        was equal to the higher of (i) the closing price for the Company’s common stock
        as reported by the Pink Sheets on the business day prior to the date the
        shares
        were mailed, or (ii) the average closing price over the five trading days
        prior
        to such mailing date. (see Note 16.)
  *Third-Party
        Manufacturing Agreement.* On
        August 1, 2005, the Company entered into a Manufacturing Agreement with Inovar,
        Inc., a Utah-based electronics manufacturing services provider (“Inovar”),
        pursuant to which the Company agreed to outsource its Salt Lake City
        manufacturing operations to Inovar. The agreement is for an initial term
        of
        three years, which shall automatically be extended for successive and additional
        terms of one year each unless terminated by either party upon 120 days advance
        notice at any time after the second anniversary of the agreement. The agreement
        generally provides, among other things, that Inovar shall: (i) furnish the
        necessary personnel, material, equipment, services, and facilities to be
        the
        exclusive manufacturer of substantially all the Company’s products that were
        previously manufactured at its Salt Lake City, Utah manufacturing facility,
        and
        the non-exclusive manufacturer of a limited number of products, provided
        that
        the total cost to the Company (including price, quality, logistic cost, and
        terms and conditions of purchase) is competitive; (ii) provide repair service,
        warranty support, and proto-type services for new product introduction on
        terms
        to be agreed upon by the parties; (iii) purchase certain items of the Company’s
        manufacturing equipment; (iv) lease certain other items of the Company’s
        manufacturing equipment and have a one-year option to purchase such leased
        items; (v) have the right to lease the Company’s former manufacturing employees
        from a third-party employee leasing company; and (vi) purchase the Company’s
        parts and materials on hand and in transit at the Company’s cost for such items
        with the purchase price payable on a monthly basis when and if such parts
        and
        materials are used by Inovar. The parties also entered into a one-year sublease
        for approximately 12 square feet of manufacturing space located in the Company’s
        headquarters in Salt Lake City, Utah, which sublease may be terminated by
        either
        party upon 90 days notice. The agreement provides that products shall be
        manufactured by Inovar pursuant to purchase orders submitted by the Company
        at
        purchase prices to be agreed upon by the parties, subject to adjustment based
        upon such factors as volume, long range forecasts, change orders, etc. The
        Company also granted Inovar a right of first refusal to manufacture new products
        developed by the Company at a cost to the Company (including price, quality,
        logistic cost, and terms and conditions of purchase) that is competitive.
        Costs
        associated with outsourcing the Company’s manufacturing totaled approximately
        $425 including severance payments, facilities no longer used by the Company,
        and
        fixed assets that will be disposed of. The Company anticipates that these
        costs
        will be included in the fiscal 2005 and 2006 consolidated financial
        statements.
  F-45
  **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)**
 **(in
        thousands except share and per share amounts)**
  *Payoff
        of Burk Note Receivable* .
        On
        August 22, 2005, the Company entered into a Mutual Release and Waiver Agreement
        with Burk pursuant to which Burk paid us $1.3 million in full satisfaction
        of
        the promissory note, which included a discount of approximately $120. As
        part of
        the Mutual Release and Waiver Agreement, we waived any right to future
        commission payments from Burk and we granted mutual releases to one another
        with
        respect to claims and liabilities. Subsequent to June 30, 2004, we anticipate
        recognizing a pre-tax gain on the sale of approximately $1.5 million. (see
        Note
        5).
  
 F-46