**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, 2003
  **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)
              
              (Zip
                  Code)
 
 Registrant’s
        telephone number **(801)
        975-7200**
  **Securities
        registered under Section 12(b) of the Act:**
 None
  **Securities
        registered under Section 12(g) of the Act:**
  **Common
        Stock, $0.001 par value**
 (Title
        of
        class)
  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 9,495,093 shares of voting common stock held
        by
        non-affiliates is approximately $37,505,617 at August 10, 2005, based on
        the
        $3.95 closing price for the Company’s common stock on the Pink Sheets on August
        10, 2005.
  
 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  ̈
  The
        number of shares of ClearOne common stock outstanding as of June 30, 2003
        and
        June 30, 2005, respectively were 11,086,733 and 11,264,233.
 
 **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,” “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, statement 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 “Item 1. Description of Business,”
and “Item 7. Management’s Discussion and Analysis of Financial Condition and
        Results of Operations.” 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
  Due
        to
        the re-audit of the Company’s financial statements for its 2002 and 2001 fiscal
        years, this Annual Report on Form 10-K for the fiscal year ended June 30,
        2003
        is first being filed in August 2005. The Company is in the process of preparing
        its Annual Report on Form 10-K for the fiscal years ended June 30, 2004 and
        2005, respectively, and plans to file such reports at the earliest practicable
        date. Shareholders and others are cautioned that the financial statements
        included in this report are two years old and are not indicative of the
        operating results that may be expected for the years ending June 30, 2004
        and
        2005. Shareholders are also cautioned that since the Company is not current
        in
        the filing of required reports with the Securities and Exchange Commission
        (SEC), the SEC could initiate proceedings against the Company at any time,
        including proceedings to suspend trading of the Company’s
        securities.
  **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 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. 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 Information***
  This
        report contains our audited consolidated financial statements for the fiscal
        year ended June 30, 2003 and our restated audited consolidated financial
        statements for the fiscal years ended June 30, 2002 and 2001. In connection
        with
        the restatement, we performed a comprehensive review of our previously issued
        consolidated financial statements for fiscal years 2002 and 2001 and identified
        a significant number of errors and adjustments. The restated consolidated
        financial statements include restatements of assets, liabilities, stockholders’
equity, results of operations and cash flows, and resulted in cumulative
        net
        reductions to stockholders’ equity as of June 30, 2002 and 2001 of approximately
        $17.4 million and approximately $3.8 million, respectively, and reductions
        in
        previously reported net income for the years ended June 30, 2002 and 2001
        of
        approximately $14.1 million and $3.9 million, respectively. The restated
        2002
        and 2001 financial statements were audited by KPMG LLP (KPMG), who replaced
        Ernst & Young LLP (Ernst & Young) as our independent registered public
        accounting firm in December 2003. Certain restated quarterly financial
        information is included in this report in the section captioned “Item 6.
        Selected Financial Data.”
  We
        have
        not amended our prior filings to reflect the restatement. As a result, the
        information previously filed in our annual reports on Form 10-K for fiscal
        years
        2002 and 2001, our quarterly reports on Form 10-Q for the quarterly periods
        included in those fiscal years and for the quarter ended September 30, 2002
        and
        any current filings on Form 8-K, or other disclosures containing fiscal 2003,
        2002 or 2001 information filed or made prior to the filing of this 2003 Form
        10-K should not be relied upon and have been superceded by this Form
        10-K.
  ***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, Greg 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.
  4
 
 ***The
        SEC Action.*** ClearOne’s
        previously filed financial statements were the subject of a civil action
        filed
        by the U.S. Securities and Exchange Commission 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) will not be issued
        from the settlement fund and claimants who would otherwise be entitled to
        receive 99 or fewer shares will be paid cash in lieu of such odd-lot number
        of
        shares. As of the date hereof, 228,000 shares of our common stock have been
        issued to the class and we plan to complete the issuance of the remaining
        shares
        in the near future in accordance with the terms of the court order, subject
        to
        the receipt of any required approvals from state regulatory
        authorities.
  ***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 fiscal 2002.
  ***Acquisitions
        of E.mergent, Inc. and OM Video.*** During
        fiscal 2002 and fiscal 2003, we entered the audio visual integration services
        business through the acquisitions of E.mergent, Inc. and Stechyson Electronics,
        Ltd., doing business as 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 this industry. However, our entry
        into
        the services business was perceived as a threat by our systems integrators
        and
        value-added resellers, many of whom we began competing against 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 fiscal 2003.
  ***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 $569,000. We expect
        that
        the operations of the U.S. audiovisual integration services will be classified
        as discontinued operations in the fiscal year 2004. As of June 30, 2003 the
        assets of audiovisual integrations services were classified as held and
        used.
  5
 
 ***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. d/b/a Premier
        Conferencing 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.
        Additionally, $1.4 million of the proceeds was utilized to pay off equipment
        leases pertaining to assets being conveyed to Clarinet. We expect that the
        conferencing services operations will be classified as discontinued operations
        in the fiscal year 2005. As of June 30, 2003, the assets of conferencing
        services were classified as held and used.
  ***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
        5.25% per year; and contingent consideration ranging from 3% to 4% 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 fiscal year 2005. As of June 30, 2003, 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. We are evaluating 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, business 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 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 Gentner® Distributed Echo
        Cancellation® and 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.
  *Provide
        greater value to our customers*
  To
        provide our customers with 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 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, video and
        data
        networks.
  6
 
 *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 new 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 all our operations in the conferencing products industry.
        We
        also previously operated in the conferencing services segment until July
        1, 2004
        when we sold our conferencing services business to American Teleconferencing
        Services, Ltd., and in the business services segment until March 4, 2005,
        when
        we sold the remaining operations in that area to 6351352 Canada Inc. For
        additional financial information about our segments see “Note 23. Segment,
        Geographic and Revenue Information” to our 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, full duplex,
        first-microphone priority and microphone gating, which combine to enable
        natural
        communication between distant conferencing participants similar to that of
        being
        in the same room.
  7
 
 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®, Audio Perfect® (AP)
        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 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 Audio
        Perfect® product line offers lower-cost products that still allow users to
        experience quality sound in a wide variety of conferencing venues. The PSR1212
        is a digital matrix mixer that provides advanced audio processing, microphone
        mixing and routing for local sound reinforcement.
  The
        XAP®,
        Audio Perfect® 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 videoconferencing systems.
  *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. It uniquely combines the sound quality of
        a
        professionally installed audio system with the simplicity of a conference
        phone,
        and can be easily connected to industry common rich-media devices, such as
        video
        or webconferencing 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.
  The
        MAX®
product line is comprised of the MAX® EX, MAX® Wireless, MAXAttach and MAXAttach
        wireless tabletop conferencing phones. MAX® Wireless was the first wireless
        conferencing phone. Designed for use in executive offices or small conference
        rooms with up to eight 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 the industry’s first dual unit
        wireless conference phone.
  8
 
 *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 webconferencing
        applications. They feature echo cancellation and audio processing technologies
        and can be used with personal computers, videoconferencing systems or installed
        audio conferencing systems. Our cameras can be used in professional conferencing
        or educational settings to enable 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 such as VCR and
        DVD
        players. Our wide selection of wood, metal and laminate conferencing furniture
        features audiovisual carts, plasma screen carts and pedestals, videoconferencing
        carts, tables, cabinets and podiums. We also provide custom furniture
        design.
  **Marketing
        and Sales**
  We
        sell
        our products primarily through a worldwide network of audiovisual, information
        technology and telecommunications distributors, who in turn sell our products
        to
        dealers, systems integrators and value-added resellers. We also sell our
        products on a limited basis directly to dealers, systems integrators,
        value-added resellers and end users. We use a two-tier distribution model,
        in
        which we primarily sell our products directly to 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. In addition, we regularly participate in
        conferencing forums, trade shows and industry promotions.
  In
        fiscal
        2003, approximately $18.6 million, or 68%, of our total product sales were
        generated in the United States and product sales of approximately $8.9 million,
        or 32%, were generated outside the United States. Revenue from product and
        business services customers outside of the United States accounted for
        approximately 26% of our total sales from continuing operations for fiscal
        2003,
        10% for fiscal 2002 and 12% for fiscal 2001. 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 90 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. We also sell our products on a limited basis to
        certain systems integrators, dealers and value-added resellers who buy our
        products at a discount to list and resell them on a non-exclusive basis to
        end
        users.
  *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.
  *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.
  9
 
 **Customers**
  No
        customer accounted for more than 10% of our total revenue during fiscal 2003,
        2002 or 2001. In fiscal 2003, revenues in our product segment included sales
        to
        three distributors that represented approximately 42% of the segment’s revenues.
        We currently only report revenues in our product segment and revenues in
        that
        segment during fiscal 2005 include sales to three distributors that represent
        approximately 63% of our revenue. As discussed below, these distributors
        facilitate product sales to a large number of end users, none of which is
        known
        to account for more than 10% 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.
  **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 Polycom, Biamp
        Systems, Sony, Sound Control, Aethra, Cisco and other companies that offer
        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. In the markets for our document cameras, competitors include Sony,
        Elmo, Ken-a-Vision, Samsung, Wolfvision and other manufacturers. Our microphones
        compete with the products of Shure, Audio Technica, Global Media and others.
        Our
        conferencing furniture products compete primarily with the products of Video
        Furniture International, Accuwood and Comlink.
  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.
  **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 $3.0 million
        in
        fiscal 2003, $3.8 million in fiscal 2002 and $2.7 million in fiscal
        2001.
  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.
  10
 
 **Manufacturing**
  Prior
        to
        June 2005, we manufactured and assembled most of our products in our
        manufacturing facility located at our corporate headquarters in Salt Lake
        City,
        Utah. We also subcontracted the manufacture of some products to a third-party
        contract manufacturer located in Southeast Asia. We also manufactured and
        continue to manufacture our furniture product line in our manufacturing facility
        located in Champlin, Minnesota.
  We
        generally purchase our assembly components from distributors. We also buy
        a
        limited amount of components directly from fabricators **** located
        near our manufacturing facilities. Many of our suppliers are located in the
        United States.
  While
        it
        is our policy to have a minimum of two vendor sources for components, certain
        electronic components used in the manufacture of our products can only be
        obtained from a single manufacturer and we are solely dependent upon these
        manufacturers to deliver such components to our suppliers so that they can
        meet
        our production needs. We do not have a written commitment from such suppliers
        to
        fulfill our future requirements. While our suppliers maintain an inventory
        of
        such components, no assurances can be given that such components will always
        be
        readily available, available at reasonable prices, available in sufficient
        quantities, or delivered in a timely fashion. If such components become
        unavailable, it is likely that we will experience delays, which could be
        significant, in the production and delivery of our products, unless and until
        we
        can otherwise procure the required component or components at competitive
        prices, if at all, or make product design changes. From time to time, we
        experience increased prices and increased lead times on certain of these
        key
        components that have limited availability. Any lack of availability of these
        components could have a material adverse effect on our ability to sell products
        and the related increase in prices would likely reduce our profit margins.
        Many
        of the components utilized by us in our manufacturing process are bonded
        by
        certain distributors and manufacturers, meaning that the component inventory
        will be kept “on-site” at vendor stock locations and managed by the vendors. The
        component inventory will then be sold to us on an as-required basis.
  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 and 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 ninety 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.
  11
 
 **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 covering 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.
  **Employees**
  As
        of
        July 31, 2005, we had 121 employees, 119 of whom were employed on a full-time
        basis, with 47 in sales, marketing and customer support, 40 in product
        development, 17 in manufacturing support and 17 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 videoconferencing technology
        and product, E.mergent, Inc., an 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 integration business services company. 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.*** In
        May
        2000, we entered into an agreement to purchase substantially all of the assets
        of ClearOne, Inc. for approximately $3.6 million consisting of $1.8 million
        of
        cash and 129,871 shares of our 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. 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.
        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.
  12
 
 We
        charged $728,000 to expense 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, we 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 year ended June 30, 2002, and
        management’s 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 assets should be
        recognized.
  ***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. We retained
        the
        accounts payable of the remote control portion of the RFM/Broadcast division
        and
        Burk assumed obligations for unfilled customer orders and satisfying warranty
        obligations to existing customers and for inventory sold to Burk. However,
        we
        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 $750,000 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 $700,000 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. The promissory note
        is
        secured by a subordinate security interest in the personal property of Burk.
        The
        gain on the sale is being recognized as cash is collected (as collection
        was not
        reasonably assured from Burk). The commission is based upon future net sales
        of
        Burk over base sales established within the agreement. We realized a gain
        on the
        sale of $200,000 for the 2003 fiscal year, $176,000 for the 2002 fiscal year,
        and $123,000 for the 2001 fiscal year. As of June 30, 2003, $1.5 million of
        the promissory note remained outstanding and we had received $20,000 in
        commissions.
  ***Ivron
        Systems, Ltd. Acquisition.*** On
        October 3, 2001, we purchased all of the issued and outstanding shares of
        Ivron
        Systems, Ltd., of 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 a cash payment of $650,000. Further,
        under that agreement, after June 30, 2002, each former Ivron shareholder
        would be entitled to receive approximately .08 shares of our common stock
        for
        each Ivron share previously held by such shareholder, provided that certain
        video product development contingencies were achieved. This represented
        approximately 429,000 shares of common stock. Thereafter, for the fiscal
        years
        ending June 30, 2003 and 2004, the former Ivron shareholders would be entitled
        to share in 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. In addition, former optionees of Ivron who remained with
        us were
        eligible to participate in a cash bonus program paid by us, based on our
        combined performance with Ivron in the fiscal years ending June 30, 2003
        and
        2004. The maximum amount payable under this cash bonus program was approximately
        $1.0 million.
  As
        of the
        acquisition date, we acquired tangible assets consisting primarily 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 primarily of
        trade
        accounts payable of $174,000, and accrued compensation and other accrued
        liabilities of $264,000.
  On
        March
        26, 2002, we entered into negotiations with the former shareholders of Ivron
        to
        modify the terms of the original purchase agreement because, upon further
        analysis, certain aspects of the acquired technology did not meet the intended
        product objectives established in our original purchase negotiations.
  13
 
 The
        amendment, which was finalized on April 8, 2002, revised the contingent
        consideration that the Ivron shareholders would have been entitled to receive
        in
        subsequent years so that upon meeting certain gross profit targets for the
        “V-There” and “Vu-Link” set-top videoconferencing products, technologies, and
        sub-elements thereof (including licensed products), the former Ivron
        shareholders had the opportunity to receive up to 109,000 shares of our common
        stock, issuable in four installments, on a quarterly basis, through July
        15,
        2003. 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,
        we
        recorded intangible assets of $5.3 million related to developed technology,
        $1.1
        million related to intellectual property, and goodwill of $218,000. 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 should be recognized. Subsequent to June
        30,
        2003, we discontinued selling the “V-There” and “Vu-Link” set-top
        videoconferencing products.
  ***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.
 
 ***E.mergent
        Acquisition.*** On
        May
        31, 2002, we completed our acquisition of E.mergent, Inc. pursuant to the
        terms
        of an Agreement and Plan of Merger dated January 21, 2002 pursuant to which
        we
        paid $7.3 million of cash and issued 868,691 shares of our common stock valued
        at $16.55 per share to the former E.mergent stockholders.
  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 the right 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.
  As
        of the
        acquisition date, we acquired tangible assets consisting primarily 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 primarily 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 as of June 30,
        2002
        of $416,000 was paid during the fiscal year ended June 30, 2003.
  We
        recorded intangible assets of $1.1 million related to patents, $392,000 related
        to customer relationships, $215,000 related to a non-compete agreement, and
        goodwill of $17.1 million. Amortization expense of $437,000 was recorded
        for the
        intangible assets for the period from June 1, 2002 to June 30, 2003. 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 our core competencies would allow us to acquire market
        share in the audio visual integration industry. However, our entry into the
        services business was perceived as a threat by our systems integrators and
        value-added resellers, many of whom we began competing against for sales.
        In
        order to avoid this conflict and maintain good relationships with our 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. We ultimately
        exited
        the U.S. audiovisual integration market and subsequently sold our U.S.
        audiovisual integration business to M:Space in May of 2004. 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 the future cash
        flows of the E.mergent business unit. 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 certain
        E.mergent assets should be recognized.
  14
 
 ***Sale
        of Broadcast Telephone Interface Business to Comrex.*** 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 $1.1 million in revenue related to this transaction in the fiscal
        year ended June 30, 2003.
  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 the Company for any additional
        product on a per item basis of cost plus 30%.
  ***OM
        Video Acquisition.*** On
        August
        27, 2002, we purchased all of the outstanding shares of Stechyson Electronics
        Ltd., doing business as OM Video, an audiovisual integration firm 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 verification of certain representations and warranties
        made in connection with the acquisition. During the second quarter of fiscal
        2003, we also paid $750,000 of a potential $800,000 earn-out provision. No
        further payment related to the holdback or contingent consideration will
        be
        paid.
  As
        of the
        acquisition date, we acquired tangible assets consisting primarily 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 also obtained a non-competition agreement with
        a
        term of two years from the former owner of OM Video.
  Our
        management at the time believed the OM Video acquisition would complement
        our
        existing operations and our core competencies would allow us to acquire market
        share in the audio visual integration industry. However, our entry into the
        services business was perceived as a threat by our systems integrators and
        value-added resellers, many of whom we began competing against for sales.
        In
        order to avoid this conflict and maintain good relationships with our 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 March 4, 2005, we sold
        all of
        our Canadian audio visual integration business. On June 30, 2003, we performed
        an impairment test and determined that an impairment loss on the OM Video
        assets
        should be recognized.
  **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,
        and 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.
  15
 
 *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, 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 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.
  *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,
        with
        the exception of one exclusive installed audio distribution agreement for
        the
        United Kingdom and Southern Ireland. 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.
  *General
        economic conditions may have an adverse impact on our
        revenues.*
  General
        economic conditions have, in the past, and may continue to lead to reductions
        in
        capital expenditures on technology by end user customers of our products.
        While
        there have been indications of improvement in the global economy and its
        impact
        on technology spending, constraints still exist and may have an adverse impact
        on our future revenues.
  *We
        depend on a limited number of suppliers for components and the inability
        to
        obtain sufficient supplies of components could adversely affect our product
        sales.*
  While
        it
        is our policy to have a minimum of two vendor sources for components, certain
        components used in the manufacture of our products can only be obtained from
        a
        single manufacturer and we are solely dependent upon these manufacturers
        to
        deliver such components to our suppliers so that they can meet our delivery
        schedules. We do not have a written commitment from such suppliers to fulfill
        our future requirements. While our suppliers maintain an inventory of such
        components, no assurances can be given that such components will always be
        readily available, available at reasonable prices, available in sufficient
        quantities, or delivered in a timely fashion. If such components become
        unavailable, it is likely that we will experience delays, which could be
        significant, in the production and delivery of our products, unless and until
        we
        can otherwise procure the required component or components at competitive
        prices, if at all. We have experienced increased prices and increased lead
        times
        on certain of these key components that have limited availability. Any lack
        of
        availability of these components could have a material adverse effect on
        our
        ability to sell products and the related increase in prices would likely
        reduce
        our profit margins.
  16
 
 Furthermore,
        suppliers of some of these components may become our competitors, which might
        also affect the availability of key components to us. It is possible that
        other
        components required in the future may necessitate custom fabrication in
        accordance with specifications developed or to be developed by us. Also,
        in the
        event we, or any of the manufacturers whose products we expect to utilize
        in the
        manufacture of our products, are unable to develop or acquire components
        in a
        timely fashion, our ability to achieve production yields, revenues and net
        income may be adversely affected.
  *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.
  *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. 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;
  ·
              hiring
                  a sufficient number of developers;
  ·
              developing
                  and testing products; 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. We cannot assure you,
        however, 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.
  17
 
 *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 26% of our total
        sales
        from continuing operations for fiscal 2003, 10% for fiscal 2002 and 12% for
        fiscal 2001. 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 subsidiary operations;
  ·
              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, ClearOne Communications of
        Canada,
        Inc. (ClearOne Canada d.b.a. OM Video), whose sales were denominated in Canadian
        Dollars until March 4, 2005, when the subsidiary was sold to a third party.
        Consolidation of ClearOne Canada’s financial statements with ours, under U.S.
        generally accepted accounting principles, required remeasurement of the amounts
        stated in ClearOne Canada’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.
  *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.
  18
 
 *Our
        reliance on international outsource manufacturing strategy.*
  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.
  *Our
        sales depend to a certain extent on government funding and
        regulation.*
  In
        the
        conferencing 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.
  *We
        may have difficulty in collecting outstanding receivables.*
  We
        grant
        credit without requiring collateral to substantially all of our customers.
        If
        there were a recurrence of economic uncertainty or an economic slowdown,
        the
        risks relating to the granting of such credit would 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.
  *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***
  *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. 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, a Vice President of Operations in December
        2004. In January 2005, we named a new Vice President of Product Line Management,
        who had been serving as our Director of Research and Development. 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.
  *We
        are not current in the filing of reports with the SEC and the SEC could initiate
        enforcement proceedings against us at any time.*
  We
        are
        not current in the filing of reports with the SEC and the SEC could initiate
        enforcement proceedings against us at any time, including proceedings to
        suspend
        trading of our securities.
  19
 
 *Our* *directors
        and officers own 19.6% of the Company and may exert control over
        us.*
  Our
        officers and directors together have beneficial ownership of approximately
        19.6%
        of our common stock (including options that are currently exercisable or
        exercisable within 60 days of July 31, 2005). With this significant holding
        in
        the aggregate, the officers and directors, acting together, could exert control
        over us and may be able to delay or prevent a change in control.
  *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
                  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;
  ·
              our
                  ability to report financial information in a timely manner;
                  and
  ·
              the
                  markets in which our stock is
                  traded.
  **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 product manufacturing and 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.
        We
        believe the facility will be reasonably adequate to meet our needs for the
        next
        12 months.
  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, Inc. with respect to the 12,000 square foot manufacturing
        facility in our headquarters building in connection with the outsourcing
        of our
        manufacturing operations. 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, ClearOne Communications of Canada, Inc. d/b/a OM
        Video,
        leased a facility in Ottawa, Canada consisting of 16,190 square feet. We
        leased
        this facility under a lease agreement that expires in July 2005. As discussed
        herein, we sold this subsidiary in March 2005.
  20
 
 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.
  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
        U.S.
        business 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
        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
        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.
  **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, we do not believe any such other proceedings will
        have a
        material, adverse effect on our financial condition or results of
        operations.
  *The
        SEC Action* .
        On
        January 15, 2003, the U.S. Securities and Exchange Commission 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
        generally accepted accounting principles (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 Agreements).
  21
 
 *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. ****
  *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 registered 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) will not be
        issued from the settlement fund and claimants who would otherwise be entitled
        to
        receive 99 or fewer shares will be paid cash in lieu of such odd-lot number
        of
        shares. As of the date hereof, 228,000 shares of our common stock have been
        issued to the class and we plan to complete the issuance of the remaining
        shares
        in the near future in accordance with the terms of the court order, subject
        to
        the receipt of any required approvals from state regulatory
        authorities.
  *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 action 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 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 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.
  22
 
 *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 and Lumbermens
        Mutual Insurance Company, 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 action, 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
        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 Bagley. The amount distributed to the Company
        and Bagley will be determined based on future negotiations between the Company
        and Bagley. We are vigorously pursuing our claims against National Union
        although no assurances can be given that we will be successful. ClearOne
        and
        Bagley have entered into a Joint Prosecution and Defense Agreement in connection
        with the action.
  *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 purchased but not paid 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.
  *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.
  **ITEM
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
  No
        matter
        was submitted to a vote of our security holders during the fourth quarter
        ended
        June 30, 2003.
  23
 
 **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 sales prices for the common
        stock for each quarter during the last three fiscal years. On August 10,
        2005,
        the closing price for our common stock on the Pink Sheets was
        $3.95.
  2001
              
              Market
              
              High
              
              LowFirst
                  Quarter
              
              
              NASDAQ
              
              $
              17.13
              
              $
              12.00Second
                  Quarter
              
              
              NASDAQ
              
              
              16.44
              
              
              8.50Third
                  Quarter
              
              
              NASDAQ
              
              
              15.69
              
              
              9.75Fourth
                  Quarter
              
              
              NASDAQ
              
              
              14.30
              
              
              9.502002
              
              
              
              
              
              High
              
              
              LowFirst
                  Quarter
              
              
              NASDAQ
              
              $
              18.72
              
              $
              9.80Second
                  Quarter
              
              
              NASDAQ
              
              
              22.94
              
              
              15.03Third
                  Quarter
              
              
              NASDAQ
              
              
              18.99
              
              
              12.30Fourth
                  Quarter
              
              
              NASDAQ
              
              
              18.80
              
              
              13.252003
              
              
              
              
              
              High
              
              
              LowFirst
                  Quarter
              
              
              NASDAQ
              
              $
              14.69
              
              $
              3.31Second
                  Quarter
              
              
              NASDAQ
              
              
              5.45
              
              
              2.82Third
                  Quarter
              
              
              NASDAQ/Pink
                  Sheets
              
              
              4.68
              
              
              1.38Fourth
                  Quarter
              
              
              Pink
                  Sheets
              
              
              3.05
              
              
              0.09
 
 **Shareholders**
  As
        of
        July 29, 2005, there were 451 shareholders of record of our common stock,
        including broker dealers and clearing corporations who hold shares for their
        customers, each of which is counted 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 capital
        requirements, growth and product development.
  **Equity
        Compensation Plan Information**
  The
        following table sets forth information as of June 30, 2003 with respect to
        compensation plans under which equity securities of ClearOne are authorized
        for
        issuance.
  24
  **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
              
              2,122,756
              
              $6.89
              
              496,668Equity
                  compensation plans not approved by security holders
              
              0
              
              0.00
              
              0Total
              
              2,122,756
              
              $6.89
              
              496,668
  ***Stock
        Repurchase program.*** During
        fiscal 2001, we repurchased 20,300 shares of our common stock on the open
        market
        at prices ranging from $10.58 to $14.16, for an aggregate purchase price
        of
        $244,000. All repurchased shares were retired. This stock repurchase program
        expired in October 2001.
  During
        fiscal 2003, we repurchased 125,000 shares on the open market at prices ranging
        from $3.06 to $3.60, for an aggregate purchase price of $430,000. All
        repurchased shares were retired. This stock repurchase program expired in
        October 2003 and we have not repurchased any additional securities since
        that
        time.
  ***Private
        Placement of Common Stock.*** 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
        an
        exercise price of $17.00 per share through November 27, 2006.
  **ITEM
        6.**  **SELECTED
        FINANCIAL DATA**
  The
        following selected financial data has been derived from our audited Consolidated
        Financial Statements. For the fiscal years ended June 30, 2002 and 2001,
        the
        data in the table below is restated to reflect the restatement of results
        for
        those years (see below and Note 3. Restatement and reclassifications of
        previously issued financial statements in Item 8 of this report). For the
        fiscal years ended June 30, 2000 and 1999, the selected financial data 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 years ended June 30, 2000 and 1999 have not
        been
        re-audited and are unaudited. 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.
  25
 
 **SELECTED
        CONSOLIDATED FINANCIAL DATA**
 **(in
        thousands, except share data)**
  **Years
                  Ended June 30,****2003**
              
              **2002**
              
              **2001**
              
              **2000**
              
              **1999****(restated)**
              
              **(restated)**
              
              **(unaudited)**
              
              **(unaudited)**Operating
                  results:Net
                  revenue
              
              $
              57,585
              
              $
              43,362
              
              $
              34,137
              
              $
              27,918
              
              $
              20,268Costs
                  and expenses:Cost
                  of goods sold
              
              
              35,301
              
              
              22,172
              
              
              15,133
              
              
              11,175
              
              
              8,908Marketing
                  and selling
              
              
              12,187
              
              
              10,739
              
              
              7,711
              
              
              6,200
              
              
              4,313General
                  and administrative
              
              
              18,011
              
              
              5,345
              
              
              4,198
              
              
              3,214
              
              
              2,545Product
                  development
              
              
              2,995
              
              
              3,810
              
              
              2,747
              
              
              1,271
              
              
              1,195Impairment
                  losses
              
              
              26,001
              
              
              7,115
              
              
              -
              
              
              -
              
              
              -Gain
                  on sale of assets
              
              
              -
              
              
              (250
              )
              
              -
              
              
              -
              
              
              -Purchased
                  in-process research and development
              
              
              -
              
              
              -
              
              
              728
              
              
              -
              
              
              -Operating
                  income (loss)
              
              
              (36,910
              )
              
              (5,569
              )
              
              3,620
              
              
              6,058
              
              
              3,307Other
                  income (expense)
              
              
              (96
              )
              
              132
              
              
              188
              
              
              153
              
              
              (78
              )Income
                  (loss) from continuing operations before income taxes
              
              
              (37,006
              )
              
              (5,437
              )
              
              3,808
              
              
              6,211
              
              
              3,229Provision
                  (benefit) for income taxes
              
              
              (834
              )
              
              1,400
              
              
              1,050
              
              
              2,229
              
              
              1,209Income
                  (loss) from continuing operations
              
              
              (36,172
              )
              
              (6,837
              )
              
              2,758
              
              
              3,982
              
              
              2,020Income
                  from discontinued operations, net of applicable income
                  taxes
              
              
              -
              
              
              -
              
              
              737
              
              
              427
              
              
              524Gain
                  on disposal of business segment, net of applicable income
                  taxes
              
              
              200
              
              
              176
              
              
              123
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              (35,972
              )
              $
              (6,661
              )
              $
              3,618
              
              $
              4,409
              
              $
              2,544Earnings
                  (loss) per common share:Basic
                  earnings (loss) from continuing operations
              
              $
              (3.23
              )
              $
              (0.71
              )
              $
              0.32
              
              $
              0.48
              
              $
              0.25Diluted
                  earnings (loss) from continuing operations
              
              $
              (3.23
              )
              $
              (0.71
              )
              $
              0.30
              
              $
              0.46
              
              $
              0.24Basic
                  earnings from discontinued operations
              
              $
              0.02
              
              $
              0.02
              
              $
              0.10
              
              $
              0.05
              
              $
              0.06Diluted
                  earnings from discontinued operations
              
              $
              0.02
              
              $
              0.02
              
              $
              0.09
              
              $
              0.04
              
              $
              0.06Basic
                  earnings (loss)
              
              $
              (3.21
              )
              $
              (0.69
              )
              $
              0.42
              
              $
              0.53
              
              $
              0.31Diluted
                  earnings (loss)
              
              $
              (3.21
              )
              $
              (0.69
              )
              $
              0.39
              
              $
              0.50
              
              $
              0.30Weighted
                  average shares outstanding:Basic
              
              
              11,183,339
              
              
              9,588,118
              
              
              8,593,725
              
              
              8,269,941
              
              
              8,080,536Diluted
              
              
              11,183,339
              
              
              9,588,118
              
              
              9,194,009
              
              
              8,740,209
              
              
              8,468,884
  **As
                  of June 30,****2003**
              
              **2002**
              
              **2001**
              
              **2000**
              
              **1999****(restated)**
              
              **(restated)**
              
              **(unaudited)**
              
              **(unaudited)**Financial
                  data:Current
                  assets
              
              $
              26,917
              
              $
              36,312
              
              $
              17,604
              
              $
              15,116
              
              $
              9,282Property,
                  plant and equipment, net
              
              
              6,768
              
              
              8,123
              
              
              5,681
              
              
              3,050
              
              
              2,126Total
                  assets
              
              
              35,276
              
              
              63,876
              
              
              25,311
              
              
              18,220
              
              
              11,519Long-term
                  debt, net of current maturities
              
              
              931
              
              
              -
              
              
              -
              
              
              -
              
              
              -Capital
                  leases, net of current maturities
              
              
              1,215
              
              
              2,016
              
              
              1,680
              
              
              230
              
              
              455Total
                  stockholders' equity
              
              
              18,743
              
              
              53,892
              
              
              20,728
              
              
              15,073
              
              
              8,352
 
 **Quarterly
        Financial Data (Unaudited)**
  The
        financial data in this Annual Report on Form 10-K for the quarter ended
        September 30, 2002, and for each of the quarters in the fiscal years ending
        June
        30, 2002 and 2001 has been restated from amounts previously reported on Forms
        10-Q and Forms 10-K. A discussion of the restatement in relation to the affected
        quarters is provided in Note 3 to our audited consolidated financial statements
        - Restatement and Reclassification of Previously Issued Consolidated Financial
        Statements. An overview of the restatement is provided in the introduction
        to
        Item 7 - Management’s Discussion and Analysis of Financial Condition and Results
        of Operations.
  26
  **Fiscal
                  2003 Quarters Ended****(in
                  thousands)****As
                  of Sept. 30**
              
              **As
                  of Dec. 31**
              
              **As
                  of Mar. 31**
              
              **As
                  of June 30****(as
                  previously reported)**
              
              **(restated)**Net
                  revenue
              
              $
              12,998
              
              $
              13,818
              
              $
              14,184
              
              $
              15,258
              
              $
              14,325Cost
                  of goods sold
              
              
              (7,440
              )
              
              (11,922
              )
              
              (6,357
              )
              
              (10,169
              )
              
              (6,853
              )Operating
                  expenses
              
              
              (6,398
              )
              
              (6,569
              )
              
              (13,129
              )
              
              (7,120
              )
              
              (6,375
              )One-time
                  charges
              
              
              (1,947
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Impairment
                  charges
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (26,001
              )Other
                  (income) expense
              
              
              77
              
              
              (11
              )
              
              (40
              )
              
              (12
              )
              
              (34
              )Gain
                  on sale of product line
              
              
              1,112
              
              
              -
              
              
              -
              
              
              -
              
              
              -Loss
                  from continuing operations before income taxes
              
              
              (1,598
              )
              
              (4,684
              )
              
              (5,342
              )
              
              (2,043
              )
              
              (24,938
              )Benefit
                  for income taxes
              
              
              (439
              )
              
              (314
              )
              
              (358
              )
              
              (137
              )
              
              (25
              )Loss
                  from continuing operations
              
              
              (1,159
              )
              
              (4,370
              )
              
              (4,984
              )
              
              (1,906
              )
              
              (24,913
              )Income
                  from discontinued operations
              
              
              -
              
              
              59
              
              
              59
              
              
              24
              
              
              58Net
                  loss
              
              $
              (1,159
              )
              $
              (4,311
              )
              $
              (4,925
              )
              $
              (1,882
              )
              $
              (24,855
              )Basic
                  (loss) per common share:Continuing
                  operations
              
              $
              (0.10
              )
              $
              (0.39
              )
              $
              (0.44
              )
              $
              (0.17
              )
              $
              (2.23
              )Discontinued
                  operations
              
              
              -
              
              
              0.01
              
              
              0.01
              
              
              -
              
              
              0.01Basic
                  (loss) per common share
              
              $
              (0.10
              )
              $
              (0.38
              )
              $
              (0.43
              )
              $
              (0.17
              )
              $
              (2.22
              )Diluted
                  (loss) per common share:Continuing
                  operations
              
              $
              (0.10
              )
              $
              (0.39
              )
              $
              (0.44
              )
              $
              (0.17
              )
              $
              (2.23
              )Discontinued
                  operations
              
              
              -
              
              
              0.01
              
              
              0.01
              
              
              -
              
              
              0.01Diluted
                  (loss) per common share
              
              $
              (0.10
              )
              $
              (0.38
              )
              $
              (0.43
              )
              $
              (0.17
              )
              $
              (2.22
              )
  **Fiscal
                  2002 Quarters Ended****(in
                  thousands)****As
                  of Sept. 30**
              
              **As
                  of Dec. 31****(as
                  previously reported)**
              
              **(restated)**
              
              **(as
                  previously reported)**
              
              **(restated)**Net
                  revenue
              
              $
              11,220
              
              $
              9,963
              
              $
              12,582
              
              $
              12,590Cost
                  of goods sold
              
              
              (4,582
              )
              
              (4,423
              )
              
              (5,057
              )
              
              (5,484
              )Operating
                  expenses
              
              
              (4,501
              )
              
              (4,304
              )
              
              (5,211
              )
              
              (4,487
              )Impairment
                  charges
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  (income) expense
              
              
              145
              
              
              71
              
              
              66
              
              
              (67
              )Income
                  from continuing operations before income taxes
              
              
              2,282
              
              
              1,307
              
              
              2,380
              
              
              2,552Provision
                  for income taxes
              
              
              870
              
              
              393
              
              
              888
              
              
              766Income
                  from continuing operations
              
              
              1,412
              
              
              914
              
              
              1,492
              
              
              1,786Income
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income
              
              $
              1,412
              
              $
              914
              
              $
              1,492
              
              $
              1,786Basic
                  earnings per common share:Continuing
                  operations
              
              $
              0.16
              
              $
              0.11
              
              $
              0.17
              
              $
              0.20Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              -
              
              
              -Basic
                  earnings per common share
              
              $
              0.16
              
              $
              0.11
              
              $
              0.17
              
              $
              0.20Diluted
                  earnings per common share:Continuing
                  operations
              
              $
              0.16
              
              $
              0.10
              
              $
              0.16
              
              $
              0.18Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              -
              
              
              -Diluted
                  earnings per common share
              
              $
              0.16
              
              $
              0.10
              
              $
              0.16
              
              $
              0.18
 27
  **Fiscal
                  2002 Quarters Ended****(in
                  thousands)****As
                  of Mar. 31**
              
              **As
                  of June 30****(as
                  previously reported)**
              
              **(restated)**
              
              **(as
                  previously reported)**
              
              **(restated)**Net
                  revenue
              
              $
              14,171
              
              $
              9,316
              
              $
              16,569
              
              $
              11,493Cost
                  of goods sold
              
              
              (5,587
              )
              
              (4,388
              )
              
              (7,774
              )
              
              (7,876
              )Operating
                  expenses
              
              
              (5,430
              )
              
              (4,971
              )
              
              (5,667
              )
              
              (5,884
              )Impairment
                  charges
              
              
              -
              
              
              -
              
              
              -
              
              
              (7,115
              )Other
                  (income) expense
              
              
              (71
              )
              
              32
              
              
              369
              
              
              97Income
                  (loss) from continuing operations before income taxes
              
              
              3,083
              
              
              (11
              )
              
              3,497
              
              
              (9,285
              )Provision
                  (benefit) for income taxes
              
              
              1,012
              
              
              (3
              )
              
              1,061
              
              
              244Income
                  (loss) from continuing operations
              
              
              2,071
              
              
              (8
              )
              
              2,436
              
              
              (9,529
              )Income
                  from discontinued operations
              
              
              -
              
              
              117
              
              
              -
              
              
              59Net
                  income (loss)
              
              $
              2,071
              
              $
              109
              
              $
              2,436
              
              $
              (9,470
              )Basic
                  earnings (loss) per common share:Continuing
                  operations
              
              $
              0.20
              
              $
              -
              
              $
              0.24
              
              $
              (0.90
              )Discontinued
                  operations
              
              
              -
              
              
              0.01
              
              
              -
              
              
              0.01Basic
                  earnings (loss) per common share
              
              $
              0.20
              
              $
              0.01
              
              $
              0.24
              
              $
              (0.89
              )Diluted
                  earnings (loss) per common share:Continuing
                  operations
              
              $
              0.20
              
              $
              -
              
              $
              0.22
              
              $
              (0.90
              )Discontinued
                  operations
              
              
              -
              
              
              0.01
              
              
              -
              
              
              0.01Diluted
                  earnings (loss) per common share
              
              $
              0.20
              
              $
              0.01
              
              $
              0.22
              
              $
              (0.89
              )
 
 **Fiscal
                  2001 Quarters Ended****(in
                  thousands)****As
                  of Sept. 30**
              
              **As
                  of Dec. 31****(as
                  previously reported)**
              
              **(restated)**
              
              **(as
                  previously reported)**
              
              **(restated)**Net
                  revenue
              
              $
              9,333
              
              $
              5,567
              
              $
              9,680
              
              $
              9,585Cost
                  of goods sold
              
              
              (3,766
              )
              
              (2,804
              )
              
              (3,971
              )
              
              (3,944
              )Operating
                  expenses
              
              
              (3,488
              )
              
              (4,042
              )
              
              (3,873
              )
              
              (3,538
              )Other
                  expense
              
              
              64
              
              
              8
              
              
              119
              
              
              88Income
                  (loss) from continuing operations before income taxes
              
              
              2,143
              
              
              (1,271
              )
              
              1,955
              
              
              2,191Provision
                  (benefit) for income taxes
              
              
              799
              
              
              (350
              )
              
              752
              
              
              604Income
                  (loss) from continuing operations
              
              
              1,344
              
              
              (921
              )
              
              1,203
              
              
              1,587Income
                  from discontinued operations
              
              
              186
              
              
              95
              
              
              337
              
              
              245Gain
                  on disposal of business segment
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              1,530
              
              $
              (826
              )
              $
              1,540
              
              $
              1,832Basic
                  earnings (loss) per common share:Continuing
                  operations
              
              $
              0.16
              
              $
              (0.11
              )
              $
              0.14
              
              $
              0.18Discontinued
                  operations
              
              
              0.02
              
              
              0.01
              
              
              0.04
              
              
              0.03Basic
                  earnings (loss) per common share
              
              $
              0.18
              
              $
              (0.10
              )
              $
              0.18
              
              $
              0.21Diluted
                  earnings (loss) per common share:Continuing
                  operations
              
              $
              0.15
              
              $
              (0.11
              )
              $
              0.13
              
              $
              0.17Discontinued
                  operations
              
              
              0.02
              
              
              0.01
              
              
              0.04
              
              
              0.03Diluted
                  earnings (loss) per common share
              
              $
              0.17
              
              $
              (0.10
              )
              $
              0.17
              
              $
              0.20
 28
 
 **Fiscal
                  2001 Quarters Ended****(in
                  thousands)****As
                  of Mar. 31**
              
              **As
                  of June 30****(as
                  previously reported)**
              
              **(restated)**
              
              **(as
                  previously reported)**
              
              **(restated)**Net
                  revenue
              
              $
              10,212
              
              $
              9,589
              
              $
              10,653
              
              $
              9,396Cost
                  of goods sold
              
              
              (4,328
              )
              
              (4,168
              )
              
              (4,438
              )
              
              (4,217
              )Operating
                  expenses
              
              
              (3,786
              )
              
              (3,805
              )
              
              (3,757
              )
              
              (3,999
              )Other
                  expense
              
              
              69
              
              
              39
              
              
              121
              
              
              53Income
                  from continuing operations before income taxes
              
              
              2,167
              
              
              1,655
              
              
              2,579
              
              
              1,233Provision
                  for income taxes
              
              
              808
              
              
              456
              
              
              959
              
              
              340Income
                  from continuing operations
              
              
              1,359
              
              
              1,199
              
              
              1,620
              
              
              893Income
                  (loss) from discontinued operations
              
              
              242
              
              
              250
              
              
              (28
              )
              
              147Gain
                  on disposal of business segment
              
              
              -
              
              
              -
              
              
              1,220
              
              
              123Net
                  income
              
              $
              1,601
              
              $
              1,449
              
              $
              2,812
              
              $
              1,163Basic
                  earnings per common share:Continuing
                  operations
              
              $
              0.16
              
              $
              0.14
              
              $
              0.19
              
              $
              0.10Discontinued
                  operations
              
              
              0.03
              
              
              0.03
              
              
              0.14
              
              
              0.03Basic
                  earnings per common share
              
              $
              0.19
              
              $
              0.17
              
              $
              0.33
              
              $
              0.13Diluted
                  earnings per common share:Continuing
                  operations
              
              $
              0.15
              
              $
              0.13
              
              $
              0.18
              
              $
              0.10Discontinued
                  operations
              
              
              0.03
              
              
              0.03
              
              
              0.13
              
              
              0.03Diluted
                  earnings per common share
              
              $
              0.18
              
              $
              0.16
              
              $
              0.31
              
              $
              0.13
 **Discussion
        of Quarterly Financial Data (Unaudited)**
 
 We
        have
        restated our previously reported consolidated financial statements for the
        fiscal years ended June 30, 2002 and 2001. The discussion below relates to
        the
        changes in the consolidated statements of operations on a quarterly basis
        and
        are unaudited. Since we have not previously filed our quarterly reports on
        Form
        10-Q for the quarters ended December 31, 2002 and March 31 and June 30, 2003,
        figures for those periods have not been restated.
 
 ***Summary
        of restatement items***
  Errors
        in
        previously issued financial statements were identified in the following
        areas:
  *Revenue
        Recognition and Related Sales Returns, Credit Memos, and Allowances.* We
        recognized revenue before the amounts charged to both distributors and
        non-distributors were considered fixed and determinable or reasonably
        collectible. Accordingly, revenue was inappropriately accelerated.
  Beginning
        in 2001 and through 2002, 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 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. Accordingly, amounts charged to
        both
        distributors and non-distributors were not considered fixed and determinable
        or
        reasonably collectible until cash was collected. Accordingly, product revenues
        to distributors and non-distributors were restated for the quarter ended
        September 30, 2002, and for each of the quarters in the fiscal years ending
        June
        30, 2002 and 2001.
  Related
        sales returns and allowances, rebates, and accounts receivables were revised
        appropriately given the revenue adjustments.
  29
 
 *Cutoff
        and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
        Assets.* We
        recorded accruals and amortized certain prepaid assets to operating expenses
        during the quarter ended September 30, 2002, and during each of the quarters
        in
        the fiscal years ending June 30, 2002 and 2001in the improper periods.
        Accordingly, adjustments to accrued liabilities, prepaid assets, and operating
        expenses were recorded to properly account for these errors.
  *Tracking
        and Valuation of Inventory, Including Controls to Identify and Properly Account
        for Obsolete Inventory.* As
        part
        of the restatement process, we discovered that we made errors 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. As a result, we made adjustments to reflect consigned
        inventory, to properly capitalize overhead expenses, physical inventory
        adjustments, adjustments to lower of cost or market, and adjustments to reserves
        for excess, obsolete and slow-moving inventory. Accordingly, inventories
        and
        cost of goods sold were restated to properly account for these
        errors.
  *Accounting
        for Leases, Including Classification as Operating or Capital.* In
        evaluating the classification of leases, we did not consider all periods
        for
        which failure to renew the lease imposes a penalty on the lessee in such
        amount
        that a renewal appears, at the inception of the leases, to be reasonably
        assured. Accordingly, certain leases were classified as operating leases
        that
        should have been classified as capital leases. The effect of properly recording
        the capital leases on our previously reported financial statements is to
        record
        additional capital lease obligations, property and equipment, and depreciation
        expense and reduce rental expense for the quarter ended September 30, 2002,
        and
        for each of the quarters in the fiscal years ending June 30, 2002 and
        2001.
  We
        did
        not consider escalating rent payments and rent holidays for certain operating
        leases. Accordingly, rent expense was inappropriately understated. The effect
        of
        straight-lining rent payments on our previously reported financial statements
        is
        to record an accrued liability for future rent payments and record additional
        rent expense.
  *Accounting
        for Acquisitions.* During
        the restatement process, we determined that the valuations and purchase price
        allocations in connection with its acquisitions of ClearOne, Ivron, and
        E.mergent were not performed properly. We engaged independent third-party
        valuation specialists to provide valuations and purchase price allocations
        on
        these acquisitions. We re-examined the purchase price allocations and adjusted
        for items that should have been recorded previously.
  ·
              In
                  our previously issued consolidated financial statements, we valued
                  the
                  129,871 shares of common stock issued in conjunction with the acquisition
                  of ClearOne at $15.40 per share. We determined that the shares
                  should have
                  been valued at $13.97 per share based on the market prices a few
                  days
                  before and after the measurement date.
 ·
              We
                  recorded adjustments to the amounts allocated to certain acquired
                  intangible assets, including developed technologies, patents and
                  trademarks, and distribution agreements. We also recorded adjustments
                  to
                  the amounts allocated to in-process research and development related
                  to
                  the ClearOne acquisition.
 ·
              We
                  recorded adjustments to the amounts allocated to certain acquired
                  tangible
                  assets and assumed liabilities, including cash, accounts receivable,
                  inventory, property, plant and equipment, deferred tax assets,
                  and
                  deferred tax liabilities.
 ·
              The
                  adjustments to purchase price, as well as the adjustments to the
                  amounts
                  allocated to acquired intangible assets, acquired tangible assets,
                  and
                  assumed liabilities, resulted in corresponding adjustments to the
                  amount
                  allocated to goodwill.
  30
  *Accounting
        for Equity and Other Significant Non-Routine Transactions.*
  ·
              During
                  the quarter ended June 30, 2001, we sold our remote control product
                  line
                  to Burk Technology. In previously issued consolidated financial
                  statements, we recognized a gain on the sale of our remote control
                  product
                  line that included a significant note receivable from the buyer
                  at the
                  time of the sale, and recognized interest income associated with
                  the note
                  receivable in periods subsequent to the sale. Based on an analysis
                  of the
                  facts and circumstances that existed at the date of the sale, the
                  recognition of this gain was inappropriate as the buyer did not
                  have the
                  wherewithal to pay this note receivable, the operations of the
                  remote
                  control product line had not historically generated cash flows
                  sufficient
                  to fund the required payments, and there were contingent liabilities
                  we
                  had to the buyer. Accordingly, we concluded that the gain should
                  be
                  recognized as cash is received from the buyer. As a result, we
                  have
                  reduced the gain on sale and eliminated the note receivable at
                  the time of
                  the sale, and recognized additional gain on the sale of the product
                  line
                  when-and-as cash payments on the note receivable are
                  obtained.
 ·
              During
                  the quarter ended June 30, 2002, we experienced certain triggering
                  events
                  that indicated that certain long-lived assets related to ClearOne
                  and
                  Ivron were impaired. Accordingly, we performed an impairment analysis
                  in
                  accordance with the provisions of Statement of Financial Accounting
                  Standards (SFAS) No. 121. As a result of this analysis, we determined
                  that
                  goodwill, intangible assets, and certain property, plant, and equipment
                  related to the ClearOne and Ivron acquisitions were fully impaired
                  as of
                  June 30, 2002. As a result, we recognized an impairment loss equal
                  to the
                  carrying value of these assets. In previously issued consolidated
                  financial statements, we failed to recognize that a triggering
                  event had
                  occurred and did not record an impairment loss for these assets.
 ·
              During
                  the quarter ended March 31, 2001, the terms of certain outstanding
                  stock
                  options were modified to allow for their acceleration in the event
                  we met
                  certain EPS targets. During the quarter ended June 30, 2001 we
                  cancelled
                  certain outstanding stock options and issued a replacement award
                  with a
                  lower exercise price, resulting in variable accounting. In previously
                  issued consolidated financial statements, we did not record compensation
                  expense in connection with these modifications in accordance with
                  Accounting Principles Board (APB) No. 25 and Financial Accounting
                  Standards Board (FASB) Interpretation Number 44, “Accounting for Certain
                  Transactions involving Stock Compensation” (an interpretation of APB No.
                  25).
 ·
              On
                  June 29, 2001, we repurchased 5,000 shares of our previously issued
                  and
                  outstanding common shares. In previously issued consolidated financial
                  statements, we did not record the effects of this transaction until
                  fiscal
                  year 2002.
 
 *Accounting
        for Income Taxes.* During
        each of the quarters in the fiscal years ending June 30, 2002 and 2001, and
        in
        the quarter ended September 30, 2002, our income before income taxes was
        restated to correct for certain accounting errors, resulting in less pre
        tax
        book income and correspondingly less income tax expense. In conjunction with
        the
        restatement, we evaluated the realizability of deferred tax assets. In the
        quarter ended June 30, 2002, we recorded an increased domestic valuation
        allowance to reflect our determination that not all of our deferred tax assets
        were more likely than not realizable pursuant to the provisions of SFAS 109,
        “Accounting for Income Taxes”.
 
 
 **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 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 “Special Note
        Regarding Forward-Looking Statement.” 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 “Factors That Could Affect Our Future
        Results” of this Management’s Discussion and Analysis of Financial Condition and
        Results of Operations 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.*
  31
 
 **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.
  **Restatements
        and Reclassifications of Previously Issued Consolidated Financial
        Statements**
  We
        have
        restated our previously reported consolidated financial statements for the
        quarter ended September 30, 2002, and for fiscal years ended June 30, 2002
        and
        2001, and each of the quarters therein. The restatement adjustments (including
        impairment charges) resulted in a cumulative net reduction to shareholders’
equity of approximately $17.4 million and $3.8 million as of June 30, 2002
        and
        2001, respectively, and a reduction in previously reported net income of
        approximately $14.1 million and $3.9 million for the years ended June 30,
        2002
        and 2001, respectively. We have also restated the July 1, 2000 opening retained
        earnings balance to reflect corrected items that relate to prior periods.
 
 We
        have not amended our prior filings to reflect the restatement. As a result,
        information previously filed in our annual reports on Form 10-K for fiscal
        years
        ended June 30, 2002 and 2001, our quarterly reports on Form 10-Q for the
        quarterly periods included in those fiscal years and for the quarter ended
        September 30, 2002 and any current reports on Form 8-K, or other disclosures,
        containing fiscal 2003, 2002 and 2001 information filed or made prior to
        the
        filing of this 2003 Form 10-K should not be relied upon.
 
 As
        discussed below, our previously issued consolidated balance sheets, consolidated
        statements of operations and comprehensive income (loss), consolidated
        statements of stockholders’ equity and cash flows for the years ended June 30,
        2002 and 2001 have been restated to correct for certain accounting
        errors.
  ***Summary
        of restatement items***
  Errors
        in
        previously issued financial statements were identified in the following
        areas:
  *Revenue
        Recognition and Related Sales Returns, Credit Memos, and Allowances.* We
        recognized revenue before the amounts charged to both distributors and
        non-distributors were considered fixed and determinable or reasonably
        collectible. Accordingly, revenue was inappropriately accelerated.
  Beginning
        in 2001 and through 2002, 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 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. Accordingly, amounts charged to
        both
        distributors and non-distributors were not considered fixed and determinable
        or
        reasonably collectible until cash was collected. Accordingly, product revenues
        to distributors and non-distributors were restated for the years ending June
        30,
        2002 and 2001.
  Related
        sales returns and allowances, rebates, and accounts receivables were revised
        appropriately given revenue adjustments.
  *Cutoff
        and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
        Assets.* We
        recorded accruals and amortized certain prepaid assets to operating expenses
        during the fiscal years ended June 30, 2002 and 2001 in the improper periods.
        Accordingly, adjustments to accrued liabilities, prepaid assets, and operating
        expenses were recorded for the years ending June 30, 2002 and 2001.
  32
 
 *Tracking
        and Valuation of Inventory, Including Controls to Identify and Properly Account
        for Obsolete Inventory.* As
        part
        of the restatement process, we discovered that we made errors 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. As a result, we made adjustments to reflect consigned
        inventory, to properly capitalize overhead expenses, physical inventory
        adjustments, adjustments to lower of cost or market, and adjustments to reserves
        for excess, obsolete and slow-moving inventory. Accordingly, inventories
        and
        cost of goods sold were restated to properly account for these
        errors.
  *Accounting
        for Leases, Including Classification as Operating or Capital.* In
        evaluating the classification of leases, we did not consider all periods
        for
        which failure to renew the lease imposes a penalty on the lessee in such
        amount
        that a renewal appears, at the inception of the leases, to be reasonably
        assured. Accordingly, certain leases were classified as operating leases
        that
        should have been classified as capital leases. The effect of properly recording
        the capital leases on our previously reported financial statements is to
        record
        additional capital lease obligations, property and equipment, and depreciation
        expense and reduce rental expense for fiscal periods ending June 30, 2002
        and
        2001.
  We
        did
        not consider escalating rent payments and rent holidays for certain operating
        leases. Accordingly, rent expense was inappropriately understated. The effect
        of
        straight-lining rent payments on our previously reported financial statements
        is
        to record an accrued liability for future rent payments and record additional
        rent expense.
  *Classification
        of Cash and Marketable Securities.* In
        previously issued consolidated financial statements, we classified municipal
        government auction rate notes and auction rate preferred stocks as cash instead
        of marketable securities. Accordingly, reclassifications were made to the
        2002
        cash balances to properly classify those as marketable securities instead
        of
        cash.
  *Accounting
        for Acquisitions.* During
        the restatement process, we determined that the valuations and purchase price
        allocations in connection with our acquisitions of ClearOne, Ivron, and
        E.mergent were not performed properly. We engaged independent third-party
        valuation specialists to provide valuations and purchase price allocations
        on
        these acquisitions. We re-examined the purchase price allocations and adjusted
        for items that should have been recorded previously.
  ·
              In
                  our previously issued consolidated financial statements, we valued
                  the
                  129,871 shares of common stock issued in conjunction with the acquisition
                  of ClearOne at $15.40 per share. We determined that the shares
                  should have
                  been valued at $13.97 per share based on the market prices a few
                  days
                  before and after the measurement date.
 ·
              We
                  recorded adjustments to the amounts allocated to certain acquired
                  intangible assets, including developed technologies, patents and
                  trademarks, and distribution agreements. We also recorded adjustments
                  to
                  the amounts allocated to in-process research and development related
                  to
                  the ClearOne acquisition.
 ·
              We
                  recorded adjustments to the amounts allocated to certain acquired
                  tangible
                  assets and assumed liabilities, including cash, accounts receivable,
                  inventory, property and equipment, deferred tax assets, and deferred
                  tax
                  liabilities.
 ·
              The
                  adjustments to purchase price, as well as the adjustments to the
                  amounts
                  allocated to acquired intangible assets, acquired tangible assets,
                  and
                  assumed liabilities, resulted in corresponding adjustments to the
                  amount
                  allocated to goodwill.
  33
  *Accounting
        for Equity and Other Significant Non-Routine Transactions.*
  ·
              During
                  the year ended June 30, 2001 we sold our remote control product
                  line to
                  Burk Technology. In previously issued consolidated financial statements,
                  we recognized a gain on the sale of our remote control product
                  line that
                  included a significant note receivable from the buyer at the time
                  of the
                  sale, and recognized interest income associated with the note receivable
                  in periods subsequent to the sale. Based on an analysis of the
                  facts and
                  circumstances that existed at the date of the sale, the recognition
                  of
                  this gain was inappropriate as the buyer did not have the wherewithal
                  to
                  pay this note receivable, the operations of the remote control
                  product
                  line had not historically generated cash flows sufficient to fund
                  the
                  required payments, and there were contingent liabilities we had
                  to the
                  buyer. Accordingly, we concluded that the gain should be recognized
                  as
                  cash is received from the buyer. As a result, we have reduced the
                  gain on
                  sale and eliminated the note receivable at the time of the sale,
                  and
                  recognized additional gain on the sale of the business segment
                  when-and-as
                  cash payments on the note receivable are
                  obtained.
 ·
              During
                  the year ended June 30, 2002 we experienced certain triggering
                  events that
                  indicated that certain long-lived assets related to ClearOne and
                  Ivron
                  were impaired. Accordingly, we performed an impairment analysis
                  in
                  accordance with the provisions of SFAS No. 121. As a result of
                  this
                  analysis, we determined that goodwill, intangible assets, and certain
                  property and equipment related to the ClearOne and Ivron acquisitions
                  were
                  fully impaired as of June 30, 2002. As a result, we recognized
                  an
                  impairment loss equal to the carrying value of these assets. In
                  previously
                  issued consolidated financial statements, we failed to recognize
                  that a
                  triggering event had occurred and did not record an impairment
                  loss for
                  these assets.
 ·
              During
                  the year ended June 30, 2001 the terms of certain outstanding stock
                  options were modified to allow for their acceleration in the event
                  we met
                  certain EPS targets. During the year ended June 30, 2001 we cancelled
                  certain outstanding stock options and issued a replacement award
                  with a
                  lower exercise price, resulting in variable accounting. In previously
                  issued consolidated financial statements, we did not record compensation
                  expense in connection with these modifications in accordance with
                  APB No.
                  25 and FASB Interpretation Number 44, “Accounting for Certain Transactions
                  involving Stock Compensation” (an interpretation of APB No. 25).
 ·
              On
                  June 29, 2001, we repurchased 5,000 shares of our previously issued
                  and
                  outstanding common shares. In previously issued consolidated financial
                  statements, we did not record the effects of this transaction until
                  fiscal
                  year 2002.
 
 *Accounting
        for Income Taxes.* During
        the fiscal periods ending June 30, 2002 and 2001, our income before income
        taxes
        was restated to correct for certain accounting errors, resulting in less
        pre tax
        book income and correspondingly less income tax expense. In conjunction with
        the
        restatement, we evaluated the realizability of deferred tax assets. In 2002,
        we
        recorded an increased domestic valuation allowance to reflect our determination
        that not all of our deferred tax assets were more likely than not realizable
        pursuant to the provisions of SFAS 109, “Accounting for Income
        Taxes”.
  34
 
 **Restated
        Financial Statements**
  ***Statements
        of Operations Adjustments (in thousands)***
  **As
                  of June 30, 2002**
              
              **As
                  of June 30, 2001****As
                  Previously Reported**
              
              **Restated**
              
              **As
                  Previously Reported**
              
              **Restated**Revenue:Product
              
              $
              37,215
              
              $
              26,253
              
              $
              28,190
              
              $
              22,448Conferencing
                  services
              
              
              17,328
              
              
              15,583
              
              
              11,689
              
              
              11,689Business
                  services
              
              
              -
              
              
              1,526
              
              
              -
              
              
              -Total
                  revenue
              
              
              54,543
              
              
              43,362
              
              
              39,879
              
              
              34,137Cost
                  of goods sold:Product
              
              
              15,057
              
              
              10,939
              
              
              10,634
              
              
              8,789Product
                  inventory write-offs
              
              
              -
              
              
              2,945
              
              
              -
              
              
              416Conferencing
                  services
              
              
              7,943
              
              
              7,310
              
              
              5,869
              
              
              5,928Business
                  services
              
              
              -
              
              
              978
              
              
              -
              
              
              -Total
                  cost of goods sold
              
              
              23,000
              
              
              22,172
              
              
              16,503
              
              
              15,133Gross
                  profit
              
              
              31,543
              
              
              21,190
              
              
              23,376
              
              
              19,004Operating
                  expenses:Marketing
                  and selling
              
              
              10,705
              
              
              10,739
              
              
              7,753
              
              
              7,711General
                  and administrative
              
              
              6,051
              
              
              5,345
              
              
              4,649
              
              
              4,198Research
                  and product development
              
              
              4,053
              
              
              3,810
              
              
              2,502
              
              
              2,747Impairment
                  losses
              
              
              -
              
              
              7,115
              
              
              -
              
              
              -Gain
                  on sale of court conferencing assets
              
              
              -
              
              
              (250
              )
              
              -
              
              
              -Purchased
                  in-process research and development
              
              
              -
              
              
              -
              
              
              -
              
              
              728Total
                  operating expenses
              
              
              20,809
              
              
              26,759
              
              
              14,904
              
              
              15,384Operating
                  income (loss)
              
              
              10,734
              
              
              (5,569
              )
              
              8,472
              
              
              3,620Other
                  income, net
              
              
              509
              
              
              132
              
              
              373
              
              
              188Income
                  (loss) from continuing operations before income taxes
              
              
              11,243
              
              
              (5,437
              )
              
              8,845
              
              
              3,808Provision
                  for income taxes
              
              
              3,831
              
              
              1,400
              
              
              3,319
              
              
              1,050Income
                  (loss) from continuing operations
              
              
              7,412
              
              
              (6,837
              )
              
              5,526
              
              
              2,758Discontinued
                  operations:Income
                  from discontinued operations, net of income taxes
              
              
              -
              
              
              -
              
              
              737
              
              
              737Gain
                  on disposal of a component of our business, net of income
                  taxes
              
              
              -
              
              
              176
              
              
              1,220
              
              
              123Net
                  income (loss)
              
              $
              7,412
              
              $
              (6,661
              )
              $
              7,483
              
              $
              3,618Basic
                  earnings (loss) per common share from continuing
                  operations
              
              $
              0.77
              
              $
              (0.71
              )
              $
              0.64
              
              $
              0.32Diluted
                  earnings (loss) per common share from continuing
                  operations
              
              $
              0.74
              
              $
              (0.71
              )
              $
              0.61
              
              $
              0.30Basic
                  earnings per common share from discontinued operations
              
              $
              -
              
              $
              0.02
              
              $
              0.23
              
              $
              0.10Diluted
                  earnings per common share from discontinued operations
              
              $
              -
              
              $
              0.02
              
              $
              0.22
              
              $
              0.09Basic
                  earnings (loss) per common share
              
              $
              0.77
              
              $
              (0.69
              )
              $
              0.87
              
              $
              0.42Diluted
                  earnings (loss) per common share
              
              $
              0.74
              
              $
              (0.69
              )
              $
              0.83
              
              $
              0.39
 35
  ***Balance
        Sheet Adjustments (in thousands)***
  **As
                  of June 30, 2002**
              
              **As
                  of June 30, 2001****As
                  Previously Reported**
              
              **As
                  Restated**
              
              **As
                  Previously Reported**
              
              **As
                  Restated****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              14,248
              
              $
              1,744
              
              $
              6,852
              
              $
              6,851Marketable
                  securities
              
              
              -
              
              
              12,400
              
              
              -
              
              
              -Accounts
                  receivable, net
              
              
              20,317
              
              
              4,322
              
              
              7,213
              
              
              2,027Inventories
              
              
              8,606
              
              
              12,516
              
              
              4,132
              
              
              6,459Note
                  Receivable, current portion
              
              
              196
              
              
              -
              
              
              71
              
              
              -Deferred
                  income tax assets
              
              
              1,293
              
              
              4,709
              
              
              248
              
              
              1,587Prepaid
                  expenses and other
              
              
              610
              
              
              621
              
              
              780
              
              
              680Total
                  current assets
              
              
              45,270
              
              
              36,312
              
              
              19,296
              
              
              17,604Property
                  and equipment, net
              
              
              5,770
              
              
              8,123
              
              
              3,697
              
              
              5,681Goodwill,
                  net
              
              
              20,553
              
              
              17,072
              
              
              2,634
              
              
              890Intangibles,
                  net
              
              
              6,991
              
              
              1,634
              
              
              182
              
              
              616Deferred
                  income tax assets
              
              
              -
              
              
              661
              
              
              -
              
              
              446Note
                  Receivable, net of current portion
              
              
              1,490
              
              
              -
              
              
              1,716Other
                  assets
              
              
              73
              
              
              74
              
              
              73
              
              
              74Total
                  assets
              
              $
              80,147
              
              $
              63,876
              
              $
              27,598
              
              $
              25,311**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Line
                  of credit
              
              $
              196
              
              $
              196
              
              
              
              
              $
              -Capital
                  lease obligations
              
              
              60
              
              
              784
              
              
              182
              
              
              619Accounts
                  payable
              
              
              3,053
              
              
              3,056
              
              
              568
              
              
              652Accrued
                  liabilities
              
              
              2,299
              
              
              2,841
              
              
              1,130
              
              
              1,408Deferred
                  revenue
              
              
              607
              
              
              572
              
              
              -
              
              
              -Income
                  taxes payable
              
              
              820
              
              
              265
              
              
              422
              
              
              224Total
                  current liabilities
              
              
              7,035
              
              
              7,714
              
              
              2,302
              
              
              2,903Capital
                  lease obligations, net of current portion
              
              
              41
              
              
              2,016
              
              
              48
              
              
              1,680Deferred
                  revenue, net of current portion
              
              
              277
              
              
              254
              
              
              -
              
              
              -Deferred
                  income tax liabilities
              
              
              1,458
              
              
              -
              
              
              746
              
              
              -Total
                  liabilities
              
              
              8,811
              
              
              9,984
              
              
              3,096
              
              
              4,583Commitments
                  and contingenciesStockholders'
                  equity:Common
                  stock
              
              
              11
              
              
              11
              
              
              9
              
              
              9Additional
                  paid-in capital
              
              
              48,384
              
              
              48,704
              
              
              8,963
              
              
              8,856Deferred
                  compensation
              
              
              -
              
              
              (147
              )
              
              -
              
              
              (122
              )Retained
                  earnings
              
              
              22,941
              
              
              5,324
              
              
              15,530
              
              
              11,985Total
                  stockholders' equity
              
              
              71,336
              
              
              53,892
              
              
              24,502
              
              
              20,728Total
                  liabilities and stockholders' equity
              
              $
              80,147
              
              $
              63,876
              
              $
              27,598
              
              $
              25,311
 
 ***Stockholders’
        Equity Adjustments***
  The
        restatement adjustments resulted in a cumulative net reduction to stockholders’
equity of approximately $17.4 million and $3.8 million as of June 30, 2002
        and
        2001, respectively. We have also restated the June 30, 2000 retained earnings
        balance to reflect cumulative adjustments through that date.
  36
 
 ***Cash
        Flows Adjustments (in thousands)***
  The
        following table presents selected consolidated statements of cash flows
        information showing previously reported and restated cash flows, for the
        years
        ended June 30, 2002 and 2001:
  **Years
                  ended**
                **June
                  30,**
              
              **Years
                  ended**
                **June
                  30,****2002**
              
              **2001****As
                  previously****reported**
              
              **As
                  restated**
              
              **As
                  previously****reported**
              
              **As
                  restated**Net
                  cash from operating activities
              
              $
              105
              
              $
              31
              
              $
              3,708
              
              $
              4,357Net
                  cash (used in) investing activities
              
              
              (17,044
              )
              
              (29,470
              )
              
              (3,114
              )
              
              (3,285
              )Net
                  cash from (used in) financing activities
              
              
              24,335
              
              
              24,156
              
              
              (104
              )
              
              (456
              )
 
 **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, 2003, 2002
        and
        2001, together with the percentage of total revenue which each such item
        represents:
 
 **Year
                    Ended June 30,****2003**
                
                **2002**
                
                **2001****(Restated)**
                
                **(Restated)****%
                    of Revenue**
                
                
                
                **%
                    of Revenue**
                
                
                
                **%
                    of Revenue**Revenues
                
                $
                57,585
                
                
                
                
                $
                43,362
                
                
                
                
                $
                34,137Cost
                    of goods sold
                
                
                35,301
                
                
                61.3
                %
                
                22,172
                
                
                51.1
                %
                
                15,133
                
                
                44.3
                %Gross
                    Profit
                
                
                22,284
                
                
                38.7
                %
                
                21,190
                
                
                48.9
                %
                
                19,004
                
                
                55.7
                %Operating
                    expenses:Marketing
                    and selling
                
                
                12,187
                
                
                21.2
                %
                
                10,739
                
                
                24.8
                %
                
                7,711
                
                
                22.6
                %General
                    and administrative
                
                
                18,011
                
                
                31.3
                %
                
                5,345
                
                
                12.3
                %
                
                4,198
                
                
                12.3
                %Research
                    and product development
                
                
                2,995
                
                
                5.2
                %
                
                3,810
                
                
                8.8
                %
                
                2,747
                
                
                8.0
                %Impairment
                    losses
                
                
                26,001
                
                
                45.2
                %
                
                7,115
                
                
                16.4
                %
                
                -
                
                
                0.0
                %Gain
                    on sale of court conferencing assets
                
                
                -
                
                
                0.0
                %
                
                (250
                )
                
                -0.6
                %
                
                -
                
                
                0.0
                %Purchased
                    in-process research and development
                
                
                -
                
                
                0.0
                %
                
                -
                
                
                0.0
                %
                
                728
                
                
                2.1
                %Total
                    operating expenses
                
                
                59,194
                
                
                102.8
                %
                
                26,759
                
                
                61.7
                %
                
                15,384
                
                
                45.1
                %Operating
                    income (loss)
                
                
                (36,910
                )
                
                -64.1
                %
                
                (5,569
                )
                
                -12.8
                %
                
                3,620
                
                
                10.6
                %Other
                    income (expense), net:Interest
                    income
                
                
                85
                
                
                0.1
                %
                
                293
                
                
                0.7
                %
                
                334
                
                
                1.0
                %Interest
                    expense
                
                
                (236
                )
                
                -0.4
                %
                
                (179
                )
                
                -0.4
                %
                
                (164
                )
                
                -0.5
                %Other,
                    net
                
                
                55
                
                
                0.1
                %
                
                18
                
                
                0.0
                %
                
                18
                
                
                0.1
                %Income
                    (loss) from continuing operations before income taxes
                
                
                (37,006
                )
                
                -64.3
                %
                
                (5,437
                )
                
                -12.5
                %
                
                3,808
                
                
                11.2
                %Provision
                    (benefit) for income taxes
                
                
                (834
                )
                
                -1.4
                %
                
                1,400
                
                
                3.2
                %
                
                1,050
                
                
                3.1
                %Income
                    (loss) from continuing operations
                
                
                (36,172
                )
                
                -62.8
                %
                
                (6,837
                )
                
                -15.8
                %
                
                2,758
                
                
                8.1
                %Net
                    gain from discontinued operations
                
                
                200
                
                
                0.3
                %
                
                176
                
                
                0.4
                %
                
                860
                
                
                2.5
                %Net
                    income (loss)
                
                $
                (35,972
                )
                
                -62.5
                %
                $
                (6,661
                )
                
                -15.4
                %
                $
                3,618
                
                
                10.6
                %
  Our
        revenues increased 68.7% over the period from $34.1 million in fiscal 2001
        to
        $57.6 million in fiscal 2003. During this period, we changed our business
        mix
        through four acquisitions and two dispositions.
 
 The
        following is a discussion of our results of operations for our fiscal years
        ended June 30, 2003, June 30, 2002 and June 30, 2001. For each of our business
        segments, we discuss revenues. All other items are discussed on a consolidated
        basis.
  37
  ***Revenues***
  For
        the
        years ended June 30, 2003, 2002 and 2001, revenues by business segment were
        as
        follows (in thousands):
 
 **Year
                  Ended June 30,****(in
                  thousands)****2003**
              
              **2002**
              
              **2001****(Restated)**
              
              **(Restated)****%
                  of Revenue**
              
              
              
              **%
                  of Revenue**
              
              
              
              **%
                  of Revenue**Product
              
              $
              27,512
              
              
              47.8
              %
              $
              26,253
              
              
              60.5
              %
              $
              22,448
              
              
              65.8
              %Conferencing
                  Services
              
              
              15,268
              
              
              26.5
              %
              
              15,583
              
              
              36.0
              %
              
              11,689
              
              
              34.2
              %Business
                  Services
              
              
              14,805
              
              
              25.7
              %
              
              1,526
              
              
              3.5
              %
              
              -
              
              
              0.0
              %Total
              
              $
              57,585
              
              
              100.0
              %
              $
              43,362
              
              
              100.0
              %
              $
              34,137
              
              
              100.0
              %
 
 ***Total
        Revenue.*** Total
        revenue increased $14.2 million, or 32.8% in fiscal 2003 compared to fiscal
        2002, and increased $9.2 million, or 27.0%, in fiscal 2002 compared to fiscal
        2001. The overall increase in revenue during fiscal 2003 was primarily
        attributable to revenue from business services which increased $13.3 million
        year over year as a result of the acquisitions of E.mergent in late fiscal
        2002
        and OM Video in early fiscal 2003. The increase in revenue during fiscal
        2002
        over fiscal 2001 was attributable to increased revenue in all three segments
        of
        our business.
  ***Product.*** Product
        revenue increased $1.3 million, or 4.8%, in fiscal 2003 compared to fiscal
        2002,
        and increased $3.8 million, or 17.0%, in fiscal 2002 compared to fiscal 2001.
        The increase in revenue was primarily due to introducing new product lines,
        which include the XAP® product, sound reinforcement product and tabletop
        conferencing phones. We also introduced additional products lines through
        acquisitions, which include our camera and furniture product lines. Beginning
        in
        2001, the Company moved from a dealer/sales representative customer model
        to a
        distributor model.
  ***Conferencing
        Services.*** Conferencing services revenue decreased $0.3 million, or 2.0%, in fiscal
        2003
        compared to fiscal 2002, and increased $3.9 million, or 33.3%, in fiscal
        2002
        compared to fiscal 2001. The decrease in revenue in fiscal 2003 compared
        to
        fiscal 2002 reflects lower price per minute charges due to intense competition
        caused primarily by overcapacity in the industry. The increase in revenue
        in
        fiscal 2002 compared to fiscal 2001 was due primarily to an increased customer
        base, including an increase in the number of resellers who sold our
        services.
  ***Business
        Services.*** Business
        services revenue increased $13.3 million, or 870.2%, in fiscal 2003 compared
        to
        fiscal 2002. The increase in revenue in fiscal 2003 compared to fiscal 2002
        was
        primarily due to our acquisitions of E.mergent, Inc. on May 31, 2002 and
        OM
        Video on August 27, 2003. The increase in revenue in fiscal 2003 was also
        due to
        the sale of a software license to Comrex with a value of $1.1 million and
        was
        associated with our telephone interface product. Prior to fiscal 2002, we
        did
        not have operations in the business services segment.
  Revenues
        from sales outside of the United States accounted for 26%, 10% and 12% of
        total
        revenues for fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
  No
        one
        customer accounted for more than 10% of our total net revenues during fiscal
        2003, 2002 or 2001. In fiscal 2003, revenues in our product segment included
        sales to three distributors that represented approximately 42% of this segment’s
        revenues. No one customer accounted for more than 10% of our conferencing
        services or business services segment revenues for any fiscal year.
  In
        fiscal
        2003 and fiscal 2002, we introduced several new products in our products
        segment
        and our conferencing services segment. We also acquired two companies and
        entered into the business services segment of our business.
  38
 
 ***Costs
        of goods sold - gross profit margin***
  Costs
        of
        goods sold (“COGS”) includes expenses associated with the manufacture of our
        products, including material and direct labor, our manufacturing organization,
        tooling depreciation, warranty expense, freight expense, royalty payments
        and
        the allocation of overhead expenses; operating and maintaining our conferencing
        services networks, including material and direct labor, depreciation, and
        an
        allocation of overhead expenses; and operating our installations services,
        including material and direct labor, depreciation, and an allocation of overhead
        expenses. COGS increased by approximately $13.1 million, or 59.2%, to $35.3
        million in fiscal 2003 compared with fiscal 2002, and increased by $7.0 million,
        or 46.5%, to $22.2 million in fiscal 2002 compared with $15.1 million in
        fiscal
        2001. As a percentage of revenues, COGS was 61.3%, 51.1% and 44.3% in fiscal
        2003, fiscal 2002 and fiscal 2001, respectively.
  Our
        gross
        profit margin from continuing operations was 38.7% in fiscal 2003 compared
        to
        48.9% in fiscal 2002 and 55.7% in fiscal 2001. The decrease in gross margins
        from 48.9% in fiscal 2002 to 38.7% 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 margin percentage, proportionally higher
        camera and furniture product revenues resulting from the E.mergent acquisition
        that carry a lower gross margin percentage, lower conferencing services gross
        margins as a result of increased price competition, and general pricing
        pressures resulting from difficult economic conditions. The decrease in gross
        margins from 55.7% in fiscal 2001 to 48.9% in fiscal 2002 is primarily due
        to
        the write down of excess, obsolete and slow moving inventory, and the addition
        of integration services revenues resulting from E.mergent acquisition that
        carry
        a lower gross margin percentage than our core products.
  ***Operating
        Expenses***
  Our
        operating expenses increased $32.4 million, or 121.2%, to $59.2 million in
        fiscal 2003 compared with fiscal 2002 expenses of $26.8 million while fiscal
        2002 expenses increased $11.4 million, or 73.9% from $15.4 million in fiscal
        2001. As a percentage of revenues, operating expenses were 102.8%, 61.7%
        and
        45.1% in fiscal 2003, 2002 and 2001, respectively.
  ***Marketing
        and selling expenses.*** Marketing and selling expenses includes sales, customer service and marketing
        expenses. Total marketing and selling expenses increased $1.4 million, or
        13.5%,
        to $12.2 million in fiscal 2003 compared with fiscal 2002 expenses of $10.7
        million while fiscal 2002 expenses increased $3.0 million, or 39.3%, from
        $7.7
        million in fiscal 2001. As a percentage of revenues, marketing and selling
        expenses were 21.2%, 24.8% and 22.6% in fiscal 2003, 2002 and 2001,
        respectively. Marketing and selling expenses as a percentage of revenues
        remained relatively flat from 2001 to 2003 except for a slight increase in
        2002.
        The increase in absolute dollars in fiscal 2003 over fiscal 2002 was primarily
        due to the addition of our business services segment and the increased headcount
        and costs associated with the increased headcount. The increase in absolute
        dollars in fiscal 2002 over fiscal 2001 was primarily due to an increased
        headcount and associated headcount costs, along with an increase in commissions
        to our resellers in our conferencing services segment. Also contributing
        was an
        increase in our marketing budget to increase momentum in the markets for
        our new
        products in our products segment and conferencing services segment and to
        introduce our new business services segment.
  39
 
 ***General
        and administrative expenses.*** General
        and administrative (G&A) expenses include compensation costs, professional
        service fees, allocations of overhead expenses, litigation costs, including
        costs associated with the SEC investigation and subsequent litigation, bad
        debt
        expenses, and corporate administrative costs, including finance and human
        resources. Total general and administrative expenses increased $12.7 million,
        or
        237.0%, to $18.0 million in fiscal 2003 compared with fiscal 2002 expenses
        of
        $5.3 million while fiscal 2002 expenses increased $1.1 million, or 27.3%,
        from
        $4.2 million in fiscal 2001. As a percentage of revenues, general and
        administrative expenses were 31.3%, 12.3% and 12.3% in fiscal 2003, 2002
        and
        2001, respectively. We attribute the increase in G&A as a percentage of
        revenues from 12.3% in 2002 to 31.3% in 2003 to the following: costs associated
        with the Securities and Exchange Commission investigation and subsequent
        lawsuits, including a settlement payment associated with the shareholders’ class
        action lawsuit in the amount of $5.0 million in cash and $2.52 million in
        stock,
        legal and accounting fees associated with these lawsuits in the amount of
        $1.84
        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, salary expense increased $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 general and
        administrative expense of $1.27 million due to the OM Video
        acquisition.
 
 ***Research
        and product development expenses.*** Research
        and product development expenses include research and development, product
        line
        management, engineering services and test and application expenses, including
        compensation costs, outside services, expensed materials, depreciation and
        an
        allocation of overhead expenses. Total research and product development expenses
        decreased $0.8 million, or 21.4%, to $3.0 million in fiscal 2003 compared
        with
        fiscal 2002 expenses of $3.8 million while fiscal 2002 expenses increased
        $1.1
        million, or 38.7%, from $2.7 million in fiscal 2001. As a percentage of
        revenues, research and product development expenses were 5.2%, 8.8% and 8.0%
        in
        fiscal 2003, 2002 and 2001, respectively. 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 office. Also, as a percentage of revenue, research and product
        development dropped from 8.8% to 5.2% due to substantially higher business
        services revenues that require little or no additional product development.
        The
        increase in product development expenses from fiscal 2001 to fiscal 2002
        was due
        to increased salaries and expenses associated with additional personnel and
        development costs associated with new product development.
  ***Impairment
        charges.*** In
        fiscal 2002, impairment charges totaled $72,000 for property and equipment
        and
        approximately $7.0 million for goodwill and intangible assets. In fiscal
        2003,
        impairment charges totaled $535,000 for property and equipment and $25.5
        million
        for goodwill and intangible assets. See Item 1. Description of Business. *Acquisitions
        and Dispositions.*
  ***Gain
        on sale of court conferencing assets.*** In
        fiscal 2002, we recognized a gain of $250,000 in connection with our sale
        of our
        court conferencing customer list to CourtCall LLC.
  ***Purchased
        in-process research and development.*** In the
        first quarter of fiscal 2001, we wrote off $728,000 representing purchased
        in-process research and development that had not yet reached technological
        feasibility related to the ClearOne acquisition.
  ***Operating
        income (loss).*** For
        fiscal 2003, our operating loss increased $31.3 million, or 562.8%, to $36.9
        million on revenues of $57.6 million, from an operating loss of $5.6 million
        on
        revenues of $43.4 million in fiscal 2002. The factors affecting this increase
        in
        operating loss were an increase in impairment charges for goodwill and other
        intangible assets of $18.9 million, an increase in general and administrative
        expenses of $12.7 million, an increase in marketing and selling expenses
        of $1.4
        million, and a decrease in the gain on sale of assets of $0.3 million, offset
        by
        a decrease in gross profit margin of $1.1 million and a reduction in product
        development expenses of $0.8 million.
  For
        fiscal 2002, our operating loss increased $9.2 million, or 253.8%, to $5.6
        million on revenues of $43.4 million, from an operating income of $3.6 million
        on revenues of $34.1 million in fiscal 2001. The principal factors affecting
        this increase in operating loss include an increase in impairment charges
        for
        goodwill and other intangible assets of $7.1 million, an increase in marketing
        and selling expenses of $3.0 million, an increase in general and administrative
        expenses of $1.1 million, and an increase in product development expenses
        of
        $1.1 million offset by a decrease in gross profit margins of $2.2 million,
        a
        decrease in purchased in-process research and development of $0.7 million
        and an
        increase in gain on sale of assets of $0.3 million.
  40
  ***Interest
        income.*** Interest
        income decreased $208,000, or 71.0%, to $85,000 in fiscal 2003 compared with
        fiscal 2002 income of $293,000 while fiscal 2002 income decreased $41,000,
        or
        12.3%, from $334,000 in fiscal 2001. As a percentage of revenues, interest
        income was 0.1%, 0.7% and 1.0% in fiscal 2003, 2002 and 2001, respectively.
        The
        reduction in interest income was due to the use of cash and cash equivalents
        to
        complete acquisitions during fiscal 2003 and 2002. The decrease in interest
        income was also due to the general decrease in interest rates paid by financial
        institutions.
  ***Interest
        expense.*** Interest
        expense increased $57,000, or 31.8%, to $236,000 in fiscal 2003 compared
        with
        fiscal 2002 expense of $179,000 while fiscal 2002 income increased $15,000,
        or
        9.1%, from $164,000 in fiscal 2001. As a percentage of revenues, interest
        expense was (0.4)%, (0.4)% and (0.5)% in fiscal 2003, 2002 and 2001,
        respectively. The increase in interest expense is due to higher debt levels
        that
        resulted from new capital leases on bridging equipment for our conferencing
        services business and the loan associated with the implementation of our
        Oracle
        ERP system.
  ***Net
        income (loss) from continuing operations.*** Net loss
        from continuing operations increased $31.6 million, or 580.6% to $37.0 million
        in fiscal 2003 compared with fiscal 2002 net loss from continuing operations
        of
        $5.4 million while fiscal 2002 income decreased $9.2 million, or 242.8%,
        from
        net income from continuing operations of $3.8 million in fiscal 2001. As
        a
        percentage of revenues, net income (loss) from continuing operations was
        (64.3)%, (12.5)% and 11.2% in fiscal 2003, 2002 and 2001, respectively. We
        attribute the increased loss to the results of operations as described
        above.
  ***Provision
        (benefit) for income taxes*** .
        Provision (benefit) for income taxes was ($0.8) million, $1.4 million and
        $1.1
        million for 2003, 2002 and 2001, respectively. Certain expenses in our
        consolidated statements of operations are not deductible for income tax
        purposes. These expenses include impairment charges, meals and entertainment
        expenses and 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 nondeductible expenses and the increased
        valuation allowance were the primary reasons for our tax expense (benefit)
        being
        different from the expected tax expense (benefit). The Company has 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.
  ***Net
        gain from discontinued operations.*** Net gain
        from discontinued operations includes the sale of our remote control product
        line to Burk Technology. The gain from discontinued operation, net of income
        taxes, increased $24,000 in fiscal 2003 to $200,000 from $176,000 in fiscal
        2002, and in fiscal 2002 decreased $684,000 from $860,000 in fiscal 2001.
        The
        income from discontinued operations during fiscal 2003 and fiscal 2002 consisted
        of payments from Burk on their note receivable. The income from discontinued
        operations during fiscal 2001 consisted of operating income from discontinued
        operations and the gain on the sale to Burk.
  ***Net
        income (loss).*** For
        fiscal 2003, our net loss increased $29.3 million, or 440.0%, to $36.0 million
        from $6.7 million in fiscal 2002. The $29.3 million increase in net loss
        primarily resulted from an increase in operating loss of $31.3 million, a
        decrease in interest income of $208,000 and an increase in interest expense
        of
        $57,000 partially offset by an increase in benefit for income taxes of $2.2
        million, an increase in gain from discontinued operations of $24,000, an
        increase in other income of $4,600 and gain on foreign currency transactions
        of
        $40,000.
  For
        fiscal 2002, our net loss increased $10.3 million, or 284.1%, to $6.7 million
        from a net income of $3.6 million in fiscal 2001. The $10.3 million increase
        in
        net loss primarily resulted from an increase in operating loss of $9.2 million,
        a decrease in gain from discontinued operations of $684,000, a decrease in
        interest income of $41,000, an increase in interest expense of $15,000, a
        decrease in other income of $46,000, and an increase in the provision for
        income
        taxes of $350,000 partially offset by an increase in gain on foreign currency
        transactions of $46,000.
  **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 a business services segment to our business. See Item 1. Description
        of Business. *Acquisitions
        and Dispositions* for more
        details. Total consideration paid to acquire these companies was approximately
        $39.9 million in cash and the issuance of common stock.
  41
 
 As
        a
        result of the impairment tests performed effective as of the end of fiscal
        2003
        and fiscal 2002 according to SFAS No. 142 and 144, and 121, respectively,
        we
        recorded impairment charges for all goodwill, a portion of purchased
        intangibles, and substantially all property and equipment for each entity.
        Impairment charges totaled approximately $33.1 million on our statements
        of
        operations. Between the end of fiscal 2002 and the third quarter of fiscal
        2005
        we had disposed of substantially all the assets and operations of the four
        acquired companies due to technology issues and 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* 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 development to release new products that are in line
        with
        our core competencies and that complement our existing product lines.
  **Private
        Placement**
  On
        December 11, 2001, we received net proceeds of $23.8 million from the private
        sale of 1.5 million shares of our common stock, after deducting costs and
        expenses associated with the private placement. The proceeds were used to
        pay
        the cash purchase price of the E.mergent acquisition and the OM Video
        acquisition described below, as well as for other corporate purposes. In
        connection with the offering, we also issued warrants to our placement agent
        entitling it to purchase up to 150,000 shares of our common stock at $17.00
        per
        share through November 27, 2006. These warrants were valued at approximately
        $1.6 million using the Black Scholes method.
  **Discontinued
        Operations**
  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. We retained
        the
        accounts payable of the remote control portion of the RFM/Broadcast division
        and
        Burk assumed obligations for unfilled customer orders and satisfying warranty
        obligations to existing customers and for inventory sold to Burk. However,
        we
        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 $750,000 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 $700,000 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. The promissory note
        is
        secured by a subordinate security interest in the personal property of Burk.
        The
        gain on the sale is being recognized as cash is collected (as collection
        was not
        reasonably assured from Burk). The commission is based upon future net sales
        of
        Burk over base sales established within the agreement. We realized a gain
        on the
        sale of $200,000 for the 2003 fiscal year, $176,000 for the 2002 fiscal year,
        and $123,000 for the 2001 fiscal year. As of June 30, 2003, $1.5 million of
        the promissory note remained outstanding and we had received $20,000 in
        commissions.
  **Sale
        of Other Assets** ****
  ***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 our court conferencing services
        to
        CourtCall LLC and recognized a gain of $250,000.
  42
  ***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 $1.1 million in revenue related to this transaction in the fiscal
        year ended June 30, 2003.
  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%.
  **Subsequent
        Events**
  ***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 $569,000.
        We
        expect that the operations of our U.S. audiovisual integration services will
        be
        classified as discontinued operations in the fiscal year 2004. As of June
        30,
        2003, the assets of audiovisual integration services were classified as held
        and
        used. We continue to manufacture and sell the camera and furniture lines
        acquired with the E.mergent acquisition.
  ***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. d/b/a Premier
        Conferencing 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 Clarinet. We expect that the
        conferencing services operations will be classified as discontinued operations
        in the fiscal year 2005. As of June 30, 2003, the assets of conferencing
        services were classified as held and used.
  ***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
        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
        5.25% per year; and contingent consideration ranging from 3% to 4% 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 fiscal year 2005. As of June 30, 2003, 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. We are evaluating what impact, if any, this settlement may have on
        the OM
        Purchaser’s ability to make the payment required under the note.
  43
 
 ***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 and 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 ninety 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 $429,000 including severance payments,
        facilities we no longer use and fixed assets that will be disposed
        of..
  **Liquidity
        and Capital Resources**
  As
        of
        June 30, 2003, our cash and cash equivalents were approximately $6.1 million,
        restricted cash of approximately $200,000 and our marketable securities of
        approximately $1.9 million, which represents 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. We had an overall increase of $7.3 million in our cash and
        cash
        equivalents and marketable securities from fiscal 2001 to fiscal 2002, with
        cash
        and cash equivalents of approximately $6.9 million and marketable securities
        of
        $0 at June 30, 2001. In addition, we previously had a $10.0 million line
        of
        credit with a bank which was unused at June 30, 2003, and had been frozen
        by our
        bank on May 16, 2003. The line of credit expired on December 22, 2003 and
        was
        not renewed.
 
 We
        generated cash from operating activities totaling $2.5 million in fiscal
        2003,
        $31,000 in fiscal 2002 and $4.4 million in fiscal 2001. The increase in cash
        provided from operating activities in fiscal 2003 over fiscal 2002 was due
        primarily to a decrease in inventory and accounts receivable coupled with
        an
        increase in deferred revenue and income taxes payable. These items were offset
        by an increase in accounts payable and a decrease in our income taxes. The
        decrease in cash provided from operating activities in fiscal 2002 over fiscal
        2001 was due primarily to an increase in our net loss and an increase in
        our
        inventory.
  The
        total
        net change in cash and cash equivalents for fiscal 2003 was an increase of
        $4.3
        million. The primary uses of cash during this period were $7.4 million, net
        of
        cash received for the purchase of OM Video, $1.8 million for the purchases
        of
        property and equipment and the payment of the earn-out provision and $430,000
        for the repurchase of common stock. The primary sources of cash were $2.5
        million from operating activities, $10.5 million of net sales of investments,
        $1.3 million from proceeds of the sale to Comrex, $318,000 from proceeds
        of
        discontinued operations, and $95,000 associated with the exercise of stock
        options and the issuance of common stock under the employee stock purchase
        plan.
  The
        total
        net change in cash and cash equivalents for fiscal 2002 was a decrease of
        $5.1
        million. The primary uses of cash during this period were $14.4 million for
        the
        purchases of E.mergent and Ivron, $12.4 million of net purchases of investments,
        and $2.8 million for the purchases of property and equipment. The primary
        sources of cash were $1.0 million associated with the exercise of stock options
        and the issuance of common stock under the employee stock purchase plan,
        $23.8
        million from the proceeds of a private placement, $250,000 from proceeds
        of the
        sale to CourtCall LLC, and $280,000 from proceeds of discontinued
        operations.
  44
 
 The
        total
        net change in cash and cash equivalents for fiscal 2001 was an increase of
        $1.5
        million. The primary uses of cash during this period were $1.9 million for
        the
        purchase of ClearOne, $1.4 million for purchases of property and equipment
        and
        $244,000 for the repurchase of common stock. The primary sources of cash
        were
        $4.4 from operating activities, $340,000 associated with the exercise of
        stock
        options and the issuance of common stock under the employee stock purchase
        plan
        and $750,000 from the proceeds of discontinued operations.
  The
        positive cash from operating activities was primarily the result of adjusted
        non-cash expenses (such as impairment, depreciation, amortization, the provision
        for doubtful accounts, inventory write-downs for excess for obsolescence,
        write
        off of in-process research and development), increases in income tax receivable
        and accrued liabilities. Offsetting the positive effect of these items were
        an
        increase in net loss, an increase in trade receivables, and a decrease in
        accounts payable.
  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).
        Consideration for the sale consisted of $750,000 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 $700,000 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.
        The promissory note is secured by a subordinate security interest in the
        personal property of Burk. The gain on the sale is being recognized as cash
        is
        collected (as collection was not reasonably assured from Burk). The commission
        is based upon future net sales of Burk over base sales established within
        the
        agreement. We realized a gain on the sale of $200,000 for the 2003 fiscal
        year,
        $176,000 for the 2002 fiscal year, and $123,000 for the 2001 fiscal year.
        We
        received payments totaling $187,000 for the 2005 fiscal year and $93,000
        for the
        2004 fiscal year. As of June 30, 2005, $1.5 million of the promissory note
        remained outstanding and we had received $20,000 in commissions.
  At
        June
        30, 2003, we had open purchase orders related to our contract manufacturers
        and
        other contractual obligations of approximately $1.4 million 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, 2003 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
                
                $
                1,698
                
                $
                728
                
                $
                970
                
                $
                -
                
                $
                -Capital
                    Leases
                
                
                2,318
                
                
                961
                
                
                1,357
                
                
                -
                
                
                -Operating
                    Leases
                
                
                1,866
                
                
                828
                
                
                938
                
                
                100
                
                
                -Total
                    Contractual Cash Obligations
                
                $
                5,882
                
                $
                2,517
                
                $
                3,265
                
                $
                100
                
                $
                -
 
 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 audit of our consolidated financial statements. Restatement
        of fiscal 2002 and fiscal 2001 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 $5.0 million in cash
        and
        agreed to issue 1.2 million shares of our common stock to settle the class
        action lawsuit, we have incurred legal fees in the amount of approximately
        $1.5
        million from January 2003 through the date hereof, and we have incurred audit
        and tax fees in the amount of approximately $2.1 million from January 2004
        through the date hereof.
  Notwithstanding
        the foregoing, as of June 30, 2005, we believe that our working capital and
        cash
        flows from operating activities will be sufficient to satisfy our operating
        and
        capital expenditure requirements for continuing operations for the next 12
        months.
  45
 
 **Critical
        Accounting Policies**
  Our
        discussion and analysis of our financial condition and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        conformity with U.S. GAAP. 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. The following describes
        our most critical accounting policies:
  ***Revenue
        and Associated Allowances for Revenue Adjustments and Doubtful
        Accounts***
  We
        currently have one source of revenue which is product revenue, primarily
        from
        product sales to independent distributors, dealers, systems integrators,
        value-added resellers and end users. 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. 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 us and 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
        end of
        fiscal year 2003.
  Accordingly,
        amounts charged to both distributors and non-distributors were not considered
        fixed and determinable or reasonably collectible until cash was collected.
        As a
        result, the June 30, 2003, 2002, and 2001 balance sheets reflect no accounts
        receivable or deferred revenue related to product sales.
 
 As
        part
        of the restatement process we identified certain deficiencies in our internal
        controls over revenue recognition where amounts charged to both distributors
        and
        non-distributors were not considered fixed and determinable or reasonably
        collectible until cash was collected. To address these internal control
        deficiencies we have implemented improved credit policies and procedures,
        improved the approval process for sales returns and credit memos, established
        processes for managing and monitoring of channel inventory levels, and provided
        training to our accounting staff. Based upon our implementation of these
        internal controls and improved experience with our customers, we expect to
        be
        able to meet the criteria for revenue recognition prior to cash collection
        in
        the near future.
  We
        offer
        rebates to certain distributors based upon volume of product 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.
  We
        estimate future product returns based upon historical experience and maintain
        an
        allowance for estimated returns which has been reflected as a reduction to
        accounts receivable. The allowance for estimated returns was $107,000, $0,
        and
        $0 as of June 30, 2003, 2002, and 2001, respectively.
  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 based upon our historical collection
        experience and expected collectibility of all accounts receivable. The allowance
        for doubtful accounts was $139,000, $190,000, and $0 as of June 30, 2003,
        2002,
        and 2001, respectively; however, 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.
  46
 
 ***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
        estimate our actual current tax expense together with our temporary differences
        resulting from differing treatment of items, such as deferred revenue, 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 and to the extent we
        believe
        that recovery is not likely, we must establish a valuation allowance against
        these 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 net 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.
  ***Lower
        of Cost or Market Adjustments***
  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 net realizable value.
  In
        order
        to determine what, if any, inventory needs to be written down, we perform
        an
        analysis of obsolete and slow-moving inventory quarterly. 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 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.
  47
 
 **Issued
        but not yet Adopted** **Accounting
        Pronouncements**
  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
        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 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.
  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 FAS 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.
  In
        November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs—an
        amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to
        converge U.S. accounting standards for inventories with International Accounting
        Standards. FAS 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.
        FAS 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.
  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.
  48
 
 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.
   **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
        $3.6
        million at June 30, 2003. We do not have significant exposure to changing
        interest rates on the note payable and capital leases because interest rates
        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. A hypothetical
        10%
        change in market interest rates over the next year would not impact our earnings
        or cash flows as the interest rates on the note payable and the majority
        of the
        capital leases are fixed.
  We
        do not
        purchase or hold any derivative financial instruments.
  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%
        adverse change in foreign currency exchange rates from June 30, 2003
        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.
   49
 
 **ITEM
                  8.**
                **FINANCIAL
                    STATEMENTS.**
 The
        following financial statements are included with this report and are located
        immediately following the signature page.
  50
 
 **ITEM
                  9.**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
  On
        July
        21, 2003, Ernst & Young, LLP ("Ernst & Young") was dismissed as the
        Company’s independent registered public accountants. The decision to dismiss
        Ernst & Young was recommended by the Audit Committee of the Board of
        Directors and was approved by the Board of Directors. The Company filed a
        current report on Form 8-K with respect to such event on July 25, 2003, which
        was subsequently amended on August 11, September 30, October 16, and November
        7,
        2003.
  Ernst
        & Young's reports on the Company's financial statements for the two fiscal
        years ended June 30, 2002 and 2001 did not contain an adverse opinion or
        disclaimer of opinion, and were not qualified or modified as to uncertainty,
        audit scope or accounting principles. However, as discussed below, such reports
        were subsequently withdrawn and the Company engaged KPMG LLP (KPMG) to reaudit
        its financial statements for its 2002 and 2001 fiscal years.
  On
        January 15, 2003, the Securities and Exchange Commission ("SEC") filed a
        complaint in the United States District Court against the Company and two
        of its
        former officers, which included allegations of improper revenue recognition
        from
        sales to distributors. The Company provided a copy of the complaint to Ernst
        & Young. The SEC complaint contained allegations that, if true, would
        materially impact the fairness or reliability of the Company's financial
        statements, and the validity of the allegations could not be determined without
        further investigation. The Company's representatives discussed with Ernst
&
Young the SEC complaint and the need to issue a press release. On January
        21,
        2003, the Company issued a press release and filed a current report on Form
        8-K
        which included statements to the effect that the Company's financial statements
        for the fiscal years ended June 30, 2001, and June 30, 2002, and for the
        quarters ended March 31, 2001, through and including September 30, 2002,
        were
        under review and that investment decisions should not be made based on such
        financial statements, or on the auditors' report thereon included in the
        Company's Annual Report as filed on Form 10K. The Company's representatives
        discussed the text of the press release with Ernst & Young prior to its
        release.
  In
        its
        letter to the Securities and Exchange Commission dated October 13, 2003,
        a copy
        of which is included as Exhibit 16.1 to the Company's 8-K/A report filed
        on
        November 7, 2003, Ernst & Young stated, among other things, that on or about
        January 21, 2003, it advised the Company's Audit Committee (through its
        designated representative) that the Securities and Exchange Commission’s
        complaint dated January 15, 2003 and other information that had come to Ernst
        & Young’s attention gave Ernst & Young concern regarding the fairness or
        reliability of the Company’s financial statements for the two fiscal years ended
        June 30, 2002 and 2001, and that such financial statements and Ernst &
Young’s reports thereon should not be relied upon and needed to be withdrawn and
        that Ernst & Young was unwilling to be associated with the previously-issued
        financial statements until a sufficient investigation into those allegations
        had
        been performed and any matters noted in the investigation appropriately
        resolved. The Company has no written record of such advice and, except as
        described in its 8-K filings, has been unable to corroborate such statements
        by
        Ernst & Young.
  On
        December 18, 2003, we engaged KPMG as our new independent registered public
        accountants to audit our financial statements for the 2003 fiscal year and
        to
        reaudit our financial statements for the 2002 and 2001 fiscal years. Those
        financial statements are included in this report.
  **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 Chief Financial Officer, as appropriate, to allow for timely
        decisions regarding required disclosure.
  We
        have
        restated our consolidated financial statements for the 2002 and 2001 fiscal
        years, and the individual restatement adjustments are discussed in “Item 8.
        Financial Statements - Note 3. Restatement and Reclassification of Previously
        Issued Financial Statements.”
  51
 
 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 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, 2003. In conducting this evaluation, we considered matters relating
        to
        the restatement of our financial statements including 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.
  We
        concluded that as of June 30, 2003, 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. Our accounting policies and
        practices over revenue recognition and related sales returns, credit memos,
        and
        allowances were inconsistent with generally accepted accounting principles
        in
        the U.S. (GAAP). We also have ineffective controls to monitor compliance
        with
        existing policies and procedures, and have insufficient training of accounting
        personnel. As a result, we recognized revenue before the amounts charged
        to both
        distributors and non-distributors were considered fixed and determinable
        or
        reasonably collectible. Related sales returns and allowances, rebates, and
        accounts receivables were also misstated as a result of the errors in revenue
        recognition.
  We
        have a
        material weakness related to accounting for cutoff and period-end close
        adjustments related to accrued liabilities and prepaid assets. Our accounting
        policies and practices over cutoff and period-end close adjustments related
        to
        accrued liabilities and prepaid assets were inconsistent with GAAP. This
        material weakness resulted in recording accruals and amortizing certain prepaid
        assets to operating expenses during the fiscal years ended June 30, 2003,
        2002
        and 2001 in the 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. Our accounting
        policies and practices over tracking and valuation of inventory, including
        controls to identify and properly account for slow moving, obsolete inventory
        were inconsistent with 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 leases, including classification as
        operating or capital. Our accounting policies and practices over accounting
        for
        leases, including proper classification as operating or capital, were
        inconsistent with GAAP. In evaluating the classification of leases, the Company
        did not consider all periods for which failure to renew the lease imposes
        a
        penalty on the lessee in such amount that a renewal appears, at the inception
        of
        the leases, to be reasonably assured. Accordingly, certain leases were
        classified as operating leases that should have been classified as capital
        leases.
  We
        have a
        material weakness in accounting for non-routine transactions, which include
        business combinations, discontinued operations, sale of a business unit (other
        than discontinued operations), and evaluation and recognition of impairment
        charges. Our accounting policies and practices over accounting for such
        non-routine transactions were inconsistent with GAAP. This material weakness
        resulted in improper purchase price allocations in business combinations,
        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, improper evaluation
        of triggering events associated with impairment of long-lived assets (including
        annual impairment tests for goodwill), and; improper calculating and recording
        of impairment charges.
  We
        have a
        material weakness in financial reporting. We lack personnel with adequate
        experience in preparing financial statements and related footnotes in accordance
        with GAAP.
  52
 
 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.
  ·
              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 complex transactions, account
                  reconciliation procedures and contract management
                  procedures.
  ·
              Ongoing
                  training and monitoring by management to ensure operation of controls
                  as
                  designed.
  ·
              Adoption
                  of a Code of Ethics.
  We
        have
        committed considerable resources to date to the reviews and remedies described
        above, although certain of such items are ongoing and it will take time to
        realize all the benefits. Additional efforts will be required to remediate
        all
        of the deficiencies 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.
  53
 
 **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. 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. 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 CPAs.
              
              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
  54
  Harry
                  Spielberg
              
              Harry
                  Spielberg joined us as a director 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
 
 ***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.
  ***Director
        Committees***
  Our
        board
        of directors currently has two standing committees: 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. 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.
  ***Meetings
        of the Board of Directors and Committees***
  The
        board
        of directors held nine meetings during fiscal 2003 and nine meetings during
        fiscal 2002. The audit committee held nineteen meetings during fiscal 2003
        and
        two meetings during fiscal 2002. The compensation committee held three meetings
        during fiscal 2003 and one meeting during fiscal 2002. In 2003, each director
        attended at least 75% of the meetings of the board of directors and the
        committees on which they served, except for Frances Flood who did not attend
        any
        board meetings after she was placed on administrative leave.
  *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
  55
  ***Executive
        Officers***
  Our
        executive officers as of the date of this filing are as follows:
  Name
              
              Age
              
              PositionZee
                  Hakimoglu
              
              51
              
              President
                  and Chief Executive OfficerDonald
                  Frederick
              
              50
              
              Chief
                  Financial OfficerTracy
                  Bathurst
              
              41
              
              Vice
                  President of Product Line ManagementDeLonie
                  Call
              
              52
              
              Vice
                  President of Human ResourcesWerner
                  Pekarek
              
              56
              
              Vice
                  President of OperationsJoseph
                  Sorrentino
              
              50
              
              Vice
                  President of Worldwide Sales and
                  Marketing
 
 Zee
        Hakimoglu joined us in December 2003 with more than 15 years of executive
        and
        senior-level, high-tech management experience. 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’s degree in physics from California State College,
        Sonoma, and a master’s degree in physics from Drexel University.
  Donald
        Frederick joined us in July 2004 with more than 25 years of financial management
        experience. From January 2000 to February 2004, Mr. Frederick was most recently
        chief financial officer of Datasweep, Inc., a privately held enterprise software
        company. From June 1997 to September 1999, he was chief financial officer
        of
        ADFlex Solutions, Inc., a publicly held manufacturer of high-tech circuitry
        for
        consumer electronic products with more than $200 million in revenue. He was
        also
        vice president of finance for publicly held Flextronics International from
        May
        1995 to May 1997 and director of finance for Sony Electronics from May 1990
        to
        May 1995. Mr. Frederick earned a master’s degree in finance from San Jose State
        University and a bachelor’s degree in accounting from Michigan Technological
        University.
  Tracy Bathurst
        joined 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 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’s degree in business management and economics.
  56
 
 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 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. He was also 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 earned a Bachelor of Science degree in electrical engineering from
        the
        University of Paderborn in Germany.
  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. In that role, he was responsible for driving sales
        of
        Polycom’s flagship voice products and launching its IP telephony, wireless and
        installed conferencing products. 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’s degree from San Jose State University.
  **Compliance
        with Section 16(a) Beneficial Ownership Reporting
        Compliance**
  Section
        16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
        and executive officers, and persons who own more than 10% 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% 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 4 dated December
        10, 2002 for Frances M. Flood; (ii) the Form 3 dated February 12, 2003 for
        Michael D. Keough; (iii) the Form 3 dated June 30, 2003 for Larry R. Hendricks;
        (iv) the Form 3 dated June 30, 2003 for Scott M. Huntsman; (v) the Form 3
        dated
        November 14, 2003 for Charles A. Callis; (vi) the Form 3 dated July 27, 2004
        for
        David Hubbard; and (vii) the Form 3 dated July 27, 2004 for Donald E. Frederick.
  **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 2003, our next four most highly compensated executive officers
        serving as of June 30, 2003 and one executive officer who served in such
        position during a portion of 2003 (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, 2003. None of these persons
        is
        currently employed by us.
  57
 
 **SUMMARY
        COMPENSATION TABLE**
  Annual
                      Compensation
                  
                  Long-Term
                      CompensationAwards
                  
                  PayoutsName
                      and Position
                  
                  FiscalYear
                  
                  Salary
                  
                  Bonus
                  
                  Other
                      Annual Compensation1
                  
                  Securities
                      Underlying Options/SARS
                  
                  All
                      Other Compensation2**Executive
                      Officers as of June 30, 2003**Frances
                      Flood President and Chief Executive Officer3
                  
                  2003
                  
                  $231,199
                  
                  -
                  
                  -
                  
                  300,000
                  
                  $1,0952002
                  
                  $179,615
                  
                  $76,006
                  
                  -
                  
                  100,000
                  
                  $2,1482001
                  
                  $160,000
                  
                  $58,400
                  
                  -
                  
                  -
                  
                  $2,056Susie
                      Strohm Vice President and Chief Financial Officer4
                  
                  2003
                  
                  $140,838
                  
                  -
                  
                  -
                  
                  50,000
                  
                  $1,0502002
                  
                  $114,615
                  
                  $30,505
                  
                  -
                  
                  -
                  
                  $2,1082001
                  
                  $110,000
                  
                  $37,000
                  
                  -
                  
                  -
                  
                  $2,316Mike
                      Keough Chief Executive Officer5
                  
                  2003
                  
                  $119,230
                  
                  -
                  
                  -
                  
                  50,000
                  
                  -Greg
                      Rand President and Chief Operating Officer6
                  
                  2003
                  
                  $130,256
                  
                  -
                  
                  -
                  
                  50,000
                  
                  -Angelina
                      Beitia Vice President7
                  
                  2003
                  
                  $116,226
                  
                  -
                  
                  $400
                  
                  15,000
                  
                  -2002
                  
                  $118,462
                  
                  $5,000
                  
                  $2,005
                  
                  -
                  
                  $3,900**Former
                      Executive Officers**Timothy
                      Morrison8Former
                      Vice President
                  
                  2003
                  
                  $120,351
                  
                  -
                  
                  -
                  
                  15,000
                  
                  $7352002
                  
                  $159,808
                  
                  $24,500
                  
                  -
                  
                  60,000
                  
                  $637
 ____________
 
 1
              The
                  Company did not pay or provide perquisites or other benefits during
                  the
                  periods indicated to 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) on behalf of the named executive
                  officers.
 3
              Ms.
                  Flood’s employment and position as an executive officer terminated on
                  December 5, 2003.
 4
              Ms.
                  Strohm’s employment and position as an executive officer terminated on
                  December 5, 2003.
 5
              Mr.
                  Keough was employed as an executive officer on from November 18,
                  2002 to
                  June 24, 2004.
 6
              Mr.
                  Rand was employed as an executive officer on from August 12, 2002
                  to
                  February 25, 2004.
 7
              Ms.
                  Beitia’s employment and position as an executive officer terminated on
                  July 1, 2004.
 8
              Mr.
                  Morrison’s employment and position as an executive officer terminated on
                  February 4, 2003. The table does not include the amount paid to
                  Mr.
                  Morrison in May 2004 in settlement of the so-called “whistleblower action”
                  described in Item 3. Legal
                  Proceedings.”
  58
  **Stock
        Options**
  The
        following table sets forth the stock option grants made to the named executive
        officers for fiscal 2003. We did not grant any stock appreciation rights,
        or
        SARs, to the named executive officers during fiscal 2003.
  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, 2003**
 **(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
                  forOption
                  Term4Name
                  and Position
              
              Granted
                  (#)
              
              in
                  Fiscal Year1
              
              Price
                  ($/Sh)
              
              Date
              
              5%($)
              
              10%($)**Executive
                  Officers as of June 30, 2003**Frances
                  Flood
              
              300,0002,5
              
              36%
              
              $3.55
              
              10/24/2012
              
              $756,511
              
              $1,973,569Susie
                  Strohm
              
              50,0003,6
              
              6%
              
              $3.55
              
              10/24/2012
              
              $126,085
              
              $328,928Mike
                  Keough
              
              50,0003
              
              6%
              
              $3.75
              
              11/18/2012
              
              $133,189
              
              $347,459Gregory
                  Rand
              
              50,0003
              
              6%
              
              $3.55
              
              10/24/2012
              
              $126,085
              
              $328,928Angelina
                  Beitia
              
              15,0003
              
              2%
              
              $3.55
              
              10/24/2012
              
              $37,826
              
              $98,678DeLonie
                  Call
              
              15,0003
              
              2%
              
              $3.55
              
              10/24/2012
              
              $37,826
              
              $98,678**Former
                  Executive Officers**Timothy
                  J. Morrison
              
              15,0003
              
              2%
              
              $3.55
              
              10/24/2012
              
              $37,826
              
              $98,678
 ____________
 
 1.
              Based
                  on an aggregate of 835,500 shares subject to options granted to
                  our
                  employees in 2003, including the named executive
                  officers.
  2.
              The
                  options have a ten year term with one-third vesting on the day
                  following
                  the grant date and the remaining two-thirds vesting in equal installments
                  on July 22, 2003 and July 22, 2004, respectively. 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.
  59
  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% or 10% 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% and 10%
                  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.
  5.
              Frances
                  Flood subsequently surrendered and cancelled a total of 706,434
                  stock
                  options, including the 300,000 options above, in accordance with
                  the
                  employment separation agreement between the Company and Ms.
                  Flood.
  6.
              Susie
                  Strohm subsequently surrendered and cancelled a total of 268,464
                  stock
                  options, including the 50,000 options above, in accordance with
                  the
                  employment separation agreement between the Company and Ms.
                  Strohm.
  **Aggregated
        Stock Option/SAR Exercises**
  The
        following table sets forth information concerning stock options exercised
        by the
        named executive officers during fiscal 2003 and the year-end value of
        in-the-money, unexercised options:
  **AGGREGATED
        OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 200** **3**
 **AND
        FISCAL YEAR-END OPTION VALUES**
 
 Number
                  of Securities Underlying Unexercised Options at FY-End (#)
              
              Value
                  of Unexercised In-the-Money Options at FY-End ($)Name
                  and Position
              
              Shares
                  Acquiredon
                  Exercise (#)
              
              ValueRealized
                  ($)1
              
              Exercisable/
                Unexercisable
              
              Exercisable/
                Unexercisable2**Executive
                  Officers as of June 30, 2003**Frances
                  Flood
              
              10,000
              
              $36,600
              
              377,333/329,101
              
              $233,872/$0Susie
                  Strohm
              
              0
              
              $0
              
              159,463/109,001
              
              $94,810/$0Mike
                  Keough
              
              0
              
              $0
              
              0/50,000
              
              $0/$0Gregory
                  Rand
              
              0
              
              $0
              
              0/50,000
              
              $0/$0Angelina
                  Beitia
              
              0
              
              $0
              
              4,375/140,625
              
              $0/$0DeLonie
                  Call
              
              0
              
              $0
              
              3,500/141,500
              
              $0/$0**Former
                  Executive Officers**Timothy
                  J. Morrison
              
              0
              
              $0
              
              0/0
              
              $0/$0
 ____________
 
 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 $2.15 per share, which was the closing
                    selling
                    price of our common stock on the Pink Sheets on the last business
                    day of
                    our 2003 fiscal year, less the option exercise price payable
                    per
                    share.
  60
  **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 as discussed below. Under
        the
        terms of the agreement, Ms. Flood agreed to serve as our Chairman of the
        Board,
        Chief Executive Officer and President. The agreement provided for the payment
        to
        Ms. Flood of a base salary of $250,000 per year from October 24, 2002 to
        October
        23, 2003; $300,000 per year from October 24, 2003 to October 23, 2004; and
        $325,000 per year from October 24, 2004 to October 24, 2005, with an annual
        bonus of up to 50% of her base salary. She was also granted stock
        options.
  The
        employment agreement provided that if Ms. Flood’s employment were terminated
        without “cause,” she would be entitled to her full monthly salary and health and
        life insurance premiums as provided in the agreement for three years from
        the
        date of termination. If Ms. Flood’s employment were terminated upon death or for
“cause,” she would be entitled to receive her salary and other benefits earned
        but not yet paid through the date of termination, subject to any legal
        requirements. If Ms. Flood’s employment were terminated for disability, she
        would continue to receive her full monthly salary and health and life insurance
        premiums as provided in the agreement for one year.
  The
        agreement provided for a cash severance payment in the amount of $875,000
        and
        accelerated vesting of all remaining stock options granted to Ms. Flood in
        the
        event of a change in control of the Company.
  *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). This summary
        description of the employment separation agreements is qualified in its entirety
        by reference to the employment separation agreements, copies of which are
        included as exhibits to this report.
  As
        of the
        end of fiscal 2003, 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.
  61
 
 *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. This summary description of the settlement agreement and releases
        are
        qualified in their entirety by reference to the settlement agreement and
        releases, copies of which are included as exhibits to this report.
  *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.
  **ITEM
                  12.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT**
  The
        following table sets forth certain information regarding ownership of our
        common
        stock as of July 31, 2005 by (i) each person known to us to be the beneficial
        owner of more than 5% 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.
  62
  Namesof
                    Beneficial Owners
                
                Amount
                    ofBeneficial Ownership
                
                Percentageof
                    Class1**Directors
                    and Executive Officers**Edward
                    Dallin Bagley2
                
                
                1,804,601
                
                
                15.3
                %Brad
                    R. Baldwin3
                
                
                181,666
                
                
                1.5
                %DeLonie
                    Call4
                
                
                74,312
                
                
                0.6
                %Zee
                    Hakimoglu5
                
                
                63,888
                
                
                0.5
                %Harry
                    Spielberg6
                
                
                59,000
                
                
                0.5
                %Tracy
                    Bathurst7
                
                
                56,017
                
                
                0.5
                %Don
                    Frederick8
                
                
                29,166
                
                
                0.2
                %Larry
                    Hendricks9
                
                
                25,500
                
                
                0.2
                %Scott
                    Huntsman10
                
                
                25,500
                
                
                0.2
                %Directors
                    and Executive Officers as a Group (11 people)11
                
                
                2,319,650
                
                
                19.6
                %
 
 1
              For
                  each individual included in the table, the calculation of percentage
                  of
                  beneficial ownership is based on 11,264,233 shares of common stock
                  outstanding as of July 31, 2005 and shares of common stock that
                  could be
                  acquired by the individual within 60 days of July 31, 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 134,000
                  shares
                  that are exercisable within 60 days after July 31,
                  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 84,000 shares that are exercisable within 60
                  days
                  after July 31, 2005.
 
 4
              Includes
                  options to purchase 73,937 shares that are exercisable within 60
                  days
                  after July 31, 2005.
 
 5
              Includes
                  options to purchase 63,888 shares that are exercisable within 60
                  days
                  after July 31, 2005.
 
 6
              Includes
                  options to purchase 59,000 shares that are exercisable within 60
                  days
                  after July 31, 2005.
 
 7
              Includes
                  options to purchase 55,519 shares that are exercisable within 60
                  days
                  after July 31, 2005.
 
 8
              Includes
                  options to purchase 29,166 shares that are exercisable within 60
                  days
                  after July 31, 2005.
 
 9
              Includes
                  options to purchase 25,500 shares that are exercisable within 60
                  days
                  after July 31, 2005.
 
 10
              Includes
                  options to purchase 25,500 shares that are exercisable within 60
                  days
                  after July 31, 2005.
 
 11
              Includes
                  options to purchase a total of 550,510 shares that are exercisable
                  within
                  60 days after July 31, 2005 by executive officers and directors.
 63
  **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 $1.5 million
        during the period from January 2003 through June 30, 2005.
  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, a director, 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 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 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 Bagley.
  
 **ITEM
                14.**
              **PRINCIPAL
                  ACCOUNTING FEES AND
                  SERVICES**
 
 ClearOne
        engaged KPMG LLP (KPMG) in December 2003 to replace Ernst & Young
        LLP as its independent registered public accountants. ClearOne engaged KPMG
        to audit its financial statements for its 2003 fiscal year and to reaudit
        its
        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.
  The
        fees
        for the audits and quarterly reviews related to the June 30, 2003, 2002 and
        2001
        financial statements, taxes and audit related fees provided by KPMG were
        as
        follows:
 
 Audit
                  Fees
              
              $
              2,258,913Audit-Related
                  Fees
              
              
              13,029Tax
                  Fees
              
              
              126,106Total
              
              $
              2,398,048
  “Audit
        Fees” consisted of fees billed for services rendered for the audit of ClearOne’s
        annual financial statements, as described above, 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.
 
 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.
  64
 
 **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, 2003, 2002 and 2001
 Consolidated
        Statements of Operations and Comprehensive Income (Loss) for fiscal years
        ended
        June 30, 2003, 2002 and 2001
 Consolidated
        Statements of Stockholders’ Equity for fiscal years ended June 30, 2003, 2002
        and 2001
 Consolidated
        Statements of Cash Flows for fiscal years ended June 30, 2003, 2002 and
        2001
 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.
 ExhibitNo.
                  
                  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.*
                  
                  This
                      filing10.2
                  
                  
                  10
                  
                  
                  Employment
                      Separation Agreement between ClearOne Communications, Inc.
                      and Susie
                      Strohm, dated December 5, 2003.*
                  
                  This
                      filing10.3
                  
                  
                  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
                  
                  This
                      filing10.4
                  
                  
                  10
                  
                  
                  Asset
                      Purchase Agreement between ClearOne Communications, Inc. and
                      Comrex Corp.,
                      dated as of August 23, 2002.
                  
                  This
                      filing10.5
                  
                  
                  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
                  
                  This
                      filing10.8
                  
                  
                  10
                  
                  
                  Asset
                      Purchase Agreement dated May 6, 2004 between ClearOne Communications,
                      Inc.
                      and M:SPACE, Inc.
                  
                  This
                      filing10.9
                  
                  
                  10
                  
                  
                  Asset
                      Purchase Agreement among Clarinet, Inc., American Teleconferencing
                      Services, Ltd. d/b/a Premier 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.
                  
                  This
                      filing10.11
                  
                  
                  10
                  
                  
                  1998
                      Stock Option Plan
                  
                  Incorp.
                      by reference610.12
                  
                  
                  10
                  
                  
                  1990
                      Stock Option Plan
                  
                  Incorp.
                      by reference710.13
                  
                  
                  10
                  
                  
                  Employment
                      Settlement Agreement and Release between ClearOne Communications,
                      Inc. and
                      Gregory Rand dated February 27, 2004.*
                  
                  This
                      filing10.14
                  
                  
                  10
                  
                  
                  Employment
                      Settlement Agreement and Release between ClearOne Communications,
                      Inc. and
                      George Claffey dated April 6, 2004.*
                  
                  This
                      filing10.15
                  
                  
                  10
                  
                  
                  Employment
                      Settlement Agreement and Release between ClearOne Communications,
                      Inc. and
                      Michael Keough dated June 16, 2004.*
                  
                  This
                      filing10.16
                  
                  
                  10
                  
                  
                  Employment
                      Settlement Agreement and Release between ClearOne Communications,
                      Inc. and
                      Angelina Beitia dated July 15, 2004.*
                  
                  This
                      filing14.1
                  
                  
                  14
                  
                  
                  Code
                      of Ethics, approved by the Board of Directors on November 18,
                      2004
                  
                  This
                      filing21.1
                  
                  
                  21
                  
                  
                  Subsidiaries
                      of the registrant
                  
                  This
                      filing31.1
                  
                  
                  31
                  
                  
                  Section
                      302 Certification of Chief Executive Officer
                  
                  This
                      filing31.2
                  
                  
                  31
                  
                  
                  Section
                      302 Certification of Chief Financial Officer
                  
                  This
                      filing32.1
                  
                  
                  32
                  
                  
                  Section
                      1350 Certification of Chief Executive Officer
                  
                  This
                      filing32.2
                  
                  
                  32
                  
                  
                  Section
                      1350 Certification of Chief Financial Officer
                  
                  This
                      filing99.1
                  
                  
                  99
                  
                  
                  Audit
                      Committee Charter, adopted November 18, 2004
                  
                  This
                      filing
 ______________
 *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, 2002.
 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.
  65
  **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.August
                  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
              
              August
                  16, 2005Zeynep
                  Hakimoglu
              
              (Principal
                  Executive Officer)/s/
                  Donald E. Frederick
              
              Chief
                  Financial Officer
              
              August
                  16, 2005Donald
                  E. Frederick
              
              (Principal
                  Financial and Accounting Officer)/s/
                  Edward Dallin Bagley
              
              Director
              
              August
                  16, 2005Edward
                  Dallin Bagley/s/
                  Brad R. Baldwin
              
              Director
              
              August
                  16, 2005Brad
                  R. Baldwin/s/
                  Larry R. Hendricks
              
              Director
              
              August
                  16, 2005Larry
                  R. Hendricks/s/
                  Scott M. Huntsman
              
              Director
              
              August
                  16, 2005Scott
                  M. Huntsman/s/
                  Harry Spielberg
              
              Director
              
              August
                  16, 2005Harry
                  Spielberg


66




**ClearOne
      Communications, Inc.**




**Index
      to Consolidated Financial Statements**




**Page**Report
                  of Independent Registered Public Accounting Firm
              
              F-2Consolidated
                  Balance Sheets as of June 30, 2003, 2002 and 2001
              
              F-3Consolidated
                  Statements of Operations and Comprehensive Income (Loss) for fiscal
                  years
                  ended June 30, 2003, 2002 and 2001
              
              F-4Consolidated
                  Statements of Stockholders' Equity for fiscal years ended June
                  30, 2003,
                  2002, and 2001
              
              F-6Consolidated
                  Statements of Cash Flows for fiscal years ended June 30, 2003,
                  2002, and
                  2001
              
              F-7Notes
                  to Consolidated Financial Statements
              
              F-9




F-1





Report
      of Independent Registered Public Accounting Firm








The
      Board of Directors and Stockholders


ClearOne
      Communications, Inc.:





We
      have audited the accompanying consolidated balance sheets of ClearOne
      Communications, Inc. and subsidiaries as of June 30, 2003, 2002, and 2001,
      and
      the related consolidated statements of operations and comprehensive income
      (loss), stockholders’ equity, and cash flows for each of the years then ended.
      These consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the 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, 2003, 2002, and 2001 and
      the results of their operations and their cash flows for each of the years
      then
      ended in conformity with U. S. generally accepted accounting
      principles.





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.





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


August
      12, 2005




F-2





**CLEARONE
      COMMUNICATIONS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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





**June
                30,****2003**
            
            **2002**
            
            **2001****(Restated)**
            
            **(Restated)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            6,124
            
            $
            1,744
            
            $
            6,851Restricted
                cash
            
            
            200
            
            
            -
            
            
            -Marketable
                securities
            
            
            1,900
            
            
            12,400
            
            
            -Accounts
                receivable, net of allowances of $246, $190 and $0,
                respectively
            
            
            4,208
            
            
            4,322
            
            
            2,027Inventories,
                net
            
            
            8,966
            
            
            12,516
            
            
            6,459Income
                tax receivable
            
            
            2,433
            
            
            -
            
            
            -Deferred
                income tax assets
            
            
            2,531
            
            
            4,709
            
            
            1,587Prepaid
                expenses and other
            
            
            555
            
            
            621
            
            
            680Total
                current assets
            
            
            26,917
            
            
            36,312
            
            
            17,604Property
                and equipment, net
            
            
            6,768
            
            
            8,123
            
            
            5,681Goodwill,
                net
            
            
            -
            
            
            17,072
            
            
            890Intangibles,
                net
            
            
            1,018
            
            
            1,634
            
            
            616Deferred
                income tax assets, net
            
            
            548
            
            
            661
            
            
            446Other
                assets
            
            
            25
            
            
            74
            
            
            74Total
                assets
            
            $
            35,276
            
            $
            63,876
            
            $
            25,311**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Line
                of credit
            
            $
            -
            
            $
            196
            
            $
            -Capital
                lease obligations
            
            
            802
            
            
            784
            
            
            619Note
                payable
            
            
            652
            
            
            -
            
            
            -Accounts
                payable
            
            
            1,948
            
            
            3,056
            
            
            652Accrued
                liabilities
            
            
            9,576
            
            
            2,841
            
            
            1,408Deferred
                revenue
            
            
            550
            
            
            572
            
            
            -Billings
                in excess of costs on uncompleted contracts
            
            
            615
            
            
            -
            
            
            -Income
                taxes payable
            
            
            -
            
            
            265
            
            
            224Total
                current liabilities
            
            
            14,143
            
            
            7,714
            
            
            2,903Capital
                lease obligations, net of current portion
            
            
            1,215
            
            
            2,016
            
            
            1,680Note
                payable, net of current portion
            
            
            931
            
            
            -
            
            
            -Deferred
                revenue, net of current portion
            
            
            244
            
            
            254
            
            
            -Total
                liabilities
            
            
            16,533
            
            
            9,984
            
            
            4,583Commitments
                and contingencies (see Notes 11 and 13)Stockholders'
                equity:Common
                stock, 50,000,000 shares authorized, par value $0.001, 11,086,733,
                11,178,392 and 8,612,978 shares issued and outstanding,
                respectively
            
            
            11
            
            
            11
            
            
            9Additional
                paid-in capital
            
            
            48,258
            
            
            48,704
            
            
            8,856Deferred
                compensation
            
            
            (75
            )
            
            (147
            )
            
            (122
            )Accumulated
                other comprehensive income
            
            
            1,197
            
            
            -
            
            
            -Retained
                earnings (accumulated deficit)
            
            
            (30,648
            )
            
            5,324
            
            
            11,985Total
                stockholders' equity
            
            
            18,743
            
            
            53,892
            
            
            20,728Total
                liabilities and stockholders' equity
            
            $
            35,276
            
            $
            63,876
            
            $
            25,311





See
      accompanying notes to consolidated financial statements.




F-3





**CLEARONE
      COMMUNICATIONS, INC.**


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


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





**Years
                ended June 30,****2003**
            
            **2002**
            
            **2001****(Restated)**
            
            **(Restated)**Revenue:Product
            
            $
            27,512
            
            $
            26,253
            
            $
            22,448Conferencing
                services
            
            
            15,268
            
            
            15,583
            
            
            11,689Business
                services
            
            
            14,805
            
            
            1,526
            
            
            -Total
                revenue
            
            
            57,585
            
            
            43,362
            
            
            34,137Cost
                of goods sold:Product
            
            
            15,940
            
            
            10,939
            
            
            8,789Product
                inventory write-offs
            
            
            2,175
            
            
            2,945
            
            
            416Conferencing
                services
            
            
            7,904
            
            
            7,310
            
            
            5,928Business
                services
            
            
            9,282
            
            
            978
            
            
            -Total
                cost of goods sold
            
            
            35,301
            
            
            22,172
            
            
            15,133Gross
                profit
            
            
            22,284
            
            
            21,190
            
            
            19,004Operating
                expenses:Marketing
                and selling
            
            
            12,187
            
            
            10,739
            
            
            7,711General
                and administrative
            
            
            18,011
            
            
            5,345
            
            
            4,198Research
                and product development
            
            
            2,995
            
            
            3,810
            
            
            2,747Impairment
                losses
            
            
            26,001
            
            
            7,115
            
            
            -Gain
                on sale of court conferencing assets
            
            
            -
            
            
            (250
            )
            
            -Purchased
                in-process research and development
            
            
            -
            
            
            -
            
            
            728Total
                operating expenses
            
            
            59,194
            
            
            26,759
            
            
            15,384Operating
                income (loss)
            
            
            (36,910
            )
            
            (5,569
            )
            
            3,620Other
                income (expense), net:Interest
                income
            
            
            85
            
            
            293
            
            
            334Interest
                expense
            
            
            (236
            )
            
            (179
            )
            
            (164
            )Other,
                net
            
            
            55
            
            
            18
            
            
            18Total
                other income (expense), net
            
            
            (96
            )
            
            132
            
            
            188Income
                (loss) from continuing operations before income taxes
            
            
            (37,006
            )
            
            (5,437
            )
            
            3,808Provision
                (benefit) for income taxes
            
            
            (834
            )
            
            1,400
            
            
            1,050Income
                (loss) from continuing operations
            
            
            (36,172
            )
            
            (6,837
            )
            
            2,758Discontinued
                operations:Income
                from discontinued operations, net of income taxes of $439 in
                2001
            
            
            -
            
            
            -
            
            
            737Gain
                on disposal of discontinued operations, net of income taxes of $119,
                $104
                and $72, respectively
            
            
            200
            
            
            176
            
            
            123Net
                income (loss)
            
            $
            (35,972
            )
            $
            (6,661
            )
            $
            3,618




See
      accompanying notes to consolidated financial
      statements.




F-4




**Years
                ended June 30,****2003**
            
            **2002**
            
            **2001****(Restated)**
            
            **(Restated)**Basic
                earnings (loss) per common share from continuing
                operations
            
            $
            (3.23
            )
            $
            (0.71
            )
            $
            0.32Diluted
                earnings (loss) per common share from continuing
                operations
            
            $
            (3.23
            )
            $
            (0.71
            )
            $
            0.30Basic
                earnings per common share from discontinued operations
            
            $
            0.02
            
            $
            0.02
            
            $
            0.10Diluted
                earnings per common share from discontinued operations
            
            $
            0.02
            
            $
            0.02
            
            $
            0.09Basic
                earnings (loss) per common share
            
            $
            (3.21
            )
            $
            (0.69
            )
            $
            0.42Diluted
                earnings (loss) per common share
            
            $
            (3.21
            )
            $
            (0.69
            )
            $
            0.39Comprehensive
                Income (Loss):Net
                income (loss)
            
            $
            (35,972
            )
            $
            (6,661
            )
            $
            3,618Foreign
                currency translation adjustments
            
            
            1,197
            
            
            -
            
            
            -Comprehensive
                income (loss)
            
            $
            (34,775
            )
            $
            (6,661
            )
            $
            3,618





See
      accompanying notes to consolidated financial statements.





F-5





**CLEARONE
      COMMUNICATIONS, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


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





**Accumulated**
            
            **Retained****Additional**
            
            
            
            **Other**
            
            **Earnings**
            
            **Total****Common
                Stock**
            
            **Paid-In**
            
            **Deferred**
            
            **Comprehensive**
            
            **(Accumulated**
            
            **Stockholders'****Shares**
            
            **Amount**
            
            **Capital**
            
            **Compensation**
            
            **Income**
            
            **Deficit)**
            
            **Equity**Balances
                at June 30, 2000 (as previously reported)
            
            
            8,427,145
            
            $
            9
            
            $
            6,697
            
            $
            -
            
            $
            -
            
            $
            8,047
            
            $
            14,753Adjustments
                to opening retained earnings (Note 3)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            320
            
            
            320Balances
                at June 30, 2000 (restated)
            
            
            8,427,145
            
            
            9
            
            
            6,697
            
            
            -
            
            
            -
            
            
            8,367
            
            
            15,073Exercises
                of employee stock options
            
            
            75,125
            
            
            -
            
            
            325
            
            
            -
            
            
            -
            
            
            -
            
            
            325Income
                tax benefits from stock option exercises
            
            
            -
            
            
            -
            
            
            116
            
            
            -
            
            
            -
            
            
            -
            
            
            116Issuances
                of common stock under employee stock purchase plan
            
            
            1,137
            
            
            -
            
            
            15
            
            
            -
            
            
            -
            
            
            -
            
            
            15Issuance
                of common stock in a purchase of business
            
            
            129,871
            
            
            -
            
            
            1,814
            
            
            -
            
            
            -
            
            
            -
            
            
            1,814Repurchase
                and retirement of common stock
            
            
            (20,300
            )
            
            -
            
            
            (244
            )
            
            -
            
            
            -
            
            
            -
            
            
            (244
            )Deferred
                compensation resulting from the modification of stock
                options
            
            
            -
            
            
            -
            
            
            133
            
            
            (133
            )
            
            -
            
            
            -
            
            
            -Amortization
                of deferred compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            11
            
            
            -
            
            
            -
            
            
            11Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,618
            
            
            3,618Balances
                at June 30, 2001 (restated)
            
            
            8,612,978
            
            
            9
            
            
            8,856
            
            
            (122
            )
            
            -
            
            
            11,985
            
            
            20,728Exercises
                of employee stock options
            
            
            195,999
            
            
            -
            
            
            1,020
            
            
            -
            
            
            -
            
            
            -
            
            
            1,020Income
                tax benefits from stock option exercises
            
            
            -
            
            
            -
            
            
            452
            
            
            -
            
            
            -
            
            
            -
            
            
            452Issuances
                of common stock under employee stock purchase plan
            
            
            724
            
            
            -
            
            
            13
            
            
            -
            
            
            -
            
            
            -
            
            
            13Issuance
                of common stock and warrants for cash
            
            
            1,500,000
            
            
            1
            
            
            23,834
            
            
            -
            
            
            -
            
            
            -
            
            
            23,835Issuance
                of common stock 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 (restated)
            
            
            11,178,392
            
            
            11
            
            
            48,704
            
            
            (147
            )
            
            -
            
            
            5,324
            
            
            53,892Exercises
                of employee stock options
            
            
            31,500
            
            
            -
            
            
            86
            
            
            -
            
            
            -
            
            
            -
            
            
            86Issuances
                of common stock under employee stock purchase plan
            
            
            1,841
            
            
            -
            
            
            8
            
            
            -
            
            
            -
            
            
            -
            
            
            8Repurchase
                and retirement of common stock
            
            
            (125,000
            )
            
            -
            
            
            (430
            )
            
            -
            
            
            -
            
            
            -
            
            
            (430
            )Remeasurement
                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
            )
            $
            18,743





See
      accompanying notes to consolidated financial statements.




F-6





**CLEARONE
      COMMUNICATIONS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**





**Years
                ended June 30,****2003**
            
            **2002**
            
            **2001****(Restated)**
            
            **(Restated)**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (35,972
            )
            $
            (6,661
            )
            $
            3,618Results
                of discontinued operations, net of income taxes
            
            
            (200
            )
            
            (176
            )
            
            (860
            )Income
                from continuing operations
            
            $
            (36,172
            )
            $
            (6,837
            )
            $
            2,758Adjustments
                to reconcile net income (loss) to net cash provided by
                operations:Loss
                on impairment of long-lived assets, goodwill and
                intangibles
            
            
            26,001
            
            
            7,115
            
            
            -Depreciation
                and amortization expense
            
            
            3,469
            
            
            3,012
            
            
            2,230Stock-based
                compensation
            
            
            (38
            )
            
            78
            
            
            11Gain
                on sale of certain assets
            
            
            -
            
            
            (250
            )
            
            -Write-off
                of inventory
            
            
            2,175
            
            
            2,945
            
            
            416Write-off
                of in-process research and development
            
            
            -
            
            
            -
            
            
            728Income
                tax benefits from stock option exercises
            
            
            -
            
            
            452
            
            
            116Loss
                (gain) on disposal of assets and fixed assets write-offs
            
            
            (2
            )
            
            (4
            )
            
            (23
            )Provision
                for doubtful accounts
            
            
            312
            
            
            43
            
            
            76Changes
                in operating assets and liabilities, net of effect of
                acquisitions:Accounts
                receivable
            
            
            268
            
            
            46
            
            
            2,361Inventories
            
            
            1,516
            
            
            (5,395
            )
            
            (3,127
            )Prepaid
                expenses and other assets
            
            
            67
            
            
            168
            
            
            59Accounts
                payable
            
            
            (1,126
            )
            
            946
            
            
            (115
            )Accrued
                liabilities
            
            
            6,142
            
            
            (457
            )
            
            (464
            )Income
                taxes
            
            
            (669
            )
            
            (1,783
            )
            
            (650
            )Deferred
                revenue
            
            
            553
            
            
            (48
            )
            
            -Net
                change in other assets/liabilities
            
            
            47
            
            
            -
            
            
            (19
            )Net
                cash provided by operating activities
            
            
            2,543
            
            
            31
            
            
            4,357Cash
                flows from investing activities:Restricted
                cash
            
            
            (200
            )
            
            -
            
            
            -Purchase
                of property and equipment
            
            
            (1,823
            )
            
            (2,805
            )
            
            (1,429
            )Proceeds
                from the sale of equipment
            
            
            4
            
            
            11
            
            
            -Proceeds
                from the sale of certain assets
            
            
            80
            
            
            160
            
            
            -Purchase
                of marketable securities
            
            
            (18,500
            )
            
            (30,600
            )
            
            -Sale
                of marketable securities
            
            
            29,000
            
            
            18,200
            
            
            -Cash
                paid for acquisitions, net of cash received
            
            
            (7,444
            )
            
            (14,436
            )
            
            (1,856
            )Net
                cash provided by (used in) investing activities
            
            
            1,117
            
            
            (29,470
            )
            
            (3,285
            )Cash
                flows from financing activities:Borrowings
                under note payable
            
            
            1,998
            
            
            -
            
            
            -Principal
                payments on capital lease obligation
            
            
            (784
            )
            
            (713
            )
            
            (552
            )Principal
                payments on note payable
            
            
            (414
            )
            
            -
            
            
            -Proceeds
                from sales of common stock
            
            
            95
            
            
            24,869
            
            
            340Purchase
                and retirement of stock
            
            
            (430
            )
            
            -
            
            
            (244
            )Net
                cash provided by financing activities
            
            
            465
            
            
            24,156
            
            
            (456
            )Cash
                provided by discontinued operations, net of income taxes
            
            
            200
            
            
            176
            
            
            860Net
                changes in cash and cash equivalents
            
            
            4,325
            
            
            (5,107
            )
            
            1,476Effect
                of foreign exchange rates on cash and cash equivalents
            
            
            55
            
            
            -
            
            
            -Cash
                and cash equivalents at the beginning of year
            
            
            1,744
            
            
            6,851
            
            
            5,375Cash
                and cash equivalents at the end of year
            
            $
            6,124
            
            $
            1,744
            
            $
            6,851




See
      accompanying notes to consolidated financial
      statements.




F-7








Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            211
            
            $
            170
            
            $
            162Cash
                paid (received) for income taxes
            
            
            (79
            )
            
            3,529
            
            
            2,523Tax
                benefits from stock option exercises
            
            
            -
            
            
            452
            
            
            116Supplemental
                disclosure of non-cash investing and financing activities:Equipment
                acquired under capital lease
            
            $
            -
            
            $
            1,155
            
            $
            1,021Supplemental
                disclosure of acquisition activity:Fair
                value of assets acquired
            
            $
            8,235
            
            $
            33,712
            
            $
            2,942IPR&D
                acquired
            
            
            -
            
            
            -
            
            
            728Liabilities
                assumed
            
            
            599
            
            
            4,484
            
            
            -Value
                of common shares issued
            
            
            -
            
            
            14,427
            
            
            1,814Cash
                paid for acquisition
            
            $
            7,636
            
            $
            14,801
            
            $
            1,856





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
                and Summary of Significant Accounting
                Policies**





***Organization***





ClearOne
      Communications, Inc. 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 customers include some of the world’s largest and most prestigious
      companies and institutions, government organizations, educational institutions,
      and small and medium sized businesses. The Company sells its products to these
      customers directly and through a distribution network of independent
      distributors and dealers, including systems integrators and value-added
      resellers.





The
      Company has restated its consolidated financial statements as of June 30, 2002
      and 2001, and for each of the years then ended, as discussed in more detail
      in
      Note 3. Certain adjustments impacting the Company’s Consolidated Financial
      Statements for periods prior to 2001 were also identified, as the Company has
      recorded the cumulative effect of adjustments of $320 for 2000 to retained
      earnings as of June 30, 2000.





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





*Consolidation* -
      These consolidated financial statements include the financial statements of
      ClearOne Communications, Inc. and its wholly-owned subsidiaries, E.mergent,
      Inc., ClearOne Communications EuMEA GmbH, ClearOne Communications of Canada,
      Inc., OM Video, ClearOne Communications Limited UK, and Gentner Communications
      Ltd. - Ireland. All intercompany balances and transactions have been eliminated
      in consolidation.





*Use
      of Estimates* -
      The preparation of financial statements in conformity with U.S. generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts in the financial statements and
      these accompanying notes. Actual results could differ from those estimates.
      Key
      estimates in the accompanying consolidated financial statements include, among
      others, 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.





*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, 2003,
      2002,
      and 2001, cash equivalents totaled $5,049, $1,174, and $6,611, respectively,
      and
      consisted primarily of money market funds.




F-9
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)




*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
      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, 2003 and 2002, all marketable securities were
      classified as current assets.





Marketable
      securities as of June 30, 2003 and 2002 were as follows:





**2003**
            
            **2002**Municipal
                government auction rate notes
            
            $
            1,900
            
            $
            8,400Auction
                preferred stock
            
            
            -
            
            
            4,000$
            1,900
            
            $
            12,400





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, 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.





*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 bad debts, customer concentrations, customer
      creditworthiness and current economic trends when evaluating the adequacy of
      the
      allowance for doubtful accounts.





*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. Consigned inventory includes product that has been delivered
      to customers for which revenue recognition criteria have not been met.
      Consideration is given to obsolescence, excessive levels, deterioration and
      other factors in evaluating net realizable value. During the fiscal years ended
      June 30, 2003, 2002, and 2001, the Company recorded inventory write-offs of
      $2,175, $2,945, and $416, respectively.




F-10
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





*Property
      and Equipment* -
      Property and equipment are stated at cost. Costs associated with internally
      developed software are capitalized in accordance with Statement of Position
      (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained
      for Internal Use. Depreciation and amortization are calculated over the
      estimated useful lives of the respective assets using the straight-line method.
      Estimated useful lives are generally two to ten years. 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. Repairs and
      maintenance costs are expensed as incurred.





*Goodwill* -
      The Company amortized goodwill related to the ClearOne, Inc. (ClearOne)
      acquisition from the acquisition date through June 30, 2002. During each of
      the
      fiscal years ended June 30, 2002 and 2001 goodwill amortization was $297, and
      was reported in general and administrative expense. 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 nonamortization and amortization provisions of SFAS No. 142 are 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 years ended
      June 30, 2003, 2002, and 2001 are presented as if the provisions of SFAS No.
      142
      had been in effect for all period presented:




**Years
                  Ended June 30,****2003**
              
              **2002**
              
              **2001****(restated)**
              
              **(restated)**Reported
                  net income (loss)
              
              $
              (35,972
              )
              $
              (6,661
              )
              $
              3,618Goodwill
                  amortization, net of income tax
              
              
              -
              
              
              186
              
              
              186Adjusted
                  net income (loss)
              
              $
              (35,972
              )
              $
              (6,475
              )
              $
              3,804Basic
                  earnings per share:As
                  reported
              
              $
              (3.21
              )
              $
              (0.69
              )
              $
              0.42Goodwill
                  amortization
              
              
              -
              
              
              0.02
              
              
              0.02As
                  adjusted
              
              $
              (3.21
              )
              $
              (0.67
              )
              $
              0.44Diluted
                  earnings per share:As
                  reported
              
              $
              (3.21
              )
              $
              (0.69
              )
              $
              0.39Goodwill
                  amortization
              
              
              -
              
              
              0.02
              
              
              0.02As
                  adjusted
              
              $
              (3.21
              )
              $
              (0.67
              )
              $
              0.41





As
      of July 1, 2002, the Company’s gross goodwill balance was $17,072 from the
      E.mergent, Inc. acquisition on May 31, 2002. Upon adoption of SFAS No. 142,
      there was no impairment of goodwill. As of 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.
      Although goodwill will be 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.




F-11
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





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.”





*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.





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. Assets to be disposed of are
      reported at the lower of the carrying amount or fair value, less the estimated
      costs to sell.





*Fair
      Value of Financial Instruments* -
      The carrying values of cash equivalents, accounts receivable, accounts payable,
      and accrued liabilities all approximate fair value due to the short-term
      maturities of these assets and liabilities. The carrying values of lines of
      credit also approximate fair value because applicable interest rates either
      fluctuate based on market conditions or approximate the Company’s borrowing
      rate.





*Foreign
      Currency* -
      The functional currency for OM Video is the Canadian Dollar. 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. Adjustments resulting from the
      translation of OM Video amounts are recorded as accumulated other comprehensive
      income in the accompanying consolidated balance sheets. The impact from
      remeasurement of all other subsidiaries is recorded in the accompanying
      consolidated statements of operations.





*Revenue
      Recognition* -
      The Company has three sources of revenue: (i) product revenue, primarily from
      product sales to distributors, dealers and end users; (ii) conferencing services
      revenue, primarily from full-service conference calling and on-demand,
      reservationless conference calling; and (iii) business services revenue which
      include 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 end of fiscal year 2003.





Accordingly,
      amounts charged to both distributors and non-distributors were not considered
      fixed and determinable or reasonably collectible until cash was collected.
      As a
      result, the June 30, 2003, 2002, and 2001 balance sheets reflect no accounts
      receivable or deferred revenue related to product sales.





Conferencing
      services revenue is recognized at the time of customer usage, and is based
      upon
      minutes used.




F-12
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





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 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 Financial Accounting
      Standards Board Technical Bulletin No. 90-1, “Accounting for Separately Priced
      Extended Warranty and Product Maintenance Contracts.”





The
      Company offers rebates 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.





The
      Company estimates future product returns based upon historical experience and
      maintains an allowance for estimated returns which has been reflected as a
      reduction to accounts receivable. The allowance for estimated returns was $107,
      $0, and $0 as of June 30, 2003, 2002, and 2001, respectively.




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.




*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, if any, is amortized to expense
      over the vesting period.





SFAS
      No. 123, “Accounting for Stock-Based Compensation,” required pro forma
      information regarding net income (loss) as if the Company had accounted for
      its
      stock options granted under 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. The following is the pro forma
      disclosure and the related impact on the net income (loss) attributable to
      common stockholders and net income (loss) per common share for the years ended
      June 30, 2003, 2002, and 2001.





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 FASB Statement No. 123, Accounting for Stock-Based
      Compensation, 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.




F-13
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)








**2003**
            
            **2002**
            
            **2001****(restated)**
            
            **(restated)**Net
                income (loss):As
                reported
            
            $
            (35,972
            )
            $
            (6,661
            )
            $
            3,618Stock-based
                employee compensation expense included in reported net income (loss),
                net
                of income taxes
            
            
            (24
            )
            
            49
            
            
            7Stock-based
                employee compensation expense determined under the fair-value method
                for
                all awards, net of income taxes
            
            
            (966
            )
            
            (1,003
            )
            
            (1,139
            )Pro
                forma
            
            $
            (36,962
            )
            $
            (7,615
            )
            $
            2,486Basic
                earnings (loss) per common share:As
                reported
            
            $
            (3.21
            )
            $
            (0.69
            )
            $
            0.42Pro
                forma
            
            
            (3.31
            )
            
            (0.79
            )
            
            0.29Diluted
                earnings (loss) per common share:As
                reported
            
            $
            (3.21
            )
            $
            (0.69
            )
            $
            0.39Pro
                forma
            
            
            (3.31
            )
            
            (0.79
            )
            
            0.27





*Research
      and Product Development Costs* -
      The Company expenses research and product development costs as incurred.





*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, 2003, 2002, and 2001 totaled $361, $693, and $358,
      respectively.





*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 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.
      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.





*Issued
      but not yet Adopted Accounting Pronouncements* -
      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. The Company has
      evaluated this interpretation but does not expect that it will have a material
      effect on its business, results of operations, financial position, or liquidity.





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. The Company has evaluated this statement but does not expect that it
      will
      have a material effect on its business, results of operations, financial
      position, or liquidity.




F-14
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





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 the Company’s business,
      results of operations, financial position, or liquidity.





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 FAS 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 will evaluate the effect, if any, of adopting
      EITF
      03-01.





In
      November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs—an
      amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to
      converge U.S. accounting standards for inventories with International Accounting
      Standards. FAS 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. FAS
      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 consolidated results of
      operations, financial condition or cash flows.





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 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 an adverse impact on its future results of
      operations.




F-15
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**3.**
            **Restatement
                and Reclassifications of Previously Issued Financial
                Statements**





The
      Company’s previously issued consolidated balance sheets, consolidated statements
      of operations and comprehensive income (loss), consolidated statements of
      stockholders’ equity and cash flows for the years ended June 30, 2002 and 2001
      have been restated to correct for certain accounting errors.





***Summary
      of restatement items***





Errors
      in previously issued financial statements were identified in the following
      areas:





*Revenue
      Recognition and Related Sales Returns, Credit Memos, and Allowances.* The
      Company recognized revenue before the amounts charged to both distributors
      and
      non-distributors were considered fixed and determinable or reasonably
      collectible. Accordingly, revenue was inappropriately accelerated.





Beginning
      in 2001 and through 2002, 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 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.
      Accordingly, amounts charged to both distributors and non-distributors were
      not
      considered fixed and determinable or reasonably collectible until cash was
      collected. Accordingly, product revenues to distributors and non-distributors
      were restated for the years ending June 30, 2002 and 2001.





Related
      sales returns and allowances, rebates, and accounts receivables were revised
      appropriately given the revenue adjustments.





*Cutoff
      and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
      Assets.* The
      Company recorded accruals and amortized certain prepaid assets to operating
      expenses during the fiscal years ended June 30, 2002 and 2001 in the improper
      periods. Accordingly, adjustments to accrued liabilities, prepaid assets, and
      operating expenses were recorded for the years ending June 30, 2002 and
      2001.





*Tracking
      and Valuation of Inventory, Including Controls to Identify and Properly Account
      for Obsolete Inventory.* As
      part of the restatement process, the Company discovered that it made errors
      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. As a result, the Company made adjustments to
      reflect consigned inventory, to properly capitalize overhead expenses, physical
      inventory adjustments, adjustments to lower of cost or market, and adjustments
      to reserves for excess, obsolete and slow-moving inventory. Accordingly,
      inventories and cost of goods sold were restated to properly account for these
      errors.





*Accounting
      for Leases, Including Classification as Operating or Capital.* In
      evaluating the classification of leases, the Company did not consider all
      periods for which failure to renew the lease imposes a penalty on the lessee
      in
      such amount that a renewal appears, at the inception of the leases, to be
      reasonably assured. Accordingly, certain leases were classified as operating
      leases that should have been classified as capital leases. The effect of
      properly recording the capital leases on the Company’s previously reported
      financial statements is to record additional capital lease obligations, property
      and equipment, and depreciation expense and reduce rental expense for fiscal
      periods ending June 30, 2002 and 2001.





The
      Company did not consider escalating rent payments and rent holidays for certain
      operating leases. Accordingly, rent expense was inappropriately understated.
      The
      effect of straight-lining rent payments on the Company’s previously reported
      financial statements is to record an accrued liability for future rent payments
      and record additional rent expense.




F-16
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





*Classification
      of Cash and Marketable Securities.* In previously issued consolidated financial statements, the Company classified
      municipal government auction rate notes and auction rate preferred stocks as
      cash instead of marketable securities. Accordingly, reclassifications were
      made
      to the 2002 cash balances to properly classify those as marketable securities
      instead of cash.





*Accounting
      for Acquisitions.* During
      the restatement process, the Company determined that the valuations and purchase
      price allocations in connection with its acquisitions of ClearOne, Ivron, and
      E.mergent were not performed properly. The Company engaged independent
      third-party valuation specialists to provide valuations and purchase price
      allocations on these acquisitions. The Company re-examined the purchase price
      allocations and adjusted for items that should have been recorded
      previously.





·
            In
                the Company’s previously issued consolidated financial statements, the
                Company valued the 129,871 shares of common stock issued in conjunction
                with the acquisition of ClearOne at $15.40 per share. The Company
                determined that the shares should have been valued at $13.97 per
                share
                based on the market prices a few days before and after the measurement
                date.


·
            The
                Company recorded adjustments to the amounts allocated to certain
                acquired
                intangible assets, including developed technologies, patents and
                trademarks, and distribution agreements. The Company also recorded
                adjustments to the amounts allocated to in-process research and
                development related to the ClearOne
                acquisition.


·
            The
                Company recorded adjustments to the amounts allocated to certain
                acquired
                tangible assets and assumed liabilities, including cash, accounts
                receivable, inventory, property and equipment, deferred tax assets,
                and
                deferred tax liabilities.


·
            The
                adjustments to purchase price, as well as the adjustments to the
                amounts
                allocated to acquired intangible assets, acquired tangible assets,
                and
                assumed liabilities, resulted in corresponding adjustments to the
                amount
                allocated to goodwill.





*Accounting
      for Equity and Other Significant Non-Routine Transactions.*





·
            During
                the year ended June 30, 2001, the Company sold its remote control
                product
                line to Burk Technology. In previously issued consolidated financial
                statements, the Company recognized a gain on the sale of its remote
                control product line that included a significant note receivable
                from the
                buyer at the time of the sale, and recognized interest income associated
                with the note receivable in periods subsequent to the sale. Based
                on an
                analysis of the facts and circumstances that existed at the date
                of the
                sale, the recognition of this gain was inappropriate as the buyer
                did not
                have the wherewithal to pay this note receivable, the operations
                of the
                remote control product line had not historically generated cash flows
                sufficient to fund the required payments, and there were contingent
                liabilities the Company had to the buyer. Accordingly, the Company
                concluded that the gain should be recognized as cash is received
                from the
                buyer. As a result, the Company has reduced the gain on sale and
                eliminated the note receivable at the time of the sale, and recognized
                additional gain on the sale of the product line when-and-as cash
                payments
                on the note receivable are
                obtained.


·
            During
                the year ended June 30, 2002, the Company experienced certain triggering
                events that indicated that certain long-lived assets related to ClearOne
                and Ivron were impaired. Accordingly, the Company performed an impairment
                analysis in accordance with the provisions of SFAS No. 121. As a
                result of
                this analysis, the Company determined that goodwill, intangible assets,
                and certain property and equipment related to the ClearOne and Ivron
                acquisitions were fully impaired as of June 30, 2002. As a result,
                the
                Company recognized an impairment loss equal to the carrying value
                of these
                assets. In previously issued consolidated financial statements, the
                Company failed to recognize that a triggering event had occurred
                and did
                not record an impairment loss for these assets.


·
            During
                the year ended June 30, 2001, the terms of certain outstanding stock
                options were modified to allow for their acceleration in the event
                the
                Company met certain EPS targets. During the year ended June 30, 2001
                the
                Company cancelled certain outstanding stock options and issued a
                replacement award with a lower exercise price, resulting in variable
                accounting. In previously issued consolidated financial statements,
                the
                Company did not record compensation expense in connection with these
                modifications in accordance with APB No. 25 and FASB Interpretation
                Number
                44, “Accounting for Certain Transactions involving Stock Compensation” (an
                interpretation of APB No. 25).





F-17
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





·
            On
                June 29, 2001, the Company repurchased 5,000 shares of its previously
                issued and outstanding common shares. In previously issued consolidated
                financial statements, the Company did not record the effects of this
                transaction until fiscal year 2002.





*Accounting
      for Income Taxes.* During the fiscal periods ending June 30, 2002 and 2001, the Company’s income
      before income taxes was restated to correct for certain accounting errors,
      resulting in less pre tax book income and correspondingly less income tax
      expense. In conjunction with the restatement, the Company evaluated the
      realizability of deferred tax assets. In 2002, the Company recorded an increased
      domestic valuation allowance to reflect its determination that not all of its
      deferred tax assets were more likely than not realizable pursuant to the
      provisions of SFAS 109, “Accounting for Income Taxes”.




F-18
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**Restated
      Financial Statements**





***Impact
      on Consolidated Statements of Operations***





**As
                of June 30, 2002**
            
            **As
                of June 30, 2001****As
                Previously Reported**
            
            **Restated**
            
            **As
                Previously Reported**
            
            **Restated**Revenue:Product
            
            $
            37,215
            
            $
            26,253
            
            $
            28,190
            
            $
            22,448Conferencing
                services
            
            
            17,328
            
            
            15,583
            
            
            11,689
            
            
            11,689Business
                services
            
            
            -
            
            
            1,526
            
            
            -
            
            
            -Total
                revenue
            
            
            54,543
            
            
            43,362
            
            
            39,879
            
            
            34,137Cost
                of goods sold:Product
            
            
            15,057
            
            
            10,939
            
            
            10,634
            
            
            8,789Product
                inventory write-offs
            
            
            -
            
            
            2,945
            
            
            -
            
            
            416Conferencing
                services
            
            
            7,943
            
            
            7,310
            
            
            5,869
            
            
            5,928Business
                services
            
            
            -
            
            
            978
            
            
            -
            
            
            -Total
                cost of goods sold
            
            
            23,000
            
            
            22,172
            
            
            16,503
            
            
            15,133Gross
                profit
            
            
            31,543
            
            
            21,190
            
            
            23,376
            
            
            19,004Operating
                expenses:Marketing
                and selling
            
            
            10,705
            
            
            10,739
            
            
            7,753
            
            
            7,711General
                and administrative
            
            
            6,051
            
            
            5,345
            
            
            4,649
            
            
            4,198Research
                and product development
            
            
            4,053
            
            
            3,810
            
            
            2,502
            
            
            2,747Impairment
                losses
            
            
            -
            
            
            7,115
            
            
            -
            
            
            -Gain
                on sale of court conferencing assets
            
            
            -
            
            
            (250
            )
            
            -
            
            
            -Purchased
                in-process research and development
            
            
            -
            
            
            -
            
            
            -
            
            
            728Total
                operating expenses
            
            
            20,809
            
            
            26,759
            
            
            14,904
            
            
            15,384Operating
                income (loss)
            
            
            10,734
            
            
            (5,569
            )
            
            8,472
            
            
            3,620Other
                income, net
            
            
            509
            
            
            132
            
            
            373
            
            
            188Income
                (loss) from continuing operations before income taxes
            
            
            11,243
            
            
            (5,437
            )
            
            8,845
            
            
            3,808Provision
                for income taxes
            
            
            3,831
            
            
            1,400
            
            
            3,319
            
            
            1,050Income
                (loss) from continuing operations
            
            
            7,412
            
            
            (6,837
            )
            
            5,526
            
            
            2,758Discontinued
                operations:Income
                from discontinued operations, net of income taxes
            
            
            -
            
            
            -
            
            
            737
            
            
            737Gain
                on disposal of a component of our business, net of income
                taxes
            
            
            -
            
            
            176
            
            
            1,220
            
            
            123Net
                income (loss)
            
            $
            7,412
            
            $
            (6,661
            )
            $
            7,483
            
            $
            3,618Basic
                earnings (loss) per common share from continuing
                operations
            
            $
            0.77
            
            $
            (0.71
            )
            $
            0.64
            
            $
            0.32Diluted
                earnings (loss) per common share from continuing
                operations
            
            $
            0.74
            
            $
            (0.71
            )
            $
            0.61
            
            $
            0.30Basic
                earnings per common share from discontinued operations
            
            $
            -
            
            $
            0.02
            
            $
            0.23
            
            $
            0.10Diluted
                earnings per common share from discontinued operations
            
            $
            -
            
            $
            0.02
            
            $
            0.22
            
            $
            0.09Basic
                earnings (loss) per common share
            
            $
            0.77
            
            $
            (0.69
            )
            $
            0.87
            
            $
            0.42Diluted
                earnings (loss) per common share
            
            $
            0.74
            
            $
            (0.69
            )
            $
            0.83
            
            $
            0.39








F-19
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**Impact
      on Consolidated Balance Sheets**





**As
                of June 30, 2002**
            
            **As
                of June 30, 2001****As
                Previously Reported**
            
            **As
                Restated**
            
            **As
                Previously Reported**
            
            **As
                Restated****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            14,248
            
            $
            1,744
            
            $
            6,852
            
            $
            6,851Marketable
                securities
            
            
            -
            
            
            12,400
            
            
            -
            
            
            -Accounts
                receivable, net
            
            
            20,317
            
            
            4,322
            
            
            7,213
            
            
            2,027Inventories
            
            
            8,606
            
            
            12,516
            
            
            4,132
            
            
            6,459Note
                receivable, current portion
            
            
            196
            
            
            -
            
            
            71
            
            
            -Deferred
                income tax assets
            
            
            1,293
            
            
            4,709
            
            
            248
            
            
            1,587Prepaid
                expenses and other
            
            
            610
            
            
            621
            
            
            780
            
            
            680Total
                current assets
            
            
            45,270
            
            
            36,312
            
            
            19,296
            
            
            17,604Property
                and equipment, net
            
            
            5,770
            
            
            8,123
            
            
            3,697
            
            
            5,681Goodwill,
                net
            
            
            20,553
            
            
            17,072
            
            
            2,634
            
            
            890Intangibles,
                net
            
            
            6,991
            
            
            1,634
            
            
            182
            
            
            616Deferred
                income tax assets
            
            
            -
            
            
            661
            
            
            -
            
            
            446Note
                Receivable, net of current portion
            
            
            1,490
            
            
            -
            
            
            1,716Other
                assets
            
            
            73
            
            
            74
            
            
            73
            
            
            74Total
                assets
            
            $
            80,147
            
            $
            63,876
            
            $
            27,598
            
            $
            25,311**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Line
                of credit
            
            $
            196
            
            $
            196
            
            
            
            
            $
            -Capital
                lease obligations
            
            
            60
            
            
            784
            
            
            182
            
            
            619Accounts
                payable
            
            
            3,053
            
            
            3,056
            
            
            568
            
            
            652Accrued
                liabilities
            
            
            2,299
            
            
            2,841
            
            
            1,130
            
            
            1,408Deferred
                revenue
            
            
            607
            
            
            572
            
            
            -
            
            
            -Income
                taxes payable
            
            
            820
            
            
            265
            
            
            422
            
            
            224Total
                current liabilities
            
            
            7,035
            
            
            7,714
            
            
            2,302
            
            
            2,903Capital
                lease obligations, net of current portion
            
            
            41
            
            
            2,016
            
            
            48
            
            
            1,680Deferred
                revenue, net of current portion
            
            
            277
            
            
            254
            
            
            -
            
            
            -Deferred
                income tax liabilities
            
            
            1,458
            
            
            -
            
            
            746
            
            
            -Total
                liabilities
            
            
            8,811
            
            
            9,984
            
            
            3,096
            
            
            4,583Commitments
                and contingenciesStockholders'
                equity:Common
                stock
            
            
            11
            
            
            11
            
            
            9
            
            
            9Additional
                paid-in capital
            
            
            48,384
            
            
            48,704
            
            
            8,963
            
            
            8,856Deferred
                compensation
            
            
            -
            
            
            (147
            )
            
            -
            
            
            (122
            )Retained
                earnings
            
            
            22,941
            
            
            5,324
            
            
            15,530
            
            
            11,985Total
                stockholders' equity
            
            
            71,336
            
            
            53,892
            
            
            24,502
            
            
            20,728Total
                liabilities and stockholders' equity
            
            $
            80,147
            
            $
            63,876
            
            $
            27,598
            
            $
            25,311





***Impact
      on Stockholders’ Equity***





The
      restatement adjustments resulted in a cumulative net reduction to stockholders’
equity of $17,444 and $3,774 as of June 30, 2002 and 2001, respectively. The
      Company has also restated the June 30, 2000 retained earnings balance to reflect
      cumulative adjustments through that date of $320.




F-20
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**Impact
      on Cash Flows**





The
      following table presents selected consolidated statements of cash flows
      information showing previously reported and restated cash flows, for the years
      ended June 30, 2002 and 2001:





****
            ****
            **Years
                  ended June 30,**
            ****
            **Years
                  ended June 30,****2002**
            
            **2001****As
                  previously reported**
            ****
            **As
                restated**
            ****
            **As
                  previously reported**
            
            **As
                restated**Net
                cash from (used in) operating activities
            
            $
            105
            
            $
            31
            
            $
            3,708
            
            $
            4,357Net
                cash (used in) investing activities
            
            
            (17,044
            )
            
            (29,470
            )
            
            (3,114
            )
            
            (3,285
            )Net
                cash from (used in) financing activities
            
            
            24,335
            
            
            24,156
            
            
            (104
            )
            
            (456
            )





**4.**
            **Inventories**





Inventories,
      net of reserves, consist of the following as of June 30, 2003, 2002 and 2001:





**June
                30,****2003**
            
            **2002**
            
            **2001****(Restated)**
            
            **(Restated)**Raw
                materials
            
            $
            3,881
            
            $
            2,159
            
            $
            2,655Finished
                goods
            
            
            3,343
            
            
            2,977
            
            
            1,414Consigned
                inventory
            
            
            1,742
            
            
            7,380
            
            
            2,390Total
                inventory
            
            $
            8,966
            
            $
            12,516
            
            $
            6,459





Consigned
      inventory represents inventory at distributors and other customers where revenue
      recognition criteria have not been achieved.





**5.**
            **Costs
                and Estimated Earnings on Uncompleted
                Contracts**





**Information
      with respect to uncompleted contracts is as follows as of June 30,
      2003:**





**2003**Costs
                incurred on uncompleted contracts
            
            $
            416Less
                billings on uncompleted contracts
            
            
            (1,031
            )$
            (615
            )





The
      above amounts are reported in the consolidated balance sheet in billings in
      excess of costs on uncompleted contracts.





**6.**
            **Property
                and Equipment**





Major
      classifications of property and equipment and estimated useful lives are as
      follows as of June 30, 2003, 2002 and 2001:





F-21
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)




**Estimated**
            
            **June
                30,****useful
                lives**
            
            **2003**
            
            **2002**
            
            **2001****(Restated)**
            
            **(Restated)**Office
                furniture and equipment
            
            
            3
                to 10 years
            
            $
            7,309
            
            $
            7,381
            
            $
            4,904Manufacturing
                and test equipment
            
            
            2
                to 10 years
            
            
            3,276
            
            
            2,622
            
            
            2,305Telephone
                bridging equipment
            
            
            5
                to 7 years
            
            
            4,693
            
            
            4,545
            
            
            3,212Vehicles
            
            
            3
                to 5 years
            
            
            9
            
            
            9
            
            
            -15,287
            
            
            14,557
            
            
            10,421Accumulated
                depreciation and amortization
            
            
            
            
            
            (8,519
            )
            
            (6,434
            )
            
            (4,740
            )Net
                property and equipment
            
            
            
            
            $
            6,768
            
            $
            8,123
            
            $
            5,681





During
      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 2002, the Company recorded impairment losses
      of
      $72 related to property and equipment associated with the Ivron asset
      grouping.





**7.**
            **Acquisitions**





During
      the fiscal year ended June 30, 2001, the Company completed the acquisition
      of
      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, a developer of videoconferencing technology and product,
      and E.mergent, a developer and manufacturer of document cameras, a manufacturer
      of conferencing furniture and an integration services business. During the
      fiscal year ended June 30, 2003, the Company completed the acquisition of
      Stechyson Electronics Ltd., doing business as OM Video, an integration business
      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 use 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:





**ClearOne**
            
            **Ivron**
            
            **E.mergent**
            
            **OM
                Video****(Restated)**
            
            **(Restated)**
            
            **(Restated)**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




F-22
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**ClearOne,
      Inc.**





In
      May 2000, the Company entered into an agreement to purchase substantially all
      of
      the assets of ClearOne, Inc. for $3,572 consisting of $1,758 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 $1,150. 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 videoconferencing technologies and subsequently
      determined that the technology was not viable and never brought the in-process
      videoconferencing 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
      should be recognized (see Note 9 below).





**Ivron
      Systems, Ltd.**




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 $6,000 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.
      Further, under that agreement, after June 30, 2002, each former Ivron
      shareholder would be entitled to receive approximately .08 shares of the
      Company’s common stock for each Ivron share previously held by such shareholder,
      provided that certain video product development contingencies were achieved.
      This represented approximately 429,000 shares of common stock. Thereafter,
      for
      the fiscal years ending June 30, 2003 and 2004, the former Ivron shareholders
      would be entitled to share in up to approximately $17,000 of additional cash
      and
      stock consideration provided that certain agreed upon earnings per share targets
      for the Company were achieved. In addition, former optionees of Ivron who
      remained with the Company were eligible to participate in a cash bonus program
      paid by the Company, based on the combined performance of the Company and Ivron
      in the fiscal years ending June 30, 2003 and 2004. The maximum amount payable
      under this cash bonus program was approximately $1,000.





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.





On
      March 26, 2002, the Company entered into negotiations with the former
      shareholders of Ivron to modify the terms of the original purchase agreement
      because, upon further analysis, certain aspects of the acquired technology
      did
      not meet the intended product objectives established by the Company in its
      original purchase negotiations.





The
      amendment, which was finalized on April 8, 2002, revised the contingent
      consideration that the Ivron shareholders would have been entitled to receive
      in
      subsequent years such that upon meeting certain gross profit targets for the
      “V-There” and “Vu-Link” set-top videoconferencing products, technologies, and
      sub-elements thereof (including licensed products), the former Ivron
      shareholders had the opportunity to receive up to 109,000 shares of common
      stock, issuable in four installments, on a quarterly basis, through July 15,
      2003. No performance targets were met and accordingly, no contingent
      consideration was or will be paid.




F-23
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





With
      the assistance of a third-party valuation firm and after considering the facts
      and circumstances surrounding the Company’s intentions, the Company determined
      the useful lives and amounts of the developed technologies and patents. The
      developed technologies had estimated useful lives of three to fifteen years
      and
      the patents had an estimated useful life of fifteen years.





After
      the acquisition, the Company experienced significant difficulties in selling
      the
      acquired videoconferencing 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
      should be recognized. Subsequent to June 30, 2003, the Company discontinued
      selling the “V-There” and “Vu-Link” set-top videoconferencing products.





**E.mergent,
      Inc.**





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 $7,300 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%, risk free interest rate of 2.9%, expected volatility of 81.8% 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 $2,201, inventory of $3,270, property and
      equipment of $475 and other assets of $1,341. The Company assumed liabilities
      consisting of accounts payable of $1,284, 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 and patents. 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.





The
      Company’s management at the time believed the E.mergent acquisition would
      complement its existing operations and its core competencies would allow the
      Company to acquire market share in this industry. However, the Company’s entry
      into the services business was perceived as a threat by its systems integrators
      and value-added resellers, many of whom the Company began competing against
      for
      sales. In order to avoid this conflict and 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 24 - Subsequent Events). 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 certain E.mergent
      assets should be recognized.




F-24
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**OM
      Video**





On
      August 27, 2002, the Company purchased all of the outstanding shares of
      Stechyson Electronics Ltd., doing business as OM Video, an audiovisual
      integration firm headquartered in Ottawa, Canada. Under the terms of the
      agreement, the shareholders of OM Video received $6,276 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 was recorded as additional
      consideration and booked to goodwill. No further payment related to the holdback
      or contingent consideration will be paid.





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
      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 the
      former owner of OM Video.





The
      Company’s management believed the OM Video acquisition would complement its
      existing operations and its core competencies would allow the Company to acquire
      market share in this industry. However, the Company’s entry into the services
      business was perceived as a threat by its systems integrators and value-added
      resellers, many of whom the Company began competing against for sales. In order
      to avoid this conflict and 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 March 4, 2005, the Company
      sold all of its Canadian audio visual integration business (see Note 24 -
      Subsequent Events). On June 30, 2003, the Company performed an impairment test
      and determined that an impairment loss on the OM Video assets should be
      recognized.





***Pro
      forma financial information***





The
      following unaudited pro forma combined financial information reflects operations
      as if the acquisitions of ClearOne, Ivron and E.mergent had occurred as of
      July
      1, 2000 and as if the acquisition of OM Video 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, 2000 and 2001, respectively.





**June
                30,****2003**
            
            **2002**
            
            **2001****(restated)**
            
            **(restated)**Revenue
                from continuing operations
            
            $
            58,728
            
            $
            72,327
            
            $
            58,085Loss
                from continuing operations
            
            
            (36,234
            )
            
            (9,022
            )
            
            (4,396
            )Net
                loss
            
            
            (36,034
            )
            
            (8,846
            )
            
            (3,536
            )Basic
                and diluted loss per common share from continuing
                operations
            
            $
            (3.24
            )
            $
            (0.94
            )
            $
            (0.51
            )Basic
                and diluted loss per common share from net income
            
            
            (3.22
            )
            
            (0.92
            )
            
            (0.41
            )








**8.**
            **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.




F-25
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**Goodwill**





The
      following presents details of the Company’s goodwill by reporting unit for the
      years ended June 30, 2003, 2002 and 2001:





Products
            
            Business
                Services
            
            TotalBalances
                as of June 30, 2000
            
            $
            -
            
            $
            -
            
            $
            -Acquisition
                of ClearOne
            
            
            1,187
            
            
            -
            
            
            1,187Amortization
                of ClearOne goodwill
            
            
            (297
            )
            
            -
            
            
            (297
            )Balances
                as of June 30, 2001
            
            
            890
            
            
            -
            
            
            890Acquisition
                of Ivron
            
            
            218
            
            
            -
            
            
            218Acquisition
                of E.mergent
            
            
            5,026
            
            
            12,046
            
            
            17,072Amortization
                of ClearOne goodwill
            
            
            (297
            )
            
            -
            
            
            (297
            )Impairment
                of ClearOne and Ivron goodwill
            
            
            (811
            )
            
            -
            
            
            (811
            )Balances
                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
            
            $
            -
            
            $
            -
            
            $
            -








***Acquired
      Intangibles***





The
      following table presents the Company’s intangible assets as of June 30, 2003,
      2002, and 2001:




**2003**
              
              **2002**
              
              **2001****Useful
                  Lives**
              
              **Gross****Value**
              
              **Accumulated****Amortization**
              
              **Gross****Value**
              
              **Accumulated****Amortization**
              
              **Gross****Value**
              
              **Accumulated****Amortization**Developed
                  technologies
              
              3
                  to 15 years
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              680
              
              $
              (227
              )Patents
                  and trademarks
              
              3
                  to 15 years
              
              
              1,060
              
              
              (75
              )
              
              1,060
              
              
              (6
              )
              
              207
              
              
              (69
              )Customer
                  relationships
              
              18
                  months to 3 years
              
              
              -
              
              
              -
              
              
              392
              
              
              (22
              )
              
              37
              
              
              (12
              )Non-compete
                  agreements
              
              2
                  to 3 years
              
              
              52
              
              
              (19
              )
              
              215
              
              
              (5
              )
              
              -
              
              
              -Total
              
              
              
              $
              1,112
              
              $
              (94
              )
              $
              1,667
              
              $
              (33
              )
              $
              924
              
              $
              (308
              )







Amortization
      of intangible assets was $680, $787, and $308 for the years ended June 30,
      2003,
      2002, and 2001, respectively. Amortization of costs related to developed
      technologies and patents was reported in product cost of goods sold.
      Amortization of costs related to trademarks, customer and partner relationships,
      and non-compete agreements was reported in general and administration expense
      and marketing and selling expense.




F-26
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





Estimated
      future amortization expense is as follows:





Years
                Ending June 30,2004
            
            $
            882005
            
            
            872006
            
            
            712007
            
            
            712008
            
            
            71Thereafter
            
            
            630Total
                estimated amortization expense
            
            $
            1,018








**9.**
            **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 videoconferencing 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.
      The analysis resulted in an impairment loss of $7,115 for the fiscal year ended
      June 30, 2002. Management estimated the fair market value of the long-lived
      assets using the present value of expected future discounted cash
      flows.





During
      the fourth quarter of the fiscal year ended June 30, 2003, the Company decided
      to deemphasize the audiovisual integration services. 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 was perceived as a
      threat by its systems integrators and value-added resellers, many of whom the
      Company began competing against for sales. In order to avoid this conflict,
      the
      Company decided to deemphasize the audiovisual integration services beginning
      in
      the fourth quarter of the fiscal year ended June 30, 2003.





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 $26,001 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-27
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





The
      impairment losses relate to the following:





**Year
                Ended June 30,****2003**
            
            **2002****(Restated)**Goodwill:ClearOne
            
            $
            -
            
            $
            593Ivron
            
            
            -
            
            
            218E.mergent
                - Business Services
            
            
            12,066
            
            
            -E.mergent
                - Products
            
            
            5,026
            
            
            -OM
                Video
            
            
            7,774
            
            
            -24,866
            
            
            811Intangible
                assets:ClearOne
            
            
            -
            
            
            308Ivron
            
            
            -
            
            
            5,924E.mergent
                - Business Services
            
            
            195
            
            
            -E.mergent
                - Products
            
            
            18
            
            
            -OM
                Video
            
            
            387
            
            
            -600
            
            
            6,232Property
                and equipment:Ivron
            
            
            -
            
            
            72E.mergent
                - Business Services
            
            
            212
            
            
            -E.mergent
                - Products
            
            
            58
            
            
            -OM
                Video
            
            
            265
            
            
            -535
            
            
            72Total
            
            $
            26,001
            
            $
            7,115








**10.**
            **Lines
                of Credit**





As
      of June 30, 2003, the Company maintained a revolving line of credit in the
      amount of $10,000 with a commercial bank. Prior to November 22, 2002, the line
      of credit was in the amount of $5,000. 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 0.25%, at the Company’s option). The
      borrowing rate was 3.62% as of June 30, 2003. The weighted average interest
      rate
      for the fiscal years ended June 30, 2003, 2002 and 2001, was 3.98%, 5.17% and
      8.14%, 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. Amounts outstanding under
      the
      line of credit were $0, $196 and $0 as of June 30, 2003, 2002 and 2001,
      respectively.





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.





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
      ERP implementation. The term of the note was 36 months with monthly payments
      of
      $60. The Company had $1,583 outstanding under the note payable as of June 30,
      2003. The Company paid the balance of the note payable in October
      2004.




F-28
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**11.**
            **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.





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,
      2003:





**Capital**
            
            **Operating**For
                years ending June 30:2004
            
            $
            961
            
            $
            8282005
            
            
            920
            
            
            6762006
            
            
            437
            
            
            2622007
            
            
            -
            
            
            802008
            
            
            -
            
            
            20Total
                minimum lease payments
            
            
            2,318
            
            $
            1,866Less
                use taxes
            
            
            (141
            )Net
                minimum lease payments
            
            
            2,177Less
                amount representing interest
            
            
            (160
            )Present
                value of net minimum lease payments
            
            
            2,017Less
                current portion
            
            
            (802
            )Long
                term capital lease obligation
            
            $
            1,215





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
      $1,328, $755 and $720 for the years ended June 30, 2003, 2002 and 2001,
      respectively.





Property
      and equipment under capital leases are as follows:





**June
                30,****2003**
            
            **2002**
            
            **2001****(Restated)**
            
            **(Restated)**Office
                furniture and equipment
            
            $
            1,051
            
            $
            1,077
            
            $
            983Manufacturing
                and test equipment
            
            
            471
            
            
            471
            
            
            479Telephone
                bridging equipment
            
            
            3,816
            
            
            3,816
            
            
            2,7495,338
            
            
            5,364
            
            
            4,211Accumulated
                amortization
            
            
            (3,099
            )
            
            (2,270
            )
            
            (1,558
            )Net
                property and equipment under capital leases
            
            $
            2,239
            
            $
            3,094
            
            $
            2,653





Depreciation
      expense for assets recorded under capital leases was $841, $739 and $569 for
      the
      years ended June 30, 2003, 2002 and 2001, respectively.





**12.**
            **Accrued
                Liabilities**





Accrued
      liabilities consist of the following as of June 30, 2003, 2002 and
      2001:





**As
                of June 30,****2003**
            
            **2002**
            
            **2001****(Restated)**
            
            **(Restated)**Accrued
                salaries and bonuses
            
            $
            883
            
            $
            759
            
            $
            410Legal
                contingencies
            
            
            147
            
            
            -
            
            
            -Class
                action settlement
            
            
            7,326
            
            
            -
            
            
            -Other
                accrued liabilities
            
            
            1,220
            
            
            2,082
            
            
            998Total
            
            $
            9,576
            
            $
            2,841
            
            $
            1,408




F-29
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**13.**
            **Commitments
                and Contingencies**





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 today, the Company does not believe any such other
      proceedings will have a material, adverse effect on its financial condition
      or
      results of operations.





*The
      SEC Action* .
      On January 15, 2003, the U.S. Securities and Exchange Commission (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 accounting principles (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.





*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 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 $5,000 and issue
      the
      class 1,200,000 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. As of June 30, 2005,
      228,000 shares of the Company’s common stock had been issued to the class and
      the Company plans to issue the remaining shares in the near future, subject
      to
      the receipt of any required approvals from state regulatory
      authorities.





*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 action
      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 issue
      materially misstated financial statements, and that Ernst & Young breached
      its professional responsibilities to the Company and acted in violation of
      generally accepted auditing standards by failing to identify or prevent the
      alleged revenue recognition violations and by issuing unqualified audit opinions
      with respect to the Company’s 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 was not in the
      best interest of the Company. Accordingly, on December 12, 2003, the Company
      moved to dismiss the actions. 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-30
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (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).





*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.  Pursuant to these agreements, the Company has made payments to
      the law firms representing such current and former directors and officers in
      the
      aggregate amount of approximately $1.5 million during the period from January
      2003 through June 30, 2005.





*The
      Insurance Coverage Action.* On
      February 9, 2004, the Company and Edward Dallin Bagley (Bagley), the chairman
      of
      the board of directors and a principal shareholder of the Company, jointly
      filed
      an action against National Union Fire Insurance Company of Pittsburgh,
      Pennsylvania and Lumbermens Mutual Insurance Company, 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 action, 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, $3,000 of which was provided by National Union
      and
      $2,000 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 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 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. The Company and
      Bagley are vigorously pursuing their claim against National Union although
      no
      assurances can be given that they will be successful. The Company and Bagley
      have entered into a Joint Prosecution and Defense Agreement in connection with
      the action.




F-31
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





*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 $1,754 that PT&T owed
      the Company for inventory purchased but not paid 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.





*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 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
      Company establishes contingent liabilities when a particular contingency is
      both
      probable and estimable. For the contingencies noted above the Company has
      accrued amounts considered probable and estimable. The Company is not aware
      of
      pending claims or assessments, other than as described above, which may have
      a
      material adverse impact on the Company’s financial position or results of
      operations.





**14.**
            **Stockholders’
                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 $25,500, before
      costs and expenses associated with this transaction, which totaled
      $1,665.





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 $1,556 using the Black-Scholes option pricing model with the
      following assumptions: expected dividend yield of 0%, risk-free interest rate
      of
      4.4%, expected price volatility of 68.0% and contractual life of five years.
      The
      warrants expire on November 27, 2006.





**Stock
      Repurchase Program**





During
      April 2001, the Company’s board of directors approved a stock repurchase program
      to purchase up to 500,000 shares of the Company’s common stock over the
      following six months on the open market or in private transactions. During
      the
      fiscal year ended June 30, 2001, the Company repurchased 20,300 shares on the
      open market for $244. All repurchased shares were retired. 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 retired. The stock repurchase program
      expired in October 2003 and no additional shares were repurchased.





**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%, 15%, 20%, 25% and 30% per year. Certain other stock
      options vest in full after eight years. As of June 30, 2003, there were 271,548
      options outstanding under the 1990 Plan and no additional options were available
      for grant under such plan.




F-32
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





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
      may be accelerated if earnings per share goals through the fiscal year ended
      June 30, 2003 were met. 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, 2003, there were 1,701,208 options outstanding under the 1998 Plan
      and
      496,668 options available for grant in the future.





Stock
      option information for the fiscal years ending June 30, 2003, 2002 and 2001
      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, 2000
            
            
            1,508,548
            
            $
            7.01Options
                granted (as restated)
            
            
            515,500
            
            
            12.73Options
                expired and canceled (as restated)
            
            
            (198,125
            )
            
            10.97Options
                exercised
            
            
            (75,125
            )
            
            4.33Outstanding
                at June 30, 2001
            
            
            1,750,798
            
            
            8.37Options
                granted
            
            
            366,908
            
            
            13.24Options
                expired and canceled
            
            
            (402,751
            )
            
            13.04Options
                exercised
            
            
            (195,999
            )
            
            5.21Outstanding
                at June 30, 2002
            
            
            1,518,956
            
            
            8.71Options
                granted
            
            
            835,500
            
            
            3.57Options
                expired and canceled
            
            
            (350,200
            )
            
            11.57Options
                exercised
            
            
            (31,500
            )
            
            2.72Outstanding
                at June 30, 2003
            
            
            1,972,756
            
            $
            6.12




F-33
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





The
      following table summarizes information about stock options outstanding as of
      June 30, 2003:





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
            
            
            271,548
            
            
            0.5
                years
            
            $
            0.78
            
            
            271,548
            
            $
            0.78$2.05
                to $4.09
            
            
            1,084,850
            
            
            3.8
                years
            
            
            3.34
            
            
            369,669
            
            
            3.08$4.10
                to $8.18
            
            
            3,081
            
            
            8.9
                years
            
            
            7.15
            
            
            3,081
            
            
            7.15$8.19
                to $10.22
            
            
            15,256
            
            
            6.3
                years
            
            
            9.67
            
            
            6,144
            
            
            9.65$10.23
                to $12.26
            
            
            204,000
            
            
            3.2
                years
            
            
            11.33
            
            
            45,235
            
            
            11.34$12.27
                to $14.31
            
            
            176,321
            
            
            7.0
                years
            
            
            13.45
            
            
            75,214
            
            
            13.56$14.32
                to $16.35
            
            
            180,200
            
            
            3.2
                years
            
            
            15.25
            
            
            62,387
            
            
            15.25$16.36
                to $18.40
            
            
            35,750
            
            
            7.0years
            
            
            17.15
            
            
            5,005
            
            
            17.15$18.41
                to $20.45
            
            
            1,750
            
            
            1.9
                years
            
            
            18.97
            
            
            1,588
            
            
            18.90Total
            
            
            1,972,756
            
            
            3.6
                years
            
            $
            6.12
            
            
            839,871
            
            $
            4.80








The
      following are the options exercisable at the corresponding weighted average
      exercise price as of June 30, 2003, 2002 and 2001, respectively: 839,871 at
      $4.80, 793,965 at $6.10 and 741,219 at $5.44.





The
      grant date weighted average fair value of options granted during the years
      ended
      June 30, 2003, 2002 and 2001 was $2.50, $9.33 and $9.45, 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, 2003, 2002 and 2001: expected dividend yield, 0% for each year; risk-free
      interest rate was 2.46%, 4.09% and 4.85%, respectively; expected price
      volatility, 89.98%, 81.16%, and 82.75%; and expected life of options, 4.90,
      5.54, and 6.25 years.





During
      fiscal 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. In
      June
      2004, 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.





**Employee
      Stock Purchase Program**





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 determine
      eligibility. The ESPP is intended to qualify under Section 423 of the Internal
      Revenue Code. All employees were eligible after thirty days
      employment.





Employees
      can purchase common stock through payroll deductions of up to 10% 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, 2003, 2002 and 2001, 1,841,
      724 and 1,137 share of common stock were issued under the ESPP. The ESPP is
      compensatory under APB 25. Compensation expense from the ESPP was $8, $13,
      and
      $15 for the years ended June 30, 2003, 2002, and 2001, respectively. The program
      was suspended during 2003 due to the Company’s failure to remain current in its
      filing of periodic reports with the SEC.





F-34
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**15.**
            **Sale
                of Assets**





*Court
      Conferencing.* ****** As
      part of the Company’s conferencing services 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.





**16.**
            **Income
                Taxes**





Income
      (loss) from continuing operations and before income taxes consisted of the
      following:





**2003**
            
            **2002**
            
            **2001****(restated)**
            
            **(restated)**Domestic
            
            $
            (28,583
            )
            $
            956
            
            $
            3,686Foreign
            
            
            (8,423
            )
            
            (6,393
            )
            
            122$
            (37,006
            )
            $
            (5,437
            )
            $
            3,808








The
      provision (benefit) for income taxes on income from continuing operations
      consisted of the following:





**2003**
            
            **2002**
            
            **2001****(restated)**
            
            **(restated)**Current:Federal
            
            $
            (3,055
            )
            $
            3,390
            
            $
            2,582State
            
            
            (50
            )
            
            456
            
            
            378Foreign
            
            
            47
            
            
            22
            
            
            67Stock
                Option Benefit Credited to Paid in Capital
            
            
            -
            
            
            452
            
            
            116Total
                Current
            
            
            (3,058
            )
            
            4,320
            
            
            3,143Deferred:Federal
            
            
            2,174
            
            
            (3,180
            )
            
            (1,751
            )State
            
            
            50
            
            
            259
            
            
            (341
            )Foreign
            
            
            -
            
            
            1
            
            
            (1
            )Total
                Deferred
            
            
            2,224
            
            
            (2,920
            )
            
            (2,093
            )$
            (834
            )
            $
            1,400
            
            $
            1,050




F-35
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (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% on income from continuing operations:





**2003**
            
            **2002**
            
            **2001****(restated)**
            
            **(restated)**U.S.
                federal statutory income tax rate
            
            $
            (12,582
            )
            $
            (1,849
            )
            $
            1,295State
                income tax rate, net of federal income tax effect
            
            
            -
            
            
            512
            
            
            35Extraterritorial
                income exclusion
            
            
            -
            
            
            (79
            )
            
            (111
            )Research
                and development credit
            
            
            -
            
            
            (46
            )
            
            (144
            )Foreign
                earnings or losses taxed at different rates
            
            
            255
            
            
            132
            
            
            24Impairment
                of investment in foreign subsidiary
            
            
            2,596
            
            
            2,112
            
            
            -Impairment
                of E.mergent goodwill
            
            
            5,811
            
            
            -
            
            
            -Change
                in federal valuation allowance attributable to operations
            
            
            2,946
            
            
            534
            
            
            -Non-deductible
                items and other
            
            
            140
            
            
            84
            
            
            (49
            )Total
            
            $
            (834
            )
            $
            1,400
            
            $
            1,050








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 significant components of the net U.S. deferred income
      tax assets and liabilities were as follows:





**2003**
            
            **2002**
            
            **2001****(restated)**
            
            **(restated)**Deferred
                income tax assets:
            
            $
            -
            
            $
            -
            
            $
            -Net
                operating loss carryforwards
            
            
            724
            
            
            293
            
            
            -Accrued
                liabilities
            
            
            2,980
            
            
            253
            
            
            25Allowance
                for sales returns and doubtful accounts
            
            
            155
            
            
            141
            
            
            -Inventory
                reserve
            
            
            1,939
            
            
            1,380
            
            
            101Deferred
                revenue
            
            
            1,796
            
            
            4,046
            
            
            1,218Installment
                sale
            
            
            128
            
            
            149
            
            
            149Accumulated
                research and development credits
            
            
            142
            
            
            142
            
            
            66Basis
                difference in intangible assets
            
            
            852
            
            
            712
            
            
            524Other
            
            
            162
            
            
            381
            
            
            196Subtotal
            
            
            8,878
            
            
            7,497
            
            
            2,279Valuation
                allowance
            
            
            (5,252
            )
            
            (1,726
            )
            
            -Deferred
                income tax assets
            
            
            3,626
            
            
            5,771
            
            
            2,279Deferred
                income tax liabilities:Basis
                difference in fixed assets
            
            
            (458
            )
            
            (401
            )
            
            (237
            )Other
            
            
            (89
            )
            
            -
            
            
            (9
            )Deferred
                income tax liabilities
            
            
            (547
            )
            
            (401
            )
            
            (246
            )Net
                deferred income tax assets
            
            $
            3,079
            
            $
            5,370
            
            $
            2,033




F-36
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (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 as
      follows:





**2003**
            
            **2002**
            
            **2001****(restated)**
            
            **(restated)**Current
                deferred income tax assets
            
            $
            2,531
            
            $
            4,709
            
            $
            1,587Non-current
                deferred income tax assets
            
            
            548
            
            
            661
            
            
            446Current
                deferred income tax liabilities
            
            
            -
            
            
            -
            
            
            -Non-current
                deferred income tax liabilities
            
            
            -
            
            
            -
            
            
            -Net
                deferred income tax assets
            
            $
            3,079
            
            $
            5,370
            
            $
            2,033








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 $56, $152 and $205 for 2001, 2002 and
      2003, respectively.





As
      of June 30, 2003, the Company has a net operating loss (“NOL”) and research
      credit carryforward for U.S. federal income tax reporting purposes of $697
      and
      $121 respectively, which will expire in 2021. These carryforwards 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 intangible assets of
      E.mergent were all impaired at June 30, 2003. The Company also has state NOL
      and
      research and development tax credit carryforwards of approximately $9,739 and
      $21, respectively, which expire depending on the rules of the various states
      to
      which the carryovers relate. The Company also has a NOL carryover 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 Footnote 24, 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. 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 $1,088 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. For
      the year ended June 30, 2002, the NOL and research and development credit
      generated by E.mergent prior to acquisition are subject to a full valuation
      allowance recorded as part of E.mergent’s purchase price allocation.
      Additionally, for the years ended June 30, 2002 and 2003, the Company has also
      recorded a valuation allowance against a portion of its deferred tax assets
      due
      to the uncertainty of realization of the assets based upon a number of factors,
      including lack of profitability in 2002 and 2003 and the limited taxable income
      in carryback years as permitted by the tax law. No valuation allowance was
      recorded to the extent that the reversal of the deferred tax assets would
      generate a NOL that could be carried back to prior tax years.





The
      net change in the Company’s domestic valuation allowance was $0 for 2001, and an
      increase of $1,726 and $3,526, in 2002 and 2003 respectively.





F-37
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





**17.**
            **Discontinued
                Operations**





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, $1,750 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 may be deferred based upon Burk not meeting net quarterly
      sales levels established within the agreement. The promissory note is 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 is based upon future net sales of Burk over base sales established
      within the agreement. The Company realized a gain on the sale of $200 (net
      of
      applicable income taxes of $119), $176 (net of applicable income taxes of $104)
      and $123 (net of applicable income taxes of $72) for the fiscal years ended
      June
      30, 2003, 2002 and 2001, respectively. As of June 30, 2003, $1,505 of the
      promissory note remains outstanding and the Company has received $20 in
      commissions.





Summary
      operating results of the discontinued operations are as follows:





**Year
                Ended June 30,****2001**(restated)Revenue
                - product
            
            $
            2,369Cost
                of goods sold - product
            
            
            806Marketing
                and selling expenses
            
            
            282Product
                development expenses
            
            
            105Income
                before income taxes
            
            
            1,176Provision
                for income taxes
            
            
            (439
            )Income
                from discontinued operations, net of income taxes
            
            $
            737








**18.**
            **Sale
                of Broadcast Telephone
                Interface**





On
      August 23, 2002, the Company entered into an agreement with Comrex Corporation
      (Comrex). In exchange for $1,300, 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 (SOP) 97-2, Software Revenue Recognition.
      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.





F-38
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





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 $1,054 in revenue related to this transaction in the fiscal year
      ended June 30, 2003.





The
      Company has entered into a manufacturing agreement to continue to manufacture
      additional product for Comrex distribution one year following the agreement
      described above on a when-and-if needed basis. Comrex will pay the Company
      for
      any additional product on a per item basis of cost plus 30%. Given the future
      revenue stream associated with each unit produced, revenue will be recognized
      when-and-if received.





**19.**
            **Earnings
                Per Share**





The
      following table sets forth the computation of basic and diluted net income
      (loss) per common share:





**Year
                Ended June 30,****2003**
            
            **2002**
            
            **2001****(restated)**
            
            
            **(restated)**Numerator:Income
                (loss) from continuing operations
            
            $
            (36,172
            )
            $
            (6,837
            )
            $
            2,758Discontinued
                operations
            
            
            200
            
            
            176
            
            
            860Net
                income (loss)
            
            $
            (35,972
            )
            $
            (6,661
            )
            $
            3,618Denominator:Basic
                weighted average shares
            
            
            11,183,339
            
            
            9,588,118
            
            
            8,593,725Dilutive
                common stock equivalents using treasury stock method
            
            
            -
            
            
            -
            
            
            600,284Diluted
                weighted average shares
            
            
            11,183,339
            
            
            9,588,118
            
            
            9,194,009Basic
                earnings (loss) per common share:Continuing
                operations
            
            $
            (3.23
            )
            $
            (0.71
            )
            $
            0.32Discontinued
                operations
            
            
            0.02
            
            
            0.02
            
            
            0.10$
            (3.21
            )
            $
            (0.69
            )
            $
            0.42Diluted
                earnings (loss) per common share:Continuing
                operations
            
            $
            (3.23
            )
            $
            (0.71
            )
            $
            0.30Discontinued
                operations
            
            
            0.02
            
            
            0.02
            
            
            0.09$
            (3.21
            )
            $
            (0.69
            )
            $
            0.39








Options
      to purchase 1,972,756, 1,518,956 and 663,250 shares of common stock were
      outstanding as of June 30, 2003, 2002 and 2001, 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, 2003 and 2002, but were not included in the
      computation of diluted earnings per share as the effect would be
      anti-dilutive.





**20.**
            **Related
                Party Transactions**





Edward
      Dallin Bagley, a director and significant shareholder of the Company, 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.





F-39
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





The
      Company and Edward Dallin Bagley jointly filed an action against National Union
      Fire Insurance Company and Lumbermens Mutual Insurance Company. See Note 13.
      Commitments and Contingencies. *The
      Insurance Coverage Action.*





The
      Company was a general partner in two limited partnerships, Gentner Research
      Ltd.
      (GRL) and Gentner Research II, Ltd. (GR2L). GRL owned rights to a proprietary
      interest in a remote control product. The Company obtained rights to utilize
      the
      proprietary interest under royalty agreements. Royalty expense under the
      agreements with GRL for the year ended June 30, 2001 was $4. GRL was dissolved
      in February 2001 after consent to dissolution and liquidation was received
      by a
      majority of the partners of GRL. The product line, which incorporated the
      proprietary interest, was deemed no longer integral to the Company’s business.





GR2L
      owned rights to a proprietary interest in a new remote control product. The
      Company obtained rights to utilize the proprietary interest under a royalty
      agreement. Royalty expense under this agreement with GR2L for the year ended
      June 30, 2001 was $91. The Company paid $179 to GR2L in the year ended June
      30,
      2001, representing GR2L’s royalty on the gain on the sale of the remote control
      product line. This amount is included in the determination of gain on disposal
      of discontinued operations in the year ended June 30, 2001.





**21.**
            **Significant
                Customers**





As
      of June 30, 2003, 2002 and 2001 and for the periods then ended, the Company
      did
      not have any customers that accounted for more than 10% of total revenue and/or
      accounts receivable balances.





**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% up to 6% of the employee’s earnings,
      paid bi-weekly. 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, 2003, 2002 and 2001
      totaled $0, $72 and $66, respectively.





**23.**
            **Segment
                and Geographic Information**





**Operating
      Segments**





The
      Company has three operating segments - products, conferencing services, 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 2002 as a result of the acquisition of E.mergent and includes certain
      operations of E.mergent and the operations of OM Video.





The
      products segment includes products for audio conferencing products,
      videoconferencing products, sound reinforcement products, broadcast telephone
      interface products and assistive listening system products. The conferencing
      services segment includes full-service conference calling; on-demand,
      reservationless conference calling; Web conferencing; audio and video streaming;
      and, customer training and education. The business services segment provided
      services in the United States and Canada, including technical services such
      as
      design, installation and services of systems, maintenance, 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.





F-40
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





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
      United States was the only country to contribute more than 10% of total revenues
      in each fiscal year. Canada contributed more than 10% of total revenues in
      the
      fiscal year ended June 30, 2003. There were no significant long-lived assets
      held outside the United States.





The
      following tables summarize the segment and geographic information:





**Operating
      Segment**





**Fiscal
                Year**
            
            **Products**
            
            **Conferencing
                Services**
            
            **Business
                Services**
            
            **Corporate**
            
            **Totals**Net
                revenue
            
            
            2003
            
            $
            27,512
            
            $
            15,268
            
            $
            14,805
            
            $
            -
            
            $
            57,5852002
            
            
            26,253
            
            
            15,583
            
            
            1,526
            
            
            -
            
            
            43,3622001
            
            
            22,448
            
            
            11,689
            
            
            -
            
            
            -
            
            
            34,137Operating
                income (loss)
            
            
            2003
            
            
            (13,099
            )
            
            31
            
            
            (23,842
            )
            
            -
            
            
            (36,910
            )2002
            
            
            (8,666
            )
            
            2,827
            
            
            270
            
            
            -
            
            
            (5,569
            )2001
            
            
            1,884
            
            
            1,736
            
            
            -
            
            
            -
            
            
            3,620Discontinued
                operations, net of taxes
            
            
            2003
            
            
            200
            
            
            -
            
            
            -
            
            
            -
            
            
            2002002
            
            
            176
            
            
            -
            
            
            -
            
            
            -
            
            
            1762001
            
            
            860
            
            
            -
            
            
            -
            
            
            -
            
            
            860Identifiable
                assets
            
            
            2003
            
            
            14,255
            
            
            4,153
            
            
            2,779
            
            
            14,089
            
            
            35,2762002
            
            
            23,497
            
            
            5,325
            
            
            15,294
            
            
            19,760
            
            
            63,8762001
            
            
            11,491
            
            
            4,849
            
            
            -
            
            
            8,971
            
            
            25,311Depreciation
                and amortization
            
            
            2003
            
            
            2,192
            
            
            999
            
            
            278
            
            
            -
            
            
            3,4692002
            
            
            2,176
            
            
            802
            
            
            34
            
            
            -
            
            
            3,0122001
            
            
            1,697
            
            
            533
            
            
            -
            
            
            -
            
            
            2,230








**Geographic**





**Fiscal
                Year**
            
            **United
                States**
            
            **Canada**
            
            **All
                Other Countries**
            
            **Totals**Net
                revenue
            
            
            2003
            
            $
            42,591
            
            $
            6,316
            
            $
            8,678
            
            $
            57,5852002
            
            
            39,144
            
            
            474
            
            
            3,744
            
            
            43,3622001
            
            
            30,076
            
            
            973
            
            
            3,088
            
            
            34,137Long-Lived
                Assets
            
            
            2003
            
            
            7,747
            
            
            -
            
            
            39
            
            
            7,7862002
            
            
            26,788
            
            
            -
            
            
            41
            
            
            26,8292001
            
            
            7,161
            
            
            -
            
            
            26
            
            
            7,187




F-41
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)




**24.**
              **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.


**25.**
            **Subsequent
                Events**




***Early
        Buyout of Operating Lease Agreements.***The Company leased an office
        in Woburn, Mass. that it initially acquired through the purchase of ClearOne,
        Inc. in July 2000. The facility consisted of 2,206 square feet. The Company
        negotiated an early buyout of the lease effective September 2003. The Company's
        U.S. business services operations were conducted from a facility totaling
        25,523
        square feet located in Golden Valley, Minnesota. The Company leased these
        facilities under a lease agreement the expired in December 2004. The Company
        negotiated an early buyout of the lease effective June 2004.




***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 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. 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 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. 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. This summary description of the settlement agreement and releases
      are
      qualified in their entirety by reference to the settlement agreement and
      releases, copies of which are included as exhibits to this report.





***Sale
      of U.S. Audiovisual Integration Services.*** On May 6, 2004, the
      Company sold certain assets of its 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, the Company
      transferred to M:Space certain assets including inventory valued at $569. The
      Company expects that the operations of the U.S. audiovisual integration services
      will be classified as discontinued operations in the fiscal year 2004. As of
      June 30, 2003 the assets of audiovisual integration services were classified
      as
      held and used.





***Sale
      of Conferencing Services Business.*** On July 1, 2004, the Company
      sold its conferencing services business segment to Clarinet, Inc., an affiliate
      of American Teleconferencing Services, Ltd. d/b/a Premier Conferencing for
      $21,300. Of the purchase price $1,000 was placed into an 18-month Indemnity
      Escrow account and an additional $300 was placed into a working capital escrow
      account. We received the $300 working capital escrow funds approximately 90
      days
      after the execution date of the contract. Additionally, $1,365 of the proceeds
      was utilized to pay off equipment leases pertaining to assets being conveyed
      to
      Clarinet. The Company expects that the conferencing services operations will
      be
      classified as discontinued operations in the fiscal year 2005. As of June 30,
      2003, the assets of conferencing services were classified as held and
      used.





***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 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 $1,256 note payable over a 15-month period,
      with interest accruing on the unpaid balance at the rate of 5.25% per year;
      and
      contingent consideration ranging from 3% to 4% of related gross revenues over
      a
      five-year period. The Company expects that the operations of the Canada
      audiovisual integration services will be classified as discontinued operations
      in fiscal year 2005. As of June 30, 2003, 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. We
      are
      evaluating what impact, if any, this settlement may have on the OM Purchaser's
      ability to make the payment required under the note.





F-42
 **CLEARONE
            COMMUNICATIONS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 (in
            thousands except share and per share amounts)





***Third-Party
      Manufacturing Agreement.*** On August 1, 2005, ClearOne Communications, Inc. (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 and 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
      12,000 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
      ninety 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 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 $429 including severance
      payments, facilities no longer used by the Company and fixed assets that will
      be
      disposed of.




F-43