**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C.  20549**
 
 **FORM
        10-Q**
 
 (Mark
        One)
 
 T           **Quarterly
        Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
        1934**
 
 For
        the
        quarterly period ended September 30, 2007
 
 **OR**
 
 o           **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: **000-17219**
 
 **CLEARONE
        COMMUNICATIONS, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 **Utah**
              
              **87-0398877**(State
                  or other jurisdiction ofincorporation
                  or organization)
              
              (I.R.S.
                  employeridentification
                  number)
 
 **5225
                  Wiley Post Way, Suite 500**
                **Salt
                  Lake City, Utah**
              
              **84116**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 Registrant’s
        telephone number, including area code:  **(801)
        975-7200**
 
 Indicate
        by check 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
T No
        o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and larger accelerated filer” in Rule 12b-2 of the Exchange
        Act.  (Check one):
 Larger
        Accelerated Filer o                    Accelerated
        Filer o                    Non-Accelerated
        Filer T
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes oNo T
 
 Indicate
        the number of shares outstanding of each of the registrant’s classes of common
        stock, as of the latest practicable date.  There were 10,848,945
        shares of the Company’s Common Stock, par value $0.001, outstanding on November
        12, 2007.
  1
 
 **CLEARONE
        COMMUNICATIONS, INC.**
 
 **INDEX
        TO FORM 10-Q**
 
 **FOR
        THE QUARTER ENDED September 30, 2007**
 
 **Page
                  Number**Disclosure
                  Regarding Forward-Looking
                  Statements
              3PART
                  I – FINANCIAL INFORMATIONItem
                  1
              Condensed
                  Consolidated Financial
                  StatementsCondensed
                  Consolidated Balance Sheets as of September 30,
                  2007 and June 30, 2007
              4Condensed
                  Consolidated Statements of Operations for the three
                  months ended September 30, 2007 and 2006
              5Condensed
                  Consolidated Statements of Cash Flows for the
                  three months ended September 30, 2007 and 2006
              7Notes
                  to Condensed Consolidated Financial
                  Statements
              9Item
                  2
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              14Item
                  3
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              21Item
                  4
              Controls
                  and Procedures
              21PART
                  II – OTHER INFORMATIONItem
                  1
              Legal
                  Proceedings
              22Item
                  1A
              Risk
                  Factors
              23Item
                  2
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              28Item
                  3
              Defaults
                  Upon Senior Securities
              28Item
                  4
              Submission
                  of Matters to a Vote of Security
                  Holders
              28Item
                  5
              Other
                  Information
              28Item
                  6
              Exhibits
              28Signatures
              
              29
  2
 ***Table
            of Contents***
  **DISCLOSURE
        REGARDING FORWARD-LOOKING
        STATEMENTS**
 
 This
        report contains forward-looking statements as defined in the Private Securities
        Litigation Reform Act of 1995.  These statements reflect our views
        with respect to future events based upon information available to us at this
        time.  These forward-looking statements are subject to uncertainties
        and other factors that could cause actual results to differ materially from
        these statements.  Forward-looking statements are typically identified
        by the use of the words “believe,” “may,” “could,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “project,” “propose,” “plan,” “intend,” and similar
        words and expressions; however, not all forward-looking statements contain
        these
        words.  Examples of forward-looking statements are statements that
        describe the proposed development, manufacturing, and sale of our products;
        statements that describe our results of operations, pricing trends, the markets
        for our products, our anticipated capital expenditures, our cost reduction
        and
        operational restructuring initiatives, and regulatory developments; statements
        with regard to the nature and extent of competition we may face in the future;
        statements with respect to the sources of and need for future financing;
        and
        statements with respect to future strategic plans, goals, and
        objectives.  Forward-looking statements are contained in this report
        in Item 2, “Management’s Discussion and Analysis of Financial Condition and
        Results of Operations,” Item 3, “Quantitative and Qualitative Disclosures About
        Market Risk,” and Item 4, “Controls and Procedures” included in this Quarterly
        Report on Form 10-Q.  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 Part II – Other Information, Item 1A, “Risk Factors” and
        the application of “Critical Accounting Policies” as discussed in Item 2,
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations.”  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, changes in circumstances, or changes in
        estimates.
 
 References
        in this quarterly Form 10-Q to “ClearOne”, “we”, “us”, “CLRO” or the “Company”
refer to ClearOne Communications, Inc., a Utah corporation, and, unless the
        context otherwise requires or is otherwise expressly stated, its
        subsidiaries.
  3
 ***Table
            of Contents***
  **PART
        I – FINANCIAL INFORMATION**
 
 **Item
                  1.**
              **Financial
                  Statements**
 
 **CLEARONE
        COMMUNICATIONS, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(in
        thousands of dollars, except per share amounts)**
 
 **(unaudited)****September 30,**
              
              
              **June 30,****2007**
              
              
              **2007****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              2,506
              
              
              $
              2,782Marketable
                  securities
              
              
              21,102
              
              
              
              19,871Accounts
                  receivable, net of allowance for doubtful accounts of $56 and $54,
                  respectively
              
              
              8,053
              
              
              
              8,025Note
                  Receivable
              
              
              166
              
              
              
              163Inventories,
                  net
              
              
              7,490
              
              
              
              7,263Income
                  tax receivable
              
              
              326
              
              
              
              0Deferred
                  income taxes
              
              
              122
              
              
              
              0Prepaid
                  expenses
              
              
              336
              
              
              
              213Total
                  current assets
              
              
              40,101
              
              
              
              38,317Property
                  and equipment, net
              
              
              2,619
              
              
              
              2,694Note
                  Receiveable - long-term
              
              
              0
              
              
              
              43Other
                  assets
              
              
              9
              
              
              
              9Total
                  assets
              
              $
              42,729
              
              
              $
              41,063**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              2,198
              
              
              $
              1,745Accrued
                  taxes
              
              
              0
              
              
              
              660Accrued
                  liabilities
              
              
              3,411
              
              
              
              1,874Deferred
                  product revenue
              
              
              5,875
              
              
              
              4,872Total
                  current liabilities
              
              
              11,484
              
              
              
              9,151Deferred
                  rent
              
              
              816
              
              
              
              855Deferred
                  income taxes, net
              
              
              122
              
              
              
              0Other
                  long-term liabilities
              
              
              958
              
              
              
              619Total
                  liabilities
              
              
              13,380
              
              
              
              10,625Shareholders'
                  equity:Common
                  stock, par value $.001, 50,000,000 shares authorized,10,937,460
                  and
                  10,861,920 shares issued and outstanding, respectively
              
              
              11
              
              
              
              11Additional
                  paid-in-capital
              
              
              47,712
              
              
              
              47,582Accumulated
                  deficit
              
              
              (18,374
              )
              
              
              (17,155
              )Total
                  shareholders' equity
              
              
              29,349
              
              
              
              30,438Total
                  liabilities and shareholders' equity
              
              $
              42,729
              
              
              $
              41,063
 See
          accompanying notes to condensed consolidated financial statements
  4
 ***Table
                of Contents***
 **CLEARONE
        COMMUNICATIONS, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 **(in
        thousands of dollars, except per share amounts)**
 
 **Three
                  Months Ended September 30,****2007**
              
              
              **2006**Revenue
              
              $
              9,442
              
              
              $
              9,411Cost
                  of goods sold
              
              
              4,299
              
              
              
              4,316Gross
                  profit
              
              
              5,143
              
              
              
              5,095Operating
                  expenses:Marketing
                  and selling
              
              
              1,601
              
              
              
              1,918Research
                  and product development
              
              
              1,756
              
              
              
              2,079General
                  and administrative
              
              
              2,895
              
              
              
              809Total
                  operating expenses
              
              
              6,252
              
              
              
              4,806Operating
                  income (loss)
              
              
              (1,109
              )
              
              
              289Other
                  income (expense), netInterest
                  Income
              
              
              313
              
              
              
              307Other,
                  net
              
              
              28
              
              
              
              25Total
                  other income, net
              
              
              341
              
              
              
              332Income
                  (loss) from continuing operations before income taxes
              
              
              (768
              )
              
              
              621Provision
                  (benefit) for income taxes
              
              
              (171
              )
              
              
              19Income
                  (loss) from continuing operations
              
              
              (939
              )
              
              
              640Discontinued
                  Operations:Income
                  from discontinued operations
              
              
              0
              
              
              
              55Gain
                  on disposal of discontinued operations
              
              
              24
              
              
              
              3Income
                  tax provision
              
              
              (9
              )
              
              
              (21
              )Income
                  from discontinued operations
              
              
              15
              
              
              
              37Net
                  income (loss)
              
              $
              (924
              )
              
              $
              677
 See
          accompanying notes to condensed consolidated financial
          statements
  5
 ***Table
            of Contents***
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)**
 **(Unaudited)**
 **(in
        thousands of dollars, except per share amounts)**
 
 **Three
                  Months Ended****September 30,**
              
              
              **September 30,****2007**
              
              
              **2006**Basic
                  earnings per common share from continuing operations
              
              $
              (0.09
              )
              
              $
              0.05Diluted
                  earnings per common share from continuing operations
              
              $
              (0.08
              )
              
              $
              0.05Basic
                  earnings per common share from discontinued operations
              
              $
              -
              
              
              $
              -Diluted
                  earnings per common share from discontinued operations
              
              $
              -
              
              
              $
              -Basic
                  earnings per common share
              
              $
              (0.08
              )
              
              $
              0.06Diluted
                  earnings per common share
              
              $
              (0.08
              )
              
              $
              0.06Basic
                  weighted average shares
              
              
              10,961,256
              
              
              
              12,184,849Diluted
                  weighted average shares
              
              
              11,072,565
              
              
              
              12,231,744
  See
        accompanying notes to condensed consolidated financial
        statements
  6
 ***Table
            of Contents***
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 **(in
        thousands of dollars, except per share amounts)**
 
 **Three
                  Months Ended****September 30,**
              
              
              **September 30,****2007**
              
              
              **2006**Cash
                  flows from operating activities:Net
                  income (loss) from continuing operations
              
              $
              (940
              )
              
              $
              640Adjustments
                  to reconcile net income (loss) from continuing operations to net
                  cash
                  provided by operations:Depreciation
                  and amortization expense
              
              
              188
              
              
              
              268Stock-based
                  compensation
              
              
              171
              
              
              
              230Write-off
                  of inventory
              
              
              331
              
              
              
              111(Gain)
                  loss on disposal of assets and fixed assets write-offs
              
              
              3
              
              
              
              -Provision
                  for doubtful accounts
              
              
              2
              
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (133
              )
              
              
              484Note
                  receivable - Ken-A-Vision
              
              
              40
              
              
              
              (319
              )Inventories
              
              
              (558
              )
              
              
              324Prepaid
                  expenses and other assets
              
              
              (123
              )
              
              
              67Accounts
                  payable
              
              
              557
              
              
              
              (954
              )Accrued
                  liabilities
              
              
              1,537
              
              
              
              (261
              )Income
                  taxes
              
              
              (942
              )
              
              
              59Deferred
                  product revenue
              
              
              1,003
              
              
              
              (622
              )Net
                  change in other assets/liabilities
              
              
              1
              
              
              
              (6
              )Net
                  cash provided by continuing operating activities
              
              
              1,137
              
              
              
              21Net
                  cash provided by discontinued operating activities
              
              
              -
              
              
              
              35Net
                  cash provided by operating activities
              
              
              1,137
              
              
              
              56Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (155
              )
              
              
              (112
              )Proceeds
                  from the sale of property and equipment
              
              
              -
              
              
              
              18Purchase
                  of marketable securities
              
              
              (5,681
              )
              
              
              -Sale
                  of marketable securities
              
              
              4,450
              
              
              
              -Net
                  cash used in continuing investing activities
              
              
              (1,386
              )
              
              
              (94
              )Net
                  cash provided by discontinued investing activities
              
              
              15
              
              
              
              567Net
                  cash provided by (used in) investing activities
              
              
              (1,371
              )
              
              
              473Cash
                  flows from financing activities:Proceeds
                  from common stock
              
              
              455
              
              
              
              2Common
                  stock purchased and retired
              
              
              (566
              )
              
              
              (37
              )Tax
                  benefit attributable to exercise of stock options
              
              
              69
              
              
              
              -Net
                  cash (used in) continuing financing activities
              
              
              (42
              )
              
              
              (35
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              (276
              )
              
              
              494Cash
                  and cash equivalents at the beginning of the period
              
              
              2,782
              
              
              
              1,240Cash
                  and cash equivalents at the end of the period
              
              $
              2,506
              
              
              $
              1,734
  See
        accompanying notes to condensed consolidated financial
        statements
  7
 ***Table
            of Contents***
  **CLEARONE
        COMMUNICATIONS, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)**
 **(Unaudited)**
 **(in
        thousands of dollars, except per share amounts)**
 
 **Three
                  Months Ended****September 30,**
              
              
              **September 30,****2007**
              
              
              **2006**Supplemental
                  disclosure of cash flow information:Cash
                  paid (received) for income taxes
              
              $
              1,052
              
              
              $
              (57
              )Supplemental
                  disclosure of non-cash financing activities:Exchanged
                  accounts receivable from a vendor with acccounts payable to the
                  same
                  vendor
              
              $
              103
              
              
              $
              -Increase
                  in accumulated deficit and income tax liability as a result of
                  the
                  adoption of FIN48 (see note 6)
              
              $
              295
              
              
              $
              -
 See
          accompanying notes to condensed consolidated financial statements
  8
 ***Table
                of Contents***
 **CLEARONE
        COMMUNICATIONS, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 **(in
        thousands of dollars, except per share amounts)**
 
 **1.**
              **Basis
                  of Presentation**
 
 The
        accompanying condensed consolidated financial statements, consisting of the
        condensed consolidated balance sheets as of September 30, 2007 and June 30,
        2007, the condensed consolidated statements of operations for the three months
        ended September 30, 2007 and 2006, and the condensed consolidated statements
        of
        cash flows for the three months ended September 30, 2007 and 2006, have been
        prepared in accordance with accounting principles generally accepted in the
        United States for interim financial information and with the instructions
        to
        Form 10-Q.  Accordingly, certain information and footnote disclosures
        normally included in complete financial statements have been condensed or
        omitted.  These condensed consolidated financial statements should be
        read in conjunction with the consolidated financial statements and notes
        thereto
        included in the Company's Annual Report on Form 10-K for the year ended June
        30,
        2007.
 
 In
        management’s opinion, all adjustments (consisting of normal recurring
        adjustments) considered necessary for a fair presentation have been
        included.  The results of operations for interim periods are not
        necessarily indicative of the results of operations to be expected for the
        entire year or for any future period.
 
 **2.**
              **Inventory**
 
 Inventories,
        net of reserves, consisted of the following as of September 30, 2007 and
        June
        30, 2007 (in thousands):
 
 **September 30,**
              
              
              **June 30,****2007**
              
              
              **2007**Raw
                  materials
              
              $
              439
              
              
              $
              453Finished
                  goods
              
              
              4,902
              
              
              
              4,695Consigned
                  inventory
              
              
              2,149
              
              
              
              2,115Total
                  inventory
              
              $
              7,490
              
              
              $
              7,263
 
 
 Consigned
        inventory represents inventory at distributors and other customers where
        revenue
        recognition criteria have not been achieved.
 
 **3.**
              **Share-Based
                  Payment**
 
 The
        Company’s share-based compensation primarily consists of the following
        plans:
 
 On
        September 30, 2007, the Company had one active share-based compensation plan,
        the 1998 Stock Option Plan (the “1998 Plan”).  Provisions of the 1998
        Plan include the granting of up to 2,500,000 incentive and non-qualified
        stock
        options.  Options may be granted to directors, officers, and key
        employees and may be granted upon such terms as the Board of Directors, in
        their
        sole discretion, determine.  Through December 1999, 1,066,000 options
        were granted that would cliff vest after 9.8 years; however, such vesting
        was
        accelerated for 637,089 of these options upon meeting certain earnings per
        share
        goals through the fiscal year ended June 30, 2003.  Subsequent to
        December 1999 and through June 2002, 1,248,250 options were granted that
        would
        cliff vest after 6.0 years; however, such vesting was accelerated for 300,494
        of
        these options upon meeting certain earnings per share goals through the fiscal
        year ended June 30, 2005.  As of September 30, 2007, 20,875 and
        150,250 of these options that cliff vest after 9.8 and 6.0 years, respectively,
        remain outstanding.
  9
 ***Table
            of Contents***
  Of
        the
        options granted subsequent to June 2002, all vesting schedules are based
        on 3 or
        4-year vesting schedules, with either one-third or one-fourth vesting on
        the
        first anniversary and the remaining options vesting ratably over the remainder
        of the vesting term. Generally, directors and officers have 3-year vesting
        schedules and all other employees have 4-year vesting schedules. Additionally,
        in the event of a change in control or the occurrence of a
 corporate
        transaction, the Company’s Board of Directors have the authority to elect that
        all unvested options shall vest and become exercisable immediately prior
        to the
        event or closing of the transaction. All options outstanding as of September
        30,
        2007 had contractual lives of ten years. 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
        September 30, 2007, there were 1,391,317 options outstanding under the 1998
        Plan, which includes the cliff vesting and 3 or 4-year vesting options discussed
        above.
 
 The
        Company also has an Employee Stock Purchase Plan (“ESPP”).  Employees
        can purchase common stock through payroll deductions of up to 10 percent
        of
        their base pay.  Amounts deducted and accumulated by the employees are
        used to purchase shares of common stock on or about the last day of each
        month.  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.  The program was suspended during the period the Company failed
        to remain current in its filing of periodic reports with the SEC and reinstated
        in fiscal year 2007 after the Company became current.
 
 Effective
        July 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payment.” The
        Company adopted the fair value recognition provisions of SFAS No. 123R using
        the
        modified prospective transition method.  Under this transition method,
        stock-based compensation cost recognized beginning July 1, 2005 includes
        the
        straight-line compensation cost for (a) all share-based payments granted
        prior
        to July 1, 2005, but not yet vested, based on the grant date fair values
        used in
        the pro-forma disclosures under the original SFAS No. 123 and (b) all
        share-based payments granted on or after July 1, 2005, in accordance with
        the
        provisions of SFAS No. 123R.
 
 The
        Company uses judgment in determining the fair value of the share-based payments
        on the date of grant using an option-pricing model with assumptions regarding
        a
        number of highly complex and subjective variables.  These variables
        include, but are not limited to, the risk-free interest rate of the awards,
        the
        expected life of the awards, the expected volatility over the term of the
        awards, the expected dividends of the awards, and an estimate of the amount
        of
        awards that are expected to be forfeited.  The Company uses the
        Black-Scholes option pricing model to determine the fair value of share-based
        payments granted under SFAS No. 123R and the original SFAS No. 123.
  10
 ***Table
            of Contents***
  **4.**
              **Discontinued
                  Operations**
 
 During
        the first fiscal quarter of 2007, the Company completed the sales of its
        document and educational camera product line to Ken-A-Vision
        Manufacturing.  Additionally, during fiscal 2005, the Company
        completed the sale of its Canadian audiovisual integration services, OM Video,
        to 6351352 Canada Inc, a Canada corporation (the “OM
        Purchaser”).  Accordingly, the results of operations and the financial
        position have been reclassified in the accompanying condensed consolidated
        financial statements as discontinued operations.  Summary operating
        results of the discontinued operations are as follows (in thousands of
        dollars):
 
 **Three
                  Months Ended****September 30,**
              
              
              **September 30,****2007**
              
              
              **2006**Income
                  from discontinued operations:Ken-A-Vision
              
              $
              -
              
              
              $
              55Gain
                  on disposal of discontinued operations:Ken-A-Vision
              
              $
              -
              
              
              $
              3OM
                  Video
              
              
              24
              
              
              
              -Total
                  gain on disposal of discontinued operations
              
              
              24
              
              
              
              3Income
                  tax (provision) benefit:Ken-A-Vision
              
              $
              -
              
              
              $
              (21
              )OM
                  Video
              
              
              (9
              )
              
              
              -Total
                  income tax (provision) benefit
              
              
              (9
              )
              
              
              (21
              )Total
                  income from discontinued operations, net of income taxes:Ken-A-Vision
              
              $
              -
              
              
              $
              37OM
                  Video
              
              
              15
              
              
              
              -Total
                  income from discontinued operations,net of income taxes
              
              $
              15
              
              
              $
              37
  
 *OM
        Video*
 
 On
        March
        4, 2005, the Company sold all of the issued and outstanding stock of its
        Canadian subsidiary, ClearOne Communications of Canada, Inc. (“ClearOne Canada”)
        to 6351352 Canada Inc., a Canada corporation. ClearOne Canada owned all the
        issued and outstanding stock of Stechyson Electronics, Ltd., which conducts
        business under the name OM Video. The Company agreed to sell the stock of
        ClearOne Canada for $200 in cash; a $1.3 note receivable over a 15-month
        period,
        with interest accruing on the unpaid balance at the rate of 5.3 percent per
        year; and contingent consideration ranging from 3.0 percent to 4.0 percent
        of
        related gross revenues over a five-year period. In June 2005, the Company
        was
        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. Based
        on
        an analysis of the facts and circumstances that existed at the end of fiscal
        2005, 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). Through December 31, 2005, all
        required payments had been made however, 6351352 Canada Inc. failed to make
        any
        subsequent, required payments under the note receivable until June 30, 2006,
        when we received a payment of $50. The Company reevaluated its options and
        concluded that its best course of action was to enforce its security and
        appoint
        a receiver over the assets of OM Video. As of September 30, 2007, the amount
        of
        the promissory note and contingent earn-out provision was approximately $660
        which is net of $632 collected through receivership. The Company expects
        to
        collect up to an additional $5 which is net of receiver fees, over the next
        several periods.
  11
 ***Table
            of Contents***
 
 **5.**
              **Shareholders’
                  Equity**
 
 The
        Company’s shareholders’ equity of $29.3 million at September 30, 2007 declined
        approximately $1.1 million from June 30, 2007. During the first three months
        of
        fiscal 2008, the Company reported a loss of $924, reduced its July 1, 2007
        balance of retained earnings by $295 upon its adoption of FASB issued
        Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes and
        repurchased 88,000 shares at aggregate cost of $566.  These items were
        partially offset by approximately $240 in stock-based compensation and related
        tax benefits and $455 upon the exercise of 163,495 stock options.
 
 **6.**
              **Income
                  Taxes**
 
 In
        July
        2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for
        Uncertainty in Income Taxes, which clarifies the accounting for uncertainty
        in
        income taxes recognized in the financial statements in accordance with FASB
        Statement No. 109, Accounting for Income Taxes. Under FIN 48, tax positions
        shall initially be recognized in the financial statements when it is more
        likely
        than not the position will be sustained upon examination by the tax authorities.
        Such tax positions shall initially and subsequently be measured as the largest
        amount of tax benefit that is greater than 50% likely of being realized upon
        ultimate settlement with the tax authority assuming full knowledge of the
        position and all relevant facts.
 
 We
        adopted the provisions of FIN 48 on July 1, 2007.  Upon adoption, we
        recognized a FIN 48 liability of $755 for permanent tax items. Included in
        the
        $755 liability is approximately $78 in interest and penalties related to
        unrecognized tax benefits. We also recognized $159 of temporary FIN 48
        liability. After taking our SFAS 5 “Accounting for Contingencies” contingent
        liability balance of $618 from June 30, 2007 we posted a cumulative-effect
        adjustment of approximately $295, increasing our liability for unrecognized
        tax
        benefits and reducing the July 1, 2007 balance of retained earnings. The
        total
        liability for unrecognized tax benefits at July 1, 2007, including temporary
        tax
        differences, was approximately $914.
 
 During
        our first fiscal quarter of 2008, we recorded approximately $45 related to
        unrecognized tax benefits that would favorably impact our effective tax rate
        if
        recognized. Included in this amount is approximately $8 related to interest
        and
        penalties.  The total outstanding balance for liabilities related to
        unrecognized tax benefits at September 30, 2007 was $958 of which $86 was
        associated with interest and penalties. We account for interest expense and
        penalties for unrecognized tax benefits as part of our income tax
        provision.
 
 We
        are
        subject to income taxes in both the United States and in certain non-U.S.
        jurisdictions. We estimate our current tax position together with our future
        tax
        consequences attributable to temporary differences resulting from differing
        treatment of items, such as deferred revenue, depreciation, and other reserves
        for tax and accounting purposes. These temporary differences result in deferred
        tax assets and liabilities. We must then assess the likelihood that our deferred
        tax assets will be recovered from future taxable income, prior year carryback,
        or future reversals of existing taxable temporary differences. To the extent
        we
        believe that recovery is not more likely than not, we establish a valuation
        allowance against these deferred tax assets. Significant management judgment
        is
        required in determining our provision for income taxes, our deferred tax
        assets
        and liabilities, and any valuation allowance recorded against our deferred
        tax
        assets. To the extent we establish a valuation allowance in a period, we
        must
        include and expense the allowance within the tax provision in the consolidated
        statement of operations. The reversal of a previously established valuation
        allowance results in a benefit for income taxes.
 
 **7.**
              **Contingent
                  Liability**
 
 In
        accordance with Statement of Financial Accounting Standards No. 5,
*Accounting for Contingencies*, the Company accrued $1.8 million in its
        fiscal 2008 first quarter, representing the probable amount that as of the
        date
        of the financial statements could be reasonably estimated of its liability,
        through trial, associated with the advancement of funds related to
        indemnification agreements with two former officers. As disclosed in July
        2007,
        the Company was informed that two of its former officers have been indicted
        by
        the United States Attorney's Office for the District of Utah. The Company
        has
        been advised that a trial date has been set for January 22, 2008. The Company
        is
        cooperating fully with the U.S. Attorney's office in this matter and has
        been
        advised that it is neither a target nor a subject of the investigation or
        indictment.
  12
 ***Table
            of Contents***
 
 **8.**
              **Recent
                  Accounting Pronouncements**
 
 In
        September 2006,  the Financial Accounting Standards Board (“FASB”)
        issued the Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair
        Value  Measurements.”  This statement defines fair value,
        establishes a framework for measuring fair value in generally accepted
        accounting principles and expands disclosures about fair value.  SFAS
        157 expands the disclosures about the use of fair value to measure assets
        and
        liabilities in interim and annual periods subsequent to initial recognition.
        The
        disclosures focus on the inputs used to measure fair value, the recurring
        fair
        value measurements using significant  unobservable inputs and the
        effect of the measurement on earnings (or changes in net assets) for the
        period.  The guidance in SFAS 157 also applies
        for derivatives and other financial instruments
        measured at fair value under Statement 133
“Accounting  for Derivative Instruments and Hedging Activities” at
        initial recognition and in all subsequent periods. SFAS 157 is effective
        for
        fiscal years beginning after November 15, 2007, and interim periods within
        those
        fiscal years.  We are currently reviewing the requirements of SFAS
        157, and at this point in time, have not determined what impact, if any,
        SFAS
        157 will have on our results of operations and financial position.
 
 In
        February 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial
        Assets and Financial Liabilities.”  This statement permits entities to
        choose to measure many financial instruments and certain other items at fair
        value that are not currently  required to be measured at fair value.
        The objective is to improve financial reporting by providing entities with
        the
        opportunity to mitigate volatility in reported earnings caused by measuring
        related assets and liabilities differently without having to apply complex
        hedge
        accounting provisions.  This statement requires a business entity to
        report unrealized gains and losses on items for which the fair value option
        has
        been elected in earnings at each subsequent reporting date.  An entity
        may decide whether to elect the fair value option for each eligible item
        on its
        election date, subject to certain requirements described in the statement.
        SFAS
        159 is effective for fiscal years beginning after November 15,
        2007.  We are currently reviewing the requirements of this statement
        and, at this point in time, have not determined the impact, if any, that
        this
        statement may have on our results of operations and financial
        position.
 
 **9.**
              **Compromise
                  Agreement and Release**
 
 The
        Company entered into a compromise agreement and release with its former Managing
        Director of Clear One Communications, Ltd. in connection with the cessation
        of
        his employment, which generally provided for his resignation from his position
        and employment with the Company, the payment of remuneration of approximately
        $94 representing six months’ notice, $10 for accrued but unused holiday pay, $32
        severance, and a general release of claims against the Company by
        him.
 
 **10.**
              **Subsequent
                  Events**
 
 Pursuant
        to the Company’s warehouse lease agreement dated September 20, 2006, the Company
        modified the terms generally providing that effective March 31, 2008, the
        Company will lease approximately 6,000 square feet for $3 per month which
        will
        be used by the Company for document and equipment storage. The Company currently
        leases approximately 17,000 square feet of warehouse space for $8 per
        month.
  On
        Monday, November 5, 2007, Chief Judge Tena Campbell
        of the United States District Court, District of Utah, Central Division,
        in the
        case of ClearOne Communications, Inc. v. Andrew Chiang. et al.. Civil No
        2:07ev00037TC, issued an order establishing the amount for the bond to be
        posted
        by ClearOne in conjunction with the Court's grant of ClearOne's motion for
        a
        preliminary injunction. This preliminary injunction order was issued by Chief
        Judge Tena Campbell on October 30, 2007 and is more fully described in the
        Form
        8-K filed by the Company on November 1, 2007. The bond was set in the amount
        of
        $908. In accordance with the order, the Company placed the bond with the
        clerk
        of the Court on November 6, 2007. This litigation is subject to all of the
        risks
        and uncertainties of litigation and there can be no assurance as to the probable
        result of litigation.
  13
 ***Table
            of Contents***
  **Item
                  2.**
              **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS**
 
 *The
        following discussion should be read in conjunction with our unaudited condensed
        consolidated financial statements and related notes to condensed consolidated
        financial statements included in this Form 10-Q and our audited consolidated
        financial statements included in our Annual Report on Form 10-K for the year
        ended June 30, 2007 filed with the SEC and management’s discussion and analysis
        contained therein.  This discussion contains forward-looking
        statements based on current expectations that involve risks and uncertainties,
        such as our plans, objectives, expectations, and intentions, as set forth
        under
“Disclosure Regarding Forward-Looking Statements.”  Our actual results
        and the timing of events could differ materially from those anticipated in
        these
        forward-looking statements as a result of various factors, including those
        set
        forth in the following discussion and under the caption “Risk Factors” in Part
        II, Item 1A, as well as other information found in the documents we file
        from
        time to time with the SEC.  Unless otherwise indicated, all references
        to a year reflect our fiscal year that ends on June 30.*
 
 **BUSINESS
        OVERVIEW**
 
 We
        are an
        audio conferencing products company. We develop, manufacture, market, and
        service a comprehensive line of high-quality audio conferencing products,
        which
        range from personal conferencing products to tabletop conferencing phones
        to
        professionally installed audio systems. We also manufacture and sell
        conferencing furniture. We have a strong history of product innovation and
        plan
        to continue to apply our expertise in audio engineering to develop and introduce
        innovative new products and enhance our existing products. We believe the
        performance and reliability of our high-quality audio products create a natural
        communications environment, which saves organizations of all sizes time and
        money by enabling more effective and efficient communication.
  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 as well as individual
        consumers. We sell our products to these end-users primarily through a network
        of independent distributors who in turn sell our products to dealers, systems
        integrators, and value-added resellers. The Company also sells products on
        a
        limited basis directly to dealers, systems integrators, value-added resellers,
        and end-users.
  **CRITICAL
        ACCOUNTING POLICIES**
  Our
        discussion and analysis of our results of operations and financial condition
        are
        based upon our condensed consolidated financial statements, which have been
        prepared in conformity with U.S. generally accepted accounting
        principles.  We review the accounting policies used in reporting our
        financial results on a regular basis.  The preparation of these
        financial statements requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting
        period.  We evaluate our assumptions and estimates on an ongoing basis
        and may employ outside experts to assist in our evaluations.  We
        believe that the estimates we use are reasonable; however, actual results
        could
        differ from those estimates.  We believe the following critical
        accounting policies affect our more significant assumptions and estimates
        that
        we used to prepare our condensed consolidated financial statements.
  **Revenue
        and Associated Allowances for Revenue Adjustments and Doubtful
        Accounts**
  Included
        in continuing operations is product revenue, primarily from product sales
        to
        distributors, dealers, and end-users.  Product revenue is recognized
        when (i) the products are shipped and any right of return expires, (ii)
        persuasive evidence of an arrangement exists, (iii) the price is fixed and
        determinable, and (iv) collection is reasonably assured.
 
 We
        provide a right of return on product sales to
        distributors.  Currently, we do not have sufficient historical return
        experience with our distributors that is predictive of future events given
        historical excess levels of inventory in the distribution
        channel.  Accordingly, revenue from product sales to distributors is
        not recognized until the return privilege has expired, which approximates
        when
        product is sold-through to customers of the Company’s distributors (dealers,
        system integrators, value-added resellers, and end-users) rather than when
        the
        product is initially shipped to a distributor.  We evaluate, at each
        quarter-end, the inventory in the channel through information provided by
        certain of our distributors.  The level of inventory in the channel
        will fluctuate up or down, each quarter, based upon our distributors’ individual
        operations.  Accordingly, each quarter-end revenue deferral is
        calculated and recorded based upon the underlying, estimated channel inventory
        at quarter-end.  Although, certain distributors provide certain
        channel inventory amounts, we make judgments and estimates with regard to
        the
        amount of inventory in the entire channel, for all customers and for all
        channel inventory items, and the appropriate revenue and cost of goods
        sold associated with those channel products.  Although
        these assumptions and judgments regarding total channel inventory revenue
        and cost of goods sold could differ from actual amounts, we believe
        that our calculations are indicative of actual levels of inventory in the
        distribution channel.  As of September 30, 2007, the Company deferred $5.9
        million in revenue and $2.2 million in cost of goods sold related to products
        sold where return rights had not lapsed.  The amounts of deferred cost
        of goods sold were included in consigned inventory.  The following
        table details the amount of deferred revenue and cost of goods sold at each
        period end for the 21-month period ended September 30, 2007 (in
        thousands).
  14
 ***Table
            of Contents***
  **Deferred
                  Revenue**
              
              
              **Deferred
                  Cost of Goods Sold**
              
              
              **Deferred
                  Gross Profit**September
                  30, 2007
              
              $
              5,875
              
              
              $
              2,149
              
              
              $
              3,726June
                  30, 2007
              
              
              4,872
              
              
              
              2,115
              
              
              
              2,757March
                  31, 2007
              
              
              5,111
              
              
              
              2,265
              
              
              
              2,846December
                  31, 2006
              
              
              4,711
              
              
              
              2,166
              
              
              
              2,545September
                  30, 2006
              
              
              5,249
              
              
              
              2,541
              
              
              
              2,708June
                  30, 2006
              
              
              5,871
              
              
              
              2,817
              
              
              
              3,054March
                  31, 2006
              
              
              5,355
              
              
              
              2,443
              
              
              
              2,912December
                  31, 2005
              
              
              4,936
              
              
              
              2,199
              
              
              
              2,737
  We
        offer
        rebates and market development funds to certain of our distributors and direct
        dealers/resellers based upon volume of product purchased by them.  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
        in the period revenue is recognized.
 
 We
        offer
        credit terms on the sale of our products to a majority of our customers and
        perform ongoing credit evaluations of our customers’ financial
        condition.  We maintain an allowance for doubtful accounts for
        estimated losses resulting from the inability or unwillingness of our customers
        to make required payments based upon our historical collection experience
        and
        expected collectibility of all accounts receivable.  Our actual bad
        debts in future periods may differ from our current estimates and the
        differences may be material, which may have an adverse impact on our future
        accounts receivable and cash position.
 
 **Purchased
        Intangibles**
  We
        assess
        the impairment of 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 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 intangibles for
        impairment at least annually.
 
 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.
  15
 ***Table
            of Contents***
 
 **Impairment
        of Long-Lived Asset**
 
 We
        assess
        the impairment of long-lived assets, such as property, equipment, and
        definite-lived intangibles subject to amortization, annually or whenever
        events
        or changes in circumstances indicate that the carrying value of an asset
        may not
        be recoverable.  Recoverability of assets to be held and used is
        measured by a comparison of the carrying amount of an asset or asset group
        to
        estimated future undiscounted net cash flows of the related asset or group
        of
        assets over their remaining lives.  If the carrying amount of an asset
        exceeds its estimated future undiscounted cash flows, an impairment charge
        is
        recognized for the amount by which the carrying amount exceeds the estimated
        fair value of the asset.  Impairment of long-lived assets is assessed
        at the lowest levels for which there are identifiable cash flows that are
        independent of other groups of assets.  The impairment of long-lived
        assets requires judgments and estimates.  If circumstances change,
        such estimates could also change.  Assets held for sale are reported
        at the lower of the carrying amount or fair value, less the estimated costs
        to
        sell.
 
 **Accounting
        for Income Taxes**
 
 We
        are
        subject to income taxes in both the United States and in certain non-U.S.
        jurisdictions.  We estimate our current tax position together with our
        future tax consequences attributable to temporary differences resulting from
        differing treatment of items, such as deferred revenue, depreciation, and
        other
        reserves for tax and accounting purposes.  These temporary differences
        result in deferred tax assets and liabilities.  We must then assess
        the likelihood that our deferred tax assets will be recovered from future
        taxable income, prior year carryback, or future reversals of existing taxable
        temporary differences.  To the extent we believe that recovery is not
        more likely than not, we establish a valuation allowance against these deferred
        tax assets.  Significant management judgment is required in
        determining our provision for income taxes, our deferred tax assets and
        liabilities, and any valuation allowance recorded against our deferred tax
        assets.  To the extent we establish a valuation allowance in a period,
        we must include an expense for the allowance within the tax provision in
        the
        condensed consolidated statement of operations. The reversal of a previously
        established valuation allowance results in a benefit for income taxes. As
        of
        September 30, 2007 we continued to be fully reserved against our net deferred
        tax assets which total to approximately $5.2 million.
 
 **Lower-of-Cost
        or Market Adjustments and Reserves for Excess and Obsolete
        Inventory**
 
 We
        account for our inventory on a first-in, first-out (“FIFO”) basis, and make
        appropriate adjustments on a quarterly basis to write down the value of
        inventory to the lower-of-cost or market.
 
 In
        order
        to determine what, if any, inventory needs to be written down, we perform
        a
        quarterly analysis of obsolete and slow-moving inventory.  In general,
        we write down our excess and obsolete inventory by an amount that is equal
        to
        the difference between the cost of the inventory and its estimated market
        value
        if market value is less than cost, based upon assumptions about future product
        life-cycles, product demand, or market conditions.  Those items that
        are found to have a supply in excess of our estimated demand are considered
        to
        be slow-moving or obsolete and the appropriate reserve is made to write down
        the
        value of that inventory to its realizable value.  These charges are
        recorded in cost of goods sold.  At the point of the loss recognition,
        a new, lower-cost basis for that inventory is established and subsequent
        changes
        in facts and circumstances do not result in the restoration or increase in
        that
        newly established cost basis.  If there were to be a sudden and
        significant decrease in demand for our products, or if there were a higher
        incidence of inventory obsolescence because of rapidly changing technology
        and
        customer requirements, we could be required to increase our inventory
        allowances, and our gross profit could be adversely affected.
 
 **Share-Based
        Payment**
 
 Prior
        to
        June 30, 2005 and as permitted under the original SFAS No. 123, we accounted
        for
        our share-based payments following the recognition and measurement principles
        of
        Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees,” as interpreted.  Accordingly, no share-based compensation
        expense had been reflected in our statements of operations for unmodified
        option
        grants since (1) the exercise price equaled the market value of the underlying
        common stock on the grant date and (2) the related number of shares to be
        granted upon exercise of the stock option was fixed on the grant
        date.
  16
 ***Table
            of Contents***
 
 In
        December 2004, the FASB issued SFAS No. 123R, “Share-Based
        Payment.”  SFAS No. 123R is a revision of SFAS No.
        123.  SFAS No. 123R establishes standards for the accounting for
        transactions in which an entity exchanges its equity instruments for goods
        or
        services.  Primarily, SFAS No. 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.
 
 Under
        SFAS No. 123R, we 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 awards – 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
        associated with the unvested options will not be recognized,
        cumulatively.
 
 Effective
        July 1, 2005, we adopted SFAS No. 123R and its fair value recognition provisions
        using the modified prospective transition method.  Under this
        transition method, stock-based compensation cost recognized after July 1,
        2005
        includes the straight-line basis compensation cost for (a) all share-based
        payments granted prior to July 1, 2005, but not yet vested, based on the
        grant
        date fair values used for the pro-forma disclosures under the original SFAS
        No.
        123 and (b) all share-based payments granted or modified on or after July
        1,
        2005, in accordance with the provisions of SFAS No. 123R.
 
 Under
        SFAS No. 123R, we recognize compensation cost net of an anticipated forfeiture
        rate and recognize the associated compensation cost for those awards expected
        to
        vest on a straight-line basis over the requisite service period.  We
        use judgment in determining the fair value of the share-based payments on
        the
        date of grant using an option-pricing model with assumptions regarding a
        number
        of highly complex and subjective variables.  These variables include,
        but are not limited to, the expected life of the awards, the expected volatility
        over the term of the awards, the expected dividends of the awards, the risk-free
        interest rate of the awards, and an estimate of the amount of awards that
        are
        expected to be forfeited.  If assumptions change in the application of
        SFAS No. 123R in future periods, the stock-based compensation cost ultimately
        recorded under SFAS No. 123R may differ significantly from what was recorded
        in
        the current period.
 
 **SEASONALITY**
 
 Our
        audio
        conferencing products revenue has historically been strongest during our
        second
        and fourth quarters.   There can be no assurance that any
        historic sales patterns will continue and, as a result, sales for any prior
        quarter are not necessarily indicative of the sales to be expected in any
        future
        quarter.
  17
 ***Table
            of Contents***
  **ANALYSIS
        OF RESULTS OF OPERATIONS**
 
 **Results
        of Operations for the three months or the first fiscal quarter (“1Q”) ended
        September 30, 2007 and 2006**
  The
        following table sets forth certain items from our unaudited condensed
        consolidated statements of operations (in thousands) for the three months
        ended
        September 30, 2007 and 2006, together with the percentage of total revenue
        which
        each such item represents:
 
 **Three
                  Months Ended**
                **(In thousands)****2007**
              
              
              **2006****%
                  of Revenue**
              
              
              **%
                  of Revenue**Product
                  Revenue:
              
              $
              9,442
              
              
              
              100.0
              %
              
              $
              9,411
              
              
              
              100.0
              %Cost
                  of goods sold:Total
                  cost of goods sold
              
              
              4,299
              
              
              
              45.5
              %
              
              
              4,316
              
              
              
              45.9
              %Gross
                  profit
              
              
              5,143
              
              
              
              54.5
              %
              
              
              5,095
              
              
              
              54.1
              %Operating
                  expenses:Marketing
                  and selling
              
              
              1,601
              
              
              
              17.0
              %
              
              
              1,918
              
              
              
              20.4
              %Research
                  and product development
              
              
              1,756
              
              
              
              18.6
              %
              
              
              2,079
              
              
              
              22.1
              %General
                  and administrative
              
              
              2,895
              
              
              
              30.7
              %
              
              
              809
              
              
              
              8.6
              %Total
                  operating expenses
              
              
              6,252
              
              
              
              66.2
              %
              
              
              4,806
              
              
              
              51.1
              %
 
 **Revenue**
  Although
        1Q 2008 revenue of $9.4 million was about even with 1Q 2007, the Company
        realized growth in its professional audio and personal conferencing products
        which collectively increased approximately $415,000 over 1Q 2007. The 1Q
        2008
        increases were offset by an approximate $385,000 collective decline in the
        Company’s premium, tabletop and conferencing furniture lines over the same
        period of 2007. The Company has not yet been able to fully penetrate and
        realize
        the potential within the premium or tabletop markets but continues to believe
        it
        has the differentiated products to become a formidable competitor in this
        space.
 
 We
        evaluate, at each quarter-end, the inventory in the channel through information
        provided by certain of our distributors.  The level of inventory in the
        channel will fluctuate up or down, each quarter, based upon our distributors’
individual operations.  Accordingly, each quarter-end revenue deferral is
        calculated and recorded based upon the underlying, estimated channel inventory
        at quarter-end.  During 1Q 2008 and 2007, the net change in deferred
        revenue based on the net movement of inventory in the channel was a net deferral
        of ($1 million) and net recognition of $622,000 in revenue,
        respectively.
 
 Total
        revenues from sales outside of the United States accounted for 22% of total
        revenue for the three months ended September 30, 2007 and 26% of total revenue
        for the three months ended September 30, 2006, respectively.
 
 **Costs
        of Goods Sold and Gross Profit**
 
 Costs
        of
        goods sold (“COGS”) from the product segment includes expenses associated with
        finished goods purchased from outsourced manufacturers, the manufacture of
        our
        products, including material and direct labor, our manufacturing and operations
        organization, property and equipment depreciation, warranty expense, freight
        expense, royalty payments, and the allocation of overhead expenses.
 
 The
        following table displays our COGS and gross profit together with each item’s
        amount as a percentage of total revenue:
  18
 ***Table
            of Contents***
  **Three
                  Months Ended****(in
                  thousands)****September 30,**
              
              
              **September 30,****2007**
              
              
              **2006****%
                  of Revenue**
              
              
              **%
                  of Revenue**Product
                  Revenue:
              
              $
              9,442
              
              
              
              100.0
              %
              
              $
              9,411
              
              
              
              100.0
              %Cost
                  of goods sold:Total
                  cost of goods sold
              
              
              4,299
              
              
              
              45.5
              %
              
              
              4,316
              
              
              
              45.9
              %Gross
                  profit
              
              
              5,143
              
              
              
              54.5
              %
              
              
              5,095
              
              
              
              54.1
              %
 
 The
        Company’s gross profit margin (GPM), gross profit as a percentage of sales, was
        54.5% and 54.1% in 1Q 2008 and 1Q 2007, respectively. Although GPM for each
        comparative quarter was about the same, the Company realized a favorable
        sales
        mix in 1Q08 as its highest margin professional audio conferencing products
        represented a larger portion of total revenue than in 1Q07, but GPM was
        negatively impacted by an increase in the Company’s reserve for inventory
        obsolescence required to account for an increase in slow-moving inventory
        in
        addition to unfavorable manufacturing variances.
 
 **Operating
        Expenses**
 
 Operating
        expenses include sales and marketing, general and administrative and research
        and development expenses. 1Q 2008 operating expenses were $6.2 million, an
        increase of $1.4 million, or 29%, from $4.8 million for 1Q 2007. The following
        is a more detailed discussion of expenses related to operating
        expenses.
 
 **Sales
        and Marketing expenses*****.***  Sales
        and marketing (S&M) expenses include selling, customer service, and
        marketing expenses such as employee-related costs, allocations of overhead
        expenses, trade shows, and other advertising and selling expenses.  1Q
        2008 S&M expenses decreased approximately $300,000, or 17%, to $1.6 million
        compared to 1Q 2007 expenses of $1.9 million. As a percentage of revenues,
        1Q
        2008 and 2007 marketing and selling expenses were 17.0% and 20.4%,
        respectively.  The lower total 1Q 2008 S&M expenses in dollar
        terms and as a percentage of sales from 1Q 2007 can be attributed primarily
        to
        lower payroll and related expenses associated with lower overall S&M
        headcount.
 
 **Research
        and product development
        expenses*****.***  Research and product
        development (R&D) expenses include research and development, product line
        management, engineering services, and test and application expenses, including
        employee-related costs, outside services, expensed materials, depreciation,
        and
        an allocation of overhead expenses.  1Q 2008 R&D expenses
        decreased to $1.8 million from $2.1 million in 1Q 2007.  As a
        percentage of revenues, 1Q 2008 and 2007 R&D expenses were 18.6% and 22.1%,
        respectively. The 1Q 2008 percentage and dollar decreases were due primarily
        to
        lower R&D project expenses as compared to 1Q 2007 when the Company was
        heavily involved in working towards launching its next generation of
        professional product, Converge Pro.
 
 **General
        and administrative
        expenses*****.***  General and
        administrative (G&A) expenses include employee-related costs, professional
        service fees, allocations of overhead expenses, litigation costs, including
        costs associated with the SEC investigation and subsequent litigation, and
        corporate administrative costs, including finance and human resources. 1Q
        2008
        G&A expenses increased $2.1 million to $2.9 million compared to 1Q 2007
        expenses of $800,000. 1Q 2008 and 2007 G&A expenses were 30.7% and 8.6% of
        sales, respectively.  The significant 1Q 2008 increase was primarily
        due estimating and establishing a $1.8 million accrual for a contingent
        liability. In accordance with Statement of Financial Accounting Standards
        No. 5,
*Accounting for Contingencies*, the Company accrued $1.8 million in its
        fiscal 2008 first quarter, representing the probable amount that as of the
        date
        of the financial statements could be reasonably estimated of its liability,
        through trial, associated with the advancement of funds related to
        indemnification agreements with two former officers. As disclosed in July
        2007,
        the Company was informed that two of its former officers have been indicted
        by
        the United States Attorney's Office for the District of Utah. The Company
        has
        been advised that a trial date has been set for January 22, 2008. The Company
        is
        cooperating fully with the U.S. Attorney's office in this matter and has
        been
        advised that it is neither a target nor a subject of the investigation or
        indictment. Also, during 1Q 2008 the Company paid Edward D. Bagley, the
        Company’s former director and Chairman the sum of $200,000 upon his resignation
        and in consideration for his service as a director of the Company since
        1994.
  19
 ***Table
            of Contents***
 
 **Operating
        income.**  1Q 2008 operating loss was ($1.1 million) compared
        to operating income of $289,000 in 1Q 2007.  The 1Q 2008 operating
        income decrease of approximately $1.4 million was due mainly to the $1.8
        million
        contingent liability charged to general & administrative expenses associated
        with the advancement of funds under the indemnification agreements with two
        former officers, partially offset by the $300,000 decreases in both the S&M
        and R&D expenses discussed above.
 
 **Other
        income, net.**  Other income, net, includes interest income,
        interest expense, capital gains, gain (loss) on the disposal of assets, and
        currency gain (loss).  1Q 2008 other income was $341,000, slightly
        higher from other income of $332,000 in 1Q 2007.
 
 **Income
        (loss) from continuing operations before income
        taxes*****.***  1Q 2008 loss from
        continuing operations was ($939,000) compared to income of $640,000 in 1Q
        2007.  As a percentage of revenues, 1Q 2008 and 2007 income (loss)
        from continuing operations was (9.9%) and 6.8%, respectively. The Company’s 1Q
        2008 operating loss was partially offset by the $341,000 in other income
        in
        addition to the $171,000 benefit from income taxes.
 
 **Income
        (loss) from discontinued operations, net of tax.** During 1Q
        2008 and 2007 we recorded income from discontinued operations, net of tax
        of
        $15,000 and $37,000, respectively. The 1Q 2008 income was exclusively related
        to
        funds received through the receivership of OM Video. The 1Q 2007 income of
        $37,000 was related to income from the discontinued operations of the document
        and educational camera product line.
  20
 ***Table
            of Contents***
  **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 As
        of
        September 30, 2007, our cash and cash equivalents were approximately $2.5
        million and our marketable securities were approximately $21.1 million,
        representing an overall increase of about $950,000 in our balances from June
        30,
        2007 which had cash and cash equivalents of approximately $2.8 million and
        marketable securities of approximately $19.8 million.
 
 Net
        cash
        flows provided by operating activities were $1.1 million for the three months
        ended September 30, 2007, an increase of $1.1 million from the net cash flows
        provided by operating activities of $56,000 for the three months ended September
        30, 2006.  The year-over-year increase can be attributed primarily to
        cash provided by changes in working capital of about $2.6 million partially
        offset by the approximately $1.6 million decrease in net income from continuing
        operations.
 
 Net
        cash
        flows used in investing activities were approximately $1.4 million for the
        three
        months ended September 30, 2007, a decrease of about $1.8 million from the
        net
        cash flows provided by investing activities of $473,000 for the three months
        ended September 30, 2006.  The change was primarily attributable to
        the purchase of $1.2 million in marketable securities and during the three
        months ending September 30, 2007.
 
 Net
        cash
        (used in) financing activities for the three months ended September 30, 2007
        totaled ($42,000) and was attributed to the Company’s repurchase of
        approximately 88,000 shares of common stock for $566,000, partially offset
        by
        the receipt of $455,000 from the exercise of stock options and $69,000 related
        to the tax benefit attributable to the exercise of those stock
        options.
 
 Management
        believes that future income from operations and effective management of working
        capital will provide the liquidity needed to finance growth plans. In addition
        to capital expenditures, the Company plans to use cash during the remainder
        of
        fiscal 2008 for selective infusions of technological, marketing or product
        manufacturing rights to broaden the Company's product offerings; for continued
        share repurchases; and if available for a reasonable price, acquisitions
        that
        may strategically fit the Company’s business and are accretive to
        performance.
 
 **Item
                  3.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK**
 
 Our
        exposure to market risk has not changed materially since June 30,
        2007.
 
 **Item
                  4.**
              **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 Principal Financial Officer, as appropriate, to allow for timely
        decisions regarding required disclosure.  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.  A controls system, no matter how well-designed and
        operated, cannot provide absolute assurance that the objectives of the controls
        system are met, and no evaluation of controls can provide absolute assurance
        that all control issues and instances of fraud, if any, within a company
        have
        been detected.  As a result, there can be no assurance that our
        disclosure controls and procedures will detect all errors or fraud.
 
 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 as of September 30 , 2007.
 Based
        upon this evaluation, our management, including the Chief Executive Officer
        and
        the Chief Financial Officer, has concluded that our disclosure controls and
        procedures were effective as of September 30, 2007.
 
 There
        were no changes in the Company’s internal controls over financial reporting that
        occurred during the quarter ended September 30, 2007, that have materially
        affected, or are reasonably likely to materially affect, the Company’s internal
        controls over financial reporting.
  21
 ***Table
            of Contents***
  **PART
        II - OTHER INFORMATION**
 
 **Item
                  1.**
              **LEGAL
                  PROCEEDINGS**
 
 *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 business. Such matters are
        subject to many uncertainties and outcomes that are not predictable. However,
        based on the information available to us as of November 9, 2007 and after
        discussions with legal counsel, we do not believe any such other proceedings
        will have a material, adverse effect on our business, results of operations,
        financial position, or liquidity, except as described below.
 
 *Theft
        of Intellectual Property and Copyright Complaints.* In January 2007, the
        Company filed a lawsuit in the Third Judicial District Court, Salt Lake County,
        State of Utah against WideBand Solutions, Inc. and two of its principals,
        one
        former employee named Dr. Jun Yang, and one previously affiliated with the
        Company (the “Intellectual Property Case”). ClearOne also brought claims against
        Biamp Systems Corporation, Inc. The matter was subsequently removed to federal
        court, the United States District Court, District of Utah, Central Division.
        The
        case is styled *ClearOne Communications, Inc. v. Jun Yang, et. al.* Civil
        No. 2:07-co-37 TC.  The Complaint brings claims against different
        combinations of the defendants for, among other things, misappropriation
        of
        certain trade secrets, breach of contract, conversion, unjust enrichment
        and
        intentional interference with business and contractual relations. The relief
        being sought by the Company includes an order enjoining the defendants from
        further use of the Company’s trade secrets and an award consisting of, among
        other things, compensation and damages related to the unjust enrichment of
        the
        defendants. The Court subsequently granted leave to add a third WideBand
        principal as a defendant to the case. In August 2007, the Company filed a
        motion
        for a preliminary injunction in the United States District Court, District
        of
        Utah, seeking to enjoin Wideband Solutions, Inc. from licensing certain
        technology the Company believes constitutes its intellectual property and
        trade
        secrets to Harman Music Group, Inc.  On October 30, 2007, the Chief
        Judge of the United States District Court, the Honorable Tena Campbell, issued
        a
        Memorandum Decision and Order (the “Injunction Order”).  The
        Injunction Order “GRANTS ClearOne’s motion for a Preliminary Injunction,” and
        orders that “Dr. Yang, as well as his agents, servants, officers, employees,
        entities and those acting under his direction and control, are hereby enjoined
        from working on or delivering any computer code – either source code or object
        code – to Harman until the completion of the trial.”  In reaching its
        decision, the Court found that Dr. Yang was subject to a valid and enforceable
        Confidentiality, Non-Competition, and Invention Assignment Agreement (the
        “NDA”), and that ClearOne had demonstrated “a substantial likelihood that
        ClearOne will succeed on its claims that Dr. Yang violated the NDA” and derived
        the code that WideBand was attempting to license to Harman from code belonging
        to ClearOne. The Injunction Order is Docket Entry 572. On Monday, October
        29,
        2007, the Company filed a second action against WideBand and the same three
        principals named as defendants in the Intellectual Property Case, this time
        alleging copyright infringement, vicarious copyright infringement, and
        contributory copyright infringement (the “Copyright Case”). The claims in the
        Copyright Case arise out of a copyright issued to the Company for the same
        computer code that is the subject of the claims in the Intellectual Property
        Case. The relief being sought by the Company includes an order enjoining
        the
        defendants from further use of the Company’s copyrighted material, and an award
        consisting of, among other things, compensation and damages related the
        copyright infringement. The defendants in the Copyright Case have not yet
        filed
        a response. This litigation is subject to all of the risks and uncertainties
        of
        litigation and there can be no assurance as to the probable result of this
        litigation.
 
 *Former
        Officer Indemnification.* In July 2007, the Company was advised that the
        United States Attorney’s Office for the District of Utah indicted two former
        officers of the Company. The Company has been advised that a trial date has
        been
        set for January 22, 2008. The Company is cooperating fully with the U.S.
        Attorney’s office in this matter and has been advised that it is neither a
        target nor a subject of the investigation or indictment. By virtue of certain
        provisions of the Company’s Articles of Incorporation, Bylaws and
        indemnification agreements with these former officers, the Company has a
        direct
        financial obligation to advance funds related to the indemnification agreements
        with each former officer for any liability and for all reasonable attorney’s
        fees and costs incurred in defending against the charges brought by the United
        States Attorney. In accordance with Statement of Financial Accounting Standards
        No. 5, Accounting for Contingencies, ClearOne accrued $1.8 million in its
        fiscal
        2008 first quarter, representing the probable amount that as of the date
        of the
        financial statements could be reasonably estimated of its liability, through
        trial, associated with the advancement of funds related to the indemnification
        agreements. The $1.8 million accrual is management’s best estimate of the
        Company’s liability as of the date of the issuance of its financial statements.
        In accordance with SFAS 5, the Company will adjust its contingent liability,
        as
        necessary, to reflect the probable amount of its liability that can be
        reasonably estimated. The Company’s actual liability may be higher or lower than
        management’s estimate upon final resolution of the matter.
  22
 ***Table
            of Contents***
  **ITEM
                  1A.**
              **RISK
                  FACTORS**
 
 *Investors
        should carefully consider the risks described below. The risks described
        below
        are not the only ones we face and there are risks that we are not presently
        aware of or that we currently believe are immaterial that may also impair
        our
        business operations. Any of these risks could harm our business. The trading
        price of our common stock could decline significantly due to any of these
        risks,
        and investors may lose all or part of their investment. In assessing these
        risks, investors should also refer to the other information contained or
        incorporated by reference in this Quarterly Report on Form 10-Q, including
        our
        September  30, 2007 unaudited condensed consolidated financial
        statements and related notes.*
 
 ***Risks
        Relating to Our Business***
 
 *We
        face intense competition in all markets for our products and services; our
        operating results will be adversely affected if we cannot compete effectively
        against other companies.*
 
 As
        described in more detail in the section entitled “Competition,” in our Annual
        Report on Form 10-K for the year ended June 30, 2007, 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, gross profit, profits, and market share, each of which could
        have
        a materially adverse effect on our business.
 
 *Difficulties
        in estimating customer demand in our products segment could harm our profit
        margins.*
 
 Orders
        from our distributors and other distribution participants are based on demand
        from end-users. Prospective end-user demand is difficult to measure. This
        means
        that our revenues in any fiscal quarter could be adversely impacted by low
        end-user demand, which could in turn negatively affect orders we receive
        from
        distributors and dealers. Our expectations for both short- and long-term
        future
        net revenues are based on our own estimates of future demand.
 
 Revenues
        for any particular time period are difficult to predict with any degree of
        certainty. We usually ship products within a short time after we receive
        an
        order; so consequently, unshipped backlog has not been a good indicator of
        future revenues. We believe that the current level of backlog will fluctuate
        dependent in part on our ability to forecast revenue mix and 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 gross profit
        and
        results of operations will be adversely affected. Higher inventory levels
        or
        stock shortages may also result from difficulties in estimating customer
        demand.
 
 *Our
        sales depend to a certain extent on government funding and
        regulation.*
 
 In
        the
        audio conferencing products market, the revenues generated from sales of
        our
        audio conferencing products for distance learning and courtroom facilities
        are
        dependent on government funding.  In the event government funding for
        such initiatives was reduced or became unavailable, our sales could be
        negatively impacted. Additionally, many of our products are subject to
        governmental regulations. New regulations could significantly impact sales
        in an
        adverse manner.
 
 *Environmental
        laws and regulations subject us to a number of risks and could result in
        significant costs and impact on revenue*
 
 New
        regulations regarding the materials used in manufacturing, the process of
        disposing of electronic equipment, and the efficient use of energy have emerged
        in the last few years. The first implementations of these regulations have
        taken
        place in Europe and have required significant effort from ClearOne to comply.
        Other countries and U.S. states are currently enacting or considering similar
        regulations, which could require additional resources and effort from ClearOne
        to comply.
  23
 ***Table
            of Contents***
  The
        European Parliament has published the RoHS Directive, which restricts the
        use of
        certain hazardous substances in electrical and electronic equipment beginning
        July 1, 2006. In order to comply with this directive, it has become necessary
        to
        re-design the majority of our products and switch over to components that
        do not
        contain the restricted substances, such as lead, mercury, and cadmium. This
        process involves procurement of the new compliant components, engineering
        effort
        to design, develop, test, and validate them, and re-submitting these re-designed
        products for multiple country emissions, safety, and telephone line interface
        compliance testing and approvals. This effort has consumed resources and
        time
        that would otherwise have been spent on new product development, which will
        continue until the products have been updated.
 
 To
        date,
        we have completed the re-design of our products and are shipping these products
        into the European market. Certain of our products will not be re-designed.
        Accordingly, sales into the European market may be negatively impacted and
        our
        results of operations could suffer. Our outsourced manufacturers may hold
        us
        responsible for the cost of purchased components that have become obsolete
        as a
        result of our re-design efforts. To the extent that we cannot manage these
        potential exposures to our current estimates, our results of operations could
        be
        negatively impacted. In addition, because this has essentially become a
        worldwide issue for all electronics manufacturers who wish to sell into the
        European market, we have seen increased lead times for compliant components
        because of the increased demand. This is an issue that is not unique to
        ClearOne, but also applies to many manufacturers exporting products to the
        European Union.
 
 The
        European Parliament has also published the WEEE Directive, which makes producers
        of certain electrical and electronic equipment financially responsible for
        collection, reuse, recycling, treatment, and disposal of equipment placed
        on the
        European Union market after August 13, 2005. We are currently compliant in
        terms
        of the labeling requirements and have finalized the recycling processes with
        the
        appropriate entities within Europe. According to our understanding of the
        directive, distributors of our product are deemed producers and must comply
        with
        this directive by contracting with a recycler for the recovery, recycling,
        and
        reuse of product. We have also completed the re-design of power supplies
        on
        certain products bringing us into compliance with a California law regarding
        efficient use of energy which went into effect in July 2007.
 
 *Product
        development delays or defects could harm our competitive position and reduce
        our
        revenues.*
 
 We
        have,
        in the past, and may again experience, technical difficulties and delays
        with
        the development and introduction of new products. Many of the products we
        develop contain sophisticated and complicated circuitry, software and
        components, and utilize manufacturing techniques involving new technologies.
        Potential difficulties in the development process that could be experienced
        by
        us include difficulty in:
 
 ·
              meeting
                  required specifications and regulatory
                  standards;
 ·
              meeting
                  market expectations for
                  performance;
 ·
              hiring
                  and keeping a sufficient number of skilled
                  developers;
 ·
              obtaining
                  prototype products at anticipated cost
                  levels;
 ·
              having
                  the ability to identify problems or product defects in the development
                  cycle; and
 ·
              achieving
                  necessary manufacturing
                  efficiencies.
 
 Once
        new
        products reach the market, they may have defects, or may be met by unanticipated
        new competitive products, 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 and results of operations could
        be
        negatively 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.
        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.
  24
 ***Table
            of Contents***
 
 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
        some 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.
 
 *Reporting
        of channel inventory by certain distributors.*
 
 We
        defer
        recognition of revenue from product sales to distributors until the return
        privilege has expired, which approximates when product is sold-through to
        customers of our distributors. We evaluate, at each quarter-end, the inventory
        in the channel through information provided by certain of our distributors.
        We
        use this information along with our judgment and estimates to determine the
        amount of inventory in the entire channel, for all customers and for all
        inventory items, and the appropriate revenue and cost of goods sold associated
        with those channel products. We cannot guarantee that the third party data,
        as
        reported, or that our assumptions and judgments regarding total channel
        inventory revenue and cost of goods sold, will be accurate. We periodically
        audit a limited number of distributors.
 
 *We
        depend on an outsourced manufacturing strategy.*
 
 In
        August
        2005, we entered into a manufacturing agreement with a manufacturing services
        provider, to manufacturer substantially all the products that were previously
        manufactured at our Salt Lake City, Utah manufacturing facility. Subsequently,
        we entered into agreements with offshore manufacturers who also manufacture
        several of our product lines. If these manufacturers experience difficulties
        in
        obtaining sufficient supplies of components, component prices significantly
        exceed anticipated costs, an interruption in their operations, or otherwise
        suffer capacity constraints, we would experience a delay in shipping these
        products which would have a negative impact on our revenues. Should there
        be any
        disruption in services due to natural disaster, economic or political
        difficulties, quarantines, transportation restrictions, acts of terror, 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. 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. Currently, we have no second source of manufacturing
        for some of our products.
 
 The
        cost
        of delivered product from our contract manufacturers is a direct function
        of
        their ability to buy components at a competitive price and to realize
        efficiencies and economies of scale within their overall business structure.
        If
        they are unsuccessful in driving efficient cost models, our delivered costs
        could rise, affecting our profitability and ability to compete. In addition,
        if
        the contract manufacturers are unable to achieve greater operational
        efficiencies, delivery schedules for new product development and current
        product
        delivery could be negatively impacted.
 
 *Product
        obsolescence could harm demand for our products and could adversely affect
        our
        revenues and our results of operations.*
 
 Our
        industry is subject to rapid and frequent technological innovations that
        could
        render existing technologies in our products obsolete and thereby decrease
        market demand for such products. If any of our products become slow-moving
        or
        obsolete and the recorded value of our inventory is greater than its market
        value, we will be required to write down the value of our inventory to its
        fair
        market value, which would adversely affect our results of operations. In
        limited
        circumstances, we are required to purchase components that our outsourced
        manufacturers use to produce and assemble our products. Should technological
        innovations render these components obsolete, we will be required to write
        down
        the value of this inventory, which could adversely affect our results of
        operations.
 
 *If
        we
        are unable to protect our intellectual property rights or have insufficient
        proprietary rights, our business would be materially
        impaired.*
  25
 ***Table
            of Contents***
 
 We
        currently rely primarily on a combination of trade secrets, copyrights,
        trademarks, patents, patents pending, 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 that
        any
        patent or registered trademark owned by us will not be invalidated, circumvented
        or challenged, or that the rights granted thereunder will provide competitive
        advantages to us. Litigation may be necessary to enforce our intellectual
        property rights. We believe our products and other proprietary rights do
        not
        infringe upon any proprietary rights of third parties; however, we cannot
        assure
        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 the resulting litigation are expensive and could
        divert
        management’s attention, regardless of their merit. In the event of a claim, we
        might be required to license third-party technology or redesign our products,
        which may not be possible or economically feasible.
 
 We
        currently hold only a limited number of patents. To the extent that we have
        patentable technology for which we have not filed patent applications, others
        may be able to use such technology or even gain priority over us by patenting
        such technology themselves.
 
 *International
        sales account for a significant portion of our net revenue and risks inherent
        in
        international sales could harm our business.*
 
 International
        sales represent a significant portion of our total product sales. We anticipate
        that the portion of our total product 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;
 ·
              unique
                  environmental regulations;
 ·
              fluctuating
                  exchange rates;
 ·
              tariffs
                  and other barriers;
 ·
              difficulties
                  in staffing and managing foreign sales
                  operations;
 ·
              import
                  and export restrictions;
 ·
              greater
                  difficulties in accounts receivable collection and longer payment
                  cycles;
 ·
              potentially
                  adverse tax consequences;
 ·
              potential
                  hostilities and changes in diplomatic and trade relationships;
                  and
 ·
              disruption
                  in services due to natural disaster, economic or political difficulties,
                  quarantines, transportation, or other restrictions associated with
                  infectious diseases.
 
 *We
        may not be able to hire and retain qualified key and highly-skilled technical
        employees, which could affect our ability to compete effectively and may
        cause
        our revenue and profitability to decline.*
 
 We
        depend
        on our ability to hire and retain qualified key and highly-skilled
        employees to manage, research and develop, market, and service new and existing
        products. Competition for such key and highly-skilled employees is intense,
        and
        we may not be successful in attracting or retaining such personnel. 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. In addition, provisions of
        the
        Sarbanes-Oxley Act of 2002 and related rules of the SEC impose heightened
        personal liability on some of our key employees. The threat of such liability
        could make it more difficult to identify, hire and retain qualified key and
        highly-skilled employees. We have relied on our ability to grant stock options
        as a means of recruiting and retaining key employees. Recent accounting
        regulations requiring the expensing of stock options will impair our future
        ability to provide these incentives without incurring associated compensation
        costs. 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, results of operations, financial position, or
        liquidity.
 
 *Our
        reliance on third-party technology or license agreements.*
  26
 ***Table
            of Contents***
 
 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.
 
 *We
        may have difficulty in collecting outstanding receivables.*
 
 We
        grant
        credit without requiring collateral to substantially all of our customers.
        In
        times of economic uncertainty, the risks relating to the granting of such
        credit
        would typically increase.  Although we monitor and mitigate the risks
        associated with our credit policies, we cannot ensure 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 position.
 
 *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 disease
        and
        terrorist attacks. 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 to help compensate us for losses that may occur.
 
 ***Risks
        Relating to Our Company***
 
 *Our
        stock price fluctuates as a result of the conduct of our business and stock
        market fluctuations.*
 
 The
        market price of our common stock has experienced significant fluctuations
        and
        may continue to fluctuate significantly. The market price of our common stock
        may be significantly affected by a variety of factors, including:
 
 ·
              statements
                  or changes in opinions, ratings, or earnings estimates made by
                  brokerage
                  firms or industry analysts relating to the market in which we do
                  business
                  or relating to us specifically;
 ·
              disparity
                  between our reported results and the projections of
                  analysts;
 ·
              the
                  shift in sales mix of products that we currently sell to a sales
                  mix of
                  lower-gross profit product
                  offerings;
 ·
              the
                  level and mix of inventory levels held by our
                  distributors;
 ·
              the
                  announcement of new products or product enhancements by us or our
                  competitors;
 ·
              technological
                  innovations by us or our
                  competitors;
 ·
              success
                  in meeting targeted availability dates for new or redesigned
                  products;
 ·
              the
                  ability to profitably and efficiently manage our supplies of products
                  and
                  key components;
 ·
              the
                  ability to maintain profitable relationships with our
                  customers;
 ·
              the
                  ability to maintain an appropriate cost
                  structure;
 ·
              quarterly
                  variations in our results of
                  operations;
 ·
              general
                  consumer confidence or general market conditions or market conditions
                  specific to technology industries;
 ·
              domestic
                  and international economic
                  conditions;
 ·
              the
                  adoption of the new accounting standard, SFAS No. 123R, “Share-Based
                  Payments,” which requires us to record compensation expense for certain
                  options issued before July 1, 2005 and for all options issued or
                  modified
                  after June 30, 2005;
 ·
              our
                  ability to report financial information in a timely manner;
                  and
 ·
              the
                  markets in which our stock is
                  traded.
 
 *We
        have previously identified material weaknesses in our internal
        controls.*
 
 In
        our
        Form 10-K for the fiscal year ending June 30, 2006, we reported and identified
        a
        material weakness in our internal controls. Although we believe we have remedied
        this weakness through the commitment of considerable resources, we are always
        at
        risk that any future failure of our own internal controls or the internal
        control at any of our outsourced manufacturers or partners could result in
        additional reported material weaknesses. Any future failures of our internal
        controls could have a material impact on our market capitalization, results
        of
        operations, or financial position, or have other adverse
        consequences.
  27
 ***Table
            of Contents***
  **Item
                  2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS**
 
 Items
        2(a) and (b) are not applicable
 (c)
        Stock
        Repurchases
 
 The
        following table details purchases by ClearOne of its own securities during
        1Q
        2008.
 
 **ISSUER
        PURCHASES OF EQUITY SECURITIES**
 **Period**
              **Total
                  Number of Shares Purchased**
              **Average
                  Price Paid per Share**
              **Total
                  Number of Shares Purchased as Part of Publicly Announced Plans
                  or
                  Programs**
              **Maximum
                  Number (or Approximate Dollar Value) of Shares that May by Purchased
                  Under
                  the Plans or Programs (1)**July
                  1, 2007 – July 31, 2007
              0
              N/A
              0
              $721,000August
                  1, 2007 – August 31, 2007
              51,243
              $6.11
              51,243
              $3,312,000September
                  1, 2007 – September 30, 2007
              37,012
              $6.84
              37,012
              $3,059,000Total
              88,255
              
              88,255
 
 (1)
              On
                  August 31, 2006, the Company’s Board of Directors approved a stock
                  buy-back program to purchase up to $2 million of the Company’s common
                  stock over the following 12 months on the open market. All repurchased
                  shares were retired. The stock buy-back program expired in August
                  2007.
 On
        August
        30, 2007, the Company’s Board of Directors approved a stock buy-back program to
        purchase up to $3.6 million of the Company’s common stock over the next 12
        months in open market and private block transactions. All repurchased shares
        will be retired.
 
 **Item
                  3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
 
 Not
        Applicable.
 
 **Item
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
 
 Not
        Applicable
 
 **Item
                  5.**
              **OTHER
                  INFORMATION**
 
 Not
        Applicable.
 
 **Item
                  6.**
              **EXHIBITS**
 
 Exhibit
              SEC
                  Ref.No.
              No.
              Title
                  of Document
              
              Location10.1
              10
              Compromise
                  Agreement between ClearOne Communications UK Limited and Martin
                  James
                  Offwood dated August 13, 2007
              
              This
                  filing10.2
              10
              Warehouse
                  Lease Agreement between Woodenshoe Development and ClearOne
                  Communications, Inc. dated October 5, 2007
              
              This
                  filing10.3
              10
              Warehouse
                  Lease Agreement between Alder Construction Company and ClearOne
                  Communications, Inc. dated September 20, 2006
              
              Incorp. by
                  reference131.1
              31
              Section
                  302 Certification of Chief Executive Officer
              
              This
                  filing31.2
              31
              Section
                  302 Certification of Principal Financial Officer
              
              This
                  filing32.1
              32
              Section
                  906 Certification of Chief Executive Officer
              
              This
                  filing32.2
              32
              Section
                  906 Certification of Principal Financial Officer
              
              This
                  filing
 
 
 1
          Incorporated by
          reference to the Registrant’s Form 10-Q for the period ended September 30,
          2006
  28
 ***Table
            of Contents***
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities and 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.November
                  12, 2007
              By:
              /s/
                  Zeynep HakimogluZeynep
                  HakimogluPresident
                  and Chief Executive Officer*(Principal
                  Executive Officer)*November
                  12, 2007
              By:
              /s/
                  Greg A. LeClaireGreg
                  A. LeClaireVP
                  Finance*(Principal
                  Financial and Accounting
                  Officer)*






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