Business Description, Basis of Presentation and Significant Accounting Policies

Business Description:

ClearOne Communications, Inc. and its subsidiaries (collectively, “ClearOne” or the “Company”) is a global company that designs, develops and sells conferencing, collaboration, streaming and digital signage solutions for audio, video and data multimedia communication. The performance and simplicity of its advanced comprehensive solutions enhance the quality of life. ClearOne products are designed for business and residential use, offering unprecedented levels of functionality, reliability and scalability.

Basis of Presentation:

The fiscal year for ClearOne is the 12 months ending on December 31st. The consolidated financial statements include the accounts of ClearOne and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

These accompanying interim condensed consolidated financial statements for the three and nine months ended September 30, 2012 and 2011 respectively have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are not audited. Certain information and footnote disclosures that are usually included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been either condensed or omitted in accordance with SEC rules and regulations. The accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of September 30, 2012 and December 31, 2011, the results of operations for the three and nine months ended September 30, 2012 and 2011, and the statements of cash flows for the nine months ended September 30, 2012 and 2011. The results of operations for the three and nine months ended September 30, 2012 and 2011 are not necessarily indicative of the results for a full-year period. These interim condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC.

Significant Accounting Policies:

The significant accounting policies were described in Note 2 to the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2011. There have been no significant changes to these policies during the nine months ended September 30, 2012 that are of significance or potential significance to the Company.

Warranty Costs – The Company accrues for warranty costs based on estimated warranty return rates and estimated costs to repair. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty returns, and repair cost. The Company reviews the adequacy of its recorded warranty accrual on a quarterly basis.

The details of changes in the Company’s warranty accrual are as follows:



	September 30, 2012			December 31, 2011
Balance at the beginning of year	$	467		$	363
Accruals/additions	234			439
Usage	(264		)	(335		)
Balance at end of period	$	437		$	467

Earnings Per Share – The following table sets forth the computation of basic and diluted earnings per common share:



	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Numerator:
Net income	$	929	$	3,375	$	1,957	$	5,508
Denominator:
Basic weighted average shares	9,113,713		9,089,919		9,106,455		9,005,221
Dilutive common stock equivalents using treasury stock method	79,861		268,373		112,706		271,398
Diluted weighted average shares	9,193,574		9,358,292		9,219,161		9,276,619

Basic earnings per common share:	$	0.10	$	0.37	$	0.21	$	0.61
Diluted earnings per common share:	$	0.10	$	0.36	$	0.21	$	0.59

Weighted average options outstanding	1,215,747		1,067,717		1,195,599		1,135,514
Anti-dilutive options not included in the computations	799,203		374,611		799,203		374,611