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ClearOne CEO denies charges

She says there was no 'concealment' regarding earnings

Embattled ClearOne Communications Inc. chief executive officer Frances Flood took the stand Tuesday to defend herself against

allegations she orchestrated clandestine deals to inflate ClearOne's revenues and earnings in order to meet the company's earnings projections.

"There were no secret agreements," Flood testified on the second day of the preliminary injunction hearing in Salt Lake City. "We'd have no desire to ever do anything fraudulent."

The Securities and Exchange Commission named Flood and chief financial officer Susie Strohm in a January complaint alleging ClearOne overstated its income, revenues and accounts receivable; misled outside accountants; made illegal deals with distributors; and hid merchandise from spring 2001 through late summer 2002.

Formerly known as Gentner Communications, ClearOne specializes in audio and video teleconferencing products and services.

Flood, on leave from her $250,000-a-year position since January, denied all of the claims and offered explanations for each during lengthy questioning by her attorney, Max Wheeler.

"There wasn't any concealment," she said. "We were actively trying to proactively fix what had gone wrong with our company."

Flood said she noticed a dramatic increase in ClearOne's accounts receivables in April 2002 and immediately took steps to curb the problem. She cited a number of factors that contributed to the increase, including the recent acquisition of an Irish company and inheritance of its $4 million in outstanding accounts and the economic slump after the Sept. 11, 2001, terrorist attacks.

The increase was publicly disclosed, Flood said, and discussed at least twice during ClearOne's routine conference calls with industry analysts.

On Monday, former ClearOne vice president Tim Morrison testified Flood asked the company's distributors to take large amounts of product — up to $1.7 million worth in one case — as "favors" to her. Though written agreements said the products must be paid for in full within 90 days, Morrison said Flood would instead verbally authorize a "pay as you sell" agreement.

The SEC alleges the practice was done at the end of each financial quarter to give the perception that ClearOne was selling much more product than it was and pump up the company's books for that quarter.

But on the stand Tuesday, Flood said there were no such side deals, and customers' credit was extended only when they couldn't pay. She testified she didn't know it was a violation of standard accounting principles to extend a customer's credit past the fixed, legal terms.

Some ClearOne distributors have provided statements that they did indeed have a "pay as you sell" agreement.

The SEC has asked U.S. District Judge Dale A. Kimball to issue an injunction against ClearOne to prevent it from further violations. The commission also has asked Kimball to appoint a special monitor to oversee the company's accounts receivable and merchandise shipments.

Closing arguments were scheduled to begin Wednesday morning. It is expected Kimball will then take the motion under advisement and issue a written ruling in the near future.