Infocus (INFS) 10-Q 2006 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

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 000-18908

INFOCUS CORPORATION

(Exact name of registrant as specified in its charter)

Oregon	93-0932102
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
or organization)
27500 SW Parkway Avenue, Wilsonville, Oregon	97070
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  503-685-8888

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   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 “large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o  Accelerated filer x   Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock without par value	39,797,128
(Class)	(Outstanding at November 1, 2006)

INFOCUS CORPORATION
FORM 10-Q
INDEX

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets - September 30, 2006 and December 31, 2005 (unaudited)
	Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)
	Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2006 and 2005 (unaudited)
	Notes to Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits
Signatures

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INFOCUS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

	September 30,			December 31,
	2006			2005
Assets
Current Assets:
Cash and cash equivalents	$	53,814		$	53,105
Marketable securities	134			1,199
Restricted cash, cash equivalents, and marketable securities	25,770			25,813
Accounts receivable, net of allowances of $7,607 and $8,198	49,689			70,883
Inventories	47,777			58,427
Consigned inventories	3,830			8,027
Land held for sale	—			4,469
Other current assets	17,713			24,094
Total Current Assets	198,727			246,017
Property and equipment, net of accumulated depreciation of $19,055 and $20,414	4,938			2,747
Deferred income taxes	—			193
Other assets, net	767			14,931
Total Assets	$	204,432		$	263,888
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	61,585		$	69,968
Related party accounts payable	1,575			4,706
Payroll and related benefits payable	2,073			2,241
Marketing incentives payable	6,813			6,541
Accrued warranty	11,036			10,986
Other current liabilities	6,964			11,217
Total Current Liabilities	90,046			105,659
Long-Term Liabilities	2,943			3,038
Shareholders’ Equity:
Common stock, 150,000,000 shares authorized; shares issued and outstanding: 39,797,128 and 39,711,578	90,910			90,037
Additional paid-in capital	76,430			76,133
Accumulated other comprehensive income:
Cumulative currency translation adjustment	28,611			24,200
Unrealized gain on equity securities	10			745
Accumulated deficit	(84,518		)	(35,924		)
Total Shareholders’ Equity	111,443			155,191
Total Liabilities and Shareholders’ Equity	$	204,432		$	263,888

The accompanying notes are an integral part of these balance sheets.

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INFOCUS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

	Three months ended Sept. 30,						Nine months ended Sept. 30,
	2006			2005			2006			2005
Revenues	$	81,231		$	130,321		$	290,892		$	403,169
Cost of revenues(1)	70,900			130,858			249,137			385,881
Gross margin (loss)	10,331			(537		)	41,755			17,288
Operating expenses(1):
Marketing and sales	12,116			15,938			39,552			49,763
Research and development	3,826			5,261			13,150			16,279
General and administrative	5,198			6,017			16,901			17,788
Restructuring costs	850			5,950			2,775			12,000
Regulatory assessments	5,086			—			5,086			1,600
Impairment of long-lived assets	—			9,813			—			9,813
	27,076			42,979			77,464			107,243
Loss from operations	(16,745		)	(43,516		)	(35,709		)	(89,955		)
Other income (expense):
Interest expense	(86		)	(129		)	(290		)	(425		)
Interest income	614			661			1,699			1,279
Other, net	(2,915		)	4,928			(13,570		)	17,871
	(2,387		)	5,460			(12,161		)	18,725
Loss before income taxes	(19,132		)	(38,056		)	(47,870		)	(71,230		)
Provision for income taxes	274			274			724			649
Net loss	$	(19,406	)	$	(38,330	)	$	(48,594	)	$	(71,879	)
Basic net loss per share	$	(0.49	)	$	(0.97	)	$	(1.23	)	$	(1.81	)
Diluted net loss per share	$	(0.49	)	$	(0.97	)	$	(1.23	)	$	(1.81	)
Shares used in per share calculations:
Basic	39,659			39,595			39,644			39,605
Diluted	39,659			39,595			39,644			39,605

(1)Cost of revenues and operating expenses for the three and nine months ended September 30, 2006 include SFAS 123(R) stock-based compensation expense.  See Note 5 of Notes to Consolidated Financial Statements for additional information.

The accompanying notes are an integral part of these statements.

3

INFOCUS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Nine months ended September 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(48,594	)	$	(71,879	)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:
Depreciation and amortization	1,924			8,254
Stock-based compensation	1,019			157
Gain on sale of property and equipment	(697		)	(104		)
Gain on sale of marketable securities	(809		)	(17,727		)
Deferred income taxes	241			1,563
Long-lived asset impairment	—			9,813
Non-cash write-down of cost based investments	7,454			—
Non-cash write-down of equity method investments	3,196			—
Non-cash regulatory assessment	5,086			1,600
Non-cash impairment of TUN assets	1,452			—
Other non-cash expense	1,955			675
(Increase) decrease in:
Restricted cash	(9,180		)	(1,842		)
Accounts receivable	22,316			30,044
Inventories	10,802			61,359
Consigned inventories	4,197			1,980
Other current assets	(392		)	(2,602		)
Increase (decrease) in:
Accounts payable	(8,723		)	12,768
Related party accounts payable	(3,634		)	119
Payroll and related benefits payable	(246		)	(2,234		)
Marketing incentives payable, accrued warranty and other current liabilities	(2,852		)	9,000
Other long-term liabilities	(116		)	191
Net cash provided by (used in) operating activities	(15,601		)	41,135
Cash flows from investing activities:
Purchase of marketable securities	—			(11,678		)
Maturities of marketable securities	9,223			15,763
Proceeds from sale of marketable securities	878			18,677
Payments for purchase of property and equipment	(4,196		)	(4,341		)
Proceeds received from sale of property and equipment	5,279			104
Payments for investments in patents and trademarks	—			(1,355		)
Cash paid for investments in joint ventures	—			(10,000		)
Dividend payments received from joint venture	1,000			2,650
Cash paid for acquisitions and cost based technology investments	—			(3,737		)
Other assets, net	616			(71		)
Net cash provided by investing activities	12,800			6,012
Cash flows from financing activities:
Repayments on short term borrowings	—			(16,198		)
Proceeds from sale of common stock	131			66
Net cash provided by (used in) financing activities	131			(16,132		)
Effect of exchange rate on cash	3,379			(1,065		)
Increase in cash and cash equivalents	709			29,950
Cash and cash equivalents:
Beginning of period	53,105			17,032
End of period	$	53,814		$	46,982

The accompanying notes are an integral part of these statements.

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INFOCUS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The consolidated financial information included herein has been prepared by InFocus Corporation without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2005 is derived from our 2005 Annual Report on Form 10-K. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2005 Annual Report on Form 10-K. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Inventories

Inventories are valued at the lower of purchased cost or market, using average purchase costs, which approximate the first-in, first-out (FIFO) method. For finished goods inventory, the average purchase costs include overhead items, such as inbound freight and other logistics costs. Following is a detail of our inventory (in thousands):

	September 30, 2006		December 31, 2005
Lamps and accessories	$	3,117	$	4,606
Service inventories	11,170		19,543
Finished goods	33,490		34,278
Total non-consigned inventories	$	47,777	$	58,427
Consigned finished good inventories	$	3,830	$	8,027
Total inventories	$	51,607	$	66,454

We classify our inventory in four categories: finished goods, lamps and accessories, service inventories and consigned finished goods inventories. Finished goods inventory consists of new projectors in our logistics centers and new projectors in transit from our contract manufacturers where title transfers at shipment. Lamps and accessories consist of replacement lamps and other new accessory products such as screens, remotes and ceiling mounts. These items can be either sold as new or used in service repair activities. Service inventories consist of service parts held for warranty or customer repair activities, remanufactured projectors and projectors in the process of being repaired. Consigned finished goods inventories consist of new projectors held by certain retailers on consignment until sold. Inventories are reported on the consolidated balance sheets net of reserve for obsolete and excess inventories of $11.3 million and $20.9 million, respectively, as of September 30, 2006 and December 31, 2005.

Note 3. Earnings Per Share

Since we were in a loss position for the three and nine-month periods ended September 30, 2006 and 2005, there was no difference between the number of shares used to calculate basic and diluted loss per share for those periods. Potentially dilutive securities that are not included in the diluted per share calculations because they would be antidilutive include the following (in thousands):

	Three and Nine Months Ended September 30,
	2006	2005
Stock Options	4,685	5,450
Restricted Stock	139	134
Total Securities	4,824	5,584

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Note 4.  Comprehensive Loss

Comprehensive loss includes foreign currency translation gains and losses and unrealized gains and losses on marketable equity securities available for sale that are recorded directly to shareholders’ equity. The following table sets forth the calculation of comprehensive loss for the periods indicated (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Net loss	$	(19,406	)	$	(38,330	)	$	(48,594	)	$	(71,879	)
Foreign currency translation gains/(losses)	(713		)	(253		)	4,411			(9,747		)
Net unrealized gain(loss) on equity securities	10			(2,134		)	(187		)	(1,002		)
Unrealized gain realized during the period	—			(4,277		)	(548		)	(17,739		)
Total comprehensive loss	$	(20,109	)	$	(44,994	)	$	(44,918	)	$	(100,367	)

Note 5.  Stock-Based Compensation

Adoption of SFAS No. 123R

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” We elected to use the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation.  Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. Our deferred compensation balance of $535,000 as of December 31, 2005, which was accounted for under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” was reclassified to additional paid in capital upon the adoption of SFAS No. 123R. In addition, the unrecognized expense of awards not yet vested at the date of adoption will be recognized in the periods after the date of adoption using the Black-Scholes valuation method over the remaining requisite service period of each grant.

Prior to January 1, 2006, we accounted for stock options using the intrinsic value method as prescribed by APB 25. We provided disclosures of net loss and net loss per share for these prior periods prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as follows (in thousands, except per share amounts):

	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net loss, as reported	$	(38,330	)	$	(71,879	)
Add - stock-based employee compensation expense included in reported net loss	46			450
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards	(449		)	(5,385		)
Net loss, pro forma	$	(38,733	)	$	(76,814	)
Basic and diluted net loss per share:
As reported	$	(0.97	)	$	(1.81	)
Pro forma	$	(0.98	)	$	(1.94	)

In May 2005, the Compensation Committee of our Board of Directors approved an acceleration of vesting of employee stock options outstanding as of May 3, 2005 with an option price greater than $5.46 per share. Options covering 889,633 shares of our common stock, or approximately 17% of the total outstanding option shares with varying remaining vesting schedules, were subject to this acceleration and became immediately vested and exercisable.

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Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Weighted average grant-date fair value of each option share granted	$	1.37	$	2.12	$	1.76	$	3.15
Total intrinsic value of share options exercised	$	—	$	—	$	26	$	28
Total fair value of shares vested	$	18	$	—	$	161	$	44
Stock-based compensation recognized in results of operations	$	332	$	45	$	1,019	$	450
Cash received from options exercised and shares purchased under all share-based arrangements	$	—	$	—	$	131	$	66

There was no tax benefit related to stock options recognized in our statements of operations, no stock-based compensation capitalized to fixed assets, inventory or other assets, nor tax deductions realized related to stock options exercised in the three and nine-month periods ended September 30, 2006 or 2005.

Our stock-based compensation was included in our statements of operations as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Cost of revenues	$	37	$	1	$	112	$	2
Marketing and sales	118		25		382		75
Research and development	37		—		130		—
General and administrative	140		19		395		80
Restructuring	—		—		—		293
	$	332	$	45	$	1,019	$	450

The $0.3 million of stock-based compensation included in our statement of operations as a component of restructuring for the nine-month period ended September 30, 2005 was related to a non-cash stock-based compensation charge for employees who transferred to our 50-50 joint venture, South Mountain Technologies.

To determine the fair value of stock-based awards granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

Three and Nine Months Ended September 30,	2006		2005
Risk-free interest rate	4.59 – 5.24	%	3.72% - 4.18	%
Expected dividend yield	0.00	%	0.00	%
Expected lives (years)	2.9 – 3.9		3.9
Expected volatility	52.1 – 71.1	%	77.3% - 78.6	%
Discount for post vesting restrictions	0.00	%	0.00	%

The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Our option pricing model utilizes the simplified method accepted under Staff Accounting Bulletin No. 107 to estimate the expected term of the option. The expected volatility for options granted pursuant to our stock incentive plans is calculated based on our historical volatility over the estimated term of the options granted. We have not paid dividends in the past and we do not expect to pay dividends in the future resulting in the dividend rate assumption above.

We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.

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The following indicates what certain operating results would have been without the effects of applying SFAS No. 123R in the three and nine-month periods ended September 30, 2006 (in thousands, except per share amounts):

	Three Months Ended September 30, 2006						Nine Months Ended September 30, 2006
	As Reported			Pro Forma without  effects of applying SFAS No. 123R			As Reported			Pro Forma without effects of applying SFAS No. 123R
Loss before income taxes	$	(19,132	)	$	(18,857	)	$	(47,870	)	$	(47,041	)
Net loss	(19,406		)	(19,131		)	(48,594		)	(47,765		)
Cash flow from operating activities	(12,646		)	(12,646		)	(15,601		)	(15,601		)
Cash flow from financing activities	—			—			131			131
Basic and diluted net loss per share	(0.49		)	(0.48		)	(1.23		)	(1.20		)

1988 Combination Stock Option Plan and 1998 Stock Incentive Plan

Our 1988 Combination Stock Option Plan, as amended (the “1988 Plan”) expired in December 1998. Our 1998 Stock Incentive Plan (the “1998 Plan” together with the 1988 Plan, the “Plans”) was approved by the Shareholders in April 1998. The 1998 Plan provides for the issuance of incentive stock options to our employees and restricted stock and non-statutory stock options to our employees, officers, directors and consultants. Under the Plans, the exercise price of all stock options cannot be less than the fair market value of our common stock at the date of grant. Options granted generally vest over a three or four-year period and expire either five or ten years from the date of grant. Options canceled under the 1988 Plan are not added back to the pool of shares available for grant. At September 30, 2006, 1.5 million options covering shares of our common stock were available for grant and 6.3 million shares of our common stock were reserved for issuance under the Plans. Stock option activity under the Plans for the nine-month period ended September 30, 2006 was as follows (shares in thousands):

	Options Outstanding		Weighted Average Exercise Price
Outstanding at December 31, 2005	4,930		$	11.13
Granted	2,132		3.99
Exercised	(33	)	3.98
Forfeited	(2,522	)	11.44
Outstanding at September 30, 2006	4,507		7.66

In the first quarter of 2006, we issued performance stock options to certain employees under the 1998 Plan. Performance stock options are a form of option award in which the number of options that ultimately vest depends on performance against specified performance targets. The performance period for the options issued in the first quarter of 2006 is January 1, 2006 through December 31, 2006. At the end of the performance period, if the performance targets are met, the options will begin to vest and will continue to vest into the first quarter of 2009. At September 30, 2006, we do not believe that the performance targets will be achieved and therefore have not recorded any stock compensation expense related to the performance stock options in our consolidated statement of operations for the nine-month period ended September 30, 2006.  At September 30, 2006, the total performance stock options outstanding were 388,300, with a weighted average exercise price of $3.95.

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Restricted stock activity under the 1998 Plan for the nine-month period ended September 30, 2006 was as follows (shares in thousands):

	Restricted Stock Outstanding		Weighted Average Grant Date Fair Value
Unvested at December 31, 2005	126		$	5.43
Granted	55		3.95
Vested	(40	)	5.39
Forfeited	(2	)	4.21
Unvested at September 30, 2006	139		5.03

Directors’ Stock Option Plan

Our Directors’ Stock Option Plan, as amended (the “Directors’ Plan”) provided for the issuance of stock options covering a total of 400,000 shares of our common stock to members of our board of directors who were not employees at any time during the preceding year (“Eligible Directors”). The Directors’ Plan expired August 22, 2002 and, therefore, no options will be granted under this plan in the future. All Eligible Director Options vested six months after the date of grant. At September 30, 2006 we had reserved 178,410 shares of common stock for issuance under the Directors’ Plan. Stock option activity under the Directors’ Plan for the nine-month period ended September 30, 2006 was as follows (shares in thousands):

	Options Outstanding		Weighted Average Exercise Price
Outstanding at December 31, 2005	192		$	15.74
Granted	—		—
Exercised	—		—
Forfeited	(14	)	7.81
Outstanding at September 30, 2006	178		16.34

Certain information regarding all options outstanding as of September 30, 2006 was as follows (shares in thousands):

	Options Outstanding		Options Exercisable
Number	4,685		2,812
Weighted average exercise price	$	7.99	$	10.65
Aggregate intrinsic value	$	2	—
Weighted average remaining contractual term	3.79 years		3.45 years

As of September 30, 2006, unrecognized stock-based compensation related to outstanding, but unvested options and restricted stock was $2.9 million, which will be recognized over the weighted average remaining vesting period of 2.3 years.

Note 6. Product Warranties

We evaluate our obligations related to product warranties on a quarterly basis. We offer a standard one-year or two-year warranty depending on product platform and geography. In addition, for certain customers, products, and regions, the standard warranty period offered may cover a 3 or 4 year period. We monitor failure rates on a product category basis through data collected by our manufacturing sites, factory repair centers and authorized service providers. The service organizations also track costs to repair each unit. Costs include labor to repair the projector, replacement parts for defective items and freight costs, as well as other costs incidental to warranty repairs. Any cost recoveries from warranties offered to us by our suppliers covering defective components are also considered, as well as any cost recoveries of defective parts and material, which may be repaired at a factory repair center or through a third party. This data is then used to calculate the accrual based on actual sales for each projector category and remaining warranty periods. For new product introductions, our quality control department

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estimates the initial failure rates based on test and manufacturing data and historical experience for similar platform projectors. If circumstances change, or a dramatic change in the failure rates were to occur, our estimate of the warranty accrual could change significantly. Revenue generated from sales of extended warranty contracts is deferred and amortized to revenue over the term of the extended warranty coverage. Deferred warranty revenue totaled $2.7 million and $2.2 million, respectively, at September 30, 2006 and December 31, 2005 and is included in other current liabilities on our consolidated balance sheets. Our warranty accrual at September 30, 2006 and December 31, 2005 totaled $13.8 million, of which $11.0 million was classified as a component of current liabilities and $2.8 million was classified as other long-term liabilities on our consolidated balances sheets.

The following is a reconciliation of the changes in the warranty liability for the nine months ended September 30, 2006 and 2005 (in thousands).

	Nine Months Ended September 30,
	2006			2005
Warranty accrual, beginning of period	$	13,767		$	13,767
Reductions for warranty payments made	(12,245		)	(13,164		)
Warranties issued	9,898			10,636
Adjustments and changes in estimates	2,397			2,528
Warranty accrual, end of period	$	13,817		$	13,767

Note 7. Letter of Credit and Restricted Cash, Cash Equivalents and Marketable Securities

At September 30, 2006 we had one outstanding letter of credit totaling $20 million, which expires February 2, 2007. This letter of credit collateralizes our obligations to a supplier for the purchase of finished goods inventory. The fair value of this letter of credit approximates its contract value. The letter of credit is collateralized by $24.5 million of cash and marketable securities, and, as such, is reported as restricted on the consolidated balance sheets.  In addition to the $20 million letter of credit, the $24.5 million in restricted cash and marketable securities also secures our foreign currency hedging transactions. The remainder of the restricted cash, totaling $1.3 million, primarily related to building lease deposits and value added tax deposits with foreign jurisdictions.

Note 8. Restructuring

In the three and nine-month periods ended September 30, 2006, we incurred restructuring charges totaling $0.9 million and $2.8 million, respectively, which included the following:

·approximately $1.1 million related to international facility consolidation activities that were completed during the first quarter of 2006;

·approximately $0.9 million in the second quarter 2006 related to severance for former InFocus employees terminated by South Mountain Technologies (“SMT”). To the extent SMT headcount reductions involve former InFocus employees, in most cases, we are contractually responsible for severance costs for their past service with InFocus. We could potentially incur additional restructuring charges in future periods related to SMT as further headcount reductions are made involving former InFocus employees which is estimated not to exceed $0.2 million; and

·approximately $0.9 million in the third quarter of 2006 related to severance costs as we took actions to reduce our cost structure.

We anticipate restructuring charges of approximately $1.0 million in the fourth quarter of 2006, primarily for additional severance costs related to further headcount reductions.

At September 30, 2006, we had $2.8 million of restructuring costs accrued on our consolidated balance sheet classified as other current liabilities. We expect the majority of the remaining severance and related costs to be paid over the next two quarters and the lease loss to be paid over the related lease terms through 2011, net of estimated sub-lease rentals.

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The following table displays a roll-forward of the accruals established for restructuring (in thousands):

	Accrual at December 31, 2005		2006 Charges		2006 Amounts Paid		Accrual at September 30, 2006
Severance and related costs	$	2,313	$	1,668	$	3,382	$	599
Lease loss reserve	2,286		808		1,288		1,806
Other	412		299		292		419
Total	$	5,011	$	2,775	$	4,962	$	2,824

The total restructuring charges in the three and nine-month periods ended September 30, 2006 and 2005 were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Severance and related costs	$	818	$	5,478	$	1,668	$	7,358
Lease loss reserve	—		230		808		3,376
Stock-based compensation	—		—		—		293
Other	32		242		299		973
	$	850	$	5,950	$	2,775	$	12,000

Note 9. Write-Down of Cost Method Investments

Based on changes in financing alternatives and strategic shifts that occurred during the first quarter of 2006, we recorded a charge of $7.5 million against other assets, net related to the write-down of two separate cost-based investments, Reflectivity and VST International, both start-up technology companies.  The write-down is included in our consolidated statements of operations for the nine-month period ended September 30, 2006 as a component of other, net. After analyzing their results of operations and prospects for raising additional capital and our willingness to participate in these activities, we determined our investments were substantially impaired. The write-down of $7.5 million in the first quarter of 2006 effectively reduced the carrying value of these cost based investments to zero at September 30, 2006.

Note 10. Write-Down of South Mountain Technologies

Based on the ongoing losses incurred and the strategic alternatives being explored for SMT in the second quarter of 2006, we recorded a charge of $2.1 million, as a component of other, net, to write off the remaining value of our investment in SMT. In addition, in the third quarter of 2006, we recorded a charge of $1.1 million as a component of other, net related to our estimate of costs to wind-down and exit from SMT’s operations. SMT is currently winding down its operations, including the sale of its assets and the settlement of its liabilities.  The charge recorded in the third quarter of 2006 of $1.1 million is our current best estimate of what our portion of the liabilities will be as we go through the wind-down process.

Note 11. Write-Down of The University Network Assets

During the third quarter of 2006, we incurred an impairment charge of $1.4 million related to the write-down of assets associated with The University Network (“TUN”).  We are in final negotiations with a third party for the sale of the assets associated with TUN and expect the sale to be complete in the fourth quarter of 2006.  The write down recorded was to restate the assets on our consolidated balance sheet to the estimated proceeds from the sale of the assets.  The charge of $1.4 million consisted of $1.1 million recorded to other, net for writing down the original purchase cost allocated to intangible assets related to TUN and $0.3 million as a component of cost of revenues for the write down of the fixed assets deployed by TUN to their fair market value.

Note 12. Land Sale

On June 5, 2006, we sold two plots of undeveloped land adjacent to our headquarters building in Wilsonville, Oregon receiving net proceeds of $5.1 million and recognizing a gain on the sale of $0.6 million in our consolidated statements of operations for the nine-month period ended September 30, 2006 as a component of other, net.

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Note 13. Other Income (Expense)

Other income (expense) included the following (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Realized gain on equity securities	$	—		$	4,277		$	542		$	17,726
Income related to the profits of Motif, 50-50 joint venture	175			1,650			1,100			2,866
Expense related to losses of SMT, 50-50 joint venture	—			(1,567		)	(2,709		)	(3,364		)
Write-down of equity method investment in SMT, 50-50 joint venture	—			—			(2,106		)	—
Charge for estimated costs to wind-down SMT	(1,091		)	—			(1,091		)	—
Impairment charge related to TUN	(1,117		)	—			(1,117		)	—
Gains/(losses) related to foreign currency transactions	(868		)	655			(1,372		)	581
Write-down of cost-based investments in technology companies	—			—			(7,474		)	—
Gain on sale of land	—			—			636			—
Other	(14		)	(87		)	21			62
	$	(2,915	)	$	4,928		$	(13,570	)	$	17,871

Note 14. 2005 10-K Filing and Audit Committee Investigations

On March 9, 2006 we announced a delay in filing our fiscal 2005 Annual Report on Form 10-K to allow for the completion of internal investigations initiated by our audit committee and completion of related audit procedures by our registered independent auditors.

In July 2005, we self disclosed possible infractions of U.S. export law to the Office of Foreign Assets Control (“OFAC”) related to shipments into restricted countries by one of our foreign subsidiaries. Our Audit Committee commenced an investigation and engaged independent counsel to assist with this process. The results of the independent investigation were submitted to OFAC and the Bureau of Industry and Security (“BIS”) in March 2006 for their review. Upon completion of the investigation, it was apparent that the severity of the situation was significantly less than initially thought.  In June 2006, we received a letter from OFAC indicating that it closed its investigation by issuing a cautionary letter in lieu of any further enforcement action.  In August 2006, we received a letter from BIS indicating that it closed its investigation by issuing a cautionary letter in lieu of any further enforcement action. We originally accrued an estimated charge of $1.6 million for potential regulatory assessments during the second quarter of 2005 and, in the third quarter of 2006, we reversed the remaining $1.3 million accrual as an offset to regulatory assessments.

In February 2006, as part of the document review related to the OFAC investigation described above, written communications were reviewed that raised potential concerns regarding the effectiveness of our financial controls and policies regarding revenue recognition. After consultation with our independent auditors, our Audit Committee commenced an investigation and engaged independent counsel and accounting experts to assist with the investigation into this matter. In June 2006, after an extensive document review and interviewing relevant current and former employees, independent counsel issued a report to the Audit Committee concluding that we employ sound and appropriate revenue recognition practices and procedures. The investigation did not identify any situation that would require restatement of financial statements for any prior periods nor any material weaknesses in internal controls. After reviewing the report, our Audit Committee adopted these findings and closed the investigation.

In January 2006, we received an unsubstantiated anonymous communication alleging that certain persons employed by our Chinese subsidiary had engaged in improper business practices. Again, after consultation with our independent auditors, our Audit Committee commenced an investigation and engaged independent counsel to assist in an investigation into this matter. In June 2006, after an extensive document review and interviewing relevant current and former employees, independent counsel

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issued a report to the Audit Committee concluding that there was no basis for these allegations. The investigation did not identify any situation that would require restatement of financial statements of any prior periods nor any material weaknesses in internal controls. After reviewing the report, our Audit Committee adopted these findings and closed the investigation.

On March 20, 2006, we received a Staff Determination notice from the Nasdaq Stock Market stating that we were not in compliance with Nasdaq’s Marketplace Rule 4310(c)(14) because we had not yet filed our annual report on Form 10-K for the fiscal year ended December 31, 2005. In April 2006, we participated in an oral hearing with a Nasdaq listing qualifications panel in which we presented our plan for filing both the 2005 Form 10-K and our Form 10-Q for the quarterly period ended March 31, 2006. On April 26, 2006, we received notice that the panel determined to continue the listing of our shares on the Nasdaq National Market, subject to certain conditions, including the filing of the Form 10-K on or before July 7, 2006 and the filing of the Form 10-Q on or before July 17, 2006. We filed both of these documents on June 26, 2006. On July 3, 2006, we were notified by the Nasdaq listing qualifications panel that we had made the requisite filings and evidenced compliance with all Nasdaq Marketplace Rules, and that our shares would therefore continue to be listed on The Nasdaq National Market.

In addition, we negotiated an extension to July 7, 2006 for providing Wells Fargo Foothill with audited financial statements for fiscal year 2005. The extension allowed us to maintain compliance with our line of credit agreement. We provided Wells Fargo Foothill with our audited financial statements for 2005 by the July 7, 2006 deadline.

Note 15. New Accounting Pronouncements

SFAS No. 158

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires employers to recognize on their balance sheets the funded status of pension and other postretirement benefit plans, effective December 31, 2006 for calendar year-end companies. In addition SFAS No. 158 requires fiscal year-end measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible, effective for fiscal years ending after December 15, 2008. We do not have any defined benefit pension or other postretirement plans and, accordingly, the adoption of the provisions of SFAS No. 158 will not have any effect on our financial position or results of operations.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  While we are still analyzing the effects of applying SFAS No. 157, we believe that the adoption of SFAS No. 157 will not have a material effect on our financial position or results of operations.

Staff Accounting Bulletin No. 108

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires companies to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. We are not currently aware of any misstatements and, accordingly, we believe that the implementation of SAB No. 108 will not have a material effect on our financial position or results of operations.

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FASB Interpretation No. 48

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” Interpretation No. 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. Upon adoption, we will adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to our beginning retained earnings (deficit) balance in the period of adoption and reported as a change in accounting principle. Based on the current facts and circumstances we do not believe that the adoption of FASB Interpretation No. 48 will have a material impact on our results of operations, financial condition or cash flows.

SFAS No. 156

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” with respect to accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for fiscal years that begin after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. We do not have any servicing assets or servicing liabilities and, accordingly, the adoption of SFAS No. 156 will not have any effect on our results of operations, financial condition or cash flows.

SFAS No. 155

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No 133 and 140.” SFAS No. 155 resolves implementation issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 is effective for fiscal years that begin after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. We do not have any beneficial interests in securitized financial assets and, accordingly, the adoption of SFAS No. 155 will not have any effect on our results of operations, financial condition or cash flows.

SFAS No. 154

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which requires companies to apply most voluntary accounting changes retrospectively to prior financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 on January 1, 2006 and, accordingly, any future voluntary accounting changes made by us will be accounted for under SFAS No. 154 and will be applied retrospectively.

Note 16. China Customs Investigation

During the second quarter of 2003, our Chinese subsidiary became the subject of an investigation by Chinese authorities. In mid-May 2003, Chinese officials took actions that effectively shut down our Chinese subsidiary’s importation and sales operations. The Chinese authorities questioned the classification of our products upon importation into China. When we established operations in China in late 2000, our Chinese subsidiary imported data projectors. The distinction between a data projector and a video projector is important because the duty rates on a video projector are much higher than on a data projector. If the video projector duty rate were to be applied to all the projectors imported by our Chinese subsidiary, the potential additional duty that could be assessed against our Chinese subsidiary is approximately $12 million.

We continue to work closely with the Chinese customs officials to resolve this matter.  During the second quarter of 2004, we received formal notification that our case is considered “Administrative” in nature, which indicates that the Chinese authorities have ruled out any potential of willful intent to underpay duties by our Chinese subsidiary. In addition, during the second quarter of 2004, we were allowed to begin selling previously impounded inventory and transferring agreed upon amounts per unit directly into a Shanghai

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Customs controlled bank account representing an additional deposit pending final resolution of the case. As of September 30, 2006, all inventory previously impounded has been released by Shanghai Customs.

In the third quarter of 2006, we were actively involved with settlement negotiations with Shanghai customs and made a settlement offer for back duties and penalties for certain products imported into China prior to the start of the investigation in 2003. The settlement offer amounted to approximately $6.4 million, which was recorded as regulatory assessments on our consolidated statement of operations. We continue to have deposits with Shanghai Customs for the release of inventory totaling $14.6 million as of September 30, 2006. This deposit, net of the $6.4 million settlement offer, which totaled approximately $8.2 million at September 30, 2006, is recorded in other current assets on our consolidated balance sheet.

The release of any or all of the cash deposit is dependent on final case resolution and Shanghai Customs controls the process and timing for finalizing their Administrative review. At this time, we are not able to estimate when this case will ultimately be resolved or whether Shanghai customs will accept our settlement offer.

Note 17. Noncompliance with Debt Covenants

At September 30, 2006, we were out of compliance with a financial covenant in our revolving line of credit facility agreement (the “Agreement”) with Wells Fargo Foothill, Inc. (“Wells Fargo”) as a result of the loss recorded for the quarter ended September 30, 2006. The Agreement requires us to achieve a minimum level of earnings before interest, taxes, depreciation and amortization as defined in the Agreement, which we failed to achieve for the third quarter of 2006. We did not have any amounts outstanding under the Agreement as of September 30, 2006. See Note 18 for a discussion of amendments to the Agreement and the waiver of non-compliance received in October 2006.

Note 18. Subsequent Events

Strategic Alternatives

In October 2006, we announced that our Board of Directors is conducting an ongoing evaluation of strategic alternatives for the company and that Banc of America Securities is engaged as our financial advisor to assist the Board in its evaluation.

Line of Credit Amendment

As discussed above, as of September 30, 2006, we were out of compliance with a financial covenant contained in our revolving line of credit facility with Wells Fargo. In October 2006, we entered into an agreement with Wells Fargo to amend the Agreement by extending the maturity date to March 31, 2007 and also received a waiver for non-compliance with the financial covenant.  Also, future financial covenants were modified to levels we expect to be able to achieve in future periods. In addition, the amendment reduced the maximum amount that can be advanced under the line from $25 million to $15 million.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Factors Affecting Our Business and Prospects

Some of the statements in this quarterly report on Form 10-Q are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, or the PSLRA. Forward-looking statements in this Form 10-Q are being made pursuant to the PSLRA and with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words like “intend,” “plan,” “believe,” “anticipate,” “project,” “may,” “will,” “could,” “continue,” “expect” and variations of these words or comparable words or phrases of similar meaning. They may relate to, among other things:

·our ability to operate profitably;

·our ability to successfully introduce new products;

·the wind-down of South Mountain Technologies (“SMT”), our 50-50 joint venture with TCL Corporation;

·the supply of components, subassemblies, and projectors manufactured for us;

·our financial risks;

·fluctuations in our revenues and results of operations;

·estimated impact of regulatory actions by authorities in the markets we serve including our China customs case;

·anticipated outcome of legal disputes;

·uncertainties associated with the activities of our contract manufacturing partners;

·the evaluation of strategic alternatives being conducted by our Board of Directors;

·expectations regarding results and charges associated with restructuring our business and other changes to reduce or simplify the cost structure of the business;

·our ability to grow the business; and

·our various expenses and expenditures, including marketing and sales expenses, research and development expenses, general and administrative expenses and expenditures for property and equipment.

These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors outside of our control, which may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements. The forward-looking statements contained in this quarterly report speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this filing. See Item 1A. Risk Factors for further discussion of factors that could cause actual results to differ from these forward-looking statements.

Company Profile

InFocus Corporation is a worldwide leader in digital projection technology and services. Our products include projectors and related accessories and solutions for business, education, government and home users.

Overview

Gross margins decreased to 12.7% on revenues of $81.2 million for the third quarter of 2006 compared to gross margins of 15.0% on revenues of $97.6 million for the second quarter of 2006.   Revenues in the third quarter of 2006 in both the Americas and Europe were negatively impacted by lower sales of our meeting room projectors through the PC distribution channel.  We transitioned our meeting room product portfolio during the third quarter of 2006 and were only able to ship our new 2000 lumen IN32 and 2500 lumen IN34 projectors in mid-September, leaving little time for sales of these products in the third quarter.  As a result of the timing of the shipment of our new meeting room products and declines in the sales of other products, we experienced a decline in the number of projector units sold in the third quarter of 2006

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to 74,000 units, down from 84,000 units in the second quarter of 2006.  In addition to the decline in projector unit sales, we experienced average sales price declines of 5% across our product portfolio in the third quarter of 2006 compared to the second quarter of 2006.  In addition to the decline in sales, our gross margins were negatively impacted by a $1.6 million charge to cost of revenues related to the write-down to estimated net realizable value of our remaining inventory and future purchase commitments for the IN72, our entry level consumer product.  The write-down to net realizable value on the IN72 was necessary due to continued sales below expectations through the mass consumer electronics retail channel.

Operating expenses in the third quarter of 2006, excluding restructuring charges of $0.9 million and regulatory assessments of $5.1 million, were $21.1 million, down $2.4 million compared to the second quarter of 2006. The reduction of $2.4 million in operating expenses during the third quarter of 2006 reflects our continued focus on restructuring efforts and other cost cutting initiatives.  In addition, we incurred $1.1 million of costs associated with audit committee investigations that came to a close in the second quarter of 2006 and we did not have any material expenses associated with these investigations during the third quarter of 2006.

Other expense in the third quarter of 2006 was $2.9 million and included a charge of $1.1 million related to our current best estimate of wind-down costs for SMT and a $1.1 million impairment charge related to The University Network (“TUN”) assets.  SMT is currently focusing on a planned wind-down of its business including a sale of assets and settlement of liabilities and the $1.1 million charge recorded in the third quarter of 2006 is our current best estimate of additional costs to be incurred by us as SMT goes through the wind-down process.  The impairment charge related to the assets of TUN was based on the difference between the carrying cost of these assets on our consolidated balance sheet and the estimated net proceeds from an expected sale of these assets to a third party.  We are currently in negotiations with a third party for the sale of the assets associated with TUN and expect the sale to be complete during the fourth quarter of 2006.

We finished the third quarter of 2006 with $79.7 million in cash, restricted cash, and marketable securities and had no outstanding borrowings. The decrease in cash of $12.7 million for the third quarter of 2006, including $25.8 million of restricted cash and marketable securities, was mainly attributable to our net loss for the quarter as cash inflows from reduced accounts receivable approximately offset the increase in inventory and reduction in accounts payable during the quarter.

In October 2006, we announced that our Board of Directors is conducting an ongoing evaluation of strategic alternatives and that Banc of America Securities is engaged as our financial advisor to assist the Board in its evaluation.  There has been no specific timeline established for completion of the evaluation and there can be no assurances that the evaluation process will result in any specific outcome.  As a result of this announcement, we implemented a retention bonus program for all employees other than the Chief Executive Officer.  The retention bonus program will pay a bonus to employees who remain with the Company through April 30, 2007.  The total cost of the retention bonus program is estimated to be $1.7 million.  All employees, other than officers of the Company, are eligible for the basic retention bonus program provided they were employed as of October 31, 2006.  The bonus amounts under the basic retention bonus program will be paid in two installments, with the first installment of 20% paid to all eligible  employees who remain with the Company through January 31, 2007 and the second installment of 80% to be paid to all eligible employees who remain with the Company through April 30, 2007.  There is a separate retention program for the officers of the Company, other than the Chief Executive Officer, which provides for each of the officers to receive 8% of their annual salary if the Company achieves its adjusted operating income goals in the fourth quarter of 2006 and an additional 8% of their annual salary if the Company achieves its adjusted operating income goals in the first quarter of 2007.  In order for the eligible officers of the Company to receive any retention bonus amounts, the officer must be employed by the Company on April 30, 2007.

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Results of Operations

	Three Months Ended September 30,(1)
	2006					2005
(Dollars in thousands)	Dollars			% of revenues		Dollars			% of revenues
Revenues	$	81,231		100.0	%	$	130,321		100.0	%
Cost of revenues	70,900			87.3		130,858			100.4
Gross margin (loss)	10,331			12.7		(537		)	(0.4	)
Operating expenses:
Marketing and sales	12,116			14.9		15,938			12.2
Research and development	3,826			4.7		5,261			4.0
General and administrative	5,198			6.4		6,017			4.6
Restructuring costs	850			1.0		5,950			4.6
Regulatory assessments	5,086			6.3		—			—
Impairment of long-lived assets	—			—		9,813			7.5
	27,076			33.3		42,979			33.0
Loss from operations	(16,745		)	(20.6	)	(43,516		)	(33.4	)
Other income (expense):
Interest expense	(86		)	(0.1	)	(129		)	(0.1	)
Interest income	614			0.8		661			0.5
Other, net	(2,915		)	(3.6	)	4,928			3.8
Loss before income taxes	(19,132		)	(23.5	)	(38,056		)	(29.2	)
Provision for income taxes	274			0.3		274			0.2
Net income (loss)	$	(19,406	)	(23.8	)%	$	(38,330	)	(29.4	)%

	Nine Months Ended September 30,(1)
	2006					2005
(Dollars in thousands)	Dollars			% of revenues		Dollars			% of revenues
Revenues	$	290,892		100.0	%	$	403,169		100.0	%
Cost of revenues	249,137			85.6		385,881			95.7
Gross margin	41,755			14.4		17,288			4.3
Operating expenses:
Marketing and sales	39,552			13.6		49,763			12.3
Research and development	13,150			4.5		16,279			4.0
General and administrative	16,901			5.8		17,788			4.4
Regulatory assessments	5,086			1.7		1,600			0.4
Restructuring costs	2,775			1.0		12,000			3.0
Impairment of long-lived assets	—			—		9,813			2.4
	77,464			26.7		107,243			26.6
Loss from operations	(35,709		)	(12.3	)	(89,955		)	(22.3	)
Other income (expense):
Interest expense	(290		)	(0.1	)	(425		)	(0.1	)
Interest income	1,699			0.6		1,279			0.3
Other, net	(13,570		)	(4.7	)	17,871			4.4
Loss before income taxes	(47,870		)	(16.5	)	(71,230		)	(17.7	)
Provision for income taxes	724			0.2		649			0.2
Net loss	$	(48,594	)	(16.7	)%	$	(71,879	)	(17.8	)%

(1) Percentages may not add due to rounding.

Revenues

Revenues decreased $49.1 million, or 38%, and $112.3 million, or 28%, respectively, in the three and nine-month periods ended September 30, 2006 compared to the same periods of 2005.

The decreases in revenue in the 2006 periods compared to the 2005 periods were due to the following:

·a $3.5 million and $10.7 million decrease, respectively, in engine and display revenues in the three and nine-month periods ended September 30, 2006 compared to the same periods of 2005 as we completely exited those markets in late 2005 ;

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·a 67% and 60% decrease, respectively, in OEM sales in the 2006 periods compared to the 2005 periods as we continued to deemphasize our OEM business;

·a 26,000 unit and 49,000 unit decrease, respectively, in total projector units sold to 74,000 units and 252,000 units in the three and nine-month periods ended September 30, 2006 compared to 99,000 units and 301,000 units in the comparable periods of 2005; and

·a 19% and 15% decrease, respectively, in the 2006 periods compared to the 2005 periods in average projector selling prices (“ASPs”), due to both lower overall pricing and a shift in product mix.

Geographic Revenues

Revenue by geographic area and as a percentage of total revenue was as follows (dollars in thousands):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2006				2005				2006				2005
United States	$	57,291	70.5	%	$	90,273	69.3	%	$	188,501	64.8	%	$	254,227	63.0	%
Europe	13,328		16.4	%	25,271		19.4	%	59,018		20.3	%	96,297		23.9	%
Asia	6,796		8.4	%	10,275		7.9	%	22,019		7.6	%	34,095		8.5	%
Other	3,816		4.7	%	4,502		3.4	%	21,354		7.3	%	18,550		4.6	%
	$	81,231			$	130,321			$	290,892			$	403,169

United States revenues in the three and nine-month periods ended September 30, 2006 were down 37% and 26%, respectively, compared to the same periods of 2005. These decreases were primarily due to the lack of engine and display revenues in the 2006 periods, as well as the decreases in units and ASPs, as discussed above.

European revenues in the three and nine-month periods ended September 30, 2006 were down 47% and 39%, respectively, compared to the same periods of 2005.  In addition to decreases in units sold and ASP’s, European revenues for the third quarter of 2006 were significantly impacted by the product transition in our main stream meeting room products as our old products in this category did not meet new regulatory requirements which went into effect on July 1, 2006.  Our entire product line is now in compliance with these new regulations.

Asian revenues in the three and nine-month periods ended September 30, 2006 were down 34% and 35%, respectively, compared to the same periods of 2005. These decreases were primarily due to decreases in units, partially due to the lack of availability of China manufactured versions of our new products earlier in 2006, and decreases in ASPs.

Backlog

At September 30, 2006, we had backlog of approximately $12.3 million, compared to approximately $17.6 million at December 31, 2005. Given current supply and demand estimates, it is anticipated that a majority of the current backlog will turn over by the end of the fourth quarter of 2006. The stated backlog is not necessarily indicative of sales for any future period, nor is a backlog any assurance that we will realize a profit from filling the orders.

Gross Margin

We achieved gross margins of 12.7% and 14.4%, respectively, in the three and nine-month periods ended September 30, 2006, compared to a negative 0.4% and a positive 4.3%, respectively, in the same periods of 2005.

The improvements in gross margins were due to the following:

·efficiencies achieved within our supply chain, including the reduction of inventory in order to better match the timing of product costs with revenues;

·introduction of new products with improved gross margins;

·a $4.3 million and a $7.3 million charge, respectively, for inventory write-downs during the three and nine-month periods ended September 30, 2006 compared to charges of $16.4 million and $24.8 million, respectively, in the comparable periods of 2005; and

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·reductions in our overall cost to serve customers, including reductions in customer program costs.

Marketing and Sales Expense

Marketing and sales expense decreased $3.8 million, or 24%, to $12.1 million in the three-month period ended September 30, 2006 compared to $15.9 million in the same period of 2005, and decreased $10.2 million, or 21%, to $39.6 million in the nine-month period ended September 30, 2006 compared to $49.8 million in the same period of 2005.

The decreases in marketing and sales expense were primarily due to efficiencies gained related to our previous restructuring activities, as well as decreases in certain marketing programs, such as cooperative advertising, which directly correlate with trends in revenue. These decreases were partially offset by advertising expenses incurred in the first three quarters of 2006 related to the launch of several new products and our new branding campaign. In addition, the 2006 periods included $118,000 and $382,000, respectively, of stock-based compensation, compared to $25,000 and $75,000, respectively, in the comparable periods of 2005.

Ongoing cost reduction initiatives contributed to the reductions in overall marketing and sales expense in the three and nine-month periods ended September 30, 2006 compared to the same periods of 2005. One of the major components of our ongoing cost reduction initiatives is to reduce our cost to serve customers. Accordingly, we have implemented, or are implementing, the following actions:

·focusing our sales and marketing activities on selected geographies in our international regions, enabling us to reduce our sales and marketing investment in these regions while improving focus in an attempt to grow our largest and most profitable revenue streams. In Europe, our focus will be the European Union, with priority given to larger markets such as the United Kingdom, Germany and the Nordics. In Asia, our focus will be larger markets such as Singapore, Australia, India and China; and

·in the Americas, we are concentrating our sales and marketing efforts on our most profitable channels and maximizing efficiencies in the highest growth channels.

Research and Development Expense

Research and development expense decreased $1.4 million, or 27%, to $3.8 million in the three-month period ended September 30, 2006 compared to $5.3 million in the same period of 2005 and decreased $3.1 million, or 19%, to $13.2 million in the nine-month period ended September 30, 2006 compared to $16.3 million in the same period of 2005.

The reductions in research and development expense were primarily due to efficiencies gained through our previous restructuring activities, as well as a decrease in labor related costs resulting from a reduction in headcount related to our wireless initiatives that took place late in the second quarter of 2006. Partially offsetting these reductions in the 2006 periods was $37,000 and $130,000, respectively, of stock-based compensation, compared to no stock-based compensation in the comparable periods of 2005.

General and Administrative Expense

General and administrative expense decreased $0.8 million, or 14%, to $5.2 million in the three-month period ended September 30, 2006 compared to $6.0 million in the same period of 2005 and decreased $0.9 million, or 5%, to $16.9 million in the nine-month period ended September 30, 2006 compared to $17.8 million in the same period of 2005.

General and administrative expense in the nine-month period ended September 30, 2006 included approximately $1.8 million of costs related to our audit committee investigations. The audit committee investigations were completed in the second quarter of 2006 and therefore no significant costs were incurred in the third quarter of 2006 associated with these investigations. In addition, the 2006 periods included $140,000 and $395,000, respectively, of stock-based compensation, compared to $19,000 and $80,000, respectively, in the comparable periods of 2005. These increases were offset by efficiencies gained related to our previous restructuring activities.

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Regulatory Assessments

Regulatory assessments of $5.1 million in the three and nine-month periods ended September 30, 2006 included a $6.4 million charge for a settlement offer we made to Shanghai Customs to resolve our outstanding case, offset by the $1.3 million reversal of our remaining accrual related to our closed Office of Foreign Assets Control case. See also Notes 14 and 16 of Notes to Consolidated Financial Statements.

Restructuring

In the three and nine-month periods ended September 30, 2006, we incurred restructuring charges totaling $0.9 million and $2.8 million, respectively.  Of the $2.8 million, approximately $1.1 million related to international facility consolidation activities that were completed during the first quarter of 2006.  Both the second quarter charge of $0.9 million and the third quarter charge of $0.9 million are for estimated severance costs related to headcount reductions.  The second quarter 2006 charge primarily related to severance for former InFocus employees terminated by SMT during the second quarter of 2006.  In most cases, we are contractually responsible for severance costs for their past service with InFocus.  We could potentially incur additional restructuring charges in future periods related to SMT as further headcount reductions are made involving former InFocus employees, which is estimated not to exceed $0.2 million.  The third quarter 2006 charge is for severance costs related to the decision to outsource our U.S. call center to a third party as well as other headcount reductions initiated during the third quarter.

In the three and nine-month periods ended September 30, 2005, we incurred restructuring charges totaling $6.0 million and $12.0 million, respectively.  The $6.0 million charge in the third quarter of 2005 was primarily related to reductions in headcount that took place as part of a comprehensive restructuring plan that was announced in September of 2005. A $1.4 million charge in the second quarter of 2005 was primarily associated with severance charges for changes in supply chain management and realignment of our European sales force. The remainder of the 2005 charges primarily related to our December 2004 plan of restructuring associated with streamlining our operations in Fredrikstad, Norway, and consisted primarily of costs to vacate space under long-term lease arrangements, additional severance charges in the U.S. and Europe and non-cash stock-based compensation expense related to former employees who transitioned to SMT.

At September 30, 2006, we had a remaining accrual for our restructuring activities of $2.8 million.  See further detail in Note 8 of Notes to Consolidated Financial Statements.

Impairment of Long-Lived Assets

Long-lived assets held and used by us and intangible assets with determinable lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Such reviews assess the fair value of the assets based upon estimates of future cash flows that the assets are expected to generate.

During the third quarter of 2005, we performed an expected present value analysis with multiple cash flow scenarios, weighted by estimated probabilities, using a risk-free interest rate to estimate fair value. This analysis indicated that the book value of our long-lived assets exceeded the undiscounted cash flows expected to result from the use and eventual disposition of the assets. Based on our analyses, we determined that all of our long-lived assets, other than tooling equipment related to current products, were fully impaired. Accordingly, we recorded a non-cash impairment charge totaling $9.8 million in the third quarter of 2005 in order to write-off the remaining book value of our long-lived assets other than tooling equipment used in the production of current products. Of the $9.8 million charge, $7.1 million was allocated to property and equipment and $2.7 million was allocated to other intangible assets, including the carrying value of patents and trademarks.  The majority of the impaired long-lived assets are continuing to be used in operations.

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Other Income (Expense)

Interest income in the three and nine-month periods ended September 30, 2006 was $0.6 million and $1.7 million, respectively, compared to $0.7 million and $1.3 million, respectively, in the same periods of 2005. The increase in the nine-month period was due to increased interest rates during the 2006 period compared to the 2005 period. For the three-month period, the increased interest rates were offset by a reduction in cash balances available for investment due to the use of cash in operations.

Other income (expense) included the following (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Realized gain on equity securities	$	—		$	4,277		$	542		$	17,726
Income related to the profits of Motif, 50-50 joint venture	175			1,650			1,100			2,866
Expense related to losses of SMT, 50-50 joint venture	—			(1,567		)	(2,709		)	(3,364		)
Write-down of equity method investment in SMT, 50-50 joint venture	—			—			(2,106		)	—
Charge for estimated costs to wind-down SMT	(1,091		)	—			(1,091		)	—
Impairment charge related to TUN assets	(1,117		)	—			(1,117		)	—
Gains/(losses) related to foreign currency transactions	(868		)	655			(1,372		)	581
Write-down of cost-based investments in technology companies	—			—			(7,474		)	—
Gain on sale of land	—			—			636			—
Other	(14		)	(87		)	21			62
	$	(2,915	)	$	4,928		$	(13,570	)	$	17,871

See Notes 9, 10 and 11 of Notes to Consolidated Financial Statements for further discussion on the write-downs of our cost-based and equity method investments in the 2006 periods.

Income Taxes

Income tax expense in the 2006 and 2005 periods primarily represented income tax expense in certain foreign tax jurisdictions.

Liquidity and Capital Resources

Total cash, cash equivalents, marketable securities and restricted cash, cash equivalents and marketable securities were $79.7 million at September 30, 2006. At September 30, 2006, we had working capital of $108.7 million, which included $53.8 million of unrestricted cash and cash equivalents and $8.2 million of assets held as a deposit by Chinese officials pending resolution of the ongoing customs investigation in China. The current ratio at September 30, 2006 and December 31, 2005 was 2.2 to 1 and 2.3 to 1, respectively.

We sustained an operating loss of $35.7 million in the first nine months of 2006, contributing to a decrease in net working capital of $31.7 million for the period. If we continue to experience significant operating losses and reductions in net working capital, we may need to obtain additional debt or equity financing to continue current business operations. There is no guarantee that we will be able to raise additional funds on favorable terms, if at all.

We currently have a $15 million line of credit facility with Wells Fargo Foothill, Inc. (“Wells Fargo”) to finance future working capital requirements.  Pursuant to the terms of the credit agreement, we may borrow against the line subject to a borrowing base determined on eligible accounts receivable.

As of September 30, 2006, we were out of compliance with a financial covenant contained in our revolving line of credit facility with Wells Fargo as a result of the loss recorded for the third quarter of 2006.  The line of credit facility requires us to achieve a minimum level of earnings before interest, taxes, depreciation and

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amortization as defined in the agreement.  In October 2006, we entered into an agreement with Wells Fargo to amend our line of credit by extending the maturity date to March 31, 2007 and also received a waiver for non-compliance with the financial covenants.  As a result, future financial covenants were modified to levels we expect to be able to achieve in future periods.  In addition, the amendment reduced the maximum amount that can be advanced under the line from $25 million to $15 million.

We anticipate that our current cash and marketable securities, along with cash we anticipate generating from operations and our ability to borrow against our line of credit, will be sufficient to fund our known operating and capital requirements for at least the next 12 months. However, to the extent our operating results fall below our expectations, we may need to raise additional capital through debt or equity financings. We may also need additional capital if we pursue other strategic growth opportunities. There is no guarantee that we will be able to raise additional funds on favorable terms, if at all.

At September 30, 2006 we had one outstanding letter of credit totaling $20 million, which expires February 2, 2007. This letter of credit collateralizes our obligations to a supplier for the purchase of finished goods inventory. The fair value of this letter of credit approximates its contract value. The letter of credit is collateralized by $24.5 million of cash and marketable securities that is reported as restricted on the consolidated balance sheets.  In addition to the $20 million letter of credit, the $24.5 million in restricted cash and marketable securities also secures our foreign currency hedging transactions. The remainder of the restricted cash, totaling $1.3 million, primarily relates to building deposits and value added tax deposits with foreign jurisdictions.

Accounts receivable decreased $21.2 million to $49.7 million at September 30, 2006 compared to $70.9 million at December 31, 2005. The decrease in the accounts receivable balance was primarily due to lower sales in the third quarter of 2006 compared to the fourth quarter of 2005. Offsetting the reduction in accounts receivable due to lower sales was an increase in days sales outstanding to 55 days at September 30, 2006 compared to 49 days at December 31, 2005.

Total inventories, including consigned inventories, decreased $14.9 million to $51.6 million at September 30, 2006 compared to $66.5 million at December 31, 2005. See Note 2 of Notes to Consolidated Financial Statements for a summary of the components of inventory as of these dates.

At September 30, 2006 and December 31, 2005, we had approximately 5 weeks of inventory in the Americas channel. Annualized inventory turns were approximately 6 times for the quarter ended September 30, 2006 compared to approximately 5 times for the quarter ended September 30, 2005 and 6 times for the quarter ended December 31, 2005. Velocity in our supply chain allows us to better match current costs against current sales prices, maximizing our gross margin opportunity, reducing our total investment in working capital and reducing exposure to excess and obsolete inventory.

Land held for sale of $4.5 million at December 31, 2005 related to two plots of undeveloped land adjacent to our headquarters building in Wilsonville, Oregon. On June 5, 2006, we sold the land, receiving net proceeds of $5.1 million and recognizing a gain on the sale of $0.6 million in the second quarter of 2006.

Other current assets at September 30, 2006 and December 31, 2005 included an $8.2 million and a $14.6 million deposit, respectively, made to Chinese customs officials in connection with their investigation of our import duties.  The decrease in this deposit was due to the regulatory assessment charge of $6.4 million recorded in the third quarter of 2006. See Part II, Item 1. and Note 16 to the Notes to the Consolidated Financial Statements for more details regarding this matter.

Expenditures for property and equipment totaling $4.2 million in the first three quarters of 2006, were primarily for purchases of tooling, software upgrades, tradeshow equipment and office equipment. Total expenditures for property and equipment are expected to be between $5.0 million and $7.0 million in 2006.

Other assets decreased $14.2 million to $0.8 million at September 30, 2006 compared to $14.9 million at December 31, 2005. The decrease primarily related to a $7.5 million charge in the first quarter of 2006 for the write-down of two of our cost-based investments, Reflectivity and VST International, both technology

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start-up companies. After analyzing their results of operations and prospects for raising additional capital and our willingness to participate in these activities, we determined our investments were substantially impaired. During the second quarter of 2006, we also recorded a $2.1 million charge to write off the remaining value of our original investment in SMT.  During the third quarter of 2006, we recorded a charge of $1.1 million related to the write-down of TUN assets.

Related party accounts payable decreased $3.1 million to $1.6 million at September 30, 2006 compared to $4.7 million at December 31, 2005 and represent outstanding payables to SMT for the purchase of projectors.

Other current liabilities decreased $4.3 million to $7.0 million at September 30, 2006 compared to $11.2 million at December 31, 2005, primarily due to a $2.2 million decrease in our accruals related to our restructuring activities and a $0.8 million reduction in value added tax payable related to our European entities. In addition, other current liabilities decreased by $1.3 million related to the reversal of our remaining accrual related to the OFAC matter, which is now closed. Included in other current liabilities at September 30, 2006 and December 31, 2005 was $2.8 million and $5.0 million, respectively, related to restructuring.

Seasonality

Given the buying patterns of various geographies and market segments, our revenues are subject to certain elements of seasonality during various portions of the year.  Historically, between 20% and 30% of our revenues have come from Europe and, as such, we typically experience a seasonal downturn due to the vacation season in mid-summer, which results in decreased revenues from that region in the third quarter compared to the second quarter. Conversely, we typically experience a resurgence of revenue from Europe in the fourth quarter. This, coupled with a strong business and holiday buying season in the fourth quarter by larger wholesale distribution partners and to a lesser extent retailers, typically leads to our strongest revenues being in the fourth quarter of each year. In addition, we sell our products into the education and government markets that typically see seasonal peaks in the United States in the third quarter of each year. The first quarter of each year is typically down from the immediately preceding fourth quarter due to corporate buying trends and typical aggressive competition from our Asian competitors with March 31 fiscal year ends.

Critical Accounting Policies and Estimates

Except for the addition of the Stock-Based Compensation information below, we reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission on June 26, 2006.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123R which requires the measurement and recognition of compensation expense for all share based payment awards granted to our employees and directors, including employee stock options and non-vested stock based on the estimated fair value of the award on the grant date. Upon the adoption of SFAS No. 123R, we maintained our method of valuation for stock option awards using the Black-Scholes valuation model, which has historically been used for the purpose of providing pro-forma financial disclosures in accordance with SFAS No. 123.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

Compensation expense is only recognized on awards that ultimately vest. Therefore, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures.  Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change. If

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actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks since the filing of our 2005 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on June 26, 2006.

Item 4.  Controls and Procedures

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a- 15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we become involved in ordinary, routine or regulatory legal proceedings incidental to the business.  When a loss is deemed probable and reasonably estimable an amount is recorded in our financial statements. With the exception of the legal proceedings specifically disclosed below, the ultimate results of these ordinary, routine or regulatory matters cannot presently be determined and management does not expect that they will have a material adverse effect on our results of operations or financial position.

China Customs Investigation

During the second quarter of 2003, our Chinese subsidiary became the subject of an investigation by Chinese authorities. In mid-May 2003, Chinese officials took actions that effectively shut down our Chinese subsidiary’s importation and sales operations. The Chinese authorities are questioning the classification of our products upon importation into China. When we established operations in China in late 2000, our Chinese subsidiary imported data projectors. The distinction between a data projector and a video projector is important because the duty rates on a video projector are much higher than on a data projector. If the video projector duty rate were to be applied to all the projectors imported by our Chinese subsidiary, the potential additional duty that could be assessed against our Chinese subsidiary is approximately $12 million.

We continue to work closely with the Chinese customs officials to resolve this matter.  During the second quarter of 2004, we received formal notification that our case is considered “Administrative” in nature, which indicates that the Chinese authorities have ruled out any potential of willful intent to underpay duties by our Chinese subsidiary.  In addition, during the second quarter of 2004, we were allowed to begin selling previously impounded inventory and transferring agreed upon amounts per unit directly into a Shanghai Customs controlled bank account representing an additional deposit pending final resolution of

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the case. As of September 30, 2006, all inventory previously impounded had been released by Shanghai Customs.

In the third quarter of 2006, we were actively involved with settlement negotiations with Shanghai customs and made a settlement offer for back duties and penalties for certain products imported into China prior to the start of the investigation in 2003.  The settlement offer amounted to approximately $6.4 million, which was recorded as regulatory assessments on our consolidated statement of operations. We continue to have deposits with Shanghai Customs for the release of inventory totaling $14.6 million as of September 30, 2006. This deposit, net of the $6.4 million settlement offer, which totaled approximately $8.2 million at September 30, 2006, is recorded in other current assets on our consolidated balance sheets.

The release of any or all of the cash deposit is dependent on final case resolution and Shanghai Customs controls the process and timing for finalizing their Administrative review. At this time, we are not able to estimate when this case will ultimately be resolved or whether Shanghai Customs will accept our settlement offer.

U.S. Export Infractions Self-Disclosure

In July 2005, we self-disclosed possible infractions of U.S. export law to the Office of Foreign Assets Control (“OFAC”) related to shipments into restricted countries by one of our foreign subsidiaries.  Our Audit Committee commenced an investigation and engaged independent counsel to assist with this process. The results of the independent investigation were submitted to OFAC and the Bureau of Industry and Security (“BIS”) in March 2006 for their review. Upon completion of the investigation, it was apparent that the severity of the situation was significantly less that initially thought. In June 2006, we received a letter from OFAC indicating that it closed its investigation by issuing a cautionary letter in lieu of any further enforcement action.  In August 2006, we received a letter from BIS indicating that it closed its investigation by issuing a cautionary letter in lieu of any further enforcement action. We originally accrued an estimated charge of $1.6 million for potential regulatory assessments during the second quarter of 2005 and, in the third quarter of 2006, we reversed the remaining $1.3 million that we had accrued as a component of regulatory assessments.

Item 1A.  Risk Factors

A description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part II, Item 1A of our quarterly report on Form 10-Q for the quarter ended June 30, 2006.

Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

We will need to raise additional financing if our financial results do not improve.

We sustained an operating loss of $98.2 million during 2005 and $35.7 million in the first nine months of 2006, contributing to a decrease in net working capital of $99.8 million and $31.7 million during the respective time periods. If we continue to experience significant operating losses and reductions in net working capital, we may need to obtain additional debt or equity financing to continue current business operations. There is no guarantee that we will be able to raise additional funds on favorable terms, if at all.

Our restructuring plan may not be successful.

In September 2005, we announced a comprehensive restructuring plan with the goal of simplifying the business and returning the company to profitability. As part of the restructuring, we implemented actions to reduce our cost to serve customers, improve our supply chain efficiency to reduce our product costs, and reduce our operating expenses. Our goal as a result of these actions was to improve gross margins to 16% to 18% and reduce our operating expenses to a level that will allow us to achieve breakeven or better

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results. We face a number of challenges related to our restructuring plan including uncertainties associated with the impact of our actions on revenues and gross margins.

Through the date of this report, our restructuring plan has not been successful in returning the company to operating profitability, primarily a result of lower than anticipated revenues. We continue to focus on increasing revenues, increasing gross margins and further reducing operating expenses to return the company to profitability.

Our Board of Directors’ evaluation of strategic alternatives for the company may not result in any actions that result in an increase in shareholder value.

On October 10, 2006, we announced that our Board of Directors is conducting an ongoing evaluation into strategic alternatives for the Company and that Banc of America Securities is engaged as the Company’s financial advisor to assist the Board in its evaluation. While a sale of the Company is one option available to be explored by the Board, there are other alternatives that could be investigated.  There has been no specific timeline established for completion of the evaluation and there can be no assurances that the evaluation process will result in any specific transaction or action that would yield an increase in shareholder value.

We do not intend to disclose developments regarding the evaluation unless and until the Company has entered into a definitive agreement for a transaction that has been approved by its Board of Directors or the Board has determined to terminate the evaluation process.

If our contract manufacturers or other outsourced service providers experience any delay, disruption or quality control problems in their operations, we could lose market share and revenues, and our reputation may be harmed.

We have outsourced the manufacturing of our products to third party manufacturers. We rely on our contract manufacturers to procure components, provide spare parts in support of our warranty and customer service obligations, and in some cases, subcontract engineering work. We generally commit the manufacturing of each product platform to a single contract manufacturer.

Our reliance on contract manufacturers exposes us to the following risks over which we have limited control:

·Unexpected increases in manufacturing and repair costs;

·Interruptions in shipments if our contract manufacturer is unable to complete production;

·Inability to completely control the quality of finished products;

·Inability to completely control delivery schedules;

·Unpredictability of manufacturing yields;

·Changes in their business models or operations;

·Potential lack of adequate capacity to manufacture all or a part of the products we require; and

·Reduced control over the availability of our products.

Our contract manufacturers are primarily located in Asia and may be subject to disruption by earthquakes, typhoons and other natural disasters, as well as political, social or economic instability. The temporary or permanent loss of the services of any of our primary contract manufacturers could cause a significant disruption in our product supply chain and operations and delays in product shipments. In addition, we do not have long-term contracts with any of our third-party contract manufacturers and these contracts are terminable by either party on relatively short notice.

In addition, we are in the process of completing the outsourcing of our U.S. customer service and technical support call center to a third party provider. We will rely on this third party to provide efficient and effective support to our customers and partners. To the extent our customers are not satisfied with the level of service provided by our third party provider we may lose market share and our revenues and corporate reputation could be negatively harmed.

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Our competitors may have greater resources and technology, and we may be unable to compete with them effectively.

The markets for our products are highly competitive and we expect aggressive price competition in our industry, especially from Asian manufacturers, to continue into the foreseeable future. Some of our current and prospective competitors have, or may have, significantly greater financial, technical, manufacturing and marketing resources than we have. Our consumer products also face competition from alternate technologies such as plasma and LCD televisions. Our ability to compete depends on factors within and outside our control, including the success and timing of product introductions, product performance and price, product distribution and customer support.

In order to compete effectively, we must continue to reduce the cost of our products, our manufacturing and other overhead costs, our channel sales models and our operating expenses in order to offset declining selling prices for our products, while at the same time drive our products into new markets. There is no assurance we will be able to compete successfully with respect to these factors.

If we are unable to manage the cost of older products or successfully introduce new products with higher gross margins, our revenues may decrease or our gross margins may decline.

The market in which we compete is subject to technological advances with continual new product releases and aggressive price competition. As a result, the price at which we can sell our products typically declines over the life of the product. The price at which a product is sold is generally referred to as the average selling price. In order to sell products that have a declining average selling price and still maintain our gross margins, we need to continually reduce our product costs. To manage product-sourcing costs, we must collaborate with our contract manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully monitor the price paid by our contract manufacturers for the significant components used in our products. We must also successfully manage our freight and inventory holding costs to reduce overall product costs. We also need to continually introduce new products with improved features and increased performance at lower costs in order to maintain our overall gross margins. Our inability to successfully manage these factors could reduce revenues or result in declining gross margins.

Our revenues and profitability can fluctuate from period to period and are often difficult to predict for particular periods due to factors beyond our control.

Our results of operations for any quarter or the year are not necessarily indicative of results to be expected in future periods. Our operating results have historically been, and are expected to continue to be, subject to quarterly and yearly fluctuations as a result of a number of factors, including:

·The introduction and market acceptance of new technologies, products and services;

·Variations in product selling prices and costs and the mix of products sold;

·The size and timing of customer orders, which, in turn, often depend upon the success of our customers’ business or specific products or services;

·Changes in the conditions in the markets for projectors and alternative technologies;

·The size and timing of capital expenditures by our customers;

·Conditions in the broader markets for information technology and communications equipment;

·The timing and availability of products coming from our offshore contract manufacturing partners;

·Changes in the supply of components;

·The impact of acquired businesses and technologies; and

·Seasonality of markets such as education, government and consumer retail, which vary quarter to quarter and are influenced by outside factors such as overall consumer confidence, budgets and political party changes.

These trends and factors could harm our business, operating results and financial condition in any particular period.

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Our operating expenses and portions of our costs of revenues are relatively fixed and we may have limited ability to reduce expenses quickly in response to any revenue shortfalls.

Our operating expenses, warranty costs, inbound freight and inventory handling costs are relatively fixed.  Because we typically recognize a significant portion of our revenues in the last month of each quarter, we may not be able to adjust our operating expenses or other costs sufficiently enough to adequately respond to any revenue shortfalls. If we are unable to reduce operating expenses or other costs quickly in response to any revenue shortfall, it could negatively impact our financial results.

If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory or experience declining gross margins.

If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with our customers within our sales channels, we may incur increased and unexpected costs associated with this inventory. We generally allow distributors, dealers and retailers to return a limited amount of our products in exchange for other new products. In addition, under our price protection policy, subject to certain conditions which vary around the globe, if we reduce the list price of a product, we may issue a credit in an amount equal to the price reduction for each of the products held in inventory by our distributors, dealers and retailers. If these customers are unable to sell their inventory in a timely manner, under our policy, we may lower the price of the products or these products may be exchanged for newer products. If these events occur, we could incur increased expenses associated with rotating and reselling product, or inventory reserves associated with writing down returned inventory, or suffer declining gross margins.

If we cannot continually develop new and innovative products and integrate them into our business, we may be unable to compete effectively in the marketplace.

Our industry is characterized by continuing improvements in technology and rapidly evolving industry standards. Consequently, short product life cycles and significant price fluctuations are common. Product transitions present challenges and risks for all companies involved in the data/video digital projector and display markets. Demand for our products and the profitability of our operations may be adversely affected if we fail to effectively manage product transitions.

Advances in product technology require continued investment in research and development and product engineering to maintain our market position. There are no guarantees that such investment will result in the right products being introduced to the market at the right time.

If we are unable to provide our contract manufacturers with an accurate forecast of our product requirements, we may experience delays in the manufacturing of our products and the costs of our products may increase.

We provide our contract manufacturers with a rolling forecast of demand which they use to determine their material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms and supply and demand for a component at a given time. Some of our components have long lead times measuring as much as 4 to 6 months from the point of order.

If our forecasts are less than our actual requirements, our contract manufacturers may be unable to manufacture sufficient products to meet actual demand in a timely manner. If our forecasts are too high, our contract manufacturers may be unable to use the components they have purchased. The cost of the components used in our products tends to decline as the product platform and technologies mature. Therefore, if our contract manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an over-supply of higher-priced components. Moreover, if they are unable to use certain components, we may be required to reimburse them for any potential inventory exposure they incur within lead time.

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Our failure to anticipate changes in the supply of product components or customer demand may result in excess or obsolete inventory that could adversely affect our gross margins.

Substantially all of our products are made for immediate delivery on the basis of purchase orders rather than long-term agreements. As a result, contract manufacturing activities are scheduled according to a monthly sales and production forecast rather than on the receipt of product orders or purchase commitments. From time to time in the past, we have experienced significant variations between actual orders and our forecasts.

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 prices of product components, rapidly changing technology and customer requirements or an increase in the supply of products in the marketplace, we could be required to write-down our inventory and our gross margins could be adversely affected.

Our contract manufacturers may be unable to obtain critical components from suppliers, which could disrupt or delay our ability to procure our products.

We rely on a limited number of third party manufacturers for the product components used by our contract manufacturers. Reliance on suppliers raises several risks, including the possibility of defective parts, reduced control over the availability and delivery schedule for parts and the possibility of increases in component costs. Manufacturing efficiencies and our profitability can be adversely affected by each of these risks.

Certain components used in our products are now available only from single sources.  Most importantly, the Digital Light Processing® (“DLP®”) devices are only available from Texas Instruments. We have recently announced that we will focus all future development on DLP® technology, which will make the continued availability of DLP® devices increasingly important.

Our contract manufacturers also purchase other single or limited-source components for which we have no guaranteed alternative source of supply, and an extended interruption in the supply of any of these components could adversely affect our results of operations. We have worked to improve the availability of lamps and other key components to meet our future needs, but there is no guarantee that we will secure all the supply we need to meet demand for our products.

Furthermore, many of the components used in our products are purchased from suppliers located outside the U.S. Trading policies adopted in the future by the U.S. or foreign governments could restrict the availability of components or increase the cost of obtaining components. Any significant increase in component prices or decrease in component availability could have an adverse effect on our results of operations.

Product defects resulting in a large-scale product recall or successful product liability claims against us could result in significant costs or negatively impact our reputation and could adversely affect our business results and financial condition.

As with any high tech manufacturing company, we are sometimes exposed to warranty and potential product liability claims in the normal course of business. There can be no assurance that we will not experience material product liability losses arising from such potential claims in the future and that these will not have a negative impact on our reputation and, consequently, our revenues. We generally maintain insurance against most product liability risks and record warranty provisions based on historical defect rates, but there can be no assurance that this insurance coverage and these warranty provisions will be adequate for any potential liability ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us. A successful claim that exceeds our available insurance coverage or a significant product recall could have a material adverse impact on our financial condition and results of operations.

During the first quarter of 2006, we announced a voluntary limited product recall in conjunction with the U.S. Consumer Product Safety Commission related to our LP120 projector and related lamp modules. In

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this specific instance, the number of products impacted was minimal and to date there have been no injuries reported as a result of the product defect.  We did however incur costs associated with the product recall and offered free repair of products for impacted customers.

SMT, our joint venture with TCL Corporation, has not been successful in implementing its business plan and is in the process of winding down its business.

SMT, our 50-50 joint venture with TCL Corporation, has not been successful in executing its business plan, primarily a result of failing to secure third party OEM customers for its products.

We are now working with SMT management and TCL to wind-down SMT’s business operations in an orderly fashion including the sale of its assets and settlement of its liabilities.

As a result of the wind down, SMT has reduced headcount in order to lower its expense run rates. To the extent SMT headcount reductions involve former InFocus employees, in most cases, we are contractually responsible for severance costs for their past service with InFocus. As a result, we recorded a restructuring charge related to these actions totaling $0.9 million during the second quarter of 2006 and could incur restructuring charges in future periods as further headcount reductions are made impacting former InFocus employees, which is estimated not to exceed $0.2 million.

During the second quarter of 2006, we recorded an impairment charge totaling $2.1 million to write down the remaining portion of our original investment in SMT and, in the third quarter of 2006, we recorded a charge of $1.1 million as our estimate of our share of the costs required to wind-down SMT based on assumptions made regarding proceeds from the sale of SMT’s assets and settlement of their liabilities.  Our share of wind-down costs could be more or less than the third quarter of 2006 charge depending on the actual results of the wind-down process.  See Note 10 of Notes to Consolidated Financial Statements for further information.

Our strategic investment and partnership strategy poses risks and uncertainties typical of such arrangements.

Our strategy depends in part on our ability to identify suitable strategic investments or prospective partners, finance these transactions, and obtain the required regulatory and other approvals. As a result of these transactions, we may face an increase in our debt and interest expense. Also, the failure to obtain such regulatory and other approvals may harm our results or prospects.

In addition, some of our activities are, and will be, conducted through affiliated entities that we do not entirely control or in which we have a minority interest. For example, in December 2004, we agreed to contribute to SMT, among other things, cash and a non-exclusive license to much of our proprietary technology in exchange for a 50% interest in the joint venture. The governing documents for partnerships and joint ventures, including SMT, generally require that certain key matters require the agreement of both partners and the approval of the Chinese government. However, in some cases, decisions regarding these matters may be made without our approval.

There is also a risk of disagreement or deadlock among the stakeholders of jointly controlled entities and decisions contrary to our interests may be made. These factors could affect our ability to pursue our stated strategies with respect to those entities or have a material adverse effect on our results or financial condition.

The importation investigation of our Chinese subsidiary may not be resolved favorably and may result in an additional charge to our statement of operations.

During the second quarter of 2003, our Chinese subsidiary became the subject of an investigation by Chinese authorities. The Chinese authorities questioned the classification of our products upon importation into China. When we established operations in China in late 2000, our Chinese subsidiary imported data projectors. The distinction between a data projector and a video projector is important because the duty rates on a video projector have been much higher than on a data projector. If the video projector duty rate were to be retroactively applied to all the projectors imported by our Chinese subsidiary,

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the potential additional duty that could be assessed against our Chinese subsidiary is approximately $12 million.

We continue to work closely with the Chinese customs officials to resolve this matter.  During the second quarter of 2004, we received formal notification that our case was considered “Administrative” in nature, which indicated that the Chinese authorities have ruled out any potential of willful intent to underpay duties by our Chinese subsidiary.  In addition, during the second quarter of 2004, we were allowed to begin selling previously impounded inventory and transferring agreed upon amounts per unit directly into a Shanghai Customs controlled bank account representing an additional deposit pending final resolution of the case.

In the third quarter of 2006, we were actively involved with settlement negotiations with Shanghai customs and made a settlement offer for back duties and penalties for certain products imported into China prior to the start of the investigation in 2003.  The settlement offer amounted to approximately $6.4 million, which was recorded as regulatory assessment charge on our consolidated statement of operations. We continue to have deposits with Shanghai Customs for the release of inventory totaling $14.6 million as of September 30, 2006. This deposit, net of the $6.4 million settlement offer, which totaled approximately $8.2 million at September 30, 2006, is recorded in other current assets on our consolidated balance sheets.

The release of any or all of the cash deposit is dependent on final case resolution and Shanghai Customs controls the process and timing for finalizing their Administrative review. At this time, we are not able to estimate when this case will ultimately be resolved or whether Shanghai Customs will accept our settlement offer.

Customs or other issues involving product delivery from our contract manufacturers could prevent us from timely delivering our products to our customers.

Our business depends on the free flow of products. Due to continuing threats of terrorist attacks, U.S. Customs has increased security measures for products being imported into the United States. In addition, increased freight volumes and work stoppages at west coast ports have, in the past, and may, in the future, cause delay in freight traffic. Each of these situations could result in delay of receipt of products from our contract manufacturers and delay fulfillment of orders to our customers. Any significant disruption in the free flow of our products may result in a reduction of revenues, an increase of in-transit (unavailable for sale) inventory, or an increase in administrative and shipping costs.

A deterioration in general global economic condition could adversely affect demand for our products.

Our business is subject to the overall health of the global economy. Purchase decisions for our products are made by corporations, governments, educational institutions, and consumers based on their overall available budget for information technology products. Any number of factors impacting the global economy including geopolitical issues, balance of trade concerns, inflation, interest rates, currency fluctuations and consumer confidence can impact the overall spending climate, both positively and negatively, in one or more geographies for our products. Deterioration in any one or combination of these factors could change overall industry dynamics and demand for discretionary products like ours and negatively impact our results of operations.

We are subject to risks associated with exporting products outside the United States.

To the extent we export products outside the United States, we are subject to United States laws and regulations governing international trade and exports, including, but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury.  A determination that we have failed to comply with one or more of these export controls could result in civil and/or criminal sanctions, including the imposition of fines upon us, the denial of export privileges, and debarment from participation in United States government contracts. Any one or more of

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such sanctions could have a material adverse effect on our business, financial condition and results of operations.

We are exposed to risks associated with our international operations.

Revenues outside the United States accounted for approximately 35% of our revenues in the first nine months of 2006, 37% of our revenues in 2005 and 43% of our revenues in 2004. The success and profitability of our international operations are subject to numerous risks and uncertainties, including:

·local economic and labor conditions;

·political instability;

·terrorist acts;

·unexpected changes in the regulatory environment;

·trade protection measures;

·tax laws; and

·foreign currency exchange rates.

Currency exchange rate fluctuations may lead to decreases in our financial results.

To the extent that we incur costs in one currency and make our sales in another, our gross margins may be affected by changes in the exchange rates between the two currencies. Although our general policy is to hedge against these currency transaction risks on a monthly basis, given the volatility of currency exchange rates, we cannot provide assurance that we will be able to effectively manage these risks. Volatility in currency exchange rates may generate foreign exchange losses, which could have an adverse effect on our financial condition or results of operations.

In addition, we have moved much of our manufacturing and supply chain activities to emerging markets, particularly China, to take advantage of their lower cost structures. In July 2005, China announced a change to their monetary policy allowing the Yuan to begin to appreciate vis a vis the United States dollar. We view change in monetary policy in China as a net positive for our business as a controlled appreciation in the Yuan will allow for continued strong economic growth in China while alleviating foreign political pressures and reducing the risk of trade restrictions against Chinese exporters. In addition, since a number of the major components used in our products are imported by our Chinese manufacturers, a stronger Yuan will reduce the cost of our products manufactured there. We also expect other Asian currencies to strengthen relative to the dollar, making their exports into the United States, our largest market, more expensive, primarily for our polysilicon based competitors. While we view the changes positively at the moment, any number of factors may emerge which may reduce or reverse these benefits and adversely affect our operating results.

Our reliance on third party logistics providers may result in customer dissatisfaction or increased costs.

We have outsourced all of our logistics and service repair functions worldwide. We are reliant on our third party providers to effectively and accurately manage our inventory, service repair, and logistics functions.  This reliance includes timely and accurate shipment of our products to our customers and quality service repair work. Reliance on third parties requires proper training of employees, creating and maintaining proper controls and procedures surrounding both forward and reverse logistics functions, and timely and accurate inventory reporting. In addition, reliance on third parties requires adherence to product specifications in order to ensure quality and reliability of our products. Failure of our third parties to deliver in any one of these areas could have an adverse effect on our results of operations.

In addition, we have recently announced our decision to outsource our US customer service and technical support call center to a third party provider.  We will rely on this third party to provide efficient and effective support to our customers and partners.  To the extent our customers are not satisfied with the level of service provided by our third party provider we may lose market share and our revenues and corporate reputation could be negatively impacted.

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We may be unsuccessful in protecting our intellectual property rights.

Our ability to compete effectively against other companies in our industry depends, in part, on our ability to protect our current and future proprietary technology under patent, copyright, trademark, trade secret and other intellectual property laws. We utilize contract manufacturers in China and Taiwan, and anticipate doing increased business in these markets and elsewhere around the world including other emerging markets. These emerging markets may not have the same protections for intellectual property that are available in the United States. We cannot make assurances that our means of protecting our intellectual property rights in the United States or abroad will be adequate, or that others will not develop technologies similar or superior to our trade secrets or design around our patents. In addition, management may be distracted by, and we may incur substantial costs in, attempting to protect our intellectual property.

Also, despite the steps taken by us to protect our intellectual property rights, it may be possible for unauthorized third parties to copy or reverse-engineer trade secret aspects of our products, develop similar technology independently or otherwise obtain and use information that we regard as our trade secrets, and we may be unable to successfully identify or prosecute unauthorized uses of our intellectual property rights. Further, with respect to our issued patents and patent applications, we cannot provide assurance that pending patent applications (or any future patent applications) will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of our patents will be held valid if subsequently challenged, or that others will not claim rights in or ownership of the patents (and patent applications) and other intellectual property rights held by us.

If we become subject to intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products.

We are periodically subject to claims that we infringe the intellectual property rights of others. We cannot provide assurance that, if and when made, these claims will not be successful. Intellectual property litigation is, by its nature, expensive and unpredictable. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid, and could distract management from other business. Any potential judgment against us could require substantial payment in damages and also could include an injunction or other court order that could prevent us from offering certain products.

We rely on large distributors, national retailers and other large customers for a significant portion of our revenues, and changes in price or purchasing patterns could lower our revenues or gross margins.

We sell our products through large distributors such as Ingram Micro, Tech Data and CDW, national retailers such as Best Buy and Circuit City and through a number of other customers and channels. We rely on our larger distributors, national retailers, and other large customers for a significant portion of our total revenues in any particular period. We have no minimum purchase commitments or long-term contracts with any of these customers. Our customers, including our largest customers, could decide at any time to discontinue, decrease or delay their purchases of our products. In addition, the prices that our distributors and retailers pay for our products are subject to competitive pressures and change frequently.

If any of our major customers change their purchasing patterns or refuse to pay the prices that we set for our products, our net revenues and operating results could be negatively impacted. If our large distributors and retailers increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product demand could be compromised. In addition, because our accounts receivable are concentrated within our largest customers, the failure of any of them to pay on a timely basis, or at all, could reduce our cash flow or result in a significant bad debt expense.

In order to compete, we must attract, retain and motivate key employees, and our failure to do so could have an adverse effect on our results of operations.

In order to compete, we must attract, retain and motivate key employees, including those in managerial, operations, engineering, service, sales, marketing, and support positions. Hiring and retaining qualified employees in all areas of the company is critical to our business. Each of our employees is an “at will employee” and may terminate his/her employment without notice and without cause or good reason.  As a result of our recent announcement that our Board of Directors is exploring strategic alternatives for the

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company, we implemented a retention bonus program for all employees.  The retention bonus program will pay a bonus to employees who remain with the Company through April 30, 2007

We depend on our officers, and, if we are not able to retain them, our business may suffer.

Due to the specialized knowledge each of our officers possess with respect to our business and our operations, the loss of service of any of our officers could adversely affect our business. We do not carry key person life insurance on our officers. Each of our officers is an “at will employee” and may terminate his/her employment without notice and without cause or good reason.  All officers of the Company, other than the Chief Executive Officer, have been provided a retention bonus program allowing them to earn a retention bonus if certain operating performance goals are achieved for the fourth quarter of 2006 and first quarter of 2007 and they remain employed by the Company on April 30, 2007.

Our results of operations could vary as a result of the methods, estimates and judgments we use in applying our accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in Part I, Item 2 above). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that leads us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations. In particular, beginning in our first quarter of 2006, the calculation of stock-based compensation expense under SFAS No. 123R requires us to use valuation methodologies and a number of assumptions, estimates and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock and the exercise behavior of our employees. Changes in forecasted share-based compensation expense could impact our gross margin percentage, research and development expenses, sales and marketing expenses and general and administrative expenses.  In addition, we are required to make judgments or take certain tax positions in relation to income taxes in both U.S. and foreign tax jurisdictions.  To the extent a taxing authority takes a position different from that of the Company and we are unsuccessful in defending our position, the outcome of that decision could impact the amount of income tax expense recorded in the period these new positions are known.

Item 4.  Submission of Matters to a Vote of Security Holders

Our annual meeting of shareholders was held on August 22, 2006, at which the following action was taken:

1.The shareholders elected the five nominees for director to our Board of Directors. The five directors elected, along with the voting results are as follows:

Name	No. of Shares Voting For	No. of Shares Withheld Voting
Peter D. Behrendt	33,333,762	3,238,805
Michael R. Hallman	33,226,772	3,345,795
Svein S. Jacobsen	33,333,904	3,238,663
Duane C. McDougall	33,332,457	3,240,110
C. Kyle Ranson	34,414,747	2,157,820

Item 6.  Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

10.1Sixth Amendment to Credit Agreement by and between the Company and Wells Fargo Foothill, Inc. dated October 25, 2006. Incorporated by reference to Exhibit 10.1 to Form 8-K filed with the Securities and Exchange Commission on October 31, 2006.

10.2Officer retention bonus plan approved October 27, 2006.

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

32.2Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	November 9, 2006	INFOCUS CORPORATION
		By:	/s/ C. Kyle Ranson
		C. Kyle Ranson
		President and Chief Executive Officer
		(Principal Executive Officer)
		By:	/s/ Roger Rowe
		Roger Rowe
		Vice President, Finance,
		Chief Financial Officer and Secretary
		(Principal Financial Officer)

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