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;

• our ability to compete in the market, including our ability to compete against alternate technologies;

• 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;

• the impact of regulatory actions by authorities in the markets we serve;

• anticipated outcome of legal disputes;

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

• impacts of changes in foreign currency rates on our results of operations;

• our ability to sustain cash;

• our ability to grow revenue and gross margins;

• 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 are 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 below for further discussion of factors that could cause actual results to differ from these forward-looking statements.

Company Profile

InFocus Corporation is the industry pioneer and a global leader in the digital projection market. Backed by more than 20 years of experience and innovation in digital projection, and approximately 240 U.S. and additional corresponding foreign patents. InFocus is dedicated to setting the industry standard for large format visual display. Our products include projectors and related accessories for use in the conference room, board room, auditorium, classroom and living room.

Overview

Our results of operations were negatively affected in the third quarter of 2008 by the unexpected degree of economic turmoil in the later part of the quarter. After four consecutive quarters of gross margins above 18%, gross margins fell to 16.1% in the third quarter of 2008. As economic conditions deteriorated, we experienced softening demand for our products and increased gross margin pressure in our United States and European markets, which resulted in an average selling price decline of 5% from the second quarter of 2008.

In the near-term, we expect that the economic challenges will create an even more aggressive competitive environment, resulting in pricing pressures on the low end of our product portfolio. We will attempt to mitigate such pricing pressures by the introduction of new products with differentiated features and improved gross margins, such as those described below.

During the third quarter of 2008, we began shipping three new projector platforms:

• The InFocus IN1100 series projectors, for mobile professionals and teams, simplify computer-to-projector connectivity with new DisplayLink™ technology to connect over USB instead of a traditional VGA cable. This differentiated feature is a key element in our strategy to reclaim our leadership position in the mobile segment;

• The InFocus IN3100 series projectors are also available with DisplayLink™ and are marketed for conference and classroom use. This addition to our portable lineup can be used on a tabletop or mounted on the ceiling; and

• The InFocus IN5100 series installation projectors feature the new SplitScreen™ technology, which allows side-by-side projection from two different sources. SplitScreen™ has been well received by our higher education and corporate customers, for use in distance learning and videoconferencing. These applications are receiving increased interest as enterprises seek to reduce transportation costs and schools extend their reach beyond the main campus.

With these new projectors, we are beginning to transform the business from one that has been offering commodity products to one that attempts to provide value-added, differentiated solutions. Our ongoing investments in product development resources support our strategy of creating value-added solutions and differentiation in our products and our brand name. The evolving features of our products are intended to address the changing needs of our customers and the evolving usage model for displaying visual content. We are addressing the commoditization in our industry by bringing back innovation to the InFocus brand. In addition to differentiated products, we are differentiating ourselves by improving our supply chain and striving for service excellence.

We have increased our focus on strategic account penetration in an effort to increase our market share and revenue. During the third quarter of 2008, we added eight new Fortune 1000 customers to our customer base.

During 2008, we redefined our internal projector categories to better reflect the converging usage models between the commercial and home market segments. We now classify our projectors into the categories "Portable," "Mobile" and "Installation." Portable is the new name for our meeting room category and better represents our projectors used in meeting rooms or classrooms. The mobile projector category has not changed and includes all of our portable projectors that weigh less than 4.4 pounds and are easily adaptable for travel. Installation now includes our home projectors, as well as our business installation projectors.

We continue to streamline our regional and global marketing and general and administration functions to drive greater efficiencies and eliminate redundant activities. Operating expenses in the third quarter of 2008, exclusive of charges for restructuring, were at the lowest level in approximately 10 years.

In the first nine months of 2008, we recorded restructuring charges of $1.3 million, primarily to account for estimated employee severance costs related to cost reduction initiatives. The anticipated reduction in costs will allow us to continue to invest in sales and product development activities while maintaining the desired operating expense levels.

Our patent portfolio remains strong and is growing as we continue to invest in advanced development for new projection opportunities and applications. We currently have approximately 240 U.S. patents issued in our name with another 80 patents pending. Additionally, we will seek to partner with third parties where a solution may be more readily available. In the first quarter of 2008, we announced a partnership with DisplayLink™ Corporation to utilize DisplayLink's™ USB graphics connection technology, which is now being used in our products. This addition improves ease of use of our products and allows for application innovations for new projector solutions. We expect to explore other opportunities to leverage third parties' technology and products where there are market opportunities outside of our core competencies or a solution is more readily available for incorporation into our overall solution.

Results of Operations



                                                   Three Months Ended
                                                   September 30, (1)
                                            2008                        2007
                                                   % of                        % of
      (Dollars in thousands)        Dollars      revenues       Dollars      revenues
      Revenues                     $  70,596        100.0 %    $  75,790        100.0 %
      Cost of revenues                59,215         83.9         62,026         81.8

      Gross margin                    11,381         16.1         13,764         18.2
      Operating expenses:
      Marketing and sales              7,926         11.2          8,424         11.1
      Research and development         3,001          4.3          3,367          4.4
      General and administrative       4,172          5.9          5,305          7.0
      Restructuring costs                430          0.6            225          0.3

                                      15,529         22.0         17,321         22.9

      Loss from operations            (4,148 )       (5.9 )       (3,557 )       (4.7 )
      Other income (expense):
      Interest expense                  (146 )       (0.2 )         (154 )       (0.2 )
      Interest income                    322          0.5            599          0.8
      Other, net                         (30 )         -             319          0.4

      Loss before income taxes        (4,002 )       (5.7 )       (2,793 )       (3.7 )
      Provision for income taxes         214          0.3             27           -

      Net loss                     $  (4,216 )       (6.0 )%   $  (2,820 )       (3.7 )%


                                                   Nine Months Ended
                                                   September 30, (1)
                                            2008                        2007
                                                   % of                        % of
      (Dollars in thousands)        Dollars      revenues       Dollars      revenues
      Revenues                     $ 204,294        100.0 %    $ 227,078        100.0 %
      Cost of revenues               167,244         81.9        192,850         84.9

      Gross margin                    37,050         18.1         34,228         15.1
      Operating expenses:
      Marketing and sales             25,115         12.3         27,510         12.1
      Research and development         8,562          4.2         11,333          5.0
      General and administrative      12,571          6.2         15,613          6.9
      Restructuring costs              1,330          0.7          4,675          2.1

                                      47,578         23.3         59,131         26.0

      Loss from operations           (10,528 )       (5.2 )      (24,903 )      (11.0 )
      Other income (expense):
      Interest expense                  (381 )       (0.2 )         (342 )       (0.2 )
      Interest income                  1,120          0.5          2,025          0.9
      Other, net                         718          0.4           (261 )       (0.1 )

      Loss before income taxes        (9,071 )       (4.4 )      (23,481 )      (10.3 )
      Provision for income taxes         796          0.4            174          0.1

      Net loss                     $  (9,867 )       (4.8 )%   $ (23,655 )      (10.4 )%

(1) Percentages may not add due to rounding.

Revenues

Revenues decreased $5.2 million, or 6.9%, and $22.8 million, or 10.0%, respectively, in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007.

The decreases in revenue in the 2008 periods compared to the 2007 periods were due primarily to a 15.3% and 11.9% decrease, respectively, in overall average selling prices ("ASPs"). The decreases in ASPs in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007 were primarily due to a higher percentage of our overall revenue being derived from lower-margin, entry-level products sold in the 2008 periods compared to the 2007 periods. In addition, the turmoil experienced in the economic and financial markets and the strengthening of the U.S. dollar against the euro placed additional pressures on average selling prices. Price reductions made on products reaching their end of life were partially offset by the introduction of several new, higher ASP products that began shipping in the third quarter of 2008.

The declines in ASPs in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007 were partially offset by an increase in units sold of approximately 10% and 2%, respectively. Units sold were 94,000 units and 254,000 units, respectively, in the three and nine-month periods ended September 30, 2008. This compares to 85,000 units and 249,000 units, respectively, in the comparable periods of 2007. These increases were primarily due to growth in the portable product segments driven by increased demand in the education and government sectors.

Geographic Revenues

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



                            Three Months Ended                        Nine Months Ended
                               September 30,                            September 30,
                         2008                2007                 2008                 2007
    United States   $ 34,229   48.5 %   $ 46,950   61.9 %   $ 100,490   49.2 %   $ 136,687   60.2 %
    Europe            20,375   28.9 %     16,269   21.5 %      61,119   29.9 %      53,114   23.4 %
    Asia              11,193   15.8 %      8,699   11.5 %      29,913   14.6 %      25,783   11.3 %
    Other              4,799    6.8 %      3,872    5.1 %      12,772    6.3 %      11,494    5.1 %

                    $ 70,596            $ 75,790            $ 204,294            $ 227,078

United States revenues in the three and nine-month periods ended September 30, 2008 decreased 27.1% and 26.5%, respectively, compared to the same periods of 2007. These decreases were primarily due to declines in unit sales of 20.9% and 24.9%, respectively, which resulted primarily from deteriorating economic conditions and were compounded by our de-emphasis on the retail sector of the market during 2008. Also negatively impacting U.S. revenues in the three-month period ended September 30, 2008 compared to the same period of 2007 was an ASP decline of 7.9% due to an increase in the percentage of the overall sales during the quarter coming from the entry-level products sold primarily into the education sector as well as sales of end of life products as efforts were made to launch higher margin follow-on products introduced late in the third quarter of 2008. U.S. ASPs decreased 2.1% in the nine-month period ended September 30, 2008 compared to the same period of 2007, primarily due to the shift in mix to lower-margin products discussed above.

European revenues increased 25.2% and 15.1%, respectively, in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007. These increases were primarily due to increases in units sold of 55.3% and 49.0%, respectively, partially offset by declines in ASPs of 19.4% and 22.8%, respectively, in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007. The increases in units sold and corresponding increases in revenue in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007 were driven by new product introductions targeted at specific channels and markets where we had identified strong growth potential. Due to current economic conditions in the market and the recent strengthening of the U.S. dollar against the euro, we do not expect to be able to maintain this level of revenue growth in future periods. The strengthening of the U.S. dollar against the euro and deteriorating economic conditions in specific regions of Europe during the third quarter of 2008 negatively affected our revenues and ASPs.

Asian revenues increased 28.7% and 16.0%, respectively, in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007. These increases were primarily due to increases in units sold of 58.8% and 37.5%, respectively, partially offset by declines in ASPs of 19.0% and 15.6%, respectively, in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007. The increases in units sold and corresponding declines in ASPs were primarily related to the introduction of a tender-specific product line, which accounted for the majority of the increase in unit sales but carries lower ASPs than non-tender specific products.

Other revenues primarily consist of sales in Canada and Latin America. Other revenues increased 24.0% and 11.1%, respectively, in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007. Other revenue unit sales increased 63.3% and 28.2%, respectively, in the

three and nine-month periods ended September 30, 2008 compared to the same periods of 2007. Other revenue ASPs decreased 24.1% and 13.4%, respectively, in the three and nine-month periods ended September 30, 2008 compared to the same periods of 2007. The decrease in ASPs in both the three and nine-month periods was primarily attributable to a shift in mix to our lower-margin entry-level products.

Backlog

At September 30, 2008, we had backlog of approximately $4.8 million, compared to approximately $6.6 million at December 31, 2007. 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 2008. 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 future orders.

Gross Margin

We achieved gross margin percentages of 16.1% and 18.1%, respectively, in the three and nine-month periods ended September 30, 2008, compared to 18.2% and a 15.1%, respectively, in the same periods of 2007.

The decrease in gross margin in the three-month period ended September 30, 2008 compared to the same period of 2007 was primarily due to softening in the global markets, increasing competition and a relatively high mix of our revenues coming from lower-priced products. Margins were also negatively affected in the three-month period by the strengthening of the U.S. dollar against the euro, which essentially lowers ASPs for our products priced in euros. We increased prices in certain markets in Europe in September 2008 in an effort to partially counteract the currency effects. In addition, emphasis on our new, differentiated products is expected to lead to improvements in gross margins over the longer term. These factors were offset in the nine-month period ended September 30, 2008 compared to the same period of 2007 by an overall shift in product mix to higher-margin products between the comparable periods, sales of end of life products in the first half of 2007, as well as continued decreases in other costs of goods sold primarily due to efficiencies achieved within our supply chain and lower costs associated with warranty repair activities. Charges for inventory related write-downs totaled $1.3 million and $3.0 million, respectively, in the three and nine-month periods ended September 30, 2008 compared to $1.6 million and $4.0 million in the comparable periods of 2007.

Marketing and Sales Expense

Marketing and sales expense decreased $0.5 million, or 5.9%, to $7.9 million in the three-month period ended September 30, 2008 compared to $8.4 million in the same period of 2007, and decreased $2.4 million, or 8.7%, to $25.1 million in the nine-month period ended September 30, 2007 compared to $27.5 million in the same period of 2007.

The decreases in marketing and sales expense were primarily due to our ongoing efforts to reduce our cost structure to better align with current revenue and gross margin levels. The majority of the reductions have been in discretionary spending, such as marketing programs and advertising, as well as in management-level employee reductions. These decreases were partially offset by our investment in additional sales and product marketing resources to drive increases in revenue.

Research and Development Expense

Research and development expense decreased $0.4 million, or 10.9%, to $3.0 million in the three-month period ended September 30, 2008 compared to $3.4 million in the same period of 2007, and decreased $2.7 million, or 24.5%, to $8.6 million in the nine-month period ended September 30, 2008 compared to $11.3 million in the same period of 2007.

These decreases were primarily due to a reduced cost structure related to our previous restructuring activities, including a decrease in personnel related costs and other discretionary spending. We have shifted our research and development model to outsource more of the design functions to our contract manufacturers, which allowed us to reduce our in-house research and development resources. These

decreases were partially offset by our increased investment in product development resources to support our strategy of creating differentiation in our products and our brand name.

General and Administrative Expense

General and administrative expense decreased $1.1 million, or 21.4%, to $4.2 million in the three-month period ended September 30, 2008 compared to $5.3 million in the same period of 2007 and decreased $3.0 million, or 19.5%, to $12.6 million in the nine-month period ended September 30, 2008 compared to $15.6 million in the same period of 2007.

Included in general and administrative expense in the three and nine-month periods ended September 30, 2007 was $0.4 million and $1.3 million, respectively, of costs incurred for various external advisors engaged as part of our strategic alternatives evaluation process. The remainder of the decreases in the 2008 periods compared to the 2007 periods were primarily related to a reduced cost structure, including decreases in personnel related costs and other discretionary spending.

Restructuring

In the three and nine-month periods ended September 30, 2008, we incurred $0.4 million and $1.3 million, respectively, of restructuring costs primarily related to employee severance in connection with the elimination of several middle management and other positions in the company and charges related to facilities that were previously abandoned and with respect to which leases were terminated during the third quarter of 2008.

In the three and nine-month periods ended September 30, 2007, we incurred restructuring charges totaling $0.2 million and $4.7 million, respectively. The charge of $0.2 million in the third quarter of 2007 was for estimated employee severance costs. A charge of $2.1 million in the second quarter of 2007 was primarily related to severance costs for personnel reductions and a charge of $2.4 million in the first quarter of 2007 primarily related to estimated lease losses on vacated or partially vacated facilities at our corporate headquarters and various European office locations. A portion of the $2.1 million charge recorded in the second quarter of 2007 for severance costs was related to a shift in our research and development model to outsource more of the design functions to our contract manufacturers, which allows us to reduce necessary in-house research and development resources.

At September 30, 2008, we had a remaining accrual for our restructuring activities of $2.4 million. See further detail in Note 10 of Notes to Consolidated Financial Statements.

Other Income (Expense)

Interest income in the three and nine-month periods ended September 30, 2008 was $0.3 million and $1.1 million, respectively, compared to $0.6 million and $2.0 million, respectively, in the same periods of 2007. The decreases were primarily due to lower interest rates realized on our invested balances. Average cash and investment balances were $29.6 million and $28.9 million, respectively, in the first nine months of 2008 and 2007.

Other, net included the following (in thousands):

                                                       Three Months Ended          Nine Months Ended
                                                          September 30,              September 30,
                                                       2008           2007          2008          2007
Income related to the profits of Motif, 50-50
joint venture                                        $     104       $   410     $    1,326      $  722
Losses related to foreign currency transactions           (116 )        (130 )         (538 )      (963 )
Recovery of impairment of cost-based investment             -            202             -          202
Foreign jurisdiction tax related
recoveries/(penalties)                                      46          (150 )           46        (150 )
Other                                                      (64 )         (13 )         (116 )       (72 )

                                                     $     (30 )     $   319     $      718      $ (261 )

Income Taxes

Income tax expense in the 2008 and 2007 periods primarily represented income tax expense in certain foreign tax jurisdictions.

Liquidity and Capital Resources

Total cash and cash equivalents and restricted cash and marketable securities were $70.3 million at September 30, 2008. Working capital totaled $66.1 million at September 30, 2008, which included $55.1 million of unrestricted cash and cash equivalents. The current ratio at September 30, 2008 and December 31, 2007 was 1.8 to 1 and 2.0 to 1, respectively.

We sustained an operating loss of $10.5 million in the first nine months of 2008 and a decrease in net working capital of $17.2 million for the period. If we continue to experience significant operating losses or experience significant reductions in net working capital, we may need to obtain additional debt or . . .