U.
S. SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
 
  x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
      the quarterly period ended June 30, 2008,
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 1-11860
  Focus
Enhancements, Inc.
 (Name of
Issuer in its Charter)
  Delaware
              
              04-3144936(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)
 1370
Dell Ave
 Campbell,
CA 95008
 (Address
of Principal Executive Offices)
  (408)
866-8300
 (Issuer's
Telephone Number, Including Area Code)
  
 Check
whether the Issuer (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 other 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, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company" in Rule 12b-2 of the Exchange Act.
 Large
accelerated filer: o Accelerated filer:
o Non-accelerated
filer: o Smaller Reporting
Company: x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b02 of the Exchange Act).
 Yes:
o No: x
 
 As of
August 8, 2008, there were 86,954,588 shares of common stock
outstanding.
 
  
  
 
 FOCUS
ENHANCEMENTS, INC.
  INDEX
 
 
 Page
                NumberPART
      I - FINANCIALINFORMATIONItem
      1.
              Financial Statements
(unaudited):Condensed Consolidated Balance
    Sheets
              3Condensed Consolidated Statements of
      Operations
              4Condensed Consolidated Statements of Cash
      Flows
              5Notes to Condensed Consolidated Financial
      Statements
              6Item
      2.
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              18Item
      3.
              Quantitative and Qualitative Disclosures about
      Market Risk
              24Item
      4T.
              Controls and Procedures
              24PART
      II - OTHER INFORMATIONItem
      1.
              Legal Proceedings
              25Item
      1A.
              Risk Factors
              25Item
      2.
              Unregistered Sales of Equity Securities and Use
      of Proceeds
              27Item
      3.
              Defaults Upon Senior Securities
              27Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              27Item
      5.
              Other Information
              27Item
      6.
              Exhibits
              27SIGNATURES
              28CERTIFICATIONS
 
   
  
  PART
I - FINANCIAL INFORMATION
 Item
1.                      Financial Statements
  Focus
Enhancements, Inc.
 Condensed Consolidated Balance Sheets
 (In
thousands, except share and per share amounts)
 (Unaudited)
  
  June
      30,
              
              
              December
      31,2008
              
              
              2007AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              2,119
              
              
              $
              1,841Restricted
      cash
              
              
              96
              
              
              
              90Accounts
      receivable, net of allowances of $155 and $253,
    respectively
              
              
              2,640
              
              
              
              4,318Inventories
              
              
              4,134
              
              
              
              3,957Prepaid
      expenses and other current assets
              
              
              2,049
              
              
              
              1,130Total
      current assets
              
              
              11,038
              
              
              
              11,336Property
      and equipment, net
              
              
              1,444
              
              
              
              1,240Other
      assets
              
              
              465
              
              
              
              153Goodwill
              
              
              13,191
              
              
              
              13,191$
              26,138
              
              
              $
              25,920Liabilities
      and Stockholders' Equity (Deficit)Current
      liabilities:Accounts
      payable
              
              $
              2,782
              
              
              $
              3,554Borrowings
      under line of credit
              
              
              6,500
              
              
              
              3,600Current
      portion of capital lease obligations
              
              
              63
              
              
              
              122Term
      loan
              
              
              -
              
              
              
              2,500Accrued
      compensation
              
              
              820
              
              
              
              872Accrued
      liabilities
              
              
              4,466
              
              
              
              2,722Total
      current liabilities
              
              
              14,631
              
              
              
              13,370Convertible
      notes
              
              
              -
              
              
              
              11,493Notes
      payable, net of debt discount
              
              
              18,524
              
              
              
              -Total
      liabilities
              
              
              33,155
              
              
              
              24,863Commitments
      and contingencies (note 8)Stockholders'
      equity (deficit):Preferred
      stock, $0.01 par value; authorized 3,000,000 shares; 3,161 shares issued
      and outstandingat
      June 30, 2008 and December 31, 2007 (liquidation preference
      $3,917)
              
              
              -
              
              
              
              -Common
      stock, $0.01 par value; 150,000,000 shares authorized 85,895,075 and
      85,248,194,shares
      issued at June 30, 2008 and December 31, 2007,
respectively
              
              
              843
              
              
              
              841Treasury
      stock at cost, 802,465 and 516,667 shares at June 30, 2008
    andDecember
      31, 2007, respectively
              
              
              (902
              )
              
              
              (775
              )Additional
      paid-in capital
              
              
              128,028
              
              
              
              123,392Accumulated
      other comprehensive income
              
              
              385
              
              
              
              257Accumulated
      deficit
              
              
              (135,371
              )
              
              
              (122,658
              )Total
      stockholders' equity (deficit)
              
              
              (7,017
              )
              
              
              1,057$
              26,138
              
              
              $
              25,920
 
  The
accompanying notes are an integral part of the condensed consolidated financial
statements.
   3
  Focus
Enhancements, Inc.
 Condensed Consolidated Statements of
Operations
 (In
thousands, except per share amounts)
 (Unaudited)
 
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2007
              
              
              June
      30, 2008
              
              
              June
      30, 2007Net
      revenue
              
              $
              3,988
              
              
              $
              8,354
              
              
              $
              7,860
              
              
              $
              15,441Cost
      of revenue
              
              
              2,362
              
              
              
              4,444
              
              
              
              4,736
              
              
              
              8,365Gross
      margin
              
              
              1,626
              
              
              
              3,910
              
              
              
              3,124
              
              
              
              7,076Operating
      expenses:Sales,
      marketing and support
              
              
              2,066
              
              
              
              2,479
              
              
              
              4,226
              
              
              
              4,604General
      and administrative
              
              
              1,071
              
              
              
              1,048
              
              
              
              2,108
              
              
              
              2,145Research
      and development
              
              
              4,218
              
              
              
              3,979
              
              
              
              7,802
              
              
              
              7,917Amortization
      of intangible assets
              
              
              -
              
              
              
              51
              
              
              
              -
              
              
              
              1567,355
              
              
              
              7,557
              
              
              
              14,136
              
              
              
              14,822Loss
      from operations
              
              
              (5,729
              )
              
              
              (3,647
              )
              
              
              (11,012
              )
              
              
              (7,746
              )Interest
      expense, net
              
              
              (978
              )
              
              
              (299
              )
              
              
              (1,665
              )
              
              
              (589
              )Other
      income (expense), net
              
              
              1
              
              
              
              (2
              )
              
              
              (9
              )
              
              
              1Loss
      before income tax expense
              
              
              (6,706
              )
              
              
              (3,948
              )
              
              
              (12,686
              )
              
              
              (8,334
              )Income
      tax expense
              
              
              3
              
              
              
              19
              
              
              
              27
              
              
              
              23Net
      loss
              
              $
              (6,709
              )
              
              $
              (3,967
              )
              
              $
              (12,713
              )
              
              $
              (8,357
              )Net
      loss per shareBasic
      and diluted
              
              $
              (0.08
              )
              
              $
              (0.05
              )
              
              $
              (0.15
              )
              
              $
              (0.11
              )Weighted
      average number of shares used in per share calculations:Basic
      and diluted
              
              
              84,142
              
              
              
              77,277
              
              
              
              83,914
              
              
              
              75,738
 
 
 
 
 
 
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  4
  Focus
Enhancements, Inc.
 Condensed Consolidated Statements of Cash Flows
 (In
thousands)
 (Unaudited)
  
  
  Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2007Cash
      flows from operating activities:Net
      loss
              
              $
              (12,713
              )
              
              $
              (8,357
              )Adjustments
      to reconcile net loss to net cash used in operatingactivities:Depreciation
      and amortization
              
              
              374
              
              
              
              580Stock-based
      compensation
              
              
              770
              
              
              
              470Amortization
      of discount on notes payble
              
              
              467
              
              
              
              -Accrued
      interest
              
              
              1,098
              
              
              
              550Amortization
      of debt issuance costs
              
              
              26
              
              
              
              9Changes
      in assets and liabilities:Accounts
      receivable
              
              
              1,741
              
              
              
              (630
              )Inventories
              
              
              (95
              )
              
              
              (197
              )Prepaid
      expenses and other assets
              
              
              (283
              )
              
              
              (234
              )Other
      assets
              
              
              10
              
              
              
              14Accounts
      payable
              
              
              (786
              )
              
              
              109Accrued
      liabilities
              
              
              707
              
              
              
              (195
              )Net
      cash used in operating activities
              
              
              (8,684
              )
              
              
              (7,881
              )Cash
      flows from investing activities:Purchases
      of property and equipment
              
              
              (567
              )
              
              
              (490
              )Net
      cash used in investing activities
              
              
              (567
              )
              
              
              (490
              )Cash
      flows from financing activities:Proceeds
      from issuance of  notes payable
              
              
              9,307
              
              
              
              -Borrowings
      under lines of credit
              
              
              12,500
              
              
              
              2,500Repayment
      of lines of credit
              
              
              (9,600
              )
              
              
              (3,390
              )Borrowings
      under term loan
              
              
              -
              
              
              
              3,450Repayment
      of term loan
              
              
              (2,500
              )
              
              
              (2,500
              )Repurchase
      of common stock
              
              
              (127
              )
              
              
              (25
              )Payments
      under capital lease obligations
              
              
              (59
              )
              
              
              (64
              )Net
      proceeds from private offerings of common stock
              
              
              -
              
              
              
              6,205Proceeds
      from exercise of common stock options and warrants, net issuance
      costs
              
              
              -
              
              
              
              207Net
      cash provided by financing activities
              
              
              9,521
              
              
              
              6,383Effect
      of exchange rate changes on cash and cash equivalents
              
              
              8
              
              
              
              5Increase
      (decrease) in cash and cash equivalents
              
              
              278
              
              
              
              (1,983
              )Cash
      and cash equivalents at beginning of period
              
              
              1,841
              
              
              
              5,969Cash
      and cash equivalents at end of period
              
              $
              2,119
              
              
              $
              3,986
 
  The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  5
  NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
 (Unaudited)
  
 
 1.
              Description of
  Business
 
 Incorporated
in 1992, Focus Enhancements, Inc. and its subsidiaries (the "Company" or
"Focus") develop and market proprietary video technology in two areas:
semiconductor and systems. Focus markets its products globally to original
equipment manufacturers (“OEMs”), and dealers and distributors in the consumer
and professional channels. Semiconductor products include several series of
Application Specific Standard Products (“ASSPs”), which address the wireless
video and data market using Ultra Wideband (“UWB”) technology and the video
convergence market. The UWB chipsets are targeted for the wireless USB market
while the video convergence chips are deployed into portable media players,
video conferencing systems, Internet TV, media center and interactive TV
applications. Focus’ systems products are designed to provide solutions for the
professional video production market particularly for the video acquisition,
media asset management and digital signage markets. Focus markets its systems
products primarily through the professional channel. Focus production products
include video scan converters, standard and high definition digital video disk
recorders, MPEG (Moving Picture Experts Group) recorders and file format
conversion tools. Focus media asset management systems products include
network-based video servers, long-duration program monitors and capture/playout
components. Focus digital signage and retail media solutions products include
standard and high definition MPEG players, servers
 
 
 2.
              Basis of Presentation
      – Interim Financial
Information
 
 The
accompanying unaudited condensed consolidated financial statements of Focus have
been prepared in conformity with accounting principles generally accepted in the
United States of America and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. The year-end condensed
consolidated balance sheet data was derived from audited consolidated financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
 
 In the
opinion of management, the condensed consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of Focus’ financial position, operating results and cash
flows for the periods presented. The results of operations and cash flows for
the six months ended June 30, 2008 are not necessarily indicative of the results
that may be expected for any future period.
 
 The
condensed consolidated financial statements of Focus as of June 30, 2008 and for
the three and six months periods ended June 30, 2008 and 2007 are unaudited and
should be read in conjunction with the audited consolidated financial statements
for the year ended December 31, 2007 included in Focus’ Annual Report on Form
10-K for the year ended December 31, 2007.
 
 
 3.
              Equity-Based
      Compensation
 
 Focus
accounts for equity-based compensation in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No.
123R”), which the Company adopted as of January 1, 2006 using the modified
prospective method.
 
  6
  The
stock-based compensation recognized for the three and six months ended June 30,
2008 and 2007, respectively, was:
 
 
 Three
      Months Ended
              
              
              Six
      Months Ended(In
      thousands, except per share data)
              
              June
      30, 2008
              
              
              June
      30, 2007
              
              
              June
      30, 2008
              
              
              June
      30, 2007Stock-based
      compensation expense by type of award:Employee
      stock options
              
              $
              123
              
              
              $
              162
              
              
              $
              248
              
              
              $
              294Restricted
      stock awards
              
              
              335
              
              
              
              81
              
              
              
              436
              
              
              
              150Non
      - employee warrants
              
              
              31
              
              
              
              6
              
              
              
              86
              
              
              
              26Total
      stock-based compensation
              
              
              489
              
              
              
              249
              
              
              
              770
              
              
              
              470Tax
      effect on stock-based compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Effect
      on net loss
              
              $
              489
              
              
              $
              249
              
              
              $
              770
              
              
              $
              470Effect
      on net loss per share - basic and diluted
              
              $
              0.01
              
              
              $
              0.00
              
              
              $
              0.01
              
              
              $
              0.01
 
 
 Stock
Options
 
 The
exercise price of each stock option equals the market price of Focus’ common
stock on the date of grant. Option grants generally vest over four years and
expire 10 years from the grant date. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model. The
weighted average assumptions used in the model are outlined in the following
table:
 
 
 Three
      Months Ended
              
              Six
      Months EndedJune
      30, 2008
              
              June
      30, 2007
              
              June
      30, 2008
              
              June
      30, 2007Average
      expected term of options
              5
      years
              
              4
      years
              
              5
      years
              
              4
      yearsRisk-free
      rate of interest
              2.95%
      - 3.57%
              
              4.57%
      - 5.03%
              
              2.36%
      - 3.57%
              
              4.56%
      - 5.03%Volatility
      of common stock
              84%
              
              77%
              
              82%
              
              81%Dividend
      yield
              0%
              
              0%
              
              0%
              
              0%
 
 
 The zero
dividend yield is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. Expected
volatility is based on the combination of historical volatility of the Company’s
common stock and the expected moderation in future volatility over the period
commensurate with the expected life of the options and other factors. The
risk-free interest rates are taken from the Daily Federal Yield Curve Rates as
of the grant dates as published by the Federal Reserve and represent the yields
on actively traded Treasury securities for terms equal to the expected term of
the options. The expected term calculation is based on the Company’s observed
historical option exercise behavior and post-vesting forfeitures of options by
employees.
 
  7
  A summary
of activity related to Focus’ stock option incentive plans for the six months
ended June 30, 2008 is presented below:
 
 
 Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Life (Yrs)
              
              
              Aggregate
      Intrinsic Value (000s)Options
      outstanding at January 1, 2008
              
              
              5,594,021
              
              
              $
              1.16Options
      granted
              
              
              460,933
              
              
              $
              0.37Options
      exercised
              
              
              -
              
              
              $
              -Options
      canceled
              
              
              (523,671
              )
              
              $
              1.22Options
      outstanding at June 30, 2008
              
              
              5,531,283
              
              
              $
              1.09
              
              
              
              5.8
              
              
              $
              -Options
      exercisable and expected to be exercisable at June 30,
2008
              
              
              5,246,511
              
              
              $
              1.10
              
              
              
              5.7
              
              
              $
              -Options
      exercisable at June 30, 2008
              
              
              3,806,419
              
              
              $
              1.17
              
              
              
              5.0
              
              
              $
              -
 
 
 The
weighted average grant date fair value of options granted during the three and
six months ended June 30, 2008 was $0.24 and $0.25 per share, respectively. No
options were exercised in the three and six month periods ended June 30, 2008.
At June 30, 2008, Focus had $778,000 of unrecognized compensation expense, net
of estimated forfeitures, related to unvested stock options, which will be
recognized over the weighted average period of 2.2 years.
 
 The
weighted average grant date fair value of options granted during the three and
six months ended June 30, 2007 was $0.75 and $0.80 per share, respectively. The
intrinsic value of options exercised during the three and six months ended June
30, 2007 was $10,000 and $17,000, respectively. Cash received from stock option
exercises was $55,000 and $80,000 for the three and six months ended June 30,
2007, respectively.
 
 The
options outstanding and exercisable at June 30, 2008 were in the following
exercise price ranges:
 
 
 Options
      Outstanding
              
              Options
      ExercisableRange
      of Exercise Prices
              Outstanding
              Weighted
      Average Remaining Life (Yrs)
              Weighted
      Average Exercise Price
              
              Exercisable
              Weighted
      Average Exercise Price$0.31-$0.97
              1,582,530
              6.6
              $0.63
              
              806,737
              $0.71$0.97-$1.43
              3,255,867
              5.8
              $1.19
              
              2,338,761
              $1.20$1.43-$1.97
              624,386
              3.9
              $1.60
              
              592,421
              $1.60$1.97-$2.22
              68,500
              5.1
              $2.08
              
              68,500
              $2.08Outstanding
      at June 30, 2008
              5,531,283
              5.8
              $1.09
              
              3,806,419
              $1.17
 
 
 At June
30, 2008, Focus had 2,319,641 shares of common stock available for grant under
its current stock option and incentive plans, which include restricted
stock.
 
 
  8
  Restricted Stock
Awards
 
 A summary
of activity related to Focus’ restricted stock awards for the six months ended
June 30, 2008 is presented below:
 
 
 Shares
              Weighted
      Average Grant Date Fair ValueNon-vested
      restricted stock shares outstanding at January 1, 2008
              1,167,067
              $1.07Restricted
      stock shares granted
              747,744
              $0.42Restricted
      stock shares vested
              (888,700)
              $0.66Restricted
      stock shares forfeited
              (79,171)
              $1.02Non-vested
      restricted stock shares outstanding at June 30, 2008
              946,940
              $0.95
 
 
 At June
30, 2008, Focus had $668,000 of unrecognized compensation expense, net of
forfeitures, related to restricted stock awards, which will be recognized over
the weighted average period of 2.5 years. During the three and six months ended
June 30, 2008, 576,494 and 888,700 shares of restricted stock vested with a fair
market value of $254,000 and $402,000, respectively. During the three and six
months ended June 30, 2007, 8,750 and 197,266 shares of restricted stock vested
with a fair market value of $12,000 and $258,000 respectively.
 
 
 4.
              Net Loss per
      Share
 
 Basic net
loss per share was computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during the period. Diluted net loss
per share is computed by dividing the net loss by the weighted average number of
shares of common stock and potential common stock equivalents outstanding during
the period, if dilutive. Options to purchase 5,531,283 and 6,154,780 shares of
common stock, unvested shares of restricted stock of 946,940 and 1,084,259,
warrants to purchase 32,703,748 and 4,218,355 shares of common stock and 3,161
shares of preferred stock convertible into 3,161,000 shares of common stock were
outstanding at June 30, 2008 and 2007, respectively, but were not included in
the computation of diluted net loss per share as the effect would have been
anti-dilutive. In addition, promissory notes that were convertible into
11,943,000 shares of common stock were outstanding at June 30, 2007, but were
not included in the computation of diluted net loss per share as the effect
would have been anti-dilutive.
 
 
 5.
              Significant
      Customers
 
 Sales to
one customer accounted for 12% of Focus’ revenue in the three months ended June
30, 2008.  No one customer accounted for more than 10% of Focus’
revenue in the six months ended June 30, 2008.  Sales to two customers
accounted for 29% of Focus’ revenue in the three months ended June 30,
2007.  Sales to one customer accounted for 15% of Focus’ revenue in
the six months ended June 30, 2007.
 
 One
customer had an accounts receivable balance of 14% of Focus’ total accounts
receivable at June 30, 2008. Two customers accounted for 32% of Focus’ total
accounts receivable at June 30, 2007.
   6.
              Inventories
 
 Inventories
are stated at lower of cost (first-in, first-out) or market:
 
 
 (In
      thousands)
              
              June
      30, 2008
              
              
              December
      31, 2007Raw
      materials
              
              $
              1,043
              
              
              $
              732Work
      in process
              
              
              1,089
              
              
              
              783Finished
      goods
              
              
              2,002
              
              
              
              2,442$
              4,134
              
              
              $
              3,957
 
 
 9
 
 7.
              Borrowings
 
 
 (In
      thousands)
              
              June
      30, 2008
              
              
              December
      31, 2007Short-term
      debt:Line
      of credit
              
              $
              6,500
              
              
              $
              3,600Term
      loan
              
              
              -
              
              
              
              2,5006,500
              
              
              
              6,100Long-term
      debt:Convertible
      notes
              
              
              -
              
              
              
              11,493Notes
      payable
              
              
              21,898
              
              
              
              -Discount
      on notes payable
              
              
              (3,374
              )
              
              
              -18,524
              
              
              
              11,493$
              25,024
              
              
              $
              17,593
 
 
 Line of Credit – Heritage
Bank of Commerce
 
 On March
4, 2008, the Company finalized a Loan and Security Agreement dated February 22,
2008 (“Loan Agreement”) with Heritage Bank of Commerce (“Heritage Bank”). Under
the Loan Agreement, the Company may borrow up to $6.5 million through one or
more advances through February 21, 2009, which is the maturity date (the
“Maturity Date”).  On the Maturity Date, all advances must be repaid. Carl
Berg, a director of the Company, has personally guaranteed the Loan Agreement.
At June 30, 2008, there was an outstanding balance under this line of credit of
$6.5 million, which is the maximum amount allowed to borrow.
 
 Payment
terms under the Loan Agreement are interest only until maturity. Interest is
payable under the Loan Agreement at prime plus 1%.  Obligations under the
Loan Agreement are secured by the Company’s accounts receivable. In addition,
the Company issued a warrant to Heritage Bank to purchase 75,000 shares of the
Company’s common stock at $0.80 per share. The line of credit was subject to
ongoing covenants including a covenant based on operating results.
 
 The
warrant is immediately exercisable through February 22, 2013.The warrant was valued at
$25,000 using the Black-Scholes option pricing model and will be amortized to
interest expense over the term of the line of credit.
 
 In
connection with Mr. Berg’s extension of his personal guarantee, the Company
has agreed to continue Mr. Berg’s first priority security interest in all
of the Company’s assets, which he shares on a pro-rata basis with the Senior
Secured Note Holders (see below, “Notes Payable”), except for the security
interest in the Company’s accounts receivable, which have been subordinated to
Heritage Bank’s security interest in the accounts receivable. However the Senior
Secured Note Holders will not be bound by the intercreditor arrangement in
respect of any indebtedness of the Company owing Heritage Bank in excess of $6.5
million. In partial consideration of this extension of the personal guarantee,
the Company issued to Mr. Berg a warrant to purchase 200,000 shares of
common stock at an exercise price of $0.40 per share. The warrant is immediately
exercisable through March 4, 2013. The warrant was valued at $50,000 using the
Black-Scholes option pricing model and was charged to general and administrative
expense at the time of issuance.
 
 
 Line of Credit and Term Loan
– Greater Bay Bank
 
 From
November 2004 through February 23, 2008, Focus had access to a $4.0 million line
of credit from Greater Bay Bank (“GBB Bank”) under which it could borrow up to
90% of its eligible outstanding accounts receivable. In addition, from June 2005
through February 23, 2008, Focus could also borrow an additional $2.5 million
from GBB Bank under a term loan agreement. Both the line of credit and term loan
were collateralized by a personal guarantee from Mr. Berg. In connection with
this credit line, GBB Bank obtained a first priority security interest in Focus’
accounts receivable through an agreement with Mr. Berg, which enabled Mr. Berg
to retain his existing security interest in all of Focus’ assets while
subordinating his pre-existing security interest in Focus’ accounts receivable
to GBB.
 
 The
credit line was subject to ongoing covenants including a covenant based on
operating results. Borrowings under the GBB Bank line of credit and term loan
were charged interest at a rate of prime plus 1%. At December 31, 2007, there
was $3.6 million outstanding on the credit line and $2.5 million outstanding
under the term loan. The GBB Bank line of credit and term loan expired on
February 23, 2008 and were repaid.
 
 
  10
 
 
  Notes
Payable
  On
February 11, 2008, Focus obtained new investments in the amount of approximately
$9.3 million through the sale of additional indebtedness under revised terms of
its existing January 24, 2006 Senior Secured Convertible Note Purchase Agreement
(the “Original Agreement”). Prior investors under the Original Agreement and new
investors amended the Original Agreement through an “Amended and Restated Senior
Secured Note Purchase Agreement” (the “Amended Agreement”). The Amended
Agreement increases the amounts outstanding under the Original Agreement from
$11.5 million (after amendments to date) to $20.8 million in new senior secured
notes (“Notes”), amends the terms of the Notes so they are no longer convertible
into Company common stock, and issues to the holders of the Notes a total of 26
million warrants under which the holders have the right to purchase one share of
the Company’s common stock for $0.80 per warrant share (“Warrant”). The Warrant
was valued at $3.8 million using the Black-Scholes option pricing model and was
recorded as a discount on notes payable and will be amortized to interest
expense through the maturity date of the Notes. The Notes mature on January 1,
2011 and initially bear interest at a 12% annual rate, increasing to 15% on
October 1, 2008, with payment dates on June 30 and December 30 of each year the
Notes remain outstanding. The Notes are collateralized by all of the assets of
the Company. The transaction closed on February 11, 2008. No placement agent fee
or commissions were paid in connection with the Amended
Agreement.
  Under the
Amended Agreement, the Company may, in its discretion, elect to pay interest due
on December 30, 2008 in cash or by issuing additional Notes in the full amount
of such interest payment, if there has been no event of default. If the Company
elects to make the interest payments by issuance of additional Notes, this would
result in the additional issuance of up to approximately $1,500,000 of Note
principal and approximately 1.9 million Warrants (at the same exercise price of
$0.80 per share).
 
 On June
30, 2008, the Company chose to issue additional Notes in the amount of
$1,098,371 and 1,372,963 Warrants in lieu of the cash interest payment due on
June 30, 2008. These Notes retain the same terms and conditions as the $20.8
million Notes issued on February 11, 2008. The Warrants were valued at
$69,000 using the Black-Scholes option pricing model and was recorded as a
discount on notes payable and will be amortized to interest expense through the
maturity date of the Notes
  Under the
Amended Agreement, an event of default includes, but is not limited to, (i)
default in payment of interest or principal on the Notes; (ii) default in the
payment of other Company indebtedness in excess of $1,000,000, (iii)
commencement of any proceeding under federal bankruptcy law or any similar
federal or state proceeding or an assignment for the benefit of
creditors, (iv) breach by the Company of any obligation under the Amended
Agreement or other agreements entered into between the Company and the Note
purchasers pursuant to the Amended Agreement which breach is not cured within 30
days after receipt of a notice of default, and (v) termination of the Company’s
business or the liquidation or dissolution of the Company. Generally, upon the
occurrence of an event of default, the Notes will become immediately due and
payable in full, and the holders of the Notes will be entitled to enforce their
security interest in all of the assets of the Company.
  The
Amended Agreement includes various negative covenants. Among these are that the
Company has agreed that it will not (i) transfer a substantial amount of its
properties or assets outside the ordinary course of business, (ii) agree to be
acquired in a merger or other acquisition transaction involving the transfer of
a substantial amount of properties or assets of the Company, or (iii) incur
additional debt for borrowed money, in each case without the consent of Purchase
Agent (Ingalls & Snyder LLC) or the holders of a majority of the principal
amount of the outstanding Notes.
  The
Warrants are exercisable at the option of the holder at any time at the initial
exercise price of $0.80 per Warrant share for one share of the Company’s common
stock subject to standard adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions. Additionally, with
some exceptions, if the Company subsequently issues equity in a transaction, the
primary purpose of which is raising capital, and the equity is issued on a
common stock equivalent per share basis at less than $0.80/share, then the
Warrant exercise price shall be adjusted to the greater of (i) the same price at
which such equity was issued or (ii) $0.35 per share.
  The
Warrants are redeemable, at the Company’s discretion, as follows. Beginning
January 1, 2009, if the average closing price of the Company’s common stock is
above $1.30 for 30 calendar days, the Company may repurchase the Warrants
for one cent ($0.01) in tranches of 2.6 million Warrants every 30 days, subject
to certain other conditions, including the exercise of such Warrants by the
holders thereof prior to the repurchase date.
  The Notes
are redeemable, in whole or in part, at any time at the Company’s option upon 30
days’ prior written notice to the Note holders, at a redemption price equal to
100% of the principal amount of the Notes then outstanding plus accrued and
unpaid interest.
 11
 
 
 8.
              Commitments and
      Contingencies
 
 Research and Development
Agreements
 
 In
September 2007, Focus entered into a design services contract under which Focus
agreed to pay approximately $1.3 million to a third party for the design and
development of new UWB integrated circuits. Payments will be made upon the
completion of specific milestones by the third party.
 
 For the
three and six months ended June 30, 2008, $105,000 and $396,000 was charged
respectively to research and development expense based on the level of effort
incurred by the third party. At June 30, 2008, obligations related to this
contract included in accrued liabilities on the condensed consolidated balance
sheet were $778,000. At December 31, 2007, obligations related to this contract
included in accrued liabilities on the condensed consolidated balance sheet were
$515,000.
 
 
 Leases
 
 Focus
leases office facilities and certain equipment under operating and capital
leases. Under the lease agreements, Focus is obligated to pay for utilities,
taxes, insurance and maintenance.
 
 Minimum
lease commitments at June 30, 2008 were as follows:
 
 
 (In
      thousands)
              
              Operating
      Lease Commitments
              
              
              Capital
      Lease Commitments2008
              
              $
              363
              
              
              $
              652009
              
              
              719
              
              
              
              -2010
              
              
              500
              
              
              
              -2011
              
              
              -
              
              
              
              -$
              1,582
              
              
              
              65Less:
      amount representing interest
              
              
              
              
              
              
              (2
              )Present
      value of future minimum future lease payments
              
              
              
              
              
              $
              63
 
 
 Inventory Purchase
Commitments
 
 Under
contract manufacturing arrangements, contract manufacturers procure inventory to
manufacture products based upon a forecast of customer demand provided by Focus.
Focus is responsible for the financial impact on the contract manufacturer of
any reduction or product mix shift in the forecast relative to materials that
the contract manufacturer had already purchased, and is unable to return, under
a prior forecast. Such a variance in forecasted demand could require a cash
payment for finished goods in excess of current customer demand or for costs of
excess or obsolete inventory.
 
 At June
30, 2008, Focus had issued non-cancelable purchase orders for approximately
$640,000 for finished goods from its contract manufacturers, and had not
incurred any significant liability for finished goods in excess of current
customer demand or for the costs of excess or obsolete inventory.
 
 
 Product Warranty
Costs
 
 Focus’
warranty period for its products is generally 90 days to one year. Focus accrues
for warranty costs, based on estimated warranty return rates and costs to
repair, at the time revenue is recognized. At June 30, 2008 and December 31,
2007, Focus’ reserves for warranty costs, which are included in accrued
liabilities on the condensed consolidated balance sheets, were $95,000 and
$118,000, respectively.
 
 Changes
in Focus’ product warranty liability during the six months ended June 30, 2008
and 2007 were as follows:
 
 
 Six
      Months Ended(In
      thousands)
              
              June
      30, 2008
              
              
              June
      30, 2007Balance
      at January 1
              
              $
              118
              
              
              $
              191Charged
      to operations
              
              
              57
              
              
              
              71Reductions
              
              
              (80
              )
              
              
              (100
              )Ending
      balance
              
              $
              95
              
              
              $
              162
 
 
 General
 
 From
time-to-time, Focus is party to certain claims and legal proceedings that arise
in the ordinary course of business which, in the opinion of management, will not
have a material adverse effect on Focus’ financial position or results of
operation.
 
 
 12
 9.
              Stockholders'
      Equity
 
 As of
June 30, 2008, Focus was obligated under certain circumstances, to issue the
following additional shares of common stock pursuant to derivative securities,
instruments or agreements:
 
 
 (In
      thousands)
              Shares
      of Common StockOptions
      to purchase common stock
              5,531Warrants
      to purchase common stock
              32,704Preferred
      stock convertible into common stock
              3,16141,396
 
 
 During
the six months ended June 30, 2008 and 2007, Focus repurchased 285,798 and
19,612 shares of common stock for $127,000 and $25,000 and included the
repurchased shares in treasury stock at June 30, 2008 and 2007, respectively.
Such shares had originally been issued in connection with the Company’s stock
compensation plans as restricted stock.
 
  13
  A summary
of activity related to Focus’ warrants for the six months ended June 30, 2008 is
presented below:
 
 
 2008Shares
              
              
              Weighted
      Average Exercise PriceWarrants
      outstanding at January 1, 2008
              
              
              5,732,447
              
              
              $
              1.29Warrants
      granted
              
              
              27,891,715
              
              
              $
              0.79Warrants
      exercised
              
              
              -
              
              
              $
              -Warrants
      canceled
              
              
              (920,414
              )
              
              $
              2.00Warrants
      outstanding at June 30, 2008
              
              
              32,703,748
              
              
              $
              0.85Weighted
      average fair value of warrants granted during the period
              
              
              
              
              
              $
              0.17
 
 
 Information
pertaining to warrants outstanding and exercisable at June 30, 2008 is as
follows:
 
 
 Warrants
      Outstanding
              
              Warrants
      ExercisableRange
      of Exercise Prices
              Outstanding
              Weighted
      Average Remaining Life (Yrs)
              Weighted
      Average Exercise Price
              
              Exercisable
              Weighted
      Average Exercise Price$0.05-$0.79
              709,464
              2.83
              $0.49
              
              608,214
              $0.53$0.80-$0.80
              27,447,965
              2.51
              $0.80
              
              27,447,965
              $0.80$0.85-$1.35
              4,046,319
              2.46
              $1.08
              
              4,046,319
              $1.08$2.00-$2.00
              500,000
              3.64
              $2.00
              
              500,000
              $2.0032,703,748
              2.53
              $0.85
              
              32,602,498
              $0.85
 
 
 During
the six months ended June 30, 2008, Focus issued 243,750 warrants in connection
with services. The warrants vest either immediately or over 10 months from the
date of grant and are exercisable at prices between $0.05 and $0.50. These
warrants have a three to five year life and were valued using the Black-Scholes
option pricing model. During the six months ended June 30, 2008 the Company
recognized $36,000 as expense related to warrants. The warrants with a 10 month
vesting schedule will be valued monthly, with the computed expense charged to
operating expense until such warrants are fully vested.
 
 
 10.
              Related Party
      Transactions
 
 Carl
Berg
 
 In
December 2002, Mr. Berg provided Samsung Semiconductor Inc., one of Focus’
contracted ASIC manufacturers, with a personal guarantee to secure Focus’
working capital requirements for ASIC purchase order fulfillment. Mr. Berg
provided the personal guarantee without additional cost or collateral, as Mr.
Berg maintains a secured priority interest in substantially all of Focus’
assets. At June 30, 2008, Focus owed Samsung $87,000 under net 30
terms.
 
 In
February 2008, replacing his prior guarantee with respect to the Company’s
indebtedness to Greater Bay Bank, Mr. Berg agreed to personally guarantee the
Company’s line of credit with Heritage Bank. In connection with Mr. Berg’s
extension of his personal guarantee to Heritage Bank, the Company has agreed to
continue Mr. Berg’s first priority security interest in all of the
Company’s assets, which he shares on a pro-rata basis with the Senior Secured
Note Holders, except for the security interest in the Company’s accounts
receivable, which have been subordinated to Heritage Bank’s security interest in
the Company’s accounts receivable. However the Senior Secured Note Holders will
not be bound by the intercreditor arrangement in respect of any indebtedness of
the Company owing Heritage Bank in excess of $6.5 million. In partial
consideration of this extension of the personal guarantee, the Company issued to
Mr. Berg a warrant to purchase 200,000 shares of common stock at an
exercise price of $0.40 per share. The warrant is immediately exercisable
through March 4, 2013.
 
 Dolby Laboratories
Inc.
 
 N.
William Jasper Jr., the Chairman of Focus’ Board of Directors, is also the
President and Chief Executive Officer of Dolby Laboratories, Inc. (“Dolby”), a
signal processing technology company located in San Francisco, California. Focus
is required to submit quarterly royalty payments to Dolby based on Dolby
technology incorporated into certain products. For the three months ended June
30, 2008 and 2007, Focus paid Dolby $10,000 and $9,000, respectively, in
royalties, which were recorded in cost of revenue. For the six months ended June
30, 2008 and 2007, Focus paid Dolby $16,000 and $21,000, respectively, in
royalties, which were recorded in cost of revenue. Focus’ arrangements with
Dolby are on standard commercial terms.
 
 Norman
Schlomka
 
 Norman
Schlomka, General Manager of COMO and an executive officer of Focus since
February 2006, owns one third of the building, located in Raisdorf, Germany,
that COMO occupies. For the three month periods ended June 30, 2008 and 2007,
Focus paid rent related to this building of approximately $26,000 and $24,000,
respectively. For the six month periods ended June 30, 2008 and 2007, Focus paid
rent related to this building of approximately $51,000 and $46,000,
respectively. The rent is on commercial terms deemed to be fair market value and
comparable to other rents in the area.
 14
 
 
 11.           Business Segment
Information
 
 Focus’
reportable segments are Systems and Semiconductor. These reportable segments
have distinct products – Systems consists of products designed to provide
solutions in video acquisition, media asset management and digital signage and
Semiconductor consists of ASICs. Focus’ chief operating decision maker is the
CEO.
 
 Focus
evaluates segment performance based on operating income (loss) and does not
allocate net interest, other income or taxes to operating segments.
Additionally, Focus does not allocate assets by operating segment.
  
  
  Three
      Months Ended June 30, 2008Systems
              
              
              Semiconductor
              
              
              TotalNet
      revenue
              
              $
              3,243
              
              
              $
              745
              
              
              $
              3,988Cost
      of revenue
              
              
              2,051
              
              
              
              311
              
              
              
              2,362Gross
      margin
              
              
              1,192
              
              
              
              434
              
              
              
              1,626Operating
      expenses:Sales,
      marketing and support
              
              
              1,421
              
              
              
              645
              
              
              
              2,066General
      and administrative
              
              
              663
              
              
              
              408
              
              
              
              1,071Research
      and development
              
              
              1,105
              
              
              
              3,113
              
              
              
              4,2183,189
              
              
              
              4,166
              
              
              
              7,355Loss
      from operations
              
              $
              (1,997
              )
              
              $
              (3,732
              )
              
              $
              (5,729
              )
 
  
  Six
      Months Ended June 30, 2008Systems
              
              
              Semiconductor
              
              
              TotalNet
      revenue
              
              $
              6,489
              
              
              $
              1,371
              
              
              $
              7,860Cost
      of revenue
              
              
              4,176
              
              
              
              560
              
              
              
              4,736Gross
      margin
              
              
              2,313
              
              
              
              811
              
              
              
              3,124Operating
      expenses:Sales,
      marketing and support
              
              
              2,771
              
              
              
              1,455
              
              
              
              4,226General
      and administrative
              
              
              1,314
              
              
              
              794
              
              
              
              2,108Research
      and development
              
              
              2,250
              
              
              
              5,552
              
              
              
              7,8026,335
              
              
              
              7,801
              
              
              
              14,136Loss
      from operations
              
              $
              (4,022
              )
              
              $
              (6,990
              )
              
              $
              (11,012
              )
 
  
  15
 
  Three
      Months Ended June 30, 2007Systems
              
              
              Semiconductor
              
              
              TotalNet
      revenue
              
              $
              7,020
              
              
              $
              1,334
              
              
              $
              8,354Cost
      of revenue
              
              
              3,891
              
              
              
              553
              
              
              
              4,444Gross
      margin
              
              
              3,129
              
              
              
              781
              
              
              
              3,910Operating
      expenses:Sales,
      marketing and support
              
              
              1,732
              
              
              
              747
              
              
              
              2,479General
      and administrative
              
              
              662
              
              
              
              386
              
              
              
              1,048Research
      and development
              
              
              1,037
              
              
              
              2,942
              
              
              
              3,979Amortization
      of intangible assets
              
              
              30
              
              
              
              21
              
              
              
              513,461
              
              
              
              4,096
              
              
              
              7,557Loss
      from operations
              
              $
              (332
              )
              
              $
              (3,315
              )
              
              $
              (3,647
              )
 
  
  
  Six
      Months Ended June 30, 2007Systems
              
              
              Semiconductor
              
              
              TotalNet
      revenue
              
              $
              12,873
              
              
              $
              2,568
              
              
              $
              15,441Cost
      of revenue
              
              
              7,252
              
              
              
              1,113
              
              
              
              8,365Gross
      margin
              
              
              5,621
              
              
              
              1,455
              
              
              
              7,076Operating
      expenses:Sales,
      marketing and support
              
              
              3,045
              
              
              
              1,559
              
              
              
              4,604General
      and administrative
              
              
              1,369
              
              
              
              776
              
              
              
              2,145Research
      and development
              
              
              2,137
              
              
              
              5,780
              
              
              
              7,917Amortization
      of intangible assets
              
              
              94
              
              
              
              62
              
              
              
              1566,645
              
              
              
              8,177
              
              
              
              14,822Loss
      from operations
              
              $
              (1,024
              )
              
              $
              (6,722
              )
              
              $
              (7,746
              )
 
  
 
 16
 12.           Comprehensive
Loss
 
 Comprehensive
loss includes net loss and foreign currency translation adjustments. The
components of comprehensive loss are as follows:
  
  Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2007
              
              
              June
      30, 2008
              
              
              June
      30, 2007(In
      thousands)Net
      loss
              
              $
              (6,709
              )
              
              $
              (3,967
              )
              
              $
              (12,713
              )
              
              $
              (8,357
              )Other
      comprehensive income (loss):Foreign
      currency translation adjustments
              
              
              (19
              )
              
              
              (60
              )
              
              
              128
              
              
              
              (39
              )Comprehensive
      loss
              
              $
              (6,728
              )
              
              $
              (4,027
              )
              
              $
              (12,585
              )
              
              $
              (8,396
              )
 
  
 
 13.           Recent
Accounting Pronouncements
 
 In
February 2008, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement
No. 157” (“FSP 157-2”), to partially defer Statement of Financial
Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS
157”). FSP 157-2 defers the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2008. The Company is currently
evaluating the impact that the adoption of FSP 157-2 will have on its
consolidated financial position and results of operations.
 
 14.           Subsequent
Event
 
 Acquisition
of Intellectual Property
 
 On July
15, 2008, Focus completed the purchase of certain intellectual property rights
for a prototype audio product chipset developed by AudioMojo, Inc. (“the
Chipset”), and owned by Hallo Development Co., LLC (“Hallo”).  As
consideration, Focus agreed to issued to Hallo (a) 1,800,000 shares of Focus’
common stock, including 300,000 shares that will be held in escrow, and (b) a
revenue share relating to the future sales of the Chipset extending over a
period of three years from the date of first commercial shipment
(“FCS”).  The revenue share is equal to (a) 10% of net sales in the
first year after FCS, (b) 7.5% of net sales in the second year after FCS and (c)
5% of net sales in the third year after FCS.
 
 Notwithstanding
the Securities and Exchange Commissions Rule 144, the shares of the Focus’
common stock issued in connection with this transaction shall be subject to
restrictions against sale by Hallo to any third party until the earlier of (a)
the date at which the Focus has sold and received $1,000,000 in net revenues
from the Chipset or (b) December 31, 2009.
 
  17
  Item  2.
Management's Discussionand Analysis of Financial Condition and
Results of Operations
 
 The
information set forth herein should be read in conjunction with the condensed
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with the consolidated financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Focus’ Annual Report on Form 10-K for the year ended December 31,
2007 and Item 1A--"Risk Factors"--contained therein.
 
 Certain
Factors That May Affect Future Results
 
 Discussions
of certain matters in this Quarterly Report on Form 10-Q may constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), and as such, may involve risks and
uncertainties.  Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of words or phrases such as "believe", "plan",
"expect", "intend", "anticipate", "estimate", "project", "forecast", "may
increase", "may fluctuate", "may improve" and similar expressions or future or
conditional verbs such as "will", "should", "would", and "could".
 
 In
particular, statements contained in this document that are not historical facts
(including, but not limited to, statements concerning anticipated revenues,
anticipated operating expense levels, capital resources and needs and liquidity
outlook, potential new products and orders, and such expense levels relative to
our total revenues) constitute forward-looking statements and are made under the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Our actual results of operations and financial condition have varied and may in
the future vary significantly and materially from those stated in any
forward-looking statements. Factors that may cause such differences include,
without limitation, the availability of capital to fund our future cash needs,
reliance on major customers, history of operating losses, market acceptance of
our products, technological obsolescence, competition, successful integration of
acquisitions, component supply problems and protection of proprietary
information, the unpredictability of costs to develop new technologies, as well
as the accuracy of our internal estimates of revenue and operating expense
levels.  For a discussion of these factors and some of the factors
that might cause such a difference see also Item 1A of this Form 10-Q and Item
1A of our Form 10-K under the heading "Risk Factors" and those described from
time to time in our other reports filed with the Securities and Exchange
Commission.  These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements. We do not undertake, and specifically disclaim any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements except, as required by
law.
 
  18
  RESULTS
OF OPERATIONS
 
 Net
revenue
 
 
 Three
      Months Ended(Dollars
      in thousands)
              
              June
      30, 2008
              
              
              June,
      2007
              
              
              Decrease
              
              
              %
      decreaseSystems
      products
              
              $
              3,243
              
              
              $
              7,020
              
              
              $
              (3,777
              )
              
              
              (53.8
              %)Semiconductor
      products
              
              
              745
              
              
              
              1,334
              
              
              
              (589
              )
              
              
              (44.2
              %)$
              3,988
              
              
              $
              8,354
              
              
              $
              (4,366
              )
              
              
              (52.3
              %)
 
 
 
 
 
 Six
      Months Ended(Dollars
      in thousands)
              
              June
      30, 2008
              
              
              June,
      2007
              
              
              Decrease
              
              
              %
      decreaseSystems
      products
              
              $
              6,489
              
              
              $
              12,873
              
              
              $
              (6,384
              )
              
              
              (49.6
              %)Semiconductor
      products
              
              
              1,371
              
              
              
              2,568
              
              
              
              (1,197
              )
              
              
              (46.6
              %)$
              7,860
              
              
              $
              15,441
              
              
              $
              (7,581
              )
              
              
              (49.1
              %)
 
 
 Revenue
for the three months ended June 30, 2008 was $4.0 million, a decrease of $4.4
million, or 52.3%, compared with the three months ended June 30,
2007.  Revenue for the six months ended June 30, 2008 was $7.9
million, a decrease of $7.6 million, or 49.1%, compared with the six months
ended June 30, 2007.
 
 For the
three months ended June 30, 2008, net sales of systems products to distributors,
retailers and value added resellers, were approximately $3.2 million compared to
$7.0 million for the same period in 2007, a decrease of $3.8 million. For the
six months ended June 30, 2008, net sales of systems products to distributors,
retailers and value added resellers, were approximately $6.5 million compared to
$12.9 million for the same period in 2007, a decrease of $6.4 million. This
decrease in sales of systems products is mainly due to reduced
sales of our direct to edit (“DTE”) disk recordersdriven by
competitive pressures on our camera partners.
  Sales of semiconductor
products to distributors and OEM customers were approximately $745,000 in the
three months ended June 30, 2008, compared to $1.3 million for the same period
in 2007, a decrease of $589,000. Sales of semiconductor products to distributors
and OEM customers were approximately $1.4 million in the six months ended June
30, 2008, compared to $2.6 million for the same period in 2007, a decrease of
$1.2 million. This
decrease is mainly due to reduced sales of our TV-Out chips for the portable
media player market due to a slow down in the economy and saturation of portable
media players in the consumer market.
  As of
June 30, 2008, we had a sales order backlog of approximately $841,000, a nominal
increase of $12,000 compared to December 31, 2007.
 
 Sales to
one customer accounted for 12% of our revenue in the three months ended June 30,
2008. Sales to two customers accounted for 29% of our revenue in the three
months ended June 30, 2007. No one customer accounted for more than 10% of our
revenue in the six months ended June 30, 2008, whereas one customer accounted
for 15% of our revenue for the six months ended in June 30, 2007.
 
 
  19
  Gross
margin
 
 
 Three
      Months Ended(Dollars
      in thousands)
              
              June
      30, 2008
              
              
              June
      30, 2007
              
              
              DecreaseGross
      margin
              
              $
              1,626
              
              
              $
              3,910
              
              
              $
              (2,284
              )Gross
      margin rate
              
              
              40.8
              %
              
              
              46.8
              %
              
              (6.0)
      percentage points
 
 
 
 
 Six
      Months Ended(Dollars
      in thousands)
              
              June
      30, 2008
              
              
              June
      30, 2007
              
              
              DecreaseGross
      margin
              
              $
              3,124
              
              
              $
              7,076
              
              
              $
              (3,952
              )Gross
      margin rate
              
              
              39.7
              %
              
              
              45.8
              %
              
              (6.1)
      percentage points
 
 
 
 Our gross
margin rate for the three months ended June 30, 2008 decreased to 40.8% from
46.8% when compared to the three months ended June 30, 2007, a decrease of 6.0
percentage points. Our gross margin rate for the six months ended June 30, 2008
decreased to 39.7% from 45.8% when compared to the six months ended June 30,
2007, a decrease of 6.1 percentage points. The decrease is attributable to lower
sales when measured as a percentage of our fixed costs.
 
 
 Operating
expenses
 
 
 (Dollars
      in thousands)
              
              Three
      Months EndedJune
      30, 2008
              
              
              June
      30, 2007
              
              
              Increase
      / (Decrease)%
      of
              
              
              
              
              
              %
      of
              
              
              
              
              
              %
      ofrevenue
              
              
              
              
              
              revenue
              
              
              
              
              
              revenueSales,
      marketing and support
              
              $
              2,066
              
              
              
              51.8
              %
              
              $
              2,479
              
              
              
              29.7
              %
              
              $
              (413
              )
              
              
              22.1
              %General
      and administrative
              
              
              1,071
              
              
              
              26.9
              %
              
              
              1,048
              
              
              
              12.5
              %
              
              
              23
              
              
              
              14.4
              %Research
      and development
              
              
              4,218
              
              
              
              105.8
              %
              
              
              3,979
              
              
              
              47.6
              %
              
              
              239
              
              
              
              58.2
              %Amortization
      of intangible assets
              
              
              -
              
              
              
              -
              
              
              
              51
              
              
              
              0.6
              %
              
              
              (51
              )
              
              
              (0.6
              %)$
              7,355
              
              
              
              184.5
              %
              
              $
              7,557
              
              
              
              90.4
              %
              
              $
              (202
              )
              
              
              94.1
              %
 
 
 
 
 (Dollars
      in thousands)
              
              Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2007
              
              
              Increase
      / (Decrease)%
      of
              
              
              
              
              
              %
      of
              
              
              
              
              
              %
      ofrevenue
              
              
              
              
              
              revenue
              
              
              
              
              
              revenueSales,
      marketing and support
              
              $
              4,226
              
              
              
              53.8
              %
              
              $
              4,604
              
              
              
              29.8
              %
              
              $
              (378
              )
              
              
              24.0
              %General
      and administrative
              
              
              2,108
              
              
              
              26.8
              %
              
              
              2,145
              
              
              
              13.9
              %
              
              
              (37
              )
              
              
              12.9
              %Research
      and development
              
              
              7,802
              
              
              
              99.3
              %
              
              
              7,917
              
              
              
              51.3
              %
              
              
              (115
              )
              
              
              48.0
              %Amortization
      of intangible assets
              
              
              -
              
              
              
              -
              
              
              
              156
              
              
              
              1.0
              %
              
              
              (156
              )
              
              
              (1.0
              %)$
              14,136
              
              
              
              179.9
              %
              
              $
              14,822
              
              
              
              96.0
              %
              
              $
              (686
              )
              
              
              83.9
              %
 
  20
 
  Sales,
marketing and support
 Sales,
marketing and support expenses for the three months ended June 30, 2008 were
$2.1 million, compared to $2.5 million for the three months ended June 30, 2007.
The $413,000 decrease between comparison periods was driven by reduced payroll,
trade show and advertising expenses, partly offset by an increase in expenses
for stock based compensation as a result of certain of the Company’s employees
participating in a salary stock swap program (the “ Stock Swap Program”) to
which each participating employee, including each of the Company’s executive
officers, will be granted fully vested stock under the Company’s 2004 Stock
Incentive Plan in exchange for a fifteen percent (15%) reduction in their gross
pay for twenty (20) consecutive pay periods, concluding on December 12, 2008.
Each dollar of gross pay that a participating employee foregoes pursuant to the
Stock Swap Program will be converted into Focus’ common stock at a predefined
exchange rate on a predefined date. For the first five exchange dates, the
exchange rates are $0.40, $0.45, $0.50, $0.55 and $0.60, respectively. For the
remaining exchange dates, the exchange rate will be the greater of $0.60 or 80%
of the trailing 15 day average price immediately preceding the exchange
date.
 
 Sales,
marketing and support expenses for the six months ended June 30, 2008 were $4.2
million, compared to $4.6 million for the six months ended June 30, 2007. This
$378,000 decrease for comparison periods was driven by decreased payroll and
trade show expenses, partly offset by an increase in expenses as a result of the
Stock Swap Program.
 
 
 General and
administrative
 
 General
and administrative expenses for the three months ended June 30, 2008 were $1.1
million compared to $1.0 million for the three months ended June 30, 2007, an
increase of $23,000.
 
 General
and administrative expenses for the six months ended June 30, 2008 were $2.1
million, consistent with the six months ended June 30, 2007.
 
 
 Research and
development
 
 Research
and development expenses for the three months ended June 30, 2008 were $4.2
million, an increase of $239,000, from $4.0 million for the three months ended
June 30, 2007. The increase mainly reflects an increase in payroll due to a
higher average headcount during the three months ended June 30, 2008 compared to
the three months ended June 30, 2007 as well as additional expenses as a result
of the Stock Swap Program
 
 Research
and development expenses for the six months ended June 30, 2008 were $7.8
million, a decrease of $115,000, from $7.9 million for the six months ended June
30, 2007. The majority of the decrease is due to a reduction in tooling and
prototype expense of $552,000 related to our UWB imitative partially offset by
increased payroll of $346,000 due to a higher average headcount during the six
months ended June 30, 2008 compared to the six months ended June 30,
2007.
 
 
  21
  Interest expense, net and
Other income, net
 
 
 Three
      Months Ended(Dollars
      in thousands)
              
              June
      30, 2008
              
              
              June
      30, 2007
              
              
              IncreaseInterest
      expense, net
              
              $
              (978
              )
              
              $
              (299
              )
              
              $
              679Other
      income/(expense), net
              
              $
              1
              
              
              $
              (2
              )
              
              $
              3
 
 
 
 
 Six
      Months Ended(Dollars
      in thousands)
              
              June
      30, 2008
              
              
              June
      30, 2007
              
              
              Increase
      / (Decrease)Interest
      expense, net
              
              $
              (1,665
              )
              
              $
              (589
              )
              
              $
              1,076Other
      income/(expense), net
              
              $
              (9
              )
              
              $
              1
              
              
              $
              (10
              )
 
 
 Net
interest expense for the three months ended June 30, 2008 was $978,000, compared
to $299,000 in the three months ended June 30, 2007. The additional interest
expense is directly related to increased borrowings, including $9.3 million
borrowed on February 11, 2008, an increase of the interest rate on the notes
outstanding from 10% to 12% effective February 11, 2008 and interest expense
derived from the amortization of note discount of $301,000.
 
 Net
interest expense for the six months ended June 30, 2008 was $1.7 million,
compared to $589,000 in the six months ended June 30, 2007. The additional
interest expense is related to increased borrowings, including $9.3 million
borrowed on February 11, 2008, an increase of the interest rate on the notes
outstanding from 10% to 12% effective February 11, 2008 and interest expense
derived from the amortization of a note discount of $467,000.
 
 Other
income (expense) for the three and six months ended June 30, 2008 consists
mainly of fluctuations associated with exchange rate differences related to
transactions denominated in Euros.
 
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 The
accompanying condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. For the six months
ended June 30, 2008 and the year ended December 31, 2007, we incurred net losses
of $12.7 million and $17.4 million, respectively, and used cash in operating
activities of $8.7 million, and $14.6 million, respectively. Absent continued
access to capital from the sale of securities or other sources, we will be
unable to continue as a going concern.
 
 The
condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should we
be unable to continue as a going concern. Continuing as a going concern depends
upon our ability to generate sufficient positive cash flows to meet our
obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to return to profitability.
 
 Since
inception, we have financed our operations primarily through the public and
private sale of common stock and other convertible debt securities, lines of
credit and debt borrowings from financial institutions, proceeds from the
exercise of options and warrants, short-term borrowings or guarantees from
private lenders (including individuals) and credit arrangements with vendors and
suppliers.
 
 
 (Dollars
      in thousands)
              
              June
      30, 2008
              
              
              December
      31, 2007Cash
      and cash equivalents
              
              $
              2,119
              
              
              $
              1,841Working
      capital
              
              $
              (3,593
              )
              
              $
              (2,034
              )Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2007Net
      cash used in operating activities
              
              $
              (8,684
              )
              
              $
              (7,881
              )Net
      cash used in investing activities
              
              $
              (567
              )
              
              $
              (490
              )Net
      cash provided by financing activities
              
              $
              9,521
              
              
              $
              6,383
 
 
 22
 Net cash used in operating
activities
 
 
 (In
      thousands)
              
              Six
      Months Ended,June
      30, 2008
              
              
              June
      30, 2007
              
              
              Change
      incash
      (used)
              
              
              cash
      (used)
              
              
              cash
      (used)provided
              
              
              provided
              
              
              providedNet
      loss
              
              $
              (12,713
              )
              
              $
              (8,357
              )
              
              $
              (4,356
              )Non-cash
      income statement items
              
              
              2,735
              
              
              
              1,609
              
              
              
              1,126Adjusted
      net loss
              
              
              (9,978
              )
              
              
              (6,748
              )
              
              
              (3,230
              )Changes
      in working capital
              
              
              1,294
              
              
              
              (1,133
              )
              
              
              2,427Net
      cash used in operating activities
              
              $
              (8,684
              )
              
              $
              (7,881
              )
              
              $
              (803
              )
 
 
 
 Net cash
used in operating activities for the six months ended June 30, 2008 and 2007 was
$8.7 million and $7.9 million, respectively. The increase in net cash used in
operating activities mainly reflects an increase in the net loss adjusted for
non-cash items, an increase in cash used by prepaid expenses and accounts
payable, partially offset by an increase in cash provided by accounts receivable
and accrued liabilities. The increase in cash provided by accounts receivable
reflects our lower sales run rate compared to prior year. The increase in cash
used by accounts payable mainly reflects the timing of payments related to our
UWB investment and reduced inventory purchases.
 
 One
customer had an accounts receivable balance of 14% of our total accounts
receivable at June 30, 2008.
  We expect
that our operating cash flows may fluctuate in future periods as a result of
fluctuations in our operating results, shipment timetable, accounts receivable
collections, inventory management, and the timing of payments among other
factors.
 
 Net cash used in investing
activities
 
 Net cash
used in investing activities was $567,000 for the six months ended June 30,
2008, compared to $490,000 used in the six months ended June 30, 2007. The
increase in cash used in investing activities mainly reflects the timing of
purchases of equipment and design tools related to our investment in UWB
technology.
 
 Net cash provided by
financing activities
 
 Net cash
provided by financing activities was $9.5 million for the six months ended June
30, 2008, compared to $6.4 million for the six months ended June 30, 2007. The
net cash provided by financing activities in the six months ended June 30, 2008
mainly consists of net proceeds of $9.3 million from the issuance of additional
notes payable and an increase in net borrowings of $400,000 associated with our
line of credit compared to cash provided from private financing of $6.2 million
and $207,000 from the exercise of stock options and warrants.
 
 Capital
Resources and Liquidity Outlook
 
 We have
incurred losses and used net cash in operating activities for the six months
ended June 30, 2008 and each of the two years in the period ended December 31,
2007, as such, we have been dependent upon raising money for short- and
long-term cash needs through the issuance of debt, proceeds from the exercise of
options and warrants, and the sale of our common stock in private
placements.
 
 We
received gross proceeds of $9.3 million from the issuance of secured notes and
warrants to a group of private investors in February 2008. These notes, along
with an additional $11.5 million in previously outstanding notes, initially bear
interest at a 12% annual rate, increasing to 15% on October 1, 2008, with
interest due on June 30 and December 30 of each year the notes remain
outstanding. We may elect to pay interest due on December 30, 2008 in cash or by
issuing additional notes in the full amount of such interest payment, if there
has been no event of default. We received net proceeds of $6.2 million and
$4.9 million from the issuances of common stock and warrants to groups of
private investors in February 2007 and September 2007,
respectively.
 
 On June
30, 2008, the Company chose to issue additional notes in the amounts of
$1,098,371 in lieu of the cash interest payment due on that date. These notes
have the same terms and conditions as the $9.3 million secured notes issued on
February 11, 2008.
 
 In March
2008, we finalized a line of credit agreement with Heritage Bank of Commerce.
Under the line of credit, we may borrow up to $6.5 million in one or more
advances through February 21, 2009. At June 30, 2008, we had an outstanding
balance of $6.5 million, which is the maximum amount available under this line
of credit.
 
 In early
2008, we focused on reducing our expense base. In February 2008, we eliminated
eight positions or approximately five percent of our total workforce from our
operations, sales and marketing departments. Additionally, in February 2008 we
initiated a cash salary reduction plan for certain employees in consideration of
such employees receiving compensation through payments of our common stock under
our various stock plans. We estimate that this could save approximately $700,000
in cash in 2008.
 
 Our
expense reduction efforts are only part of our overall efforts to reduce our
financial risks. We will need to raise additional amounts before September
30, 2008,to continue development and launch commercialization
of our next generation products. The amount necessary will depend upon the
results and timing of ongoing development efforts and the anticipated growth of
our Semiconductor and Systems businesses. Our future capital requirements will
remain dependent upon  these and other factors, including cash flow
from operations, the ability to increase sales from their recent reduced levels
over those of prior years, increasing our gross margins from current levels,
continued progress in research and development programs , and our ability to
market our new products successfully.
 23
 
 Summary of Certain
Contractual Obligations as of June 30, 2008
 
 
 (In
      thousands)<
      1 year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              TotalCapital
      and operating leases (including interest)
              
              $
              790
              
              
              $
              857
              
              
              $
              -
              
              
              $
              1,647Inventory
      purchase commitments
              
              
              640
              
              
              
              -
              
              
              
              -
              
              
              
              640Line
      of credit
              
              
              6,500
              
              
              
              -
              
              
              
              -
              
              
              
              6,500Notes
      payable
              
              
              -
              
              
              
              21,898
              
              
              
              -
              
              
              
              21,898Interest
      on notes payable
              
              
              3,231
              
              
              
              4,810
              
              
              
              -
              
              
              
              8,041$
              11,161
              
              
              $
              27,565
              
              
              $
              -
              
              
              $
              38,726
 
    Item
3. Quantitative and Qualitative Disclosures about Market Risk
 
 Interest Rate
Risk
 
 At June
30, 2008, we did not hold any short-term investments that would be exposed to
market risk from adverse movements in interest rates.
 
 At June
30, 2008, our outstanding debt obligations consisted of secured notes payable of
$21.9 million – see Note 7, “Borrowings”. A fixed interest rate is applicable to
these debt obligations of 12.0% per annum through September 30, 2008 after which
the rate increases to 15.0% per annum until maturity (January 1,
2011).
 
 Foreign Currency
Risk
 
 Gains or
losses related to foreign exchange currency transactions were not material for
the periods ended June 30, 2008 and 2007.
 
 Item
4T. Controlsand Procedures
 
 Management
of the Company, with the participation of the President and Chief Executive
Officer and the Chief Financial Officer (its principal executive officer and
principal financial officer, respectively), evaluated our disclosure controls
and procedures as of the end of the period covered by this Report. Based on that
evaluation, the President and Chief Executive Officer and the Chief Financial
Officer have concluded that, as of the end of the period covered by this Report,
our disclosure controls and procedures are effective.
 
 There was
no change in our internal control over financial reporting that occurred during
the three months ended June 30, 2008 of 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
  24
  PART
II - OTHER INFORMATION
 
 Item
      1.
              LegalProceedings
  From time
to time, Focus is a party to certain claims and legal proceedings that arise in
the ordinary course of business of which, in the opinion of management, will not
have a material adverse effect on Focus’ financial position or results of
operations.
 
 Item
      1A.
              RiskFactors
  Except as
described below, there have been no material changes to our risk factors
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2007. You should carefully consider the risks identified therein any of which
could materially affect our business, financial condition or future
results.
 
 We
have a long history of operating losses.
 
 As of
June 30, 2008, we had an accumulated deficit of $135.4 million. We incurred
net losses of $17.4 million, $15.9 million and $15.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively, and we expect to continue
to incur net losses for the remainder of 2008. There can be no assurance that we
will ever become profitable. Additionally, our independent registered public
accounting firm has included an explanatory paragraph in its report on our
consolidated financial statements for the year ended December 31, 2007 with
respect to substantial doubt about our ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
  We
will need to raise additional capital, which may not be available when we need
it.
  Historically,
we have met our short- and long-term cash needs through debt issuances, the sale
of common stock or other convertible securities in private placements, because
cash flow from operations has been insufficient to fund our operations. Recent
financial market turmoil has exacerbated the capital raising efforts of small
technology companies. The Company has sold debt securities on a secured basis
when it has been unable to sell its equity securities on acceptable terms, and
the inability to provide security to different future lenders may preclude the
availability of such capital sources. If the Company cannot access either the
debt or capital markets, it would have no choice but to reorganize its
operations, either in bankruptcy or other insolvency proceedings.
  We
received net proceeds of $9.3 million from the issuance of secured notes and
warrants to a group of private investors in February 2008. We received net
proceeds of $6.2 million and $4.9 million from the issuances of common stock to
groups of private investors in February 2007 and September 2007. We
believe that we will need to raise additional amounts before September 30, 2008
to continue development and launch commercialization of our next generation UWB
products. The amount necessary will depend upon the results of ongoing UWB and
other product development efforts and our Semiconductor and Systems businesses.
Our future capital requirements will remain dependent upon these and other
factors, including cash flow from operations, increasing our gross margins from
current  levels, continued progress in research and development programs,
competing technological and market developments, and our ability to market our
new products successfully. There can be no assurance that additional equity or
debt financing, if required, will be available on acceptable terms or at all. If
we are unable to access equity or debt financings when we need it, our business
will be substantially harmed.
  Our
future capital raising activities may dilute the ownership of our existing
stockholders.
  We will
sell securities in the public and private equity markets if and when conditions
are favorable.  Raising funds through the issuance of common stock will
dilute the ownership of our existing stockholders.  Furthermore, we may
issue common stock, or securities convertible into or exercisable for our common
stock, at prices that represent a substantial discount to the market price of
our common stock, which could result in a decline in the trading price of our
common stock.
 
 Currently
we do not meet the requirements to remain listed on the Nasdaq Capital
Market.  As described below, we have sought a hearing to reverse the
delisting notice that we have received, but there can be no assurance that we
will meet the criteria required for reversal. If we are delisted, it could,
among other things, decrease the liquidity of our common stock, limit our
ability to raise additional capital and potentially accelerate the amounts
due under our $21.9 million outstanding principal amount of senior secured
notes at the option of the holders of such notes.
 
 We
may be delisted from the Nasdaq Capital Market.
 
 Our
common stock is traded on the Nasdaq Capital Market. There are various
quantitative listing requirements for a company to remain listed on the Nasdaq
Capital Market, including maintaining a minimum bid price of $1.00 per share of
common stock and stockholders’ equity of $2.5 million or market capitalization
of at least $35 million.
 
 On June
16, 2008, the Company received a letter from The Nasdaq Stock Market (“Nasdaq”)
notifying the Company that it fails to comply with the market value of public
listed securities requirement for continued listing set forth in Marketplace
Rule 4310(c)(3)(B). Such rule requires that the Company’s market value not be
below $35,000,000 for ten consecutive trading days. According to Nasdaq, as of
June 13, 2008, the Company's listed securities market value was $30,214,960. The
Company had until July 16, 2008, to regain compliance with the
rule.
 
 On July
21, 2008, the Company received a letter from Nasdaq notifying the Company that
it has not regained compliance in accordance with Marketplace Rule
4310(c)(8)(C). Accordingly, the Company’s securities will be delisted from the
Nasdaq Capital Market on July 30, 2008, unless the Company appealed its
delisting to the Nasdaq Listing Qualifications Panel.
 
 On July
28, 2008, the Company was notified that its request to appear before the Nasdaq
Hearings Panel has been approved and that a hearing has been scheduled for
September 4, 2008.  Accordingly, the delisting of the Company’s
securities has been stayed pending the Nasdaq Hearings Panel’s
decision.  The Company intends to submit materials and attend the
hearing in support of its appeal. There can be no assurance, however, that the
Nasdaq Hearings Panel will grant a request for continued listing.
 
 In
addition to receiving notices that the Company has not been in compliance with
Nasdaq’s market capitalization rule for continued listing, the Company also has
received notices that it has not been in compliance with Nasdaq’s $1.00 minimum
bid price rule for continued listing on the Nasdaq Capital Market.  On
August 15, 2007, we were notified that for the previous 30 consecutive business
days, the bid price of our common stock had closed below the minimum $1.00 per
share price requirement and we were initially given until February 11, 2008 to
regain compliance. But, on February 12, 2008, we were advised that we had an
additional six months extension or until August 11, 2008 to attain compliance
with this $1.00 minimum bid price rule.
 25
 
 On August
12, 2008, the Company was notified by Nasdaq that the Company has not regained
compliance with Nasdaq’s $1.00 minimum bid price rule and that this matter
serves as an additional basis for delisting of the Company’s securities from the
Nasdaq Capital Market.  Additionally, Nasdaq notified the Company that
the Nasdaq Listing Qualifications Panel will consider this matter in rendering
its determination regarding the Company’s continued listing on the Nasdaq
Capital Market.  Accordingly, the Company also intends to address the
minimum bid price rule at the hearing on September 4, 2008.
  We may
take certain actions in order to regain compliance with Nasdaq’s continued
listing requirements.  These actions include, without limitation, a
reverse stock split of our shares of common stock.  There can be no
assurance, however, that such actions will allow us to regain compliance with
any of the Nasdaq’s continued listing requirements.  If we do not
regain compliance with the continued listing requirements within the allotted
compliance period (including the minimum bid price per share and the market
capitalization requirement), including any extensions that may be granted by
Nasdaq, Nasdaq would notify us that our common stock will be delisted from the
Nasdaq Capital Market.
 
 If we are
delisted from the Nasdaq Capital Market, our shares may be quoted on the OTC
Electronic Bulletin Board or some other quotation medium, such as the pink
sheets, depending on our ability to meet the specific listing requirements of
the specific quotation system and market makers’ willingness to quote our shares
on either of these mediums. As a result, an investor might find it more
difficult to trade, or to obtain accurate price quotations for, such shares.
Delisting might also reduce our ability to raise capital as well as the
visibility, liquidity, and price of our voting common stock. If our common stock
were not listed on the Nasdaq Capital Market or another established automated
over-the-counter trading market in the United States, all amounts outstanding
under our $21.9 million senior secured notes would become due and payable at the
option of the holders. We do not now have such capital, and we may not have
sufficient resources or access to additional capital at the time such demand is
made, to satisfy those note obligations at the time they would become due, which
would have a material adverse impact on our financial condition and results of
operations
 
 The
exercise price of a significant number of our outstanding warrants will adjust
downward in the event we issue equity securities or equity linked securities at
an effective price less than $0.80 per share.
 
 The
exercise price of the warrants held by our senior secured note holders will be
adjusted without any change in the number of securities purchasable under the
warrants if the Company issues any equity or equity linked securities in
connection with a financing, the primary purpose of which is to raise equity
capital, at a net effective price to the Company of less than $0.80 per share of
common stock.  If the Company makes such an issuance, then the exercise
price of the warrants issued and then outstanding held by our senior secured
note holders will be adjusted so that the exercise price to purchase one share
of common stock pursuant to the warrant will be the net effective price received
by the Company in the financing; provided, however, that such adjustment to the
exercise price may not result in the exercise price of the warrant to be less
than $0.35 per share.
 
 We
have a significant number of outstanding securities that will dilute existing
stockholders upon conversion or exercise.
 
 At July
31, 2008, we had 3,161 shares of preferred stock issued and outstanding
32,703,748 warrants and 5,512,529 options outstanding which are all exercisable
for or convertible into shares of common stock. The 3,161 shares of preferred
stock are convertible into 3,161,000 shares of our voting common stock.
Furthermore, at July 31, 2008, 2,235,034 additional shares of common stock were
available for grant to our employees, officers, directors and consultants under
our current stock option and incentive plans. We also may issue additional
shares in acquisitions. Any additional grant of options under existing or future
plans or issuance of shares in connection with an acquisition will further
dilute existing stockholders.
 
  26
  Item
      2.
              UnregisteredSales of Equity Securities and
      Use of Proceeds
 
 On June
20, 2008, we issued a warrant to Darren S. Bankston of Piedmont Consulting, to
purchase 37,500 shares of our common stock at a purchase price of $0.50 per
share for investor relation services. The warrant was issued pursuant to section
4(2) of the Securities Act based on the nature of the investor and certain
representations made to us. The warrant was immediately exercisable and expires
five years from the date of grant.
  
 On June
20, 2008, we issued a warrant to Keith Fetter of Piedmont Consulting, to
purchase 37,500 shares of our common stock at a purchase price of $0.50 per
share for investor relation services. The warrant was issued pursuant to section
4(2) of the Securities Act based on the nature of the investor and certain
representations made to us. The warrant was immediately exercisable and expires
five years from the date of grant
  
 Although
we do not have any publicly announced programs or plans to repurchase our
securities, during the six months ended June 30, 2008, we repurchased an
aggregate of 285,798 shares of our common stock which were originally issued as
restricted stock under our stock compensation plans for an aggregate purchase
price of $127,000.
  Item
      3.
              DefaultsUpon Senior
  Securities
 
 None.
  Item
      4.
              Submissionof Matters to a Vote of Security
      Holders
 
 None.
  Item
      5.
              OtherInformation
 
 None.
  Item
      6.
              Exhibits
  4.1
                Common
      Stock Purchase Warrant issued to R. Keith Fetter, dated June 20,
      20084.2
                Common
      Stock Purchase Warrant issued to Darren S. Bankston, dated June 20,
      20084.3
                Piggyback
      Registration Rights Agreement between Focus and R. Keith Fetter., dated
      June 20, 20084.4
                Piggyback
      Registration Rights Agreement between Focus and Darren S. Bankston, dated
      June 20, 200810.1
                Hallo Asset Purchase
      agreement, dated April 23, 200831.1
                Rule
      13a-14(a) Certification of CEO31.2
                Rule
      13a-14(a) Certification of CFO32.1
                CEO
      906 Certification32.2
                CFO
      906 Certification
 
   27
  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.
 
 
 
 
 August 14,
      2008
              Focus Enhancements,
      Inc.Date
              RegistrantBy:/s/ Brett A.
    MoyerBrett
      A. MoyerChief
      Executive Officer and President(Principal
      Executive Officer)By:/s/  Gary L.
      WilliamsGary
      L. WilliamsExecutive
      Vice President of Finance,Chief
      Financial Officer(Principal
      Accounting Officer)