Document:

Exhibit 4.1

 

	
  $20,800,000

  	
   

  	
  Date:  February 11, 2008

  

 

FOCUS ENHANCEMENTS, INC.

 

AMENDED AND RESTATED SENIOR SECURED NOTE DUE
JANUARY 1, 2011

 

This Amended
and Restated Senior Secured Note Due January 1, 2011 hereby amends and
restates in its entirety the Senior Secured Convertible Note Due January 1,
2011 that was executed on January 24, 2006 by FOCUS ENHANCEMENTS,
INC.  This Note is one of those issued
pursuant to an Amended and Restated Senior Secured Note Purchase Agreement of
even date herewith (the “Purchase Agreement”) among the Company (as identified
below) and the “Purchasers” named therein, which Purchasers include the holder
of this Note and other like Notes (collectively the “Notes”).    Unless otherwise specified in this Note, the
Holder of this Note shall be Ingalls & Snyder LLC as nominee for the
actual Holder.

 

THIS NOTE HAS
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE SECURITIES LAWS.  THIS NOTE  MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.

 

1.                                             INTEREST

 

Focus
Enhancements, Inc., a Delaware corporation (the “Company”, which term
shall include any successor corporation under the Purchase Agreement
hereinafter referred to), promises to pay interest on the principal amount of
this Note at the rate of twelve percent (12%) per annum beginning January 1,
2008 and continuing until September 30, 2008.  Thereafter, interest
under this Note shall accrue at the rate of fifteen percent (15%) per annum
beginning October 1, 2008 and continuing until the Final Maturity Date or
the date of any earlier retirement or redemption under the terms of this
Note.  The Company shall pay interest
semiannually on June 30 and December 30 of each year, commencing on June 30,
2008.  Interest on the Notes shall accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the Purchase
Agreement Closing Date; provided, however, that if there is not
an existing default in the payment of interest and if this Note is
authenticated between a record date referred to on the face hereof and the next
succeeding interest payment date, interest shall accrue from such interest
payment date.  Interest will be computed on the basis of a 360-day year
and 30-day months.

 

2                                              METHOD
OF PAYMENT

 

The Company
shall pay interest on this Note (except defaulted interest) to the person who
is the Holder of this Note at the close of business on the related interest
payment date.  The Holder must surrender this Note to the Company to
collect payment of principal.  The Company will pay principal and interest
in money of the United States that at the time of payment is legal tender for
payment of public and private debts.  If there is no pending Event of
Default under the Loan Documents as of the interest payment date for which
interest will be paid, the Company may pay interest due on June 30, 2008
and December 30, 2008 by issuing a new Note in the principal amount which
includes all cumulative interest then due, and in all other respects having
terms identical to this Note (each, a “Payment-in-Kind”).  Upon any
Payment-In-Kind, the Holder shall be entitled to receive,  on the same terms as set forth in the
Warrants issued under the Purchase Agreement of even date 

 

1

 

herewith,
additional Warrants for a number of Common Stock Shares of the Company equal to
the  additional new  Note amount divided by $0.80, subject to
further adjustment as set forth in the Warrants issued under such  Purchase Agreement.  The Company will pay principal due upon
surrender of this Note by check sent to the Holder’s address on the books and
records of the Company, or, if the Holder has provided wire transfer
instructions to the Company at least five Business Days prior to the payment
date, in immediately available funds by wire transfer.

 

3.                                             PURCHASE
AGREEMENT

 

This Note is one of a duly authorized issue of Notes of the Company
designated as its Amended and Restated Senior Secured Notes Due January 1,
2011 (the “Notes”) issued under the Purchase Agreement.  The terms of this
Note include those stated in the Purchase Agreement.  The Notes are secured
obligations of the Company.

 

4.                                             SECURITY
INTEREST; ADDITIONAL SECURED CREDITORS

 

This Note is
secured by all of the assets of the Company in accordance with the terms and
subject to the conditions of the Amended and Restated Security Agreement of even
date herewith (the “Security Agreement”) among the Company, Purchasers’ Agent,
and the Purchasers.  In case of an Event
of Default, the Holders shall have the rights set forth in the Security
Agreement; provided that such rights shall be subject to the senior or
contemporaneous rights of the Bank and Berg as set forth in the Amended
Intercreditor Agreement and the Amended and Restated Intercreditor Agreement
both dated as of December 31, 2007.

 

5.                                             [INTENTIONALLY
OMITTED]

 

6.                                             DEFAULT

 

In the case an
Event of Default shall occur, the aggregate unpaid principal balance plus
accrued and unpaid interest on this Note shall become or may be declared to be
due and payable in the manner and with the effect provided in the Loan
Documents.

 

7.                                             OPTIONAL
REDEMPTION

 

This Note is
subject to redemption, at the option of the Company, in whole or in part, at
any time upon at least 30 days’ notice at a Redemption Price in cash equal to
100% of the principal amount of the Note to be redeemed together with accrued
and unpaid interest, if any, on the principal amount of the Note redeemed to
the date of redemption.  Accrued interest also shall be paid in cash at
the Redemption Date.  No sinking fund is provided for the Notes.

 

8.                                             NOTICE
OF REDEMPTION

 

Notice of
redemption as stated in Paragraph 7 will be delivered at least 30 days before
the Redemption Date to the Holder of this Note at the Holder’s address on the
books and records of the Company.  Notes in denominations larger than
$1,000,000 may be redeemed in part, but only in whole multiples of
$1,000,000. Notes of lesser amounts may be redeemed in full so long as all
such Notes redeemed shall total at 

 

2

 

least
$1,000,000, unless the Notes outstanding shall total less than $1,000,000.  On and after the Redemption Date interest
shall cease to accrue on Notes or portions of them called for redemption.

 

9.                                             REPURCHASE
OF NOTES AT OPTION OF HOLDER UPON A FUNDAMENTAL CHANGE

 

A.                                    Subject
to the terms and conditions of the Purchase Agreement, if a Fundamental
Change  occurs at any time prior to the
Final Maturity Date, the Holder will, upon receipt of the notice of the
occurrence of a Fundamental Change, have the right to require the Company to
repurchase any or all of such Holder’s Notes for cash in an amount equal to
101% of the principal amount of the Notes to be repurchased plus accrued and
unpaid interest, if any, to (but not including) the Fundamental Change
Repurchase Date.   Subject to Section 3.1 of the Purchase Agreement,
on or before the 15 th Business Day after the effective date of a
Fundamental Change, the Company will provide to the Holder and Purchasers’
Agent a notice of the occurrence of the Fundamental Change and of the resulting
repurchase right.  To exercise the repurchase right, the Holder must
deliver a Repurchase Exercise Notice duly completed to the Company as described
in the Purchase Agreement.

 

B.                                    Holder
has the right to withdraw any Fundamental Change repurchase notice, in whole or
in part, by delivering to the Company a written notice of withdrawal in
accordance with the provisions of the Purchase Agreement.

 

C.                                    All
interest shall cease to accrue on this Note (or portions thereof) immediately
after such Fundamental Change Repurchase Date, and the Holder shall have no
other rights as such other than the right to receive the Fundamental Change
Repurchase Price upon surrender of the Note plus any accrued but unpaid
interest.

 

10.                                           [INTENTIONALLY
OMITTED]

 

11.                                           [INTENTIONALLY
OMITTED]

 

12.                                           DENOMINATIONS,
TRANSFER, EXCHANGE

 

The Notes are
issued without coupons in the name of Ingalls & Snyder LLC, as nominee
for each individual Holder unless otherwise requested by each individual Holder
and are recorded in the name of the Holder on the books and records of the
Company.  The Holder may register the transfer of or exchange of this Note
in accordance with the Purchase Agreement.  The Company may require the
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes or other governmental charges that may be
imposed in relation thereto by law or permitted by the Purchase Agreement.

 

13.                                           PERSONS
DEEMED OWNERS

 

The Holder of
this Note may be treated as the owner of it for all purposes.

 

14.                                           AMENDMENT,
SUPPLEMENT AND WAIVER

 

3

 

Subject to
certain exceptions, the Purchase Agreement or the Notes may be amended or
supplemented with the consent of the Holders of at least a Majority-in-Interest
of the Notes, and an existing default or Event of Default and its consequence
or compliance with any provision of the Purchase Agreement or the Notes may be
waived in a particular instance with the consent of the Holders of a
Majority-in-Interest of the Notes.  The Majority-in-Interest may act through
the Purchasers’ Agent.  Without the
consent of or notice to any Holder, the Company and the Purchasers’ Agent may
amend or supplement the Purchase Agreement or the Notes to, among other things,
cure any ambiguity, defect or inconsistency or make any other change that does
not adversely affect the rights of any Holder.

 

15.                                           [INTENTIONALLY
OMITTED]

 

16.                                           NO
RECOURSE AGAINST OTHERS

 

No past,
present or future director, officer, employee, incorporator or stockholder of
the Company, as such, shall have any liability for any obligations of the
Company under the Notes, the Purchase Agreement or for any claim based on, in
respect of, or by reason of, such obligations or their creation.  The
Holder of this Note by accepting this Note waives and releases all such liability. 
The waiver and release are part of the consideration for the issuance of this
Note.

 

17.                                           ABBREVIATIONS
AND DEFINITIONS

 

Customary
abbreviations may be used in the name of the Holder or an assignee, such as:
TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (=
joint tenants with right of survivorship and not as tenants in common), CUST (=
Custodian) and UGMA (= Uniform Gifts to Minors Act).

 

All terms used
in this Note but not specifically defined herein are defined in the Purchase
Agreement and are used herein as so defined.

 

18.                                           PURCHASE
AGREEMENT TO CONTROL; GOVERNING LAW

 

In the case of
any conflict between the provisions of this Note and the Purchase Agreement,
the provisions of the Purchase Agreement shall control.

 

THIS NOTE
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAW OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS
OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION
WOULD BE REQUIRED THEREBY.

 

The Company
will furnish to any Holder, upon written request and without charge, a copy of
the Purchase Agreement.  Requests may be made to: Focus Enhancements, Inc.,
1370 Dell Avenue, Campbell, CA  95008.

 

Executed by
the undersigned duly authorized officer of the Company at the Company’s
principal office in Campbell, California on February 11, 2008.

 

4

 

	
   

  	
  FOCUS
  ENHANCEMENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Brett
  Moyer

  
	
   

  	
   

  
	
   

  	
  Its:

  	
  President &
  CEO

  

 

The consents
of the Company and Purchasers’ Agent are required to amend this Note.  Therefore, the Company and Purchasers’ Agent
hereby consent to the amendment and restatement of this Note as set forth
herein by setting forth their signatures below.

 

Consented to
this day of February 11, 2008

 

COMPANY

 

	
  FOCUS
  ENHANCEMENTS, INC.

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Brett
  Moyer

  	
   

  
	
   

  	
   

  
	
  Its:

  	
  Title:
  President & CEO

  	
   

  

 

 

PURCHASERS’
AGENT

 

	
  /s/ Thomas
  O. Boucher Jr.

  	
   

  
	
  THOMAS O.
  BOUCHER, JR.

  	
   

  

 

SIGNATURE PAGE TO AMENDED AND RESTATED SENIOR SECURED

NOTE DUE JANUARY 1, 2011

 

5

 

ASSIGNMENT FORM

 

To assign this
Note, fill in the form below:

 

I or we assign
and transfer this Note to:

 

	
  (Insert assignee’s social security or tax I.D. number)

  
	
   

  
	
   

  
	
  (Print or type assignee’s name, address and zip code)

  
	
   

  
	
  and
  irrevocably appoint

  
	
   

  
	
  agent to
  transfer this Note on the books of the Company. The agent may substitute
  another to act for him or her.

  

 

 

	
  Date:

  	
   

  	
  Your
  Signature:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Sign
  exactly as your name appears on the

  other side of this Note)

  

 

* Signature
guaranteed by:

 

	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

*
                
Signature(s) must be guaranteed by a qualified guarantor institution with
membership in an approved signature guarantee program pursuant to Rule 17Ad-15
under the Securities Exchange Act of 1934.

 

6

 

REPURCHASE EXERCISE NOTICE

UPON A FUNDAMENTAL CHANGE

 

To:
                             
Focus Enhancements, Inc.

 

The undersigned registered
owner of this Note hereby irrevocably acknowledges receipt of a notice from
Focus Enhancements, Inc. (the “Company”) as to the occurrence of a
Fundamental Change with respect to the Company and requests and instructs the
Company to redeem the entire principal amount of this Note, or the portion
thereof (which is $100,000 or an integral multiple thereof) below designated,
in accordance with the terms of the Purchase Agreement referred to in this Note
at the Fundamental Change Repurchase Price, together with accrued interest to,
but excluding, the Repurchase Date, to the registered Holder hereof.

 

	
  Dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature(s)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature(s) must
  be guaranteed by a qualified guarantor institution with membership in an
  approved signature guarantee program pursuant to Rule 17Ad-15 under the
  Securities Exchange Act of 1934.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature
  Guaranty

  
	
   

  	
   

  	
   

  
	
  Principal
  amount to be redeemed

  	
   

  	
   

  
	
  (in an
  integral multiple of $100,000, if less than 

  all):

  	
   

  	
   

  

 

NOTICE: The
signature to the foregoing Election must correspond to the name as written upon
the face of the Note in every particular, without alteration or any change
whatsoever.

 

7Exhibit 4.2

 

COMMON STOCK PURCHASE WARRANT

 

To
Purchase «Shares» Shares of Common Stock
of

 

FOCUS ENHANCEMENTS, INC.

 

THIS COMMON STOCK PURCHASE
WARRANT (the “Warrant”) is one of a series of Warrants (all “Warrants”)
issued under that certain Amended and Restated Senior Secured Note Purchase
Agreement (the “Purchase Agreement”) of even date herewith among the
Company and the purchasers signatory thereto.

 

For value received, «Holder»  (the “Holder” hereof) is
entitled, upon the terms and subject to the limitations on exercise and the
conditions hereinafter set forth, at any time on or after the date of issuance
of this Warrant (the “Initial Exercise Date”) and on or prior to January 1,
2011 (the “Termination Date”) but not thereafter, to subscribe for and
purchase from Focus Enhancements, Inc., a Delaware corporation (the “Company”),
up to «Shares» shares (the “Warrant
Shares”) of Common Stock, par value $0.01 per share, of the Company (the “Common
Stock”).  The purchase price of one share of Common Stock (the “Exercise
Price”) under this Warrant shall be $0.80, subject to adjustment
hereunder.  The Exercise Price and the number of Warrant Shares for which
the Warrant is exercisable shall be subject to adjustment as provided herein.
Capitalized terms used and not otherwise defined herein shall have the meanings
set forth in the  Purchase Agreement.

 

1.                                       Title to Warrant.  Prior to the Termination Date and
subject to compliance with applicable laws and Section 7 of this Warrant,
this Warrant and all rights hereunder are transferable, in whole or in part, at
the office or agency of the Company by the Holder in person or by duly
authorized attorney, upon surrender of this Warrant together with the
Assignment Form annexed hereto properly endorsed.  The transferee shall
sign an investment letter in form and substance reasonably satisfactory to the
Company.

 

2.                                       Authorization of Shares.  The Company covenants that all
Warrant Shares which may be issued upon the exercise of the purchase rights
represented by this Warrant will, upon exercise of the purchase rights
represented by this Warrant, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).

 

3.                                       Exercise of Warrant.

 

(a)  Exercise of the
purchase rights represented by this Warrant may be made at any time or times on
or after the Initial Exercise Date and on or before the Termination Date by
delivery of the Notice of Exercise Form, surrender of this Warrant and payment
of the aggregate Exercise Price, in each case, to the Company at its address
set forth on the signature page to the Purchase Agreement (or such other
office or agency of the Company as it may designate by notice in writing to the
registered Holder at the address of such Holder appearing on the books of the
Company).  Certificates for shares purchased hereunder shall be delivered
to the Holder within five (5) Trading Days from the delivery to the
Company of the Notice of Exercise Form, surrender of this Warrant and payment
of the aggregate Exercise Price as set forth above (“Warrant Share Delivery
Date”).  This Warrant shall be deemed to have been exercised on the
date the Exercise Price is received by the Company.  The Warrant Shares
shall be deemed to have been issued, and Holder or any other person so
designated to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the Warrant has been
exercised by payment to the Company of the Exercise Price and all taxes
required to be paid by the Holder, if any, pursuant to Section 5 prior to
the issuance of such shares, have been paid.  If the Company fails to
deliver to the Holder a certificate or certificates representing the Warrant
Shares pursuant to this Section 3(a) by the Warrant Share Delivery
Date, then the Holder will have the right to rescind such exercise.  In
addition to any other rights available to the Holder, if the Company fails to
deliver to the Holder a certificate or certificates representing the Warrant
Shares pursuant to an exercise by the Warrant Share Delivery Date, and if after
such day the Holder is required by its broker to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of the Warrant Shares which the Holder anticipated
receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay
in cash to the Holder the amount by which (x) the Holder’s 

 

1

 

total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the amount obtained by multiplying (A) the
number of Warrant Shares that the Company was required to deliver to the Holder
in connection with the exercise at issue times (B) the price at which the
sell order giving rise to such purchase obligation was executed, and (2) at
the option of the Holder, either reinstate the portion of the Warrant and
equivalent number of Warrant Shares for which such exercise was not honored or
deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its exercise and delivery obligations
hereunder.  For example, if the Holder purchases Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
exercise of shares of Common Stock with an aggregate sale price giving rise to
such purchase obligation of $10,000, under clause (1) of the immediately
preceding sentence the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In, together with applicable confirmations
and other evidence reasonably requested by the Company.  Nothing herein
shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
exercise of the Warrant as required pursuant to the terms hereof.  Notwithstanding the foregoing or any other
provision of this Warrant, Holder  agrees
that under no circumstances shall such Holder 
aggregate or combine any of the securities issued upon exercise of the
Warrants with other securities issued to other holders  upon exercise of the Warrant such that same
constitutes 19.9% or more of the Company’s then outstanding voting power or
then outstanding securities.

 

(b)                                 If this Warrant shall have been exercised in
part, the Company shall, at the time of delivery of the certificate or
certificates representing Warrant Shares, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased Warrant Shares
called for by this Warrant, which new Warrant shall in all other respects be
identical with this Warrant.

 

(c)                                  If at any time after one year from the date
of issuance of this Warrant there is no effective Registration Statement
registering the resale of the Warrant Shares by the Holder, this Warrant may
also be exercised at such time by means of a “cashless exercise” in which the
Holder shall be entitled to receive a certificate for the number of Warrant
Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 

(A) = 
the Market Price (as defined below) of one share of Common Stock on the date
that the Holder delivers a complete Notice of Exercise Form to the Company
as provided herein

 

(B) = 
the Exercise Price of this Warrant, as adjusted; and

 

(X) = 
the number of Warrant Shares issuable upon exercise of this Warrant in
accordance with the terms of this Warrant by means of a cash exercise rather
than a cashless exercise.

 

(d)  The term “Market
Price” as of a particular date (the “Valuation Date”) shall mean the
following: (a) if the Common Stock is then listed or quoted on a Trading
Market, the closing sale price of one share of Common Stock on such exchange on
the last Trading Day prior to the Valuation Date or, if no such closing sale
price is available, the average of the high bid and the low asked price quoted
thereon on the last Trading Day prior to the Valuation Date; (b) if the
Common Stock is not then listed or quoted on a Trading Market and if prices for
the Common Stock are then quoted on the OTC Bulletin Board or such similar
exchange or association, the closing sale price of one share of Common Stock on
the OTC Bulletin Board or such other exchange or association on the last
Trading Day prior to the Valuation Date or, if no such closing sale price is
available, the average of the high bid and the low asked price quoted thereon
on the last Trading Day prior to the Valuation Date; or (c) if the Common
Stock is not then listed or quoted on a Trading Market or quoted on the OTC
Bulletin Board or such other exchange or association, the fair market value of
one share of Common Stock as of the Valuation Date shall be determined in good
faith by the Board of Directors of the Company and the Holder.  If the
Common Stock is not then listed or quoted on a Trading Market or quoted on the
OTC Bulletin Board or such other exchange or association, the Board of Directors
of the Company shall respond promptly, in writing, to an inquiry by the Holder
prior to the exercise hereunder as to the fair market value of a share of
Common Stock as determined by the Board of Directors of the Company.  In
the event that the Board of Directors of the Company and the Holder are unable
to agree upon the fair market value in respect of subpart (c) hereof, the
Company and the Holder shall jointly select an appraiser, who is experienced in
such matters.  The decision of such appraiser shall be final and
conclusive, and the cost of such 

 

2

 

appraiser shall be borne
equally by the Company and the Holder.  Such adjustment shall be made
successively whenever such a payment date is fixed.

 

(e) Commencing on or  after January 1, 2009 and prior to December 21, 2010, if the average of the closing prices of the Common Stock on the Nasdaq National Market (or such other national securities exchange on which the Common Stock is then listed or quoted for trading) for 30 consecutive calendar days is greater than $1.30, (as the same may be adjusted pursuant to Section 7 hereof) (a “Trigger Period”), then the Company shall have the right, upon 10 (ten) days’ notice to all  Holders (the “Redemption Notice”), to redeem 2,600,000 Warrants on a pro rata basis among all Holders thereof based upon the proportion that the Warrants represented hereby bear to all Warrants issued under the Purchase Agreement. The redemption price shall be $.01 (one cent) per Warrant Share then unexercised (the “Redemption Price”), on the date set forth in the Redemption Notice, but in no event earlier than 10 Trading Days following the date of the Company’s transmission  of such Redemption Notice (the “Redemption Date”). The Holder may exercise the called portion of this Warrant at any time prior to the Redemption Date. Any called portion of this Warrant not exercised by 6:30 p.m. (New York City time) on the Redemption Date shall no longer be exercisable and shall be returned to the Company; the Company, upon its receipt of the unexercised called portion of this Warrant, shall issue therefor in full and complete satisfaction of its obligations under such remaining portion of this Warrant to the Holder an amount equal to the number of shares of Common Stock then issuable hereunder and not exercised multiplied by the Redemption Price of one cent per such share (the “Total Redemption Price”). In such circumstance, the Total Redemption Price shall be mailed to such Holder at its address of record, and the Warrant shall be canceled.  Twenty (20) days after  the Company has given the first such Redemption Notice and the applicable Ten Trading Days have lapsed, the Company may issue additional Redemption Notice(s) provided that as of the date of each such additional Redemption Notice the  Common Stock then listed or quoted for trading has previously been for 30 consecutive calendar days  greater than $1.30, and the Company may thereafter redeem 2,600,000 Warrants in the manner and for the Redemption Price as set forth above in this paragraph. Subject to its meeting the applicable conditions, the Company may continue to exercise its redemption rights every thirty (30) days in the manner and at the Redemption Price set forth herein until no further Warrants remain outstanding.  Notwithstanding the foregoing, the Company shall not issue a Redemption Notice to any one Holder if such Holder, upon exercise of all such Holder’s Warrants then subject to the Redemption Notice,  would cause such Holder’s ownership or voting control of all Company securities then held by such Holder or over which Holder has voting power to  exceed 19.9% of the Company’s then outstanding voting power or securities.
 

4.                                       No Fractional Shares or Scrip.  No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.  As to any fraction of a share which Holder would otherwise be
entitled to purchase upon such exercise, the Company shall pay a cash
adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price.

 

5.                                       Charges, Taxes and Expenses.  Issuance of certificates for Warrant
Shares shall be made without charge to the Holder for any issue or transfer tax
or other incidental expense in respect of the issuance of such certificate, all
of which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; provided, however, that in the event
certificates for Warrant Shares are to be issued in a name other than the name
of the Holder, this Warrant when surrendered for exercise shall be accompanied
by the Assignment Form attached hereto duly executed by the Holder; and
the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.

 

6.                                       Closing of Books.  The Company will not close its
stockholder books or records in any manner which prevents the timely exercise
of this Warrant, pursuant to the terms hereof.

 

7.                                       Transfer, Division and Combination.(a)        Subject to compliance with any applicable securities laws and the
conditions set forth herein  and to the
provisions of Purchase Agreement, this Warrant and all rights hereunder are
transferable, in whole or in part, upon surrender of this Warrant at the
principal office of the Company, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by the Holder
or its agent or attorney and funds sufficient to pay any transfer taxes payable
upon the making of such transfer.  Upon such surrender and, if required,
such payment, the Company shall execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees and in the denomination or
denominations specified in such 

 

3

 

instrument of assignment,
and shall issue to the assignor a new Warrant evidencing the portion of this
Warrant not so assigned, and this Warrant shall promptly be cancelled.  A
Warrant, if properly assigned, may be exercised by a new holder for the
purchase of Warrant Shares without having a new Warrant issued.

 

(b)                                 This Warrant may be divided or combined with
other Warrants upon presentation hereof at the aforesaid office of the Company,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued, signed by the Holder or its agent or
attorney.  Subject to compliance with Section 7(a), as to any
transfer which may be involved in such division or combination, the Company
shall execute and deliver a new Warrant or Warrants in exchange for the Warrant
or Warrants to be divided or combined in accordance with such notice.

 

(c)                                  The Company shall prepare, issue and deliver
at its own expense (other than transfer taxes) the new Warrant or Warrants
under this Section 7.

 

(d)                                 The Company agrees to maintain, at its
aforesaid office, books for the registration and the registration of transfer
of the Warrants.

 

8.                                       No Rights as Stockholder until Exercise.  This Warrant does not entitle the
Holder to any voting rights or other rights as a stockholder of the Company
prior to the exercise hereof.  Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price (or by means of a permitted cashless
exercise), the Warrant Shares so purchased shall be and be deemed to be issued
to such Holder as the record owner of such shares as of the close of business
on the later of the date of such surrender or payment.

 

9.                                       Loss, Theft, Destruction or Mutilation of
Warrant.  The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate relating to the Warrant Shares, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.

 

10.                                 Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a federal holiday, then such action may be taken
or such right may be exercised on the next succeeding day that is not a
Saturday, Sunday or federal holiday.

 

11.                                 Adjustments of Exercise Price and Number of
Warrant Shares, Stock Splits, etc.  (A) The number and kind of securities purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the happening of any of the following.  In case the
Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to all of the holders of its outstanding
Common Stock, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares of common Stock, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue
any shares of its capital stock in a reclassification of the Common Stock, then
the number of Warrant Shares purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that the Holder shall be
entitled to receive the kind and number of Warrant Shares or other securities
of the Company which it would have owned or have been entitled to receive had
such Warrant been exercised in advance thereof.  Upon each such adjustment
of the kind and number of Warrant Shares or other securities of the Company
which are purchasable hereunder, the Holder shall thereafter be entitled to
purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment
by the number of Warrant Shares purchasable pursuant hereto immediately prior
to such adjustment and dividing by the number of Warrant Shares or other
securities of the Company that are purchasable pursuant hereto immediately
after such adjustment.  An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.

 

(B) The Exercise Price
of the securities purchasable upon the exercise of this Warrant shall be
adjusted as follows, without any change in the number of securities purchasable
hereunder. If the Company issues, 

 

4

 

at
a net effective price to the Company of less than $0.80 (eighty cents) a Common
Stock share (subject to capital adjustments), any equity or equity linked
securities, in connection with a “financing” the primary purpose of which is to
raise equity capital (excluding warrants for up to 500,000 shares of its Common
Stock in connection with renewal or replacement of Company’s existing indebtedness
to Greater Bay Bank (Wells Fargo Bank), then the Exercise Price of all Warrants
issued and then outstanding hereunder shall be adjusted so that the Exercise
Price to purchase one share of the Company’s Common Stock shall be the net
effective price received by the Company in such financing (“Ratchet Provision”);
provided, however that under no circumstances shall any Ratchet Provision cause
or result in an adjustment to the Exercise Price of less than $0.35 (the
closing bid price of the Company’s shares as traded on the NASDAQ Capital
Markets on the last trading day immediately preceding the date of the Purchase Agreement).  In
connection with such event, only the Exercise Price hereunder shall be adjusted
and the number of shares of Common Stock issuable upon exercise hereof shall
remain the same as before the Ratchet Provision is triggered such that the
Company shall have no obligation hereunder to issue any additional Warrants or
shares of its Common Stock. As used herein, “net effective price” of any
financing shall be calculated as (x) the net  proceeds received or receivable by the Company
in such financing based upon the terms of the instruments issued  in such financing. divided by (y) the
number of Common Stock share equivalents issuable in such financing, based upon
the terms of such instruments.

 

12.                                 Reorganization, Reclassification, Merger,
Consolidation or Disposition of Assets.  In case the Company shall reorganize its capital, reclassify
its capital stock, consolidate or merge with or into another corporation (where
the Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell,
transfer or otherwise dispose of its property, assets or business to another
corporation and, pursuant to the terms of such reorganization,
reclassification, merger, consolidation or disposition of assets, shares of
common stock of the successor or acquiring corporation, or any cash, shares of
stock or other securities or property of any nature whatsoever (including
warrants or other subscription or purchase rights) in addition to or in lieu of
common stock of the successor or acquiring corporation (“Other Property”),
are to be received by or distributed to the holders of Common Stock of the
Company, then the Holder shall have the right thereafter to receive, upon
exercise of this Warrant, the number of shares of common stock of the successor
or acquiring corporation or Common Stock of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of
assets by a Holder of the number of shares of Common Stock for which this
Warrant is exercisable immediately prior to such event.  In case of any
such reorganization, reclassification, merger, consolidation or disposition of
assets, the successor or acquiring corporation (if other than the Company)
shall expressly assume the due and punctual observance and performance of each
and every covenant and condition of this Warrant to be performed and observed
by the Company and all the obligations and liabilities hereunder, subject to
such modifications as may be deemed appropriate (as determined in good faith by
resolution of the Board of Directors of the Company) in order to provide for
adjustments of Warrant Shares for which this Warrant is exercisable which shall
be as nearly equivalent as practicable to the adjustments provided for in this Section 12. 
For purposes of this Section 12, “common stock of the successor or
acquiring corporation” shall include stock of such corporation of any class
which is not preferred as to dividends or assets over any other class of stock
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of stock or other securities
which are convertible into or exchangeable for any such stock, either
immediately or upon the arrival of a specified date or the happening of a
specified event and any warrants or other rights to subscribe for or purchase
any such stock.  The foregoing provisions of this Section 12 shall
similarly apply to successive reorganizations, reclassifications, mergers,
consolidations or disposition of assets.

 

13.                                 Voluntary Adjustment by the Company.  The Company may at any time during
the term of this Warrant reduce the then current Exercise Price to any amount
and for any period of time deemed appropriate by the Board of Directors of the
Company; provided, however that under no
circumstances shall the Exercise Price be less than $0.35 (the closing bid
price of the Company’s shares as traded on the NASDAQ Capital Markets on the
last trading day immediately preceding the date of the Purchase
Agreement)..

 

14.                                 Notice of Adjustment.  Whenever the number of Warrant Shares
or number or kind of securities or other property purchasable upon the exercise
of this Warrant or the Exercise Price is adjusted, as herein provided, the
Company shall give notice thereof to the Holder, which notice shall state the
number of Warrant Shares (and other securities or property) purchasable upon
the exercise of this Warrant and the Exercise Price of 

 

5

 

such Warrant Shares (and
other securities or property) after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made.

 

15.                                 [INTENTIONALLY OMITTED]

 

16.                                 Notice of Corporate Action.  If at any time:

 

(a)                                   the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive a
dividend or other distribution, or any right to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class or any other
securities or property, or to receive any other right, or

 

(b)                                  there shall be any capital
reorganization of the Company, any reclassification or recapitalization of the
capital stock of the Company or any consolidation or merger of the Company with,
or any sale, transfer or other disposition of all or substantially all the
property, assets or business of the Company to, another corporation, or

 

(c)                                   there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Company;

 

then, in any one or more of
such cases, the Company shall give to Holder (i) at least 10 days’ prior
written notice of the date on which a record date shall be selected for such
dividend, distribution or right or for determining rights to vote in respect of
any such reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, liquidation or winding up, and (ii) in the case of
any such reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, dissolution, liquidation or winding up, at least 10 days’
prior written notice of the date when the same shall take place.  Such
notice in accordance with the foregoing clause also shall specify (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up.  Each such written notice shall be sufficiently given if  addressed to Holder at the last address of
Holder appearing on the books of the Company and delivered in accordance with Section 18(d).

 

17.                                 Authorized Shares.  The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any purchase rights under this
Warrant.  The Company further covenants that its issuance of this Warrant
shall constitute full authority to its officers who are charged with the duty
of executing stock certificates to execute and issue the necessary certificates
for the Warrant Shares upon the exercise of the purchase rights under this
Warrant.  The Company will take all such reasonable action as may be
necessary to assure that such Warrant Shares may be issued as provided herein
without violation of any applicable law or regulation, or of any requirements
of the Trading Market upon which the Common Stock may be listed.

 

Except and to the extent as
waived or consented to by the Holder, the Company shall not by any action,
including, without limitation, amending its certificate of incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder as set forth in this Warrant
against impairment.  Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any Warrant Shares above
the amount payable therefor upon such exercise immediately prior to such
increase in par value, (b) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use
commercially reasonable efforts to obtain all such authorizations, exemptions 

 

6

 

or consents from any public
regulatory body having jurisdiction thereof as may be necessary to enable the
Company to perform its obligations under this Warrant.

 

Before taking any action
which would result in an adjustment in the number of Warrant Shares for which
this Warrant is exercisable or in the Exercise Price, the Company shall obtain
all such authorizations or exemptions thereof, or consents thereto, as may be necessary
from any public regulatory body or bodies having jurisdiction thereof.

 

18.                                 Miscellaneous.

 

(a)                                  Jurisdiction.  All questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
determined in accordance with the provisions of the Purchase Agreement.

 

(b)                                 Restrictions.  The Holder acknowledges that the
Warrant Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal securities
laws.

 

(c)                                  Nonwaiver and Expenses.  No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as
a waiver of such right or otherwise prejudice Holder’s rights, powers or
remedies, notwithstanding all  rights
hereunder terminate on the Termination Date.  If the Company willfully and
knowingly fails to comply with any provision of this Warrant, which results in
any material damages to the Holder, the Company shall pay to Holder such
amounts as shall be sufficient to cover any costs and expenses including, but
not limited to, reasonable attorneys’ fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant hereto
or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

(d)                                 Notices.  Any notice, request or other document required or permitted to
be given or delivered to the Holder by the Company shall be delivered in
accordance with the notice provisions of the Purchase Agreement.

 

(e)                                  Limitation of Liability.  No provision hereof, in the absence
of any affirmative action by Holder to exercise this Warrant or purchase
Warrant Shares, and no enumeration herein of the rights or privileges of
Holder, shall give rise to any liability of Holder for the purchase price of
any Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.

 

(f)                                    Remedies.  Holder, in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific
performance of its rights under this Warrant.  The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.

 

(g)                                 Successors and Assigns.  Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
successors and permitted assigns of Holder.  The provisions of this
Warrant are intended to be for the benefit of all Holders from time to time of
this Warrant and shall be enforceable by any such Holder or holder of Warrant
Shares.

 

(h)                                 Amendment.  This Warrant may be modified or amended or the provisions
hereof waived with the written consent of (a) the Company and the Holder
or (b) the Company and  the  holders of 
a majority of the then outstanding Warrants issued under the Purchase
Agreement (with the denominator being  the number of all such then unexercised outstanding
Warrants) as of the effective date of any such amendment or waiver. Any such
amendment or waiver effected under immediately preceding clause (b) shall
bind all other holders of  such
outstanding described Warrants and their successors in interest with the same
force and effect as if such holders had consented to or waived same under
clause (a) of the immediately preceding sentence.

 

(i)                                     Severability.  Wherever possible, each provision of
this Warrant shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Warrant shall be prohibited
by or 

 

7

 

invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provisions of this Warrant.

 

(j)                                     Headings.  The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be deemed a part of this
Warrant.

 

********************

 

8

 

IN WITNESS WHEREOF, the Company
has caused this Warrant to be executed by its officer thereunto duly
authorized.

 

 

Dated:  February 11,
2008

 

	
   

  	
  FOCUS ENHANCEMENTS, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gary Williams

  
	
   

  	
   

  	
  Name: Gary Williams

  
	
   

  	
   

  	
  Title: EVP of Finance &
  CFO

  
				

 

9

 

NOTICE OF
EXERCISE

 

To:                              Focus Enhancements, Inc.

 

(1)          The undersigned hereby
elects to purchase                 
Warrant Shares of the Company pursuant to the terms of the attached Warrant,
and tenders herewith payment of the exercise price in full, together with all
applicable transfer taxes, if any, in the event Warrant Shares are to be issued
in a name other than the undersigned.

 

(2)          Payment shall take the
form of (check applicable box):

 

o
in lawful money of the United States; or

 

o
the cancellation of such number of Warrant Shares as is necessary, in
accordance with the formula set forth in subsection 3(c), to exercise this
Warrant with respect to the maximum number of Warrant Shares purchasable
pursuant to the cashless exercise procedure set forth in subsection 3(c).

 

(3)          Please issue a
certificate or certificates representing said Warrant Shares in the name of the
undersigned or in such other name as is specified below:

 

 

The Warrant Shares shall be delivered to the following:

 

 

 

(4)  Accredited Investor.  The undersigned represents and warrants that
the undersigned is an “accredited investor” as defined in Regulation D under
the Securities Act of 1933, as amended.

 

	
   

  	
  [PURCHASER/HOLDER]

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  Dated: 

  	
   

  
				

 

 

ASSIGNMENT
FORM

 

(To assign the
foregoing Warrant, execute

this form and supply required information. 

Do not use this form to exercise the Warrant.)

 

FOR VALUE RECEIVED, the
foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

                                                                                              
whose address is

 

 

                                                                                                                              .

 

                                                                                                                                                                                                                                                                                                                                                Dated:                              ,

 

                                                                                                                                                Holder’s
Signature:

 

                                                                                                                                                Holder’s
Address:

 

 

Signature Guaranteed:

 

NOTE:  The signature to this
Assignment Form must correspond with the name as it appears on the face of
the Warrant, without alteration or enlargement or any change whatsoever, and
must be guaranteed by a bank or trust company. 
Officers of corporations and those acting in a fiduciary or other
representative capacity should file proper evidence of authority to assign the
foregoing Warrant.

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