<PAGE>

                                                                    EXHIBIT 10.4

                             SEPARATION AGREEMENT

     THIS AGREEMENT is made this first day of May, 2000, by and between FOCUS
Enhancements, Inc., A Delaware Corporation, hereinafter referred to as the
"Company", and Thomas L. Massie, hereinafter referred to as "Employee".

     RECITALS:

     WHEREAS, beginning on or about December 18, 1992, Company and Employee
entered into an employment agreement, which was subsequently amended on
March 22, 1993, December 16, 1993, and restated on January 1, 1998
(collectively, the "Employment Contract"); and

     WHEREAS, Employee owes to Company $140,000, plus interest, pursuant to
promissory notes dated January 6, 1996 and December 1, 1998 (collectively, the
"Notes");

     WHEREAS, Employee has voluntarily chosen to sever the employment
relationship; and

     WHEREAS, Employee and Company now desire to avoid any disputes or
differences regarding any prospective claims which may be asserted by Employee
regarding any entitlement to continuation of his employment with the Company;

     NOW, THEREFORE, in consideration of the above recitals, which are
incorporated herein by this reference, and in further consideration of the
covenants, promises and conditions hereinafter set forth, Employee and Company
agree as follows:

1.   Employee's employment with the Company shall be considered as and was
     terminated effective April 28, 2000 ("Termination Date"). As of the
     Termination Date, the Employment Contract shall be considered terminated by
     Employee. Company acknowledges that termination of the Employment Contract
     shall not contravene any rights that Employee may otherwise have to
     continue to serve as Chairman of Company's Board of Directors for the
     remainder of his elected term. Notwithstanding the foregoing, sections 2.3,
     2.4, 2.5 and 2.6 of the Employment Contract shall survive termination of
     this Agreement.

2.   On the Termination Date, Company delivered to Employee all salary earned
     and owed to Employee, less appropriate withholdings, through such date. All
     remaining remuneration consisting of vacation pay (11 days totaling
     $6,346.56) and unpaid bonus pay ($14,999.68.00) amounting to twenty-one
     thousand three hundred forty-six dollars ($21,346.24) fifty-seven cents is
     paid in hand herewith.

3.   The Company agrees to and does deliver herewith to Employee in a certain
     Consulting Agreement between Focus Enhancements, Inc., and Employee, dated
     contemporaneously herewith, and is subject to all of the terms and
     provisions of the Consulting Agreement. Company agrees that during the term
     of the Consulting Agreement, all non-qualified stock options held by
     Employee as of the date hereof, shall continue to vest and shall continue
     to do so while Employee is a member of the Board of Directors.

4.   This Separation Agreement is entered into voluntarily by the parties
     without cause. The Company acknowledges that pursuant to extensive
     investigation conducted during February-April 2000 by a Special Committee
<PAGE>

     of the Board of Directors and independent accounting firms, the Special
     Committee made no findings that Employee had personal knowledge of or
     involvement in inventory misstatements made by a company accounting
     manager. The Company further acknowledges that Employee has fully performed
     the duties and obligations of his employment with Company as defined in
     Article 2 of the Employment Contract.

5.   The Company agrees to reimburse Employee for COBRA expenses until (i)
     Employee accepts employment with another company where employee is eligible
     to participate in that company's health plan, or (ii) April 28, 2001,
     whichever is earlier.

6.   Employee shall have the right to retain all Company records currently in
     his possession to assist him in his role as a member of the Board of
     Directors.

7.   The Company agrees to forgive all outstanding balances due to the Company
     under the Notes, including interest, at a rate of one eighth (1/8) per
     Company's fiscal quarter on the last day of each such quarter beginning
     September 30, 2000, and continuing for eight fiscal quarters until such
     Notes are paid in full. Further, as of the date hereof, all interest on the
     Notes shall cease to accrue. Employee agrees, however, that should he
     voluntarily resign from his position as a member of the Company's Board of
     Directors for any reason prior to June 1, 2002, then any remaining
     unforgiven portion of the Notes shall become immediately due and payable
     and all interest that would have accrued but for this Agreement shall
     accelerate and become due. Company agrees that in no event shall the amount
     forgiven under the Note for which Employee shall receive an IRS form 1099
     exceed $168,200.03.

8.   Subject to approval by the Securities and Exchange Commission (SEC), the
     Company agrees to make a public statement via a press release transmitted
     via Business Wire, faxed to the Company's internal database, with a hard
     copy to all employees in substantially the form attached hereto.

9.   Employee acknowledges his continuing duties to maintain Company's
     confidential information pursuant to an Employment Agreement executed
     between the parties, and further expressly agrees that he/she will keep in
     confidence and trust any proprietary information of the Company, which
     includes, but is not limited to, trade secrets, copyrights, ideas,
     techniques, know-how, inventions (whether patentable or not), and/or any
     other information of any type relating to designs, configurations,
     toolings, documentation, recorded data, schematics, source code, object
     code, masterworks, master data bases, algorithms, flowcharts, formulae,
     circuits, works of authorship, mechanisms, research, manufacture,
     improvements, assembly, installation, marketing, forecasts, pricing,
     customers, the salaries, duties, qualifications, performance levels and
     terms of compensation of other employees, and/or costs or other financial
     data concerning any of the foregoing or the Company and its operations,
     generally. Employee further agrees not to use or disclose to any third
     party any such information without the prior written consent of an officer
     of the Company or without actual knowledge that the disclosure will be
     governed by a Non-disclosure Agreement between Company and the third party.
     Employee agrees that the herein covenant of confidentiality is a material
     part of this Agreement.

10.  Except with respect to issues related to pending class action litigation
     and except as expressly provided herein to the contrary, each party hereto,
     on behalf of itself and its respective servants, agents, representatives,
     attorneys, insurers, predecessors, successors, administrators, trustees,
     affiliated and related entities, assignors and assignees, officers,
     directors, shareholders and employees, and each of them, releases the other
     party hereto and its respective servants, agents, representatives,
     attorneys, insurers, predecessors, successors, administrators, trustees,
     affiliated and related entities, assignors and assignees, officers,
     directors, shareholders and employees, and each of them, from any and all

                                       2
<PAGE>

     claims, demands, expenses, losses, causes of action, liabilities,
     obligations, damages, liens and/or liabilities of any kind or nature
     whatsoever, arising out of or related to Employee's employment with the
     Company to the date of this Agreement, the negotiations preceding such
     employment, and any and all facts, events or circumstances related thereto.
     In addition, Employee agrees not to instigate or otherwise cause a negative
     action to exist against Company, it officers or directors, including, but
     not limited to, judicial actions, administrative actions, or message boards
     relating to Company, except to the extent required by law.


     Employee understands and expressly agrees that this Agreement extends to
     all claims of every nature and kind whatsoever related to Employee's
     employment with Company, known or unknown, suspected or unsuspected, past
     or present, which existed before the date of execution of this Agreement,
     including, but not limited to, any claims in tort or contract related to
     Employee's employment or to any acts or omissions of the Company involving
     Employee.

     Nothing herein shall contravene Employee's rights to indemnity for prior
     acts pursuant to the indemnity provisions of the Articles of Incorporation
     nor shall this Agreement limit any coverage to which Employee would
     otherwise be entitled under the Company's Directors and Officers Insurance.

11.  The parties agree that the terms and provisions of this agreement shall
     remain confidential, and each party hereto shall use their best efforts to
     preserve such confidentiality.

12.  The parties hereby agree that in any legal action or proceeding instituted
     to enforce the terms of this Agreement, to seek a declaration of rights in
     conjunction herewith, or otherwise relating to or arising out of this
     Agreement, whether in tort or in contract, the prevailing or successful
     party shall be entitled to recovery of its reasonable attorneys' fees,
     costs, and other expenses, notwithstanding whether the action or proceeding
     proceeds to trial or hearing, unless otherwise required by law.

13.  This Agreement represents and contains the entire agreement and
     understanding among parties hereto with respect to the subject matter of
     this Agreement, and supersedes any and all prior oral and written
     agreements and understandings. This Agreement may not be amended or
     modified except by an agreement in writing signed by the party against whom
     the enforcement of any modification or amendment is sought.

     Each party to the Agreement represents that it has executed this Agreement
     voluntarily and declares, warrants and represents that no promises,
     inducements, or other agreements not expressly contained and set forth in
     this Agreement have been made, and further, that the terms of this
     Agreement are contractual and not merely a recital, and shall be construed
     and enforced as such.

14.  Each party hereto has been specifically advised of its right to counsel in
     conjunction with the negotiation and formulation of this Agreement, and,
     accordingly, this Agreement shall be construed as if negotiated and drafted
     jointly by each of the parties hereto, and shall be interpreted and
     construed accordingly.

     Each of the parties to this Agreement, and/or their attorneys and
     representatives, agree to execute any and all documents necessary to
     effectuate the terms, conditions and purposes of this Agreement.

15.  In the event that one or more of the provisions, or portions thereof, of
     this Agreement is determined to be illegal or unenforceable, the remainder
     of this Agreement shall not be affected thereby and each remaining
     provision or portion thereof shall continue to be valid and effective and
     shall be enforceable to the fullest extent permitted by law.

16.  This Agreement shall bind and inure to the benefit of each party and each
     party's agents, representatives, successors, heirs and assigns.

                                       3
<PAGE>

17.  This Agreement may be executed in any number or counterparts, each of which
     shall be deemed to be an original, and all of which together shall be
     deemed one and the same instrument.

18.  This Agreement is the result of a compromise and settlement of claims
     presently asserted or potentially assertable by Employee and Company, and
     the consideration paid and received therefore is not to be construed as an
     admission of any obligation or liability by any party hereto or by persons
     not a part of this Agreement. Notwithstanding the foregoing, Company
     acknowledges that no competent finder of fact has adjudged Employee as
     having participated in any intentional misconduct.

19.  Notwithstanding any other provision of this Agreement, each party hereto,
     as a part of the consideration for this Agreement, agrees that any
     controversy or claim arising out of this agreement or a breach thereof
     shall, on written request or either party served on the other, be submitted
     to binding arbitration. Judgment on the award rendered by the arbitrators
     may be entered in any court having jurisdiction. The parties shall each
     appoint one person to hear and determine the dispute, and if they shall be
     unable to agree, then the two persons so chosen shall select a third
     impartial arbitrator whose decision shall be final and conclusive upon both
     parties. The cost of such arbitration shall be borne by the losing party,
     or in such proportions as the arbitrators shall decide. Arbitration shall
     take place in Boston, Massachusetts and shall be conducted in accordance
     with the Rules of the American Arbitration Association.

     Each party warrants and represents that this Agreement is executed by
individuals or entities on its behalf by a duly authorized partner, officer or
representative.

"Company"                                    "Employee"
FOCUS Enhancements, Inc.                     Thomas L. Massie



By: /s/ William B. Coldrick                  By: /s/ Thomas L. Massie
    ---------------------------                  ------------------------
Printed: William B. Coldrick                 Printed: Thomas L. Massie
         ----------------------                       -------------------
Vice Chairman of the Board
Date: May  ____, 2000                        Date: May 1, 2000

                                       4