U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q/A

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934

               For the quarterly period ended March 31, 2003, or

[X] 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. Employer
     Incorporation 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)

             Securities registered pursuant to Section 12(b) of Act:

                               Title of Each Class
                      ------------------------------------
                          Common Stock, $.01 par value

                      Name of Exchange on which Registered
                      ------------------------------------
                                     NASDAQ

        Securities registered pursuant to Section 12(g) of the Act: None

     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.   [X] Yes   No [ ]


     As of May 7, 2003, there were 37,127,314 shares of the Registrant's  Common
Stock Outstanding.

This Form 10-Q/A is being filed to reflect changes in format and disclosure (see
Item 3) from Form 10-QSB to Form 10-Q.  No other  changes  have been made to the
Issuer's  Quarterly  Report on Form 10-QSB for the quarterly  period ended March
31, 2003 and filed with the Commission on May 9, 2003.

<PAGE>


                            Focus Enhancements, Inc.
                      Condensed Consolidated Balance Sheets
                      (in thousands, except per share data)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                                  March 31,     December 31,
                                                                                     2003           2002
                                                                               ---------------  ----------
                                   ASSETS
<S>                                                                              <C>              <C>
Current assets:
  Cash and cash equivalents                                                      $     1,253      $     1,310
  Accounts receivable, net of allowances of $394 and $403 at
    March 31, 2003 and December 31, 2002, respectively                                 1,358            1,628
  Inventories                                                                          2,294            2,350
  Prepaid expenses and other current assets                                              133              185
                                                                                 -----------      -----------
    Total current assets                                                               5,038            5,473

Property and equipment, net                                                              153              191
Capitalized software development costs                                                    --               40
Other assets, net                                                                         82               86
Intangible assets, net                                                                   925            1,053
Goodwill, net                                                                          5,191            5,191
                                                                                 -----------      -----------
    Total assets                                                                 $    11,389      $    12,034
                                                                                 ===========      ===========

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Obligations under capital leases, current portion                              $        29      $        44
  Accounts payable                                                                     2,232            1,860
  Accrued liabilities                                                                  1,952            2,018
                                                                                 -----------      -----------
    Total current liabilities                                                          4,213            3,922

Convertible notes payable to shareholder                                               3,867            3,867
Obligations under capital leases, non-current                                             --                1
                                                                                 -----------      -----------

    Total liabilities                                                                  8,080            7,790
                                                                                 -----------      -----------


Commitments and contingencies (Note 5)

Stockholders' equity

  Preferred stock, $.01 par value;  authorized  3,000,000  shares;  1,904 shares
    issued at March 31, 2003 and December 31, 2002 (aggregate liquidation
    preference $2,267)                                                                    --               --

  Common stock,  $.01 par value;  60,000,000 shares  authorized,  37,624,369 and
    37,560,537 shares issued at March 31, 2003 and December 31,
    2002, respectively                                                                   376              376
  Additional paid-in capital                                                          65,974           65,940
  Accumulated deficit                                                                (62,292)         (61,323)
  Deferred price protection                                                               --              (49)
  Treasury stock at cost, 497,055 and 450,000 shares at March 31, 2003 and
    December 31, 2002, respectively                                                     (749)            (700)
                                                                                 -----------      -----------
  Total stockholders' equity                                                           3,309            4,244
                                                                                 -----------      -----------
    Total liabilities and stockholders' equity                                   $    11,389      $    12,034
                                                                                 ===========      ===========

     The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
                                       2
<PAGE>


                            Focus Enhancements, Inc.
                 Condensed Consolidated Statements Of Operations
                    (in thousands, except per share amounts)
                                   (unaudited)


                                                  Three Months ended March 31,
                                                  ----------------------------
                                                      2003             2002
                                                  --------------  ------------
Net product revenues                                 $ 4,090         $  4,058
Contract revenues                                         --              700
                                                      ------         --------
  Total net revenues                                   4,090            4,758

Cost of revenues:
  Products                                             2,403            2,573
  Contract                                                --              460
                                                      ------         --------
  Total costs of revenues                              2,403            3,033
                                                      ------         --------

  Gross profit                                         1,687            1,725
                                                       -----            -----

Operating expenses:
  Sales, marketing and support                           998            1,386
  General and administrative                             376              673
  Research and development                             1,057              922
  Amortization expense                                   172              291
                                                      ------         --------

    Total operating expenses                           2,603            3,272
                                                      ------         --------

    Loss from operations                                (916)          (1,547)

  Interest expense, net                                  (51)             (83)
  Other expense, net                                      --              (24)
                                                      ------         ---------

    Loss before income taxes                            (967)          (1,654)

  Income tax expense                                       2               --
                                                      ------         --------

    Net loss                                           $(969)         $(1,654)
                                                       =====          =======

Loss per common share:
  Basic and diluted                                   $(0.03)         $  (0.05)
                                                      =======         ========

Weighted average common shares outstanding:
  Basic and diluted                                   37,108           35,009
                                                      ======          =======

          The accompanying notes are an integral part of the condensed
                       consolidated financial statements.

                                       3

<PAGE>


                            Focus Enhancements, Inc.
                 Condensed Consolidated Statements of Cash Flows
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                          Three Months Ended March 31,
                                                                                             2003              2002
                                                                                         --------------- -------------
<S>                                                                                         <C>               <C>
Cash flows from operating activities:
Net loss                                                                                    $  (969)          $(1,654)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                                 223               370
  Deferred compensation expense                                                                  --                30
  Gain on debt settlement                                                                        --               263
  Changes in operating assets and liabilities:
   Decrease (increase) in accounts receivable                                                   270              (113)
   Decrease in inventories                                                                       56               189
   Decrease in prepaid expenses and other assets                                                 53                46
   Increase (decrease) in accounts payable                                                      372            (1,284)
   Decrease in accrued liabilities                                                              (66)             (284)
   Payment of legal judgement                                                                    --            (2,073)
                                                                                            -------           -------

  Net cash used in operating activities                                                         (61)           (4,510)
                                                                                            -------           -------

Cash flows from investing activities:
  Decrease in restricted collateral deposit                                                      --             2,363
  Additions to property and equipment                                                           (14)              (47)
                                                                                            -------           -------

Net cash provided by (used in)  investing activities                                            (14)            2,316
                                                                                            -------           -------

Cash flows from financing activities:
  Repayment of convertible notes payable to shareholder                                          --              (145)
  Payments under capital lease obligations                                                      (16)              (10)
  Net proceeds from private offerings of common stock                                            --             2,425
  Net proceeds from exercise of common stock options and warrants                                34                --
                                                                                            -------           -------

Net cash provided by financing activities                                                        18             2,270
                                                                                            -------           -------

Net increase (decrease) in cash and cash equivalents                                            (57)               76
Cash and cash equivalents at beginning of year                                                1,310               449
                                                                                            -------           -------

Cash and cash equivalents at end of period                                                  $ 1,253           $   525
                                                                                            =======           =======
</TABLE>

          The accompanying notes are an integral part of the condensed
                       consolidated financial statements.

                                       4

<PAGE>

                            Focus Enhancements, Inc.
         Notes To Unaudited Condensed Consolidated Financial Statements

1.  Basis of Presentation - Interim Financial Information

    The condensed consolidated financial statements of Focus Enhancements,  Inc.
("the Company") as of March 31, 2003 and for the three month periods ended March
31,  2003 and 2002 are  unaudited  and  should be read in  conjunction  with the
consolidated  financial statements and notes thereto for the year ended December
31, 2002  included in the  Company's  Annual  Report on Form 10-KSB for the year
ended December 31, 2002.

    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 its  financial  position,
operating  results and cashflows for interim periods  presented.  The results of
operations and cashflows for the three month period ended March 31, 2003 are not
necessarily  indicative  of the  results  that may be  expected  for any  future
period.  All intercompany  accounts and  transactions  have been eliminated upon
consolidation.

    Stock Compensation Plans.

    Statement of Financial  Accounting  Standards (SFAS) No. 123, Accounting for
Stock-Based  Compensation,  encourages  all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the fair value of the award which is
recognized  over the  service  period,  which is  usually  the  vesting  period.
However,  it also allows an entity to continue to measure  compensation cost for
those plans using the intrinsic  value based method of accounting  prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an  employee  must pay to acquire  the stock.  Stock  options  issued  under the
Company's  stock  option  plans  have no  intrinsic  value  at the  grant  date.
Accordingly,  under APB Opinion No. 25, no compensation cost is recognized.  The
Company has elected to continue  with the  accounting  prescribed in APB Opinion
No. 25 and,  as a result,  must make pro forma  disclosures  of net  income  and
earnings  per share and other  disclosures  as if the fair value based method of
accounting had been applied. Had compensation cost for the Company's stock-based
compensation plans and non-plan stock options  outstanding been determined based
on the fair value at the grant dates for awards  under  those  plans  consistent
with the method  prescribed by SFAS No. 123, the Company's net loss and loss per
share would have been  adjusted  to the pro forma  amounts  indicated  below (in
thousands except per share data):

                                                    Three months ended March 31,
                                                    ----------------------------
                                                          2003        2002
                                                      ----------   ----------

             Net loss reported under APB 25           $     (969)  $   (1,654)

Add: Stock-based employee compensation
 expense included in reported net loss                        --           30

Deduct: Total stock-based employee
 compensation expense determined under
 fair value based method for all awards                     (212)        (189)
                                                      ----------   ----------

Pro forma net loss                                    $   (1,181)  $   (1,813)
                                                      ==========   ==========

Basic and diluted loss per share, as reported         $    (0.03)  $    (0.05)
Basic and diluted loss per share, pro forma           $    (0.03)  $    (0.05)



    Common stock  equivalents  have been excluded from all  calculations of loss
per share and pro forma loss per share for the  periods  presented  because  the
effect of including them would be anti-dilutive.

                                       5

<PAGE>

                            Focus Enhancements, Inc.
         Notes To Unaudited Condensed Consolidated Financial Statements


2.  Management's Plans

    The accompanying  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 quarter
ended March 31, 2003 and the year ended December 31, 2002, the Company  incurred
a net loss of $969,000 and $5,957,000, and net cash used in operating activities
totaled $61,000 and $5,004,000,  respectively.  These factors  indicate that the
Company may potentially be unable to continue as a going concern.  Additionally,
our  auditors  have  included an  explanatory  paragraph  in their report on our
financial  statements  for the year  ended  December  31,  2002 with  respect to
uncertainties about our ability to continue as a going concern.

    The  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 the
Company be unable to continue as a going concern. The Company's  continuation as
a going concern is dependent upon its ability to generate  sufficient cash flows
to meet its obligations on a timely basis, to obtain additional financing as may
be required,  and ultimately to return to profitability and significant positive
cash flows.

    The Company has  historically  met cash needs from the proceeds of debt, the
sale of common stock in private  placements,  and the exercise of stock  options
and  warrants.  Management  continues  to assess its  product  lines in light of
technology trends and economic  conditions,  to identify how to enhance existing
product lines or create new distribution  channels. In addition,  the Company is
developing and expects to release at least three more new products during 2003.

    During 2002,  management  took steps to continue to reduce costs,  including
the  reduction  of its  personnel  by 9% in April  2002 and the  closure  of its
Chelmsford,   MA  office  on  September  30,  2002,   (resulting  in  a  $96,000
restructuring charge).  Additionally,  in September 2002, the Company furloughed
7% of its personnel and subsequently terminated such personnel in December 2002.
At March 31, 2003, $96,000 of the restructuring reserve remained.

    Even with the anticipated reduction in expenses related to the restructuring
and an expected  increase in sales, the Company  anticipates that during 2003 it
will need to raise  additional  funds to support its working  capital  needs and
meet existing debt obligations.

    There is no  assurance  that  management's  plans will be  successful  or if
successful, that they will result in the Company continuing as a going concern.

3. Recent Accounting Pronouncements

     In December 2002, the FASB, issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition  and  Disclosure-an  Amendment of FASB Statement No.123,
which provides  alternative  methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.  In
addition,  this Statement amends the disclosure  requirements of SFAS No. 123 to
require prominent  disclosures in both annual and interim  financial  statements
about the method of accounting for  stock-based  employee  compensation  and the
effect of the method used on reported results.  Effective December 31, 2002, the
Company adopted the amended annual and interim  disclosure  requirements of SFAS
No. 123.

    In  November  2002,  the FASB issued  FASB  Interpretation  No. 45 (FIN 45),
Guarantor's  Accounting and Disclosure  Requirements  for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of  Others.  FIN 45  requires  that upon
issuance of a guarantee,  the guarantor  must recognize a liability for the fair
value  of the  obligation  it  assumes  under  that  guarantee.  The  disclosure
provisions of FIN 45 are effective for financial statements of interim or annual
periods that end after December 15, 2002. The provisions for initial recognition
and  measurement  are effective on a prospective  basis for guarantees  that are
issued or modified  after  December  31,  2002,  irrespective  of a  guarantor's
year-end. Management has not yet determined the impact of the adoption of FIN 45
on the Company's results of operations or financial position.

                                       6
<PAGE>

                            Focus Enhancements, Inc.
         Notes To Unaudited Condensed Consolidated Financial Statements


    In November 2002, the Emerging  Issues Task Force (EITF) reached a consensus
on Issue No. 00-21,  Revenue Arrangements with Multiple  Deliverables.  EITF No.
00-21 addresses  certain aspects of the accounting by a vendor for  arrangements
under which the vendor will perform multiple revenue generating activities.  The
EITF  will be  effective  for  fiscal  years  beginning  after  June  15,  2003.
Management  has not yet  determined the impact of the adoption of EITF No. 00-21
on the Company's results of operations or financial position.


4. Inventories

    Inventories are stated at lower of cost (first-in,  first-out) or market (in
thousands):

                                               March 31,         December 31,
                                                 2003                2002
                                                ------              ------
         Raw materials                          $1,432              $1,383
         Work in process                           240                 116
         Finished goods                            622                 851
                                                ------              ------
         Totals                                 $2,294              $2,350
                                                ======              ======
5.  Commitments

    Convertible Promissory Notes

    Convertible promissory notes payable at March 31, 2003 and December 31, 2002
consists of three promissory notes totaling $3,867,000,  payable to Carl Berg, a
Company director and shareholder. The promissory notes were amended on April 28,
2003,  to provide for an extension  of the maturity  dates to November 25, 2004.
The  notes  bear  interest  at  prime  plus  1%,  payable  quarterly,   and  are
collateralized by substantially all of the assets of the Company. The Company is
obligated,  under certain  circumstances,  including at the election of Mr. Berg
and Focus,  to convert the  outstanding  balances  of the notes,  and any unpaid
interest,  into shares of Focus common stock or preferred stock, as specified in
the respective note agreements.


    General

    From time to time,  the Company is party to certain  other  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 the  Company's
financial position or results of operations.


6.  Stockholders' Equity

    Preferred Stock

    On April 24, 2001, the Company's board of directors adopted a Certificate of
Designation  whereby a total of 2,000 shares of Series B Preferred Stock,  $0.01
par value per share,  are reserved for  issuance.  Each share has a  liquidation
preference  in the amount of  $1,190.48  plus all accrued or declared but unpaid
dividends.  Cash dividends on the stock are  non-cumulative  and are paid at the
option of the board of directors.  If paid,  the rate shall be seven percent per
annum. The board does not presently intend to pay dividends on the stock. At the
option  of the  holder,  each  share is  convertible  into  1,000  shares of the
Company's common stock.

    The Company is  obligated,  under  certain  circumstances,  including at the
election of Mr. Berg and Focus, to convert  certain of the outstanding  balances
of convertible  notes payable to Mr. Berg, and any unpaid interest,  into shares
of Focus preferred  stock. As of March 31, 2003,  approximately  1,404 shares of
preferred stock were subject to issuance to Mr. Berg pursuant to the convertible
notes payable agreements. See "See Note 5.
Commitments - Convertible Promissory Notes."

                                       7
<PAGE>

                            Focus Enhancements, Inc.
         Notes To Unaudited Condensed Consolidated Financial Statements


Common Stock

    On December 20, 2002, the  stockholders of the Company  approved an increase
to the authorized common shares from 50,000,000 to 60,000,000. This increase was
recommended  and  approved by the  Company's  Board of  Directors to ensure that
sufficient  shares are  available  for  issuance  under the  Company's  2002 Non
Qualified Stock Option Plan (1,000,000 shares) and for issuances associated with
private placements and services provided by non-employees.

    On January 11, 2002, the Company  completed the sale of 2,434,490  shares of
its common  stock in a private  placement  to four  independent  third  parties,
receiving  proceeds  of  approximately  $2,436,000,  net of  offering  costs  of
$314,000.  Additionally,  the Company incurred  $182,000 of costs during 2001 in
connection with this offering  (including  costs  associated with the subsequent
registration of the shares),  resulting in total offering costs of $496,000. The
shares were sold at a 20% discount to the 20-day  average  closing bid prices of
the  Company's  common stock as of December  27, 2001,  the date an agreement in
principle was reached by the parties.  In connection with the private placement,
the Company issued warrants to the four investors to purchase a total of 367,140
shares of common stock at an exercise price of $1.36 per share. Additionally, in
connection  with the efforts of vFinance  Investments  Inc. to find investors in
the private placement,  the Company issued warrants to vFinance Investments Inc.
to purchase a total of 123,690  shares of common  stock at an exercise  price of
$1.36 per share.  Tim Mahoney,  a member of the Company's  Board of Directors is
the  Chairman  and  COO of  vFinance,  Inc.,  the  parent  company  of  vFinance
Investments Inc.

    On July  28,  2000,  the  Company  entered  into an  equity  line of  credit
agreement with Euston Investments  Holdings Limited  ("Euston"),  for the future
issuance and purchase of up to 4,000,000 shares of the Company's common stock at
a 10% discount.  In lieu of providing Euston with a minimum  aggregate  drawdown
commitment,  the Company issued to Euston a stock  purchase  warrant to purchase
250,000  shares of common  stock with an exercise  price of $1.625.  The warrant
expires  June 12, 2005.  The Company had sought to register  such shares under a
Registration Statement on Form SB-2. However,  before the registration statement
was declared effective, on January 11, 2002, Focus and Euston mutually agreed to
terminate the agreement.  As  consideration  for terminating the agreement,  the
exercise price of Euston's  warrants to purchase  250,000 shares of Focus common
stock was reduced from $1.625 to $0.75 per share.  As a result of the  repricing
the Company  incurred a $334,000 charge to other expense in the first quarter of
2002. The charge was computed using the Black-Scholes  model with assumptions of
a risk-free  rate of interest of 2.9%,  expected  volatility of 130%, a dividend
yield of 0.0% and an expected remaining life of 1.4 years.

    On March 1, 2002, the Company issued warrants to purchase  270,000 shares of
common stock as compensation to three unrelated parties for consulting  services
in the areas of investment  advisory,  investor  relations  and public  relation
services.  The  warrants are  exercisable  for a period of two to three years at
exercise  prices  ranging  from $1.35 to $1.50 per share.  The Company  recorded
charges of approximately  $238,000 for the quarter ended March 31, 2002 based on
the fair value of the  warrants.  Such  amounts  were  recorded  as general  and
administrative expenses and the fair value of the warrants were calculated using
the  Black-Scholes   option  pricing  model  with  the  following   assumptions:
contractual term of 2 to 3 years, volatility of 136% to 143%, risk free interest
rate of 2.9% to 3.6%, and no dividends during the term of the warrant.

    On November 25, 2002,  the Company  completed the sale of 800,000  shares of
its  common  stock in a private  placement  to two  independent  third  parties,
receiving proceeds of approximately  $685,000, net of offering costs of $83,000.
The shares  were sold at an  approximate  20%  discount  to the  20-day  average
closing bid prices of the  Company's  common stock as of November 24, 2002,  the
date an  agreement in principle  was reached by the  parties.  Additionally,  in
connection  with the efforts of vFinance  Investments  Inc. to find investors in
the private placement,  the Company issued warrants to vFinance Investments Inc.
to purchase a total of 40,000  shares of common  stock at an  exercise  price of
$1.20 per share.

                                       8
<PAGE>

                            Focus Enhancements, Inc.
         Notes To Unaudited Condensed Consolidated Financial Statements


    As of March 31, 2003, the Company was obligated under certain circumstances,
to issue the following  additional shares of common stock pursuant to derivative
securities, instruments or agreements:

Warrants to purchase common stock                                      1,174,569
Options to purchase common stock                                       6,480,172
Notes payable convertible into common stock                            1,940,177
Preferred Stock convertible into common stock                          1,904,000
                                                                      ----------
   Total shares of common stock obligated, under
      certain circumstances, to issue                                 11,498,918
                                                                      ==========


7.   Related Party Transactions

    During the  quarter  ended March 31,  2003,  the  Company  engaged  vFinance
Consulting  to assist the Company in preparing a Strategic  Business  Plan.  Tim
Mahoney, a member of the Company's Board of Directors is the Chairman and COO of
vFinance,  Inc.,  the parent  company to vFinance  Consulting.  The Company paid
vFinance Consulting $15,000 in fees during the first quarter of 2003.


8.   Significant Customers

    One customer,  accounted  for 10% of the  Company's  revenue for the quarter
ended March 31, 2003 and 20% of the  Company's  accounts  receivable  balance at
March 31, 2003.

    Three unrelated  customers,  each with sales in excess of 10% of our revenue
accounted for 35% of total revenue for the quarter ended March 31, 2002.

     As of December 31, 2002, two distributors represented  approximately 31% of
the Company's accounts  receivable  balance (21% and 10% respectively),  while a
customer  represented  an additional  10% of the Company's  accounts  receivable
balance.


9.   Bill and Hold Transaction

     Net  product  revenue  relating  to  products  sold and,  at the  customers
request,  stored by the Company totaled  approximately  $362,000 for the quarter
ended March 31, 2003 (none for the quarter ended March 31,  2002).  Such revenue
pertained to the sale of product to the  Company's  distributor  in Asia and was
recognized during the first quarter of 2003 as the product specifications of the
purchase  contract had been met during the quarter,  the product was accepted by
the buyer,  title had  passed to the buyer,  there was no right of return in the
contract,  the distributor requested that the product be stored and, the product
was segregated from the Company's  regular inventory and was ready for shipment.
Full  payment  for the product  was  received in March 2003 and the  distributor
requested that the product be shipped in May 2003.


                                       9
<PAGE>


Item 2. Management's  Discussion And Analysis Of Financial Condition And Results
        Of Operations

Introduction

    The  following   information   should  be  read  in  conjunction   with  the
consolidated  financial  statements  and notes thereto in Part I, Item 1 of this
Quarterly  Report and with  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations  contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2002.

Certain Factors That May Affect Future Results

    Discussions of certain  matters in this Quarterly  Report on Form 10-Q/A may
constitute  forward-looking  statements within the meaning of the 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  which  are  not
historical  facts  (including,   but  not  limited  to,  statements   concerning
anticipated  revenues,  anticipated  operating  expense  levels,  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 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,   component   supply   problems  and   protection  of   proprietary
information,  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 " - Risks  Factors."  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 disclaims any obligation, to update any forward-looking  statements
to reflect  occurrences or unanticipated  events or circumstances after the date
of such statements.


Results of Operations

Net Revenues

    Net revenues for the  three-months  ended March 31, 2003 were  $4,090,000 as
compared  with  $4,758,000  for the  three-month  period  ended March 31, 2002 a
decrease of $668,000, or 14%.

    For the  three-months  ended March 31,  2003,  net sales of system  products
(professional   and  consumer)  to   distributors,   retailers  and  VAR's  were
approximately  $3,578,000 as compared to $3,526,000 for the same period in 2002,
an increase of $52,000 or 1%.

    For the  three-months  ended  March 31,  2003,  net  sales of  semiconductor
products to distributors and OEM customers,  which includes  contract  revenues,
were  approximately  $512,000 as compared to  $1,232,000  for the same period in
2002,  a decrease  of $720,000  or 58% The  decrease  in OEM sales is  primarily
attributable to a decrease in contract revenues as the Company reported contract
revenues  of  $700,000  for the  three-months  ended  March 31,  2002,  while no
contract  revenues  were  reported  for the  three-months  ended March 31, 2003.
Contract  revenues  related  to  the  development  of  an  Application  Specific
Integrated Circuit (ASIC) for a third party that began in June 2001 and finished
in June  2002.  Under this  development  contract  the  Company  recorded  total
revenues of $2.1 million.

    As of March 31, 2003, the Company had a sales order backlog of approximately
$1,226,000, an increase of $977,000 when compared to the fourth quarter of 2002.
The growth in backlog is a result of increased  semiconductor chip and FireStore
orders.

                                       10
<PAGE>

Cost of Goods Sold

    Cost  of  goods  sold  were  $2,403,000,  or  59%  of  net  sales,  for  the
three-months  ended March 31, 2003, as compared with  $3,033,000,  or 64% of net
sales, for the three-months ended March 31, 2002, a decrease of $630,000 or 21%.
The Company's  gross profit margin for the three months ended March 31, 2003 and
2002 was 41% and 36%,  respectively.  The  increase  in gross  profit  margin is
primarily  attributable to reduced manufacturing expenses as the Company reduced
its personnel expenditures,  primarily headcount, and as a result of product mix
and improved pricing on certain of its products.

Sales, Marketing and Support Expenses

    Sales, marketing and support expenses were $998,000, or 24% of net revenues,
for the three-months  ended March 31, 2003, as compared with $1,386,000,  or 29%
of net  revenues,  for the  three-months  ended  March 31,  2002,  a decrease of
$389,000 or 28%.  The  decrease  in sales,  marketing  and  support  expenses is
primarily  the  result of  reduced  personnel  expenses  and  reduced  marketing
expenses as we adjusted our advertising expenses to better match our revenue.

General and Administrative Expenses

    General and  administrative  expenses for the  three-months  ended March 31,
2003 were  $376,000 or 9% of net  revenues,  as compared with $673,000 or 14% of
net revenues for the  three-months  ended March 31, 2002, a decrease of $297,000
or 44%.  The  decrease  is  primarily  the  result of a charge of  approximately
$238,000  associated with the issuance of warrants in connection with consulting
services incurred in the three-months ended March 31, 2002.

Research and Development Expenses

    Research and development  expenses for the three-months ended March 31, 2003
were approximately  $1,057,000 or 26% of net revenues, as compared with $922,000
or 19% of net revenues for the three-months ended March 31, 2002, an increase of
$135,000  or 15%.  The  increase  in research  and  development  expenses is due
primarily  to the  allocation  of research and  development  expenses to cost of
sales during the  three-months  ended March 31, 2002,  as the Company  performed
development  work under  contract.  Partially  offsetting  this  increase  was a
decrease in payroll expenses between comparable periods.

Amortization

    Amortization  expense for the  three-month  period  ended March 31, 2003 was
$172,000 or 4% of net revenues, as compared with $291,000 or 6% of net revenues,
for the  three-months  ended March 31,  2002, a decrease of $119,000 or 41%. The
decrease is due to the Company's  completion of  amortization of its capitalized
software and  cessation of  amortization  of its  assembled  workforce  upon the
adoption of SFAS No. 142.

Interest Expense, Net

    Net  interest  expense for the  three-month  period ended March 31, 2003 was
$52,000,  or 1% of net revenues,  as compared to $83,000, or 2% of net revenues,
for the three-months  ended March 31, 2002, a decrease of $31,000.  The decrease
in interest expense is primarily  attributable to a decrease in debt obligations
and lower interest rates.

Other Expense, Net

    The Company did not incur net other expense for the three-month period ended
March 31,  2003,  as  compared  to net other  expense of  $24,000,  or 1% of net
revenues, for the three-months ended March 31, 2002.

    Other  expense for the period  ended March 31, 2002 is comprised of a charge
of $334,000 related to the repricing of warrants associated with the termination
of an equity line of credit  offset by gains of $310,000  on the  settlement  of
debts for less than original amounts.

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
three  months ended March 31, 2003 and the year ended  December  31,  2002,  the
Company  incurred net losses of $969,000 and $5,957,000,  respectively,  and net
cash used in operating  activities  of $61,000,  and  $5,004,000,  respectively.
These factors indicate that the Company may potentially be unable to continue as
a going concern.

                                       11
<PAGE>

     The  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 the
Company be unable to continue as a going concern. The Company's  continuation as
a going concern is dependent upon its ability to generate  sufficient cash flows
to meet its obligations on a timely basis, to obtain additional financing as may
be required,  and ultimately to return to profitability and significant positive
cash flows.

    Since inception,  the Company has financed its operations  primarily through
the public and  private  sale of common  stock,  proceeds  from the  exercise of
options and warrants,  short-term  borrowing from private lenders, and favorable
credit arrangements with vendors and suppliers.

    Net cash used in operating  activities  for the  three-month  periods  ended
March 31, 2003 and 2002 was $61,000 and $4,510,000,  respectively.  In the first
quarter of 2003, net cash used in operating  activities consisted primarily of a
net loss of $969,000  adjusted for  depreciation  and  amortization of $223,000,
offset by a decrease  in  accounts  receivable  of  $270,000  and an increase in
accounts  payable of $372,000.  In the first  quarter of 2002,  net cash used in
operating  activities  consisted  primarily of a net loss of $1,654,000 adjusted
for depreciation and amortization of $370,000,  gain on debt settlement totaling
$263,000,  a decrease in accounts  payable of $1,284,000  and payment of a legal
judgment of $2,073,000,  partially offset by an increase in inventories totaling
$189,000.

    Only one customer had an accounts receivable balance in excess of 10% of our
total accounts  receivable at March 31, 2003 and that customer accounted for 20%
of our total accounts receivable at that date.

    We expect that our operating cash flows may fluctuate in future periods as a
result of fluctuations in our operating results, shipment linearity and accounts
receivable collections,  inventory management,  and the timing of payments among
other factors.

    Net cash used by investing  activities for the three-months  ended March 31,
2003 was $14,000  compared to net cash provided by investing  activities for the
three-months  ended March 31, 2002 of $2,316,000.  In the first quarter of 2003,
cash used in  investing  activities  was  directly  related to the  purchase  of
property and equipment of $14,000.  In the first quarter of 2002,  cash provided
in  investing  activities  was  principally  from  the  decrease  in  restricted
collateral  deposit of $2,363,000,  partially offset by the purchase of property
and equipment of $47,000.

    Net cash provided by financing  activities for the three-month periods ended
March 31, 2003 and 2002 was $18,000 and $2,270,000,  respectively.  In the first
quarter of 2003, the Company  received $34,000 from the exercise of common stock
options.  In the first quarter of 2002, the Company  received  $2,425,000 in net
proceeds from private  offerings of common stock which were partially  offset by
repayment of convertible notes payable to shareholder of $145,000.

    As of March 31,  2003,  the  Company  had working  capital of  $825,000,  as
compared to $1,551,000 at December 31, 2002, a decrease of $726,000.

    The Company has incurred  losses and negative cash flows from operations for
the three  months  ended  March 31, 2003 and each of the two years in the period
ended  December 31, 2002 and as such has been  dependent  upon raising money for
short and  long-term  cash needs  through  debt,  proceeds  from the exercise of
options and warrants,  and the sale of common stock in private  placements.  For
the year ended December 31, 2002, the Company received approximately  $3,121,000
in net proceeds from private offerings of common stock.

    At March 31, 2003, the Company owed Mr. Berg  approximately  $4.3 million in
principal and accrued interest on various notes.

    During 2002, management continued to take steps to reduce costs, including a
9% reduction in personnel in April of 2002. Additionally, in September 2002, the
Company closed its Chelmsford,  MA office (resulting in a $96,000  restructuring
charge)  and  furloughed  7% of its  personnel.  In December  2002,  the Company
terminated  those  furloughed  employees  and  recorded a  severance  accrual of
$26,000. At March 31, 2003, $96,000 of the restructuring reserve remained.

                                       12
<PAGE>

    In  addition  to  regularly  reviewing  its cost  structure,  management  is
continually  reviewing its product lines to identify how to enhance  existing or
create new  distribution  channels.  During 2002, the Company  released four new
products.  Many of  these  new  products  are  expected  to take  hold in  their
respective  markets  and  provide  additional  revenue  to the  Company in 2003.
Additionally, the Company expects to release at least three more new products in
2003.  There can be no assurances as to the amount of revenue these new products
will produce. See "Risk Factors."

    There is no  assurance  that  management's  plans will be  successful  or if
successful, that they will result in the Company continuing as a going concern.

    Ultimate future capital requirements will depend on many factors,  including
cash flow from  operations,  continued  progress  in  research  and  development
programs,  competing  technological and market developments,  and our ability to
market our products  successfully.  The Company  believes that it is likely that
additional  financings  will be  required in 2003 as the  Company  continues  to
implement  its  business  plan.  As of  March  31,  2003,  the  Company  had  no
commitments  from  any  other  sources  to  provide  additional  equity  or debt
financing.  As such,  there can be no assurance  that  sufficient  funds will be
raised.  Moreover,  any  equity  financing  would  result  in  dilution  to  our
then-existing  stockholders  and any  additional  debt  financing  may result in
higher interest expense.

Summary of Certain Contractual Obligations as of March 31, 2003

<TABLE>
<CAPTION>
                                        Amount of Commitment Expiration Per Period (in thousands)
                                        ---------------------------------------------------------
                                                    Less Than                         After 5
                                           Total      1 year     2-3 Years  4-5 Years  Years
                                           ------     ------     ------     ------     -------
<S>                                        <C>        <C>        <C>        <C>        <C>
Notes payable to stockholder               $3,867     $ --       $3,867     $ --       $  --
Capital leases                                 29         29       --         --          --
Operating leases                            1,167        382        783          2        --
                                           ------     ------     ------     ------     -------
  Total                                    $5,063     $  411     $4,650     $    2     $  --
                                           ======     ======     ======     ======     =======
</TABLE>



Effects of Inflation and Seasonality

    The Company believes that inflation has not had a significant  impact on the
Company's sales or operating results. The Company's business does not experience
substantial  variations  in revenues or operating  income during the year due to
seasonality.

Risk Factors

You should  carefully  consider the following risks relating to our business and
our common stock,  together with the other  information  described  elsewhere in
this  prospectus.  If any of the following risks actually  occur,  our business,
results of operations and financial condition could be materially affected,  the
trading price of our common stock could decline,  and you might lose all or part
of your investment.

Risks Related to Our Business

We have a long history of operating losses.

As of March 31, 2003, we had an accumulated deficit of $62,292,000.  We incurred
net losses of $969,000,  $5,597,000  and  $6,658,000  for the three months ended
March 31, 2003 and the years  ended  December  31, 2002 and 2001,  respectively.
There can be no  assurance  that we will become  profitable.  Additionally,  our
auditors have included an explanatory paragraph in their report on our financial
statements  for the year ended  December 31, 2002 with respect to  uncertainties
about our ability to continue as a going  concern.  The financial  statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of that
uncertainty.

                                       13

<PAGE>


We may need to raise additional  capital,  which will result in further dilution
of existing and future stockholders.

Historically,  we have met our short-and long-term extra cash needs through debt
and the sale of  common  stock in  private  placements  because  cash  flow from
operations  has been  insufficient  to fund our  operations.  Set forth below is
information regarding net proceeds received recently:
<TABLE>
<CAPTION>

                                         Private Offerings Of    Issuance of           Exercise of Stock
                                             Common Stock           Debt             Options and Warrants
                                             ------------           ----             --------------------
<S>                                           <C>                 <C>                      <C>
           First quarter 2003                         --                  --                $34,000
           Fiscal 2002                        $3,121,000                  --               $625,000
           Fiscal 2001                                --          $2,650,000               $199,000
</TABLE>

Future  capital  requirements  will depend on many factors,  including cash flow
from  operations,  continued  progress in  research  and  development  programs,
competing  technological and market developments,  and our ability to market our
products successfully.  If we require additional equity or debt financing in the
future,  there  can be no  assurance  that  sufficient  funds  will  be  raised.
Moreover,  any equity  financing or convertible debt would result in dilution to
our  then-existing  stockholders  and could have a negative effect on the market
price of our common stock. Furthermore, any additional debt financing may result
in higher interest expense.

In the event we are unable to raise  additional  capital,  we may not be able to
fund our  operations  which could result in the inability to execute our current
business plan.

We have a significant amount of convertible securities that will dilute existing
stockholders upon conversion.

At March 31, 2003,  we had  37,624,369  and 1,904 shares of common and preferred
shares  issued  and  outstanding,   respectively,  and  1,174,569  warrants  and
6,480,172  options that are exercisable  into shares of common stock.  The 1,904
shares of preferred  stock are convertible  into 1,904,000  shares of our common
stock.  We also may  issue  additional  shares  in  acquisitions  and may  grant
1,172,917  additional  stock options to our employees,  officers,  directors and
consultants  under our current stock option  plans.  Any  additional  plans will
further dilute existing stockholders.

In  addition,  at March 31,  2003,  the  Company  was  obligated  under  certain
circumstances,  to issue up to 1,404 shares of preferred stock  convertible into
1,404,000  shares of common stock upon the  conversion of $1,842,000 in debt and
accrued interest.

We are dependent upon a significant  stockholder  to meet our interim  financing
needs.

We have relied upon the ability of Carl Berg, a director and  significant  owner
of our common stock for interim financing needs. As of March 31, 2003, we had an
aggregate of approximately $4.3 million in debt and accrued interest outstanding
to Mr. Berg.  There can be no assurances  that Mr. Berg will continue to provide
such interim financing should we need additional funds.

We rely on certain vendors for a significant portion of our manufacturing.

Over 40% of the components for our products are  manufactured on a turnkey basis
by three vendors,  Furthertech  Company Ltd.,  Samsung  Semiconductor  Inc., and
Asemtec  Corporation.  In addition,  certain of our products are  assembled by a
single  vendor in Mexico.  If these  vendors  experience  production or shipping
problems for any reason,  we in turn could  experience  delays in the production
and shipping of our products,  which would have an adverse effect on our results
of operations.

We are dependent on our suppliers.

We  purchase  all of our  parts  from  outside  suppliers  and from time to time
experience   delays  in  obtaining  some   components  or  peripheral   devices.
Additionally,  we are dependent on sole source suppliers for certain components.
There can be no  assurance  that labor  problems,  supply  shortages  or product
discontinuations will not occur in the future which could significantly increase
the cost,  or delay  shipment,  of our products,  which in turn could  adversely
affect our results of operations.

                                       14

<PAGE>


We rely on sales to a few major customers for a large part of our revenues.

As of March 31,  2003,  one  distributor  represented  approximately  20% of the
Company's accounts receivable.  We do not have long-term contracts requiring any
customer to purchase any minimum  amount of products.  There can be no assurance
that we will  continue to receive  orders of the same  magnitude  as in the past
from  existing  customers  or we will be able to market our  current or proposed
products  to new  customers.  Loss of any major  customer  would have a material
adverse effect on our business as a whole. Furthermore, many of our products are
dependent  upon the overall  success of our  customer's  product,  over which we
often have no control.

Our products may become obsolete very quickly.

The computer  peripheral  markets are  characterized  by extensive  research and
development  and rapid  technological  change  resulting  in short  product life
cycles.  Development  by  others  of  new or  improved  products,  processes  or
technologies  may  make our  products  or  proposed  products  obsolete  or less
competitive.  We must devote  substantial  efforts and  financial  resources  to
enhance  our  existing  products  and to develop new  products.  There can be no
assurance that we will succeed with these efforts.

We may not be able to protect our proprietary information.

As of March 31, 2003, we had been issued five patents and filed five provisional
patent  applications  in the United  States.  Certain of these patents have also
been filed and issued in  countries  outside  the  United  States.  We treat our
technical data as confidential and rely on internal  non-disclosure  safeguards,
including  confidentiality  agreements  with  employees,  and on laws protecting
trade secrets, to protect our proprietary information. There can be no assurance
that  these  measures  will  adequately  protect  the   confidentiality  of  our
proprietary  information  or prove  valuable  in light of  future  technological
developments.

Delays in product  development  could  adversely  affect our market  position or
customer relationships.

We have experienced delays in product development in the past and may experience
similar delays in the future. Given the short product life cycles in the markets
for our products,  any delay or  unanticipated  difficulty  associated  with new
product  introductions or product  enhancements could cause us to lose customers
and damage our  competitive  position.  Prior delays have resulted from numerous
factors, such as:

     o   changing product  specifications;  difficulties in hiring and retaining
         necessary personnel;

     o   difficulties in reallocating  engineering  resources and other resource
         limitations;

     o   difficulties with independent contractors;

     o   changing market or competitive product requirements;

     o   unanticipated engineering complexity;

     o   undetected errors or failures in software and hardware; and

     o   delays in the acceptance or shipment of products by customers.

If we are unable to respond to rapid  technological  change in a timely  manner,
then we may lose customers to our competitors.

To  remain   competitive,   we  must   continue   to  enhance  and  improve  the
responsiveness,  functionality  and  features of our  products.  Our industry is
characterized  by rapid  technological  change,  changes  in user  and  customer
requirements and preferences and frequent new product and service introductions.
If competitors introduce products and services embodying new technologies, or if
new industry  standards  and  practices  emerge,  then our existing  proprietary
technology  and systems may become  obsolete.  Our future success will depend on
our ability to do the following:

     o   both license and internally develop leading  technologies useful in our
         business;

     o   enhance our existing technologies;

     o   develop new  services  and  technology  that  address the  increasingly
         sophisticated and varied needs of our prospective customers; and

     o   respond to technological  advances and emerging industry  standards and
         practices on a cost-effective and timely basis.

                                       15
<PAGE>

To develop our proprietary technology entails significant technical and business
risks. We may use new  technologies  ineffectively,  or we may fail to adapt our
proprietary   technology  and   transaction   processing   systems  to  customer
requirements  or emerging  industry  standards.  If we face  material  delays in
introducing  new  services,  products and  enhancements,  then our customers may
forego the use of our services and use those of our competitors.

We typically operate without a significant amount of backlog.

We typically operate with a small amount of backlog.  Accordingly,  we generally
do not have a material backlog of unfilled  orders,  and revenues in any quarter
are  substantially  dependent on orders booked in that quarter.  Any significant
weakening in current  customer  demand would  therefore  have and has had in the
past an almost immediate adverse impact on our operating results.

Our quarterly financial results are subject to significant fluctuations.

We have been unable in the past to accurately forecast our operating expenses or
revenues.  Our revenues currently depend heavily on volatile customer purchasing
patterns.  If actual revenues are less than projected revenues, we may be unable
to reduce expenses  proportionately,  and our operating results,  cash flows and
liquidity would likely be adversely affected.

Our common stock  currently  does not meet the minimum bid price  requirement to
remain listed on the Nasdaq SmallCap Market. If we were to be delisted, it could
make trading in our stock more difficult.

Our common  stock is traded on the Nasdaq  SmallCap  Market.  There are  various
quantitative  listing  requirements for a company to remain listed on the Nasdaq
SmallCap Market.

     o   We are  required to maintain a minimum bid price of $1.00 per share for
         our common stock.  Between  January 1, 2003 and May 6, 2003,  our stock
         closed below $1.00 a share on 64 of 86 trading days. On March 18, 2003,
         we were  notified by the Nasdaq that our common stock does not meet the
         minimum bid price  requirement to remain listed on the Nasdaq  SmallCap
         Market.  Focus has been provided 180 calendar days, or until  September
         15, 2003, to regain compliance.

     o   We must maintain stockholders' equity of $2,500,000. At March 31, 2003,
         we had total  stockholders'  equity of $3.3  million.  To the extent we
         continue to incur net losses and do not raise additional  capital,  our
         stockholders' equity will be reduced.

If we fail  these  Nasdaq  SmallCap  requirements,  our  common  stock  could be
delisted,  eliminating  the only  established  trading  market for shares of our
common  stock.  Any sales of our common stock at a discount to market may reduce
the trading  price of our common  stock to a level below the Nasdaq  minimum bid
price requirement.

In the event we are delisted from Nasdaq,  we would be forced to list our shares
on the OTC Electronic  Bulletin Board or some other  quotation  medium,  such as
pink sheets,  depending on our ability to meet the specific listing requirements
of those quotation systems. As a result an investor might find it more difficult
to dispose of, or to obtain accurate price quotations for, our shares. Delisting
might also reduce the visibility, liquidity, and price of our common stock.

Our common stock price is volatile.

The  market  price  for  our  common  stock  is  volatile  and  has   fluctuated
significantly  to date.  For example,  between April 1, 2002 and March 31, 2003,
the per  share  price of our stock has  fluctuated  between  $0.45 and $2.20 per
share, closing at $0.71 at March 31, 2003. The trading price of our common stock
is likely to continue to be highly volatile and subject to wide  fluctuations in
response to factors including the following:

     o   actual or anticipated variations in our quarterly operating results;

     o   announcements  of technological  innovations,  new sales formats or new
         products or services by us or our competitors;

     o   changes in financial estimates by securities analysts;

                                       16
<PAGE>


     o   changes in the economic  performance  and/or market valuations of other
         multi-media, video scan companies;

     o   announcements   by   us   of   significant   acquisitions,    strategic
         partnerships, joint ventures or capital commitments;

     o   additions or departures of key personnel; and

     o   sales of common stock or issuance of other dilutive securities.

In addition,  the securities  markets have experienced  extreme price and volume
fluctuations,  and the market prices of the  securities of technology  companies
have been  especially  volatile.  These broad  market and  industry  factors may
adversely affect the market price of our common stock,  regardless of our actual
operating  performance.  In the past,  following  periods of  volatility  in the
market price of stock,  many companies have been the object of securities  class
action  litigation,  including  us. If we are sued again in a  securities  class
action, then it could result in additional  substantial costs and a diversion of
management's attention and resources.

Risks Related to Our Industry

International sales are subject to significant risk.

Our  revenues  from  outside the United  States are  subject to  inherent  risks
related thereto, including currency rate fluctuations,  the general economic and
political  conditions  in each  country.  There  can be no  assurance  that  the
economic crisis and currency issues currently being experienced in certain parts
of the world  will not reduce  demand  for our  products  and  therefore  have a
material adverse effect on our revenue or operating results.

Our businesses are very competitive.

The computer peripheral markets are extremely  competitive and are characterized
by significant  price erosion over the life of a product.  We currently  compete
with  other  developers  of video  conversion  products  and with  video-graphic
integrated  circuit  developers.  Many of our  competitors  have greater  market
recognition and greater  financial,  technical,  marketing and human  resources.
Although we are not currently aware of any announcements by our competitors that
would have a material impact on its  operations,  there can be no assurance that
we will be  able to  compete  successfully  against  existing  companies  or new
entrants to the marketplace.

The video production equipment market is highly competitive and is characterized
by  rapid  technological  change,  new  product  development  and  obsolescence,
evolving  industry  standards and  significant  price erosion over the life of a
product.  Competition is fragmented with several hundred manufacturers supplying
a variety of products to this market. We anticipate increased competition in the
video post-production  equipment market from both existing manufacturers and new
market entrants. Increased competition could result in price reductions, reduced
margins and loss of market share,  any of which could  materially  and adversely
affect our business, financial condition and results of operations. There can be
no assurance that we will be able to compete  successfully  against  current and
future competitors in this market.

Often our competitors have greater financial,  technical,  marketing,  sales and
customer  support  resources,  greater  name  recognition  and larger  installed
customer bases than we possess. In addition,  some of our competitors also offer
a wide variety of video equipment,  including professional video tape recorders,
video cameras and other related equipment.  In some cases, these competitors may
have a competitive  advantage based upon their ability to bundle their equipment
in certain large system sales.

We  are  exposed  to  general   economic   conditions   that  have  resulted  in
significantly  reduced sales levels. If such adverse economic conditions were to
continue or worsen,  our business,  financial  condition  and operating  results
could be adversely impacted.

If the adverse economic conditions in the United States and throughout the world
economy  continue or worsen,  we may experience a material adverse impact on our
business,  operating  results,  and  financial  condition.  We  continue to take
actions and charges to reduce our cost of sales and operating  expenses in order
to address these adverse  conditions.  A prolonged  continuation or worsening of
sales trends may require  additional actions and charges to reduce cost of sales
and operating expenses in subsequent  quarters.  We may be unable to reduce cost
of sales and operating  expenses at a rate and to a level consistent with such a
future  adverse  sales  environment.   If  we  must  undertake  further  expense
reductions, we may incur significant incremental special charges associated with
such expense reductions that are  disproportionate  to sales,  thereby adversely
affecting our business,  financial  condition and operating results.  Continuing
weakness  in the  economy  could  decrease  demand  for our  products,  increase
delinquencies in payments and otherwise have an adverse impact on our business.

                                       17
<PAGE>

Recent corporate bankruptcies,  accounting  irregularities,  and alleged insider
wrong doings have negatively  affected  general  confidence in the stock markets
and the  economy,  further  depressing  the stock  market and  causing  the U.S.
Congress to enact sweeping legislation.

In an effort to address  these  growing  investor  concerns,  the U.S.  Congress
passed, and on July 30, 2002, President Bush signed into law, the Sarbanes-Oxley
Act of 2002. This sweeping legislation  primarily impacts investors,  the public
accounting  profession,   public  companies,   including  corporate  duties  and
responsibilities, and securities analysts. Some highlights include establishment
of a new  independent  oversight  board for public  accounting  firms,  enhanced
disclosure  requirements  for  public  companies  and their  insiders,  required
certification  by CEO's  and CFO's of SEC  financial  filings,  prohibitions  on
certain loans to offices and  directors,  efforts to curb  potential  securities
analysts'  conflicts of interest,  forfeiture of profits by certain  insiders in
the event  financial  statements are restated,  enhanced  board audit  committee
requirements,   whistleblower  protections,  and  enhanced  civil  and  criminal
penalties  for  violations  of  securities  laws. It is difficult to predict the
impact of such legislation, however it will increase the costs of securities law
compliance for publicly traded companies such as us.

Continued  terrorism  threats  and war in the  Middle  East have had a  negative
impact on the U.S. economy.

The adverse consequences of war and the effects of terrorism have had a negative
affect  on the  U.S.  economy.  Further  conflicts  in  the  Middle  East  could
negatively  impact  our  ability  to raise  additional  funds if needed  and our
revenues will be adversely affected if consumers and businesses  continue to cut
back spending.

The spread of severe acute  respiratory  syndrome may have a negative  impact on
our business and results of operations.

The recent outbreak of severe acute respiratory syndrome, or SARS, which has had
particular  impact in China,  Hong Kong,  and  Singapore,  could have a negative
effect  on our  operations.  Our  operations  may be  impacted  by a  number  of
SARS-related factors,  including,  among other things,  disrupting operations at
our turnkey  manufacturer and certain of our distributors and customers  located
in those areas.  If the number of SARS cases continues to spread to other areas,
our international and domestic sales and operations could be harmed.

                                       18

<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

    At March 31, 2003 we did not hold any short-term  investments  that would be
exposed to market risk from adverse movements in interest rates.

    At March 31, 2003,  we had three  promissory  notes  payable to Carl Berg, a
Company director and shareholder, totaling $3,867,000, bearing interest at prime
plus 1%. If  short-term  interest  rates were to increase  100 basis points (100
basis points equals 1%), the increased  interest  expense  associated with these
promissory  notes  would  not have a  material  impact  on our net loss and cash
flows.


Item 4. Controls and Procedures

(a)  In accordance  with Section 302 of the  Sarbanes-Oxley  Act of 2002 and the
     Securities  Exchange  Act of  1934  Section  13(a)  or  Section  15(d),  we
     implemented disclosure controls and procedures pursuant to which management
     under the  supervision  and with the  participation  of the chief executive
     officer ("CEO") and chief financial  officer ("CFO") carried out, within 90
     days prior to the filing of this quarterly  report, a review and evaluation
     of the  effectiveness  of  these  controls  and  procedures.  Based on this
     review,  our CEO and CFO have concluded  that our  disclosure  controls and
     procedures  are effective in timely  alerting  them to material  changes in
     information required to be included in our periodic Securities and Exchange
     Commission filings.

(b)  There were no  significant  changes in our  internal  controls  or in other
     factors that could  significantly  affect these controls  subsequent to the
     date of the evaluation referred to above.

                                       19

<PAGE>


PART II - OTHER INFORMATION

Item 1. Legal Proceedings


General

    From time to time,  the Company is party to certain  other  claims and legal
proceedings  that arise in the  ordinary  course of  business  of which,  in the
opinion of  management,  do not have a material  adverse effect on the Company's
financial position or results of operation.

Item 2. Changes in Securities

   (a) (None)

   (b) (None)

   (c) (None)

   (d) (None)


Item 3. Defaults Upon Senior Securities

       (None)

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

       (None)

Item 5. Other Information

       (None)

Item 6. Exhibits and Reports on Form 8-K

   (a)  Exhibits

        Exhibit 31.1 - Rule 13a-14(a) Certification of CEO
        Exhibit 31.2 - Rule 13a-14(a) Certification of CFO
        Exhibit 32.1 - CEO 906 Certification
        Exhibit 32.2 - CFO 906 Certification

   (b)  Reports on Form 8-K

        On March 19, 2003, the Company filed a Form 8-K  announcing  that is was
        notified  by the Nasdaq  that its common  stock did not meet the minimum
        bid price requirement to remain listed on the Nasdaq SmallCap Market.

                                       20
<PAGE>


                                   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 21, 2003                      Focus Enhancements, Inc.
   ---------------                      ------------------------
        Date                                    Registrant

                                        By: /s/ Brett A. Moyer
                                           --------------------
                                           Brett A. Moyer
                                           Chief Executive Officer and President
                                           (Principal Executive Officer)


                                        By: /s/ Gary L. Williams
                                           ------------------------
                                           Gary L. Williams
                                           Vice President of Finance,
                                           Chief Financial Officer
                                           (Principal Accounting Officer)