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

                                    FORM 10-Q

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

                For the quarterly period ended March 31, 2004, or

[ ]  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, $0.01 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. Yes [X] No [ ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No  [X]

As of the close of business  May 12,  2004,  there were 49.8  million  shares of
Focus Enhancement's common stock issued and outstanding.



<PAGE>
                            FOCUS ENHANCEMENTS, INC.

                                      INDEX
<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                       Number
                                                                                                       ------
<S>           <C>                                                                                        <C>
PART I - FINANCIAL INFORMATION

Item 1.       Financial Statements:
                  Condensed Consolidated Statements of Operations                                         3
                  Condensed Consolidated Balance Sheets                                                   4
                  Condensed Consolidated Statements of Cash Flows                                         5
                  Notes to Condensed Consolidated Financial Statements                                    6

Item 2.       Management's Discussion and Analysis of Financial Condition
                 and Results of Operations                                                               13

Item 3.       Quantitative and Qualitative Disclosures about Market Risk                                 26

Item 4.       Controls and Procedures                                                                    26


PART II - OTHER INFORMATION

Item 1.       Legal proceedings                                                                          27

Item 2.       Changes in securities                                                                      27

Item 3.       Defaults upon senior securities                                                            27

Item 4.       Submission of matters to a vote of security holders                                        28

Item 5.       Other information                                                                          28

Item 6.       Exhibits and reports on Form 8-K                                                           28



SIGNATURES                                                                                               29


CERTIFICATIONS                                                                                           30
</TABLE>

                                       2
<PAGE>
                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                            Focus Enhancements, Inc.
                 Condensed Consolidated Statements of Operations
                    (In thousands, except per-share amounts)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                                            --------------------------------
                                                            March 31, 2004    March 31, 2003
                                                            --------------    --------------
<S>                                                         <C>               <C>
Net revenue                                                 $       4,094     $       4,090
Cost of revenue                                                     2,762             2,403
                                                            --------------    --------------
  Gross margin                                                      1,332             1,687

Operating expenses:
  Sales, marketing and support                                      1,054               998
  General and administrative                                          557               376
  Research and development                                          1,106             1,057
  Amortization of intangible assets                                   164               172
                                                            --------------    --------------
                                                                    2,881             2,603
                                                            --------------    --------------
    Loss from operations                                           (1,549)             (916)
  Interest expense, net                                               (46)              (51)
  Other net income                                                      6              --
                                                            --------------    --------------
    Loss before income taxes                                       (1,589)             (967)
  Income tax expense                                                 --                   2
                                                            --------------    --------------
    Net loss                                                $      (1,589)    $        (969)
                                                            --------------    --------------
Net loss per share
   Basic and diluted                                        $       (0.04)    $       (0.03)

Weighted average common and common equivalent shares
   Basic and diluted                                               42,905            37,108

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

                                       3
<PAGE>
                            Focus Enhancements, Inc.
                      Condensed Consolidated Balance Sheets
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  March 31,    December 31,
                                                                                     2004          2003
                                                                                ------------   ------------
<S>                                                                             <C>            <C>
                                   Assets
Current assets:
  Cash and cash equivalents                                                     $      2,701   $      3,731
  Accounts receivable, net of allowances of $345 and $384                              1,659          2,385
  Inventories                                                                          3,206          3,493
  Prepaid expenses and other current assets                                              305            368
                                                                                ------------   ------------
      Total current assets                                                             7,871          9,977

Long-term assets:
  Property and equipment, net                                                            182            146
  Other assets                                                                           246            151
  Intangible assets, net                                                               1,362            635
  Goodwill                                                                             5,854          5,191
                                                                                ------------   ------------
      Total long-term assets                                                           7,644          6,123

                                                                                ------------   ------------
                                                                                $     15,515   $     16,100
                                                                                ============   ============
                    Liabilities and Stockholders' Equity

Current liabilities:
  Accounts payable                                                              $      1,930   $      2,292
  Accrued liabilities                                                                  1,499          1,989
  Current portion of long-term debt                                                       31           --
  Borrowings under line-of-credit                                                        453           --
  Loan payable                                                                           251           --
                                                                                ------------   ------------
      Total current liabilities                                                        4,164          4,281

Long-term liabilities:
  Convertible promissory notes payable to shareholder                                   --            3,867
  Long-term debt, net of current portion                                                 196           --
                                                                                ------------   ------------
      Total long-term liabilities                                                        196          3,867

Stockholders' equity:
  Preferred stock, $0.01 par value; authorized 3,000,000 shares; 3,161 and
     1,904 shares issued at March 31, 2004 and December 31, 2003,
     respectively (aggregate liquidation preference $3,917)                             --             --
  Common stock, $0.01 par value; 100,000,000 shares authorized, 45,876,274
     and 42,800,240 shares issued at March 31, 2004 and December 31, 2003,
     respectively                                                                        459            428
  Additional paid-in capital                                                          77,154         71,295
  Accumulated deficit                                                                (64,610)       (63,021)
  Cumulative foreign currency translation adjustments                                     (1)          --
  Notes receivable from related parties                                               (1,097)          --
  Treasury stock at cost, 497,500 shares at March 31, 2004 and
    December 31, 2003, respectively                                                     (750)          (750)
                                                                                ------------   ------------
      Total stockholders' equity                                                      11,155          7,952
                                                                                ------------   ------------
                                                                                $     15,515   $     16,100
                                                                                ============   ============
</TABLE>
          The accompanying notes are an integral part of the condensed
                       consolidated financial statements.

                                       4
<PAGE>
                            Focus Enhancements, Inc.
                 Condensed Consolidated Statements of Cash Flows
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                      Three Months Ended,
                                                                            --------------------------------------
                                                                            March 31, 2004          March 31, 2003
                                                                            --------------          --------------
<S>                                                                         <C>                     <C>
Cash flows from operating activities:
      Net loss                                                              $      (1,589)          $         (969)
      Adjustments to reconcile net loss to net cash used in operating
      activities:
          Depreciation and amortization                                               189                      223
          Changes in assets and liabilities:
              Decrease in accounts receivable                                         903                      270
              Decrease in inventories                                                 555                       56
              Decrease (increase) in prepaid expenses and other assets               (124)                      53
              Increase (decrease) in accounts payable                                (695)                     372
              Decrease in accrued liabilities                                        (136)                     (66)
                                                                            -------------           --------------
Net cash used in operating activities                                                (897)                     (61)

Cash flows from investing activities:
      Acquisition of COMO Computer and Motion GmbH net of cash acquired                (3)                    --
      Increase in other assets                                                       (194)                    --
      Purchases of property and equipment                                             (15)                     (14)
                                                                            -------------           --------------
Net cash used in investing activities                                                (212)                     (14)

Cash flows from financing activities:
      Payments under capital lease obligations                                       --                        (16)
      Proceeds from exercise of common stock options and warrants                      79                       34
                                                                            -------------           --------------
Net cash provided by financing activities                                              79                       18

Decrease in cash and cash equivalents                                              (1,030)                     (57)
Cash and cash equivalents at beginning of period                                    3,731                    1,310
                                                                            -------------           --------------
Cash and cash equivalents at end of period                                  $       2,701           $        1,253
                                                                            =============           ==============

Non-Cash Activity

Conversion of notes payable and accrued interest to related party into
      common and preferred stock                                            $      4,454            $         --
                                                                            =============           ==============
</TABLE>
          The accompanying notes are an integral part of the condensed
                       consolidated financial statements.

                                       5
<PAGE>
                            Focus Enhancements, Inc.

              Notes to Condensed Consolidated Financial Statements

1.    Basis of Presentation - Interim Financial Information

The condensed  consolidated  financial  statements of Focus  Enhancements,  Inc.
("Focus" or "the  Company") as of March 31, 2004 and December 31, 2003,  and for
the  three-month  periods ended March 31, 2004 and March 31, 2003, are unaudited
and should be read in conjunction with the consolidated financial statements and
notes  thereto for the year ended  December 31, 2003  included in Focus'  Annual
Report on Form 10-K for the year ended December 31, 2003.

In the opinion of management,  the condensed  consolidated  financial statements
include  all  adjustments  (consisting  only of  normal  recurring  adjustments)
necessary  for a fair  presentation  of  Focus'  financial  position,  operating
results and cash flows for the periods presented.  The results of operations and
cash  flows for the  three  months  ended  March  31,  2004 are not  necessarily
indicative of the results that may be expected for any future period.

Focus' fiscal year ends on December 31 and the interim quarters include 13 weeks
and end on the last  Sunday of the period.  For  convenience,  the  accompanying
condensed  consolidated  financial  statements  are shown as ending on March 31,
2004 and 2003,  although the first  quarters of fiscal year 2004 and fiscal year
2003 ended on April 4, 2004 and March 30, 2003, respectively.


2.    Consolidation and Foreign Currency Translation

The interim unaudited condensed consolidated financial statements include Focus'
accounts and those of its wholly owned subsidiaries.  All inter-company accounts
and transactions have been eliminated upon consolidation.

The  functional  currency of Focus' foreign  subsidiary,  COMO Computer & Motion
("COMO" - see Note 5, "Business  Combinations"),  is the Euro.  Gains and losses
resulting from the translation of COMO's financial  statements are reported as a
separate  component of  stockholders'  equity.  Gains and losses  resulting from
foreign currency transactions are included in net loss.


3.    Pro Forma Stock Compensation Expense

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 and 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 over the  amount an  employee  must pay to
acquire the stock.  Stock options issued under Focus' stock option plans have no
intrinsic  value at grant  date.  Accordingly,  under  APB  Opinion  No.  25, no
compensation cost is recognized.

Focus 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. The estimated fair value of the options is amortized to
expense over the vesting period of the option. The following table presents the
effect on reported net loss and net loss per share of accounting for employee
stock options under the fair value method:


                                       6
<PAGE>
                            Focus Enhancements, Inc.

              Notes to Condensed Consolidated Financial Statements

<TABLE>
<CAPTION>
(In thousands, except per-share data)                              Three Months Ended
                                                         ------------------------------------
                                                         March 31, 2004        March 31, 2003
                                                         --------------        --------------
<S>                                                      <C>                   <C>
Reported net loss                                        $      (1,589)        $        (969)
Option fair value amortization                                    (273)                 (212)
                                                         -------------         -------------
Pro forma net loss                                       $      (1,862)        $      (1,181)
                                                         =============         =============
Reported net loss per share                              $       (0.04)        $       (0.03)
Net effect per share of option fair value amortization           (0.00)                (0.00)
                                                         -------------         -------------
Basic and diluted pro forma net loss per share           $       (0.04)        $       (0.03)
                                                         =============         =============
</TABLE>

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

4.    Management's Plans

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, 2004 and the year ended December 31, 2003, Focus incurred
a net loss of $1.6 million and $1.7 million,  respectively, and used net cash in
operating   activities   of  $0.9  million  and  $2.6   million,   respectively.
Additionally,  in January 2004, Microsoft ceased placing orders for Focus' FS454
product.  Shipments  of the FS454,  which  were  primarily  to this  significant
customer,  represented 25% and 37% of Focus' total revenues for the three months
ended March 31, 2004 and the year ended December 31, 2003,  respectively.  These
factors  indicate  that Focus may  potentially  be unable to continue as a going
concern.

The condensed  consolidated  financial statements do not include any adjustments
relating to the  recoverability  and classification of recorded asset amounts or
the amounts and  classification  of liabilities  that might be necessary  should
Focus 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.

Focus has  historically  met cash needs from the  proceeds of debt,  the sale of
common stock in private  placements,  and the exercise of employee 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,  although no
assurances can be given, Focus is developing,  and expects to release, three new
products during 2004.

Focus'  management  believes that net proceeds of $5.2 million received in April
2004 from a  private  equity  placement  transaction  (see Note 12,  "Subsequent
Events"), in addition to current cash balances, should be sufficient to meet all
currently planned expenditures and sustain operations through December 31, 2004.
However,  Focus' continued  significant  investment in research and development,
primarily in the area of Ultra  Wideband,  could require it to find a partner to
fund a portion of the continued  development  and/or raise  additional  funds to
support its working capital needs.

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

                                       7
<PAGE>
                            Focus Enhancements, Inc.

              Notes to Condensed Consolidated Financial Statements

5.    Business Combinations

COMO Computer & Motion GmbH
---------------------------
On February 27, 2004, Focus completed the acquisition of COMO,  located in Kiel,
Germany, pursuant to which COMO became a wholly owned subsidiary of Focus. Under
the terms of the agreement,  Focus acquired COMO through the issuance of 795,162
shares of its  common  stock.  Focus may also issue up to an  additional  46,266
shares  of its  common  stock  to  COMO's  shareholders,  in the  event  certain
conditions  are  met at the  end of 2004  and  2005.  In  connection  with  this
transaction,  Focus paid vFinance Investments, Inc., (a related party) a success
fee of $100,000 and 30,000 shares of Focus' common stock.  The aggregate  number
of shares of common stock issued by Focus  relative to the  acquisition of COMO,
including the earn out shares, was 871,428.

Founded in 1990,  COMO  develops,  manufactures  and  distributes  digital video
solutions.  The  acquisition  will enable Focus to add new features to its video
technology product line, including content storage and management functionality,
and will  provide the  presence of an office in  Germany,  thereby  facilitating
support of Focus' European distributors and customers.

COMO's results of operations are included in Focus'  financial  statements  from
the date of acquisition,  and the assets and liabilities  were recorded based on
their fair values as of the date of  acquisition.  There were no employee  stock
options or warrants assumed as a result of the acquisition. Pro forma results of
operations have not been presented because the effect of the acquisition was not
material to Focus' financial position or results of operations.

The purchase price of approximately  $1.7 million,  consisting of 871,428 shares
of Focus common stock and acquisition costs of approximately  $220,000, has been
allocated  based on the  preliminary  estimated  fair value of net  tangible and
intangible assets acquired, and liabilities assumed, to the following assets and
liabilities:

(In thousands)                                         Purchase Price
                                                         Allocation
                                                       --------------
Assets acquired                                        $       1,520
Intangible assets: Existing technology                           890
Goodwill                                                         663
Liabilities assumed                                           (1,420)
                                                       --------------

                                                       $       1,653
                                                       ==============

Existing  technology  is  being  amortized  on a  straight-line  basis  over  an
estimated useful life of three years.

Visual Circuits Corporation
---------------------------
On January 28, 2004,  Focus  announced that it had entered into an Agreement and
Plan of  Reorganization  to  acquire  substantially  all the  assets  and assume
certain liabilities of Visual Circuits Corporation ("Visual Circuits"),  located
in Minneapolis,  Minnesota,  in exchange for approximately 3.8 million shares of
Focus' common stock,  subject to certain  adjustments.  Founded in 1991,  Visual
Circuits is a manufacturer  and developer of integrated  hardware,  software and
network products that manage,  schedule,  distribute,  store and present digital
video in commercial-market media applications. The acquisition is subject to the
approval of Visual Circuits' shareholders. A special meeting of Visual Circuits'
shareholders  is scheduled for May 28, 2004 and the  acquisition  is expected to
close as soon as practical thereafter.

                                       8
<PAGE>
                            Focus Enhancements, Inc.

              Notes to Condensed Consolidated Financial Statements


6.    Goodwill and Intangible Assets

The following table provides a summary of the change in the carrying amount of
goodwill:

(In thousands)                                                         Goodwill
                                                                     -----------

Balance as of December 31, 2003                                      $     5,191
Additional goodwill resulting from the acquisition of COMO                   663
                                                                     -----------
Balance as of March 31, 2004                                         $     5,854
                                                                     ===========

The  following  tables  provide a summary of the carrying  amounts of intangible
assets:

(In thousands)                                   March 31, 2004
                                   ---------------------------------------------
                                                    Accumulated          Net
                                   Gross Amount     Amortization        Amount
                                   -----------      ------------     -----------
Existing technology                $     2,885      $    (1,558)     $     1,327
Tradename                                  176             (141)              35
                                   -----------      -----------      -----------
                                   $     3,061      $    (1,699)     $     1,362
                                   ===========      ===========      ===========


                                                 December 31, 2003
                                   ---------------------------------------------
                                                    Accumulated          Net
                                   Gross Amount     Amortization        Amount
                                   -----------      ------------     -----------
Existing technology                      1,995           (1,406)             589
Tradename                                  176             (130)              46
                                   -----------      -----------      -----------
                                   $     2,171      $    (1,536)     $       635
                                   ===========      ===========      ===========

The total expected future amortization  related to intangible assets is provided
in the table below:

(In thousands)                                              Amortization
                                                            ------------
Nine months ended December 31, 2004                         $        636
Fiscal year 2005                                                     354
Fiscal year 2006                                                     323
Fiscal year 2007                                                      49
                                                            ------------
Total                                                       $      1,362
                                                            ============

                                       9
<PAGE>
                            Focus Enhancements, Inc.

              Notes to Condensed Consolidated Financial Statements

7.    Inventories

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

(In thousands)
                                              March 31, 2004   December 31, 2003
                                              --------------   -----------------
Raw materials                                 $        1,742   $          2,048
Work in process                                          252                 72
Finished goods                                         1,212              1,373
                                              --------------   ----------------
                                              $        3,206   $          3,493
                                              ==============   ================

8.       Commitments

(In thousands)
                                              March 31, 2004   December 31, 2003
                                              --------------   -----------------
Short-term debt:
  Current portion of notes payable to bank    $           31   $           --
  Borrowings under line-of-credit                        453               --
  Loan payable                                           251               --
                                              --------------   -----------------
                                                         735               --
Long-term debt:
  Notes payable to bank (long-term
    portion)                                             196               --
  Convertible promissory notes payable
    to shareholder                                      --                3,867
                                              --------------   ----------------
                                                         196              3,867
                                              --------------   ----------------
                                              $          931   $          3,867
                                              ==============   ================

Short- and long-term  debts were assumed by Focus as a result of the acquisition
of COMO in February 2004 - see Note 5, "Business Combinations".

The short-term debt consists of the current portion of two notes payable,  which
in aggregate, and including the long-term portion, total approximately $227,000,
a line-of-credit  with an outstanding  balance of  approximately  $453,000 and a
loan with a German small  business  lending  institution.  The notes payable and
line-of-credit  are  denominated in Euros and are both with a local German bank.
Interest  is payable on the notes at an average of 6% and on the  line-of-credit
at 11%. The two notes of $172,000 and $55,000 will be paid through December 2011
and  December  2006,  respectively.  The notes  payable and  line-of-credit  are
partially  secured by personal  guarantees from the two  shareholders  from whom
Focus purchased the shares of COMO common stock. These personal guarantees total
approximately $344,000.

The loan with the German  small  business  lending  institution  consists of two
contracts of similar amounts signed in 1995 and 1996.  Interest rates applicable
to  the  two  contracts   average  8%.  In  addition,   there  is  profit-linked
remuneration,  as defined, of approximately 3%, which accumulates and is payable
upon  profits  generated  by COMO up to two years after the  termination  of the
contracts.  As a result of Focus'  acquisition of COMO, the lending  institution
has  notified  COMO  that  these  loans  must be repaid  by June 30,  2004,  and
accordingly,  an accrual for profit-linked remuneration of approximately $60,000
has been  classified  in "Accrued  liabilities"  in the  condensed  consolidated
balance sheets.  This loan is partially secured by personal  guarantees from the
two  shareholders  from whom Focus  purchased  the shares of COMO common  stock.
These personal guarantees total approximately $123,000.

                                       10
<PAGE>
                            Focus Enhancements, Inc.

              Notes to Condensed Consolidated Financial Statements

Convertible Promissory Notes
----------------------------
Convertible  promissory  notes  payable at December 31, 2003  consisted of three
promissory  notes totaling $3.9 million payable to Carl Berg, a Company director
and  shareholder.  The notes bore interest at prime plus 1%, payable  quarterly,
and were  collateralized by substantially all of the assets of Focus.  Focus was
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.

On March 19, 2004, Mr. Berg converted his approximately $3.9 million of debt and
$587,000 of accrued  interest into common and preferred  stock.  This conversion
resulted in the  issuance of  2,173,193  shares of Focus'  common  stock and 840
shares of Series B preferred  stock and 417 shares of Series C preferred  stock,
which are  convertible  into an additional  840,000 and 417,000 shares of Focus'
common stock, respectively. Following the conversion, and assuming conversion of
the  preferred  stock,  Mr.  Berg  owned  approximately  11%  of  the  Company's
outstanding common and preferred stock.

General
-------
From time to time,  Focus is party to certain claims and legal  proceedings that
arise in the ordinary  course of business  which,  in the opinion of management,
will not have a material adverse effect on Focus' financial  position or results
of operations.

Focus  indemnifies  its  customers  from third party claims  alleging  patent or
copyright  infringement  relating  to the use of the  Company's  products.  Such
indemnification  provisions are accounted for in accordance  with SFAS No. 5 and
are generally  limited to the amount paid by the customer.  Historically,  costs
related to these indemnification arrangements have not been significant.


9.    Stockholders' Equity

The  acquisition  of COMO in February  2004 resulted in the issuance of  825,162
shares of Focus'  common stock,  consisting  of 795,162  shares issued to COMO's
shareholders  and  30,000  shares  issued to  vFinance  Investments,  Inc.,  for
investment banking services related to the acquisition.  Focus may also issue up
to an  additional  46,266 shares of common stock to COMO's  shareholders  in the
event certain conditions are met at the end of 2004 and 2005.

On March 19, 2004, Carl Berg, a Company director and shareholder,  converted his
approximately  $3.9  million of  convertible  promissory  notes and  $587,000 of
accrued  interest  into common and  preferred  stock,  as  discussed  in note 8,
"Commitments".

As of March 31, 2004, Focus was obligated under certain circumstances,  to issue
the  following   additional  shares  of  common  stock  pursuant  to  derivative
securities, instruments or agreements:

(In thousands)                                               Shares of
                                                           Common Stock
                                                           -------------
Warrants to purchase common stock (1)                               380
Options to purchase common stock                                  5,315
Preferred Stock convertible into common stock                     3,161
                                                           -------------
                                                                  8,856
                                                           =============

(1) Does not include  warrants  issued in connection  with a private  placement,
which closed on April 14, 2004. See Note 12, "Subsequent Events".

                                       11
<PAGE>
                            Focus Enhancements, Inc.

              Notes to Condensed Consolidated Financial Statements

10.   Related Party Transactions

vFinance Investments Inc.
-------------------------
Focus has engaged  the  services of  vFinance  Investments  Inc.,  to act as the
Company's  financial  advisor.  Timothy  Mahoney,  a member of  Focus'  Board of
Directors is the Chairman and C.O.O.  of vFinance,  Inc.,  the parent company to
vFinance  Consulting,  and owns approximately 20% of the shares of vFinance Inc.
Focus paid  vFinance  Consulting  $100,000  in fees and 30,000  shares of common
stock in the three months ended March 31, 2004 related to merger and acquisition
services and $15,000 in fees in the three months ended March 31, 2003 related to
the development of a strategic business plan.

Notes receivable from related parties
-------------------------------------
Notes receivable from shareholders,  totaling  $1,097,000 at March 31, 2004, are
due from the two former COMO shareholders,  who are now employees of Focus, from
whom Focus purchased the shares of COMO common stock.  The notes  receivable are
non-interest bearing, are due on demand and are collateralized by 610,094 shares
of Focus common stock.


11.   Bill and Hold Transaction

For the three months ended March 31, 2003,  product revenue relating to products
sold and, at the  customer's  request,  stored by Focus,  totaled  approximately
$362,000. Such revenue pertained to the sale of product to Focus' distributor in
Asia  and was  recognized  during  the  first  quarter  of  2003 as the  product
specifications  of the purchase  contract had been met during this 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 Focus'  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.


12.   Subsequent Events

On April 14, 2004, Focus completed a private placement to sell approximately 3.9
million shares of its common stock to third party investors,  receiving proceeds
of approximately $5.2 million, net of offering costs of approximately  $400,000.
The shares were issued at $1.45 per share,  an  approximate  11% discount to the
closing price of Focus'  common stock on April 5, 2004.  In connection  with the
private  placement,  Focus issued  warrants to the  investors and to a placement
agent to purchase a total of approximately  940,000 shares of common stock at an
exercise price of $2.00 per share.  No  compensation  expense was recorded given
that the warrants were issued in connection with the issuance of common stock.

                                       12
<PAGE>

     Item 2. Management's Discussion and Analysis of Financial Condition and
                             Results of Operations

The  following  information  should be read in  conjunction  with the  condensed
consolidated  financial  statements  and notes thereto in Part I, Item 1 of this
Quarterly  Report and with  Management's  Discussion  and  Analysis of Financial
Condition  and Results of  Operations  contained in Focus' Annual Report on Form
10-K for the year ended December 31, 2003.

Certain Factors That May Affect Future Results

Discussions  of  certain  matters  in this  Quarterly  Report  on Form  10-Q may
constitute  forward-looking  statements within the meaning of 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 that 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,  successful integration of acquisitions,  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 Revenue

<TABLE>
<CAPTION>
                                      Three Months Ended
                             -------------------------------------
                                                                            Increase/          %increase/ -
(Dollars in thousands)         March 31, 2004     March 31, 2003            (decrease)            decrease
                             -------------------------------------    -------------------------------------
<S>                            <C>               <C>                    <C>                    <C>
System products               $         2,935    $         3,578        $         (643)            -18.0%
Semiconductor products                  1,159                512                   647             126.4%
                             ------------------------------------    -------------------------------------

                              $         4,094    $         4,090        $            4               0.1%
                             ====================================    =====================================
</TABLE>

Revenue for the three  months  ended March 31, 2004  was $4.1  million,  flat as
compared  with the three months  ended March 31,  2003.  The decrease in revenue
from sales of systems  products  was offset by an increase in revenue from sales
of our semiconductor products.

For the three  months  ended  March  31,  2004,  net  sales of  system  products
(professional   and  consumer)  to   distributors,   retailers  and  VAR's  were
approximately $2.9 million compared to $3.6 million for the same period in 2003,
a decrease of  $644,000.  The decrease in sales of our systems  products  mainly
reflects lower Mixer product sales, and to a lesser extent,  the  discontinuance

                                       13
<PAGE>
of certain non-profitable products,  partially offset by the introduction of new
products,  including  FireStore.  The decrease in Mixer product  sales  occurred
primarily in Asia, as video enthusiasts move from stand-alone editing systems to
computer based or non-linear editing systems.  Although this shift in technology
began in the United States and Europe in prior years, certain markets, including
Asia, were initially slower to adopt non-linear editing.

Sales  of  semiconductor   products  to  distributors  and  OEM  customers  were
approximately  $1,159,000  in the three months ended March 31, 2004  compared to
$512,000  for the same period in 2003,  an increase of $647,000.  This  increase
mainly reflects sales of our FS454 chip, which was included in Microsoft's Xbox,
partially  offset by  decreased  sales of our FS401 chip.  The decrease in FS401
sales is  primarily  related  to the  timing of our  design  wins as well as our
customers' production schedules.

In January  2004,  Microsoft  ceased  placing  orders for Focus' FS454  product.
Shipments  of the FS454,  which were  primarily  to this  significant  customer,
represented  25% and 37% of Focus'  total  revenues  for the three  months ended
March 31, 2004 and the year ended December 31, 2003, respectively.

As of March 31, 2004, we had a sales order backlog of approximately  $330,000, a
decrease of $746,000 when compared to the fourth quarter of 2003.  This decrease
in backlog reflects the cessation of orders from Microsoft for our FS454 chip.

Three customers had sales in excess in of 10% of our revenue in the three months
ended March 31, 2004. The aggregate sales to these  customers  accounted for 47%
of our total  revenue.  One  customer  accounted  for 10% of our revenue for the
three months ended March 31, 2003.

Gross margin

<TABLE>
<CAPTION>
                                                Three Months Ended
                                        ------------------------------------
(Dollars in thousands)                   March 31, 2004    March 31, 2003       Increase/ (decrease)
                                        ------------------------------------    -------------------
<S>                                      <C>               <C>                   <C>
Gross margin                             $        1,332    $        1,687        $           (355)
                                        ====================================
Gross margin rate                                 32.5%             41.2%                    -8.7%
                                        ====================================
</TABLE>

Our gross margin rate for the three  months  ended March 31, 2004,  decreased to
32.5% from 41.2% for the three  months  ended March 31,  2003, a decrease of 8.7
percentage  points.  The  decrease in the gross  margin rate  reflects the below
average  gross margin  business  that we conducted  with one of our  significant
customers,  which did not occur in three  months  ended  March  31,  2003.  This
significant customer represented  approximately 25% of our revenue for the three
months ended March 31, 2004.  Sales to this customer were made at a gross profit
margin  percentage of less than 30%,  primarily as a result of volume  discounts
provided.

                                       14
<PAGE>
Operating expenses
<TABLE>
<CAPTION>
(Dollars in thousands)                                 Three Months Ended
                                       -------------------------------------------------
                                           March 31, 2004            March 31, 2003        Increase / (decrease)
                                       -----------------------   -----------------------   -----------------------
                                                      % of                     % of                      % of
                                                    revenue                   revenue                   revenue
<S>                                     <C>             <C>       <C>             <C>       <C>              <C>
Sales, marketing and support            $    1,054      25.8%     $     998       24.4%     $      56        1.4%
General and administrative                     557      13.6%           376        9.2%           181        4.4%
Research and development                     1,106      27.0%         1,057       25.8%            49        1.2%
Amortization of intangible assets              164       4.0%           172        4.2%            (8)      -0.2%
                                       -----------------------   -----------------------   -----------------------
                                        $    2,881      70.4%     $   2,603       63.6%     $     278        6.8%
                                       =======================   =======================   =======================
</TABLE>

Sales, marketing and support
----------------------------
Sales,  marketing and support expenses for the three months ended March 31, 2004
were $1,054,000,  an increase of $56,000 from $998,000 in the three months ended
March 31, 2003. An increase in headcount  resulting from the acquisition of COMO
Computer & Motion GmbH ("COMO") was partially  offset by lower  commissions  and
advertising expenditures.

General and administrative
--------------------------
General and  administrative  expenses  for the three months ended March 31, 2004
were $557,000,  an increase of $181,000 from $376,000 for the three months ended
March 31, 2003. The increase in general and  administrative  expenses was mainly
due to the change in classification of certain personnel costs from research and
development  in 2003 to  general  and  administrative  in 2004,  and to a lesser
extent, an increase in public relations and auditing fees.

Research and development
------------------------
Research and development expenses for the three months ended March 31, 2004 were
$1,106,000,  an increase of $49,000 from  $1,057,000  for the three months ended
March 31,  2003.  The  increase in research and  development  expenses  reflects
additional  expenses  resulting  mainly from the acquisition of COMO,  partially
offset by a change in classification  of certain personnel costs  year-over-year
from research and development in 2003 to general and administrative in 2004.

Amortization
------------
Amortization  expense for the three months ended March 31, 2004 was $164,000,  a
decrease of $8,000 from $172,000 for the three months ended March 31, 2003.  The
decrease  reflects the completion of amortization  of our remaining  capitalized
software  development expenses in 2003, partially offset by amortization expense
associated  with the intangible  assets that resulted from the  acquisitions  of
DVUlimited in September 2003 and COMO in February 2004.

                                       15
<PAGE>
Interest expense, net and Other income, net
<TABLE>
<CAPTION>
(Dollars in thousands)                       Three Months Ended
                                       -------------------------------      Increase /    %increase / -
                                       March 31, 2004   March 31, 2003     (decrease)       decrease
                                       --------------   --------------
<S>                                    <C>              <C>                 <C>           <C>
Interest expense, net                  $         (46)   $         (51)      $     (5)             -9.8%
                                       ==============   ==============

Other income, net                                  6               --               6              n/a
                                       ==============   ==============
</TABLE>

Net  interest  expense for the three  months  ended March 31, 2004 was  $46,000,
compared to $51,000 in the three months  ended March 31,  2003.  The decrease in
net  interest  expense  reflects  the  conversion  in March 2004 of  convertible
promissory notes into common and preferred  stock,  partially offset by interest
expense  associated  with short- and long-term debt assumed with the acquisition
of COMO in February 2004.

                                       16
<PAGE>
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, 2004 and the year ended  December  31, 2003,  we incurred
net losses of $1.6  million  and $1.7  million,  respectively,  and used cash in
operating  activities of $0.9 million,  and $2.6  million,  respectively.  These
factors  indicate  that we may  potentially  be  unable 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 we be unable to
continue as a going concern.  Our  continuation  as a going concern is dependent
upon our ability to generate  sufficient cash flows to meet our 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,  we have financed our operations  primarily  through the public
and private  sale of common  stock,  proceeds  from the  exercise of options and
warrants,  short-term  borrowings  from private  lenders,  and favorable  credit
arrangements with vendors and suppliers.

First  Quarter of Fiscal Year 2004  compared to the First Quarter of Fiscal Year
2003

                                               As of or for Three Months Ended
                                             -----------------------------------
(Dollars in thousands)                       March 31, 2004   December 31, 2003
                                             --------------   -----------------
Cash and cash equivalents                    $        2,701   $           3,731

Working capital                              $        3,707   $           5,696


                                             March 31, 2004      March 31, 2003
                                             --------------      --------------
Days sales outstanding (DSO)                           36.5                52.5

Inventory turns - annualized                            3.4                 2.8

Net cash used in operating activities        $         (897)     $          (61)
Net cash used in investing activities        $         (212)     $          (14)
Net cash provided by financing activities    $           79      $           18


                                       17
<PAGE>
Net cash used in operating activities
-------------------------------------
<TABLE>
<CAPTION>
(In thousands)                                             Three Months Ended,
                                                  ------------------------------------
                                                  March 31, 2004        March 31, 2003
                                                  --------------        --------------         Change in
                                                   cash (used),          cash (used),         cash (used),
                                                     provided              provided             provided
                                                  --------------        --------------         ---------
<S>                                               <C>                   <C>                    <C>
Net loss                                          $      (1,589)        $        (969)         $    (620)
Non-cash income statement items                             189                   223                (34)
Decrease in accounts receivable                             903                   270                633
Decrease in inventories                                     555                    56                499
Decrease (increase) in prepaid expenses
  and other assets                                         (124)                   53               (177)
Increase (decrease) in accounts payable                    (695)                  372             (1,067)
Decrease in accrued liabilities                            (136)                  (66)               (70)
                                                  --------------        --------------          ---------
                                                  $        (897)        $         (61)          $   (836)
                                                  ==============        ==============          =========
</TABLE>

Net cash used in operating  activities for the three months ended March 31, 2004
and 2003 was $897,000 and $61,000,  respectively.  The increase in net cash used
in operating  activities  mainly reflects an increase in the net loss as well as
an increase in cash used for accounts  payable,  partially offset by an increase
in cash provided from accounts receivable and inventories.  The increase in cash
used for accounts  payable in the three  months  ended March 31, 2004,  reflects
payments  relating  to  payable  balances   outstanding  at  December  31,  2003
associated  with FS454 chip  production,  which was primarily used in Microsoft'
Xbox. In January 2004,  Microsoft  ceased placing orders for the FS454 chip from
us. The  increase  in cash  provided  by  accounts  receivable  and  inventories
reflects  significant  decreases  in our  accounts  receivable  and  inventories
balances from December 31, 2003.  These  decreases are a result of a decrease in
FS454 production and related sales, which were primarily to Microsoft.

Two  customers  had accounts  receivable  balances in excess of 10% of our total
accounts  receivable at March 31, 2004 and those customers  accounted for 42% 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 timetable and accounts
receivable collections,  inventory management,  and the timing of payments among
other factors.

Net cash used in investing activities
-------------------------------------
Net cash used in  investing  activities  was $212,000 for the three months ended
March 31,  2004,  compared to $14,000 for the three months ended March 31, 2003.
The increase in cash used in investing activities mainly reflects an increase in
other assets  associated with transaction costs incurred during the three months
ended March 31, 2004 with respect to the pending  acquisition of Visual Circuits
(see Note 5, "Business Combinations").

Net cash provided by investing activities
-----------------------------------------
Net cash provided by financing  activities  increased $61,000 to $79,000 for the
three  months  ended March 31,  2004,  compared to $18,000 for the three  months
ended March 31, 2003,  reflecting  increased  proceeds from warrant and employee
option exercises.

Capital Resources and Liquidity Outlook
---------------------------------------
We have incurred losses and used net cash in operating  activities for the three
months  ended  March  31,  2004 and each of the two  years in the  period  ended
December 31,  2003,  and as such,  have been  dependent  upon raising  money for


                                       18
<PAGE>
short- and  long-term  cash needs  through  debt,  proceeds from the exercise of
options and  warrants,  and the sale of our common stock in private  placements.
For the year ended December 31, 2003, we received  approximately $1.9 million in
net proceeds from private  offerings of common stock.  In April 2004 we received
net proceeds of approximately  $5.2 million from the sale of  approximately  3.9
million  shares of our common  stock to a group of third  party  investors  in a
private placement transaction.

At December 31, 2003,  we owed Carl Berg,  a Company  director and  shareholder,
approximately  $4.4 million in principal and accrued  interest on various notes.
On March 19, 2004,  Mr. Berg  converted  the  outstanding  principal and accrued
interest  balance  into  common and  preferred  stock.  At March 31,  2004,  our
remaining   debt   obligations   consisted   of   approximately    $931,000   in
Euro-denominated  short-  and  long-term  debt  assumed in  connection  with the
acquisition of COMO - see Note 8, "Commitments".

In  January  2004,  Microsoft  ceased  placing  orders  for our  FS454  product.
Shipments  of the FS454,  which were  primarily  to this  significant  customer,
represented  25% and 37% of our total  revenues for the three months ended March
31, 2004 and the year ended December 31, 2003,  respectively.  We recorded gross
margins as a percentage of sales,  before  commissions and selling expenses,  of
below 30% relative to sales of the FS454 chip. The loss of Microsoft  orders for
the FS454 will have a material adverse effect on our revenues,  operating profit
and liquidity,  especially when compared to the third and fourth quarter of 2003
and the first quarter of 2004, as we began our initial shipments to the customer
in the third  quarter of 2003 and  continued  sales through the first quarter of
2004.  However,  as  the  product  was  manufactured  by  one  of  our  contract
manufacturers,  we were  able to meet the  customer's  requirements  without  an
increase in our staffing and operations. Although there can be no assurances, we
do not anticipate any  significant  adjustments to our staffing or operations or
significant  adjustments  to the  carrying  value of our FS454  inventory,  as a
result of this loss.

In addition to regularly  reviewing our cost structure,  we released several new
products in 2003, which are expected to generate  additional revenue in 2004 and
beyond,  and are  continually  reviewing  our product  lines to identify  how to
enhance existing, or create new, distribution channels.  Additionally,  although
no  assurances  can be given,  we expect to release  three new products in 2004.
There can be no  assurances  as to the amount of revenue these new products will
produce.

We believe that the net  proceeds of $5.2 million  received in April 2004 from a
private  equity  placement  transaction,  in addition to current cash  balances,
should be  sufficient  to meet all currently  planned  expenditures  and sustain
operations  through  December  31,  2004.  However,  our  continued  significant
investment in research and development, primarily in the area of Ultra Wideband,
could  require  us to  find a  partner  to  fund  a  portion  of  the  continued
development and/or raise additional funds to support our working capital needs.

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

Summary of Certain Contractual Obligations as of March 31, 2004

(In thousands)
                        < 1 year       2-3 Years        Total
                      -----------     -----------     ----------

Operating leases      $       426     $       241     $      667
                      ===========     ===========     ==========

                                       19
<PAGE>
RISK FACTORS

Risks Related to Our Business
-----------------------------

We have a long history of operating losses.

As of March  31,  2004,  we had an  accumulated  deficit  of $64.6  million.  We
incurred net losses of $1.6 million, $1.7 million and $6.0 million for the three
months  ended  March 31, 2004 and the years  ended  December  31, 2003 and 2002,
respectively.  There can be no  assurance  that we will ever become  profitable.
Additionally,  our  auditors  have  included an  explanatory  paragraph in their
report on our  financial  statements  for the year ended  December 31, 2003 with
respect to  substantial  doubt 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.

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.

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  will
result in higher interest expense.

We  recently  completed  the  acquisition  of COMO and  expect to  complete  the
acquisition  of Visual  Circuits  Corporation  in the  second  quarter  of 2004.
Although these  acquisitions  were, or will be, effected through the issuance of
common  stock,  cash may be needed to fund  operations  because  the  businesses
associated with these acquisitions are not currently profitable. To that end, in
April 2004 we raised net proceeds of approximately $5.2 million through the sale
of  approximately  3.9  million  shares of our common  stock to a group of third
party investors in a private  placement  transaction.  See Note 12,  "Subsequent
Events".

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 December 31, 2003, we
had an aggregate  of  approximately  $4.4  million in debt and accrued  interest
outstanding  to Mr. Berg. On March 19, 2004,  Mr. Berg  converted  this debt and
accrued  interest  to common and  preferred  stock.  Additionally,  Mr. Berg has
provided Samsung  Semiconductor  Inc., our contracted ASIC manufacturer,  with a
personal guarantee to secure our working capital  requirements for ASIC purchase
order  fulfillment.  There can be no  assurances  that Mr. Berg will continue to
provide such interim financing or personal guarantees, should we need additional
funds or increased credit facilities with our vendors.

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

At May 10, 2004, we had 3,161 shares of preferred shares issued and outstanding,
and 1.2 million warrants and 5.3 million options, which are all exercisable into
shares of common stock. The 3,161 shares of preferred stock are convertible into
approximately  3.2  million  shares of our  voting  common  stock.  See Note 10,
"Related Party Transactions".  Furthermore,  we may grant 1.4 million additional
stock options to our employees,  officers,  directors and consultants  under our
current stock option plans. We also may issue additional shares in acquisitions.
Any  additional  grant of options under  existing or future plans or issuance of
shares  in  connection   with  an  acquisition   will  further  dilute  existing
stockholders.

                                       20
<PAGE>
Any  acquisitions  of companies or  technologies  by us,  including our proposed
acquisition of Visual  Circuits  Corporation's  assets,  and recently  completed
acquisition of COMO may result in distraction of our management and  disruptions
to our business.

We may acquire or make  investments in complementary  businesses,  technologies,
services or  products if  appropriate  opportunities  arise,  as was the case in
January 2004 when we announced  that we had entered into a definitive  agreement
to acquire substantially all the assets of Visual Circuits  Corporation,  and in
February  2004 when we  acquired  the stock of COMO.  From time to time,  we may
engage in discussions and negotiations with companies  regarding the possibility
of  acquiring  or  investing  in  their   businesses,   products,   services  or
technologies.  We may not be able to identify suitable acquisition or investment
candidates in the future, or if we do identify suitable  candidates,  we may not
be able to make such  acquisitions  or  investments on  commercially  acceptable
terms or at all.  If we  acquire  or invest in  another  company,  we could have
difficulty  assimilating  that company's  personnel,  operations,  technology or
products and service offerings.  In addition,  the key personnel of the acquired
company  may decide not to work for us.  These  difficulties  could  disrupt our
ongoing business,  distract our management and employees,  increase our expenses
and  adversely  affect the  results  of  operations.  Furthermore,  we may incur
indebtedness  or issue  equity  securities  to pay for any  future  acquisitions
and/or pay for the legal,  accounting or finders fees, typically associated with
an  acquisition.  The  issuance  of equity  securities  could be dilutive to our
existing stockholders. In addition, the accounting treatment for any acquisition
transaction  may  result in  significant  goodwill,  which,  if  impaired,  will
negatively  affect  our  consolidated  results  of  operations.  The  accounting
treatment  for any  potential  acquisition  may  also  result  in a  charge  for
in-process  research and development  expense,  which will negatively affect our
consolidated results of operations.

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

Approximately  49% of the  components  for our  products are  manufactured  on a
turnkey basis by two vendors, Furthertech Company Ltd. and Samsung Semiconductor
Inc. In addition,  a single vendor in Mexico assembles  certain of our products.
If these vendors  experience  production or shipping problems for any reason, we
in turn could experience  delays in the production and shipping of the Company's
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.

We depend on a few customers for a high  percentage of our revenues and the loss
or failure to pay of any one of these  customers  could result in a  substantial
decline in our revenues and profits.

For the three months ended March 31, 2004, three customers in aggregate provided
47% of our total revenues and as of March 31, 2004 comprised 47% of our accounts
receivable  balance. We presently have no reason to believe that these customers
lack  the  financial  resources  to  pay.  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 will be able to  market  our  current  or
proposed products to new customers. However, the loss of any major customer, the
failure of any such identified customer to pay us, or to discontinue issuance of
additional  purchase  orders,  would  have  a  material  adverse  effect  on our
revenues,  results  of  operation,  and  business  as a whole  absent the timely
replacement of the associated  revenues and profit margins  associated with such
business.  Furthermore,  many of our  products  are  dependent  upon the overall
success of our customers' products, over which we often have no control.

To that point,  in January 2004,  Microsoft  ceased placing orders for our FS454
product.  Shipments  of the FS454,  which  were  primarily  to this  significant
customer,  represented  25% and 37% of our total  revenues  for the three months

                                       21
<PAGE>
ended March 31, 2004 and the year ended  December  31, 2003,  respectively.  The
loss of Microsoft  orders for the FS454 will have a material  adverse  effect on
our revenues,  operating  profit and liquidity,  especially when compared to the
third and fourth  quarter of 2003 and the first quarter of 2004, as we began our
initial  shipments to Microsoft in the third quarter of 2003 and continued sales
through the first quarter of 2004.  However,  as the product was manufactured by
one of our contract manufacturers, we were able to meet Microsoft's requirements
without an increase in our staffing  and  operations.  Although  there can be no
assurances,  we do not anticipate any significant adjustments to our staffing or
operations  or  significant  adjustments  to the  carrying  value  of our  FS454
inventory, as a result of this loss.

Our quarterly financial results are subject to significant fluctuations.

We have been unable in the past to accurately forecast our operating expenses or
revenues.  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 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,  including  our
investment  in  Ultra  Wideband   technology,   which  is  currently   averaging
approximately  $500,000  per quarter  and is expected to increase  significantly
through the  remainder of 2004.  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, 2004,  we held four patents and one pending  application,  which
combined five previous  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.

                                       22
<PAGE>
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.

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.

During much of the first half of 2003, our common stock did 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 voting  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.

We are  required  to  maintain  a  minimum  bid price of $1.00 per share for our
common  stock.  Between  April 1, 2003 and March 31, 2004,  Focus voting  common
stock closed below $1.00 a share on 64 of 314 trading  days.  On March 18, 2003,
we were  notified by the Nasdaq  that our common  stock did not meet the minimum
bid price  requirement to remain listed on the Nasdaq SmallCap Market.  However,
on May 21,  2003,  we received  notification  from  Nasdaq that we had  regained
compliance and the matter was closed.

We must maintain stockholders' equity of $2.5 million. At March 31, 2004, we had
total  stockholders'  equity of $11.2 million. To the extent we incur net losses
and do not raise additional capital, our stockholders' equity will be reduced.

If we fail to meet these Nasdaq SmallCap requirements, our common stock could be
delisted,  eliminating the only established  trading market for our shares.  Any
sales of our voting  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 the Nasdaq SmallCap Market, 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, such shares. Delisting might also reduce the visibility, liquidity, and
price of our voting common stock.

                                       23
<PAGE>
Our common stock price is volatile.

The market  price for our voting  common  stock is volatile  and has  fluctuated
significantly to date. For example,  between January 1, 2003 and March 31, 2004,
the per share price has fluctuated between $0.50 and $4.20 per share, closing at
$1.39 on May 11, 2004. The trading price of our voting 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    cyclical nature of consumer products using our technology;
     o    changes in financial estimates by us or securities analysts;
     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;
     o    additions or losses of significant customers; and
     o    sales of common stock or issuance of other dilutive securities.

In addition,  the securities  markets have experienced  extreme price and volume
fluctuations  in  recent  times,  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  common  stock,
regardless of 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 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 our  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.

                                       24
<PAGE>
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
continue or worsen,  we may continue to 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.

Recent corporate bankruptcies,  accounting  irregularities,  and alleged insider
wrong doings have negatively  affected  general  confidence in the stock markets
and the economy, causing the U.S. Congress to enact sweeping legislation,  which
will increase the costs of compliance.

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  and internal  control  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.  Such  legislation  and
subsequent  regulations 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.

                                       25
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk

At March  31,  2004 we did not hold any  short-term  investments  that  would be
exposed to market risk from adverse movements in interest rates.

In connection with the acquisition of COMO, we assumed approximately $931,000 in
Euro-denominated short- and long-term debt. The average interest rate applicable
to these debt obligations is 9%.

Also as a result of the COMO acquisition, we had net tangible assets denominated
in Euros of approximately $100,000 as at March 31, 2004.

Item 4. Controls and Procedures

Management  of the Company,  with the  participation  of the President and Chief
Executive  Officer and the Chief  Financial  Officer  (its  principal  executive
officer  and  principal  financial  officer,  respectively),   evaluated  Focus'
disclosure  controls and  procedures as of the end of the period covered by this
Report.

Based on that  evaluation,  the  President and Chief  Executive  Officer and the
Chief Financial Officer have concluded that, as of the end of the period covered
by this Report,  Focus'  disclosure  controls and  procedures  are  effective to
ensure that  information  required to be disclosed by Focus in the reports filed
or submitted by it under the  Securities  Exchange Act of 1934,  as amended,  is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's rules and forms,  and include  controls and procedures  designed to
ensure that  information  required to be  disclosed  by Focus in such reports is
accumulated and communicated to Focus'  management,  including the President and
Chief Executive Officer and the Chief Financial Officer of Focus, as appropriate
to allow timely decisions regarding required disclosure.

There was no change in Focus'  internal  control over  financial  reporting that
occurred  during  Focus'  first  fiscal  quarter  of 2004  that  has  materially
affected,  or is reasonably likely to materially affect, Focus' internal control
over financial reporting.

                                       26
<PAGE>
                           PART II - OTHER INFORMATION

Item 1.  Legal proceedings

         From time to time,  Focus 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
         Focus' financial position or results of operation.

Item 2.  Changes in securities

         Changes in Securities,  Use of Proceeds and Issuer  Purchases of Equity
         Securities

         (a)  None

         (b)  None

         (c)  and (d) On April  14,  2004,  the  Company  completed  the sale of
              3,862,070  shares of its common  stock in a private  placement  to
              independent   third  party   investors,   receiving   proceeds  of
              approximately $5.2 million, net of offering costs of approximately
              $400,000.  The shares were sold at an approximate  11% discount to
              the closing  price of the  Company's  common  stock as of April 5,
              2004, the date the commitment to purchase/sell  was reached by the
              parties.   Additionally,   the  Company  issued  warrants  to  the
              investors  and a  placement  agent to purchase  940,414  shares of
              common stock at an exercise  price of $2.00 per share.  The shares
              were sold to accredited  investors  pursuant to an exemption  from
              registration under the federal securities laws. Focus will use the
              funds from the sale of the  3,862,070  shares of common  stock for
              general corporate purposes.  The shares,  including the underlying
              warrants,  will be registered on a Registration  Statement on Form
              S-3  pursuant  to  a  registration   rights   agreement  with  the
              investors.

              On March 19,  2004,  Mr. Berg  converted  his  approximately  $3.9
              million of debt and $587,000 of accrued  interest  into common and
              preferred  stock.  This  conversion  resulted  in the  issuance of
              2,173,193  shares of Focus' common  stock,  840 shares of Series B
              preferred stock and 417 shares of Series C preferred stock,  which
              are convertible  into an additional  840,000 and 417,000 shares of
              Focus' common stock,  respectively.  Following the conversion, Mr.
              Berg owned  approximately 11% of the Company's  outstanding common
              and preferred  stock.  The conversion was exempt for  registration
              under the federal  securities  laws as Mr.  Berg is an  accredited
              investor under applicable securities laws.

              On February 27, 2004,  Focus  completed the  acquisition  of COMO,
              located in Kiel,  Germany,  pursuant to which COMO became a wholly
              owned subsidiary of Focus. Under the terms of the agreement, Focus
              acquired COMO through the issuance of 795,162 shares of its common
              stock.  Focus may also issue up to an additional  46,266 shares of
              its  common  stock to COMO's  shareholders,  in the event  certain
              conditions are met at the end of 2004 and 2005. In connection with
              this  transaction,  Focus  paid  vFinance  Investments,  Inc.,  (a
              related  party) a success fee of $100,000 and 30,000 shares of the
              Focus'  common  stock.  The  aggregate  number of shares of common
              stock  issued  by  Focus  relative  to the  acquisition  of  COMO,
              including the earn out shares, was 871,428. The shares were issued
              to the  two  owners  of  COMO  located  in  Germany  in a  private
              transaction  pursuant to an exemption from registration  under the
              federal securities laws. Focus has filed a Registration  Statement
              on Form S-3 to register the shares.

         (e)  None

Item 3.  Defaults upon senior securities
         None.
                                       27
<PAGE>
Item 4.  Submission of matters to a vote of security holders

         Focus will hold its annual  meeting of  shareholders  at its  corporate
         headquarters located at 1370 Dell Avenue,  Campbell, CA on Friday, July
         30, 2004.  Shareholders  of record on June 11, 2004 will be entitled to
         vote on matters to be considered at the meeting.  Focus expects to mail
         its proxy materials to shareholders on or about June 23, 2004.

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 January  28,  2004,  Focus filed on Form 8-K to announce it had
              entered into an agreement to acquire  substantially all the assets
              and  liabilities of Visual  Circuits  Corporation and had signed a
              letter of intent to acquire COMO Computer and Motion GmbH.

              On April 7,  2004,  Focus  filed a  Current  Report on Form 8-K to
              announce:
              o    It had obtained binding  commitments to raise $5.6 million of
                   gross proceeds through a private placement; and
              o    Carl Berg, a director of Focus,  converted his  approximately
                   $4.5 million of debt and accrued  interest into preferred and
                   common stock.

                                       28
<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.



   May 17, 2004      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)


                                       29