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 June 30, 2003, 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 Small Business Issuer in its Charter)

                Delaware                                   04-3144936
     (State or Other Jurisdiction of                    (I.R.S. Employer
     Incorporation or Organization)                   Identification No.)

                                  1370 Dell Ave
                               Campbell, CA 95008
                    (Address of Principal Executive Offices)

                                 (408) 866-8300
                (Issuer's Telephone Number, Including Area Code)

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

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

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

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the preceding 12 months (or for such other  shorter  period that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No

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

     As of August 11, 2003,  there were  39,991,009  shares of the  Registrant's
Common Stock Outstanding.


<PAGE>

                            Focus Enhancements, Inc.
                      Condensed Consolidated Balance Sheets
                      (in thousands, except per share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                    June 30,     December 31,
                                                                                      2003           2002
                                                                                    --------       --------
<S>                                                                                  <C>            <C>
                                   ASSETS
Current assets:
  Cash and cash equivalents                                                         $    162       $  1,310
  Accounts receivable, net of allowances of $391 and $403 at
    June 30, 2003 and December 31, 2002, respectively                                  2,253          1,628
  Inventories                                                                          2,420          2,350
  Prepaid expenses and other current assets                                              205            185
                                                                                    --------       --------
    Total current assets                                                               5,040          5,473

Property and equipment, net                                                              141            191
Capitalized software development costs                                                    --             40
Other assets                                                                              59             86
Intangibles, net                                                                         795          1,053
Goodwill                                                                               5,191          5,191
                                                                                    --------       --------
    Total assets                                                                    $ 11,226       $ 12,034
                                                                                    ========       ========

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Obligations under capital leases, current portion                                 $     21       $     44
  Accounts payable                                                                     2,522          1,860
  Accrued liabilities                                                                  2,150          2,018
                                                                                    --------       --------
    Total current liabilities                                                          4,693          3,922

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

    Total liabilities                                                                  8,560          7,790
                                                                                    --------       --------

Commitments and contingencies

Stockholders' equity
  Preferred stock, $.01 par value; authorized 3,000,000 shares; 1,904 shares
      issued at June 30, 2003 and December 31, 2002 (aggregate liquidation
      preference $2,267)                                                                  --             --
  Common stock,  $.01 par value; 60,000,000 shares authorized, 37,767,397 and
    37,560,537 shares issued at June 30, 2003 and December, 2002, respectively           378            376
  Additional paid-in capital                                                          66,101         65,940
  Accumulated deficit                                                                (63,063)       (61,323)
  Deferred compensation and price protection                                              --            (49)
  Treasury stock at cost, 497,055 and 450,000 shares at June 30, 2003 and
     December 31, 2002, respectively                                                    (750)          (700)
                                                                                    --------       --------
  Total stockholders' equity                                                           2,666          4,244
                                                                                    --------       --------
    Total liabilities and stockholders' equity                                      $ 11,226       $ 12,034
                                                                                    ========       ========
</TABLE>


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


                                       2
<PAGE>

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


                                                Three Months ended June 30,
                                                ---------------------------
                                                  2003              2002
                                                --------          --------
Net product revenues                            $  4,301          $  4,453
Contract revenues                                     --                59
                                                --------          --------
  Total net revenues                               4,301             4,512

Cost of revenues:
  Products                                         2,440             2,867
  Contract                                            --                39
                                                --------          --------
  Total cost of revenues                           2,440             2,906
                                                --------          --------

  Gross profit                                     1,861             1,606
                                                --------          --------
Operating expenses:
  Sales, marketing and support                     1,089             1,330
  General and administrative                         436               542
  Research and development                         1,047             1,043
  Amortization expense                               132               217
  Restructuring recovery                             (29)               --
                                                --------          --------

    Total operating expenses                       2,675             3,132
                                                --------          --------

    Loss from operations                            (814)           (1,526)

  Interest expense, net                              (51)              (34)
  Other income, net                                   95                48
                                                --------          --------

    Net loss                                    $   (770)         $ (1,512)
                                                ========          ========

Loss per common share:
  Basic                                         $  (0.02)         $  (0.04)
                                                ========          ========
  Diluted                                       $  (0.02)         $  (0.04)
                                                ========          ========

Weighted average common shares outstanding:
  Basic                                           37,184            35,500
                                                ========          ========
  Diluted                                         37,184            35,500
                                                ========          ========

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


                                       3
<PAGE>

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


                                                Six Months ended June 30,
                                                --------------------------
                                                  2003              2002
                                                --------          --------
Net product revenues                            $  8,391          $  8,511
Contract revenues                                     --               759
                                                --------          --------
  Total net revenues                               8,391             9,270

Cost of revenues:
  Products                                         4,843             5,440
  Contract                                            --               499
                                                --------          --------
  Total cost of revenues                           4,843             5,939
                                                --------          --------

  Gross profit                                     3,548             3,331
                                                --------          --------
Operating expenses:
  Sales, marketing and support                     2,087             2,716
  General and administrative                         813             1,215
  Research and development                         2,104             1,965
  Amortization expense                               304               508
  Restructuring recovery                             (29)               --
                                                --------          --------

    Total operating expenses                       5,279             6,404
                                                --------          --------

    Loss from operations                          (1,731)           (3,073)

  Interest expense, net                             (102)             (117)
  Other income, net                                   95                24
                                                --------          --------

    Loss before income taxes                      (1,738)           (3,166)

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

    Net loss                                    $ (1,740)         $ (3,166)
                                                ========          ========

Loss per common share:
  Basic                                         $  (0.05)         $  (0.09)
                                                ========          ========
  Diluted                                       $  (0.05)         $  (0.09)
                                                ========          ========

Weighted average common shares outstanding:
  Basic                                           37,146            35,254
                                                ========          ========
  Diluted                                         37,146            35,254
                                                ========          ========

               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>
                                                                                      Six Months Ended June 30,
                                                                                      -------------------------
                                                                                       2003              2002
                                                                                      -------           -------
<S>                                                                                   <C>               <C>
Cash flows from operating activities:
Net loss                                                                              $(1,740)          $(3,166)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                           405               661
  Amortization of deferred compensation expense                                            --                61
  Gain on debt settlement                                                                 (95)             (311)
  Warrant issue expense                                                                    --               573
  Changes in operating assets and liabilities, net of the effects of acquisitions:
   Decrease (increase) in accounts receivable                                            (625)              246
   Decrease (increase) in inventories                                                     (70)              824
   Decrease in prepaid expenses and other assets                                            1               134
   Increase (decrease) in accounts payable                                                593            (1,303)
   Increase (decrease) in accrued liabilities                                             296              (258)
   Payment of legal judgement                                                              --            (2,073)
                                                                                      -------           -------

  Net cash used in operating activities                                                (1,235)           (4,612)
                                                                                      -------           -------
Cash flows from investing activities:
  Decrease in restricted collateral deposit                                                --             2,363
  Additions to property and equipment                                                     (51)              (63)
                                                                                      -------           -------

Net cash provided by (used in) investing activities                                       (51)            2,300
                                                                                      -------           -------
Cash flows from financing activities:
  Repayment of convertible notes payable to shareholder                                    --              (145)
  Payments under capital lease obligations                                                (24)              (21)
  Net proceeds from private offerings of common stock                                      --             2,435
  Net proceeds from exercise of common stock options/warrants                             162               186
                                                                                      -------           -------

Net cash provided by financing activities                                                 138             2,455
                                                                                      -------           -------

Net increase (decrease) in cash and cash equivalents                                   (1,148)              143
Cash and cash equivalents at beginning of period                                        1,310               449
                                                                                      -------           -------

Cash and cash equivalents at end of period                                            $   162           $   592
                                                                                      =======           =======
</TABLE>

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


                                       5
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

1.   Basis of Presentation - Interim Financial Information

     The condensed consolidated financial statements of Focus Enhancements, Inc.
("the  Company"  or "Focus") as of June 30, 2003 and for the three and six month
periods  ended  June  30,  2003 and 2002 are  unaudited  and  should  be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended  December 31, 2002  included in the  Company's  Annual Report on Form
10-KSB for the year ended December 31, 2002.

     In  the  opinion  of  management,   the  condensed  consolidated  financial
statements  include  all  adjustments   (consisting  only  of  normal  recurring
adjustments)  necessary  for a  fair  presentation  of its  financial  position,
operating  results and cashflows for interim periods  presented.  The results of
operations and cashflows for the three and six month periods ended June 30, 2003
are not  necessarily  indicative  of the results  that may be  expected  for any
future period.  All intercompany  accounts and transactions have been eliminated
upon consolidation.

     Stock Compensation Plans

     Statement of Financial  Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based  Compensation,  encourages  all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the fair value of the award which is
recognized  over the  service  period,  which is  usually  the  vesting  period.
However,  it also allows an entity to continue to measure  compensation cost for
those plans using the intrinsic  value based method of accounting  prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an  employee  must pay to acquire  the stock.  Stock  options  issued  under the
Company's  stock  option  plans  have no  intrinsic  value  at the  grant  date.
Accordingly,  under APB Opinion No. 25, no compensation cost is recognized.  The
Company has elected to continue  with the  accounting  prescribed in APB Opinion
No. 25 and,  as a result,  must make pro forma  disclosures  of net  income  and
earnings  per share and other  disclosures  as if the fair value based method of
accounting had been applied. Had compensation cost for the Company's stock-based
compensation plans and non-plan stock options  outstanding been determined based
on the fair value at the grant dates for awards  under  those  plans  consistent
with the method  prescribed by SFAS No. 123, the Company's net loss and loss per
share would have been  adjusted  to the pro forma  amounts  indicated  below (in
thousands except per share data):
<TABLE>
<CAPTION>
                                                      Three months ended           Six months ended
                                                           June 30,                    June 30,
                                                    ---------------------       ---------------------
                                                     2003          2002          2003          2002
                                                    -------       -------       -------       -------
<S>                                                 <C>           <C>           <C>           <C>
Net loss reported under APB 25                      $  (770)      $(1,512)      $(1,740)      $(3,166)

Add: Stock-based employee compensation
 expense included in reported net loss                   --            30            --            61

Deduct: Total stock-based employee
 compensation expense determined under
 fair value based method for all awards                (188)         (186)         (396)         (375)
                                                    -------       -------       -------       -------

Pro forma net loss                                  $  (958)      $(1,668)      $(2,136)      $(3,480)
                                                    =======       =======       =======       =======

Basic and diluted loss per share, as reported       $ (0.02)      $ (0.04)      $ (0.05)      $ (0.09)
                                                    =======       =======       =======       =======
Basic and diluted loss per share, pro forma         $ (0.03)      $ (0.05)      $ (0.06)      $ (0.10)
                                                    =======       =======       =======       =======
</TABLE>


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


                                       6
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

2.   Management's Plans

     The accompanying  consolidated financial statements have been prepared on a
going  concern  basis,  which  contemplates  the  realization  of assets and the
satisfaction of liabilities in the normal course of business. For the six months
ended June 30, 2003 and the year ended December 31, 2002, the Company incurred a
net loss of $1,740,000 and $5,957,000, and net cash used in operating activities
totaled $1,235,000 and $5,004,000, respectively. These factors indicate that the
Company may potentially be unable to continue as a going concern.  Additionally,
our  auditors  have  included an  explanatory  paragraph  in their report on our
financial  statements  for the year  ended  December  31,  2002 with  respect to
uncertainties about our ability to continue as a going concern.

     The  consolidated  financial  statements  do not  include  any  adjustments
relating to the  recoverability  and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's  continuation as
a going concern is dependent upon its ability to generate  sufficient cash flows
to meet its obligations on a timely basis, to obtain additional financing as may
be required,  and ultimately to return to profitability and significant positive
cash flows.

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

     During 2002,  management took steps to continue to reduce costs,  including
the  reduction  of its  personnel  by 9% in April  2002 and the  closure  of its
Chelmsford,   MA  office  on  September  30,  2002,   (resulting  in  a  $96,000
restructuring charge).  Additionally,  in September 2002, the Company furloughed
7% of its personnel and subsequently terminated such personnel in December 2002.
At June 30, 2003, $44,000 of the restructuring reserve remained.

     Even  with  the   anticipated   reduction   in  expenses   related  to  the
restructuring and an expected increase in sales, the Company  determined that it
would need to raise  additional  funds to support its working  capital needs and
meet existing debt  obligations.  In connection with that need, on July 2, 2003,
the Company  raised net  proceeds  of  approximately  $2.0  million in a private
placement  transaction  with  independent  third parties through the issuance of
2,200,000 shares of the Company's common stock. See Note 11 "Subsequent  Event -
Private Placement" for further details.

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

3.   Recent Accounting Pronouncements

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

     In November  2002,  the FASB issued  FASB  Interpretation  No. 45 (FIN 45),
Guarantor's  Accounting and Disclosure  Requirements  for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of  Others.  FIN 45  requires  that upon
issuance of a guarantee,  the guarantor  must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The Company has adopted
the  disclosure  provisions  of FIN 45,  where  applicable,  and will  apply the
recognition and measurement  provision for all material  guarantees entered into
or modified after December 31, 2002. The adoption of FIN 45 had no impact on the
Company's financial statements.

                                       7
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

4.   Inventories

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

                                        June 30,   December 31,
                                          2003        2002
                                         ------      ------
                    Raw materials        $1,452      $1,383
                    Work in process         292         116
                    Finished goods          676         851
                                         ------      ------
                    Totals               $2,420      $2,350
                                         ======      ======

5.   Intangible Assets

     Intangible assets consisted of the following as of (in thousands):
<TABLE>
<CAPTION>
                                                June 30, 2003                         December 31, 2002
                                   -------------------------------------      ------------------------------------
                                     Gross                                     Gross
                                   Carrying      Accumulated                  Carrying     Accumulated
                                    Amount       Amortization       Net        Amount      Amortization      Net
                                   --------      ------------     ------      --------     ------------     ------
<S>                                 <C>             <C>           <C>         <C>              <C>          <C>
      Intangible assets:
         Tradename                  $   176         $    108      $   68      $    176         $   86       $   90
         Existing Technology          1,888            1,161         727         1,888            925          963
                                    -------         --------      ------      --------         ------       ------

      Total                         $ 2,064         $  1,269      $  795      $  2,064         $1,011       $1,053
                                    =======         ========      ======      ========         ======       ======
</TABLE>

      Estimated Future Amortization Expense:
      For the six months ending December 31, 2003           $  258
      Year ending December 31, 2004                            516
      Year ending December 31, 2005                             21
                                                            ------
                                                            $  795
                                                            ======

6.   Commitments

     Convertible Promissory Notes

     Convertible promissory notes payable at June 30, 2003 and December 31, 2002
consists of three promissory notes totaling $3,867,000,  payable to Carl Berg, a
Company director and shareholder. These notes were amended on April 28, 2003, to
provide for an extension of the maturity  dates to November 25, 2004.  The notes
bear interest at prime plus 1%, payable  quarterly,  and are  collateralized  by
substantially all of the assets of the Company. The Company is obligated,  under
certain  circumstances,  including  at the  election of Mr.  Berg and Focus,  to
convert the outstanding  balances of the notes,  and any unpaid  interest,  into
shares of Focus common stock or preferred  stock, as specified in the respective
note agreements.

     General

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

     We  indemnify  our  customers  from third party claims  alleging  patent or
copyright infringement relating to the use of our products. Such indemnification
provisions are accounted for in accordance with SFAS No. 5 and are generally

                                       8
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

limited to the amount paid by the customer. Historically, costs related to these
indemnification arrangements have not been significant.

7.   Stockholders' Equity

Preferred Stock

     The Company is  obligated,  under certain  circumstances,  including at the
election of Mr. Berg and Focus, to convert  certain of the outstanding  balances
of convertible  notes payable to Mr. Berg, and any unpaid interest,  into shares
of Focus  preferred  stock. As of June 30, 2003,  approximately  1,421 shares of
preferred stock were subject to issuance to Mr. Berg pursuant to the convertible
notes payable agreements.  See "See Note 6. Commitments - Convertible Promissory
Notes."

Common Stock

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

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

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

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

                                       9
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

    As of June 30, 2003, the Company was obligated under certain  circumstances,
to issue the following additional shares of common stock :

       Warrants to purchase common stock                               1,162,140
       Options to purchase common stock                                6,363,469
       Notes payable convertible into common stock                     1,963,138
       Preferred Stock convertible into common stock                   1,904,000
                                                                      ----------
            Total shares of common stock obligated, under
             certain circumstances, to issue                          11,392,747
                                                                      ==========

         See also Note 11.  "Subsequent Event - Private Placement."

8.   Related Party Transactions

     In February 2003,  the Company  engaged  vFinance  Consulting to assist the
Company in preparing a Strategic  Business  Plan.  Tim Mahoney,  a member of the
Company's  Board of Directors is the  Chairman  and COO of vFinance,  Inc.,  the
parent company to vFinance  Consulting.  For the three and six months ended June
30,  2003 the  Company  incurred  consulting  expenses  of $35,000  and  $50,000
respectively.  In connection  with its efforts to find  investors in the private
placement   completed  on  January  11,  2002,  the  Company  engaged   vFinance
Investments Inc. Tim Mahoney is a principal in vFinance Investments Inc. For the
three and six months ended June 30, 2003,  vFinance  Investments Inc.,  received
$275,000 in cash and a warrant to  purchase  123,690  shares of common  stock of
Focus at $1.36 per share.

9.   Significant Customers

     One customer  accounted  for 17% of the  Company's  revenue for the quarter
ended June 30, 2003 and 27% of the Company's accounts receivable balance at June
30, 2003.

     Three  unrelated  customers,  each  with  sales  in  excess  of  10% of the
Company's  revenue accounted for 35% of total revenue for the quarter ended June
30, 2002.

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

10.  Bill and Hold Transaction

     For the periods  ended June 30, 2003 and 2002,  the Company did not have in
its possession any product that had been sold and at the customer's  request was
being stored by the Company.  However, for the quarter ended March 31, 2003, the
Company had approximately  $362,000 of product it was storing for one particular
customer.  Such  revenue  pertained  to the  sale of  product  to the  Company's
distributor in Asia and was  recognized  during the first quarter of 2003 as the
product specifications of the purchase contract had been met during the quarter,
the product was accepted by the buyer,  title had passed to the buyer, there was
no right of return in the contract,  the distributor  requested that the product
be stored and, the product was segregated from the Company's  regular  inventory
and was ready for  shipment.  Full payment for the product was received in March
2003. In June 2003, in accordance with the customer's instructions,  the Company
shipped the product.


                                       10
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

11.  Subsequent Event

     Private Placement

     On July 2, 2003, the Company  completed the sale of 2,200,000 shares of its
common stock in a private placement to two independent third parties,  receiving
net  proceeds  of  approximately  $2.0  million.  The  shares  were  sold  at an
approximate  20%  discount  to the  5-day  average  closing  bid  prices  of the
Company's  common  stock  prior to  closing.  In  connection  with  the  private
placement,  the Company  issued  warrants to the two  investors  and a placement
agent to purchase a total of 467,500 shares of common stock at an exercise price
of $1.44 per share.  The  Company  has agreed to file a  registration  statement
covering  public  resales of the shares  issued and the shares  issuable  in the
future upon the exercise of the warrants.


                                       11
<PAGE>

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

Introduction

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

Certain Factors That May Affect Future Results

     Discussions of certain  matters in this  Quarterly  Report on Form 10-Q may
constitute  forward-looking  statements within the meaning of the Section 27A of
the  Securities  Act of 1933, as amended,  and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange  Act"), and as such, may involve
risks and uncertainties.  Forward-looking statements, which are based on certain
assumptions  and  describe  future  plans,  strategies,  and  expectations,  are
generally identifiable by the use of words or phrases such as "believe", "plan",
"expect",  "intend",  "anticipate",   "estimate",  "project",  "forecast",  "may
increase",  "may fluctuate",  "may improve" and similar expressions or future or
conditional verbs such as "will", "should", "would", and "could".

     In  particular,  statements  contained  in  this  document  which  are  not
historical  facts  (including,   but  not  limited  to,  statements   concerning
anticipated  revenues,  anticipated  operating  expense  levels,  potential  new
products and orders,  and such expense  levels  relative to our total  revenues)
constitute  forward  looking  statements  and are made  under  the  safe  harbor
provisions of the Private  Securities  Litigation Reform Act of 1995. Our actual
results of operations and financial  condition have varied and may in the future
vary significantly from those stated in any forward looking statements.  Factors
that may cause such differences include, without limitation, the availability of
capital to fund our future cash needs,  reliance on major customers,  history of
operating losses, market acceptance of our products, technological obsolescence,
competition,   component   supply   problems  and   protection  of   proprietary
information,  as well as the accuracy of our  internal  estimates of revenue and
operating  expense  levels.  For a discussion  of these  factors and some of the
factors that might cause such a difference  see also " - Risks  Factors."  These
factors should be considered in evaluating the forward-looking  statements,  and
undue reliance should not be placed on such statements. We do not undertake, and
specifically disclaims any obligation, to update any forward-looking  statements
to reflect  occurrences or unanticipated  events or circumstances after the date
of such statements.

Results of Operations

Net Revenues

     Net revenues for the  three-months  ended June 30, 2003 were  $4,301,000 as
compared  with  $4,512,000  for the  three-month  period  ended June 30, 2002, a
decrease of $211,000, or 5%. Net revenues for the six-months ended June 30, 2003
were $8,391,000 as compared with $9,270,000 for the six-month  period ended June
30, 2002, a decrease of $879,000 or 9%.

     For the  three-months  ended June 30,  2003,  net sales of system  products
(professional   and  consumer)  to   distributors,   retailers  and  VAR's  were
approximately  $3,513,000 as compared to $3,952,000 for the same period in 2002,
a decrease of $439,000 or 11%. For the six-months ended June 30, 2003, net sales
of system products  (professional  and consumer) to distributors,  retailers and
VAR's were  approximately  $7,161,000  as  compared to  $7,478,000  for the same
period in 2002, an increase of $317,000 or 4%. The decrease  between  comparison
periods is the result of a decrease in business to business sales as a result of
the  continued  slowdown  in the  economy  and as a  result  of a  reduction  of
nationwide computer sales and decreased educational spending.

     For the  three-months  ended  June 30,  2003,  net  sales of  semiconductor
products to distributors and OEM customers,  which includes  contract  revenues,
were approximately $788,000 as compared to $560,000 for the same period in 2002,
an increase of $228,000 or 40%.  For the  six-months  ended June 30,  2003,  net
sales  of  semiconductor  products  to  distributors  and OEM  customers,  which
includes  contract  revenues,  were  approximately  $1,230,000  as  compared  to
$1,792,000  for the same period in 2002,  a decrease  of  $562,000  or 31%.  The
increase in OEM sales for the three

                                       12
<PAGE>

months  comparison  period is primarily  attributable  to increased sales of our
semiconductor chips as we have been designed into newly introduced products. The
decrease  in OEM  sales  for the  six  months  comparison  period  is  primarily
attributable to a decrease in contract revenues as the Company reported contract
revenues of $759,000 for the six-months  ended June 30, 2002,  while no contract
revenues were reported for the six-months ended June 30, 2003. Contract revenues
related to the development of an Application  Specific Integrated Circuit (ASIC)
for a third party that began in June 2001 and finished in June 2002.  Under this
development contract the Company recorded total revenues of $2.1 million.

     As of June 30, 2003, the Company had a sales order backlog of approximately
$6,793,000,  an increase of  $5,567,000  when  compared to the first  quarter of
2003.  The  growth in backlog is a result of  increased  semiconductor  chip and
FireStore orders. See Risk Factors - "The substantial increase in our backlog in
recent  periods  should not be  construed  as  indicative  of future  revenue or
performance".

Cost of Goods Sold

     Cost  of  goods  sold  were  $2,440,000,  or  57%  of net  sales,  for  the
three-months  ended June 30, 2003,  as compared with  $2,906,000,  or 64% of net
sales, for the three-months  ended June 30, 2002, a decrease of $466,000 or 16%.
The Company's  gross profit margin for the second quarters of 2003 and 2002 were
43% and 36%,  respectively.  Cost of goods sold were  $4,843,000,  or 58% of net
sales, for the six-months  ended June 30, 2003, as compared with $5,939,000,  or
64% of net  sales,  for the six  months  ended  June 30,  2002,  a  decrease  of
$1,096,000 or 18%. The Company's  gross profit margin for the six-month  periods
of 2003 and 2002 were 42% and 36%, respectively. The majority of the increase in
gross profit margin for the three and six month comparison  periods is primarily
attributable  to reduced  manufacturing  expenses  as the  Company  reduced  its
personnel expenditures,  primarily headcount, and as a result of product mix and
improved pricing on certain of its products.

Sales, Marketing and Support Expenses

     Sales,  marketing  and  support  expenses  were  $1,089,000,  or 25% of net
revenues, for the three-months ended June 30, 2003, as compared with $1,330,000,
or 29% of net revenues,  for the three-months ended June 30, 2002, a decrease of
$241,000 or 18%. Sales,  marketing and support expenses were $2,087,000,  or 25%
of net  revenues,  for the  six-months  ended June 30,  2003,  as compared  with
$2,716,000,  or 29% of net revenues,  for the six-months  ended June 30, 2002, a
decrease of  $629,000  or 23%.  The  decrease  in sales,  marketing  and support
expenses in absolute  dollars is  primarily  the result of lower  staffing,  and
reduced marketing and advertising expenses.

General and Administrative Expenses

     General and  administrative  expenses for the  three-months  ended June 30,
2003 were $436,000 or 10% of net  revenues,  as compared with $542,000 or 12% of
net revenues for the three-months ended June 30, 2002, a decrease of $106,000 or
20%. General and administrative  expenses for the six-months ended June 30, 2003
were $813,000 or 10% of net revenues,  as compared with $1,215,000 or 13% of net
revenues for the  six-months  ended June 30,  2002, a decrease of $402,000.  The
decrease in general and administrative  expense for the three-month period ended
June 30, 2003 is primarily  attributable to a decrease in bad debt expense.  For
the six-month period,  general and administrative  expenses decreased as the six
months  ended  June 30,  2002  included a $238,000  charge  associated  with the
issuance of warrants in  connection  with  consulting  services  and included an
additional $61,000 of bad debt expense.

Research and Development Expenses

     Research and development  expenses for the three-months ended June 30, 2003
were  approximately  $1,047,000  or  24%  of  net  revenues,  as  compared  with
$1,043,000 or 23% of net revenues for the  three-months  ended June 30, 2002, an
increase of $4,000 or less than 1%.  Research and  development  expenses for the
six-months  ended  June 30,  2003 were  approximately  $2,104,000  or 25% of net
revenues,  as compared with $1,965,000 or 21% of net revenues for the six-months
ended June 30, 2002, an increase of $139,000 or 7%. The increase in research and
development  expenses between the six-month  comparison periods is due primarily
to a reduction in  engineering  work  performed  under contract and as such less
research and  development  personnel  expenses were  allocated to costs of sales
than in the prior year.

                                       13
<PAGE>

Amortization

     Amortization  expenses for the three-month  period ended June 30, 2003 were
$132,000 or 3% of net revenues, as compared with $217,000 or 5% of net revenues,
for the  three-months  ended  June 30,  2002,  a  decrease  of  $85,000  or 39%.
Amortization expenses for the six-month period ended June 30, 2003 were $304,000
or 5% of net revenues, as compared with $508,000 or 5% of net revenues,  for the
six-months  ended June 30,  2002, a decrease of $204,000 or 40%. The decrease in
the three and six month  comparison  periods is primarily  due to the  Company's
adoption  of FAS 142 on January  1,  2002,  under  which  goodwill  is no longer
amortized  (See also "Basis of  Presentation - Interim  Financial  Information -
Stock   Compensation   Plans")  and  as  a  result  of  the  Company  completing
amortization of its remaining capitalized software development expenses.

Restructuring Expenses

     The Company  reduced its  restructuring  expense accrual in the three-month
period ended June 30, 2003,  by $29,000 as it was able to settle  amounts due on
the  closure  of its  Chelmsford  facility  for an amount  less than  originally
estimated.

Interest Expense, Net

     Net  interest  expense for the  three-month  period ended June 30, 2003 was
$51,000,  or 1% of net revenues,  as compared to $34,000, or 1% of net revenues,
for the three-months  ended June 30, 2002, an increase of $17,000.  Net interest
expense for the six-month period ended June 30, 2003 was $102,000,  or 1% of net
revenues,  as compared to $117,000,  or 2% of net revenues,  for the  six-months
ended June 30, 2002, a decrease of $15,000.

Other Income, Net

     Net  other  income  for the  three-month  period  ended  June 30,  2003 was
$95,000,  or 2% of net revenues,  as compared to $48,000, or 1% of net revenues,
for the  three-months  ended June 30,  2002,  an increase of $47,000.  Net other
income for the  six-month  period ended June 30, 2003 was $95,000,  or 2% of net
revenues,  as compared to $24,000,  or 1% of net  revenues,  for the  six-months
ended June 30, 2002, an increase of $71,000.

     Other income for the three months ended June 30, 2003 and 2002 is primarily
comprised  of the  settlement  of debts for less than  original  amounts.  Other
income for the six months  ended June 30,  2003 is  primarily  comprised  of the
settlement  of debts for less than  original  amounts.  Other income for the six
months  ended  June 30,  2002 is  primarily  comprised  of a charge of  $334,000
related to the  repricing  of warrants  associated  with the  termination  of an
equity line of credit  offset by gains on the  settlement of debts for less than
original amounts of $360,000

Liquidity and Capital Resources

     The  accompanying  condensed  consolidated  financial  statements have been
prepared on a going concern basis,  which contemplates the realization of assets
and the  satisfaction  of liabilities in the normal course of business.  For the
six months ended June 30, 2003 and the year ended December 31, 2002, the Company
incurred net losses of $1,740,000  and  $5,957,000,  respectively,  and net cash
used in operating activities of $1,235,000, and $5,004,000,  respectively. These
factors  indicate  that the Company 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 the
Company be unable to continue as a going concern. The Company's  continuation as
a going concern is dependent upon its ability to generate  sufficient cash flows
to meet its obligations on a timely basis, to obtain additional financing as may
be required,  and ultimately to return to profitability and significant positive
cash flows.

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

                                       14
<PAGE>

     Net cash used in operating  activities for the six-month periods ended June
30, 2003 and 2002 was $1,235,000 and $4,612,000,  respectively. In the first six
months of 2003, net cash used in operating  activities  consisted primarily of a
net loss of $1,740,000  adjusted for  depreciation and amortization of $405,000,
an increase in accounts payable of $593,000 and accrued  liabilities of $296,000
offset by an increase in accounts  receivable  of $625,000  and  inventories  of
$70,000. In the first six months of 2002, net cash used in operating  activities
consisted  primarily of a net loss of $3,166,000  adjusted for  depreciation and
amortization  of $661,000,  warrant  issue  expense of $573,000 and gain on debt
settlement  totaling $311,000,  a decrease in accounts payable of $1,303,000 and
payment of legal  judgement of  $2,073,000,  partially  offset by an decrease in
inventories totaling $824,000.

     One customer  accounted  for 17% of the  Company's  revenue for the quarter
ended June 30, 2003 and 27% of the Company's accounts receivable balance at June
30, 2003.

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

     Net cash used by investing  activities  for the  six-months  ended June 30,
2003 was $51,000  compared to net cash provided by investing  activities for the
six-months ended June 30, 2002 of $2,300,000.  For the first six months of 2003,
cash used in  investing  activities  was related to the purchase of property and
equipment  of  $51,000.  For the first  six  months of 2002,  cash  provided  in
investing activities was principally from the decrease in restricted  collateral
deposit of  $2,363,000,  offset by the  purchase of property  and  equipment  of
$63,000.

     Net cash provided by financing  activities for the six-month  periods ended
June 30, 2003 and 2002 was $138,000 and $2,455,000,  respectively.  In the first
six months of 2003,  the Company  received  $162,000 from the exercise of common
stock  options,  which were  partially  offset by payment  under  capital  lease
obligations. In the first six months of 2002, the Company received $2,435,000 in
net  proceeds  from private  offerings  of common  stock and  $186,000  from the
exercise of common stock options,  which were  partially  offset by repayment of
convertible notes payable to shareholder of $145,000.

     As of June 30,  2003,  the  Company  had working  capital of  $347,000,  as
compared to $1,551,000 at December 31, 2002, a decrease of $1,204,000.

     The Company has incurred losses and negative cash flows from operations for
the six months ended June 30, 2003 and each of the two years in the period ended
December 31, 2002 and as such has been  dependent  upon raising  money for short
and long-term cash needs through debt, proceeds from the exercise of options and
warrants, and the sale of common stock in private placements. For the year ended
December 31, 2002, the Company received approximately $3,121,000 in net proceeds
from private offerings of common stock.

     At June 30, 2003, the Company owed Mr. Berg  approximately  $4.3 million in
principal and accrued interest on various notes.

     During 2002, management continued to take steps to reduce costs,  including
a 9% reduction in personnel in April of 2002.  Additionally,  in September 2002,
the  Company  closed  its  Chelmsford,   MA  office   (resulting  in  a  $96,000
restructuring charge) and furloughed 7% of its personnel.  In December 2002, the
Company  terminated those furloughed  employees and recorded a severance accrual
of $26,000. At June 30, 2003, $44,000 of the restructuring reserve remained.

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

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

                                       15
<PAGE>

     Ultimate future capital requirements will depend on many factors, including
cash flow from  operations,  continued  progress  in  research  and  development
programs,  competing  technological and market developments,  and our ability to
market  our  products  successfully.  Even  with the  anticipated  reduction  in
expenses  related to the  restructuring  and an expected  increase in sales, the
Company  determined that it would need to raise  additional funds to support its
working  capital needs and meet existing debt  obligations.  In connection  with
that need,  on July 2, 2003,  the Company  raised net proceeds of  approximately
$2.0 million in a private  placement  transaction with independent third parties
through the issuance of 2,200,000  shares of the Company's  common stock.  It is
expected that additional  costs will be incurred by the Company to register such
shares  during  the third  quarter of 2003  pursuant  to a  registration  rights
agreement.  See Note 11  "Subsequent  Event -  Private  Placement"  for  further
details.

Effects of Inflation and Seasonality

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

Summary of Certain Contractual Obligations as of June 30, 2003
<TABLE>
<CAPTION>
                                       Amount of Commitment Expiration Per Period (in thousands)
                                       ---------------------------------------------------------
                                                   Less Than                              After 5
                                       Total         1 year     2-3 Years    4-5 Years     Years
                                       -----         ------     ---------    ---------     -----
<S>                                   <C>            <C>          <C>          <C>         <C>
     Notes payable to stockholder     $ 3,867        $   --       $3,867       $  --       $  --
     Capital leases                        21            21           --          --          --
     Operating leases                   1,039           261          776           2          --
                                      -------        ------       ------       -----       -----
       Total                          $ 4,927        $  282       $4,643       $   2       $  --
                                      =======        ======       ======       =====       =====
</TABLE>

Recent Accounting Pronouncements

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

     In November  2002,  the FASB issued  FASB  Interpretation  No. 45 (FIN 45),
Guarantor's  Accounting and Disclosure  Requirements  for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of  Others.  FIN 45  requires  that upon
issuance of a guarantee,  the guarantor  must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The Company has adopted
the  disclosure  provisions  of FIN 45,  where  applicable,  and will  apply the
recognition and measurement  provision for all material  guarantees entered into
or modified after December 31, 2002. The adoption of FIN 45 had no impact on the
Company's financial statements.

Critical Accounting Policies

     There have no  significant  changes to the  Company's  critical  accounting
policies as described in the Company's 2002 Form 10-KSB

Risk Factors

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

                                       16
<PAGE>

Risks Related to Our Business

We have a long history of operating losses.

As of June 30, 2003, we had an accumulated  deficit of $63,063,000.  We incurred
net losses of  $1,740,000,  $5,597,000  and  $6,658,000 for the six months ended
June 30, 2003 and the years  ended  December  31,  2002 and 2001,  respectively.
There can be no  assurance  that we will become  profitable.  Additionally,  our
auditors have included an explanatory paragraph in their report on our financial
statements  for the year ended  December 31, 2002 with respect to  uncertainties
about our ability to continue as a going  concern.  The financial  statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of that
uncertainty.

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

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

<S>                                 <C>                <C>                     <C>
  First six months of 2003                  --                  --             $162,000
  Fiscal 2002                       $3,121,000                  --             $625,000
  Fiscal 2001                               --          $2,650,000             $199,000
</TABLE>

See  also  Note  11  "Subsequent  Event -  Private  Placement."  Future  capital
requirements  will depend on many factors,  including cash flow from operations,
continued progress in research and development programs, competing technological
and market developments, and our ability to market our products successfully. If
we require  additional  equity or debt financing in the future,  there can be no
assurance that sufficient funds will be raised.  Moreover,  any equity financing
or convertible debt would result in dilution to our  then-existing  stockholders
and could  have a  negative  effect on the  market  price of our  common  stock.
Furthermore,  any  additional  debt  financing  may  result in  higher  interest
expense.

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

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

At June 30, 2003,  we had  37,270,342  and 1,904 shares of common and  preferred
shares  issued  and  outstanding,   respectively,  and  1,162,140  warrants  and
6,363,469  options that are exercisable  into shares of common stock.  The 1,904
shares of preferred  stock are convertible  into 1,904,000  shares of our common
stock.  Furthermore,  we may grant  1,134,092  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. See also Note 11
"Subsequent Event - Private Placement."

In  addition,  at June  30,  2003,  the  Company  was  obligated  under  certain
circumstances,  to issue up to 1,963,138 shares of common stock and 1,421 shares
of preferred stock  convertible  into 1,421,000  shares of common stock upon the
conversion of $4.3 million in debt and accrued interest  outstanding to Mr. Carl
Berg.

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 June 30, 2003, we had an
aggregate of approximately $4.3 million in debt and accrued interest outstanding
to Mr. Berg. Additionally, Mr. Berg has provided Samsung Semiconductor Inc., the
Company's contracted ASIC manufacturer,  with a personal guarantee to secure the
Company's  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.

                                       17
<PAGE>

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

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

We are dependent on our suppliers.

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

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

As of June  30,  2003,  one  distributor  represented  approximately  27% of the
Company's accounts receivable.  We do not have long-term contracts requiring any
customer to purchase any minimum  amount of products.  There can be no assurance
that we will  continue to receive  orders of the same  magnitude  as in the past
from  existing  customers  or we will be able to market our  current or proposed
products  to new  customers.  Loss of any major  customer  would have a material
adverse effect on our business as a whole. Furthermore, many of our products are
dependent  upon the overall  success of our  customer's  product,  over which we
often have no control.

Our products may become obsolete very quickly.

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

We may not be able to protect our proprietary information.

As of June 30, 2003, we had been issued five patents and filed five  provisional
patent  applications  in the United  States.  Certain of these patents have also
been filed and issued in  countries  outside  the  United  States.  We treat our
technical data as confidential and rely on internal  non-disclosure  safeguards,
including  confidentiality  agreements  with  employees,  and on laws protecting
trade secrets, to protect our proprietary information. There can be no assurance
that  these  measures  will  adequately  protect  the   confidentiality  of  our
proprietary  information  or prove  valuable  in light of  future  technological
developments.

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

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

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

     *    difficulties in reallocating  engineering resources and other resource
     limitations;

     *    difficulties with independent contractors;

     *    changing market or competitive product requirements;

     *    unanticipated engineering complexity;

     *    undetected errors or failures in software and hardware; and

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

                                       18
<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:

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

     *    enhance our existing technologies;

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

     *    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.

The  substantial  increase  in our  backlog  in  recent  periods  should  not be
construed as indicative of future revenue or performance.

In the past we have experienced quarterly  fluctuations in operating results due
to the contractual  nature of our business and the consequent  timing of product
orders.  In  addition,  we have  historically  operated  with a small  amount of
backlog and  accordingly  our  revenues in any quarter  have been  substantially
dependent upon orders booked in that quarter.  However, as of June 30, 2003, our
total backlog was  approximately  $6.8 million  compared to $223,000 at December
31,  2002.  There can be no  assurance  that the rate of growth in backlog  will
continue.  Furthermore,  only a small portion of our backlog is fully-funded and
many of our customers  have the ability to delay  delivery or cancel  contracts,
therefore,  there can be no assurance that orders comprising the backlog will be
realized as revenue. In any event, quarterly sales and operating results will be
continue  to be  affected  by the volume and timing of  contracts  received  and
performed within the quarter,  which are difficult to forecast.  Any significant
deferral or cancellation  of a contract could have a material  adverse effect on
our operating  results in any particular  period.  Because of these factors,  we
believe  that  period-to-period  comparisons  of our  operating  results are not
necessarily indicative of future performances.

Our quarterly financial results are subject to significant fluctuations.

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

Recently,  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 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  January 1, 2003 and June 30,  2003,  our stock
     closed below $1.00 a share on 64 of 124 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 the
     Company had regained compliance and the matter was now closed.

                                       19
<PAGE>

     We must maintain  stockholders' equity of $2,500,000.  At June 30, 2003, we
     had total  stockholders'  equity of  $2,666,000  million.  To the extent we
     continue  to incur net  losses  and do not raise  additional  capital,  our
     stockholders'  equity will be reduced.  See  however,  Note 11 - Subsequent
     Event - Private Placement.

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

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

Our common stock price is volatile.

The  market  price  for  our  common  stock  is  volatile  and  has   fluctuated
significantly to date. For example,  between July 1, 2002 and June 30, 2003, the
per share price of our stock has  fluctuated  between $0.45 and $2.20 per share,
closing at $1.87 at August 11,  2003.  The trading  price of our common stock is
likely to continue to be highly  volatile  and subject to wide  fluctuations  in
response to factors including the following:

     *    actual or anticipated variations in our quarterly operating results;

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

     *    changes in financial estimates by the Company or securities analysts;

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

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

     *    additions or departures of key personnel; and

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

In addition,  the securities  markets have experienced  extreme price and volume
fluctuations,  and the market prices of the  securities of technology  companies
have been  especially  volatile.  These broad  market and  industry  factors may
adversely affect the market price of our common stock,  regardless of our actual
operating  performance.  In the past,  following  periods of  volatility  in the
market price of stock,  many companies have been the object of securities  class
action  litigation,  including us. If we are sued 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 business is very competitive.

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

The video production equipment market is highly competitive and is characterized
by  rapid  technological  change,  new

                                       20
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       21
<PAGE>

     Item 3. Quantitative and Qualitative Disclosures About Market Risk

     At June 30, 2003 we did not hold any short-term  investments  that would be
exposed to market risk from adverse movements in interest rates.

     At June 30, 2003,  we had three  promissory  notes  payable to Carl Berg, a
Company director and shareholder, totaling $3,867,000, bearing interest at prime
plus 1%. If  short-term  interest  rates were to increase  100 basis points (100
basis points equals 1%), the increased  interest  expense  associated with these
promissory  notes  would  not have a  material  impact  on our net loss and cash
flows.

     Item 4. Controls and Procedures

     In accordance  with Section 302 of the  Sarbanes-Oxley  Act of 2002 and the
Securities  Exchange Act of 1934 Section 13(a) or Section 15(d),  we implemented
disclosure  controls  and  procedures  pursuant  to which  management  under the
supervision and with the  participation  of the chief executive  officer ("CEO")
and chief  financial  officer  ("CFO") carried out, as of the quarter ended June
30, 2003, a review and  evaluation of the  effectiveness  of these  controls and
procedures.  Based  on this  review,  our CEO and CFO  have  concluded  that our
disclosure  controls and  procedures  are  effective in timely  alerting them to
material  changes  in  information  required  to be  included  in  our  periodic
Securities and Exchange Commission filings.

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

                                       22
<PAGE>

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

General

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

Item 2. Changes in Securities and Use of Proceeds

     (a) (None)

     (b) (None)

     (c) (None - However, See Note 11. Subsequent Event - Private Placement)

     (d) Use of Proceeds.  On November 25, 2002, the Company  completed the sale
of 800,000 shares of its common stock in a private  placement to two independent
third parties,  receiving  proceeds of approximately  $685,000,  net of offering
costs of $83,000.  The shares were sold at an  approximate  20%  discount to the
20-day average  closing bid prices of the Company's  common stock as of November
24,  2002,  the date an  agreement  in  principle  was  reached by the  parties.
Additionally,  in connection  with the efforts of vFinance  Investments  Inc. to
find investors in the private placement, the Company issued warrants to vFinance
Investments  Inc.  to  purchase a total of 40,000  shares of common  stock at an
exercise price of $1.20 per share. The shares were sold to accredited  investors
pursuant to an exemption from registration under the federal securities laws. We
used the funds from the sale of the 800,000  shares of common  stock for general
corporate purposes.

The shares, including the underlying warrants, were subsequently registered on a
Registration  Statement on Form S-3 deemed  effective on April 25, 2003.  We did
not receive  any  proceeds  from the sale of shares by the selling  stockholders
pursuant to the Form S-3.  However,  we will receive  funds from the exercise of
warrants held by selling  stockholders  who pay the exercise  price in cash. The
warrants  entitle the selling  shareholders  to purchase up to an  aggregate  of
40,000 shares of our common stock at a conversion  price of $1.20 per share.  We
will receive the proceeds of any exercise of the warrants, which we will use for
general corporate purposes. If all warrants are exercised, we will receive gross
proceeds of $48,000. There can be no assurances that any of the warrants will be
exercised.  As of June 30, 2003, no warrants registered pursuant to the Form S-3
had been exercised.

Item 3. Defaults Upon Senior Securities

         (None)

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

         (None)

Item 5. Other Information

         (None)

Item 6. Exhibits and Reports on Form 8-K

        (a)   Exhibits

              Exhibit 31.1 - Rule 13a-14(a) Certification of CEO

              Exhibit 31.2 - Rule 13a-14(a) Certification of CFO

                                       23
<PAGE>

              Exhibit 32.1 - CEO Certification Pursuant to the 18 U.S.C. Section
              1350

              Exhibit 32.2 - CFO Certification Pursuant to the 18 U.S.C. Section
              1350

        (b) Reports on Form 8-K

              On May 5, 2003,  Focus  Enhancements,  Inc. issued a press release
              announcing it first quarter 2003 results.

              On July 7, 2003, Focus  Enhancements,  Inc. issued a press release
              announcing that it had closed an private  placement of 2.2 million
              shares of Focus  Enhancements  common stock for gross  proceeds of
              $2,200,000.  In addition,  Focus issued warrants for an additional
              467,500  shares of  common  stock.  Proceeds  will be used to fund
              working  capital  and for  general  corporate  purposes.  vFinance
              Investments, Inc. and TN Capital Equities, Ltd. acted as placement
              agents in the transaction.  In a separate development,  on July 7,
              2003, Focus  Enhancements,  Inc. issued a press release announcing
              that it had raised its revenue guidance for the remainder of 2003.

                                       24
<PAGE>

                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
         the  registrant  has duly caused this report to be signed on its behalf
         by the undersigned, thereunto duly authorized.


   August 12, 2003                          Focus Enhancements, Inc.
--------------------                        ---------------------------
       Date                                        Registrant

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


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