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 September 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 November 7, 2003,  there were  42,116,906  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>
                                                                               September 30,  December 31,
                                                                                    2003          2002
                                                                                  --------      --------
<S>                                                                               <C>           <C>
                                   ASSETS
Current assets:
  Cash and cash equivalents                                                       $  2,203      $  1,310
  Accounts receivable, net of allowances of $386 and $403 at
     September 30, 2003 and December 31, 2002, respectively                          4,608         1,628
  Inventories                                                                        4,225         2,350
  Prepaid expenses and other current assets                                            353           185
                                                                                  --------      --------
     Total current assets                                                           11,389         5,473

Property and equipment, net                                                            144           191
Capitalized software development costs                                                  --            40
Other assets                                                                            56            86
Intangibles, net                                                                       773         1,053
Goodwill                                                                             5,191         5,191
                                                                                  --------      --------
     Total assets                                                                 $ 17,553      $ 12,034
                                                                                  ========      ========
                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Obligations under capital leases, current portion                               $      8      $     44
  Accounts payable                                                                   4,540         1,860
  Accrued liabilities                                                                2,022         2,018
                                                                                  --------      --------
     Total current liabilities                                                       6,570         3,922

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

     Total liabilities                                                              10,437         7,790
                                                                                  --------      --------

Commitments and contingencies

Stockholders' equity
  Preferred stock, $.01 par value; authorized 3,000,000 shares;
     1,904 shares issued at September 30, 2003 and December 31, 2002
     (aggregate liquidation preference $2,267)                                          --            --
     Common stock, $.01 par value; 60,000,000 shares authorized, 41,792,817 and
     37,560,537 shares issued at September 30, 2003 and December 31, 2002,
     respectively                                                                      418           376
  Additional paid-in capital                                                        69,979        65,940
  Accumulated deficit                                                              (62,531)      (61,323)
  Deferred compensation and price protection                                            --           (49)
  Treasury stock at cost, 497,055 and 450,000 shares at September 30, 2003
     and December 31, 2002, respectively                                              (750)         (700)
                                                                                  --------      --------
  Total stockholders' equity                                                         7,116         4,244
                                                                                  --------      --------
     Total liabilities and stockholders' equity                                   $ 17,553      $ 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 September 30,
                                            --------------------------------
                                                2003              2002
                                            ------------      --------------
Net product revenues                          $ 10,762           $  4,091
Contract revenues                                   --                 --
                                              --------           --------
  Total net revenues                            10,762              4,091

Cost of revenues:
  Products                                       7,469              2,659
  Contract                                          --                 --
                                              --------           --------
  Total cost of revenues                         7,469              2,659
                                              --------           --------

  Gross profit                                   3,293              1,432
                                              --------           --------

Operating expenses:
  Sales, marketing and support                   1,103              1,141
  General and administrative                       417                423
  Research and development                       1,070              1,042
  Amortization expense                             132                217
  Restructuring expense                             --                 96
                                              --------           --------

     Total operating expenses                    2,722              2,919
                                              --------           --------

     Income (loss) from operations                 571             (1,487)

  Interest expense, net                            (46)               (57)
  Other income, net                                  7                 --
                                              --------           --------

     Net income (loss)                        $    532           $ (1,544)
                                              ========           ========

Income (loss) per common share:
  Basic                                       $   0.01           $  (0.04)
                                              ========           ========
  Diluted                                     $   0.01           $  (0.04)
                                              ========           ========

Weighted average common shares outstanding:
  Basic                                         40,159             35,777
                                              ========           ========
  Diluted                                       48,755             35,777
                                              ========           ========

          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)


                                            Nine Months ended September 30,
                                            -------------------------------
                                                2003              2002
                                            ------------      -------------
Net product revenues                          $ 19,153           $ 12,602
Contract revenues                                   --                759
                                              --------           --------
  Total net revenues                            19,153             13,361

Cost of revenues:
  Products                                      12,312              8,099
  Contract                                          --                499
                                              --------           --------
  Total cost of revenues                        12,312              8,598
                                              --------           --------

  Gross profit                                   6,841              4,763
                                              --------           --------
Operating expenses:
  Sales, marketing and support                   3,190              3,857
  General and administrative                     1,230              1,638
  Research and development                       3,174              3,007
  Amortization expense                             436                725
  Restructuring (recovery) expense                 (29)                96
                                              --------           --------

     Total operating expenses                    8,001              9,323
                                              --------           --------

     Loss from operations                       (1,160)            (4,560)

  Interest expense, net                           (150)              (174)
  Other income, net                                104                 24
                                              --------           --------

     Loss before income taxes                   (1,206)            (4,710)

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

     Net loss                                 $ (1,208)          $ (4,710)
                                              ========           ========

Loss per common share:
  Basic                                       $  (0.03)          $  (0.13)
                                              ========           ========
  Diluted                                     $  (0.03)          $  (0.13)
                                              ========           ========

Weighted average common shares outstanding:
  Basic                                         38,150             35,428
                                              ========           ========
  Diluted                                       38,150             35,428
                                              ========           ========

          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>
                                                                                 Nine Months Ended September 30,
                                                                                 -------------------------------
                                                                                     2003              2002
                                                                                 ------------      -------------
<S>                                                                                <C>                <C>
Cash flows from operating activities:
Net loss                                                                           $(1,208)           $(4,710)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                        571                950
  Amortization of deferred compensation expense                                         --                 91
  Gain on debt settlement                                                              (95)              (311)
  Warrant issue expense                                                                 --                573
  Changes in operating assets and liabilities:
     Decrease (increase) in accounts receivable                                     (2,980)             1,014
     Decrease (increase) in inventories                                             (1,875)             1,453
     Decrease (increase) in prepaid expenses and other assets                         (147)                23
     Increase (decrease) in accounts payable                                         2,611             (1,470)
     Increase (decrease) in accrued liabilities                                        168               (364)
     Payment of legal judgement                                                         --             (2,073)
                                                                                   -------            -------

  Net cash used in operating activities                                             (2,955)            (4,824)
                                                                                   -------            -------

Cash flows from investing activities:
  Decrease in restricted collateral deposit                                             --              2,363
  Acquisition of developed technology                                                  (57)                --
  Additions to property and equipment                                                  (89)               (64)
                                                                                   -------            -------

Net cash provided by (used in) investing activities                                   (146)             2,299
                                                                                   -------            -------

Cash flows from financing activities:
  Repayment of convertible notes payable to shareholder                                 --               (145)
  Payments under capital lease obligations                                             (37)               (31)
  Net proceeds from private offerings of common stock                                1,924              2,435
  Net proceeds from exercise of common stock options/warrants                        2,107                537
                                                                                   -------            -------

Net cash provided by financing activities                                            3,994              2,796
                                                                                   -------            -------

Net increase in cash and cash equivalents                                              893                271
Cash and cash equivalents at beginning of period                                     1,310                449
                                                                                   -------            -------
Cash and cash equivalents at end of period                                         $ 2,203            $   720
                                                                                   =======            =======

Supplemental Cash Flow Information:
  Interest paid                                                                    $    --            $   280
  Income taxes paid                                                                      2                 --
  Common stock issued in connection with acquisition of DVUnlimited                     50                 --
  Conversion of accounts payable to common stock                                        --                 23
</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 September  30, 2003 and for the three and nine
month periods ended September 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 cash flows for interim periods  presented.  The results of
operations  and cash flows for the three and nine month periods ended  September
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.

    Accounting Period

    The Company's  fiscal year ends on December 31 and the interim  quarters end
on the Sunday closest to the end of each calendar quarter. For convenience,  the
accompanying  interim condensed  consolidated  financial statements are shown as
ending on September 30.

    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):


                                       6
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                       Three months ended          Nine months ended
                                                          September 30,               September 30,
                                                  --------------------------   ---------------------------
                                                      2003           2002          2003           2002
                                                  -----------   ------------   ------------   ------------
<S>                                               <C>           <C>            <C>            <C>
Net income (loss) reported under APB 25           $       532   $     (1,544)  $     (1,208)  $     (4,710)

Add: Stock-based employee compensation
 expense included in reported net loss                     --             30             --             91

Deduct: Total stock-based employee
 compensation expense determined under
 fair value based method for all awards                  (276)          (259)          (670)          (636)
                                                  -----------   ------------   ------------   ------------

Pro forma net income (loss)                       $       256   $     (1,773)  $     (1,878)  $     (5,255)
                                                  ===========   ============   ============   ============

Basic income (loss) per share, as reported        $      0.01   $      (0.04)  $      (0.03)  $      (0.13)
                                                  ===========   ============   ============   ============
Basic income (loss) per share, pro forma          $      0.01   $      (0.05)  $      (0.05)  $      (0.15)
                                                  ===========   ============   ============   ============

Diluted income (loss) per share, as reported      $      0.01   $      (0.04)  $      (0.03)  $      (0.13)
                                                  ===========   ============   ============   ============
Diluted income (loss) per share, pro forma        $      0.01   $      (0.05)  $      (0.05)  $      (0.15)
                                                  ===========   ============   ============   ============
</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.

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.  Although the
Company reported net income of $532,000 for the three months ended September 30,
2003,  for the nine months ended  September 30, 2003 and the year ended December
31, 2002, the Company incurred a net loss of $1,208,000 and $5,957,000,  and net
cash  used  in  operating   activities   totaled   $2,955,000  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 to achieve sustained  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
fourth quarter 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 September 30, 2003, $35,000 of the restructuring reserve remained.


                                       7
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

    Even with the  reduction  in expenses  related to the  restructuring  and an
expected increase in sales, the Company determined late in the second quarter of
2003,  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  $1.9 million
in a private  placement  transaction with independent  third parties through the
issuance of 2,200,000 shares of the Company's common stock.

    Although  the Company  reported  net income of $532,000 for the three months
ended  September 30, 2003 and cash of $2.2 million at September 30, 2003,  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.

    In May 2003, the FASB issued SFAS No. 150,  Accounting for Certain Financial
Instruments with  Characteristics of both Liabilities and Equity. This Statement
establishes   standards  for  the  classification  and  measurement  of  certain
financial  instruments with characteristics of both liabilities and equity. This
Statement is effective for financial  instruments entered into or modified after
May 31, 2003,  and  otherwise  effective at the  beginning of the first  interim
period  beginning  after June 15, 2003.  The Company  currently has no financial
instruments which meet these requirements.

    In April 2003 the FASB issued SFAS No. 149,  Amendment of Statement  No. 133
on Derivative  Instruments  and Hedging  Activities.  This Statement  amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including  certain  derivative  instruments  embedded  in other  contracts.  The
Statement  clarifies  under what  circumstances  a contract  with an initial net
investment meets the characteristic of a derivative, clarifies when a derivative
contains  a  financing  component,   amends  the  definition  of  an  underlying
derivative to conform it to language used in FASB Interpretation FIN No. 45, and
amends  certain  other  existing  pronouncements.  SFAS No. 149 is effective for
contracts  entered  into or  modified  after  June  30,  2003  and  for  hedging
relationships  designated  after June 30, 2003. All provisions of the Statement,
except those related to forward purchases or sales of "when-issued"  securities,
should be applied  prospectively.  The Company currently has no instruments that
meet the  definition  of a  derivative,  and  therefore,  the  adoption  of this
Statement will have no impact on the Company's  financial position or results of
operations.

   In  January  2003,   the  FASB  issued   Interpretation   No.  46  (FIN  46),
Consolidation of Variable Interest  Entities,  which addresses  consolidation by
business  enterprises of variable interest entities that either: (i) do not have
sufficient  equity  investment  at risk to  permit  the  entity to  finance  its
activities without additional subordinated financial support, or (ii) the equity
investors lack an essential  characteristic of a controlling financial interest.
FIN 46 originally  required  disclosure of Variable  Interest Entities (VIEs) in
financial statements issued after January 31, 2003, if it is reasonably possible
that as of the transition date: (i) the company will be the primary  beneficiary
of an existing  VIE that will  require  consolidation,  or (ii) the company will
hold a significant  variable interest in, or have significant  involvement with,
an existing  VIE. In October 2003 the FASB elected to defer the  effective  date
for applying the provisions of FIN 46 for interests  held by public  entities in
variable  interest  entities or potential  variable  interest  entities  created
before


                                       8
<PAGE>

February 1, 2003. A public entity need not apply the  provisions of FIN 46 to an
interest held in a variable  interest  entity until the end of the first interim
or annual period ending after  December 31, 2003.  The adoption of FIN 46 is not
expected to have an impact on the Company's financial statements.

4.  Inventories

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

                                   September 30,    December 31,
                                       2002             2003
                                      ------           ------
    Raw materials                     $1,856           $1,383
    Work in process                       98              116
    Finished goods                     2,271              851
                                      ------           ------
    Totals                            $4,225           $2,350
                                      ======           ======

5.  Intangible Assets

    Intangible assets consisted of the following as of (in thousands):

<TABLE>
<CAPTION>
                                               September 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         $    119      $   57    $    176         $   86       $   90
         Existing Technology (1)        1,995            1,279         716       1,888            925          963
                                      -------         --------      ------    --------         ------       ------

      Total                           $ 2,171         $  1,398      $  773    $  2,064         $1,011       $1,053
                                      =======         ========      ======    ========         ======       ======

      Estimated Future Amortization Expense:
      For the three months ending December 31, 2003    $  138
      Year ending  December  31, 2004                     552
      Year ending  December 31, 2005                       57
      Year ending December 31, 2006                        26
                                                       ------
                                                       $  773
                                                       ======
</TABLE>

      (1)   In September  2003, the Company  acquired the  intangible  assets of
            DVUnlimited,  a sole proprietorship,  located in Budapest,  Hungary.
            The total  purchase price was $107,000,  consisting of cash,  common
            stock  and  related  legal  costs.  This  amount  has been  added to
            existing  technology  and will be  amortized  over a period of three
            years.

6.  Commitments

    Convertible Promissory Notes

    Convertible  promissory notes payable at September 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 mutual election of Mr.
Berg and the Company, 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.  In September 2003, Mr. Berg agreed
to convert such debt and accrued  interest,  which  totaled  approximately  $4.3
million at September  30,  2003,  into  preferred  and common stock


                                       9
<PAGE>

based on the conversion terms of the respective notes. As of September 30, 2003,
the conversion would result in the issuance of approximately 2,178,433 shares of
common stock and 1,257  shares of preferred  stock  convertible  into  1,257,000
shares of common  stock.  The  conversion is expected to be completed as soon as
practical, but in no event sooner than March 2004.

    General

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

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

7.  Stockholders' Equity

Preferred Stock

    The Company is  obligated,  under  certain  circumstances,  including at the
mutual  election  of Mr.  Berg  and  the  Company,  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  September  30,  2003,
approximately  1,257 shares of preferred  stock and  2,178,433  shares of common
stock were  subject to issuance to Mr. Berg  pursuant to the  convertible  notes
payable agreements. 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  $2,435,000,  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


                                       10
<PAGE>

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.

    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
proceeds of  approximately  $1,924,000,  net of offering costs of $276,000.  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.

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

  Warrants to purchase common stock                                 1,157,950
  Options to purchase common stock                                  5,413,267
  Notes payable convertible into common stock                       2,178,433
  Preferred Stock convertible into common stock                     1,904,000
                                                                   ----------
       Total shares of common stock obligated, under
        certain circumstances, to issue                            10,653,650
                                                                   ==========


8.   Related Party Transactions

    In February  2003,  the Company  engaged  vFinance  Consulting to assist the
Company with the preparation of 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. In connection with the preparation of
the business plan, the Company incurred  consulting  expenses of $50,000 for the
nine  months  ended  September  30,  2003,  which is  included  in  general  and
administrative expenses.

    The  Company  has also  engaged  vFinance  Consulting,  from July 1, 2003 to
September 30, 2003, to act as the Company's exclusive financial advisor, for the
purpose of merger and  acquisition  services.  In connection with such financial
advisory services,  the Company incurred  consulting expenses of $22,500 for the
three  months  ended  September  30,  2003,  which is  included  in general  and
administrative  expenses.  The  consulting  agreement  was  extended,  by mutual
agreement,  through  December 31, 2003.  If vFinance  Consulting  assists in the
successful  completion of a qualifying  transaction  under the  engagement,  the
Company will pay vFinance  Consulting a success fee depending on the total value
of the  transaction of (i) no less than $100,000 and up to 2% of the total value
of the  transaction;  and (ii) no less than  30,000  and up to 80,000  shares of
Focus common stock.

    In  connection  with its  efforts to find  investors  for the Company in the
private placement completed on July 2, 2003, vFinance  Investments Inc. received
$137,500 and  out-of-pocket  expenses,  including  legal fees,  of $27,500.  Tim
Mahoney is a principal  in vFinance  Investments  Inc.  In  connection  with its
efforts to find investors in the private placements for the Company completed on
January 11, 2002 and November  25, 2002,  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 and  $70,000 in cash and a warrant to  purchase  40,000
shares of common stock of Focus at $1.20 per share, respectively.  All


                                       11
<PAGE>

such cash payments to vFinance  Investments Inc., were recorded as reductions of
the proceeds received from the private placements.

    Carl  Berg,  a  Company  director  and  shareholder,  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.  See also  "Note 6.  Commitments  -  Convertible  Promissory
Notes."

9.   Significant Customers

    For the three and nine month periods ended  September 30, 2003, one customer
represented  64% and 36% of the  Company's  total  revenues,  respectively.  Two
customers  accounted for 68% of the Company's  accounts  receivable balance (54%
and 14% respectively) at September 30, 2003.

    No customer  accounted for greater than 10% of total revenue for the quarter
ended  September 30, 2002.  One customer  accounted for 11% of total revenue for
the nine months ended September 30, 2002.

    As of December 31, 2002, three customers  represented  approximately  41% of
the Company's accounts receivable balance (21%, 10% and 10% respectively).


                                       12
<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 September 30, 2003 were $10,762,000
as compared with $4,091,000 for the three-month period ended September 30, 2002,
an increase of  $6,671,000,  or 163%.  Net  revenues for the  nine-months  ended
September  30,  2003 were  $19,153,000  as  compared  with  $13,361,000  for the
nine-months ended September 30, 2002, an increase of $5,792,000 or 43%.

    For the three-months  ended September 30, 2003, net sales of system products
(professional   and  consumer)  to   distributors,   retailers  and  VAR's  were
approximately  $3,355,000 as compared to $3,639,000 for the same period in 2002,
a decrease of $284,000 or 8%. For the nine-months  ended September 30, 2003, net
sales of system products (professional and consumer) to distributors,  retailers
and VAR's were approximately $10,429,000 as compared to $11,117,000 for the same
period in 2002,  a decrease of $688,000 or 6%. The decrease  between  comparison
periods is primarily the result of a decrease in sales of our consumer  products
as a result of reduced educational spending due to budgetary  constraints at the
state and local level, offset by increased sales of the Company's newest product
introductions,   including   FireStore.   Consumer   product   sales   decreased
approximately $850,000, between the nine-month comparison periods.

    For the  three-months  ended September 30, 2003, net sales of  semiconductor
products to distributors and OEM customers,  were approximately  $7,407,000,  as
compared to $452,000 for the same period in 2002,  an increase of  $6,955,000 or
1,539%. For the nine-months ended September 30, 2003, net sales of semiconductor
products to distributors and OEM customers,  which includes  contract  revenues,
were  approximately  $8,724,000 as compared to $2,244,000 for the same period in
2002,  an  increase of  $6,480,000  or 289%.  The  increase in OEM sales for the
three-
                                       13

<PAGE>

month  comparison periods is primarily  attributable to increased sales of
our  semiconductor  chips,  resulting  primarily from the inclusion of our FS454
semiconductor  chip in  Microsoft's  Xbox.  The  increase  in OEM  sales for the
nine-month comparison periods is also attributable to the inclusion of our FS454
semiconductor chip in Microsoft's Xbox, and as a result of the Company reporting
contract  revenues of $759,000 for the  nine-months  ended  September  30, 2002,
while no contract revenues were reported for the nine-months ended September 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  September  30,  2003,  the  Company  had a  sales  order  backlog  of
approximately $3,251,000, compared to $6,793,000 as of June 30, 2003, a decrease
of  $3,542,000.  Backlog  for the third  quarter of 2002 was  $212,000.  Backlog
consists  primarily of  semiconductor  chip orders,  including FS454 orders from
Microsoft  and  FireStore  orders.  The  decrease  in backlog  between the third
quarter and second  quarter of 2003, is primarily the result of the  seasonality
of Microsoft's ordering.  The increase between the third quarter of 2003 and the
third quarter of 2002, is a result of newly introduced products,  both, from our
customers,  in which our semiconductor chips are included, and new introductions
from us. See Risk Factors - "Backlog  should not be construed as  indicative  of
future revenue or performance".

Cost of Goods Sold

    Cost  of  goods  sold  were  $7,469,000,  or  69%  of  net  sales,  for  the
three-months  ended September 30, 2003, as compared with  $2,659,000,  or 65% of
net sales,  for the  three-months  ended  September  30,  2002,  an  increase of
$4,810,000 or 181%. The Company's  gross profit margin for the third quarters of
2003 and 2002 were 31% and 35%,  respectively.  The  majority of the decrease in
the Company's gross profit margin is related to significantly lower than average
gross profit  margins (below 30 percent),  on the Company's  FS454 chip sales to
Microsoft.  Cost of goods sold were  $12,312,000,  or 64% of net sales,  for the
nine-months ended September 30, 2003, as compared with $8,598,000, or 64% of net
sales,  for the nine months ended  September 30, 2002, an increase of $3,714,000
or 43%. The Company's gross profit margin for the nine-month periods of 2003 and
2002 was 36%. The  Company's  gross profit  margins were flat between nine month
comparison  periods,  as a result of a  combination  of lower than average gross
profit margins on the Company's FS454 chip sales to Microsoft  offset by reduced
manufacturing  expenses  as the  Company  reduced  its  personnel  expenditures,
primarily  headcount,  and as a result of  improved  pricing  on  certain of its
products.

Sales, Marketing and Support Expenses

    Sales,  marketing  and  support  expenses  were  $1,103,000,  or  10% of net
revenues,  for the  three-months  ended  September  30, 2003,  as compared  with
$1,141,000,  or 28% of net revenues,  for the  three-months  ended September 30,
2002, a decrease of $38,000 or 3%. Sales,  marketing  and support  expenses were
$3,190,000,  or 17% of net revenues,  for the  nine-months  ended  September 30,
2003, as compared with $3,857,000,  or 29% of net revenues,  for the nine-months
ended  September 30, 2002, a decrease of $667,000 or 17%. 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 September 30,
2003 were  $417,000 or 4% of net  revenues,  as compared with $423,000 or 10% of
net revenues for the three-months ended September 30, 2002, a decrease of $6,000
or 1%. General and  administrative  expenses for the nine-months ended September
30, 2003 were  $1,230,000 or 6% of net revenues,  as compared with $1,638,000 or
12% of net revenues for the nine-months  ended September 30, 2002, a decrease of
$408,000 or 25%. For the nine-month period, general and administrative  expenses
decreased as the nine months ended  September 30, 2002  included CEO  relocation
expenses of $65,000,  a $238,000 charge associated with the issuance of warrants
in connection  with  consulting  services and an additional  $54,000 of bad debt
expense.

Research and Development Expenses

    Research and development  expenses for the three-months  ended September 30,
2003 were  approximately  $1,070,000  or 10% of net  revenues,  as compared with
$1,042,000 or 25% of net revenues for the three-months ended September 30, 2002,
an  increase  of  $28,000  or 3%.  Research  and  development  expenses  for the
nine-months ended September 30, 2003 were approximately $3,174,000 or 17% of net
revenues, as compared with $3,007,000 or 23% of


                                       14
<PAGE>

net revenues  for the  nine-months  ended  September  30,  2002,  an increase of
$167,000 or 6%. The increase in research and  development  expenses  between the
nine-month  comparison  periods is  primarily  because no  engineering  work was
performed  under  contract for the nine months ended  September 30, 2003 and, as
such, no research and development  personnel expenses were allocated to costs of
sales during such period.

Amortization

      Amortization  expense for the three-month  period ended September 30, 2003
was  $132,000  or 1% of net  revenues,  as compared  with  $217,000 or 5% of net
revenues,  for the three-months  ended September 30, 2002, a decrease of $85,000
or 39%.  Amortization expense for the nine-month period ended September 30, 2003
was  $436,000  or 2% of net  revenues,  as compared  with  $725,000 or 5% of net
revenues,  for the nine-months  ended September 30, 2002, a decrease of $289,000
or 40%. The decrease in the three and nine 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  "Note 1. 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  nine-month
period ended September 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.  For the three and nine months ended  September 30, 2002, the Company
recorded  restructuring  expenses totaling $96,000 related to the closure of its
Chelmsford, MA, facility.

Interest Expense, Net

    Net interest expense for the three-month period ended September 30, 2003 was
$46,000,  or less than 1% of net revenues,  as compared to $57,000, or 1% of net
revenues,  for the three-months  ended September 30, 2002, a decrease of $9,000.
Net interest  expense for the  nine-month  period ended  September  30, 2003 was
$150,000, or 1% of net revenues, as compared to $174,000, or 1% of net revenues,
for the  nine-months  ended  September  30,  2002,  a decrease of  $24,000.  The
decrease in interest  expense is primarily  attributable to lower interest rates
between comparison periods.

Other Income, Net

    Net other income for the  three-month  period ended  September  30, 2003 was
$7,000,  or  less  than  1% of  net  revenues,  as  compared  to  none  for  the
three-months  ended September 30, 2002, an increase of $7,000.  Net other income
for the nine-month  period ended  September 30, 2003 was $104,000,  or 1% of net
revenues,  as  compared  to $24,000,  or less than 1% of net  revenues,  for the
nine-months ended September 30, 2002, an increase of $80,000.

    Other  income for the three and nine  months  ended  September  30,  2003 is
primarily comprised of the settlement of debts for less than original amounts.

    Other  expense for the  nine-months  ended  September  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.  Although
the Company reported net income of $532,000 for the three months ended September
30,  2003,  for the nine  months  ended  September  30,  2003 and the year ended
December 31, 2002, the Company incurred net losses of $1,208,000 and $5,957,000,
respectively,  and net cash used in  operating  activities  of  $2,955,000,  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


                                       15
<PAGE>

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 to achieve  sustained  profitability  and  significant
positive cash flows.

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

    Net cash used in  operating  activities  for the  nine-month  periods  ended
September 30, 2003 and 2002 was $2,955,000 and $4,824,000,  respectively. In the
first  nine  months of 2003,  net cash used in  operating  activities  consisted
primarily of a net loss of $1,208,000 adjusted for depreciation and amortization
of  $571,000,  an  increase  in  accounts  payable  of  $2,611,000  and  accrued
liabilities  of  $168,000  offset  by an  increase  in  accounts  receivable  of
$2,980,000 and inventories of $1,875,000.  In the first nine months of 2002, net
cash  used  in  operating  activities  consisted  primarily  of a  net  loss  of
$4,170,000 adjusted for depreciation and amortization of $950,000, warrant issue
expense of $573,000 and gain on debt settlement totaling $311,000, a decrease in
accounts  payable of  $1,470,000  and payment of legal  judgment of  $2,073,000,
partially  offset by an decrease  in accounts  receivable  of  $1,014,000  and a
decrease in inventories totaling $1,453,000.

    One  customer  accounted  for 64% of the  Company's  revenue for the quarter
ended  September  30, 2003.  Two  customers  accounted  for 68% of the Company's
accounts  receivable  balance (54% and 14%  respectively) at September 30, 2003.
See "Risk Factors - We depend on a few  customers  for a high  percentage of our
revenues  and  the  loss  of any  one  of  these  customers  could  result  in a
substantial decline in our revenues and profits."

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

    Net cash used by investing  activities for the  nine-months  ended September
30, 2003 was $146,000,  as compared to net cash provided by investing activities
for the nine-months  ended September 30, 2002 of $2,299,000.  For the first nine
months  of 2003,  net cash  used in  investing  activities  was  related  to the
purchase of property and equipment of $89,000 and the  acquisition of intangible
assets from  DVUnlimited,  which resulted in a net cash outflow of $57,000.  For
the first  nine  months  of 2002,  net cash  provided  by  investing  activities
resulted  principally  from the  decrease in  restricted  collateral  deposit of
$2,363,000, offset by the purchase of property and equipment of $64,000.

    Net cash provided by financing  activities for the nine-month  periods ended
September 30, 2003 and 2002 was $3,994,000 and $2,796,000,  respectively. In the
first nine months of 2003, the Company received  $1,924,000 in net proceeds from
private  offerings  of common stock and  $2,107,000  from the exercise of common
stock  options and  warrants,  which were  partially  offset by  payments  under
capital  lease  obligations.  In the  first  nine  months of 2002,  the  Company
received  $2,435,000 in net proceeds from private  offerings of common stock and
$537,000 from the exercise of common stock options which were  partially  offset
by $145,000 in repayments on convertible notes to a shareholder.

    As of September 30, 2003, the Company had working capital of $4,819,000,  as
compared to $1,551,000 at December 31, 2002, an increase of $3,268,000.

    The Company has incurred  losses and negative cash flows from operations for
the nine months ended September 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 nine months ended  September 30, 2003 and the year ended  December 31, 2002,
the Company  received  approximately  $1,924,000  and $3,121,000 in net proceeds
from private offerings of common stock, respectively.

   At September 30, 2003, the Company owed Mr. Berg  approximately  $4.3 million
in principal and accrued  interest on various notes. In September 2003, Mr. Berg
agreed to convert such debt and accrued interest into preferred and common stock
on conversion terms agreed to more than two years ago. As of September 30, 2003,
the conversion would result in the issuance of approximately 2,178,433 shares of
common stock and 1,257  shares of preferred  stock


                                       16
<PAGE>

convertible into 1,257,000 shares of common stock. The conversion is expected to
be completed as soon as practical, but in no event sooner than March 2004.

    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 September 30, 2003, $35,000 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 the nine months ended  September 30,
2003,  the Company  released  four new  products.  Additionally,  the Company is
developing  and expects to  announce  at least one more new  product  during the
fourth  quarter of 2003.  There can be no assurances as to the amount of revenue
these new products will produce. See "Risk Factors."

    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 reduction in expenses related to
the restructuring and an expected increase in sales, the Company determined late
in the second quarter of 2003, 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  $1.9 million in a private placement  transaction with independent
third parties through the issuance of 2,200,000  shares of the Company's  common
stock.

    Although  the Company  reported  net income of $532,000 for the three months
ended  September 30, 2003 and cash of $2.2 million at September 30, 2003,  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.

Effects of Inflation and Seasonality

         The Company believes that inflation has not had a significant impact on
the Company's sales or operating results.

         Prior  to  fiscal  2003,  the  Company's  business  had  not  generally
experienced substantial variations in annual revenues or operating income due to
seasonality.  The  significant  increase in our revenues  during the nine months
ended September 30, 2003 over the comparable  period in 2002 was a result of the
Microsoft's  inclusion of our FS454 semiconductor chip in its Xbox product.  For
fiscal 2003, a substantial  portion of our semiconductor  revenues is subject to
risks  associated  with the sales of certain  end  products  at retail  that are
seasonal,  with a large majority of retail sales occurring  during the period of
September through December.  As a result, our 2003 annual operating results will
depend on the successful sales in the relatively brief holiday season of the end
user  products  in which  our in which  our  semiconductor  products  are  used,
including Microsoft's Xbox.  Furthermore,  the volume of work for such customers
is likely to vary from year to year and is subject to risks of non-renewal.

Summary of Certain Contractual Obligations as of September 30, 2003

<TABLE>
<CAPTION>
                                         Amount of Commitment Expiration Per Period
                                                      (in thousands)
                                    ---------------------------------------------------
                                              Less Than                         After 5
                                     Total      1 year   1-3 Years  4-5 Years    Years
                                    -------     ------   --------   --------     ------
<S>                                 <C>         <C>        <C>        <C>        <C>
Notes payable to stockholder        $ 3,867     $   --     $3,867     $   --     $   --
Capital leases                            8          8         --         --         --
Operating leases                        917        139        776          2         --
                                    -------     ------     ------     ------     ------
  Total                             $ 4,792     $  147     $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


                                       17
<PAGE>

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.

    In May 2003, the FASB issued SFAS No. 150,  Accounting for Certain Financial
Instruments with  Characteristics of both Liabilities and Equity. This Statement
establishes   standards  for  the  classification  and  measurement  of  certain
financial  instruments with characteristics of both liabilities and equity. This
Statement is effective for financial  instruments entered into or modified after
May 31, 2003,  and  otherwise  effective at the  beginning of the first  interim
period  beginning  after June 15, 2003.  The Company  currently has no financial
instruments which meet these requirements.

    In April 2003 the FASB issued SFAS No. 149,  Amendment of Statement  No. 133
on Derivative  Instruments  and Hedging  Activities.  This Statement  amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including  certain  derivative  instruments  embedded  in other  contracts.  The
Statement  clarifies  under what  circumstances  a contract  with an initial net
investment meets the characteristic of a derivative, clarifies when a derivative
contains  a  financing  component,   amends  the  definition  of  an  underlying
derivative to conform it to language used in FASB Interpretation FIN No. 45, and
amends  certain  other  existing  pronouncements.  SFAS No. 149 is effective for
contracts  entered  into or  modified  after  June  30,  2003  and  for  hedging
relationships  designated  after June 30, 2003. All provisions of the Statement,
except those related to forward purchases or sales of "when-issued"  securities,
should be applied  prospectively.  The Company currently has no instruments that
meet the  definition  of a  derivative,  and  therefore,  the  adoption  of this
Statement will have no impact on the Company's  financial position or results of
operations.

   In  January  2003,   the  FASB  issued   Interpretation   No.  46  (FIN  46),
Consolidation of Variable Interest  Entities,  which addresses  consolidation by
business  enterprises of variable interest entities that either: (i) do not have
sufficient  equity  investment  at risk to  permit  the  entity to  finance  its
activities without additional subordinated financial support, or (ii) the equity
investors lack an essential  characteristic of a controlling financial interest.
FIN 46 originally  required  disclosure of Variable  Interest Entities (VIEs) in
financial statements issued after January 31, 2003, if it is reasonably possible
that as of the transition date: (i) the company will be the primary  beneficiary
of an existing  VIE that will  require  consolidation,  or (ii) the company will
hold a significant  variable interest in, or have significant  involvement with,
an existing  VIE. In October 2003 the FASB elected to defer the  effective  date
for applying the provisions of FIN 46 for interests  held by public  entities in
variable  interest  entities or potential  variable  interest  entities  created
before February 1, 2003. A public entity need not apply the provisions of FIN 46
to an interest  held in a variable  interest  entity  until the end of the first
interim or annual period ending after  December 31, 2003. The adoption of FIN 46
is not expected to have an 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.


                                       18
<PAGE>

Risks Related to Our Business

We have a long history of operating losses.

As of September 30, 2003, we had an accumulated deficit of $62,531,000. Although
we recorded  net income of $532,000 for the three  months  ended  September  30,
2003, we incurred net losses of  $1,208,000,  $5,957,000  and $6,658,000 for the
nine months ended  September 30, 2003 and the years ended  December 31, 2002 and
2001,  respectively.  Although we were profitable for the third quarter of 2003,
there can be no assurance that we will remain profitable in subsequent quarters.
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.

A  significant  portion of our revenues is from  products  that are designed for
consumer goods that have seasonal sales.

A significant  portion of our revenues is subject to risks  associated  with the
sales of certain end  products at retail that are  seasonal,  with a majority of
retail sales occurring  during the period of September  through  December.  As a
result,  our annual operating results with respect to sales of our semiconductor
chips  designed  into newly  introduced  products,  including  Microsoft's  Xbox
depend, in large part, on sales during the relatively brief holiday season.

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      Exercise of Stock
                                    Common Stock         of Debt    Options and Warrants
                                    ------------         -------    --------------------
<S>                                 <C>                <C>                <C>
  First nine months of 2003          $1,924,000                --         $2,108,000
  Fiscal 2002                        $3,121,000                --           $625,000
  Fiscal 2001                                --        $2,650,000           $199,000
</TABLE>

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

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

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

At  September  30,  2003,  we had  41,295,762  and 1,904  shares  of common  and
preferred shares issued and outstanding,  respectively,  and 1,157,950  warrants
and 5,413,267  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 376,901 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.

In addition,  in September 2003, Mr. Carl Berg agreed to convert his approximate
$4.3 million of debt and accrued  interest  into  preferred  and common stock on
conversion  terms agreed to more than two years ago. As of  September  30, 2003,
the conversion would result in the issuance of approximately 2,178,433 shares of
common stock and 1,257  shares of preferred  stock  convertible  into  1,257,000
shares of common stock.  Due to a recently  negotiated  sale of a portion of


                                       19
<PAGE>

Mr. Berg's position in FOCUS  Enhancements  to an  institutional  investor,  the
conversion  is expected to be  completed as soon as  practical,  but in no event
sooner  than March 2004,  which is six months from the date of the recent  sale,
the earliest  date  permitted by SEC Section  16(b) and  appropriate  securities
laws.

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 September 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.

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

Over 60% 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 depend on a few customers for a high  percentage of our revenues and the loss
or failure to pay of any one of these  customers  could result in a  substantial
decline in our revenues and profits.

For the three and nine months ended September 30, 2003, one customer represented
64% and 36% of our total revenues, respectively. This customer also represents a
significant  portion  of our  backlog  and  anticipated  revenue  for the fourth
quarter of 2003.  Two  customers,  one of which is  described  in the  preceding
sentence,  represented  68% of our  accounts  receivable  balance  (54% and 14%,
respectively)  as of September 30, 2003. We presently  have no reason to believe
that these  customers  lack the  financial  resources  to pay us. 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.  However,  the loss of
any of these  identified  or other  major  customers,  the  failure  of any such
identified  customer to pay us, or to continue  issuance of additional  purchase
orders  would  have a  material  adverse  effect  on our  revenues,  results  of
operation,  and  business  as a  whole  absent  the  timely  replacement  of the
associated   revenues  and  profit  margins   associated   with  such  business.
Furthermore,  many of our products are dependent upon the overall success of our
customers' products, over which we often have no control.

Backlog 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 September 30, 2003,
our total  backlog  was  approximately  $3.3  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.


                                       20
<PAGE>

Our quarterly financial results are subject to significant fluctuations.

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

Our 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  September  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.

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


                                       21
<PAGE>

    *     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.


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 September 30, 2003, our stock closed
below  $1.00 a share on 64 of 186  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.

We must maintain  stockholders' equity of $2,500,000.  At September 30, 2003, we
had total stockholders' equity of $7,116,000.  To the extent we incur net losses
and do not raise additional capital, our stockholders' equity will be reduced.

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

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

Our common stock price is volatile.

The  market  price  for  our  common  stock  is  volatile  and  has   fluctuated
significantly  to date. For example,  between  October 1, 2002 and September 30,
2003,  the per share price of our stock has  fluctuated  between $0.50 and $2.76
per share, closing at $2.72 at November 7, 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;

    *     cyclical nature of consumer products using our technology;

    *     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,


                                       22
<PAGE>

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

Recent corporate bankruptcies,  accounting  irregularities,  and alleged insider
wrong doings have negatively  affected  general  confidence in the stock markets
and the  economy,  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


                                       23
<PAGE>

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 SARS re-emerges in the future, our international and domestic
sales and operations could be harmed.


                                       24
<PAGE>

    Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

    At September 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 end of the
period covered by this filing,  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.

     During the Company's most recent quarter, there were no significant changes
in our internal  controls or in other  factors that could  significantly  affect
these controls.


                                       25
<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) and (d) 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.  As of
                 September 30, 2003, the 40,000 warrants  registered pursuant to
                 the Form S-3 had been exercised.

                 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  $1.9  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  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
                 2,200,000   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 October 7, 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. We will receive the proceeds of any
                 exercise  of the  warrants,  which  we  will  use  for  general
                 corporate  purposes.  As of  September  30,  2003,  none of the
                 warrants   registered   pursuant  to  the  Form  S-3  had  been
                 exercised.


                                       26
<PAGE>

Item 3. Defaults Upon Senior Securities

       (None)

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

       (None)

Item 5. Other Information

       (None)

Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits

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

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


          Exhibit 32.1 - CEO  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 July 7,  2003,  Focus  Enhancements,  Inc.  issued a press  release
          announcing  that it had  closed a  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.

          On August 7, 2003,  Focus  Enhancements,  Inc.  issued a press release
          announcing it second quarter 2003 results.


                                       27
<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.



   November 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)