Document:

REGISTRATION RIGHTS AGREEMENT

         THIS REGISTRATION RIGHTS AGREEMENT,  dated as of January 11, 2002 (this
"Agreement"),  is made by and  between  FOCUS  ENHANCEMENTS,  INC.,  a  Delaware
corporation, with headquarters located at 1370 Dell Avenue, Campbell, California
95008 (the  "Company"),  and each entity named on a signature page hereto (each,
an "Investor"), and vFINANCE INVESTMENTS,  INC. ("VFIN") (each agreement with an
Investor being deemed a separate and independent  agreement  between the Company
and such Investor,  except that each Investor  acknowledges  and consents to the
rights granted to each other Investor under such agreement).

                              W I T N E S S E T H:

         WHEREAS,  upon the terms and  subject to the  conditions  of the Common
Stock and Warrant Purchase Agreement,  dated as of January 11, 2002, between the
Investor and the Company (the " Purchase Agreement"; terms not otherwise defined
herein shall have the meanings ascribed to them in the Purchase Agreement),  the
Company has agreed to issue and sell to the  Investors  the Common  Stock of the
Company (the "Common Stock"); and

         WHEREAS,  the Company has agreed to issue the  Warrants to the Investor
and VFIN in connection  with the issuance of the Common Stock,  and the Warrants
may be  exercised  for the  purchase  of shares of Common  Stock  (the  "Warrant
Shares") upon the terms and conditions of the Warrants; and

         WHEREAS,  to induce the Investor to execute and deliver the  Securities
Purchase  Agreement,  the  Company  has agreed to provide  certain  registration
rights under the Securities Act of 1933;

         NOW,  THEREFORE,  in  consideration  of the  premises  and  the  mutual
covenants  contained  herein  and other  good and  valuable  consideration,  the
receipt and  sufficiency of which are hereby  acknowledged,  the Company and the
Investor hereby agree as follows:

         1.  Definitions.  As used in this Agreement,  the following terms shall
have the following meanings:

                  (a)  "Effective  Date"  means  the  date  the SEC  declares  a
Registration Statement covering Registrable Securities and otherwise meeting the
conditions contemplated hereby to be effective.

                  (b) "Held Shares Value" means the Purchase Price for shares of
Common Stock acquired by the Investor and not yet sold.

                  (c) "Investor" means the Investor any permitted  transferee or
assignee  who agrees to become  bound by the  provisions  of this  Agreement  in
accordance with Section 9 hereof and who holds Registrable  Securities and VFIN,
as the context may require.

                  (d) "Potential Material Event" means any of the following: (i)
the possession by the Company of material information not ripe for disclosure in
a registration  statement,  which shall be evidenced by a determination  in good
faith  by the  Board  of  Directors  of the  Company  that  disclosure  of  such
information in the  registration  statement would be detrimental to the business
and affairs of the Company or (ii) any  material  engagement  or activity by the
Company
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which would,  in the good faith  determination  of the Board of Directors of the
Company, be adversely affected by disclosure in a registration statement at such
time; in each case where such determination shall be accompanied by a good faith
determination  by the Board of Directors  of the Company  that the  registration
statement  would  be  materially   misleading   absent  the  inclusion  of  such
information.

                  (e) "Register,"  "Registered," and  "Registration"  refer to a
registration  effected  by  preparing  and filing a  Registration  Statement  or
Statements in compliance  with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering  securities on a
continuous  basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the Commission.

                  (f)  "Registrable  Securities"  means the  Common  Stock,  the
Warrants, and the Warrant Shares.

                  (g) "Registration Statement" means a registration statement of
the Company under the  Securities  Act covering  Registrable  Securities on Form
S-3,  if the  Company is then  eligible  to file  using  such  form,  and if not
eligible, on Form SB-2 or other appropriate form.

                  (h) "Required Effective Date" means June 1, 2002.

                  (i) "Restricted  Sale Date" means the first date, other than a
date  during a Permitted  Suspension  Period (as  defined  below),  on which the
Investor is restricted  from making sales of Registrable  Securities  covered by
any previously effective Registration Statement.

         Capitalized  terms used herein and not otherwise  defined  herein shall
have the respective  meanings set forth in the Common Stock and Warrant Purchase
Agreement or in the Rules of the SEC.

         2. Registration.

                  (a) Mandatory Registration.

                           (i) The Company  shall prepare and file with the SEC,
as soon as  practicable  after the Closing  Date,  an  amendment  to an existing
Registration  Statement, or a Registration Statement in either event registering
for resale by the Investor a sufficient number of shares of Common Stock for the
Investors and VFIN to sell all of the Registrable  Securities.  The Registration
Statement  shall also state that, in accordance with Rules 416 and 457 under the
Securities Act, it also covers such indeterminate number of additional shares of
Common  Stock as may  become  issuable  upon  conversion  of the  Debentures  or
exercise of the Warrants to prevent  dilution  resulting  from stock splits,  or
stock dividends.  The Company will use its reasonable best efforts to cause such
Registration Statement to be declared effective on a date (the "Initial Required
Effective  Date")  which is no later than the earlier of (Y) five (5) days after
oral or written notice by the SEC that it may be declared  effective or (Z) June
1, 2002.

                           (ii) The aggregate  number of shares  registered  for
the  Investors in each  Registration  Statement or  amendment  thereto  shall be
allocated  among the Investors on a pro rata basis among them according to their
relative Registrable Shares included in such Registration Statement.

                  (b) Payments by the Company.

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<PAGE>

                           (i) [RESERVED]

                           (ii)  If  the  Registration  Statement  covering  the
Registrable  Securities  is not  declared  effective  by the  relevant  Required
Effective  Date or if there is a  Restricted  Sale Date within  ninety (90) days
after the effective date of the  Registration  Statement,  then the Company will
make  payments  to the  Investor  in such  amounts and at such times as shall be
determined pursuant to this Section 2(b).

                           (iii) The amount (the  "Periodic  Amount") to be paid
by the Company to the Investor shall be determined as of each  Computation  Date
(as  defined  below)  and such  amount  shall be  equal to the  Periodic  Amount
Percentage (as defined below) of the Purchase Price for the Common Stock for the
period from the date following the Required  Effective Date or a Restricted Sale
Date, as the case may be, to the first relevant Computation Date, and thereafter
to each subsequent  Computation Date. The "Periodic Amount Percentage" means (A)
with respect to the Required  Effective  Date,  two percent (2%) of the Purchase
Price of the Common Stock for the first,  second and third Computation Dates and
three percent (3%) of the Purchase Price of the Common Stock to each Computation
Date  thereafter,  and (b) with  respect  to a  Restricted  Sale  Date,  one and
one-half  (1 1/2%)  percent  of the  Purchase  Price  of the  Common  Stock  not
previously  sold  by the  Investor  after  the  Restricted  Sale  Date  to  each
Computation  Date  thereafter.  Anything  in the  preceding  provisions  of this
paragraph (iii) to the contrary  notwithstanding,  after the relevant  Effective
Date the  Purchase  Price shall be deemed to refer to the sum of the Held Shares
Value.  By way of  illustration  and not in limitation of the foregoing,  if the
Registration  Statement is not declared effective by July 15, 2002, the Periodic
Amount will aggregate three (3%) percent of the Purchase Price.

                           (iv) Each  Periodic  Amount  will be  payable  by the
Company,  except as provided in the other provisions of this subparagraph  (iv),
in cash or other  immediately  available  funds to the  Investor  (1) on the day
after the Required Effective Date or a Restricted Sale Date, as the case may be,
and (2) on the  earlier  of (A) each  thirtieth  day  thereafter,  (B) the third
business day after the date the  Registration  Statement is filed or is declared
effective,  or (C) the third business day after the  Registration  Statement has
its restrictions removed after the relevant Effective Date, in each case without
requiring demand therefor by the Investor. Notwithstanding the provisions of the
first sentence of this subparagraph (iv), at the mutual agreement of the Company
and the Investor,  any time before the Periodic Amount is paid, all or a portion
of the  Periodic  Amount can be paid by the  issuance  of  additional  shares of
Common Stock to the Investor  ("Periodic  Amount  Shares") in an amount equal to
the Periodic Amount being paid thereby divided by 90% of the average Closing Bid
Price for the last five (5) trading days prior to the Computation Date.

                           (v) The parties  acknowledge  that the damages  which
may be  incurred  by the  Investor if the  Registration  Statement  has not been
declared  effective by the Required  Effective  Date,  including if the right to
sell Registrable  Securities under a previously effective Registration Statement
is  suspended  or the  shares  of the  Company's  stock  are not  listed  on the
Principal Trading Market, may be difficult to ascertain.  The parties agree that
the Periodic Amounts represent a reasonable estimate on the part of the parties,
as of the date of this Agreement, of the amount of such damages.

                           (vi)  Notwithstanding  the  foregoing,   the  amounts
payable by the Company  pursuant to this  provision  shall not be payable to the
extent  any delay in the  effectiveness  of the  Registration  Statement  occurs
because of an act of, or a failure to act or to act  timely by the  Investor  or
its counsel.

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<PAGE>

                           (vii)  "Computation Date" means (A) the date which is
the  earlier  of  thirty  (30)  days  after  the  Required  Effective  Date or a
Restricted  Sale  Date,  or when the  shares of Common  Stock are  listed on the
Principal  Trading  Market  (with  respect to payments  due as  contemplated  by
Section  2(b)(ii)  hereof),  as the case may be,  and (B) each date which is the
earlier of (1) thirty (30) days after the previous  Computation  Date or (2) the
date after the previous Computation Date on which the Registration  Statement is
declared effective or has its restrictions  removed or the shares ofCommon Stock
are listed on the  Principal  Trading  Market  (with  respect to payments due as
contemplated by Section 2(b)(ii) hereof), as the case may be.

         3.  Obligations of the Company.  In connection with the registration of
the Registrable Securities, the Company shall do each of the following:

                  (a) Prepare and file,  with the SEC a  Registration  Statement
with respect to not less than the number of Registrable  Securities  provided in
Section 2(a) above, and thereafter use its reasonable best efforts to cause such
Registration Statement relating to Registrable Securities to become effective by
the Required Effective Date and keep the Registration Statement effective at all
times during the period (the "Registration Period") continuing until the earlier
of (i) the date when the Investors  may sell all  Registrable  Securities  under
Rule 144(k) without volume or other  restrictions  or limits,  (ii) the date the
Investors no longer own any of the Registrable  Securities,  which  Registration
Statement  (including  any amendments or  supplements  thereto and  prospectuses
contained  therein) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements  therein,  in light of the circumstances in which they were made,
not  misleading,  or  (iii)  one  (1)  year  after  the  Effective  Date  of the
Registration Statement.

                  (b) Prepare and file with the SEC such  amendments  (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus  used  in  connection  with  the  Registration  Statement  as  may be
necessary to keep the Registration  Statement  effective at all times during the
Registration  Period,  and,  during the  Registration  Period,  comply  with the
provisions  of  the  Securities  Act  with  respect  to the  disposition  of all
Registrable  Securities  of the Company  covered by the  Registration  Statement
until such time as all of such  Registrable  Securities have been disposed of in
accordance  with the intended  methods of  disposition  by the seller or sellers
thereof as set forth in the Registration Statement;

                  (c)  Permit  a  single  firm  of  counsel  designated  by  the
Investors (which,  until further notice,  shall be deemed to be Krieger & Prager
LLP,  Attn:  Samuel  Krieger,  Esq.,  which firm has  requested  to receive such
notification;   each,  an  "Investor's  Counsel")  to  review  the  Registration
Statement and all amendments and supplements  thereto for a reasonable period of
time (but not less than three (3) business  days) prior to their filing with the
SEC,  and not  file any  document  in a form to which  such  counsel  reasonably
objects;

                  (d)   Notify  the   Investor's   Counsel   and  any   managing
underwriters  immediately (and, in the case of (i)(A) below, not less than three
(3) business  days prior to such  filing) and (if  requested by any such person)
confirm such notice in writing no later than one (1) business day  following the
day (i)(A) when a Prospectus  or any  Prospectus  supplement  or  post-effective
amendment to the  Registration  Statement is proposed to be filed;  (B) whenever
the  SEC  notifies  the  Company  whether  there  will  be a  "review"  of  such
Registration  Statement;  (C) whenever the Company receives (or a representative
of the Company receives on its behalf) any oral or written comments from the SEC
in respect of a Registration Statement (copies or, in the case of oral comments,
summaries of such  comments (as such comments  relate to the Investor)  shall be

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<PAGE>

promptly furnished by the Company to the Investors); and (D) with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective;  (ii)  of any  request  by the  SEC or any  other  Federal  or  state
governmental  authority  for  amendments  or  supplements  to  the  Registration
Statement or Prospectus or for additional information;  (iii) of the issuance by
the SEC of any stop  order  suspending  the  effectiveness  of the  Registration
Statement covering any or all of the Registrable Securities or the initiation of
any proceedings for that purpose; (iv) if at any time any of the representations
or  warranties  of  the  Company  contained  in  any  agreement  (including  any
underwriting agreement) contemplated hereby ceases to be true and correct in all
material  respects;  (v) of the receipt by the Company of any notification  with
respect to the suspension of the  qualification or exemption from  qualification
of any of the  Registrable  Securities  for  sale  in any  jurisdiction,  or the
initiation or threatening  of any  proceeding for such purpose;  and (vi) of the
occurrence  of any event that to the best  knowledge  of the  Company  makes any
statement  made in the  Registration  Statement  or  Prospectus  or any document
incorporated  or deemed to be  incorporated  therein by reference  untrue in any
material respect or that requires any revisions to the  Registration  Statement,
Prospectus or other documents so that, in the case of the Registration Statement
or the Prospectus,  as the case may be, it will not contain any untrue statement
of a material  fact or omit to state any  material  fact  required  to be stated
therein  or  necessary  to  make  the  statements   therein,  in  light  of  the
circumstances  under which they were made,  not  misleading.  In  addition,  the
Company shall furnish the Investor's Counsel with copies of all intended written
responses to the comments  contemplated  in clause (C) of this Section 3(d) that
relate to Investors not later than one (1) business day in advance of the filing
of such responses with the SEC so that the Investors  shall have the opportunity
to comment thereon;

                  (e) Furnish to Investor's  Counsel (i) promptly after the same
is prepared  and  publicly  distributed,  filed with the SEC, or received by the
Company, one (1) copy of the Registration Statement, each preliminary prospectus
and prospectus, and each amendment or supplement thereto, all correspondence to,
with, or from the SEC, and (ii) such number of copies of a  prospectus,  and all
amendments and supplements  thereto (as  contemplated in Section 3(d) above) and
such  other  documents,  as such  Investor  may  reasonably  request in order to
facilitate the disposition of the Registrable Securities owned by such Investor;

                  (f) As promptly as  practicable  after becoming aware thereof,
notify  each  Investor  of the  happening  of any event of which the Company has
knowledge,  as a result of which the  prospectus  included  in the  Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material  fact  required to be stated  therein or  necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading,  and use its best efforts promptly to prepare a supplement
or amendment to the Registration  Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Investor as such Investor may reasonably
request;

                  (g) As promptly as  practicable  after becoming aware thereof,
notify each  Investor who holds  Registrable  Securities  being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of a Notice of  Effectiveness or any notice of effectiveness or any stop
order or other suspension of the effectiveness of the Registration  Statement at
the earliest possible time;

                  (h) Notwithstanding the foregoing, if at any time or from time
to time  after the date of  effectiveness  of the  Registration  Statement,  the
Company  notifies  the  Investors  in writing

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<PAGE>

of the existence of a Potential Material Event, the Investors shall not offer or
sell any Registrable Securities, or engage in any other transaction involving or
relating to the  Registrable  Securities,  from the time of the giving of notice
with respect to a Potential  Material Event until such Investor receives written
notice from the  Company  that such  Potential  Material  Event  either has been
disclosed to the public or no longer  constitutes  a Potential  Material  Event;
provided, however, that the Company may not so suspend the right to such holders
of  Registrable  Securities  during the periods the  Registration  Statement  is
required to be in effect  other than during a Permitted  Suspension  Period (and
the  applicable  provisions of Section 2(b) shall apply with respect to any such
suspension  other  than  during  a  Permitted  Suspension  Period)  .  The  term
"Permitted  Suspension Period" means up to two such suspension periods,  each of
which  suspension  period  shall not  either (i) be for more than  fifteen  (15)
business  days or (ii) begin less than ten (10) business days after the last day
of the preceding  suspension (whether or not such last day was during or after a
Permitted Suspension Period); provided further that the Company shall, if lawful
to do so,  provide the Investor  with at least two (2) business  days' notice of
the existence (but not the substance of) a Potential Material Event;

                  (i) Use its  reasonable  efforts  to secure and  maintain  the
designation  and  listing  of all  the  Registrable  Securities  covered  by the
Registration  Statement on the  Principal  Trading  Market within the meaning of
Rule  11Aa2-1  of the SEC  under  the  Exchange  Act and  the  quotation  of the
Registrable Securities on the Principal Trading Market.

                  (j)  Provide a transfer  agent and  registrar,  which may be a
single  entity,  for the  Registrable  Securities  not  later  than the  initial
Effective Date.

                  (k)  Cooperate   with  the  Investors  who  hold   Registrable
Securities  being offered to facilitate the timely  preparation  and delivery of
certificates  for the  Registrable  Securities  to be  offered  pursuant  to the
Registration   Statement  and  enable  such  certificates  for  the  Registrable
Securities  to be in such  denominations  or  amounts as the case may be, as the
Investors may  reasonably  request,  and,  within five (5) business days after a
Registration   Statement  which  includes  Registrable   Securities  is  ordered
effective by the SEC, the Company shall  deliver,  and shall cause legal counsel
selected by the Company to deliver,  to the transfer  agent for the  Registrable
Securities  (with  copies to the  Investors  whose  Registrable  Securities  are
included in such Registration  Statement) an appropriate instruction and opinion
of such counsel,  which shall  include,  without  limitation,  directions to the
transfer  agent  to  issue  certificates  of  Registrable   Securities(including
certificates  for  Registrable  Securities to be issued after the Effective Date
and replacement  certificates  for  Registrable  Securities  previously  issued)
without legends or other restrictions; and

                  (l) Take all other  reasonable  actions  necessary to expedite
and  facilitate  disposition  by  the  Investor  of the  Registrable  Securities
pursuant to the Registration Statement.

                  (m) Comply with all  applicable  rules and  regulations of the
Commission  and  make  generally  available  to  its  security  holders  earning
statements  satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90 days
after  the end of any  12-month  period  if such  period  is a fiscal  year) (i)
commencing at the end of any fiscal quarter in which Registrable  Securities are
sold to underwriters in a firm commitment or best efforts underwritten  offering
and (ii) if not sold to  underwriters  in such an  offering,  commencing  on the
first day of the first fiscal quarter of the Company after the effective date of
the Registration Statement, which statement shall cover said 12-month period, or
end shorter periods as is consistent with the requirements of Rule 158.

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<PAGE>

         4. Obligations of the Investors. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:

                  (a)  Each  Investor,  by  such  Investor's  acceptance  of the
Registrable  Securities,  agrees to  cooperate  with the  Company as  reasonably
requested by the Company in connection  with the  preparation  and filing of the
Registration Statement hereunder,  unless such Investor has notified the Company
in  writing  of such  Investor's  election  to  exclude  all of such  Investor's
Registrable Securities from the Registration Statement; and

                  (b) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind  described in Section 3(f)
or 3(g),  above,  such  Investor will  immediately  discontinue  disposition  of
Registrable  Securities  pursuant to the  Registration  Statement  covering such
Registrable  Securities  until  such  Investor's  receipt  of the  copies of the
supplemented or amended prospectus  contemplated by Section 3(f) or 3(g) and, if
so directed by the Company,  such Investor  shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate  of
destruction)  all  copies  in  such  Investor's  possession,  of the  prospectus
covering  such  Registrable  Securities  current  at the time of receipt of such
notice.

         5.  Expenses  of  Registration.  All  reasonable  expenses  (other than
underwriting  discounts and commissions of the Investor)  incurred in connection
with  registrations,  filings  or  qualifications  pursuant  to  Section  3, but
including,  without limitation,  all registration,  listing,  and qualifications
fees,  printers and accounting  fees, the fees and  disbursements of counsel for
the Company shall be borne by the Company.

         6.  Indemnification.  In  the  event  any  Registrable  Securities  are
included in a Registration Statement under this Agreement:

                  (a) To the extent permitted by law, the Company will indemnify
and hold  harmless  each  Investor who holds such  Registrable  Securities,  the
directors,  if any, of such  Investor,  the officers,  if any, of such Investor,
each  person,  if any,  who  controls  any  Investor  within the  meaning of the
Securities  Act  or  the  Exchange  Act  (each,  an   "Indemnified   Person"  or
"Indemnified  Party"),  against  any losses,  claims,  damages,  liabilities  or
expenses (joint or several)  incurred  (collectively,  "Claims") to which any of
them may become subject under the Securities Act, the Exchange Act or otherwise,
insofar  as such  Claims  (or  actions  or  proceedings,  whether  commenced  or
threatened,  in  respect  thereof)  arise  out of or are  based  upon any of the
following statements,  omissions or violations in the Registration Statement, or
any post-effective  amendment thereof, or any prospectus  included therein:  (i)
any untrue statement or alleged untrue statement of a material fact contained in
the  Registration  Statement  or any  post-effective  amendment  thereof  or the
omission or alleged  omission to state  therein a material  fact  required to be
stated therein or necessary to make the statements therein not misleading,  (ii)
any untrue statement or alleged untrue statement of a material fact contained in
the final  prospectus  (as amended or  supplemented,  if the  Company  files any
amendment thereof or supplement thereto with the SEC) or the omission or alleged
omission to state  therein any material  fact  necessary to make the  statements
made therein,  in light of the circumstances  under which the statements therein
were made,  not  misleading or (iii) any  violation or alleged  violation by the
Company of the Securities Act, the Exchange Act, any state securities law or any
rule or  regulation  under the  Securities  Act,  the  Exchange Act or any state
securities  law (the matters in the  foregoing  clauses (i) through (iii) being,
collectively,  "Violations").  Subject  to  clause  (b) of this  Section  6, the
Company shall  reimburse the  Investors,  promptly as such expenses are incurred
and  are due and

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payable,  for any legal fees or other  reasonable  expenses  incurred by them in
connection  with  investigating  or  defending  any such Claim.  Notwithstanding
anything  to  the  contrary  contained  herein,  the  indemnification  agreement
contained in this Section 6(a) shall not (I) apply to a Claim  arising out of or
based upon a Violation  which  occurs in reliance  upon and in  conformity  with
information  furnished  in  writing  to  the  Company  by or on  behalf  of  any
Indemnified  Person  expressly for use in connection with the preparation of the
Registration  Statement or any such  amendment  thereof or  supplement  thereto,
after such prospectus was made available by the Company pursuant to Section 3(c)
hereof;  (II) be available to the extent such Claim is based on a failure of the
Investor to deliver or cause to be delivered the  prospectus  made  available by
the  Company or the  amendment  or  supplement  thereto  made  available  by the
Company; (III) be available to the extent such Claim is based on the delivery of
a  prospectus  by the Investor  after  receiving  notice from the Company  under
Section 3(f), (g) or (h) hereof (other than a notice regarding the effectiveness
of the Registration  Statement or any amendment or supplement thereto),  or (IV)
apply to amounts paid in settlement of any Claim if such  settlement is effected
without the prior  written  consent of the Company,  which  consent shall not be
unreasonably  withheld or delayed.  Each Investor will indemnify the Company and
its  officers,   directors  and  agents  (each,  an   "Indemnified   Person"  or
"Indemnified Party") against any claims arising out of or based upon a Violation
which occurs in reliance upon and in conformity  with  information  furnished in
writing to the Company,  by or on behalf of such Investor,  expressly for use in
connection with the preparation of the  Registration  Statement or the amendment
or  supplement  thereto,  subject  to such  limitations  and  conditions  as are
applicable  to the  indemnification  provided by the Company to this  Section 6.
Such  indemnity  shall  remain  in  full  force  and  effect  regardless  of any
investigation  made by or on behalf of the Indemnified  Person and shall survive
the transfer of the Registrable  Securities by the Investors pursuant to Section
9.

                  (b)  Promptly  after  receipt  by  an  Indemnified  Person  or
Indemnified  Party  under this  Section 6 of notice of the  commencement  of any
action  (including  any  governmental   action),   such  Indemnified  Person  or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying  party under this  Section 6, deliver to the  indemnifying  party a
written notice of the commencement thereof and the indemnifying party shall have
the right to  participate  in,  and,  to the  extent the  indemnifying  party so
desires,  jointly with any other indemnifying party similarly noticed, to assume
control  of the  defense  thereof  with  counsel  mutually  satisfactory  to the
indemnifying  party and the Indemnified  Person or the Indemnified Party, as the
case may be. In case any such action is brought against any  Indemnified  Person
or Indemnified Party, and it notifies the indemnifying party of the commencement
thereof,  the indemnifying party will be entitled to participate in, and, to the
extent that it may wish,  jointly with any other  indemnifying  party  similarly
notified,  assume the defense thereof,  subject to the provisions  herein stated
and after  notice  from the  indemnifying  party to such  Indemnified  Person or
Indemnified  Party  of its  election  so to  assume  the  defense  thereof,  the
indemnifying  party will not be liable to such Indemnified Person or Indemnified
Party  under  this  Section  6 for any legal or other  reasonable  out-of-pocket
expenses  subsequently  incurred by such Indemnified Person or Indemnified Party
in  connection  with  the  defense  thereof  other  than  reasonable   costs  of
investigation,  unless the indemnifying party shall not pursue the action to its
final  conclusion.  The Indemnified  Person or Indemnified  Party shall have the
right to employ  separate  counsel in any such action and to  participate in the
defense  thereof,  but the fees and  reasonable  out-of-pocket  expenses of such
counsel  shall  not  be  at  the  expense  of  the  indemnifying  party  if  the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory  to the  Indemnified  Person or  Indemnified  Party  provided  such
counsel is of the opinion that all defenses  available to the Indemnified  Party
can be maintained without  prejudicing the rights of the indemnifying party. The
failure to deliver written notice to the indemnifying  party within a

                                       8
<PAGE>

reasonable  time of the  commencement  of any such action shall not relieve such
indemnifying  party of any liability to the  Indemnified  Person or  Indemnified
Party under this Section 6, except to the extent that the indemnifying  party is
prejudiced in its ability to defend such action. The indemnification required by
this Section 6 shall be made by periodic  payments of the amount  thereof during
the course of the  investigation or defense,  as such expense,  loss,  damage or
liability is incurred and is due and payable.

         7. Contribution.  To the extent any  indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable  under  Section  6 to the  fullest  extent  permitted  by law;  provided,
however,  that (a) no contribution shall be made under  circumstances  where the
maker would not have been liable for  indemnification  under the fault standards
set  forth in  Section  6; (b) no  seller of  Registrable  Securities  guilty of
fraudulent  misrepresentation  (within  the  meaning  of  Section  11(f)  of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities  who was not  guilty of such  fraudulent  misrepresentation;  and (c)
except where the seller has committed fraud (other than a fraud by reason of the
information included or omitted from the Registration  Statement as to which the
Company  has not  given  notice as  contemplated  under  Section  3  hereof)  or
intentional  misconduct,  contribution  by any seller of Registrable  Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.

         8. Reports under Securities Act and Exchange Act. With a view to making
available to Investor the benefits of Rule 144 promulgated  under the Securities
Act or any  other  similar  rule or  regulation  of the SEC that may at any time
permit  Investor  to  sell  securities  of the  Company  to the  public  without
Registration ("Rule 144"), the Company agrees to:

                  (a) make and keep public information available, as those terms
are understood and defined in Rule 144;

                  (b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and

                  (c) furnish to Investor so long as Investor  owns  Registrable
Securities,  promptly upon request,  (i) a written statement by the Company that
it has complied with the reporting  requirements  of the  Securities Act and the
Exchange Act,  (ii) a copy of the most recent annual or quarterly  report of the
Company and such other  reports and  documents so filed by the Company and (iii)
such other information as may be reasonably requested to permit Investor to sell
such securities pursuant to Rule 144 without Registration.

                  (d)  The  Company  will,  at  the  request  of any  Holder  of
Registrable  Securities,   upon  receipt  from  such  Holder  of  a  certificate
certifying  (i) that such  Holder  has held such  Registrable  Securities  for a
period  of not less than one (1) year,  (ii)  that such  Holder  has not been an
affiliate  (as defined in Rule 144) of the company for more than the ninety (90)
preceding  days,  and (iii) as to such other  matters as may be  appropriate  in
accordance with such Rule, remove from the stock  certificate  representing such
Registrable  Securities that portion of any restrictive  legend which relates to
the registration  provisions of the Securities Act, provided,  however, that, at
the  Company's   cost  and  expense,   counsel  to  Investor  may  provide  such
instructions  and opinion to the  transfer  agent  regarding  the removal of the
restrictive legend.

         9.  Assignment  of the  Registration  Rights.  The  rights  to have the
Company  register  Registrable  Securities  pursuant to this Agreement  shall be
automatically  assigned by the

                                       9
<PAGE>

Investors to any transferee of the  Registrable  Securities  only if the Company
is, within a reasonable  time after such transfer or assignment,  furnished with
written  notice of (a) the name and address of such  transferee  or assignee and
(b) the  securities  with  respect to which such  registration  rights are being
transferred or assigned.

         10. Amendment of Registration  Rights.  Any provision of this Agreement
may be amended and the observance  thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively),  only with the
written  consent of the Company  and  Investors  who hold a fifty (50%)  percent
interest  of the Shares as of such date.  Any  amendment  or waiver  effected in
accordance  with this  Section 10 shall be binding  upon each  Investor  and the
Company.

         11. Miscellaneous.

                  (a) A person or entity is deemed to be a holder of Registrable
Securities  whenever  such  person or entity  owns of  record  such  Registrable
Securities.  If  the  Company  receives  conflicting  instructions,  notices  or
elections  from  two or more  persons  or  entities  with  respect  to the  same
Registrable  Securities,  the Company shall act upon the basis of  instructions,
notice  or  election  received  from the  registered  owner of such  Registrable
Securities.

                  (b) Notices  required or permitted to be given hereunder shall
be given in the manner  contemplated  by the Purchase  Agreement,  (i) if to the
Company or to the Investor,  to their  respective  address  contemplated  by the
Purchase Agreement,  and (ii) if to any other Investor,  at such address as such
Investor shall have provided in writing to the Company, or at such other address
as each such party  furnishes  by notice given in  accordance  with this Section
11(b).

                  (c) Failure of any party to exercise any right or remedy under
this  Agreement or otherwise,  or delay by a party in  exercising  such right or
remedy, shall not operate as a waiver thereof.

                  (d) This Agreement shall be deemed to be a contract made under
the laws of the State of Delaware for  contracts to be wholly  performed in such
state and without giving effect to the principles thereof regarding the conflict
of laws. Each of the parties  consents to the jurisdiction of the federal courts
whose  districts  encompass  any part of the State of  California,  Santa  Clara
County in connection  with any dispute  arising under this  Agreement and hereby
waives,  to the maximum extent  permitted by law, any  objection,  including any
objection based on forum non conveniens,  to the bringing of any such proceeding
in such jurisdictions.

                  (e) The Company, the Investor and VFIN hereby waive a trial by
jury in any action,  proceeding or counterclaim brought by either of the parties
hereto  against  the  other  in  respect  of  any  matter  arising  out of or in
connection with this Agreement or any of the other Transaction Agreements.

                  (f) If any  provision  of this  Agreement  shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or  enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.

                  (g)  subject to the  requirements  of  Section 9 hereof,  this
Agreement  shall inure to the benefit of and be binding upon the  successors and
assigns of each of the parties hereto.

                                       10
<PAGE>

                  (h) All  pronouns  and any  variations  thereof  refer  to the
masculine, feminine or neuter, singular or plural, as the context may require.

                  (i) The  headings in this  Agreement  are for  convenience  of
reference only and shall not limit or otherwise affect the meaning thereof.

                  (j)  This   Agreement   may  be   executed   in  one  or  more
counterparts,  each of which shall be deemed an original  but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be  delivered  to  the  other  party  hereto  by  telephone  line  facsimile
transmission  of a copy of this Agreement  bearing the signature of the party so
delivering this Agreement.

                  (k) The Company  acknowledges  that any failure by the Company
to perform its  obligations  under  Section  3(a)  hereof,  or any delay in such
performance could result in loss to the Investors,  and the Company agrees that,
in  addition  to any  other  liability  the  Company  may have by reason of such
failure or delay,  the Company shall be liable for all direct  damages caused by
any such  failure  or delay,  unless  the same is the  result of force  majeure.
Neither party shall be liable for consequential damages.

                  (l) This Agreement  constitutes the entire agreement among the
parties  hereto  with  respect  to  the  subject  matter  hereof.  There  are no
restrictions,  promises, warranties or undertakings,  other than those set forth
or  referred to herein.  This  Agreement  supersedes  all prior  agreements  and
understandings  among the  parties  hereto with  respect to the  subject  matter
hereof. This Agreement may be amended only by an instrument in writing signed by
the party to be charged with enforcement thereof.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       11
<PAGE>

         IN WITNESS  WHEREOF,  the parties have caused this Agreement to be duly
executed by their  respective  officers  thereunto duly authorized as of the day
and year first above written.

                            COMPANY:

                            FOCUS ENHANCEMENTS, INC.

                            By:      /s/ Michael D'Addio
                               -------------------------------------------------
                            Name:    Michael D'Addio
                            Title:   President and Chief Executive Officer

                            FOLKINBURG INVESTMENTS LIMITED

                            By:      /s/ David Sims
                               -------------------------------------------------
                            Name:    David Sims
                            Title:   Director

                            STONE STREET LIMITED PARTNERSHIP

                            By:      /s/ Elizabeth Leonard
                               -------------------------------------------------
                            Name:   Elizabeth Leonard
                            Title:  Director

                            PAPELL HOLDINGS LIMITED

                            By:      /s/ C.B. Williams
                               -------------------------------------------------
                            Name:    International First Secretarial Group Ltd.
                            Title:   Secretary

                            VFINANCE INVESTMENTS, INC.

                            By:      /s/ Richard Rosenblum
                               -------------------------------------------------
                            Name:    Richard Rosenblum
                            Title:

                            BOAT BASIN INVESTMENTS LLC

                            By:      /s/ Abi Beck
                               -------------------------------------------------
                            Name:    Abi Beck
                            Title:   Manager

                                       12<PAGE>
                                                                    EXHIBIT 4.01

                                  FORM OF NOTE

THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"), TO A NOMINEE OF DTC OR BY DTC OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
TO SALOMON SMITH BARNEY HOLDINGS INC. OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO.
OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

No. R-1                                              INITIAL PRINCIPAL AMOUNT
CUSIP [      ]                                       REPRESENTED $[        ]
                                                     representing [     ] ELKS
                                                     ($10 per ELKS)

                       SALOMON SMITH BARNEY HOLDINGS INC.

                 Equity Linked Securities (ELKS(SM)) based upon
            the Common Stock of Cisco Systems, Inc. due [    ], 2003

         Salomon Smith Barney Holdings Inc., a New York corporation (hereinafter
referred to as the "Company", which term includes any successor corporation
under the Indenture herein referred to), for value received and on condition
that this Note is not redeemed by the Company prior to [    ], 2003 (the "Stated
Maturity Date"), hereby promises to pay to CEDE & CO., or its registered
assigns, the Maturity Payment (as defined below), on the Stated Maturity Date.
This Note will bear semi-annual payments of interest, is not subject to any
sinking fund, is not subject to redemption at the option of the Holder thereof
prior to the Stated Maturity Date, and is not subject to the defeasance
provisions of the Indenture.

         Payment of the Maturity Payment with respect to this Note shall be made
upon presentation and surrender of this Note at the corporate trust office of
the Trustee in the Borough of Manhattan, The City and State of New York, in such
coin or currency of the United States as at the time of payment is legal tender
for payment of public and private debts or, if applicable, in the common stock
of Cisco Systems, Inc. ("Cisco Systems").

         This Note is one of the series of Equity Linked Securities based upon
the common stock of Cisco Systems, Inc. due [     ], 2003 (the "ELKS").
<PAGE>
COUPON

         A coupon of $[ ] per ELKS will be paid in cash on [     ], 2002 and a
coupon of $[   ] per ELKS will be paid in cash on [   ], 2003. The [   ], 2002
coupon will be composed of $[   ] of interest and a partial payment of an option
premium in the amount of $[   ]. The [   ], 2003 coupon will be composed of
$[   ] of interest and a partial payment of an option premium in the amount of
$[   ]. Coupon payments will be payable to the persons in whose names the ELKS
are registered at the close of business on the Business Day preceding each
Interest Payment Date. If an Interest Payment Date falls on a day that is not a
Business Day, the coupon payment to be made on such Interest Payment Date will
be made on the next succeeding Business Day with the same force and effect as if
made on such Interest Payment Date, and no additional interest will accrue as a
result of such delayed payment.

         "Business Day" means any day that is not a Saturday, a Sunday or a day
on which the AMEX or banking institutions or trust companies in the City of New
York are authorized or obligated by law or executive order to close.

         The interest portion of the coupon will represent interest accruing at
a rate of [   ]% per annum from [   ], 2002 or from the most recent Interest
Payment Date to which the interest portion of the coupon has been paid or
provided for until maturity. The interest portion of the coupon will be computed
on the basis of a 360-day year of twelve 30-day months.

PAYMENT AT MATURITY

         On the Stated Maturity Date, Holders of the ELKS will receive for each
ELKS the Maturity Payment described below.

DETERMINATION OF THE MATURITY PAYMENT

         The Maturity Payment for each ELKS equals either:

         -        a number of shares of Cisco Systems common stock equal to the
                  Exchange Rate, if the Trading Price of Cisco Systems common
                  stock on any Trading Day after [   ], 2002 up to and including
                  the third Trading Day before the Stated Maturity Date (whether
                  intra-day or at the close of trading on any day) is less than
                  or equal to [  ], or

         -        $10 in cash.

         In lieu of any fractional share of Cisco Systems common stock otherwise
payable in respect of any ELKS, at the Stated Maturity Date, the Holder of this
Note will receive an amount in cash equal to the value of such fractional share
of Cisco Systems common stock, based on the Closing Price of Cisco Systems
common stock on the third Trading Day before the Stated Maturity Date. The
number of full shares of Cisco Systems common stock, and any cash in lieu of a
fractional share, to be delivered at the Stated Maturity Date to the Holder of
this Note will be calculated based on the aggregate number of ELKS held by such
Holder.

                                       2
<PAGE>
         The "Closing Price" of Cisco Systems common stock (or any other
security for which a Closing Price must be determined) on any date of
determination will be (1) if the common stock is listed on a national securities
exchange on that date of determination, the closing sale price or, if no closing
sale price is reported, the last reported sale price on that date on the
principal U.S. exchange on which the common stock is listed or admitted to
trading, (2) if the common stock is not listed on a national securities exchange
on that date of determination, or if the closing sale price or last reported
sale price is not obtainable (even if the common stock is listed or admitted to
trading on such exchange), and the common stock is quoted on the Nasdaq National
Market, the closing sale price or, if no closing sale price is reported, the
last reported sale price on that date as reported on the Nasdaq, and (3) if the
common stock is not quoted on the Nasdaq on that date of determination or, if
the closing sale price or last reported sale price is not obtainable (even if
the common stock is quoted on the Nasdaq), the last quoted bid price for the
common stock in the over-the-counter market on that date as reported by the OTC
Bulletin Board, the National Quotation Bureau or a similar organization. If no
closing sale price or last reported sale price is available pursuant to clauses
(1), (2) or (3) of the preceding sentence or if there is a Market Disruption
Event, the Closing Price on any date of determination will be the arithmetic
mean, as determined by the calculation agent, of the bid prices of the common
stock obtained from as many dealers in such stock (which may include Salomon
Smith Barney Inc. or any of our other subsidiaries or affiliates), but not
exceeding three such dealers, as will make such bid prices available to the
calculation agent. A security "quoted on the Nasdaq National Market" will
include a security included for listing or quotation in any successor to such
system and the term "OTC Bulletin Board" will include any successor to such
service.

         The "Initial Share Price" will equal [   ], the price per share of
Cisco Systems common stock at the market close on [   ], 2002.

         The "Exchange Rate" will equal [          ].

         A "Market Disruption Event" means the occurrence or existence of any
suspension of or limitation imposed on trading (by reason of movements in price
exceeding limits permitted by any exchange or market or otherwise) of, or the
unavailability, through a recognized system of public dissemination of
transaction information, of accurate price, volume or related information in
respect of, (1) the shares of Cisco Systems common stock on any exchange or
market, or (2) any options contracts or futures contracts relating to the shares
of Cisco Systems common stock, or any options on such futures contracts, on any
exchange or market if, in each case, in the determination of the calculation
agent, any such suspension, limitation or unavailability is material.

         A "Trading Day" means a day, as determined by the calculation agent, on
which trading is generally conducted (or was scheduled to have been generally
conducted, but for the occurrence of a Market Disruption Event) on the New York
Stock Exchange, the AMEX, the Nasdaq National Market, the Chicago Mercantile
Exchange and the Chicago Board Options Exchange, and in the over-the-counter
market for equity securities in the United States.

         The "Trading Price" of Cisco Systems common stock (or any other common
stock for which a Trading Price must be determined) on any date of determination
will be (1) if the

                                       3
<PAGE>
common stock is listed on a national securities exchange on that date of
determination, any reported sale price, regular way, of the principal trading
session on that date on the principal U.S. exchange on which the common stock is
listed or admitted to trading, (2) if the common stock is not listed on a
national securities exchange on that date of determination, or if the reported
sale price on such exchange is not obtainable (even if the common stock is
listed or admitted to trading on such exchange), and the common stock is quoted
on the Nasdaq National Market, any reported sale price of the principal trading
session on that date as reported on the Nasdaq, and (3) if the common stock is
not quoted on the Nasdaq on that date of determination, or if the reported sale
price on the Nasdaq is not obtainable (even if the common stock is quoted on the
Nasdaq), any reported sale price of the principal trading session on the
over-the-counter market on that date as reported on the OTC Bulletin Board, the
National Quotation Bureau or a similar organization. The determination of the
Trading Price by the calculation agent in the event of a Market Disruption Event
may be deferred by the calculation agent for up to five consecutive Trading Days
on which a Market Disruption Event is occurring. If no reported sale price of
the principal trading session is available pursuant to clauses (1), (2) or (3)
above or if there is a Market Disruption Event, the Trading Price on any date of
determination, unless deferred by the calculation agent as described in the
preceding sentence, will be the arithmetic mean, as determined by the
calculation agent, of the bid prices of the common stock obtained from as many
dealers in such stock (which may include Salomon Smith Barney Inc. or any of our
other subsidiaries or affiliates), but not exceeding three such dealers, as will
make such bid prices available to the calculation agent. A security "quoted on
the Nasdaq National Market" will include a security included for listing or
quotation in any successor to such system and the term "OTC Bulletin Board" will
include any successor to such service.

DILUTION ADJUSTMENTS

         If Cisco Systems, after the closing date of the offering of the ELKS,

         (1)      pays a stock dividend or makes a distribution with respect to
                  its common stock in shares of the stock,

         (2)      subdivides or splits the outstanding shares of its common
                  stock into a greater number of shares,

         (3)      combines the outstanding shares of the common stock into a
                  smaller number of shares, or

         (4)      issues by reclassification of shares of its common stock any
                  shares of other common stock of Cisco Systems,

then, in each of these cases, the Exchange Rate will be multiplied by a dilution
adjustment equal to a fraction, the numerator of which will be the number of
shares of common stock outstanding immediately after the event, plus, in the
case of a reclassification referred to in (4) above, the number of shares of
other common stock of Cisco Systems, and the denominator of which will be the
number of shares of common stock outstanding immediately before the event.

                                       4
<PAGE>
         If Cisco Systems, after the closing date, issues, or declares a record
date in respect of an issuance of, rights or warrants to all holders of its
common stock entitling them to subscribe for or purchase shares of its common
stock at a price per share less than the Then-Current Market Price of the common
stock, other than rights to purchase common stock pursuant to a plan for the
reinvestment of dividends or interest, then, in each of these cases, the
Exchange Rate will be multiplied by a dilution adjustment equal to a fraction,
the numerator of which will be the number of shares of common stock outstanding
immediately before the adjustment is effected, plus the number of additional
shares of common stock offered for subscription or purchase pursuant to the
rights or warrants, and the denominator of which will be the number of shares of
common stock outstanding immediately before the adjustment is effected by reason
of the issuance of the rights or warrants, plus the number of additional shares
of common stock which the aggregate offering price of the total number of shares
of common stock offered for subscription or purchase pursuant to the rights or
warrants would purchase at the Then-Current Market Price of the common stock,
which will be determined by multiplying the total number of shares so offered
for subscription or purchase by the exercise price of the rights or warrants and
dividing the product obtained by the Then-Current Market Price. To the extent
that, after the expiration of the rights or warrants, the shares of common stock
offered thereby have not been delivered, the Exchange Rate will be further
adjusted to equal the Exchange Rate which would have been in effect had the
adjustment for the issuance of the rights or warrants been made upon the basis
of delivery of only the number of shares of common stock actually delivered.

         If Cisco Systems, after the closing date, declares or pays a dividend
or makes a distribution to all holders of the common stock of any class of its
capital stock, the capital stock of one or more of its subsidiaries, evidences
of its indebtedness or other non-cash assets, excluding any dividends or
distributions referred to in the above paragraph, or issues to all holders of
its common stock rights or warrants to subscribe for or purchase any of its or
one or more of its subsidiaries' securities, other than rights or warrants
referred to in the above paragraph, then, in each of these cases, the Exchange
Rate will be multiplied by a dilution adjustment equal to a fraction, the
numerator of which will be the Then-Current Market Price of one share of the
common stock, and the denominator of which will be the Then-Current Market Price
of one share of the common stock, less the fair market value (as determined by a
nationally recognized independent investment banking firm retained for this
purpose by the Company, whose determination will be final) as of the time the
adjustment is effected of the portion of the capital stock, assets, evidences of
indebtedness, rights or warrants so distributed or issued applicable to one
share of common stock.

         Notwithstanding the foregoing, in the event that, with respect to any
dividend or distribution to which the above paragraph would otherwise apply, the
denominator in the fraction referred to in the above formula is less than $1.00
or is a negative number, then the Company may, at its option, elect to have the
adjustment provided by this paragraph not be made and in lieu of this
adjustment, at maturity, each Holder of the ELKS will be entitled to receive an
additional amount of cash equal to the product of the number of ELKS held by the
holder multiplied by the fair market value of the capital stock, indebtedness,
assets, rights or warrants (determined, as of the date this dividend or
distribution is made, by a nationally recognized independent investment banking
firm retained for this purpose by the Company, whose

                                       5
<PAGE>
determination will be final) so distributed or issued applicable to a number of
shares of Cisco Systems common stock equal to the Exchange Rate.

         If Cisco Systems, after the closing date, declares a record date in
respect of a distribution of cash, other than any Permitted Dividends described
below, any cash distributed in consideration of fractional shares of common
stock and any cash distributed in a Reorganization Event referred to below, by
dividend or otherwise, to all holders of its common stock, or makes an Excess
Purchase Payment, then the Exchange Rate will be multiplied by a dilution
adjustment equal to a fraction, the numerator of which will be the Then-Current
Market Price of the common stock, and the denominator of which will be the
Then-Current Market Price of the common stock on the record date less the amount
of the distribution applicable to one share of common stock which would not be a
Permitted Dividend, or, in the case of an Excess Purchase Payment, less the
aggregate amount of the Excess Purchase Payment for which adjustment is being
made at the time divided by the number of shares of Cisco Systems common stock
outstanding on the record date.

         For the purposes of these adjustments:

         A "Permitted Dividend" is any quarterly cash dividend in respect of
Cisco Systems common stock, other than a quarterly cash dividend that exceeds
the immediately preceding quarterly cash dividend, and then only to the extent
that the per share amount of this dividend results in an annualized dividend
yield on the common stock in excess of 10%.

         An "Excess Purchase Payment" is the excess, if any, of (x) the cash and
the value (as determined by a nationally recognized independent investment
banking firm retained for this purpose by the Company, whose determination will
be final) of all other consideration paid by Cisco Systems with respect to one
share of common stock acquired in a tender offer or exchange offer by Cisco
Systems, over (y) the Then-Current Market Price of the common stock.

         Notwithstanding the foregoing, in the event that, with respect to any
dividend or distribution or Excess Purchase Payment to which the fifth paragraph
in this section would otherwise apply, the denominator in the fraction referred
to in the formula in that paragraph is less than $1.00 or is a negative number,
then the Company may, at its option, elect to have the adjustment provided by
the fifth paragraph in this section not be made and in lieu of this adjustment,
at maturity, each Holder of the ELKS will be entitled to receive an additional
amount of cash equal to the product of the number of ELKS held by the Holder
multiplied by the sum of the amount of cash plus the fair market value of other
consideration (determined, as of the date this dividend or distribution is made,
by a nationally recognized independent investment banking firm retained for this
purpose by the Company, whose determination will be final) so distributed or
applied to the acquisition of the common stock in the tender offer or exchange
offer applicable to a number of shares of Cisco Systems common stock equal to
the Exchange Rate.

                                       6
<PAGE>
         Each dilution adjustment will be effected as follows:

         -        in the case of any dividend, distribution or issuance, at the
                  opening of business on the Business Day next following the
                  record date for determination of holders of Cisco Systems
                  common stock entitled to receive this dividend, distribution
                  or issuance or, if the announcement of this dividend,
                  distribution, or issuance is after this record date, at the
                  time this dividend, distribution or issuance was announced by
                  Cisco Systems,

         -        in the case of any subdivision, split, combination or
                  reclassification, on the effective date of the transaction,

         -        in the case of any Excess Purchase Payment for which Cisco
                  Systems announces, at or prior to the time it commences the
                  relevant share repurchase, the repurchase price per share for
                  shares proposed to be repurchased, on the date of the
                  announcement, and

         -        in the case of any other Excess Purchase Payment, on the date
                  that the holders of the repurchased shares become entitled to
                  payment in respect thereof.

         All dilution adjustments will be rounded upward or downward to the
nearest 1/10,000th or, if there is not a nearest 1/10,000th, to the next lower
1/10,000th. No adjustment in the Exchange Rate will be required unless the
adjustment would require an increase or decrease of at least one percent
therein, provided, however, that any adjustments which by reason of this
sentence are not required to be made will be carried forward (on a percentage
basis) and taken into account in any subsequent adjustment. If any announcement
or declaration of a record date in respect of a dividend, distribution, issuance
or repurchase requiring an adjustment as described herein is subsequently
canceled by Cisco Systems, or this dividend, distribution, issuance or
repurchase fails to receive requisite approvals or fails to occur for any other
reason, then, upon the cancellation, failure of approval or failure to occur,
the Exchange Rate will be further adjusted to the Exchange Rate which would then
have been in effect had adjustment for the event not been made. If a
Reorganization Event described below occurs after the occurrence of one or more
events requiring an adjustment as described herein, the dilution adjustments
previously applied to the Exchange Rate will not be rescinded but will be
applied to the new Exchange Rate provided for below.

         The "Then-Current Market Price" of the common stock, for the purpose of
applying any dilution adjustment, means the average Closing Price per share of
common stock for the 10 Trading Days immediately before this adjustment is
effected or, in the case of an adjustment effected at the opening of business on
the Business Day next following a record date, immediately before the earlier of
the date the adjustment is effected and the related Ex-Date. For purposes of
determining the Then-Current Market Price, the determination of the Closing
Price by the calculation agent in the event of a Market Disruption Event, as
described in the definition of Closing Price, may be deferred by the calculation
agent for up to five consecutive Trading Days on which a Market Disruption Event
is occurring.

                                       7
<PAGE>
         The "Ex-Date" with respect to any dividend, distribution or issuance is
the first date on which the shares of the common stock trade in the regular way
on their principal market without the right to receive this dividend,
distribution or issuance.

         In the event of any of the following "Reorganization Events":

         -        any consolidation or merger of Cisco Systems, or any surviving
                  entity or subsequent surviving entity of Cisco Systems, with
                  or into another entity, other than a merger or consolidation
                  in which Cisco Systems is the continuing corporation and in
                  which the common stock outstanding immediately before the
                  merger or consolidation is not exchanged for cash, securities
                  or other property of Cisco Systems or another issuer,

         -        any sale, transfer, lease or conveyance to another corporation
                  of the property of Cisco Systems or any successor as an
                  entirety or substantially as an entirety,

         -        any statutory exchange of securities of Cisco Systems or any
                  successor of Cisco Systems with another issuer, other than in
                  connection with a merger or acquisition, or

         -        any liquidation, dissolution or winding up of Cisco Systems or
                  any successor of Cisco Systems,

each Holder of the ELKS will have the right to receive cash in an amount per $10
principal amount of ELKS equal to the Exchange Rate multiplied by the
Transaction Value (as defined below).

         The "Transaction Value" will be the sum of:

         (1)      for any cash received in a Reorganization Event, the amount of
                  cash received per share of common stock,

         (2)      for any property other than cash or Marketable Securities
                  received in a Reorganization Event, an amount equal to the
                  market value on the date the Reorganization Event is
                  consummated of that property received per share of common
                  stock, as determined by a nationally recognized independent
                  investment banking firm retained for this purpose by the
                  Company, whose determination will be final, and

         (3)      for any Marketable Securities received in a Reorganization
                  Event, an amount equal to the Closing Price per share of these
                  Marketable Securities on the Trading Day immediately prior to
                  the maturity date or Exchange Date multiplied by the number of
                  these Marketable Securities received for each share of common
                  stock.

         "Marketable Securities" are any perpetual equity securities or debt
securities with a stated maturity after the maturity date, in each case that are
listed on a U.S. national securities exchange or reported by the Nasdaq Stock
Market. The number of shares of any equity securities

                                       8
<PAGE>
constituting Marketable Securities included in the calculation of Transaction
Value pursuant to clause (3) above will be adjusted if any event occurs with
respect to the Marketable Securities or the issuer of the Marketable Securities
between the time of the Reorganization Event and maturity that would have
required an adjustment as described above, had it occurred with respect to the
Cisco Systems common stock or Cisco Systems. Adjustment for these subsequent
events will be as nearly equivalent as practicable to the adjustments described
above.

GENERAL

         This Note is one of a duly authorized issue of Debt Securities of the
Company, issued and to be issued in one or more series under a Senior Debt
Indenture, dated as of October 27, 1993, as supplemented by a First Supplemental
Indenture, dated as of November 28, 1997, a Second Supplemental Indenture, dated
as of July 1, 1999, and as further supplemented from time to time (the
"Indenture"), between the Company and The Bank of New York, as Trustee (the
"Trustee", which term includes any successor trustee under the Indenture), to
which Indenture reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the ELKS, and the terms upon which the ELKS are,
and are to be, authenticated and delivered.

         If an Event of Default with respect to the ELKS shall have occurred and
be continuing, the principal of the ELKS may be declared due and payable in the
manner and with the effect provided in the Indenture. In such case, the amount
declared due and payable upon any acceleration permitted by the Indenture will
be determined by the calculation agent and will be equal to, with respect to
this Note, the Maturity Payment calculated as though the Stated Maturity Date of
this Note were the date of early repayment. In case of default at Maturity of
this Note, this Note shall bear interest, payable upon demand of the beneficial
owners of this Note in accordance with the terms of the ELKS, from and after
Maturity through the date when payment of such amount has been made or duly
provided for, at the rate of [ ]% per annum on the unpaid amount (or the cash
equivalent of such unpaid amount) due.

         The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Debt Securities of each series to
be affected under the Indenture at any time by the Company and a majority in
aggregate principal amount of the Debt Securities at the time Outstanding of
each series affected thereby. The Indenture also contains provisions permitting
the Holders of specified percentages in aggregate principal amount of the Debt
Securities of any series at the time Outstanding, on behalf of the Holders of
all Debt Securities of such series, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.

         The Holder of this Note may not enforce such Holder's rights pursuant
to the Indenture or the Notes except as provided in the Indenture. No reference
herein to the Indenture and no provision of this Note or of the Indenture shall
alter or impair the obligation of the Company to

                                       9
<PAGE>
pay the Maturity Payment with respect to this Note, and to pay any interest on
any overdue amount thereof at the time, place and rate, and in the coin or
currency, herein prescribed.

         All terms used in this Note which are defined in the Indenture but not
in this Note shall have the meanings assigned to them in the Indenture.

         Unless the certificate of authentication hereon has been executed by
the Trustee by manual signature, this Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purposes.

                                       10
<PAGE>
         IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.

                                       SALOMON SMITH BARNEY HOLDINGS INC.

                                       By:
                                           ------------------------------
                                           Name:
                                           Title:

Corporate Seal
Attest:

By:
    ----------------------------------------
    Name:
    Title:

Dated: [       ], 2002

CERTIFICATE OF AUTHENTICATION
     This is one of the Notes referred to in
     the within-mentioned Indenture.

The Bank of New York,
as Trustee

By:
    ----------------------------------------
    Authorized Signatory

                                       11

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