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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2004, or

For the transition period from              to             .

Commission File Number 1-11860

Focus Enhancements, Inc.

(Name of Issuer in its Charter)

1370 Dell Ave

Campbell, CA 95008

(Address of Principal Executive Offices)

(408) 866-8300

(Issuer’s Telephone Number, Including Area Code)

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

Title of Each Class

Common Stock, $0.01 par value

Name of Exchange on which Registered

NASDAQ

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

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

As of the close of business on August 11, 2004, there were 53.2 million shares of Focus Enhancement’s common stock issued and outstanding.

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FOCUS ENHANCEMENTS, INC.

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Focus Enhancements, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per-share amounts)

(Unaudited)

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

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Focus Enhancements, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per-share amounts)

(Unaudited)

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

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Focus Enhancements, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

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

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Focus Enhancements, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

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Focus Enhancements, Inc.

Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation – Unaudited Interim Financial Information

The condensed consolidated financial statements of Focus Enhancements, Inc. (“Focus” or “the Company”) as of June 30, 2004 and December 31, 2003, and for the three and six months ended June 30, 2004 and 2003, are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2003 included in Focus’ Annual Report on Form 10-K for the year ended December 31, 2003.

In the opinion of management, the condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of Focus’ financial position, operating results and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2004 and 2003 and cash flows for the six months ended June 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for any future period.

Focus’ fiscal year ends on December 31 and the interim quarters include 13 weeks and end on the last Sunday of the quarter. For convenience, the accompanying condensed consolidated financial statements are shown as ending on June 30, 2004 and 2003, although the second quarters of fiscal year 2004 and 2003 ended on July 4, 2004 and June 29, 2003, respectively.

2. Consolidation and Foreign Currency Translation

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

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

3. Pro Forma Stock Compensation Expense

Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. Stock options issued under Focus’ stock option plans have no intrinsic value at grant date. Accordingly, under APB Opinion No. 25, no compensation cost is recognized.

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Focus Enhancements, Inc.

Notes to Condensed Consolidated Financial Statements

Focus has elected to continue with the accounting prescribed in APB Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied. The estimated fair value of the options is amortized to expense over the vesting period of the option. The following table presents the effect on reported net loss and net loss per share of accounting for employee stock options under the fair value method:

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

4. Management’s Plans

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the six months ended June 30, 2004 and the year ended December 31, 2003, Focus incurred a net loss of $4.2 million and $1.7 million, respectively, and used net cash in operating activities of $2.3 million and $2.6 million, respectively. Additionally, in January 2004, Microsoft ceased placing orders for Focus’ FS454 product. Shipments of the FS454, which were primarily to this significant customer, represented 11% and 37% of Focus’ total revenues for the six months ended June 30, 2004 and the year ended December 31, 2003, respectively. These factors indicate that Focus may potentially be unable to continue as a going concern.

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

Focus has historically met cash needs from the proceeds of debt, the sale of common stock in private placements and the exercise of employee stock options and warrants. Management continues to assess its product lines in light of technology trends and economic conditions, to identify how to enhance existing product lines or create new distribution channels.

Focus’ management believes that net proceeds of $5.2 million received in April 2004 from a private equity placement transaction (see Note 9, “Stockholders Equity”), in addition to current cash balances, are unlikely to meet all currently planned expenditures and operations through December 31, 2004. Focus’ continued significant investment in research and development, primarily in the area of Ultra Wideband, and working capital needs, will require it to find a partner to fund a portion of the continued development in Ultra Wideband and/or raise additional capital before year end. Focus anticipates that this will be so regardless of whether it partners with an experienced semiconductor design house or manufacturer.

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

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Focus Enhancements, Inc.

Notes to Condensed Consolidated Financial Statements

5. Business Combinations

Visual Circuits Corporation

On May 28, 2004, Focus acquired substantially all the assets and assumed certain liabilities of Visual Circuits Corporation (“Visual Circuits”) pursuant to an Agreement and Plan of Reorganization. The transaction was accounted for as a purchase business combination at a total cost of approximately $9.3 million. Founded in 1991, Visual Circuits is a manufacturer and developer of integrated hardware, software and network products that manage, schedule, distribute, store and present digital video in a wide range of commercial media applications.

Under the terms of the agreement, Visual Circuits, located in Minneapolis, Minnesota, received 3,805,453 shares of voting common stock of Focus. In connection with this transaction, Focus paid vFinance Investments, Inc., (a related party) a success fee of $168,000 and 80,000 shares of Focus’ common stock. The agreement also required Visual Circuits Corporation Liquidating Trust, formerly Visual Circuits, to reimburse Focus for all transaction costs paid by Visual Circuits prior to the acquisition. Accordingly, an amount of $400,000 has been recorded as a current asset in Focus’ condensed consolidated balance sheets as of June 30, 2004.

Visual Circuits’ results of operations are included in Focus’ financial statements from the date of acquisition, and the assets and liabilities were recorded based on their fair values as of the date of acquisition. There were no employee stock options or warrants assumed as a result of the acquisition.

The purchase price of approximately $9.3 million consisted of the fair value of 3,885,453 shares of Focus common stock, which included the 80,000 shares distributed to vFinance Investments, Inc., and acquisition costs of approximately $440,000. The purchase price has been allocated based on the preliminary estimated fair value of net tangible and intangible assets acquired and liabilities assumed as well as in-process research and development costs. As of the acquisition date, technological feasibility of the in-process technology had not been established and the technology had no alternative future use. Therefore, Focus expensed $300,000 of the purchase price as in-process research and development expense in the second quarter of fiscal year 2004. The purchase price has been allocated as follows:

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

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Focus Enhancements, Inc.

Notes to Condensed Consolidated Financial Statements

The following pro forma information presents the results of operations of Focus as if the transaction had occurred on January 1, 2003:

COMO Computer & Motion GmbH

On February 27, 2004, Focus completed the acquisition of COMO, located in Kiel, Germany, pursuant to which COMO became a wholly owned subsidiary of Focus. The acquisition was accounted for as a purchase business combination at a total cost of approximately $1.0 million. Under the terms of the agreement, Focus acquired COMO through the issuance of 185,069 shares of its common stock and approximately $359,000 in cash to COMO’s shareholders. Focus may also issue up to an additional 46,266 shares of its common stock to COMO’s shareholders, in the event certain conditions are met at the end of 2004 and 2005. In connection with this transaction, Focus paid vFinance Investments, Inc. (a related party), a success fee of $100,000 and 30,000 shares of Focus’ common stock.

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

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

The purchase price of approximately $1.0 million, consisting of 231,335 shares of Focus common stock issued to the COMO shareholders including the earn-out shares, 30,000 shares of Focus common stock issued to vFinance, cash paid to the COMO shareholders, and acquisition costs of approximately $220,000, has been allocated based on the estimated fair value of net tangible and intangible assets acquired, and liabilities assumed. The earn-out shares are included in the purchase price because Focus management believes it is probable that the conditions under which such shares would become payable will be met. A summary of the allocation of the purchase price to the assets acquired and liabilities assumed is as follows:

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

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Focus Enhancements, Inc.

Notes to Condensed Consolidated Financial Statements

6. Goodwill and Intangible Assets

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

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

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

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Focus Enhancements, Inc.

Notes to Condensed Consolidated Financial Statements

7. Inventories

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

8. Borrowings and Commitments

Borrowings consisted of the following:

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

The short-term debt consists of the current portion of two notes payable, which in aggregate, and including the long-term portion, total approximately $222,000, a line-of-credit with an outstanding balance of approximately $306,000 and a loan with a German small business lending institution for $251,000. The notes payable and line-of-credit are denominated in Euros and are both with a local German bank. Interest is payable on the notes at an average of 6% and on the line-of-credit at 10%. The two notes of $172,000 and $50,000 will be paid through December 2011 and December 2006, respectively. The notes payable and line-of-credit are secured by personal guarantees from the two shareholders from whom Focus purchased the shares of COMO common stock. These personal guarantees total approximately $600,000.

The loan with the German small business lending institution consists of two contracts of similar amounts signed in 1995 and 1996. As a result of Focus’ acquisition of COMO, the lending institution requested that COMO repay these loans, and accordingly the loans with an outstanding balance of $251,000 were repaid in July 2004.

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Focus Enhancements, Inc.

Notes to Condensed Consolidated Financial Statements

Convertible Promissory Notes

Convertible promissory notes payable at December 31, 2003 consisted of three promissory notes totaling $3.9 million payable to Carl Berg, a Company director and shareholder. The notes bore interest at prime plus 1%, payable quarterly, and were collateralized by substantially all of the assets of Focus. Focus was obligated under certain circumstances, including at the election of Mr. Berg and Focus, to convert the outstanding balances of the notes, and any unpaid interest, into shares of Focus common stock or preferred stock, as specified in the respective note agreements.

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

General

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

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

In June 2004, Focus entered into a development and license agreement under which Focus agreed to pay $664,000 to a third party for engineering services and the rights to certain intellectual property that will be used in the research and development of Ultra Wideband technology. Payments will be made upon the achievement of specific development milestones by the third party, which are expected to be completed by January 2005. Focus recorded approximately $85,000 associated with this arrangement to research and development expense in June 2004, under the percentage of completion method of accounting.

9. Stockholders’ Equity

The acquisition of substantially all of the assets and assumption of liabilities of Visual Circuits on May 28, 2004 resulted in the issuance of 3,885,453 shares of Focus’ common stock, consisting of 3,805,453 shares issued to Visual Circuit’s shareholders and 80,000 shares issued to vFinance Investments, Inc. (a related party), for investment banking services related to the acquisition.

On April 6, 2004, Focus announced that it had obtained binding commitments to sell approximately 3.9 million shares of its common stock to a group of third party investors in a private placement transaction, receiving proceeds of approximately $5.2 million, net of offering costs of approximately $400,000. The shares were issued at $1.45 per share, an approximate 11% discount to the closing price of Focus’ common stock on April 5, 2004. In connection with the private placement, Focus issued warrants to the investors and to a placement agent to purchase a total of approximately 1.0 million shares of common stock at an exercise price of $2.00 per share. No compensation expense was recorded given that the warrants were issued in connection with the issuance of common stock.

The acquisition of COMO on February 27, 2004 resulted in the issuance of 261,335 shares of Focus’ common stock, consisting of 231,335 shares issued to COMO’s shareholders, including 46,266 earn-out shares held in escrow, and 30,000 shares issued to vFinance Investments, Inc., for investment banking services related to the acquisition. Additionally, Focus issued 610,096 common shares, held in escrow, (“the Escrow shares”) to COMO’s two former shareholders (“the sellers”) who became employees of Focus. In exchange for the Escrow shares, the Sellers issued non-interest bearing, non-recourse, demand notes payable to Focus in the aggregate amount of $1.1 million. After registration of the shares, the two former shareholders of COMO can sell the Escrow shares at no less than the then current fair market value, with all proceeds to be remitted to Focus in exchange for cancellation of the outstanding note obligations regardless of whether such proceeds are greater than or less than the balance of the notes. For accounting purposes, the Escrow shares are reported in the accompanying financial statements as outstanding, subscribed shares. The proceeds from the sale of such shares as eventually remitted to Focus by the Sellers will be recorded as an increase in capital when received. The note receivable from the Sellers is not recorded in the accompanying condensed consolidated financial statements, as it will be cancelled upon receipt of the proceeds from the Escrow shares.

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

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Focus Enhancements, Inc.

Notes to Condensed Consolidated Financial Statements

10. Related Party Transactions

vFinance Investments Inc.

Focus has engaged the services of vFinance Investments Inc., to act as the Company’s financial advisor. Timothy Mahoney, a member of Focus’ Board of Directors, is the Chairman and C.O.O. of vFinance, Inc., the parent company to vFinance Investments and vFinance Consulting, and owns approximately 20% of the shares of vFinance Inc. Focus paid vFinance Investments $268,000 in fees and 110,000 shares of common stock in the six months ended June, 2004 related to merger and acquisition services.

In February 2003, Focus engaged vFinance Consulting to assist it in preparing a Strategic Business Plan. Focus recorded $35,000 and $50,000 in the three and six months ended June 30, 2003, respectively, related to the preparation of this plan.

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

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

Certain Factors That May Affect Future Results

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

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

RESULTS OF OPERATIONS

Net revenue

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Revenue for the three months ended June 30, 2004 was $5.0 million, an increase of $723,000 compared with the three months ended June 30, 2003. Revenue for the six months ended June 30, 2004 was $9.1 million, an increase of $727,000 compared with the six months ended June 30, 2003.

For the three months ended June 30, 2004, sales of system products (professional and consumer) to distributors, retailers and VAR’s were approximately $4.3 million compared to $3.5 million for the same period in 2003, an increase of $760,000. This increase in sales of our systems products mainly reflects sales of products resulting from the acquisitions of COMO in February 2004 and Visual Circuits in May 2004, as well as the introduction of new products, including FireStore, partially offset by a decrease in sales of our consumer scan conversion products. The decrease in sales of system products of $41,000 in the six-month comparison reflects those same factors affecting the three-month comparison, as well as significantly lower Mixer sales. The decrease in Mixer product sales occurred primarily in Asia, as video enthusiasts move from stand-alone editing systems to computer based or non-linear editing systems. Although this shift in technology began in the United States and Europe in prior years, certain markets, including Asia, were initially slower to adopt non-linear editing. Our consumer scan conversion product sales have decreased as an increasing number of personal computers and televisions now incorporate scan conversion technology.

Sales of semiconductor products to distributors and OEM customers of approximately $751,000 in the three months ended June 30, 2004 were relatively flat compared to $788,000 for the comparative period in 2003. The $768,000 increase in sales of semiconductor products in the six-month comparison reflects sales of our FS454 chip in the first quarter of 2004 to Microsoft for use in it’s Xbox, partially offset by decreased sales of our FS401 chip. In January 2004, Microsoft ceased placing orders for our FS454 product. Shipments of the FS454, which were primarily to this significant customer, represented 11% and 37% of Focus’ total revenues for the six months ended June 30, 2004 and the year ended December 31, 2003, respectively. There were no sales of our FS454 chip to Microsoft in the three months ended June 30, 2004 and 2003.

As of June 30, 2004, we had a sales order backlog of approximately $1.4 million, an increase of $1.1 million compared to the first quarter of 2004. The backlog at June 30, 2004 consisted primarily of products resulting from the acquisition of Visual Circuits and semiconductor chips.

One customer accounted for 16% of our revenue in the three months ended June 30, 2004. One customer accounted for 17% of our revenue for the three months ended June 30, 2003. In the six months ended June 30, 2004, two customers with sales in excess of 10% of our revenue accounted for 26% of total revenue. In the six months ended June 30, 2003, one customer accounted for 13% of our total revenue.

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Gross margin

Our gross margin rate in the three months ended June 30, 2004 decreased by 7.5 percentage points to 35.8% from 43.3% in the three months ended June 30, 2003. Our gross margin rate in the six months ended June 30, 2004 decreased to 34.4% from 42.3% in the six months ended September 29, 2002, a decrease of 7.9 percentage points.

The decrease in the gross margin rate in the three-month comparison reflects inventory write-downs of $80,000 for excess and obsolete inventory, a charge of $140,000 associated with a fair value adjustment to Visual Circuits’ inventory upon acquisition and an accrual of $100,000 for a royalty payment based on the achievement of certain sales volumes. In addition to these factors, the decrease in the gross margin rate in the six-month comparison was affected by the below average gross margin business that we conducted with Microsoft in the three months ended March 31, 2004, which did not occur in three months ended March 31, 2003. This significant customer represented approximately 25% of our revenue for the three months ended March 31, 2004. Sales to this customer were made at a gross profit margin percentage of less than 30%, primarily as a result of volume discounts provided.

Operating expenses

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Sales, marketing and support

Sales, marketing and support expenses for the three months ended June 30, 2004 were $1.3 million compared to $1.1 million in the three months ended June 30, 2003, an increase of $184,000. Sales, marketing and support expenses for the six months ended June 30, 2004 were $2.3 million, compared to $2.1 million for the six months ended June 30, 2003, an increase of $240,000.

The increase in sales, marketing and support expenses in the three- and six-month comparisons reflects an increase in headcount resulting from the acquisitions of COMO and Visual Circuits in February and May of 2004, respectively, partially offset by lower public relations and advertising expenditures.

General and administrative

General and administrative expenses for the three months ended June 30, 2004 were $908,000, compared to $436,000 in the three months ended June 30, 2003, an increase of $472,000. General and administrative expenses for the six months ended June 30, 2004 were $1.5 million, compared to $813,000 for the six months ended June 30, 2003, an increase of $652,000.

The increase in general and administrative expenses in the three- and six-month comparisons was mainly due to additional headcount associated with the acquisitions of COMO and Visual Circuits and corporate compliance initiatives, the change in classification of certain personnel costs from research and development in 2003 to general and administrative in 2004, and to a lesser extent, an increase in public relations and legal fees. The increase in legal fees was associated with Ultra Wideband patent applications and the timing of our annual shareholders meeting.

Research and development

Research and development expenses for the three months ended June 30, 2004 were $1.7 million, compared to $1.0 million in the three months ended June 30, 2003, an increase of $619,000. Research and development expenses for the six months ended June 30, 2004 were $2.8 million, compared to $2.1 million for the six months ended June 30, 2003, an increase of $668,000.

The increase in research and development expenses in the three- and six month comparisons mainly reflects additional headcount and expenditure related to our investment in Ultra Wideband technology as well as the acquisitions of COMO and Visual Circuits in February and May of 2004, respectively. This increase in our investment in Ultra Wideband technology was the primary factor that resulted in our Semiconductor Business increasing its research and development spending to $770,000 for the three months ended June 30, 2004 compared to $515,000 for the second quarter of 2003. These increases in research and development expenses were partially offset by a change in classification of certain personnel costs year-over-year from research and development in 2003 to general and administrative in 2004.

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Amortization

Amortization expense for the three months ended June 30, 2004 was $243,000, an increase of $111,000 from $132,000 for the three months ended June 30, 2003. Amortization expense for the six months ended June 30, 2004 was $407,000, an increase of $103,000 from $304,000 for the six months ended June 30, 2003. The increase in amortization expense for the three-month comparison reflects additional amortization expense associated with the intangible assets that resulted from the acquisitions of DV Unlimited in September 2003, COMO in February 2004 and Visual Circuits in May 2004. In the six-month comparison, this additional amortization expense was partially offset by the completion of amortization on certain intangible assets in 2003.

Interest expense, net and Other income, net