FORM 10-QSB


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


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

                 For the quarterly period ended: March 31, 1999

      [  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934

                For the transition period from _______ to _______

                         Commission File Number 1-11860


                            FOCUS Enhancements, Inc.
        (Exact name of small business issuer as specified in its charter)


            Delaware                                        04-3186320
 (State or other jurisdiction of                           (IRS Employer
 incorporation or organization)                       identification No.)


                               600 Research Drive
                              Wilmington, MA 01887
                    (Address of principal executive offices)


                                (978) 988 - 5888
                           (Issuer's telephone number)


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15 (d) of the  Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes _X No_____

As of March 31, 1999, there were outstanding  18,005,090 shares of Common Stock,
$.01 par value per share.


<PAGE>


                            FOCUS Enhancements, Inc.
                                   FORM 10-QSB

                                QUARTERLY REPORT
                                 March 31, 1999

                                TABLE OF CONTENTS


                                                                        Page



Facing Page                                                               1
Table of Contents                                                         2

PART I.  FINANCIAL INFORMATION

         Item 1. Consolidated Financial Statements:

                  Consolidated Balance Sheets at March 31, 1999
                  and December 31, 1998                                   3

                  Consolidated Statements of Operations
                  for the Three Months Ended March 31, 1999
                  and 1998                                                4

                  Statement of Changes in Equity for the Three
                  Months Ended March 31, 1999                             5

                  Statement of Changes in Equity for the Three
                  Months Ended March 31, 1998                             6

                  Consolidated Statements of Cash Flows
                  for the Three Months Ended March 31, 1999
                  and 1998                                                7-8

                  Notes to Consolidated Financial Statements              9-11

         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                    12-18


PART II. OTHER INFORMATION


         Item 1. Legal Proceedings                                        19
         Item 2. Changes in Securities                                    19
         Item 3. Defaults Upon Senior Securities                          19
         Item 4. Submission of Matters to a Vote of Security Holders      19 
         Item 5. Other Information                                        19
         Item 6. Exhibits and Reports on Form 8-K                         19



SIGNATURES                                                                20


                                       2
<PAGE>
<TABLE>
<CAPTION>
                                            FOCUS ENHANCEMENTS, INC.
                                           CONSOLIDATED BALANCE SHEETS
                                                   (UNAUDITED)

                                                     ASSETS
                                                                                      March 31,     December 31,
                                                                                        1999            1998
                                                                                   -------------   -------------

<S>                                                                               <C>            <C>
Current Assets:
    Cash and cash equivalents                                                      $    234,126    $  1,128,380
    Certificates of deposit                                                             257,202         253,067
    Securities available for sale                                                       320,120         248,983
    Accounts receivable, net of allowances of $662,475 and                            3,444,808       2,553,139
      $649,987 at March 31, 1999 and December 31, 1998,
      respectively
    Inventories                                                                       5,736,221       5,948,624
    Prepaid expenses and other current assets                                           244,232         217,092
                                                                                   ------------    ------------
      Total current assets                                                           10,236,709      10,349,285

    Property and equipment, net                                                       1,843,140       1,272,477
    Other assets, net                                                                   303,117         304,498
    Goodwill, net                                                                       764,075         810,673
                                                                                   ------------    ------------
      Total assets
                                                                                   $ 13,147,041    $ 12,736,933
                                                                                   ============    ============

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Notes payable                                                                  $    969,459    $    702,057
    Obligations under capital leases                                                    124,562         119,536
    Current portion of long-term debt                                                   290,279         283,180
    Accounts payable                                                                  6,600,488       5,999,694
    Accrued liabilities                                                               1,298,238       1,810,025
                                                                                   ------------    ------------
      Total current liabilities                                                       9,283,026       8,914,492

    Deferred income                                                                      84,212          84,212
    Obligations under capital leases                                                    264,491         321,760
    Long-term debt, net of current portion                                              463,312         538,597
                                                                                   ------------    ------------

      Total liabilities                                                              10,095,041       9,859,061
                                                                                   ------------    ------------

Stockholders' equity
    Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued              --              --
    Common stock, $.01 par value; 25,000,000 shares authorized,
        18,005,090 shares outstanding at March 31, 1999 and
        December 31, 1998, respectively                                                 180,051         180,051
    Additional paid-in capital                                                       38,913,304      38,913,304
    Accumulated deficit                                                             (35,095,945)    (35,198,935)
    Accumulated other comprehensive income                                               71,138            --
    Note receivable, common stock                                                      (316,418)       (316,418)
    Treasury stock at cost, 450,000 shares                                             (700,130)       (700,130)
                                                                                   ------------    ------------
      Total stockholders' equity                                                      3,052,000       2,877,872
                                                                                   ------------    ------------

      Total liabilities and stockholders' equity                                   $ 13,147,041    $ 12,736,933
                                                                                   ============    ============
</TABLE>

                                                       3
<PAGE>

                            FOCUS ENHANCEMENTS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                  Three Months Ended
                                               March 31,       March 31,
                                                 1999            1998
                                             ------------    ------------

Net sales                                    $  5,067,079    $  5,251,948
Cost of goods sold                              2,937,134       2,781,936
                                             ------------    ------------

     Gross profit                               2,129,945       2,470,012
                                             ------------    ------------

Operating expenses:

     Sales, marketing and support               1,023,696       1,166,327
     General and administrative                   353,943         387,959
     Research and development                     492,480         310,801
     Depreciation and amortization expense        139,370         153,272
                                             ------------    ------------
         Total operating expenses               2,009,489       2,018,359
                                             ------------    ------------

Income from operations                            120,456         451,653

Interest expense, net                             (21,364)        (77,039)
Other income, net                                  3,898             634
                                             ------------    ------------

Income before income taxes                        102,990         375,248

Income tax expense                                   --            10,500
                                             ------------    ------------

Net income                                   $    102,990    $    364,748
                                             ============    ============

Net income per common share
         Basic                               $       0.01    $       0.03
                                             ============    ============
         Diluted                             $       0.01    $       0.02
                                             ============    ============

Weighted average common shares outstanding
         Basic                                 18,005,090      14,528,419
                                             ============    ============
         Diluted                               18,721,905      15,875,315
                                             ============    ============


                                       4

<PAGE>
<TABLE>
<CAPTION>

                                                      FOCUS ENHANCEMENTS, INC.
                                                   STATEMENT OF CHANGES IN EQUITY
                                              FOR THE THREE MONTHS ENDED MARCH 31, 1999


                                                                                    Accumulated      Note
                                                         Additional                    Other      Receivable
                                              Common      Paid-in     Accumulated  Comprehensive    Common    Treasury
                                               Stock      Capital       Deficit        Income       Stock      Stock      Total
                                            ----------  -----------  ------------- ------------- ----------- ---------- ----------

<S>                                          <C>       <C>          <C>            <C>          <C>         <C>        <C>       
 Beginning balance                            $180,051  $38,913,304  $(35,198,935)  $       --   $ (316,418) $(700,130) $2,877,872
                                                                                                                        ----------
 Comprehensive income
   Net income                                       --           --       102,990           --           --         --     102,990
   Other comprehensive income, net of tax
     unrealized gains on securities                 --           --            --       71,138           --         --      71,138
                                                                                                                        ----------

 Comprehensive income                               --           --            --           --           --         --     174,128
                                              --------  -----------  ------------   ----------   ----------  ---------  ----------
 Ending balance                               $180,051  $38,913,304  $(35,095,945)  $   71,138   $ (316,418) $(700,130) $3,052,000
                                              ========  ===========  ============   ==========   ==========  =========  ==========


</TABLE>
                                                                 5

<PAGE>

<TABLE>
<CAPTION>


                                                      FOCUS ENHANCEMENTS, INC.
                                                   STATEMENT OF CHANGES IN EQUITY
                                              FOR THE THREE MONTHS ENDED MARCH 31, 1998

                                                                                     Accumulated     Note 
                                                         Additional                    Other      Receivable
                                              Common      Paid-in     Accumulated  Comprehensive    Common    Treasury
                                               Stock      Capital       Deficit        Income       Stock      Stock      Total
                                            ----------  -----------  ------------- ------------- ----------- ---------- -----------

<S>                                          <C>       <C>          <C>            <C>          <C>         <C>         <C>       
 Beginning balance                            $140,102  $27,339,892  $(22,411,611)  $      --    $      --   $      --   $5,068,383
                                                                                                                         ----------
 Comprehensive income
   Net income                                       --           --       364,748          --           --          --      364,748 
   Other comprehensive income, net of tax
     unrealized gains on securities                 --           --            --       57,097          --          --       57,097
                                                                                                                         ----------
                     
 Comprehensive income                               --           --            --           --          --          --      421,845
                                                                                                                         ----------
 Common stock issued                            15,409    4,075,713            --           --          --          --    4,091,122
                                              --------  -----------  ------------   ----------   ---------   ---------   ----------
 Ending balance                               $155,511  $31,415,605  $(22,046,863)  $   57,097   $      --   $      --   $9,581,350
                                              ========  ===========  ============   ==========   =========   =========   ==========


</TABLE>
                                                                 6

<PAGE>
<TABLE>
<CAPTION>

                                                FOCUS ENHANCEMENTS, INC.
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (UNAUDITED)

                                                                                               Three Months Ended
                                                                                            March 31,      March 31,
                                                                                              1999           1998
                                                                                          -----------    -----------
<S>                                                                                      <C>            <C>
Cash flows from operating activities:
    Net income                                                                            $   102,990    $   364,748
    Adjustments to reconcile net income to net cash used in operating activities:
        Depreciation and amortization                                                         139,370        153,272
        Changes in operating assets and liabilities, net of the effects of acquisition:
            (Increase) decrease in accounts receivable                                       (891,669)    (1,297,886)
            Decrease (increase) in inventories                                                212,403         67,154
            Decrease (increase) in prepaid expenses and other assets                          (27,140)       108,844
            (Decrease) increase in accounts payable                                           600,794     (1,455,445)
            (Decrease) increase in accrued liabilities                                       (511,787)      (205,254)
                                                                                          -----------    -----------
        Net cash used in operating activities                                                (375,039)    (2,264,567)
                                                                                          -----------    -----------

Cash flows from investing activities:
    Increase in certificates of deposit                                                        (4,135)          --
    Purchase of property and equipment                                                       (662,053)      (188,452)
    Cash paid in acquisitions, net of cash received                                              --           (6,980)
                                                                                          -----------    -----------
        Net cash used in investing activities                                                (666,188)      (195,432)
                                                                                          -----------    -----------

Cash flows from financing activities:
    Payments on notes payable                                                                (702,057)       (30,000)
    Payments under capital lease obligations                                                  (52,243)       (40,725)
    Payments on long-term debt                                                                (68,186)          --
    Net proceeds from accounts receivable factoring                                           969,459           --
    Net proceeds from private offerings of common stock                                          --        2,827,355
    Net proceeds from exercise of common stock options and warrants                              --          148,142
                                                                                          -----------    -----------
        Net cash provided by financing activities                                             146,973      2,904,772
                                                                                          -----------    -----------

Net increase in cash and cash equivalents                                                    (894,254)       444,773

Cash and cash equivalents at beginning of period                                            1,128,380        719,851
                                                                                          -----------    -----------

Cash and cash equivalents at end of period                                                $   234,126    $ 1,164,624
                                                                                          ===========    ===========

Supplemental Cash Flow Information:

        Interest paid                                                                     $    43,147    $    77,039
        Income taxes paid                                                                          50          6,411

</TABLE>


                                                           7

<PAGE>


Supplemental  schedule of noncash investing and financing  activities:  On March
31, 1998, the Company purchased  certain assets and assumed certain  Liabilities
of Digital Vision, Inc. as follows:

Fair value of tangible assets acquired                                 224,957
Fair value of liabilities assumed                                     (329,953)
                                                                 -------------
Fair value of net assets acquired                                     (104,996)

Common stock issued                                                 (1,115,625)
Cash paid                                                               (6,980)
Accrued cash payments                                                  (40,000)
                                                                 -------------
Excess of cost over fair value of net assets acquired             $ (1,267,601)
                                                                 =============






                                       8

<PAGE>
                            FOCUS Enhancements, Inc.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.       BASIS OF PRESENTATION

         The consolidated financial statements of FOCUS Enhancements, Inc. ("the
Company") as of March 31, 1999 and for the three month  periods  ended March 31,
1999  and  1998  are  unaudited  and  should  be read in  conjunction  with  the
consolidated  financial statements and notes thereto for the year ended December
31, 1998 included in the  Company's  Annual Report on Form 10-KSB/A for the year
ended  December 31, 1998.  The  consolidated  financial  statements  include the
accounts of the Company and its wholly-owned  subsidiaries PC Video  Conversion,
Inc., Lapis  Technologies,  Inc.,  TView,  Inc., and FOCUS  Enhancements B.V. (a
Netherlands corporation). On March 31, 1998, the Company acquired certain assets
and  assumed  certain  liabilities  of Digital  Vision,  Inc.  in a  transaction
accounted for under the purchase  method of  accounting.  On July 29, 1998,  the
Company  acquired  certain  assets and assumed  certain  liabilities of PC Video
Conversion,  Inc. in a transaction  accounted  for under the purchase  method of
accounting. All intercompany accounts and transactions have been eliminated upon
consolidation.  The results of operations for the three-month period ended March
31, 1999 are not necessarily  indicative of the results that may be expected for
any future period.

         The results of operations of Digital Vision, Inc. have been included in
the  accompanying  consolidated  financial  statements  since April 1, 1998. The
results of  operations  of PC Video  Conversion,  Inc. have been included in the
accompanying   consolidated  financial  statements  since  July  29,  1998.  The
following unaudited pro forma information presents a summary of the consolidated
results of operations of the Company as if the  acquisitions had occurred at the
beginning of the period presented.

                                              Three Months Ended
                                                  March 31,
                                                    1998
                                               -----------------

        Net sales                                $ 5,689,948
        Income from operations                       635,613
        Net income                                   470,648
        Net income per common share           
                  Basic                          $       .03
                  Diluted                        $       .03
                                              
2.       NET INCOME PER SHARE               

         In February 1997,  the Financial  Accounting  Standards  Board ("FASB")
issued Statement of Financial  Accounting Standards ("SFAS") No. 128 - "Earnings
Per Share" which  requires  earnings per share to be  calculated  on a basic and
dilutive basis.  Basic earnings per share represents  income available to common
stock divided by the weighted-average number of common shares outstanding during
the period.  Diluted earnings per share reflects  additional  common shares that
would have been outstanding if dilutive potential common shares had been issued,
as well  as any  adjustment  to  income  that  would  result  from  the  assumed
conversion.  Potential  common  shares that may be issued by the Company  relate
solely to outstanding  stock options and warrants,  and are determined using the
treasury  stock method.  The assumed  conversion of  outstanding  dilutive stock
options and warrants would increase the shares outstanding but would not require
an  adjustment  to income as a result of the  conversion.  For the three- months
ended March 31, 1999 and 1998,  options and  warrants  applicable  to  3,361,949
shares and 5,460,505 shares,  respectively were  anti-dilutive and excluded from
the diluted  earnings per share  computation.   

                                       9
<PAGE>

3.       INCOME TAXES

         The  Company has  utilized  its net  operating  loss  carryforwards  in
estimating its provision for income taxes in the three-month periods ended March
31, 1999 and 1998.

4.       INVENTORIES

         Inventories consist of the following:

                                  March 31,     December 31,
                                    1999            1998
                                -----------     -----------

        Finished goods          $ 5,569,989     $ 5,718,260
        Raw materials               166,232         230,364
                                -----------     -----------
                                 $5,736,221     $ 5,948,624
                                ===========     ===========

5.       NOTES PAYABLE

         Line of Credit, Bank. As of December 31, 1998, the Company maintained a
revolving  line of credit with a bank with  outstanding  borrowings of $620,000.
Borrowings bear interest at the bank's prime rate plus 1% (8.75% at December 31,
1998),  are payable upon demand and are  collateralized  by all of the assets of
the  Company,  except  as noted  below.  Under  the  terms of the line of credit
agreement, the Company was required to comply with certain restrictive covenants
and was in  violation of certain of these  covenants  at December  31, 1998.  On
March 31,  1999,  the  Company  repaid  all  monies  owed on this line of credit
totaling  approximately  $637,000  from  proceeds  received  under a  $2,000,000
accounts receivable  financing agreement with its commercial bank. The agreement
allows for  advances  on  accounts  receivable  not to exceed  80% of  qualified
invoices.  Interest is charged on the outstanding balance at a rate of the prime
lending  rate plus  4.5%.  Under the terms of this  agreement  the bank has been
issued  warrants to purchase  100,000 shares of the Company's  common stock at a
price of $1.70 per share.  At March 31, 1999, the Company had  borrowings  under
this agreement of approximately $969,500.

         Long-Term  Debt. On July 29, 1998, the Company issued a $1,000,000 note
payable  to a related  party in  conjunction  with the  acquisition  of PC Video
Conversion,  Inc.  providing  for the payment of principal and interest at 3.5 %
over a period of 36 months.  The Company  computed a discount of $89,915 on this
note based on its  incremental  borrowing  rate.  The balance  owed on this note
payable, net of discount at March 31, 1999 was $753,591. Maturities of long-term
debt at March 31, 1999 are as follows:

                              Years End March 31,
                              -------------------

                               2000    $ 290,279
                               2001      320,321
                               2002      142,991
                                       ---------
                               Total   $ 753,591
                                       =========


                                       10
<PAGE>
6.       COMMON STOCK TRANSACTIONS

         On February 22, 1999,  the Company issued  warrants to purchase  30,000
shares of common stock to the principals of an unaffiliated  investor  relations
firm. The warrants are exercisable  until February 22, 2002 at an exercise price
of $1.063 per share.

         On February 22, 1999, the Company issued a warrant to purchase  100,000
shares of common stock to an  unaffiliated  investment  advisor.  The warrant is
exercisable until September 9, 2002 at an exercise price of $1.063 per share.

         On February 22, 1999, the Company  issued a warrant to purchase  50,000
shares  of  common  stock  pursuant  to a debt  financing  arrangement  with  an
unrelated  individual.  The warrant is exercisable  until February 22, 2004 at a
conversion price of $1.063.

         On March 22,  1999,  the Company  issued a warrant to purchase  100,000
shares  of  common  stock  pursuant  to a debt  financing  arrangement  with  an
unaffiliated commercial bank. The warrant is exercisable until March 22, 2006 at
a conversion price of $1.70.


                                       11
<PAGE>

ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS


INTRODUCTION

         The  following  information  should  be read in  conjunction  with  the
consolidated  financial  statements  and notes thereto in Part I, Item 1 of this
Quarterly  Report and with  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations  contained in the Company's Annual Report on
Form 10-KSB/A for the year ended December 31, 1998.

         The  Company  does  not  provide  forecasts  of  the  future  financial
performance of the Company.  However, from time to time, information provided by
the Company or statements  made by its employees may contain  "forward  looking"
information  that involve risks and  uncertainties.  In  particular,  statements
contained in this Form 10-QSB which are not historical facts constitute  forward
looking  statements and are made under the safe harbor provisions of the Private
Securities  Litigation Reform Act of 1995. Each forward looking statement should
be read in  conjunction  with the  consolidated  financial  statements and notes
thereto in Part I, Item 1, of this  Quarterly  Report  and with the  information
contained in Item 2, including,  but not limited to,  "Certain  Factors That May
Affect  Future  Results"  contained  herein,   together  with  the  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
contained in the  Company's  Annual  Report on Form  10-KSB/A for the year ended
December 31, 1998,  including,  but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."


RESULTS OF OPERATIONS

               Three-Month Period Ended March 31, 1999 As Compared
                With The Three-Month Period Ended March 31, 1998

Net Sales

         Net sales for the  three-month  period  ended  March 31, 1999 ("Q1 99")
were  $5,067,079 as compared with  $5,251,948 for the  three-month  period ended
March 31, 1998 ("Q1 98"),  a  decrease of $184,869 or 4%. The  decrease in sales
is  primarily  attributed  to the  discontinuation  of sales  to  non-performing
resellers  of the  Company's  consumer  video  conversion  product line in North
America. In the three-month period ending March 31, 1998, approximately $800,000
of sales  were to  resellers  that the  Company  discontinued  selling to in the
fourth  quarter  of  1998.  There  were no  sales  to  these  resellers  for the
three-month  period ended March 31, 1999. This decrease in sales to US resellers
was offset by  increased  sales to  international  resellers  and  OEM/Licensing
customers.  Specifically,  net  sales  in Q1 99 to the  Company's  international
resellers  increased  22% to  $517,000  from  $425,000  in Q1 98.  Net  sales to
OEM/Licensing customers increased 24% to $677,000 in Q1 99 from $547,000 for the
same quarter in 1998. The increases in  international  and  OEM/Licensing  sales
reflect  increased  acceptance  of the  Company's  video  conversion  technology
combined with market penetration in international reseller channels.

         As of  March  31,  1999,  the  Company  had a sales  order  backlog  of
approximately $500,000.


                                       12
<PAGE>
 Cost of Goods Sold

         Cost  of  goods  sold  were  $2,937,134  or 58% of net  sales,  for the
three-month  period ended March 31, 1999, as compared with  $2,781,936 or 53% of
net sales,  for the  three-month  period  ended  March 31,  1998, an increase in
absolute dollars of $155,198 or 6%. The Company's gross profit margins for Q1 99
and Q1 98 were 42% and 47%, respectively.  The increase in cost of goods sold in
absolute  dollars and as a percentage of sales is due principally to an increase
in OEM sales on which  margins  are  typically  lower as  compared  to  consumer
channel sales.

Sales, Marketing and Support Expenses

         Sales,  marketing and support  expenses  were  $1,023,696 or 20% of net
sales,  for the  three-month  period  ended March 31,  1999,  as  compared  with
$1,166,327 or 22% of net sales, for the three-month period ended March 31, 1998,
a decrease of $142,631 or 12%. The decrease in absolute dollars is due primarily
to a reduction in the marketing projects and advertising expenses as compared to
the three-month period March 31, 1998.

General and Administrative Expenses

         General and  administrative  expenses for the three-month  period ended
March 31, 1999 were $353,943 or 7% of net sales, as compared with $387,959 or 7%
of net sales for the  three-month  period ended March 31,  1998,  a  decrease of
$34,016 or 9%. The decrease in absolute  dollars is due  primarily to a decrease
in consulting fees of approximately $26,700.

Research and Development Expenses

         Research  and  development  expenses for the  three-month  period ended
March 31, 1999 were $492,480,  or 10% of net sales, as compared to $310,801,  or
6% of net sales,  for  three-month  period ended March 31, 1998,  an increase of
$181,679 or 59%. The increases were due  principally  to increased  staffing and
employee benefits resulting from the acquisition of PC Video Conversion, Inc. in
July 1998.

Interest Expense, Net

         Net interest  expense for the  three-month  period ended March 31, 1999
was $21,364,  or .4% of net sales, as compared to $77,039, or 1.5% of net sales,
for the three-month period ended March 31, 1998, a decrease of $55,675,  or 72%.
The decrease is primarily attributable a decrease in note payable obligations at
March 31, 1999 as compared to March 31, 1998.

Other Income

         Other Income for the three-month period ended March 31, 1999 was $3,948
as compared to $634,  for the  three-month  period ended March 31,  1998.  Other
income  for Q1 99  resulted  from the  settlement  of certain  accounts  payable
obligations.

Net Income

         For the quarter ended March 31, 1999,  the Company  reported net income
of $102,990,  or $0.01 per share,  as compared to $364,748,  or $0.03 per share,
for the quarter ended March 31, 1998. The

                                       13
<PAGE>
decrease  in net  income is  primarily  due to the  discontinuation  of sales to
non-performing resellers, combined with an increase in R&D investments.


LIQUIDITY AND CAPITAL RESOURCES

         Net cash used in operating activities for the three-month periods ended
March 31, 1999 and 1998 was $375,039 and $2,264,567, respectively. In Q1 99, net
cash used in operating activities consisted primarily of an increase in accounts
receivable of $891,669 and a decrease in accrued  liabilities of $511,787.  This
was offset by a decrease  in  inventory  of  $212,403,  an  increase in accounts
payable  of  $600,794,   depreciation  and  amortization  (non-cash  charge)  of
$139,370,  and net income of $102,990.  As of March 31, 1999 and 1998,  accounts
receivable  from a major  distributor  represented  approximately  45% and  31%,
respectively,  of total accounts receivable.  In Q1 99, the Company continued to
record  provisions for potential  future  uncollectable  accounts and maintained
reserves for potential product returns.

         In the three months ended March 31, 1998,  net cash used in  operations
consisted  primarily of an increase in accounts  receivable  of  $1,297,886  and
decreases  in  accounts  payable  and  accrued  liabilities  of  $1,455,445  and
$205,254, respectively.

         Net cash used in investing activities for the three-month periods ended
March 31, 1999 and 1998 was $666,188 and $195,432 respectively.  In Q1 99 and Q1
98,  cash used in  investing  activities  was  principally  for the  purchase of
property and equipment.

         Net cash provided by financing  activities for the three-month  periods
ended March 31, 1999 and 1998 was $146,973 and $2,904,772,  respectively.  In Q1
99, the Company  received  $969,459 in net proceeds from a debt financing from a
commercial  bank.  The Company's  financing  proceeds were offset by payments on
notes payable and capital  lease  obligations.  In the same period in 1998,  the
Company  received  $2,827,355 in net proceeds  from private  offerings of Common
Stock and $148,142 from the exercise of common stock  options and warrants.  The
Q1 98 financing  proceeds  were offset by payments on notes  payable and capital
lease obligations.

         As of March 31, 1999, the Company had working  capital of $953,683,  as
compared to  $1,434,793  at December  31,  1998,  a decrease  of  $481,110.  The
Company's cash position at March 31, 1999 was $234,126,  a decrease of $894,254,
over amounts at December 31, 1998.

         Although  the  Company  has  been  successful  in the  past in  raising
sufficient  capital to fund its  operations,  there can be no assurance that the
Company will achieve sustained  profitability or obtain sufficient  financing in
the future.

Effects of Inflation and Seasonality

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

Environmental Liability

         The Company has no known environmental violations or assessments.

                                       14
<PAGE>
Year 2000

         General
         The  Company's  Year  2000   compliance   project  ("the  Project")  is
proceeding on schedule. The Project is addressing the issue of computer programs
and embedded  computer chips being unable to  distinguish  between the year 1900
and the year  2000.  In early  1999,  in order to  improve  access  to  business
information  and to strengthen its  infrastructure  through  common,  integrated
computing  systems  across the  Company,  the Company  began a business  systems
replacement  project  with systems  that use  programs  from a nationally  known
business  software company (the "System").  The installation of the new systems,
which are expected to make  approximately  90 percent of the Company's  business
computer  systems Year 2000 compliant,  is scheduled for completion by mid-1999.
The System will replace a  non-compliant  accounting and  manufacturing  system.
Implementation  of the  System  is on  schedule  and  approximately  70  percent
complete.   To  facilitate  the  Project,   The  Company  has  retained  outside
consultants with expertise in wide area networking ("WAN"),  systems integration
and business/contact data management.

         The Company has developed a contingency  plan to make the programs that
are scheduled to be replaced by the System Year 2000 compliant.  The contingency
plan  includes   contracted  on-site  support,   work-flow   modification,   and
integration  of Year 2000 compliant  systems.  At the end of first quarter 1999,
management  agreed that there was no need to implement the  contingency  plan at
that time. The decision will be re-evaluated monthly through year-end. Remaining
business  software  programs are expected to be made Year 2000 compliant through
the Project,  including those supplied by vendors, or they will be retired. None
of the Company's other information  technology ("IT") projects have been delayed
due to the implementation of the Project.

         Project
         The Project is being  implemented in two phases:  Phase I, installation
of the hardware and business applications, preceded the WAN installation and the
integration  of various  communications  systems.  Phase I was 75%  completed on
March 31, 1999. Phase II is expected to be completed by July 31, 1999.

         The Project is divided  into two major  sections -  infrastructure  and
applications  software (sometimes  collectively referred to as "IT Systems") and
third-party  suppliers and customers  ("External  Agents").  The general  phases
common to all sections  are: (1)  inventorying  Year 2000 items;  (2)  assigning
priorities to identified  items; (3) assessing the Year 2000 compliance of items
determined to be material to the Company;  (4)  repairing or replacing  material
items that are determined not to be Year 2000  compliant;  (5) testing  material
items; and (6) designing and implementing  contingency and business continuation
plans for each organization and Company location.

         At September 30, 1998, the inventory and priority  assessment phases of
each section of the Project had been completed.  While  substantially  complete,
the  process  of  assessing  Year  2000  compliance  of its  material  items and
repairing or replacing such items continues on an ongoing basis.  Material items
are  those  believed  by the  Company  to have a risk  involving  the  safety of
individuals,  or that may cause damage to property or the  environment,  or that
have a material  effect on the  Company's  revenues.  The testing  phases of the
Project  will be  performed  by the  Company  and will be ongoing as hardware or
system software is remedied, upgraded or replaced.


                                       15
<PAGE>
         The  infrastructure  portion of the IT section consists of hardware and
systems software other than  applications  software.  The Company estimates that
approximately  90 percent of the activities  required to achieve  infrastructure
Year 2000  compliance had been  completed at March 31, 1999. All  infrastructure
activities are expected to be completed by July 31, 1999.  Contingency  planning
for infrastructure is also substantially complete.

         The application  software  portion of the IT section  includes both the
conversion of  applications  software that is not Year 2000 compliant and, where
available  from the supplier,  the  replacement  of such  software.  The Company
estimates  that the  software  conversion  phase was  approximately  65  percent
complete at March 31, 1999,  and the  remaining  conversions  are expected to be
completed by mid-1999.

         The testing phase for  application  software is ongoing and is expected
to be completed by mid-1999.  The vendor software  replacements and upgrades are
presently  behind  schedule,   although  the  Company  currently  believes  that
replacements and upgrades will be completed on schedule by mid-1999. Contingency
planning for  application  software has begun and is scheduled for completion by
mid-1999.

         The External  Agents section  includes the process of  identifying  and
prioritizing critical suppliers and customers at the direct interface level, and
communicating  with them about their plans and progress in addressing  their own
Year 2000 issues.  Detailed  evaluations of the most critical third parties have
been  initiated.  These  evaluations  will be  followed  by the  development  of
contingency plans,  which are scheduled for completion by mid-1999.  The Company
estimates that this section was on schedule at April 30, 1999. Follow-up reviews
of External Agents are expected to be undertaken through the remainder of 1999.

         Costs
         The total cost  associated with required  modifications  to become Year
2000  compliant  is not  expected  to be  material  to the  Company's  financial
position. The estimated total cost of the Project is approximately $300,000. The
total amount  expended on the Project  through April 30, 1999, was $240,000,  of
which  approximately  $200,000 related to the cost to repair or replace software
and related hardware problems,  and approximately $40,000 related to the cost of
identifying and communicating with External Agents. The estimated future cost of
completing  the Project is estimated  to be  approximately  $60,000;  $45,000 to
repair or replace  software  and related  hardware  and $15,000 to identify  and
communicate  with  External  Agents.  Funds for the Project are provided  from a
separate budget of $300,000 for all items other than External Agent costs, which
are included in existing operating budgets.  Ancillary costs of implementing the
System are not included in these cost estimates.

         Risks
         The failure to correct a material  Year 2000 problem could result in an
interruption  in,  or a  failure  of,  certain  normal  business  activities  or
operations.  Such failures could  materially and adversely  affect the Company's
results of  operations,  liquidity and financial  condition.  Due to the general
uncertainty  inherent  in the Year  2000  problem,  resulting  in part  from the
uncertainty of the Year 2000  readiness of third-party  suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000  failures  will  have  a  material  impact  on  the  Company's  results  of
operations,  liquidity  or  financial  condition.  The  Project is  expected  to
significantly  reduce the  Company's  level of  uncertainty  about the Year 2000
problem and, in particular,  about the Year 2000 compliance and readiness of its
material External Agents.  The Company believes that, with the implementation of
new business systems and completion of the Project as scheduled, the possibility
of significant interruptions of normal operations should be reduced.


                                       16
<PAGE>
         Readers are cautioned that forward-looking  statements contained in the
year 2000 Update should be read in  conjunction  with the Company's  disclosures
under the heading: "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS" herein.

         The Company is including  the  following  cautionary  statement to take
advantage of the "safe harbor" provisions of the PRIVATE  SECURITIES  LITIGATION
REFORM ACT OF 1995 for any  forward-looking  statement made by, or on behalf of,
the Company.  The factors identified in this cautionary  statement are important
factors (but not  necessarily  all  important  factors)  that could cause actual
results  to  differ  materially  from  those  expressed  in any  forward-looking
statement made by, or on behalf of, the Company.

         Where any such  forward-looking  statement  includes a statement of the
assumptions or bases  underlying  such  forward-looking  statement,  the Company
cautions that,  while it believes such assumptions or bases to be reasonable and
makes them in good faith,  assumed facts or bases almost always vary from actual
results,  and the differences  between assumed facts or bases and actual results
can be material,  depending on the circumstances.  Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future  results,  such  expectation  or belief is expressed in good faith and
believed to have a  reasonable  basis,  but there can be no  assurance  that the
statement of expectation or belief will result, or be achieved or accomplished.

         Taking into account the  foregoing,  the  following  are  identified as
important  risk  factors  that could cause  actual  results  with respect to the
Company's Year 2000 compliance to differ  materially from those expressed in any
forward-looking  statement made by, or on behalf of, the Company: 

o    The dates on which the Company  believes the Project will be completed  and
     the System will be implemented  are based on  management's  best estimates,
     which  were  derived  utilizing  numerous  assumptions  of  future  events,
     including  the continued  availability  of certain  resources,  third-party
     modification  plans and other factors.  However,  there can be no guarantee
     that these  estimates  will be achieved,  or that there will not be a delay
     in, or increased costs associated with, the implementation of the Project.

o    A delay in the  implementation  of the System  could  impact the  Company's
     readiness for  transactions  involving the Euro currency in connection with
     the Company's European sales activities.

o    Other specific factors that might cause  differences  between the estimates
     and actual results  include,  but are not limited to, the  availability and
     cost of personnel trained in these areas, the ability to locate and correct
     all  relevant  computer  code,  timely  responses  to  and  corrections  by
     third-parties and suppliers,  the ability to implement  interfaces  between
     the  new  systems  and  the  systems  not  being   replaced,   and  similar
     uncertainties.

o    Due to the general uncertainty inherent in the Year 2000 problem, resulting
     in part from the  uncertainty of the Year 2000  readiness of  third-parties
     and the interconnection of global businesses, the Company cannot ensure its
     ability to timely and cost-effectively resolve problems associated with the
     Year 2000 issue that may materially and adversely affect its operations and
     business, or expose it to third-party liability.

                                       17
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS


              The Company  does not provide  forecasts  of the future  financial
performance of the Company.  However, from time to time, information provided by
the Company or statements  made by its employees may contain  "forward  looking"
information  that involve risks and  uncertainties.  In  particular,  statements
contained in this Form 10-QSB which are not historical facts (including, but not
limited to, statements concerning international revenues,  anticipated operating
expense levels and such expense levels relative to the Company's total revenues)
constitute  forward  looking  statements  and are made  under  the  safe  harbor
provisions  of  the  Private  Securities  Litigation  Reform  Act of  1995.  The
Company's  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 the Company's future cash needs, reliance on
major customers,  history of operating losses,  limited  availability of capital
under credit  arrangements  with  lenders,  market  acceptance  of the Company's
products, technological obsolescence, competition, component supply problems and
protection of proprietary information,  as well as the accuracy of the Company's
internal  estimates of revenue and  operating  expense  levels and the Company's
ability  to  achieve  Year  2000  compliance  on a timely  basis  as more  fully
described above.

                                       18

<PAGE>

                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

         The Company is not party to any pending legal  proceedings,  other than
routine  litigation  that is  incidental  to the  business,  which  would have a
material  adverse  effect on the  Company's  financial  position  or  results of
operations for the three-month period ended March 31, 1999.

ITEM 2.  CHANGES IN SECURITIES

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE

         None

ITEM 5.  OTHER INFORMATION

         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a.       The following exhibits are filed herewith:

         2.1  Form of Common Stock Purchase Warrant issued to Richard West and
              R.J. Faulkner
         2.2  Form of Common Stock Purchase Warrant issued to Brian G. Swift and
              Edward Price
         2.3  Common Stock Purchase Warrant issued to Silicon Valley Bank
         10   Accounts Receivable Purchase Agreement dated March 22, 1999 
              between the Company and Silicon Valley Bank
         11.  Statement Re: Computation of Per Share Earnings
         27.  Financial data schedule

b. Reports on Form 8-K

         The Company  did not file any  reports on Form 8-K  reports  during the
quarter ended March 31, 1999.


                                       19
<PAGE>

                                   SIGNATURES

In accordance  with the  requirements  of the Exchange Act, the  Registrant  has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                         FOCUS Enhancements, Inc.




 May 17, 1999                            By: \s\  Thomas L. Massie       
                                             Thomas L. Massie
                                             Chief Executive Officer and
                                             Chairman of the Board
                                             (Principal Executive Officer)



 May 17, 1999                            By: \s\  Gary M. Cebula        
                                             Gary M. Cebula
                                             Vice President of Finance
                                             and Administration
                                             (Principal Accounting Officer)



                                       20