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

                                   FORM 10-QSB

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

              For the quarterly period ended September 30, 2001, or

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

            For the transition period from __________ to __________.

                         Commission File Number 1-11860

                            Focus Enhancements, Inc.
                 (Name of Small Business Issuer in its Charter)

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

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

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

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

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

                      Name of Exchange on which Registered
                                     NASDAQ

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

     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. Yes No



     As of October 31, 2001, there were  approximately  32,671,250 shares of the
Registrant's Common Stock Outstanding.


<PAGE>
<TABLE>
                            Focus Enhancements, Inc.
                           Consolidated Balance Sheets
                          (in thousands, except shares)
<CAPTION>
                                                                                September 30,     December 31,
                                                                                     2001             2000
                                                                                 -----------      -----------
                                                                                 (unaudited)
<S>                                                                              <C>              <C>
                                   ASSETS
Current assets:
  Cash and cash equivalents                                                      $       706      $       352
  Restricted certificates of deposit                                                     298            1,263
  Restricted collateral deposit                                                        2,363            2,363
  Accounts receivable, net of allowances of $1,005 and $1,042 at
    September 30, 2001 and December 31, 2000, respectively                             3,181            1,778
  Inventories                                                                          4,543            2,095
  Prepaid expenses and other current assets                                              272               43
                                                                                 -----------      -----------
    Total current assets                                                              11,363            7,894

Property and equipment, net                                                              410              395
Capitalized software development costs                                                   482              728
Other assets, net                                                                        123              490
Intangibles, net                                                                       2,385               --
Goodwill, net                                                                          4,773              274
                                                                                 -----------      -----------
    Total assets                                                                 $    19,536      $     9,781
                                                                                 ===========      ===========

               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Current portion of long-term debt                                              $        --      $       364
  Obligations under capital leases, current portion                                       36              100
  Accounts payable                                                                     4,616            3,377
  Accrued liabilities                                                                  1,416            1,681
  Accrued legal judgment                                                               2,148            2,148
                                                                                 -----------      -----------
    Total current liabilities                                                          8,216            7,670

Convertible notes payable                                                                450               --
Convertible notes payable to stockholder                                               3,562            2,362
Obligations under capital leases, non-current                                             60              102
Long-term debt, net of current portion                                                    --               64
                                                                                 -----------      -----------

    Total liabilities                                                                 12,288           10,198
                                                                                 -----------      -----------

Commitments and contingencies

Stockholders' equity (deficit)

  Preferred stock, $.01 par value; authorized 3,000,000 shares; 1,904
shares   issued at September 30, 2001, none at December 31, 2000.
(Aggregate liquidation preference $2,266,674)                                             --               --
  Common stock,  $.01 par value;  50,000,000 shares  authorized,  32,671,250 and
    26,350,203 shares issued at September 30, 2001 and December 31,
    2000, respectively                                                                   326              264
  Deferred compensation                                                                 (382)              --
  Additional paid-in capital                                                          61,369           48,727
  Accumulated deficit                                                                (53,365)         (48,708)
  Treasury stock at cost, 450,000 shares                                                (700)            (700)
                                                                                 -----------      -----------
  Total stockholders' equity (deficit)                                                 7,248             (417)
                                                                                 -----------      ------------
    Total liabilities and stockholders' equity (deficit)                         $    19,536      $     9,781
                                                                                 ===========      ===========
<FN>
                  The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>

                                       2
<PAGE>

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

                                                           Three Months ended
                                                              September 30,
                                                         -----------------------
                                                             2001          2000
                                                         --------      --------
Net product revenues                                     $  6,024      $  4,116
Contract revenues                                             693          --
                                                         --------      --------
  Total net revenues                                        6,717         4,116
Cost of goods sold                                          4,387         2,729
                                                         --------      --------
  Gross profit                                              2,330         1,387
                                                         --------      --------

Operating expenses:
  Sales, marketing and support                              1,425           797
  General and administrative                                  467           542
  Research and development                                    617           245
  Amortization expense                                        700           182
                                                         --------      --------
    Total operating expenses                                3,209         1,766
                                                         --------      --------
    Loss from operations                                     (879)         (379)

  Legal judgement expense (CRA)                              --          (2,148)
  Interest expense, net                                       (44)           (3)
  Other income, net                                            33            13
                                                         --------      --------
    Loss before income taxes                                 (890)       (2,517)
  Income tax benefit                                         --            --
                                                         --------      --------
    Net loss                                             $   (890)     $ (2,517)
                                                         ========      ========
Loss per common share:
  Basic                                                  $  (0.03)     $  (0.10)
                                                         ========      ========
  Diluted                                                $  (0.03)     $  (0.10)
                                                         ========      ========
Weighted average common shares outstanding:
  Basic                                                    32,520        25,863
                                                         ========      ========
  Diluted                                                  32,520        25,863
                                                         ========      ========
         The accompanying notes are an integral part of the consolidated
                             financial statements.


                                       3
<PAGE>



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

                                                            Nine Months ended
                                                              September 30,
                                                         -----------------------
                                                             2001          2000
                                                         --------      --------
Net product revenues                                     $ 17,194      $ 12,130
Contract revenues                                           1,021          --
                                                         --------      --------
  Total net revenues                                       18,215        12,130
Cost of goods sold                                         11,300         8,420
                                                         --------      --------
  Gross profit                                              6,915         3,710
                                                         --------      --------
Operating expenses:
  Sales, marketing and support                              4,531         2,857
  General and administrative                                1,683         2,432
  Research and development                                  2,515           854
  Amortization expense                                      1,976           432
  Restructuring expense                                        33           202
  Write-off of in-process technology                          505          --
                                                         --------      --------
    Total operating expenses                               11,243         6,777
                                                         --------      --------
    Loss from operations                                   (4,328)       (3,067)

  Legal judgement expense (CRA)                              --          (2,148)
  Interest expense, net                                      (267)          (58)
  Other (expense) income , net                                (62)           67
                                                         --------      --------
    Loss before income taxes                               (4,657)       (5,206)

  Income tax expense                                         --               2
                                                         --------      --------
    Net loss                                             $ (4,657)     $ (5,208)
                                                         ========      ========
Loss per common share:
  Basic                                                  $  (0.15)     $  (0.21)
                                                         ========      ========
  Diluted                                                $  (0.15)     $  (0.21)
                                                         ========      ========
Weighted average common shares outstanding:
  Basic                                                    31,329        25,003
                                                         ========      ========
  Diluted                                                  31,329        25,003
                                                         ========      ========

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


                                       4
<PAGE>


<TABLE>
                            Focus Enhancements, Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
                                   (unaudited)
<CAPTION>
                                                                                     Nine Months Ended
                                                                                       September 30,
                                                                                     ------------------
                                                                                      2001       2000
                                                                                     -------    -------
<S>                                                                                  <C>        <C>
Cash flows from operating activities:
Net loss                                                                             $(4,657)   $(5,208)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                        2,328        733
  Deferred compensation expense                                                          209       --
  Write-off of in process technology                                                     505       --
  Inventory obsolescence                                                                 136       --
  Allowance for doubtful accounts                                                         15       --
  Changes in operating assets and liabilities, net of the effects of acquisitions;
   Decrease (increase) in accounts receivable                                         (1,260)       111
   Decrease (increase) in inventories                                                    (80)     1,605
   Increase in prepaid expenses and other assets                                         (66)    (1,132)
   Increase (decrease) in accounts payable                                                78       (552)
   Increase (decrease) in accrued liabilities                                           (160)     2,092
                                                                                     -------    -------
  Net cash used in operating activities                                               (2,952)    (2,351)
                                                                                     -------    -------
Cash flows from investing activities:
  Decrease (increase) in restricted certificates of deposit                              965       (746)
  Additions to property and equipment                                                   (169)      (406)
  Net cash from acquisition of Videonics                                                 360       --
                                                                                     -------    -------
Net cash provided by (used in) investing activities                                    1,156     (1,152)
                                                                                     -------    -------
Cash flows from financing activities:
  Payments on notes payable and long-term debt                                          (400)    (1,101)
  Proceeds from stockholder loans                                                      2,650       --
  Payments under capital lease obligations                                              (106)      (252)
  Net proceeds from private offerings of common stock
                                                                                        --        1,284
  Costs related to registration of common stock                                         (117)      --
  Net proceeds from exercise of common stock options and warrants                        123      1,121
                                                                                     -------    -------
Net cash provided by financing activities                                              2,150      1,052
                                                                                     -------    -------
Net increase (decrease) in cash and cash equivalents                                     354     (2,451)
Cash and cash equivalents at beginning of year                                           352      3,737
                                                                                     -------    -------
Cash and cash equivalents at end of period                                           $   706    $ 1,286
                                                                                     =======    =======
Supplement schedule of non-cash financing activities:
 Acquisition of Videonics, Inc., for common stock                                      7,960       --
 Conversion of relates party note payable to preferred stock                           2,266       --
 Conversion of accrued liabilities and notes payable to common stock                   1,294       --

<FN>
         The accompanying notes are an integral part of the consolidated
                             financial statements.
</FN>
</TABLE>

                                       5
<PAGE>
1.  Basis of Presentation

    The  consolidated  financial  statements of Focus  Enhancements,  Inc. ("the
Company")  as of  September  30,  2001 and for the three and nine month  periods
ended  September  30,  2001  and  2000  are  unaudited  and  should  be  read in
conjunction with the consolidated financial statements and notes thereto for the
year ended  December 31, 2000  included in the  Company's  Annual Report on Form
10-KSB for the year ended December 31, 2000.

    In the opinion of management,  the consolidated financial statements include
all adjustments  (consisting only of normal recurring adjustments) necessary for
a fair  presentation  of the  results of the  interim  periods.  The  results of
operations for the three and nine month periods ended September 30, 2001 are not
necessarily  indicative  of the  results  that may be  expected  for any  future
period.  The  consolidated  financial  statements  include  the  accounts of the
Company  and,  as of the  January  16,  2001  acquisition  date (see  "Note 3"),
Videonics Inc. ("Videonics").

2.  Management's Plans

    The  Company  has  incurred  significant  losses for the last two years.  At
September 30, 2001, the Company reported  stockholder's equity of $7,248,000 and
an accumulated deficit of $53,365,000.

    To date we have met our short-and  long-term cash needs from the proceeds of
debt,  the sale of common stock in private  placements and the exercise of stock
options and warrants because cash flow from operations has been  insufficient to
fund  operations.  Management is assessing  product lines in light of the recent
merger with Videonics Inc.,  (see "Note 3") to identify how to enhance  existing
or create new distribution channels. In addition, the Company released three new
products in the third  quarter of 2001,  which  should  provide the Company with
incremental revenue.

    Management has taken steps to reduce costs,  including the closure of its PC
Video  facility  in  Morgan  Hill,  CA in the  second  quarter  of 2000  and its
Wilmington,  MA facility on April 1, 2001. All operations,  customer support and
finance  were  moved  into the  Campbell,  CA,  facility.  The  remaining  sales
personnel   relocated   into  a  2,800  square  foot  facility  in   Chelmsford,
Massachusetts. In connection with this restructuring the Company reduced overall
personnel by 20%.

    Even with the anticipated reduction in expenses related to the restructuring
and an expected increase in sales, the Company  anticipates that during the rest
of 2001 it will need to raise over $500,000 to support its working capital needs
and meet existing debt  obligations.  There can be no assurances that such funds
will be  adequate.  Any  further  funds will be affected by a number of factors,
including,  but not  limited  to,  market  demand  for the  Company's  products,
successful integration of Videonics and the successful resolution of shareholder
lawsuits. See also "Item 2 - Risk Factors."

    In an effort to meet those  needs,  the Company  has entered  into a Private
Equity Line of Credit Agreement  ("Equity  Agreement")  with Euston  Investments
("Euston").  Under the  Euston  Equity  Agreement  the  Company  can issue up to
4,000,000 shares of its common stock, subject to certain restrictions, to Euston
at a 10% discount to raise additional  money. The Company has sought to register
such shares under a Registration Statement on Form SB-2 initially filed with the
Securities  and Exchange  Commission  on February 7, 2001 and then as amended on
August 9, 2001. As of November 12, 2001 the registration  statement had not been
deemed  effective.  There  can be no  assurances  when or if  such  registration
statement  will be deemed  effective.  This document is neither an offer to sell
nor a solicitation for an offer to buy securities.  The offering with respect to
the  proposed  equity  line of credit  will be made only by a  prospectus  or an
exemption therefrom.

3.   Acquisition of Videonics Inc.

     On January  16,  2001,  Focus  acquired  all of the  outstanding  shares of
Videonics  in  a  transaction   accounted  for  using  the  purchase  method  of
accounting.  Focus  issued 0.87  shares of its common  stock for each issued and
outstanding  share of Videonics  common stock on the closing date.  Based on the
exchange ratio, a total of  approximately  5,135,000  shares were issued.  Focus
incurred  approximately  $637,000 in acquisition  expenses,  including financial
advisory and legal fees and other direct  transaction costs, which were included
as a component of the purchase price.


                                       6
<PAGE>
Unaudited Pro Forma Purchase Price
Allocation of Videonics                                         January 16, 2001
 -----------------------                                        ----------------

Value of common shares issued                                       $7,960,000
Assumption of Videonics options                                        498,000
Estimated transaction costs                                            637,000
                                                                   -----------
Total purchase cost                                                 $9,095,000
                                                                   -----------

Tangible assets acquired                                            $3,384,000
  Intangible assets acquired                                         2,963,000
  In-process research and  development                                 505,000
  Liabilities assumed                                               (3,373,000)
                                                                   -----------
   Excess of cost over fair value (goodwill)                        $5,616,000
                                                                   ===========

The intangibles and goodwill acquired in this acquisition will be amortized on a
straight-line  basis over a period of three to four years. See "Note 4. - Recent
Accounting Pronouncements," for further discussion of goodwill.

4. Recent Accounting Pronouncements

     Effective  January 1, 2001,  the Company  adopted  Statement  of  Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative  Instruments and
Hedging  Activities,"  as amended by SFAS No.  137.  SFAS No. 133  requires  the
recognition  of all  derivatives  in the  balance  sheet as either an asset or a
liability  measured at fair value.  The adoption of SFAS No. 133 did not have an
impact on the Company's  financial  statements.  The Company  currently does not
utilize derivative financial instruments in its operating activities nor does it
use them for trading or speculative purposes.

    In June 2001, the Financial  Accounting  Standards  Board (FASB) issued SFAS
No. 141,  Business  Combinations and SFAS No.142,  Goodwill and Other Intangible
Assets.  SFAS No. 141 requires that all business  combinations  initiated  after
June 30, 2001 be  accounted  for under the  purchase  method and  addresses  the
initial  recognition  and  measurement of goodwill and other  intangible  assets
acquired  in  a  business  combination.  SFAS  No.  142  addresses  the  initial
recognition and measurement of intangible  assets acquired outside of a business
combination  and  the  accounting  for  goodwill  and  other  intangible  assets
subsequent to their  acquisition.  SFAS No. 142 provides that intangible  assets
with finite useful lives be amortized and that  goodwill and  intangible  assets
with indefinite lives will not be amortized,  but will rather be tested at least
annually for impairment. The Company will adopt SFAS No. 142 for its fiscal year
beginning  January 1, 2002. Upon adoption of SFAS 142, the Company will stop the
amortization of goodwill, expected to have a net carrying value of $4,380,962 at
the date of adoption,  resulting in an expected reduction of annual amortization
of approximately $1,568,400 resulting from business combinations completed prior
to the adoption of SFAS 141.

In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of " SFAS No.  144  applies to all  long-lived  assets  (including  discontinued
operations) and consequently  amends APB Opinion No. 30,  "Reporting the Results
of Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144  develops  one  accounting  model for  long-lived  assets that are to be
disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be
disposed  of by sale be  measured  at the lower of book value or fair value less
cost to sell.  Additionally  SFAS No.  144  expands  the  scope of  discontinued
operations to include all components of an entity with  operations  that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing  operations  of the  entity in a disposal  transaction.  SFAS No. 144 is
effective  for the  Company for all  financial  statements  issued in 2002.  The
adoption  of SFAS No.  144 is not  expected  to have a  material  impact  on the
Company's financial statements.


                                       7
<PAGE>
5.  Reclassification of Certain Expenses

    Certain  expenses in the three and nine month periods  ending  September 30,
2000,  have been  reclassified  to conform to the current  period  presentation.
These  reclassifications  did not  change the net loss for those  periods  ended
September 30, 2000.

6.  Inventories

    Inventories  at September  30, 2001 and  December  31, 2000,  consist of the
following:

                                             2001            2000
                                         -----------     --------
    Raw materials                         $2,148,000      $826,000
    Work in process                          520,000           --
    Finished goods                         1,875,000     1,269,000
                                         -----------     ---------
    Totals                                $4,543,000    $2,095,000
                                         ===========    ==========

7. Commitments

    Bank Loan

    On November 13, 2000, Pacific Business Funding loaned Videonics $400,000. On
January 16, 2001, in connection with the merger,  the loan was assumed by Focus.
The loan was fully secured by a senior lien on the Company's assets. Interest is
calculated at a rate of 15%. The loan was repaid in full on July 16, 2001.

    Purchase of PC Video Conversion, Inc.

    On July 29, 1998, the Company issued a $1,000,000 note payable to Steve Wood
in conjunction  with the acquisition of PC Video  Conversion,  Inc. ("PC Video")
providing for the payment of principal and interest at 3.5 % over a period of 36
months.

    On July 28, 2000, the Company entered into a Separation Agreement with Steve
Wood.  Mr.  Wood was the  Vice  President  of Pro AV  engineering,  former  sole
shareholder  of PC Video and manager of the Company's  Morgan Hill, CA facility.
On June 15, 2000, the Company  closed the Morgan Hill  facility.  As part of the
separation agreement which terminated Mr. Wood's employment agreement,  Mr. Wood
remained a consultant  until an upgrade to one of the  Company's Pro AV products
was completed.  In return,  Mr. Wood received a right to convert the outstanding
balance of  $427,000  due under the  promissory  note into  common  stock of the
Company following approval of the increase to the number of shares of authorized
common stock of the Company. The Company's stockholders approved the increase to
the authorized common stock on January 12, 2001 and shortly thereafter, Mr. Wood
agreed to convert  the  promissory  note into  468,322  shares of the  Company's
common stock based on the average trading price of the common stock for the five
day period  preceding  January 12, 2001.  On June 27, 2001,  the Company  issued
468,322 shares of common stock to Mr. Wood.

    Convertible Notes

    On October 26, 2000,  Carl Berg, a Focus  director and  shareholder,  loaned
Focus  $2,362,494 to  collateralize  a $2,362,494 bond posted in connection with
the CRA litigation (see below  "Litigation - Focus is involved as a defendant in
litigation  with CRA Systems,  Inc.").  The promissory  note has a term of three
years and bears interest at a rate of prime plus 1%. The interest  earned on the
collateral  is payable to Mr. Berg.  The interest  payable by the Company to Mr.
Berg is  reduced  by the  amount  of  interest  earned  on the  collateral.  The
principal  amount of the note will be due at the end of its term,  with interest
to be paid quarterly. Under certain circumstances,  including at the election of
Mr. Berg and Focus,  the promissory  note and any accrued and unpaid interest is
convertible  into shares of Focus common  stock at a  conversion  price of $1.25
which  represented the average closing bid and ask price of the Company's common
stock on the day preceding the agreement.  The  promissory  note is secured by a
security  agreement in favor of Mr. Berg  granting him a security  interest,  in
first priority,  over  substantially all of the assets of Focus. On May 7, 2001,
$46,000 of outstanding  interest due under the note was converted into 38 shares
of Preferred Stock. See "Note 8. Stockholders Equity - Series B Preferred Stock"
for more information.  As of September 30, 2001 the Company had unpaid principal
and accrued interest due under the note totaling approximately $2,388,000.


                                       8
<PAGE>
     On  February  28,  2001,  Carl Berg  agreed to loan Focus  $2.0  million to
support the Company's  working capital needs. The promissory note has a due date
of  September  25,  2003 and  bears  interest  at a rate of prime  plus 1%.  The
principal  amount of the note will be due at the end of its term,  with interest
to be paid  quarterly.  On April 24, 2001,  the note was amended to provide that
under  certain  circumstances,  including at the election of Mr. Berg and Focus,
the  promissory  note and any accrued and unpaid  interest is  convertible  into
shares of Focus preferred stock at a conversion price of $1.19 which represented
125% of the trailing  30-day average of the Company's  common stock ending April
23, 2001. The promissory note is secured by a security agreement in favor of Mr.
Berg granting him a security  interest in first priority over  substantially all
of the assets of Focus.  On May 7, 2001,  the Company and Mr. Berg agreed to the
conversion  of $1.0 million of debt and all accrued  interest due under the note
into 854 shares of Preferred Stock. See "Note 8. Stockholders  Equity - Series B
Preferred Stock" for more information.  As of September 30, 2001 the Company had
principal  and  accrued  interest  due  under  the note  totaling  approximately
$1,033,000.

     On June 29, 2001, the Company issued a convertible  promissory  note to Mr.
Berg in the amount up to  $650,000  to support  the  Company's  working  capital
needs.  The promissory note has a due date of January 3, 2003 and bears interest
at a rate of prime plus 1%. The principal  amount of the note will be due at the
end of its term, with interest to be paid  quarterly.  The note provides that at
the  election of Mr.  Berg and Focus,  the  promissory  note and any accrued and
unpaid  interest  is  convertible  into  shares  of Focus  preferred  stock at a
conversion price of $1.56 which  represented 125% of the trailing 30-day average
of the  Company's  common  stock ending June 28, 2001.  The  promissory  note is
secured by a security  agreement  in favor of Mr. Berg  granting  him a security
interest in first priority over  substantially all of the assets of Focus. As of
September 30, 2001 the Company had principal and accrued  interest due under the
note totaling approximately $661,000.

    Note Payable to Stockholder

     On January 16, 2001 in connection with the Videonics merger,  Focus assumed
an  unsecured  note payable to Carl Berg in the amount of  $1,035,000.  The note
earned  interest at 8% per year and was due on January 16, 2002. On May 7, 2001,
the $1,035,000 and approximately $169,000 of accrued interest due under the note
were converted into 1,012 shares of Preferred Stock.  See "Note 8.  Stockholders
Equity - Series B Preferred Stock" for more information.

    Letters of Credit

    During 2000, the Company  entered into  agreements  with  subcontractors  to
manufacture  partially and fully completed products. As part of these agreements
the Company  was  required  to obtain  from its banks an  irrevocable  letter of
credit to secure  payment of each order placed with these  vendors.  The Company
was required to secure these letters of credit by depositing cash in an interest
bearing  account with the bank. At September 30, 2001 and December 31, 2000, the
Company maintained interest bearing accounts  collateralizing  letters of credit
in the amount of $298,000 and $1,263,000, respectively. These restricted amounts
are recorded in current  assets as they relate to the  procurement  of inventory
and are outstanding for periods of less than one year.

    Restricted Collateral Deposit

    In connection the CRA Systems judgment discussed below, the Company posted a
bond in the amount of  $2,362,494  to suspend any  enforcement  of the  judgment
pending appeal.  Carl Berg, a director and  shareholder of the Company  obtained
the bond on Focus' behalf in exchange for a secured convertible note in the same
amount as described in "Convertible Notes" above. The bond is irrevocable and is
collateralized  by a certificate of deposit in the amount of $2,363,000.  In the
event the case is settled for less than the bond amount,  the Company has agreed
to utilize the proceeds to pay down any outstanding  debt owed to Mr. Berg. This
restricted  amount is  recorded  in  current  assets as it relates to an accrued
legal judgment in the amount of $2,148,000.

    Restructuring Expenses

    In December  2000,  the  Company's  Board of  Directors  determined  that to
significantly reduce the Company's cost structure it would close its Wilmington,
MA facility,  reduce personnel and relocate to a significantly  smaller facility
during the first  quarter of 2001.  As such,  restructuring  charges of $522,000
were recorded in the fourth quarter of 2000. In addition,  restructuring charges
of $33,000 were  incurred in the first quarter of 2001.  Restructuring  expenses
were  related  to the  reduction  of 16  employees  in the areas of  operations,
customer support and finance of  approximately  $153,000 and equipment and lease
abandonment charges of approximately  $402,000. At September 30, 2001 $41,000


                                       9
<PAGE>
of restructuring reserves remained,  primarily relating to ongoing lease charges
for  abandoned  equipment  and  personnel  benefits  associated  with  scheduled
staffing reductions.

    The  closure of the  Company's  Morgan Hill  facility  occurred in the first
quarter of 2000 and restructuring charges totaled approximately $202,000. Direct
expenses were  comprised of inventory  adjustments  of  approximately  $118,000,
payroll and benefits of approximately  $57,000,  travel of approximately $16,000
and lease cancellation  charges of approximately  $11,000. At September 30, 2001
all restructuring costs related to the Morgan Hill closure have been paid.

Litigation

    Focus has been named as a  defendant  in an alleged  class  action  alleging
violation of federal securities laws.

    Focus and one of its directors have been named as defendants in a securities
class  action  pending  in United  States  District  Court for the  District  of
Massachusetts. The complaint alleges a class of shareholders who purchased Focus
shares  during the July 17, 1997 to February 19, 1999 period.  The complaint was
initially  filed in November of 1999 and has been  amended  several  times.  The
complaint purports to allege violations of the federal securities laws and seeks
unspecified  monetary  damages.  Defendants  moved to dismiss  the  action.  The
Federal  District  Court granted  certain  portions of the  Company's  motion to
dismiss and denied other portions  allowing the case to go forward into pretrial
discovery  as to  certain  matters.  Focus  believes  that  it has  consistently
complied  with the federal  securities  laws,  and does not believe at this time
that this litigation  will result in a material  adverse effect on its financial
condition. Nonetheless, the management time and resources that could be required
to respond  effectively  to such claims and to defend Focus  vigorously  in such
litigation could adversely impact our management's administrative capabilities.

    Focus is involved as a defendant in litigation with CRA Systems, Inc

    In 1996 CRA Systems,  Inc., a Texas  corporation,  and Focus entered into an
agreement,  the terms and  nature of which  were  subsequently  disputed  by the
parties. Focus contended that the transaction was simply a sale of inventory for
which Focus was never paid.  CRA contended  otherwise.  CRA brought suit against
Focus and on September 21, 1998,  for breach of contract  contending  that Focus
grossly exaggerated the demand for the product and the margin of profit that was
available to CRA  regarding  this project.  CRA sought to recover  out-of-pocket
losses exceeding  $100,000 and lost profits of $400,000 to $1,000,000.  The case
was removed to the US District  Court for the Western  District of Texas,  Waco,
Texas.  A jury trial in May 2000 in that court resulted in a verdict in favor of
CRA for $848,000 actual damages and $1,000,000  punitive damages. On October 10,
2000, the court rendered a judgment in favor of CRA for actual damages, punitive
damages, attorney's fees, costs, and interest. In connection with this judgment,
we recorded an expense of $2,147,722 in the period ended September 30, 2000. The
court  overruled  the  motion  for new trial  that  Focus  filed,  and Focus has
appealed the judgment to the U.S.  Court of Appeals for the Fifth Circuit in New
Orleans,  Louisiana.  On  October  27,  2000,  Focus  submitted  a  bond  in the
approximate amount of $2.3 million (being the approximate amount of the judgment
plus 10% to cover interest and costs of CRA) and the U.S. District Court granted
a stay of any enforcement of the judgment  pending appeal.  The court of appeals
has  tentatively set the appeal for oral argument during the week of December 3,
2001.

    General

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

8. Stockholders' Equity
     Increase to Authorized Common Shares

    On January 12, 2001, the stockholders of the Company approved an increase to
the authorized  common shares from  30,000,000 to 50,000,000.  This increase was
recommended and approved by the Company's  Board of Directors,  in part to issue
approximately  5,135,000 shares in connection with the merger of Videonics Inc.,
and to ensure  that  sufficient  shares are  available  for  issuance  under the
Company's  2000 Non  Qualified  Stock Option Plan  (5,000,000  shares) and for a
Private Equity Line of Credit (4,000,000 shares).


                                       10
<PAGE>
    Private Placement

    On June 9, 2000, the Company entered into a financing agreement resulting in
$1,500,000 in gross  proceeds from the sale of 1,400,000  shares of common stock
and the issuance of a warrant to purchase an additional 140,000 shares of common
stock  in a  private  placement,  to an  unaffiliated  accredited  investor.  In
accordance  with our obligations  under the agreement,  the Company is incurring
charges  of 2% per month of the gross  proceeds  until its  registration  of the
shares  purchased  by the  investor.  During  the  three and nine  months  ended
September  30,  2001,  the Company  recorded  expenses of $52,000 and  $231,000,
respectively,  related to such charges  (included in Other  Expense,  Net).  The
investor  agreed  to  exchange  the  gross  amount  of  calculated  charges  for
additional  common  stock of Focus  based on an exchange  rate of 0.68.  Through
September 30, 2001,  the Company has issued 485,295 shares of Focus common stock
to extinguish this accrued liability.  In connection with the issuance of common
stock under this agreement, the Company recorded charges of $17,000 and $142,000
for the three and nine  months  ended  September  30,  2001  (included  in Other
Expense, Net).

    On February 7, 2001, the Company filed a preliminary  registration statement
under the Securities  Act of 1933, as amended,  to register those shares and the
underlying  warrants.  On  August  9, 2001 an  amended  SB-2 was filed  with the
Securities  and Exchange  Commission.  As of November 12, 2001 the  registration
statement  had not been deemed  effective.  This document is neither an offer to
sell nor a  solicitation  for an  offer to buy  securities.  The  offering  with
respect to the proposed  equity line of credit will be made only by a prospectus
or an exemption therefrom.

    Series B Preferred Stock

    On April 24, 2001,  the board of directors of Focus adopted a Certificate of
Designation  whereby a total of 2,000 shares of Series B Preferred Stock,  $0.01
par value per share,  are reserved for  issuance.  Each share has a  liquidation
preference  in the amount of  $1,190.48  plus all accrued or declared but unpaid
dividends.  Cash dividends on the stock are  non-cumulative  and are paid at the
option of the board of directors.  If paid,  the rate shall be seven percent per
annum. The board does not presently intend to pay dividends on the stock. At the
option of the  holder,  each share is  convertible  into 1,000  shares of common
stock of Focus.

    On May 7, 2001, Carl Berg converted  approximately  $2.3 million of debt and
accrued interest currently owed by Focus to Mr. Berg into 1,904 shares of Series
B convertible preferred stock based on the estimated fair value of the preferred
stock the date on which the related subscription agreement was executed.

9.   Related Party Transactions

    Timothy  Mahoney,  who is a Focus director,  is a principal of vFinance.com,
Inc., the parent company to Union Atlantic  Capital L.C., and a partner of Union
Atlantic L.C. For the years ended  December 31, 2000 and 1999,  Focus paid Union
Atlantic  L.C.  $83,206  and  $112,226,   respectively  in  consulting  fees  in
connection with equity financing agreements negotiated by Union Atlantic L.C. In
addition,  on June 27, 2001,  vFinance Capital L.C. was issued 243,833 shares of
Focus common stock in lieu of  investment  banking fees in  connection  with the
acquisition of Videonics Inc in January 2001. In connection with the merger, the
Company accrued  $251,000 for such investment  banking fees,  which was included
within the transaction costs associated with the acquisition of Videonics.  Such
amount  was  converted  into the  243,833  shares of common  stock  based on the
trading price of the common stock as of January 12, 2001,  the date on which the
stockholders  approved  the  merger.  Pursuant  to an  agreement,  in the  event
vFinance.com,  Inc. or any of its affiliates  publicly sell the shares of common
stock in the market at a price below  $1.03,  the  Company  would be required to
issue to vFinance.com, Inc. additional shares to make up any shortfalls, up to a
maximum of 3,500,000.  Such shares can be  repurchased  by Focus within five (5)
business  days from the date of  issuance at the  difference  between the market
price at the time the shares were sold by vFinance or its  affiliates and $1.03.
Such amount would not exceed $227,000.

See  also  "Note 7 -  Commitments  -  Convertible  Notes,"  "- Note  Payable  to
Stockholder," and "Note 8 - Series B Preferred Stock."


                                       11
<PAGE>
Item  2. Management's Discussion And Analysis Of Financial Condition And Results
         Of Operations

Introduction

    The  following   information   should  be  read  in  conjunction   with  the
consolidated  financial  statements  and notes thereto in Part I, Item 1 of this
Quarterly  Report and with  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations  contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2000.

    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, of this Quarterly Report and with the information  contained in Item 2,
including,  but not limited to, "Certain Factors That May Affect Future Results"
and "Risk Factors" 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 for the year ended  December  31, 2000,
including,  but not limited to, the section therein  entitled  "Certain  Factors
That May Affect Future Results" and "Risk Factors."

Acquisition of Videonics

     On  January  16,  2001,  Focus  Enhancements,  Inc.,  acquired  all  of the
outstanding shares of Videonics,  Inc., ("Videonics") in a transaction accounted
for using the purchase  method of accounting.  Focus issued 0.87 shares of Focus
common stock for each issued and outstanding  share of Videonics common stock on
the  closing  date.  Based  on the  exchange  ratio,  a total  of  approximately
5,135,000  shares  were  issued.  Focus  incurred   approximately   $637,000  in
acquisition  expenses,  including  financial  advisory  and legal fees and other
direct  transaction  costs,  which were  included as a component of the purchase
price.

     Following the merger,  the Company  believes it has an  opportunity to take
advantage of the  complementary  strategic fit of the  businesses.  In addition,
certain new application  specific  integrated circuits ("ASICs") currently under
development  by the Focus  engineering  team have  integrated  video  mixing and
switching  technology.  We  believe  that  the  Videonics  engineering  team can
capitalize on this chip  technology to build  attractively  priced digital video
solutions for an expanded customer base.

     In accordance with the Company's  restructuring  plan, it has significantly
reduced its post merger  staffing in the areas of operations,  customer  support
and finance as all the  aforementioned  functional areas have been  consolidated
into the company's Campbell, California facility. The Company also negotiated an
early  release  from its  lease of a 22,000  square  foot  facility  located  in
Wilmington, Massachusetts and has since moved its remaining Massachusetts' sales
personnel   into  a  2,800   square  foot   facility   located  in   Chelmsford,
Massachusetts.

Results of Operations

Net Revenues

    Net revenues for the  three-months  ended September 30, 2001 were $6,717,000
as compared with $4,116,000 for the three-month  period ended September 30, 2000
an increase of  $2,601,000,  or 63%.  Net  revenues  for the  nine-months  ended
September  30,  2001 were  $18,215,000  as  compared  with  $12,130,000  for the
nine-month period ended September 30, 2000 an increase of $6,085,000, or 50%.

    For the three months ended  September 30, 2001, net sales to Professional AV
customers  were  approximately  $3,716,000  compared to $1,345,000  for the same
period in 2000,  an increase of  $2,371,000  or 176%.  For the nine months ended
September 30, 2001, net sales to  Professional  AV customers were  approximately
$10,783,000  compared to $3,424,000  for the same period in 2000, an increase of
$7,359,000 or 215%.  Such increase in net sales to Professional AV customers for
the three and nine month periods ending September 30, 2001 primarily  related to
the  inclusion  of  Videonics  Inc.  sales  beginning  on  January  16,  2001 of
$2,451,000 and $7,308,000, respectively.


                                       12
<PAGE>
    For the three months ended  September  30, 2001,  net sales to OEM customers
were  approximately  $1,696,000 as compared to $1,073,000 for the same period in
2000,  an increase of $623,000 or 58%. For the nine months ended  September  30,
2001,  net sales to OEM customers were  approximately  $3,208,000 as compared to
$2,674,000  for the same period in 2000,  an  increase  of $534,000 or 20%.  The
increase in both the three and nine month periods is primarily  attributable  to
contract  revenue of $693,000 and  $1,021,000 in the three and nine months ended
September  30,  2001,  respectively.  Sales of our current  line of  application
specific  integrated  circuits  ("ASIC")  chips (FS400,  FS450 and 460 families)
increased  by  $478,000  (83%) and  $1,619,000  (130%) over three and nine month
prior year periods, respectively.

    For the three  months  ended  September  30,  2001,  net sales to  Resellers
consisting  of  Distributors,  Retailers,  VAR's  and  Education  segments  were
approximately  $1,305,000 as compared to $1,698,000 for the same period in 2000,
a decrease of $393,000 or 23%. For the nine months ended September 30, 2001, net
sales to Resellers were  approximately  $4,224,000 as compared to $6,032,000 for
the same  period in 2000,  a decrease  of  $1,808,000  or 30%.  The  decrease is
primarily  the  result a  reduction  of  nationwide  computer  sales,  decreased
educational  spending and a trend by certain  customers to incorporate  our scan
conversion chips in televisions and video conferencing systems.

    As of  September  30,  2001,  the  Company  had a  sales  order  backlog  of
approximately $150,000.

Cost of Goods Sold

    Cost  of  goods  sold  were  $4,387,000,  or  65%  of  net  sales,  for  the
three-months  ended September 30, 2001, as compared with  $2,729,000,  or 66% of
net sales,  for the  three-months  ended September 30, 2000. The Company's gross
profit  margin  for the  third  quarters  of 2001  and  2000  were  35% and 34%,
respectively.  Cost of goods sold were $11,300,000, or 62% of net sales, for the
nine-months ended September 30, 2001, as compared with $8,420,000, or 69% of net
sales, for the nine-months  ended September 30, 2000. The Company's gross profit
margin  for  the  nine-month  periods  of  2001  and  2000  were  38%  and  31%,
respectively.

    The  increase  in gross  margin for the three and nine month  periods  ended
September  30,  2001,  are  primarily   related  to,  increased  sales  and  the
efficiencies  gained by  consolidating  the  manufacturing  operations  into one
facility  following  the merger  with  Videonics.  Additionally,  the nine month
period ended  September 30, 2000 included  charges to cost of sales  principally
attributable  to a physical  inventory  adjustment  at Focus' Far East  contract
manufacturer  of  approximately  $285,000 and the write-down of inventory to its
net  realizable  value,  including  the InVideo  product  line of  approximately
$318,000.  In addition,  gross margin was lower due to customer mix and sales of
certain slow moving product at carrying value.

Sales, Marketing and Support Expenses

    Sales,  marketing  and  support  expenses  were  $1,425,000,  or  21% of net
revenues,  for the  three-months  ended  September  30, 2001,  as compared  with
$797,000, or 19% of net revenues, for the three-months ended September 30, 2000,
an increase  of $628,000 or 79%.  Sales,  marketing  and support  expenses  were
$4,531,000,  or 25% of net revenues,  for the  nine-months  ended  September 30,
2001, as compared with $2,857,000,  or 24% of net revenues,  for the nine-months
ended September 30, 2000, an increase of $1,674,000 or 59%.

    The increase in absolute dollars and as a percentage of net revenues for the
three and nine month periods ending  September 30, 2001 are primarily due to the
addition of Videonics sales, marketing and support expenses following the merger
on January 16, 2001.

General and Administrative Expenses

    General and administrative expenses for the three-months ended September 30,
2001 were  $467,000 or 7% of net  revenues,  as compared with $542,000 or 13% of
net  revenues  for the  three-months  ended  September  30,  2000, a decrease of
$75,000 or 14%. General and  administrative  expenses for the nine-months  ended
September  30, 2001 were  $1,683,000  or 9% of net  revenues,  as compared  with
$2,432,000 or 20% of net revenues for the nine-months  ended September 30, 2000,
a decrease of $749,000 or 31%.


                                       13
<PAGE>
    The decrease of general and administrative  expenses in absolute dollars and
as a  percentage  of net  sales  for the  three  and nine  month  periods  ended
September  30, 2001 is  primarily a result of  decreased  payroll  expenses  and
consulting fees. Additionally, the first quarter of 2000 included accounting and
legal  fees of  approximately  $302,000  relating  to the  Company's  review  of
accounting  practices  and a  special  investigation  conducted  by the Board of
Directors.

Research and Development Expenses

    Research and development  expenses for the three-months  ended September 30,
2001  were  approximately  $617,000  or 9% of net  revenues,  as  compared  with
$245,000 or 6% of net revenues,  for the three-months  ended September 30, 2000,
an increase  of $372,000 or 152%.  Research  and  development  expenses  for the
nine-months ended September 30, 2001 were approximately $2,515,000 or 14% of net
revenues,  as compared with $854,000 or 7% of net revenues,  for the nine-months
ended September 30, 2000, an increase of $1,661,000 or 194%.

    The increase in research and development  expenses in both absolute  dollars
and as a  percentage  of revenues is due  primarily to the addition of Videonics
research and development expenses.  Additionally, the Company did not capitalize
any ASIC  development  costs  during  the  three  or nine  month  periods  ended
September 30, 2001. In the three and nine month periods ended September 30, 2000
the Company  capitalized  ASIC  development  costs of $450,000  and  $1,210,000,
respectively.  Partially  offsetting  the  increases  just  described,  were the
allocation  of research  and  development  expenses to costs of sales during the
three and nine month periods ended September 30, 2001, as the Company  performed
development work under contract.

Amortization

    Amortization  expenses for the  three-month  period ended September 30, 2001
were  $700,000 or 10% of net  revenues,  as compared  with $182,000 or 4% of net
revenues, for the three-months ended September 30, 2000, an increase of $518,000
or 285%.  Amortization  expenses for the nine-month  period ended  September 30,
2001 were $1,976,000 or 11% of net revenues,  as compared with $432,000 or 4% of
net  revenues,  for the  nine-months  ended  September  30, 2000, an increase of
$1,544,000 or 357%.

    The  increase  in terms  of  absolute  dollars  and as a  percentage  of net
revenues is primarily due to the Company  recording and subsequently  amortizing
goodwill and  intangibles  associated  with the Videonics  merger.  Amortization
associated with the merger approximated  $557,000 and $1,579,000,  respectively,
for the three and nine month  periods ended  September  30, 2001.  Excluding the
increase associated with the Videonics merger,  amortization  expenses decreased
as the Company  wrote-off and adjusted  down the carrying  value of its goodwill
amounts  in the  fourth  quarter  of 2000.  See also Note 4  "Recent  Accounting
Pronouncements."

Restructuring Expenses

    For the nine-month  period ended  September 30, 2001,  the Company  recorded
restructuring   expenses   totaling  $33,000  related  to  the  closure  of  its
Wilmington, MA, facility.

    For the nine-month  period ended  September 30, 2000,  the Company  recorded
restructuring expenses of $202,000 in conjunction with the closure of its Morgan
Hill,  CA facility  and  operation.  These  direct  expenses  are  comprised  of
inventory  adjustments  of  approximately  $118,000,  payroll  and  benefits  of
approximately  $57,000,  travel of approximately  $16,000 and lease cancellation
charges of approximately $11,000.

Write-off of In-Process Technology

    In connection with the acquisition of Videonics  during the first quarter of
2001,  the Company  recorded a charge for  purchased  in-process  technology  of
$505,000.


                                       14
<PAGE>
Interest Expense, Net

    Net interest expense for the three-month period ended September 30, 2001 was
$44,000, or 1% of net revenues, as compared to $3,000 for the three-months ended
September  30,  2000,  an  increase  of $41,000.  Net  interest  expense for the
nine-month period ended September 30, 2001 was $267,000,  or 1% of net revenues,
as compared to $58,000 for the nine-months ended September 30, 2000, an increase
of $209,000.

     The increase in interest  expense is primarily  attributable to an increase
in  debt  of  approximately  $3.6  million  between  comparable  periods  ending
September 30.

Other Expense, Net

    Other  income  for the  three-month  period  ended  September  30,  2001 was
$33,000,  as compared  to other  income of $13,000  for the  three-months  ended
September 30, 2000, a change of $20,000. Other expense for the nine-month period
ended September 30, 2001 was $62,000, as compared to other income of $67,000 for
the nine-months ended September 30, 2000, a change of $129,000.

    The increase in other income for the three month period ended  September 30,
2001 is primarily attributable to gains of approximately $128,000 related to the
settlement of debts for less than original amounts accrued, offset by charges of
$69,000   associated   with  the  untimely   registering   of  AMRO   Investment
International's  1,400,000 shares which were issued in connection with a private
placement in which the Company  received  gross  proceeds of  $1,500,000 in June
2000.  The  Company  expects  to  incur  these  charges  until  the  shares  are
registered.  Although there can be no assurance, the Company expects to register
the shares by December of 2001.

    The increase in other expense for the nine month period ended  September 30,
2001 are  primarily  attributable  to charges of  $374,000  associated  with the
untimely registering of AMRO Investment International's shares. Offsetting these
charges were gains of approximately  $328,000 related to the settlement of debts
for less than original amounts accrued.

Liquidity and Capital Resources

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

    Net cash used in  operating  activities  for the  nine-month  periods  ended
September 30, 2001 and 2000 was  $2,952,000  and  $2,351,000,  respectively.  In
first  nine  months of 2001,  net cash used in  operating  activities  consisted
primarily of a net loss of $4,657,000 adjusted for depreciation and amortization
of $2,328,000, the write-off of in-process technology related to the acquisition
of Videonics totaling $505,000,  deferred  compensation  expense of $209,000,  a
decrease  in accrued  expenses  totaling  $160,000  and an  increase in accounts
receivable of $1,260,000, partially offset by an increase in accounts payable of
$78,000.  In first nine months of 2000,  net cash used in  operating  activities
consisted  primarily of a net loss of $5,208,000  adjusted for  depreciation and
amortization of $733,000 and an increase in prepaid expenses and other assets of
$1,132,000  offset by an increase in accrued  liabilities  of  $2,092,000  and a
decrease in inventories of $1,605,000.

    As of  September  30,  2001  and  2000,  accounts  receivable  from a  major
distributor  represented  approximately  23%  and  24%,  respectively  of  total
accounts receivable.

    Net  cash  provided  by  investing  activities  for  the  nine-months  ended
September 30, 2001 was $1,156,000 whereas net cash used by investing  activities
was $1,152,000 for the nine-months  ended September 30, 2000. For the first nine
months of 2001,  cash was provided by a reduction in restricted  certificates of
deposit of approximately  $965,000 and net cash provided through the acquisition
of Videonics on January 16, 2001,  of $360,000,  offset by additions to property
and equipment of $169,000.  The  acquisition of Videonics was accounted for as a
purchase and made through the issuance of approximately  5,135,000 shares of the
Company's common stock. In the first nine months of 2000, cash


                                       15
<PAGE>
used in investing  activities was for the purchase of property and equipment and
capitalized software development costs of $406,000 and an increase in restricted
certificates of deposit of approximately $746,000.

    Net cash provided by financing  activities for the nine-month  periods ended
September 30, 2001 and 2000 was $2,150,000 and $1,052,000,  respectively. In the
first nine  months of 2001,  cash  provided  by  financing  activities  occurred
primarily  from the issuance of notes payable to a  stockholder  and director of
the Company of  $2,650,000  offset by  repayments  of $400,000 to a bank. In the
first nine months of 2000, the Company received  $1,121,000 in net proceeds from
the exercise of common stock options and warrants and received  $1,284,000  from
private offerings of common stock. The Company's  financing proceeds were offset
by payments on notes payable and capital lease obligations totaling $1,353,000.

    As of September 30, 2001, the Company had working capital of $3,147,000,  as
compared to $224,000 at December 31, 2000, an increase of $2,923,000.

    The Company has incurred  losses and negative cash flows from operations for
each of the two years in the period  ended  December 31, 2000 and for the period
ending  September 30, 2001 and as such has been dependent upon raising money for
short and  long-term  cash needs  through  debt,  proceeds  from the exercise of
options and warrants,  and the sale of common stock in private  placements.  For
the years ended December 31, 2000 and 1999, the Company  received  approximately
$1,284,000 and $4,414,000,  respectively, in net proceeds from private offerings
of common stock and $1,121,000 and $2,596,000,  respectively,  from the exercise
of common stock  options and warrants.  For the nine months ended  September 30,
2001, the Company has received  approximately  $123,000 in net proceeds from the
exercise of stock options.

     In addition,  on February 28, 2001, and June 29, 2001, the Company and Carl
Berg,  a  Focus  director  and  shareholder  entered  into  Secured  Convertible
Promissory  Note  agreements  under which Mr. Berg loaned the Company a total of
$2.7 million to support the Company's working capital needs. On May 7, 2001, the
Company converted $2.3 million of outstanding debt under two separate promissory
notes and accrued  interest owed by Focus to Mr. Berg to  Convertible  Preferred
Stock.  See "Note 7 - Commitments  - Conversion of Debt to Preferred  Stock" for
more information.

    At September 30, 2001, the Company owed Mr. Berg  approximately $4.1 million
in principal and accrued interest on various notes.

    Management has taken steps to reduce costs,  including the closure of its PC
Video  facility  in  Morgan  Hill,  CA in the  first  quarter  of  2000  and its
Wilmington,  MA facility on April 1, 2001. All operations,  customer support and
finance were moved into the Campbell,  CA,  facility.  In  connection  with this
restructuring, the Company has reduced overall personnel by approximately 20%.

    Management  is assessing  product  lines in light of the recent  merger with
Videonics Inc., to identify how to enhance  existing or create new  distribution
channels.  In  addition,  the Company  released  three new products in the third
quarter of 2001, which should provide the Company with incremental revenue.

    Even with the anticipated reduction in expenses related to the restructuring
and an expected increase in sales, the Company  anticipates that during the rest
of 2001 it will need to raise over $500,000 to support its working capital needs
and meet existing debt obligations

    In an effort to meet those  needs,  the Company  has entered  into a Private
Equity Line of Credit Agreement  ("Equity  Agreement")  with Euston  Investments
("Euston").  Under the  Euston  Equity  Agreement  the  Company  can issue up to
4,000,000 shares of its common stock, subject to certain restrictions, to Euston
at a 10% discount to raise additional  money. The Company has sought to register
such shares under a Registration Statement on Form SB-2 initially filed with the
Securities  and Exchange  Commission  on February 7, 2001 and then as amended on
August 9, 2001.  As of August 10, 2001 the  registration  statement has not been
deemed  effective  and there can be no assurances  when or if such  registration
statement  will be deemed  effective.  This document is neither an offer to sell
nor a solicitation for an offer to buy securities.  The offering with respect to
the  proposed  equity  line of credit  will be made only by a  prospectus  or an
exemption therefrom.

     Ultimate future capital requirements will depend on many factors, including
cash flow from  operations,  continued  progress  in  research  and  development
programs,  competing  technological and market developments,  and our ability to


                                       16
<PAGE>
market our products  successfully.  Other than as described in the Euston Equity
Agreement,  the Company  has no  commitments  from any other  sources to provide
additional  equity or debt  financing.  As such,  there can be no assurance that
sufficient funds will be raised.  Moreover, any equity financing would result in
dilution to our then-existing shareholders and any additional debt financing may
result in higher  interest  expense.  See "Risk  Factors - Risks  Related to the
Equity Line of Credit."

    Although there can be no assurances,  the Company  believes that its current
cash, anticipated proceeds from the Euston Equity Agreement (if its registration
statement  as filed  with the  Securities  and  Exchange  Commission  is  deemed
effective), its borrowings from a shareholder,  together with its operating cash
flows,  will be  sufficient  to meet  the  Company's  requirements  for  working
capital, and capital expenditures for the next 12 months.

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.

Risk Factors

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

We have been named as a defendant in alleged class actions alleging violation of
federal securities laws.

We are  subject to two class  action  lawsuits  alleging  that Focus and certain
present and former officers violated federal  securities laws in connection with
a number of allegedly  false or  misleading  statements.  On May 10,  2001,  the
Federal  District  Court  dismissed  one  of the  alleged  class  action  in its
entirety.  Focus  believes  that it has  consistently  complied with the federal
securities  laws,  and does not believe at this time that this  litigation  will
result in a material adverse effect on its financial condition. Nonetheless, the
management  time and resources that could be required to respond  effectively to
such claims and to defend Focus  vigorously in such  litigation  could adversely
impact  our  management's  administrative  capabilities  and  there  can  be  no
assurances as to whether the eventual  outcome of the cases will have a material
adverse effect on our financial condition or operations.

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

Historically,  we have met our short-and long-term extra cash needs through debt
and the sale of  common  stock in  private  placements  because  cash  flow from
operations  has been  insufficient  to fund its  operations.  Set forth below is
information regarding net proceeds received in the last nine months and our last
two fiscal years:

                          Private Offerings    Issuance      Exercise of Stock
                           Of Common Stock     of Debt      Options and Warrants

    Nine months ended

      September 30, 2001               -       $2,650,000          $123,000
    Fiscal 2000               $1,284,000       $2,362,000        $1,121,000
    Fiscal 1999               $4,414,000               --        $2,596,000

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

At October 31, 2001, we had  32,671,250 and 1,904 shares of common and preferred
stock issued and outstanding,  respectively,  and 818,079 warrants and 6,213,240
options that are  exercisable  into shares of common stock.  The 1,094


                                       17
<PAGE>
shares of preferred  stock are convertible  into 1,904,000  shares of our common
stock.  We also may  issue  additional  shares  in  acquisitions  and may  grant
4,771,754  additional  stock options to our employees,  officers,  directors and
consultants under our current stock option plans.

We  entered  into  a  private  equity  line  of  credit  agreement  with  Euston
Investments Holdings Limited, a British Virgin Islands corporation,  on July 28,
2000,  for the future  issuance and  purchase of up to  4,000,000  shares of our
common stock at a 10% discount to the then market price of our common stock. The
dollar amount of each sale is limited by our common stock's trading volume and a
minimum period of time must occur between  sales.  In turn,  Euston  Investments
will have the right sell our stock in the open  market,  sell our stock to other
affiliated investors through negotiated  transactions,  or hold our stock in its
own  portfolio.  We will only  drawdown  on the equity  line to meet our funding
needs and cannot utilize the line of credit until the shares are registered with
the SEC. The Company  included such shares for  registration on its amended Form
SB-2 filed with the SEC on August 9, 2001. There can be no assurances when or if
such  registration  statement will be deemed effective by the SEC. This document
is neither an offer to sell nor a solicitation  for an offer to buy  securities.
The offering  with  respect to the  proposed  equity line of credit will be made
only by a prospectus or an exemption therefrom.

The issuance or even the  potential  issuance of shares under the equity line of
credit, in connection with any other additional financing,  and upon exercise of
warrants,  options or rights will have a dilutive  impact on other  stockholders
and could have a negative effect on the market price of our common stock.

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

We are dependent upon a significant  shareholder  to meet our interim  financing
needs.

We have relied upon the ability of Carl Berg, a director and  significant  owner
of our common stock for interim  financing  needs.  As of September 30, 2001, we
had an aggregate of  approximately  $4,012,000 in debt  outstanding to Mr. Berg.
There can be no  assurances  that Mr. Berg will continue to provide such interim
financing  should we need such  funds  prior to  utilizing  the  equity  line of
credit.

We have a long history of operating losses.

As of September 30, 2001, Focus had an accumulated deficit of $53,365,000. Focus
incurred net losses of  $12,029,000  and $1,480,000 for the years ended December
31,  2000  and  1999,  respectively.  Additionally,  Focus  incurred  a loss  of
$4,657,000 for the nine month period ended  September 30, 2001.  There can be no
assurance that we will be profitable.

Focus relies on four vendors for 90% of its product components.

Over 90% of the components for our products are  manufactured on a turnkey basis
by  four  vendors,  Furthertech  Company,  Ltd.,  Sicon  International,  Samsung
Semiconductor  Inc.,  and  Asemtec  Corporation.  If  these  vendors  experience
production or shipping  problems for any reason,  Focus in turn could experience
delays in the  production  and shipping of Focus  products,  which would have an
adverse effect on our results of operations.

We are dependent on our suppliers.

We  purchase  all of our  parts  from  outside  suppliers  and from time to time
experience   delays  in  obtaining  some   components  or  peripheral   devices.
Additionally,  we are dependent on sole source suppliers for certain components.
We attempt to reduce the risk of supply interruption by evaluating and obtaining
alternative  sources for various  components  or  peripheral  devices  when such
sources are available.  However, there can be no assurance that supply shortages
will not occur in the future which could  significantly  increase  the cost,  or
delay  shipment  of,  our  products,  which in turn could  adversely  affect our
results of operations.

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

For the year ended  December 31, 2000,  approximately  15% of our revenues  were
derived from sales to a major distributor, and approximately 21% of our revenues
were derived from sales to two major  retailers.  These  figures were 11% and 4%
respectively  for the nine  months  ended  September  30,  2001.  We do not have
long-term  contracts  requiring  any customer to purchase any minimum  amount of
products.  There can be no assurance  that we will continue to receive orders of
the same magnitude as in the past from existing  customers or we will be able to
market its current or  proposed


                                       18
<PAGE>
products  to new  customers.  Loss of any major  customer  would have a material
adverse effect on the Focus business as a whole.

Our products may become obsolete very quickly.

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

We may not be able to protect our proprietary information.

Although Focus has filed eight patent  applications with respect to its PC-to-TV
video-graphics  products,  currently  only five patents have been issued.  Focus
treats its technical data as confidential and relies on internal  non-disclosure
safeguards,  including  confidentiality  agreements with employees,  and on laws
protecting trade secrets to protect its proprietary information. There can be no
assurance that these measures will  adequately  protect the  confidentiality  of
Focus proprietary information or prove valuable in light of future technological
developments.

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

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

     o   changing product specifications;

     o   difficulties in hiring and retaining necessary personnel;

     o   difficulties in reallocating  engineering  resources and other resource
         limitations;

     o   difficulties with independent contractors;

     o   changing  market or  competitive  product  requirements;  unanticipated
         engineering complexity;

     o   undetected errors or failures in software and hardware; and

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

If we are unable to respond to rapid  technological  change in a timely  manner,
then we may lose customers to our competitors.

To  remain   competitive,   we  must   continue   to  enhance  and  improve  the
responsiveness,  functionality  and  features of our  products.  Our industry is
characterized  by rapid  technological  change,  changes  in user  and  customer
requirements and preferences and frequent new product and service introductions.
If competitors introduce products and services embodying new technologies, or if
new industry  standards  and  practices  emerge,  then our existing  proprietary
technology  and systems may become  obsolete.  Our future success will depend on
our ability to do the following:

both license and internally develop leading technologies useful in our business;
enhance our existing  technologies;  develop new services  and  technology  that
address  the  increasingly  sophisticated  and varied  needs of our  prospective
customers; and respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.

To develop our proprietary technology entails significant technical and business
risks. We may use new  technologies  ineffectively,  or we may fail to adapt our
proprietary   technology  and   transaction   processing   systems  to  customer
requirements  or emerging  industry  standards.  If we face  material  delays in
introducing  new  services,  products and  enhancements,  then our customers may
forego the use of our services and use those of our competitors.

We typically operate without a significant amount of backlog.

We typically operates with a small amount of backlog.  Accordingly, it generally
does not have a material backlog of unfilled orders, and revenues in any quarter
are  substantially  dependent on orders booked in that quarter.  Any significant
weakening  in customer  demand would  therefore  have and has had in the past an
almost immediate adverse impact on our operating results.


                                       19
<PAGE>
Our quarterly financial results are subject to significant fluctuations.

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

Our common stock could be delisted from the Nasdaq  SmallCap  Market which would
make trading in our stock more difficult.

Our common  stock is traded on the Nasdaq  SmallCap  Market.  There are  various
quantitative  listing  requirements for a company to remain listed on the Nasdaq
SmallCap  Market.

     o   We must maintain  stockholders' equity of $2,500,000.  At September 30,
         2001, we had total stockholders'
         equity of $7.2 million.

     o   We are  required to maintain a minimum bid price of $1.00 per share for
         our common stock.  The closing price of our common stock on October 31,
         2001, was $1.50. Between June 1, 2001 and September 30, 2001, our stock
         closed below $1.00 a share on 41 of 122 trading days.  Note that Nasdaq
         suspended the $1.00 bid requirement until January 2, 2002.

If we fail these Nasdaq SmallCap  requirements  in the future,  our common stock
could be delisted, eliminating the only established trading market for shares of
our common stock.  Euston Investments can also terminate the private equity line
of credit  agreement if we are delisted.  The issuance by us of shares of common
stock to Euston  Investments,  or the subsequent resale by Euston Investments of
those shares,  in either case at a discount to the market price,  may reduce the
trading price of our common stock to a level below the Nasdaq  minimum bid price
requirement.

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

Our common stock price is volatile.

The  market  price  for  our  common  stock  is  volatile  and  has   fluctuated
significantly  to date.  For  example,  between  January 1, 2001 and October 31,
2001,  the per share  price of our stock  has been  between  $0.65 and $1.50 per
share.  The trading price of our common stock is likely to continue to be highly
volatile and subject to wide  fluctuations in response to factors  including the
following:

     o   actual or anticipated variations in our quarterly operating results;

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

     o   changes in financial estimates by securities analysts;

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

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

     o   additions or departures of key personnel; and

     o   sales of common stock.

         In addition,  the securities markets have experienced extreme price and
volume  fluctuations,  and the market  prices of the  securities  of  technology
companies have been especially volatile. These broad market and industry factors
may  adversely  affect the market price of our common  stock,  regardless of our
actual operating  performance.  In the past,  following periods of volatility in
the market price of stock,  many  companies  have been the object of  securities
class action  litigation.  If we are sued in a securities class action,  then it
could result in substantial costs and a diversion of management's  attention and
resources.

Risks Related to Our Industry

International sales are subject to significant risk.

Our  revenues  from  outside the United  States are  subject to  inherent  risks
related thereto, including currency rate fluctuations,  the general economic and
political  conditions  in each  country.  There  can be no  assurance  that  the
economic  crisis and currency  issues,  currently  being  experienced in certain
parts of the world will not have a  material  adverse  effect on our  revenue or
operating results in the future.


                                       20
<PAGE>
Our businesses are very competitive.

The computer  peripheral  markets are  extremely  competitive.  Focus  currently
competes  with  other   developers  of  video   conversion   products  and  with
video-graphic  integrated  circuit  developers.  Many  of our  competitors  have
greater market recognition and greater financial, technical, marketing and human
resources.  Although Focus is not currently  aware of any  announcements  by its
competitors that would have a material impact on its operations, there can be no
assurance  that  Focus  will be able to compete  successfully  against  existing
companies or new entrants to the  marketplace.  The video  production  equipment
market is highly competitive and is characterized by rapid technological change,
new product  development  and  obsolescence,  evolving  industry  standards  and
significant price erosion over the life of a product.  Competition is fragmented
with  several  hundred  manufacturers  supplying  a variety of  products to this
market.  We  anticipate  increased  competition  in  the  video  post-production
equipment  market  from both  existing  manufacturers  and new market  entrants.
Increased competition could result in price reductions, reduced margins and loss
of  market  share,  any of which  could  materially  and  adversely  affect  our
business,  financial  condition  and  results  of  operations.  There  can be no
assurance  that it will be able to  compete  successfully  against  current  and
future competitors.

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

The  energy  crisis  in the  State of  California  could  adversely  effect  our
operations.

Various factors including the opening of new power plants, moderate weather, the
national economic slowdown, and energy conservation  contributed to the State of
California's  being able to meet  electricity  demand  during the summer of 2001
with only minimal  disruption.  While the peak summer demand season is now over,
longer  term  aspects  of  the  California   energy  crisis  remain,   including
uncertainty  regarding the settlement of the various financial components of the
crisis.  These financial  components  include a potential  adverse impact on the
State of California's  general fund, the determination of which energy customers
will bear what cost burdens,  and the resolution of the financial  status of the
two largest utilities in the State.

We remain  concerned about the potential impact of the energy crisis upon Focus'
operations  and the  financial  condition  of our  customers  and  suppliers  in
California.  Focus itself is not a particularly  large user of energy.  However,
our  California  offices at this time do not have backup  generators,  and hence
would need to curtail our operations in the event of an electricity brown-out or
black-out.

Recent terrorist attacks in the United States have affected the stock market and
the general economy and could negatively affect our income.

On September  11, 2001,  the World Trade Center in New York was  destroyed,  the
Pentagon  outside  Washington,  DC was damaged and a jetliner crashed in central
Pennsylvania as a result of terrorist  attacks.  Following these attacks,  stock
prices declined in general, and questions were raised concerning the impact that
the terrorist attacks and the United States' response would have on the national
economy.  These  uncertainties  have  contributed  to the  existing  slowdown in
economic activity in the United States. Continuing weakness in the economy could
decrease  demand  for our  products,  increase  delinquencies  in  payments  and
otherwise have an adverse impact on our business.


                                       21
<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.


                                       22
<PAGE>
PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Class Action Suits

Focus and one of its  directors  have been named as  defendants  in a securities
class  action  pending  in United  States  District  Court for the  District  of
Massachusetts. The complaint alleges a class of shareholders who purchased Focus
shares  during  the  July  17,  1997 to  February  19,  1999  period  (C.A.  No.
99-12344-DPW).  The complaint  was  initially  filed in November of 1999 and has
been amended several times. The complaint  purports to allege  violations of the
federal securities laws and seeks unspecified monetary damages. Defendants moved
to dismiss the action.  The Federal  District Court granted certain  portions of
the Company's  motion to dismiss and denied other portions  allowing the case to
go forward into pretrial discovery as to certain matters. Focus believes that it
has consistently complied with the federal securities laws, and does not believe
at this time that this  litigation  will result in a material  adverse effect on
its financial  condition.  Nonetheless,  the management  time and resources that
could be required  to respond  effectively  to such  claims and to defend  Focus
vigorously  in  such  litigation   could  adversely   impact  our   management's
administrative capabilities.

CRA Systems, Inc.

In 1996 CRA  Systems,  Inc.,  a Texas  corporation,  and Focus  entered  into an
agreement,  the terms and  nature of which  were  subsequently  disputed  by the
parties. Focus contended that the transaction was simply a sale of inventory for
which Focus was never paid.  CRA contended  otherwise.  CRA brought suit against
Focus and on September 21, 1998,  filed in the 170th Judicial  District Court of
McLennon County,  Texas (Case No.  98-3151-4) for breach of contract  contending
that Focus  grossly  exaggerated  the demand for the  product  and the margin of
profit that was available to CRA regarding  this project.  CRA sought to recover
out-of-pocket  losses  exceeding  $100,000  and  lost  profits  of  $400,000  to
$1,000,000.  The case was  removed  to the US  District  Court  for the  Western
District of Texas, Waco, Texas (Civil No. W-99-CA-031). A jury trial in May 2000
in that court resulted in a verdict in favor of CRA for $848,000  actual damages
and  $1,000,000  punitive  damages.  On October 10, 2000,  the court  rendered a
judgment in favor of CRA for actual damages, punitive damages,  attorney's fees,
costs, and interest. In connection with this judgment, we recorded an expense of
$2,147,722  in the period ended  September  30, 2000.  The court  overruled  the
motion for new trial that Focus  filed,  and Focus has  appealed the judgment to
the U.S.  Court of Appeals for the Fifth Circuit in New Orleans,  Louisiana.  On
October  27,  2000,  Focus  submitted a bond in the  approximate  amount of $2.3
million (being the approximate amount of the judgment plus 10% to cover interest
and costs of CRA) and the U.S.  District Court granted a stay of any enforcement
of the judgment  pending  appeal.  The court of appeals has  tentatively set the
appeal for oral argument during the week of December 3, 2001.

General

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


                                       23
<PAGE>
Item 2. Changes in Securities

         On June 9, 1999,  we entered into a Common  Stock and Warrant  Purchase
Agreement with AMRO  International,  S.A. for the private placement of 1,400,000
shares of Focus common  stock.  This  Agreement  also required the issuance of a
common stock purchase warrant,  under the terms of which AMRO may purchase up to
140,000  additional shares of FOCUS common stock. In return,  AMRO paid to Focus
$1,500,000 at the closing. On June 27, 2001 and on September 28, 2001, we issued
485,295  and  69,336  shares of Focus  common  stock,  respectively,  to AMRO to
satisfy  part  of our  obligation  under  the  agreement  regarding  the  timely
registration of the shares purchased by AMRO.

         The  issuance of the  securities  described  above were  exempt  either
pursuant  to  Section  4(2) of the  Securities  Act of 1933,  as  amended,  as a
transaction by an issuer not involving a public offering. The recipients in such
transactions   represented   their  intention  to  acquire  the  securities  for
investment  only  and not  with a view to or for  sale in  connection  with  any
distribution  thereof,  and  appropriate  legends  were  affixed  to  the  share
certificates  and instruments  issued in such  transactions.  All recipients had
adequate access,  through their  relationships with the Company,  to information
about the Company.

         No  underwriters  were  employed  in  any of  the  above  transactions.
Appropriate  legends were affixed to the share  certificates and warrants issued
in the transactions.


                                       24
<PAGE>
Item 3. Defaults Upon Senior Securities

         (None)

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

         (None)

Item 5. Other Information

         (None)

Item 6. Exhibits and Reports on Form 8-K

              (a) Exhibits

              10.61 Promissory note issued to Carl Berg dated June 29, 2001.

              (b) Reports on Form 8-K

                  None

                                       25
<PAGE>
                                   SIGNATURES

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

   November 13, 2001                              Focus Enhancements, Inc.
-----------------------------                    --------------------------
           Date                                          Registrant



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