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 June 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 [X]

     As of August 10, 2001, there were  approximately  32,501,914  shares of the
Registrant's Common Stock Outstanding.
<PAGE>

                            Focus Enhancements, Inc.
                           Consolidated Balance Sheets
                          (in thousands, except shares)

<TABLE>
<CAPTION>
                                                                               June 30,   December 31,
                                                                               --------    --------
                                                                                 2001        2000
                                                                               --------    --------
                                                                             (unaudited)
<S>                                                                            <C>         <C>
                                   ASSETS
Current assets:
  Cash and cash equivalents                                                    $    642    $    352
  Restricted certificates of deposit                                                296       1,263
  Restricted collateral deposit                                                   2,363       2,363
  Accounts receivable, net of allowances of $1,022 and $1,042 at
    June 30, 2001 and December 31, 2000, respectively                             3,409       1,778
  Inventories                                                                     4,639       2,095
  Prepaid expenses and other current assets                                         136          43
                                                                               --------    --------
    Total current assets                                                         11,485       7,894

Property and equipment, net                                                         486         395
Capitalized software development costs                                              585         728
Other assets, net                                                                   125         490
Intangibles, net                                                                  2,589        --
Goodwill, net                                                                     5,165         274
                                                                               --------    --------
    Total assets                                                               $ 20,435    $  9,781
                                                                               ========    ========

               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Bank loan                                                                    $    150    $   --
  Current portion of long-term debt                                                --           364
  Obligations under capital leases, current portion                                  56         100
  Accounts payable                                                                4,673       3,377
  Accrued liabilities                                                             1,842       1,681
  Accrued legal judgment                                                          2,148       2,148
                                                                               --------    --------
    Total current liabilities                                                     8,869       7,670

Convertible notes payable to stockholder                                          3,563       2,362
Obligations under capital leases, non-current                                        75         102
Long-term debt, net of current portion                                             --            64
                                                                               --------    --------

    Total liabilities                                                            12,507      10,198
                                                                               --------    --------

Commitments and contingencies

Stockholders' equity (deficit)

  Preferred stock, $.01 par value; authorized 3,000,000 shares; 1,904 shares
  issued at June 30, 2001, none at December 31, 2001.
  (Aggregate Liquidation preference $2,266,674)                                    --          --
  Common stock, $.01 par value; 50,000,000 shares authorized, 32,443,580
    and 26,350,203 shares issued at June 30, 2001 and December 31, 2000,
    respectively                                                                    329         264
  Deferred compensation                                                            (456)       --
  Additional paid-in capital                                                     61,230      48,727
  Accumulated deficit                                                           (52,475)    (48,708)
  Treasury stock at cost, 450,000 shares                                           (700)       (700)
                                                                               --------    --------
  Total stockholders' equity (deficit):                                           7,928        (417)
                                                                               --------    --------
    Total liabilities and stockholders' equity (deficit):                      $ 20,435    $  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 June 30,
                                                    ---------------------------
                                                        2001          2000
                                                      --------      --------
Net revenues                                          $  6,489      $  4,400
Cost of goods sold                                       3,694         3,335
                                                      --------      --------

  Gross profit                                           2,795         1,065
                                                      --------      --------

Operating expenses:
  Sales, marketing and support                           1,646           959
  General and administrative                               473           707
  Research and development                                 903           285
  Amortization expense                                     700           237
                                                      --------      --------

    Total operating expenses                             3,722         2,188
                                                      --------      --------

    Loss from operations                                  (927)       (1,123)

  Interest expense, net                                   (100)          (34)
  Other (expense) income , net                             (16)           43
                                                      --------      --------

    Loss before income taxes                            (1,043)       (1,114)

  Income tax benefit                                      --              (2)
                                                      --------      --------

    Net loss                                          $ (1,043)     $ (1,112)
                                                      ========      ========

Loss per common share:
  Basic                                               $  (0.03)     $  (0.04)
                                                      ========      ========
  Diluted                                             $  (0.03)     $  (0.04)
                                                      ========      ========

Weighted average common shares outstanding:
  Basic                                                 31,285        24,785
                                                      ========      ========
  Diluted                                               31,285        24,785
                                                      ========      ========

         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)


                                                       Six Months ended June 30,
                                                       -------------------------
                                                           2001          2000
                                                         --------      --------
Net revenues                                             $ 11,498      $  8,014
Cost of goods sold                                          6,913         5,665
                                                         --------      --------

  Gross profit                                              4,585         2,349
                                                         --------      --------

Operating expenses:
  Sales, marketing and support                              3,106         1,987
  General and administrative                                1,216         1,854
  Research and development                                  1,898           545
  Amortization expense                                      1,276           451
  Restructuring expense                                        33           202
  Write-off of in-process technology                          505          --
                                                         --------      --------

    Total operating expenses                                8,034         5,039
                                                         --------      --------

    Loss from operations                                   (3,449)       (2,690)

  Interest expense, net                                      (223)          (54)
  Other (expense) income , net                                (95)           54
                                                         --------      --------

    Loss before income taxes                               (3,767)       (2,690)

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

    Net loss                                             $ (3,767)     $ (2,692)
                                                         ========      ========

Loss per common share:
  Basic                                                  $  (0.12)     $  (0.11)
                                                         ========      ========
  Diluted                                                $  (0.12)     $  (0.11)
                                                         ========      ========

Weighted average common shares outstanding:
  Basic                                                    30,734        24,557
                                                         ========      ========
  Diluted                                                  30,734        24,557
                                                         ========      ========

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


                                       4
<PAGE>

                            Focus Enhancements, Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                  Six Months Ended June 30,
                                                                                  -------------------------
                                                                                      2001       2000
                                                                                     -------    -------
<S>                                                                                  <C>        <C>
Cash flows from operating activities:
Net loss                                                                             $(3,767)   $(2,692)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                        1,503        451
  Deferred compensation expense                                                          135       --
  Write-off of in process technology                                                     505       --
  Changes in operating assets and liabilities, net of the effects of acquisitions;
   Increase in accounts receivable                                                    (1,473)        (4)
   Increase in inventories                                                               (40)      (281)
   Decrease in prepaid expenses and other assets                                          68         83
   Increase in accounts payable                                                          168        124
   Increase (decrease) in accrued liabilities                                            166        (59)
                                                                                     -------    -------

  Net cash used in operating activities                                               (2,735)    (2,378)
                                                                                     -------    -------

Cash flows from investing activities:
  Decrease (increase) in restricted certificates of deposit                              967       (734)
  Additions to property and equipment                                                   (119)      (570)
  Net cash from acquisition of Videonics                                                 360       --
                                                                                     -------    -------

Net cash provided by (used in) investing activities                                    1,208     (1,304)
                                                                                     -------    -------

Cash flows from financing activities:
  Payments on notes payable and long-term debt                                          (250)    (1,101)
  Proceeds from stockholder loan                                                       2,200       --
  Payments under capital lease obligations                                               (71)      (223)
  Net proceeds from private offerings of common stock                                   --        1,284
  Payments for registration of common stock                                              (96)      --
  Net proceeds from exercise of common stock options and warrants                         34      1,069
                                                                                     -------    -------

Net cash provided by financing activities                                              1,817      1,029
                                                                                     -------    -------

Net increase (decrease) in cash and cash equivalents                                     290     (2,653)
Cash and cash equivalents at beginning of year                                           352      3,737
                                                                                     -------    -------

Cash and cash equivalents at end of period                                           $   642    $ 1,804
                                                                                     =======    =======
Supplement schedule of non-cash financing activities:
  Acquisition of Videonics Inc., for common stock                                      7,960       --
  Conversion of related 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 June 30, 2001 and for the three and six month periods ended June
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 six month  periods  ended  June 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 June
30,  2001,  the  Company  reported  stockholder's  equity of  $7,928,000  and an
accumulated deficit of $52,475,000.

    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 is developing and
expects to release at least two more new products for the year 2001, although no
assurances can be given.

    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  expects to
reduce 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 $1.0  million 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 August 14, 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.

     In  addition,  on February  28,  2001,  the Company and Carl Berg,  a Focus
director and  shareholder  entered into a Secured  Convertible  Promissory  Note
agreement  under  which Mr.  Berg  agreed to loan the  Company  $2.0  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 June 30, 2001, Focus owed Mr. Berg $3.6 million in principal and accrued
interest under various notes.
                                       6
<PAGE>

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.


 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  ("Accounting  for  Derivative
Instruments  and  Hedging  Activities--Deferral  of the  Effective  Date of FASB
Statement No. 133.") 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 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.

                                       7
<PAGE>

5. Reclassification of Certain Expenses

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


6. Inventories

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

                                                   2001          2000
                                                ----------    ----------
    Raw materials                               $2,270,000    $  826,000
    Work in process                                793,000            --
    Finished goods                               1,576,000     1,269,000
                                                ----------    ----------
    Totals                                      $4,639,000    $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 is fully secured by a senior lien on the Company's assets.  Interest is
calculated  at a rate of 15%. As of June 30, 2001,  an aggregate of $150,000 was
outstanding under the loan. 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

                                       8
<PAGE>

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  preceeding  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 June  30,  2001 the  Company  had  unpaid
principal  and  accrued  interest  due  under  the note  totaling  approximately
$2,377,000.

     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 common stock at a  conversion  price of $1.06 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 June 30,  2001 the Company had
principal  and  accrued  interest  due  under  the note  totaling  approximately
$1,213,000.

    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 June 30, 2001 and  December  31,  2000,  the
Company maintained interest bearing accounts  collateralizing  letters of credit
in the amount of $296,000 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.

                                       9
<PAGE>

    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 June 30,  2001  $88,000 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 March 31, 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  has been  named as a  defendant  in two  consolidated  alleged  class
actions alleging violations of federal securities laws. The lawsuits allege that
Focus and its Chairman and certain  other present and former  officers  violated
federal  securities  laws in  connection  with a number  of  allegedly  false or
misleading  statements and seek  certification of two classes,  one on behalf of
persons who  purchased  stock from July 17,  1997 to  February  19, 1999 and the
other on behalf of persons who  purchased  stock  between  November  15, 1999 to
March 1, 2000,  respectively.  Defendants moved to dismiss both actions.  On May
10, 2001, the Federal District Court dismissed the later alleged class action in
its entirety. As to the earlier alleged class 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 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. A jury trial in May 2000 in
federal district court in Waco, Texas, 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,   for  a  total  award  of
approximately  $2,000,000.  In  connection  with this  judgment,  we recorded an
expense of $2.1  million 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.  The  case  has not yet  been  submitted  to the  appeals  court  for
decision.  The trial court has granted a stay of any enforcement of the judgment
pending appeal, based on the posting of 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).

    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.

                                       10
<PAGE>

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).

    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 six months ended June 30,
2001,  the Company  recorded  expenses of $90,000  and  $180,000,  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. On June 27, 2001,  the Company  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 $125,000  (included in Other Expense,  Net). The Company has
included  such shares for  registration  on the its amended Form SB-2 filed with
the Securities and Exchange Commission on August 9, 2001.

    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.  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.  Each
share of preferred stock has a liquidation preference of $1,190.48 per share and
is convertible into 1,000 shares of common stock.

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,  Union  Atlantic  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.

                                       11
<PAGE>
         See also "Note 7 - Commitments - Convertible  Notes,  " "- Note Payable
to Stockholder," and "Note 8 - Series B Preferred Stock."

                                       12
<PAGE>

Item 2. Management's  Discussion And Analysis Of Financial Condition And Results
Of Operations

Introduction

    The  following   information   should  be  read  in  conjunction   with  the
consolidated  financial  statements  and notes thereto in Part I, Item 1 of this
Quarterly  Report and with  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations  contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 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 June 30, 2001 were  $6,489,000  as
compared  with  $4,400,000  for the  three-month  period  ended June 30, 2000 an
increase of $2,089,000,  or 47%. Net revenues for the six-months  ended June 30,
2001 were $11,498,000 as compared with $8,014,000 for the six-month period ended
June 30, 2000 an increase of $3,484,000, or 43%.

     For the three  months  ended June 30, 2001,  net sales to  Professional  AV
customers were approximately $3,736,000 compared to $868,000 for the same period
in 2000, an increase of  $2,868,000  or 330%.  For the six months ended June 30,
2001,  net sales to  Professional  AV customers  were  approximately  $7,067,000
compared to $1,544,000 for the same period in 2000, an increase of $5,523,000 or
358%.  Such increase in net sales to Professional AV customers for the three and
six month periods ending June 30, 2001 is primarily  related to the inclusion of
Videonics Inc. sales beginning on January 16, 2001 of $2,000,000 and $4,857,000,
respectively.

     For the three months ended June 30, 2001,  net sales to OEM customers  were
approximately  $1,071,000 as compared to $1,145,000 for the same period in 2000,
a decrease of $74,000 or 6%. For the six months ended June 30,  2001,  net sales
to OEM customers were approximately $1,512,000 as compared to $1,676,000 for the
same period in 2000,  a decrease of $164,000 or 10%.  The  decrease is primarily
the result of a certain OEM making a bulk purchase of  approximately  $90,000 in
the first  quarter of 2000.  Sales of our current line of  application  specific
integrated circuits ("ASIC") chips (FS400, FS450 and 460 families) increased 12%
and 16% over three and six month prior year periods, respectively.

     For the three months ended June 30, 2001, net sales to Resellers consisting
of  Distributors,  Retailers,  VAR's and Education  segments were  approximately
$1,682,000 as compared to $2,386,000  for the same period in 2000, a decrease of
$704,000 or 30%. For the six months ended June 30, 2001,  net sales to Resellers
consisting  of  Distributors,  Retailers,  VAR's  and  Education  segments  were
approximately  $2,919,000 as compared to $4,793,000 for the same period in 2000,
a decrease of  $1,874,000  or 39%.  The  decrease is  primarily  the result of 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.


                                       13


<PAGE>
Cost of Goods Sold

    Cost  of  goods  sold  were  $3,694,000,  or  57%  of  net  sales,  for  the
three-months  ended June 30, 2001,  as compared with  $3,335,000,  or 76% of net
sales,  for the  three-months  ended June 30, 2000.  The Company's  gross profit
margin for the second quarters of 2001 and 2000 were 43% and 24%,  respectively.
Cost of goods  sold were  $6,913,000,  or 60% of net sales,  for the  six-months
ended June 30, 2001, as compared with  $5,665,000,  or 71% of net sales, for the
six-months ended June 30, 2000. The Company's gross profit margin for the second
quarters of 2001 and 2000 were 40% and 29%, respectively.

     The increase in costs of goods sold for the three and six month periods are
primarily  related to an increase in sales. The increase in gross margin for the
three and six month  periods  ended June 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  second  quarter  of 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  $1,646,000,  or  25% of net
revenues,  for the three-months  ended June 30, 2001, as compared with $959,000,
or 22% of net revenues, for the three-months ended June 30, 2000, an increase of
$687,000 or 72%. Sales,  marketing and support expenses were $3,106,000,  or 27%
of net  revenues,  for the  six-months  ended June 30,  2001,  as compared  with
$1,987,000,  or 25% of net revenues,  for the six-months ended June 30, 2000, an
increase of $1,119,000 or 56%.

    The increase in absolute dollars and as a percentage of net revenues for the
three  and six month  periods  ending  June 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

                                       14
<PAGE>

    General and administrative expenses for the three-months ended June 30, 2001
were  $473,000 or 7% of net  revenues,  as compared  with $707,000 or 16% of net
revenues  for the  three-months  ended June 30,  2000, a decrease of $234,000 or
33%. General and administrative  expenses for the six-months ended June 30, 2001
were  $1,216,000 or 11% of net revenues,  as compared with  $1,854,000 or 23% of
net revenues for the  six-months  ended June 30, 2000, a decrease of $638,000 or
34%.

     The decrease of general and administrative expenses in absolute dollars and
as a percentage  of net sales for the three and six month periods ended June 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 June 30, 2001
were approximately $903,000 or 14% of net revenues, as compared with $285,000 or
6% of net  revenues,  for the  three-months  ended June 30, 2000, an increase of
$618,000 or 217%.  Research and  development  expenses for the six-months  ended
June 30, 2001 were approximately  $1,898,000 or 17% of net revenues, as compared
with $545,000 or 7% of net revenues,  for the six-months ended June 30, 2000, an
increase of $1,353,000 or 248%.

     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 six month periods ended June 30,
2001.  In the  three and six  month  periods  ended  June 30,  2000 the  Company
capitalized ASIC development costs of $467,000 and $760,000, respectively.

Amortization

    Amortization  expenses for the  three-month  period ended June 30, 2001 were
$700,000  or  11%  of net  revenues,  as  compared  with  $237,000  or 5% of net
revenues,  for the three-months  ended June 30, 2000, an increase of $463,000 or
195%.  Amortization  expenses for the six-month  period ended June 30, 2001 were
$1,276,000  or 11% of net  revenues,  as  compared  with  $451,000  or 6% of net
revenues,  for the  six-months  ended June 30, 2000,  an increase of $825,000 or
183%.

     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 $1,022,000,  respectively,
for the three and six month periods ended June 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  six-month  period  ended  June  30,  2001,  the  Company  recorded
restructuring   expenses   totaling  $33,000  related  to  the  closure  of  its
Wilmington, MA, facility.

    For  the  six-month  period  ended  June  30,  2000,  the  Company  recorded
restructuring  expenses of $202,000 in conjunction  with the planned  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.

                                       15
<PAGE>

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.

Interest Expense, Net

    Net  interest  expense for the  three-month  period  ended June 30, 2001 was
$100,000,  or 2% of net revenues, as compared to $34,000, or 1% of net revenues,
for the three-months  ended June 30, 2000, an increase of $66,000.  Net interest
expense for the six-month period ended June 30, 2001 was $223,000,  or 2% of net
revenues,  as compared to $54,000,  or 1% of net  revenues,  for the  six-months
ended June 30, 2000, an increase of $169,000.

     The increase in interest  expense is primarily  attributable to an increase
in notes payable of $3.6 million between comparable periods ending June 30.

Other Expense, Net

    Other expense for the three-month period ended June 30, 2001 was $16,000, as
compared to other income of $43,000 for the three-months  ended June 30, 2000, a
change of $59,000.  Other expense for the  six-month  period ended June 30, 2001
was  $95,000,  as compared to other income of $54,000 for the  six-months  ended
June 30, 2000, a change of $149,000.

    The increase in other expense for the three month period ended June 30, 2001
is primarily  attributable  to charges of $215,000  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 in September of 2001.  Offsetting  these
charges were gains of approximately  $200,000 related to the settlement of debts
for less than original amounts accrued.

    The  increase in other  expense for the six month period ended June 30, 2001
are primarily  attributable to charges of $305,000  associated with the untimely
registering of AMRO Investment  International's shares. Offsetting these charges
were gains of approximately $200,000 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 six-month  periods ended June
30, 2001 and 2000 was  $2,735,000  and  $2,378,000,  respectively.  In first six
months of 2001, net cash used in operating  activities  consisted primarily of a
net loss of $3,767,000 adjusted for depreciation and amortization of $1,503,000,
the write-off of in-process  technology  related to the acquisition of Videonics
totaling $505,000,  deferred compensation expense of $135,000 and an increase in
accounts receivable of $1.5 million, partially offset by an increase in accounts
payable of $168,000 and accrued expenses totaling $166,000.  In first six months
of 2000, net cash used in operating activities consisted primarily of a net loss
of $2,692,000  adjusted for  depreciation  and  amortization  of $451,000 and an
increase in inventories of $281,000 offset by an increase in accounts payable of
$124 ,000.

    As of June 30, 2001 and 2000,  accounts  receivable from a major distributor
represented   approximately   25%  and  26%,   respectively  of  total  accounts
receivable.

    Net cash provided by investing  activities for the six-months ended June 30,
2001 was $1,208,000 whereas net cash used by investing activities was $1,304,000
for the six-months  ended June 30, 2000. For the first six months of 2001,  cash
was  provided  by  a  reduction  in  restricted   certificates   of  deposit  of
approximately $967,000 and net cash of

                                       16
<PAGE>

$360,000  provided  through the  acquisition  of  Videonics on January 16, 2001,
offset by additions of $119,000 to property and  equipment.  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 six
months of 2000,  cash  used in  investing  activities  was  principally  for the
purchase of property and equipment and capitalized software development costs of
$570,000 and an increase in restricted  certificates of deposit of approximately
$734,000.

    Net cash provided by financing  activities  for the six-month  periods ended
June 30, 2001 and 2000 was $1,817,000 and $1,029,000, respectively. In the first
six months of 2001,  cash provided by financing  activities  occurred  primarily
from the issuance of a note payable to a stockholder and director of the Company
of  $2,200,000  offset by  repayments  of $250,000  to a bank.  In the first six
months  of 2000,  the  Company  received  $1,069,000  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 $1,324,000.

    As of June 30,  2001,  the  Company had working  capital of  $2,616,000,  as
compared to $224,000 at December 31, 2000, an increase of $2,392,000.

    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 June 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 two-year
periods ended December 31, 2000, 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 six months ended June 30, 2001, the Company
has received  approximately  $34,000 in net proceeds  from the exercise of stock
options and warrants.

     In  addition,  on February  28,  2001,  the Company and Carl Berg,  a Focus
director and  shareholder  entered into a Secured  Convertible  Promissory  Note
agreement  under  which Mr.  Berg  agreed to loan the  Company  $2.0  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 June 30, 2001, the Company owed Mr. Berg  approximately  $3.6 million in
principle 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  to  identify  how to  enhance  existing  or create  new  distribution
channels. In addition, the Company is developing and expects to release at least
two more new products for the year 2001.  Although  there can be no  assurances,
management  expects the  Company's  sales for 2001 to increase over combined pro
forma revenues for 2000, as the Company begins shipments of its new products and
expected synergies in its sales channels solidify.

    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 $1.0  million 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 14, 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.
                                       17
<PAGE>

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

Risks Related to Our Business

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

    The lawsuits  allege that Focus and its Chairman and certain  other  present
and former officers violated federal securities laws in connection with a number
of allegedly  false or misleading  statements  and seek  certification  as class
actions on behalf of persons  alleged to have purchased stock from July 17, 1997
to  February  19,  1999  or  between   November  15,  1999  to  March  1,  2000,
respectively.  On May 10, 2001, the Federal  District Court  dismissed the later
alleged  class action in its entirety.  As to the earlier  alleged class 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.

We are 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 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. A jury trial in May 2000 in
federal district court in Waco, Texas, resulted in a verdict in favor

                                       18
<PAGE>

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,  for a total award of
approximately  $2,000,000.  In  connection  with this  judgment,  we recorded an
expense of $2.1  million in the  period  ended  September  30,  2000.  The court
overruled  the motion for new trial that Focus  filed,  and Focus now intends to
pursue an appeal to the United  States Court of Appeals for the Fifth Circuit in
New Orleans,  Louisiana.  The court has granted a stay of any enforcement of the
judgment  pending  appeal,  based on the  posting  of a bond in the  approximate
amount of $2.3 million, which is the approximate amount of the judgment plus 10%
to cover interest and costs of CRA.

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 our last two fiscal years:

                   Private Offerings of   Issuance of          Exercise of Stock
                         Stock                Debt          Options and Warrants
                         -----                ----          --------------------

Six months ended
  June 30, 2001                --          $2,200,000               $34,000
Fiscal 2000            $1,284,000          $2,362,000            $1,121,000
Fiscal 1999            $4,414,000                  --            $2,596,000

    Furthermore,  during  the six  months  ended  June 30,  2001,  we  converted
approximately  $3.6 million of debt and other obligations into equity. See "Part
II - Other Information. Item 2. Changes in Securities." While conversion of debt
to equity reduces our liabilities,  it also has the effect of diluting  existing
shareholder interests.

    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.

    We may also issue additional shares in acquisitions and may grant additional
stock options to our employees,  officers,  directors and consultants  under our
stock option plans.

    The  issuance  of the  potential  shares  under the  equity  line of credit,
convertible debt, to obtain 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 addition, the
shares  issuable to Euston  Investments  under the equity line of credit will be
issued at a discount to the daily volume  weighted  average prices of our common
stock during 15 trading days beginning seven days before the draw down notice to
Euston. This will further dilute our outstanding shares of common stock.

We have a long history of operating losses.

    We have experienced limited  profitability  since inception.  As of June 30,
2001, Focus had an accumulated deficit of $52,475,000. Focus incurred net losses
of  $12,029,000  and  $1,480,000 for the years ended December 31, 2000 and 1999.
Additionally,  Focus  incurred a net loss of $3,767,000 for the six months ended
June 30, 2001. There can be no assurance that the newly merged companies will be
profitable.

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

    Over 90% of the components for the Company's  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.

                                       19
<PAGE>

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 12% and 6%
respectively  for the six months  ended June 30, 2001.  Management  expects that
sales to these customers will continue to represent a significant  percentage of
Focus'  future  revenues.  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
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 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 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.

Videonics has incurred significant delays in the introduction of new products.

    As the complexity of Videonics'  product  designs and feature sets continues
to increase, we may continue to experience product development delays that would
and  has  had in  the  past  an  adverse  effect  on  the  profitability  of our
operations.  There can be no assurance  that it will be successful in the timely
development of new products to replace or supplement  existing  products or that
we will be successful in integrating  acquired products or technologies with its
current business. Delays in new product development have had an adverse material
impact on our growth.  Similar  adverse  effects on results of operations can be
expected  until new products  are  successfully  introduced  and accepted by end
users.

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.

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

                                       20
<PAGE>

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.

    The  closing  bid price of our stock on August 10,  2001 was $1.20.  Between
April 1, 2001 and August 10, 2001 the  Company's  common stock closed a total of
31 times below Nasdaq's minimum bid requirement of $1.00. If we fail to meet the
minimum bid requirement  under Nasdaq's Small Cap regulations or any of Nasdaq's
other Small Cap regulations, 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.

Risks Related to our Recent Acquisition of Videonics, Inc.

The anticipated benefits of the merger may not be realized.

    The success of the merger of Focus and  Videonics  will depend,  in part, on
our ability to realize the anticipated growth opportunities and synergies,  from
combining the businesses of Focus and  Videonics.  Achieving the benefits of the
merger will depend in part on:

         o        effectively   and   efficiently   integrating   the  policies,
                  procedures and operations of Videonics and Focus;

         o        successfully  retaining  and  attracting  key employees of the
                  combined  company,  including  operating  management  and  key
                  technical  personnel,  during a period  of  transition  and in
                  light of the competitive employment market; and

         o        while   integrating   the   combined   Company's   operations,
                  maintaining  adequate Focus on our core businesses in order to
                  take advantage of competitive  opportunities and to respond to
                  competitive challenges.

    If members of the  management  team of the combined  company are not able to
develop strategies and implement a business plan that achieves these objectives,
the anticipated benefits of the merger may not be realized,  which would have an
adverse impact on our combined  company and the market prices of shares of Focus
common stock.

Risks Related to Our Industry

International sales are subject to significant risk.

    Protectionist  trade  legislation  in  either  the  United  States  or other
countries, such as a change in the current tariff structures,  export compliance
laws or other trade policies,  could adversely  affect our companies  ability to
sell in  international  markets.  Furthermore,  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 companies'  revenue or operating  results in the
future.

                                       21
<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.

    The  California  legislature  and  Governor  Gray Davis  continue  to debate
possible  solutions to the State's  energy  crisis.  The largest  utility in the
State, Pacific Gas & Electric Company, has filed bankruptcy,  while the State is
attempting  to purchase  certain  assets,  including  transmission  lines,  from
Southern California Edison.  Energy suppliers are owed billions of dollars by PG
& E alone,  while  the  State  has  been  losing  millions  of  dollars  per day
purchasing  wholesale  power and then  selling it to end users at lower  prices.
Standard  & Poors  recently  dropped  the  State's  credit  rating,  potentially
increasing the State's cost of borrowing in the capital markets.

    Officials  at  the  Federal  Energy  Regulatory   Commission   ("FERC")  and
California's  federal  congressional  representatives  have  issued  a range  of
statements and positions,  including several regarding the potential  regulation
of wholesale  energy prices.  At this time, we cannot predict what the price and
availability of energy might be in California during the traditional summer peak
demand  period,  and the impact of the energy crisis upon the pace and nature of
economic activity 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.

Risks Related to the Equity Line of Credit

We will have broad discretion over the resulting funds.

    We will have broad  discretion  in the use of the proceeds  from the sale of
common  stock under the  private  equity  line of credit  agreement  with Euston
Investments,  and any failure to apply them effectively  could negatively affect
our business prospects.

    We expect to use the net  proceeds  from the draw  downs  under the  private
equity line of credit  agreement with Euston  Investments  Holdings  Limited for
general corporate purposes. We will have significant flexibility in applying the
net  proceeds.  You will not have the  opportunity  to  evaluate  the  economic,
financial or other  information on which we base our decisions on how to use the
net  proceeds.  If we fail to apply the net proceeds  effectively,  our business
could be negatively affected.

                                       22
<PAGE>

We expect to sell  shares of our common  stock in the future,  including  shares
issued  pursuant  to the equity  line of credit,  and these sales may dilute the
interests of other security holders and depress the price of our common stock.

    Sales of a  substantial  number of shares of our common  stock in the public
market could cause a reduction in the market price of our common  stock.  We had
approximately  32,444,000  common shares issued and  outstanding  as of June 30,
2001.  In  addition,  the  Company  has issued  warrants  and  options  that are
exercisable  into  shares of common  stock.  Moreover,  we may issue  additional
shares in acquisitions  and may grant additional stock options to our employees,
officers, directors and consultants under our stock option plans.

    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
addition,  the shares  issuable to Euston  Investments  under the equity line of
credit will be issued at a 10%  discount to the average of the three  lowest bid
prices of our common  stock for the  15-trading  day period  around our drawdown
request, beginning seven days before the request and ending seven days after.

    As we sell shares of our common stock to Euston Investments under the equity
line of credit,  and then  Euston  Investments  sells the common  stock to third
parties, our common stock price may decrease due to the additional shares in the
market.  If we decide to draw down on the equity  line of credit as the price of
our stock  decreases,  we will be  required  to issue more  shares of our common
stock for any given  dollar  amount  invested by Euston,  subject to the minimum
selling price we specify.  The more shares that are issued under the equity line
of credit,  the more our shares will be diluted and the more our stock price may
decrease.  This may encourage  short sales,  which could place further  downward
pressure on the price of our stock.

If our  registration  statement filed with the SEC is not deemed  effective,  we
will not be able to utilize the equity line of credit.

    The  Company  has  registered  such  shares  under  a SB-2  filed  with  the
Securities and Exchange Commission  initially on February 7, 2001 and amended on
August 9, 2001.  As of August 14, 2001 the  registration  statement has not been
deemed  effective  by  the  SEC.  There  can  be no  assurances  when  or if the
registration  statement will be deemed effective by the SEC. If the registration
statement  is not deemed  effective,  we will not be able to utilize  the equity
line of credit which could have a material adverse effect on our ability to fund
our operations.

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.

                                       23
<PAGE>

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Class Action Suits

    Focus  and  certain  of its  officers  and  directors  have  been  named  as
defendants in two alleged  class-actions pending in United States District Court
for the District of  Massachusetts,  on or about  November 9, 1999, on behalf of
Frank E. Ridel and other  currently-unnamed  person(s)  who are  alleged to have
purchased  shares of our common  stock from July 17, 1997 to February  19, 1999.
Consolidated  amended  complaints  have been filed in each alleged class action.
The first complaint  alleges a claim of shareholders  who purchased Focus shares
during the July 17, 1997 to February  19, 1999 period (C.A.  No.  99-12344-DPW).
The  second  complaint  alleges a class of  shareholders  who  purchased  shares
between November 15, 1999 and March 1, 2000 (C.A. No.  00-10400-DPW).  The first
complaint  was  initially  filed in November of 1999.  The second  complaint was
initially filed in March of 2000. Both complaints  purport to allege  violations
of the federal securities laws. Defendants moved to dismiss both actions. On May
10, 2001, the Federal District Court dismissed the later alleged class action in
its entirety. As to the earlier alleged class 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 moved 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
federal district court in Waco, Texas, 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. The case has not yet been submitted to the appeals court for
a  decision.  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  trial  court  granted a stay of any
enforcement of the judgment pending appeal.

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.

                                       24
<PAGE>

Item 2. Changes in Securities

         Focus  signed a debt  conversion  agreement  with  Steve Wood and Red &
White  Enterprises,  Inc., a California  corporation,  on July 17, 2000, for the
issuance of our common stock in lieu of cash payment under a secured  promissory
note held by Red & White Enterprises.  Steve Wood is the sole stockholder of Red
& White  Enterprises  and a former employee of Focus.  Red & White  Enterprises,
f/k/a PC Video  Conversion,  Inc.,  obtained the  promissory  note from Focus in
exchange for certain assets and liabilities of PC Video Conversion,  which Focus
purchased in July 1998.

         In connection with the separation agreement, on January 24, 2001, Red &
White  Enterprises  exercised its right to convert the remaining  balance of the
note.  Approximately  $427,437 was converted into 468,322 shares of Focus common
stock.  The conversion  price was 93% of the average closing prices for the five
day period after  stockholder  approval of an increase in  authorized  shares of
Focus (January 11, 2001).

         On May 7, 2001, Carl Berg, a director of Focus, converted approximately
$2.3 million of debt and accrued  interest  currently  owed by Focus to Mr. Berg
into 1,904 shares of  convertible  preferred  stock based on the estimated  fair
value of the  preferred  stock as of May 1, 2001,  the date on which the related
subscription  agreement  was  executed.  Each  share of  preferred  stock  has a
liquidation  preference  of $1,190.48  per share and is  convertible  into 1,000
shares of common stock.

         Focus entered into a master purchase agreement with Advanced Electronic
Support  Products,  Inc.  ("AESP") whereby Focus agreed to purchase a minimum of
$2,500,000 of cables and other  products from AESP by March 29, 2001. In return,
Focus received certain pricing  commitments over the term of the master purchase
agreement.  The  agreement  provided that in the event Focus did not purchase at
least  $2,500,000  of cables  and other  products  during the term of the master
purchase  agreement,  Focus  would  pay  AESP  an  amount  equal  to  20% of the
difference  between  $2,500,000  and the  aggregate  amount  of  purchases.  The
agreement allowed Focus and its  subcontractors,  to purchase product from other
sources if AESP's pricing or quality do not meet certain  competitive levels and
that such purchases shall reduce the minimum  requirements  under the agreement.
Focus  failed to meet the  minimum  purchase  requirements  and there  were some
disputes  between  the  parties  under  the  agreement.  On June  26,  2001,  as
settlement,  in exchange for a release from AESP of Focus from further liability
under the contract,  Focus agreed to issue 150,000 shares of its common stock to
AESP.

         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, we issued  485,295 shares of Focus
common  stock to AMRO to  satisfy  part of our  obligation  under the  agreement
regarding the timely registration of the shares purchased by AMRO.

         On June 27,  2001,  we issued  243,833  shares of Focus common stock to
Union Atlantic Capital,  L.C. for investment  banking services rendered to Focus
in connection  with Focus  acquisition  of Videonics.  The shares were issued in
lieu of fees of $228,538 for such services.

         The Registrant believes 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.

                                       25
<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

         None

         (b)      Reports on Form 8-K

         On May  8,  2001,  Registrant  filed  a  Current  Report  on  Form  8-K
         announcing  that it had  terminated its engagement of Wolf & Co. as its
         independent  auditors and that Deloitte & Touche, LLP had been retained
         as its  independent  auditors  for the fiscal year ending  December 31,
         2001.

         On June 1,  2001,  Registrant  filed a Current  Report on Form 8-K/A to
         amend the  Company's  Form 8-K filed on May 8, 2001 to include  Exhibit
         16.1, Letter of Wolf & Co. re: Change in Certified Public Accountants.

                                       26
<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.



   August 14, 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)