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 March 31, 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)

                                 (978) 988-5888
                (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 [X] No

     As of May 15, 2001, there were 31,057,610 shares of the Registrant's Common
Stock Outstanding.


<PAGE>


<TABLE>
                                                      Focus Enhancements, Inc.
                                                     Consolidated Balance Sheets
                                                           (in thousands)

<CAPTION>
                                                                                                       March 31,        December 31,
                                                                                                       -----------------------------
                                                                                                         2001               2000
                                                                                                       --------           --------
                                                                                                     (unaudited)
<S>                                                                                                    <C>                <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                                                                            $  1,185           $    352
  Restricted certificates of deposit                                                                        553              1,263
  Restricted collateral deposit                                                                           2,363              2,363
  Accounts receivable, net of allowances of $1,357 and $1,042 at
    March 31, 2001 and December 31, 2000, respectively                                                    1,973              1,778
  Inventories                                                                                             4,427              2,095
  Prepaid expenses and other current assets                                                                 125                 43
                                                                                                       --------           --------
    Total current assets                                                                                 10,626              7,894

Property and equipment, net                                                                                 527                395
Capitalized software development costs                                                                      657                728
Other assets, net                                                                                           177                490
Intangibles, net                                                                                          2,793               --
Goodwill, net                                                                                             5,557                274
                                                                                                       --------           --------
    Total assets                                                                                       $ 20,337           $  9,781
                                                                                                       ========           ========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Bank loan                                                                                            $    300           $   --
  Current portion of long-term debt                                                                         427                364
  Obligations under capital leases, current portion                                                          78                100
  Accounts payable                                                                                        4,544              3,377
  Accrued liabilities                                                                                     2,970              1,681
  Accrued legal judgment                                                                                  2,148              2,148
                                                                                                       --------           --------
    Total current liabilities                                                                            10,467              7,670

Note payable to stockholder                                                                               1,035               --
Convertible notes payable to stockholder                                                                  3,362              2,362
Obligations under capital leases, non-current                                                                89                102
Long-term debt, net of current portion                                                                     --                   64
                                                                                                       --------           --------

    Total liabilities                                                                                    14,953             10,198
                                                                                                       --------           --------

Commitments and contingencies

Stockholders' equity (deficit)

  Preferred stock, $.01 par value; authorized 3,000,000 shares; none issued                                --                 --
  Common stock, $.01 par value; 50,000,000 shares authorized, 31,493,145
    and 26,350,203 shares issued at March 31, 2001 and December 31,
    2000, respectively                                                                                      315                264
  Deferred compensation                                                                                    (530)              --
  Additional paid-in capital                                                                             57,730             48,727
  Accumulated deficit                                                                                   (51,431)           (48,708)
  Treasury stock at cost, 450,000 shares                                                                   (700)              (700)
                                                                                                       --------           --------
  Total stockholders' equity (deficit):                                                                   5,384               (417)
                                                                                                       --------           --------
    Total liabilities and stockholders' equity:                                                        $ 20,337           $  9,781
                                                                                                       ========           ========

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

                                                                 2

<PAGE>


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

<CAPTION>
                                                                                                    Three Months ended March 31,
                                                                                                 ----------------------------------
                                                                                                   2001                      2000
                                                                                                 --------                  --------
<S>                                                                                              <C>                       <C>
Net revenues                                                                                     $  5,009                  $  3,614
Cost of goods sold                                                                                  3,219                     2,329
                                                                                                 --------                  --------

  Gross profit                                                                                      1,790                     1,285
                                                                                                 --------                  --------

Operating expenses:
  Sales, marketing and support                                                                      1,460                     1,028
  General and administrative                                                                          743                     1,147
  Research and development                                                                            995                       260
  Amortization expense                                                                                576                       214
  Restructuring expense                                                                                33                       202
  Write-off of in-process technology                                                                  505                      --
                                                                                                 --------                  --------

    Total operating expenses                                                                        4,312                     2,851
                                                                                                 --------                  --------

    Loss from operations                                                                           (2,522)                   (1,566)

  Interest expense, net                                                                              (123)                      (19)
  Other (expense) income, net                                                                         (79)                       10
                                                                                                 --------                  --------

    Loss before income taxes                                                                       (2,724)                   (1,575)

  Income tax expense                                                                                 --                           4
                                                                                                 --------                  --------

    Net loss                                                                                     $ (2,724)                 $ (1,579)
                                                                                                 ========                  ========

Loss per common share:
  Basic                                                                                          $  (0.09)                 $  (0.06)
                                                                                                 ========                  ========
  Diluted                                                                                        $  (0.09)                 $  (0.06)
                                                                                                 ========                  ========

Weighted average common shares outstanding:

  Basic                                                                                            30,183                    24,335
                                                                                                 ========                  ========
  Diluted                                                                                          30,183                    24,335
                                                                                                 ========                  ========

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

                                                                 3

<PAGE>


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

<CAPTION>
                                                                                                             Three Months Ended
                                                                                                                   March 31,
                                                                                                           ------------------------
                                                                                                            2001              2000
                                                                                                           -------          -------
<S>                                                                                                        <C>              <C>
Cash flows from operating activities:
Net loss                                                                                                   $(2,724)         $(1,579)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                                                701              214
  Deferred compensation expense                                                                                 62             --
  Write-off of in process technology                                                                           505             --
  Changes in operating assets and liabilities, net of the effects of acquisitions;
   Decrease (increase) in accounts receivable                                                                  (36)             334
   Decrease (increase) in inventories                                                                          172             (205)
   Decrease (increase) in prepaid expenses and other assets                                                     27             (571)
   Increase (decrease) in accounts payable                                                                       6           (1,143)
   Increase (decrease) in accrued liabilities                                                                  206              597
                                                                                                           -------          -------

  Net cash used in operating activities                                                                     (1,081)          (2,353)
                                                                                                           -------          -------

Cash flows from investing activities:

  Decrease (increase) in restricted certificates of deposit                                                    710             (177)
  Additions to property and equipment                                                                          (26)            (500)
  Net cash from acquisition of Videonics                                                                       360             --
                                                                                                           -------          -------

Net cash provided by (used in) investing activities                                                          1,044             (677)
                                                                                                           -------          -------

Cash flows from financing activities:
  Payments on notes payable and long-term debt                                                                (100)            (868)
  Proceeds from stockholder loan                                                                             1,000             --
  Payments under capital lease obligations                                                                     (36)             (42)
  Net proceeds from exercise of common stock options and warrants                                                6            1,056
                                                                                                           -------          -------

Net cash provided by financing activities                                                                      870              146
                                                                                                           -------          -------

Net increase (decrease) in cash and cash equivalents                                                           833           (2,884)
Cash and cash equivalents at beginning of year                                                                 352            3,737
                                                                                                           -------          -------

Cash and cash equivalents at end of period                                                                 $ 1,185          $   853
                                                                                                           =======          =======

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

                                                                 4

<PAGE>


                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

1.  Basis of Presentation

     The consolidated  financial  statements of Focus  Enhancements,  Inc. ("the
Company") as of March 31, 2001 and for the three month  periods  ended March 31,
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 month period ended March 31, 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"),  its  wholly-owned
subsidiary  Videonics  Inc.   ("Videonics").   All  intercompany   accounts  and
transactions have been eliminated upon consolidation.

2.  Management's Plans

     The  Company has  incurred  significant  losses for the last two years.  At
March 31, 2001, the Company reported  stockholder's  equity of $5,384,000 and an
accumulated deficit of $51,431,000.

     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 three new  products  for the year 2001,  although no
assurances can be given.

     During 2000,  management took steps to reduce costs,  including the closure
of its PC Video  facility in Morgan Hill, CA and planning for the closure of its
Wilmington,  MA facility in connection with its recent  acquisition of Videonics
Inc., located in Campbell, CA. The Wilmington, MA facility was in fact closed on
April 1, 2001 and 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  2001 it will need to raise  over $3.0  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  filed  with  the
Securities  and Exchange  Commission on February 7, 2001. As of May 15, 2001 the
Company has not yet received  clearance  from the SEC to register  these shares.
This announcement 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  loaned the Company  $1.0  million and agreed to
loan up to an additional  $1.0 million to support the Company's  working capital
needs. See "Note 6 - Convertible Notes" for more information.

     On May 7, 2001, the Company  converted $2.3 million of outstanding debt and
accrued  interest owed by Focus to Mr. Berg to Convertible  Preferred Stock. See
"Note 10 - Subsequent Event - Conversion of Debt to Convertible Preferred Stock"
for more information.

                                       5

<PAGE>


                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

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                     January 16,
Videonics                                                               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.

4. Recent Accounting Pronouncements

     Effective  January 1, 2001,  the Company  adopted  Statement  of  Financial
Accounting Standards No. 133 (SFAS 133),  "Accounting for Derivative Instruments
and Hedging Activities." SFAS 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  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.

                                       6

<PAGE>


                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

5. Reclassification of Certain Expenses

     Certain expenses in the period ended March 31, 2000, have been reclassified
to conform to the current period presentation.  These  reclassifications did not
change the net loss for the period ended March 31, 2000.

6. Inventories

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

                                                    2001                 2000
                                                 ----------           ----------
Raw materials                                    $2,749,000           $  826,000
Work in process                                     460,000                 --
Finished goods                                    1,519,000            1,269,000
                                                 ----------           ----------
Totals                                           $4,728,000           $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 March 31, 2001, an aggregate of
$300,000  is  outstanding  under the loan.  The loan is to be repaid in $100,000
increments on May 5, June 5 and July 5, 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. At March 31, 2001, the balance was $427,000.

     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 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 preceeding  Jaunuary 12, 2001. As of
March 31,  2001,  the Company had not yet issued  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 - Focus is involved as a defendant in litigation
with CRA Systems, Inc.") The promissory note has a term of three years and bears
interest at a rate of prime plus 1%. The interest  earned on the  collateral  is
payable to Mr. Berg. The interest  payable by the Company to Mr. Berg is reduced
by the amount of interest earned on the collateral.  The principal amount of the
note will be due at the end of its term,  with  interest  to be paid  quarterly.
Under  certain  circumstances,  including at the election of Mr. Berg and Focus,
the  promissory  note and any accrued and unpaid  interest is  convertible  into
shares of Focus common stock at a  conversion  price of $1.25 which  represented
the average of the closing bid and ask price on the day preceding the agreement.
The  promissory  note is secured by a security  agreement  in favor of Mr.  Berg
granting him a security
                                       7
<PAGE>


                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

interest,  in first priory, over substantially all of the assets of Focus. As of
March 31,  2001 the Company had  accrued  interest  due under the note  totaling
$38,400.

     On February 28, 2001,  Carl Berg, a Focus director and  shareholder, loaned
Focus  $1.0  million  and  agreed to loan up to an  additional  $1.0  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. 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  the closing price of the  Company's  common stock on the day
preceding the agreement.  The promissory note is secured by a security agreement
in favor of Mr.  Berg  granting  him a security  interest  in first  priory over
substantially  all of the assets of Focus.  As of March 31, 2001 the Company had
accrued interest due under the note totaling $8,400.

     See also " Note 10 - Subsequent  Events - Conversion of Debt to Convertible
Preferred Stock."

     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
bears interest at 8% per year and is due on January 16, 2002.  Accrued  interest
under the loan is payable at maturity.

     For a  discussion  of the  conversion  of certain of the notes and  accrued
interest by Mr. Berg to convertible  preferred stock, see " Note 10 - Subsequent
Events - Conversion of Debt to Convertible Preferred Stock."

     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 March 31, 2001 and  December  31, 2000,  the
Company maintained interest bearing accounts  collateralizing  letters of credit
in the amount of $553,000 and $1,263,000, respectively. These restricted amounts
are recorded in current  assets as they relate to the  procurement  of inventory
and are outstanding for periods of less than one year.

     Restricted Collateral Deposit

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

     Restructuring Expenses

     In December  2000,  the  Company's  Board of Directors  determined  that to
significantly reduce the Company's cost structure it would close its Wilmington,
MA facility,  reduce personnel and relocate to a significantly  smaller facility
during the first  quarter of 2001.  As such,  restructuring  charges of $522,000
were recorded in the fourth quarter of 2000. In addition,  restructuring charges
of $33,000  were  incurred in the first  quarter of 2001.  Planned  expenses are
comprised of expenses  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 March 31,  2001
$130,000 of restructuring  reserves remained  primarily related to ongoing lease
charges for abandoned equipment and personnel benefits associated with scheduled
staffing reductions.
                                       8
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

     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.

                                       9
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

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. On
February 7, 2001, the Company filed a preliminary  registration  statement under
the Securities  Act of 1933 to register  those shares issued in connection  with
this  transaction and for those to be issued upon exercise of the warrants.  The
Securities  and Exchange  Commission  has  requested  that December 31, 2000 and
March 31, 2001 information be included in the registration statement and as such
the  registration  statement  has  not yet been  refiled as of May 15, 2001.  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 months ended March 31, 2001,
the Company  recorded  expenses of $90,000 related to such charges  (included in
Other  Expense,  Net) and the total amount accrued as of that date was $240,000.
The investor has agreed to exchange the gross amount of  calculated  charges for
additional  common stock of Focus based on an exchange rate of 0.68. As of March
31, 2001, the Company is required to issue to the investor an additional 353,000
shares of Focus common stock, to extinguish this accrued liability.

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,  Union  Atlantic  Capital L.C.  will be issued  approximately  243,800
shares of Focus common stock in lieu of  investment  banking fees in  connection
with the  acquisition  of Videonics  Inc in January  2001. At March 31, 2001 the
Company  has  accrued  $251,000  which was  included  within  transaction  costs
associated with the acquisition of Videonics. Such amount will be converted into
243,800 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.

10.  Subsequent Event

Conversion of Debt to Convertible Preferred Stock

     On May 7, 2001, Carl Berg converted  approximately $2.3 million of debt and
accrued interest  currently owed by Focus to Mr. Berg into  approximately  1,900
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.

Potential Nasdaq Delisting

     As  of  March  31,  2001  the  Company  reported  net  tangible  assets  of
($173,000).  (Calculated as:  $20,337,000  total assets,  less $14,953,000 total
liabilities,  less $5,557,000 goodwill). Nasdaq requires that the Company have a
minimum of  $2,000,000  in net  tangible  assets or a market  capitalization  of
$35,000,000  or $500,000 or net income for the most  recently  completed  fiscal
year or two of the three most recently completed fiscal years. In addition,  the
Company's  stock  has  recently  traded  below the  $1.00  minimum  bid price as
required by Nasdaq  SmallCap  regulations.  If the Company is unable to meet the
Nasdaq SmallCap requirements, the Company's stock could be delisted. The Company

                                       10
<PAGE>


                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

is making every effort to comply with the Nasdaq SmallCap requirements.  In this
regard,  on May 7, 2001, the Company  converted  approximately,  $2.3 million of
debt to  equity.    The Company  believes that it is now in compliance  with the
Nasdaq  SmallCap  requirements.  If Nasdaq should deem that the Company is still
not in  compliance,  the  Company  will  request a hearing  before  the  Listing
Qualifications  Panel.  There can be no assurance  that the Panel will grant the
Company's request for continued listing.

                                       11

<PAGE>


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

Introduction

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

     The Company does not provide forecasts of the future financial  performance
of the Company.  However, from time to time, information provided by the Company
or statements made by its employees may contain  "forward  looking"  information
that involve risks and  uncertainties.  In particular,  statements  contained in
this Form 10-QSB  which are not  historical  facts  constitute  forward  looking
statements  and are  made  under  the  safe  harbor  provisions  of the  Private
Securities  Litigation Reform Act of 1995. Each forward looking statement should
be read in  conjunction  with the  consolidated  financial  statements and notes
thereto, of this Quarterly Report and with the information  contained in Item 2,
including,  but not limited to, "Certain Factors That May Affect Future Results"
and "Risk Factors" contained herein, together with the "Management's  Discussion
and Analysis of Financial Condition and Results of Operations"  contained in the
Company's  Annual  Report on Form 10-KSB for the year ended  December  31, 2000,
including,  but not limited to, the section therein  entitled  "Certain  Factors
That May Affect Future Results" and "Risk Factors."

Acquisition of Videonics

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

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

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

Results of Operations

Net Revenues

     Net revenues for the  three-months  ended March 31, 2001 were $5,009,000 as
compared  with  $3,614,000  for the  three-month  period ended March 31, 2000 an
increase of $1,395,000, or 39%.

     During the period ended March 31, 2001, the Company had net sales increases
to Professional  AV customers  (184%),while it had decreases in net sales to OEM
customers (24%) and to Resellers (33%).

     For the three  months ended March 31, 2001,  net sales to  Professional  AV
customers  were  approximately  $3,331,000  compared to $1,171,000  for the same
period  in 2000,  an  increase  of  $2,160,000  or 184%.  Revenue  increased  by
approximately  $2,000,000 due to the inclusion of Videonics Inc. sales beginning
on January 16, 2001.

     For the three months ended March 31, 2001,  net sales to OEM customers were
approximately  $441,000 as compared to $583,000  for the same period in 2000,  a
decrease of $142,000 or 24%. 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 and FS450  families)  increased  9% over the  comparable
prior year period.

     For the  three  months  ended  March  31,  2001,  net  sales  to  Resellers
consisting  of  Distributors,  Retailers,  VAR's  and  Education  segments  were
approximately  $1,237,000 as compared to $1,860,000 for the same period in 2000,
a decrease of $623,000 or 33%. The decrease is primarily  the result a reduction
of overall computer sales and decreases in educational spending.
                                       12

<PAGE>


As of March 31,  2001,  the Company had a sales order  backlog of  approximately
$1,400,000.

Cost of Goods Sold

     Cost  of  goods  sold  were  $3,219,000,  or  64%  of net  sales,  for  the
three-months  ended March 31, 2001, as compared with  $2,329,000,  or 64% of net
sales,  for the  three-months  ended March 31, 2000,  an increase of $890,000 or
38%. The Company's  gross profit margin for the first  quarters of 2001 and 2000
was 36%. For the three month period ended March 31, 2001,  the Company  incurred
expenses of approximately  $250,000 associated with the operations department of
the  Wilmington,  Massachusetts  facility  and moving of  inventory to Campbell,
California.  The Company closed its  Wilmington  facility on March 31, 2001. For
the  three-month  period ended March 31, 2000, the Company  recorded  charges to
inventory obsolescence of $177,000. These charges were to reserve for excess and
obsolete  inventory  and to  adjust  the  carrying  value  of  inventory  to its
estimated net realizable value.

Sales, Marketing and Support Expenses

     Sales,  marketing  and  support  expenses  were  $1,460,000,  or 29% of net
revenues,   for  the  three-months  ended  March  31,  2001,  as  compared  with
$1,028,000,  or 28% of net revenues,  for the three-months ended March 31, 2000,
an increase of $432,000 or 42%. The increase is primarily due to the addition of
Videonics sales,  marketing and support  expenses of approximately  $550,000 for
the three-month period. The offsetting decrease in sales,  marketing and support
expenses in absolute  dollars is primarily  the result of reduced  marketing and
advertising expenses.

General and Administrative Expenses

     General and  administrative  expenses for the three-months  ended March 31,
2001 were $743,000 or 15% of net revenues, as compared with $1,147,000 or 32% of
net revenues for the  three-months  ended March 31, 2000, a decrease of $404,000
or 42%. Excluding accounting and legal fees of approximately  $302,000 and legal
fees of $292,000 respectively, incurred in the first quarter of 2000 relating to
the  Company's  review  of  accounting  practices  and a  special  investigation
conducted by the Board of Directors,  and an increase of $45,000 to the bad debt
provision,  the  Company's  expenses  in the  first  quarter  of 2001  increased
primarily due to the addition of Videonics general and  administrative  expenses
of approximately $245,000.

Research and Development Expenses

     Research and development expenses for the three-months ended March 31, 2001
were approximately $995,000 or 20% of net revenues, as compared with $260,000 or
7% of net revenues,  for the  three-months  ended March 31, 2000, an increase of
$735,000 or 283%.  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  of  approximately
$425,000.  Additionally,  the Company did not  capitalize  any ASIC  development
costs in the first  quarter of 2001.  In the first  quarter of 2000 the  Company
capitalized ASIC development costs of $293,000.

Amortization

     Amortization  expenses for the three-month period ended March 31, 2001 were
$576,000  or  11%  of net  revenues,  as  compared  with  $214,000  or 6% of net
revenues,  for the three-months ended March 31, 2000, an increase of $362,000 or
169%.  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 $465,000 for the period ending March 31,
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.

                                       13

<PAGE>


Restructuring Expenses

     For the  three-month  period  ended March 31,  2001,  the Company  recorded
restructuring   expenses   totaling  $33,000  related  to  the  closure  of  its
Wilmington, MA, facility.

     For the  three-month  period  ended March 31,  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   (approximately  $118,000),   payroll  and  benefits
(approximately  $57,000),  travel (approximately $16,000) and lease cancellation
charges (approximately $11,000).

Write-off of In-Process Technology

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

Interest Expense, Net

     Net interest  expense for the  three-month  period ended March 31, 2001 was
$123,000,  or 2% of net revenues, as compared to $20,000, or 1% of net revenues,
for the three-months ended March 31, 2000, an increase of $103,000. The increase
in interest expense is primarily attributable to an increase of debt obligations
totaling $3.6 million.

Other Expense, Net

     Other expense for the three-month  period ended March 31, 2001 was $79,000,
or 2% of  net  revenues,  as  compared  to  other  income  of  $10,000  for  the
three-months  ended March 31, 2000,  a change of $89,000.  The increase in other
expense is  primarily  attributable  to charges of $90,000  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.  The Company  expects to incur expenses of $30,000
per month until the shares are  registered.  Although there can be no assurance,
the Company expects to register the shares by June of 2001.

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  three-month  periods ended
March 31, 2001 and 2000 was $1,081,000 and  $2,353,000,  respectively.  In first
quarter of 2001, net cash used in operating  activities consisted primarily of a
net loss of $2,724,000  adjusted for  depreciation and amortization of $701,000,
the write-off of in-process  technology  related to the acquisition of Videonics
totaling $505,000, partially offset by a decrease in inventories of $172,000 and
an increase in accrued expenses totaling $206,000. In first quarter of 2000, net
cash used in operating  activities consisted primarily of increases in inventory
of $205,000 and prepaid  expenses  and other  assets of $571,000,  a decrease in
accounts payable of $1,143,000, and a net loss of $1,579,000. This was offset by
a  decrease  in  accounts  receivable  of  $334,000,   an  increase  in  accrued
liabilities of $597,000, and depreciation and amortization of $214,000.

     As of March 31, 2001 and 2000, accounts receivable from a major distributor
represented   approximately   17%  and  26%,   respectively  of  total  accounts
receivable.

     Net cash provided by investing  activities for the three-months ended March
31,  2001 was  $1,044,000  whereas  net cash used by  investing  activities  was
$677,000  for the  three-months  ended March 31, 2000.  In the first  quarter of
2001, cash was provided by the decrease in restricted certificates of deposit of
approximately $710,000 and net cash of $360,000 provided through the acquisition
of Videonics on January 16, 2001. 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 quarter of 1999, cash used in investing
activities  was  principally  for the  purchase of property  and  equipment  and
capitalized software development costs.
                                       14
<PAGE>


     Net cash provided by financing activities for the three-month periods ended
March 31, 2001 and 2000 was $870,000 and  $146,000,  respectively.  In the first
quarter 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
$1,000,000  offset by  repayments of $100,000 to a bank. In the first quarter of
2000,  the Company  received  $1,056,000  in net  proceeds  from the exercise of
common stock options and warrants.  The Company's financing proceeds were offset
by payments on notes payable and capital lease obligations.

     As of March 31,  2001,  the  Company had working  capital of  $159,000,  as
compared to $224,000 at December 31, 2000, a decrease of $85,000.

     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  March 31, 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.  As
described in the Company's  10-KSB for the period 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.

     During 2000,  management took steps to reduce costs,  including the closure
of its PC Video  facility in Morgan Hill, CA and planning for the closure of its
Wilmington,  MA facility in connection with its recent  acquisition of Videonics
Inc., located in Campbell, CA. The Wilmington, MA facility was in fact closed on
April 1, 2001 and operations,  customer  support and finance were moved into the
Campbell,   CA,  facility.   As  of  May  15,  2001,  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
three 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  2001 it will need to raise  over $3.0  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 with Euston Investments. Under the Euston Equity
Agreement  the Company can issue  shares of its common  stock to Euston at a 10%
discount to raise additional  money.  The Agreement  places  restrictions on the
frequency and amount of shares that may be issued along with other  limitations.
We are under no  obligation  to  request  a draw for any  period.  However,  the
Company  will incur a  non-usage  fee equal to  $50,000  minus 10% of the dollar
amount of drawdowns  actually issued during each twelve months of the commitment
period. The agreement  terminates 24 months after the 4,000,000 shares under the
agreement are registered. The Company has sought to register such shares under a
registration  statement  on form SB-2 filed  with the  Securities  and  Exchange
Commission  on  February  7, 2001.  As of May 15,  2001 the  Company has not yet
received clearance from the SEC to register these shares.

     On February 28, 2001,  Carl Berg, a Focus director and  stockholder  loaned
Focus  $1.0  million  and  agreed to loan up to an  additional  $1.0  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. Under certain circumstances,  including at the election of
Mr. Berg and Focus,  the  promissory  note is  convertible  into shares of Focus
common stock generally equal to the value of the promissory note and any accrued
and unpaid interest.  The promissory note is secured by a security  agreement in
favor of Mr.  Berg  granting  him a  security  interest  and first  priory  over
substantially all of the assets of Focus.

                                       15

<PAGE>


     On May 7, 2001, Mr. Berg  converted  $2.3 million of  outstanding  debt and
accrued  interest of Focus owed to Mr. Berg to Convertible  Preferred Stock. See
Note  10  to  the  Consolidated  Financial  Statements  -  "Subsequent  Event  -
Conversion of Debt to Convertible Preferred Stock."

     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,  when registered
with the Securities and Exchange Commission,  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 twelve
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 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

                                       16

<PAGE>


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
                        Common Stock           Debt         Options and Warrants
                        ------------           ----         --------------------
Three months ended
  March 31, 2001               --           $1,000,000          $    6,000
Fiscal 2000              $1,284,000         $2,362,000          $1,121,000
Fiscal 1999              $4,414,000               --            $2,596,000

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

     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 March 31,
2001, Focus had an accumulated deficit of $51,431,000. Focus incurred net losses
of  $12,029,000  and  $1,480,000 for the years ended December 31, 2000 and 1999.
Additionally, Focus incurred losses of $2,724,000 for the period ended March 31,
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.

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 7%  respectively  for the three  months  ended  March 31,  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

                                       17

<PAGE>


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
to reduce expenses  proportionately,  and its operating results,  cash flows and
liquidity would likely be adversely affected.

                                       18

<PAGE>


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

     Our common stock is traded on the Nasdaq SmallCap Market. The following are
the  quantitative  listing  requirements  for a company to remain  listed on the
Nasdaq Small-Cap Market and Focus' status as of March 31, 2001.

                                                                  Focus Meets
                       Requirements                             The Requirements
                       ------------                             ----------------

1.  Net Tangible Assets(1)                      $2 million
                                                    or

    Market Capitalization                       $35 million           No
                                                    or
    Net Income (in latest fiscal year or
     2 of last fiscal years)                    $500,000
2.  Public Float (shares)(2)                    500,000               Yes
3.  Market Value of Public Float                $1 million            Yes
4.  Minimum Bid Price(3)                        $1                    No
5.  Shareholders (round lot holders)(4)         300                   Yes
6.  Market Makers                               2                     Yes

-------------------
(1)  Net tangible  assets  equals total  assets  minus total  liabilities  minus
     goodwill.
(2)  Public float is defined as shares that are not held  directly or indirectly
     by any officer or director of the issuer and by any other person who is the
     beneficial owner of more than 10 percent of the total shares outstanding.
(3)  The closing price of our common stock on March 31, 2001, was $0.875.
(4)  Round lot holders are considered holders of 100 shares or more.

     The  closing  price  of our  common  stock  on May  15,  2001,  was  $1.15.
Furthermore, at March 31, 2001, our liabilities exceeded our net tangible assets
by $173,000. On May 7, 2001, Carl Berg a director and shareholder of the Company
converted $2.3 million of debt and accrued interest currently owed to him by the
Company into  convertible  preferred  stock.  This transaction will increase the
Company's net tangible assets by $2.3 million,  which would allow the Company to
meet Nasdaq's SmallCap tangible net assets requirement.

     If we  continue to fail these  Nasdaq  Small Cap  requirements,  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:

                                       19

<PAGE>


     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.

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

                                       20

<PAGE>


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.

     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
31,043,000  common  shares  issued  and  outstanding  as of March 31,  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.

     The Company has sought to register  such shares under a SB-2 filed with the
Securities  and Exchange  Commission on February 7, 2001. As of May 15, 2001 the
Company has not yet received  clearance  from the SEC to register  these

                                       21

<PAGE>


shares. There can be no assurances when or if the registration statement will be
cleared by the SEC.

Certain Factors That May Affect Future Results

     The Company does not provide forecasts of the future financial  performance
of the Company.  However, from time to time, information provided by the Company
or statements made by its employees may contain  "forward  looking"  information
that involve risks and  uncertainties.  In particular,  statements  contained in
this Form 10-QSB which are not historical facts (including,  but not limited to,
statements  concerning  international  revenues,  anticipated  operating expense
levels  and such  expense  levels  relative  to the  Company's  total  revenues)
constitute  forward  looking  statements  and are made  under  the  safe  harbor
provisions  of  the  Private  Securities  Litigation  Reform  Act of  1995.  The
Company's  actual results of operations and financial  condition have varied and
may in the future vary  significantly  from those stated in any forward  looking
statements. Factors that may cause such differences include, without limitation,
the availability of capital to fund the Company's future cash needs, reliance on
major customers,  history of operating losses,  limited  availability of capital
under credit  arrangements  with  lenders,  market  acceptance  of the Company's
products, technological obsolescence, competition, component supply problems and
protection of proprietary information,  as well as the accuracy of the Company's
internal estimates of revenue and operating expense levels.

                                       22

<PAGE>


PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Class Action Suits

     Focus  and  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-DPN).  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.

Item 2. Changes in Securities

     The Company did not sell any securities during the three months ended March
31, 2001 without registering the securities under the Securities Act of 1933, as
amended.

Item 3. Defaults Upon Senior Securities

     (None)

                                       23

<PAGE>


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

     (None)

Item 5. Other Information

     (None)

Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits

     10.87   Secured Convertible Promissory Note Dated February 28, 2001

     (b) Reports on Form 8-K

     On  January  16,  2001,  Registrant  filed a  Current  Report  on Form  8-K
     announcing the results of its reconvened annual meeting held on January 11,
     2001.

     On  January  17,  2001,  Registrant  filed a  Current  Report  on Form  8-K
     announcing  that it had completed its  acquisition  of Videonics on January
     16, 2001.

     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.

                                       24

<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.


   May 18, 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)