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, 2002, or

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

            For the transition period from __________ to __________.

                         Commission File Number 1-11860

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

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

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

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

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

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

                      Name of Exchange on which Registered
                      ------------------------------------
                                     NASDAQ

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

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

     As of May 10, 2002, there were 35,979,150 shares of the Registrant's Common
Stock Outstanding.
<PAGE>

                            Focus Enhancements, Inc.
                      Condensed Consolidated Balance Sheets
                        (in thousands, except share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                          March 31, December 31,
                                                                          --------- ------------
                                                                            2002       2001
                                                                          --------   --------
<S>                                                                       <C>        <C>
                                   ASSETS
Current assets:
  Cash and cash equivalents                                               $    525   $    449
  Restricted collateral deposit                                               --        2,363
  Accounts receivable, net of allowances of $477 and $666 at
    March 31, 2002 and December 31, 2001, respectively                       3,427      3,314
  Inventories, net of reserves of $798 and $819 at March 31, 2002            3,820      4,009
    and December 31, 2001, respectively
  Prepaid expenses and other current assets                                    184        230
                                                                          --------   --------
    Total current assets                                                     7,956     10,365

Property and equipment, net                                                    378        411
Capitalized software development costs                                         295        379
Other assets                                                                   105        107
Intangibles, net                                                             1,977      2,181
Goodwill, net                                                                4,654      4,654
                                                                          --------   --------
    Total assets                                                          $ 15,365   $ 18,097
                                                                          ========   ========

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Obligations under capital leases, current portion                             42         42
  Accounts payable                                                           2,381      4,295
  Accrued liabilities                                                        1,930      1,917
  Accrued legal judgment                                                      --        2,073
                                                                          --------   --------
    Total current liabilities                                                4,353      8,327

Convertible notes payable to stockholder                                     3,867      4,012
Obligations under capital leases, non-current                                   35         45
                                                                          --------   --------

    Total liabilities                                                        8,255     12,384
                                                                          --------   --------

Commitments and contingencies

Stockholders' equity

  Preferred stock, $.01 par value; authorized 3,000,000 shares;               --         --
      1,904 shares issued at March 31, 2002 and December 31, 2001
      (aggregate liquidation preference $2,267)
  Common stock, $.01 par value; 50,000,000 shares authorized, 35,873,690
    and 33,423,403 shares issued at March 31, 2002 and December
31,                                                                            359        334
2001, respectively
  Additional paid-in capital                                                64,612     61,616
  Accumulated deficit                                                      (57,020)   (55,366)
  Deferred compensation and price protection                                  (141)      (171)
  Treasury stock at cost, 450,000 shares                                      (700)      (700)
                                                                          --------   --------
  Total stockholders' equity                                                 7,110      5,713
                                                                          --------   --------
    Total liabilities and stockholders' equity                            $ 15,365   $ 18,097
                                                                          ========   ========
</TABLE>

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

                                       2
<PAGE>

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

                                                    Three Months ended March 31,
                                                    ----------------------------
                                                        2002          2001
                                                      --------      --------
Net product revenues                                  $  4,058      $  5,009
Contract revenues                                          700          --
                                                      --------      --------
  Total net revenues                                     4,758         5,009

Cost of revenues:
  Products                                               2,573         3,219
  Contract                                                 460          --
                                                      --------      --------
  Total costs of revenues                                3,033         3,219
                                                      --------      --------

  Gross profit                                           1,725         1,790
                                                      --------      --------

Operating expenses:
  Sales, marketing and support                           1,386         1,460
  General and administrative                               673           743
  Research and development                                 922           995
  Amortization expense                                     291           576
  Restructuring expense                                   --              33
  Write-off of in-process technology                      --             505
                                                      --------      --------

    Total operating expenses                             3,272         4,312
                                                      --------      --------

    Loss from operations                                (1,547)       (2,522)

  Interest expense, net                                    (83)         (123)
  Other expense, net                                       (24)          (79)
                                                      --------      --------

    Loss before income taxes                            (1,654)       (2,724)

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

    Net loss                                          $ (1,654)     $ (2,724)
                                                      ========      ========

Loss per common share:
  Basic                                               $  (0.05)     $  (0.09)
                                                      ========      ========
  Diluted                                             $  (0.05)     $  (0.09)
                                                      ========      ========

Weighted average common shares outstanding:
  Basic                                                 35,009        30,183
                                                      ========      ========
  Diluted                                               35,009        30,183
                                                      ========      ========

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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             Three Months Ended March 31,
                                                                             ----------------------------
                                                                                      2002     2001
                                                                                    -------   -------
<S>                                                                                 <C>       <C>
Cash flows from operating activities:
Net loss                                                                            $(1,654)  $(2,724)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                         370       701
  Deferred compensation expense                                                          30        62
  Gain on debt settlement                                                               263      --
  In process research and development                                                  --         505
  Changes in operating assets and liabilities, net of the effects of acquisitions:
   Increase in accounts receivable                                                     (113)      (36)
   Decrease in inventories                                                              189       172
   Decrease in prepaid expenses and other assets                                         46        27
   Increase (decrease) in accounts payable                                           (1,284)        6
   Increase (decrease) in accrued liabilities                                          (284)      206
   Payment of legal judgement                                                        (2,073)     --
                                                                                    -------   -------

  Net cash used in operating activities                                              (4,510)   (1,081)
                                                                                    -------   -------

Cash flows from investing activities:
  Decrease in restricted certificates of deposit                                       --         710
  Decrease in restricted collateral deposit                                           2,363      --
  Additions to property and equipment                                                   (47)      (26)
  Net cash from acquisition of Videonics                                               --         360
                                                                                    -------   -------

Net cash provided by investing activities                                             2,316     1,044
                                                                                    -------   -------

Cash flows from financing activities:
  Payments on notes payable and long-term debt                                         --        (100)
  Proceeds from convertible notes payable to shareholder                               --       1,000
  Repayment of convertible notes payable to shareholder                                (145)     --
  Payments under capital lease obligations                                              (10)      (36)
  Net proceeds from private offerings of common stock                                 2,425      --
  Net proceeds from exercise of common stock options and warrants                      --           6
                                                                                    -------   -------

Net cash provided by financing activities                                             2,270       870
                                                                                    -------   -------

Net increase in cash and cash equivalents                                                76       833
Cash and cash equivalents at beginning of year                                          449       352
                                                                                    -------   -------

Cash and cash equivalents at end of period                                          $   525   $ 1,185
                                                                                    =======   =======
</TABLE>

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

                                       4
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

1. Basis of Presentation - Interim Financial Information

     The condensed consolidated financial statements of Focus Enhancements, Inc.
("the Company") as of March 31, 2002 and for the three month periods ended March
31,  2002 and 2001 are  unaudited  and  should be read in  conjunction  with the
consolidated  financial statements and notes thereto for the year ended December
31, 2001  included in the  Company's  Annual  Report on Form 10-KSB for the year
ended December 31, 2001.

     In  the  opinion  of  management,   the  condensed  consolidated  financial
statements  include  all  adjustments   (consisting  only  of  normal  recurring
adjustments)  necessary  for a  fair  presentation  of its  financial  position,
operating results and cashflows for interim periods  presented..  The results of
operations and cashflows for the three month period ended March 31, 2002 are not
necessarily  indicative  of the  results  that may be  expected  for any  future
period.  The  consolidated  financial  statements  include  the  accounts of the
Company  and,  as of the  January  16,  2001  acquisition  date (see  "Note 3"),
Videonics Inc.  ("Videonics").  All intercompany  accounts and transactions have
been eliminated upon consolidation.

2. Management's Plans

     The accompanying  consolidated financial statements have been prepared on a
going  concern  basis,  which  contemplates  the  realization  of assets and the
satisfaction  of liabilities  in the normal course of business.  For the quarter
ended March 31, 2002 and year ended  December 31, 2001,  the Company  incurred a
net loss of $1,654,000 and $6,658,000, and net cash used in operating activities
totaled $4,510,000 and $3,452,000, respectively. These factors indicate that the
Company  may   potentially  be  unable  to  continue  as  a  going  concern.   .
Additionally,  our  auditors  have  included an  explanatory  paragraph in their
report on our  financial  statements  for the year ended  December 31, 2001 with
respect to uncertainties about our ability to continue as a going concern.

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

     The Company has  historically met cash needs from the proceeds of debt, the
sale of common stock in private  placements,  and the exercise of stock  options
and  warrants.  Management  is assessing  its product to identify how to enhance
existing product lines or create new  distribution  channels.  In addition,  the
Company is developing and expects to release at least three new products  during
2002.  Although  there can be no  assurances,  management  expects the Company's
sales for 2002 to increase over  consolidated  revenues for 2001, as the Company
begins  shipments  of its new  products  and  expected  synergies  in its  sales
channels solidify.

     During  2001,  management  took  steps to  reduce  costs,  including  a 13%
reduction in personnel,  the closure of its Wilmington,  MA facility on April 1,
2001, the transfer of operations,  customer support and finance to the Campbell,
CA, headquarters  facility,  and the relocation of the remaining sales personnel
into a 2,800 square foot  facility.  To further  reduce its  expenses,  in April
2002, Company reduced its personnel by an additional 9%.

     Even  with  the   anticipated   reduction   in  expenses   related  to  the
restructuring  and an expected  increase in sales, the Company  anticipates that
during  2002 it will  need to raise  additional  funds to  support  its  working
capital needs and meet existing debt obligations.  In connection with that need,
on January 11,  2002,  the Company  raised net  proceeds of  approximately  $2.4
million  in a private  placement  transaction  with  independent  third  parties
through  the  issuance  of  2,434,490  shares  of the  Company's  common  stock.
Additional  financings  may be required in 2002 as the  Company  implements  its
business plans.

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

                                       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.

4. Recent Accounting Pronouncements

     In June 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS
No.142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial
recognition and measurement of intangible  assets acquired outside of a business
combination  and  the  accounting  for  goodwill  and  other  intangible  assets
subsequent to their  acquisition.  SFAS No. 142 provides that intangible  assets
with finite useful lives be amortized and that  goodwill and  intangible  assets
with indefinite lives will not be amortized,  but will rather be tested at least
annually for impairment.  In addition,  the standard includes provisions for the
reclassification  of  certain  existing  recognized   intangibles  as  goodwill,
reassessment   of  the  useful   lives  of  existing   recognized   intangibles,
reclassification  of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments  of goodwill.  The Company  adopted SFAS No. 142 for its fiscal year
beginning  January 1, 2002 and,  as such,  ceased the  amortization  of goodwill
resulting  from business  combinations  completed  prior to the adoption of SFAS
141, with a net carrying  value of $4,654,000 at the date of adoption.  On a pro
forma  basis had the  amortization  of goodwill  ceased on January 1, 2001,  the
Company's  amortization  expense for the three months ended March 31, 2001 would
have  decreased by $333,000,  and the Company  would have reported a net loss of
$2,391,000 or $0.08 per share.  SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption.  The
Company is currently assessing but has not yet determined the impact of SFAS 142
on its financial position and results of operations.

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

5. Inventories

     Inventories  at March  31,  2002 and  December  31,  2001,  consist  of the
following:

                                        2002        2001
                                     ----------  ----------
                    Raw materials    $1,490,000  $1,678,000
                    Work in process     453,000     825,000
                    Finished goods    1,877,000   1,506,000
                                     ----------  ----------
                    Totals           $3,820,000  $4,009,000
                                     ==========  ==========

                                       6
<PAGE>
                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

6. Commitments

     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 "CRA Systems,  Inc."). The promissory note has a term of
three years and bears interest at a rate of prime plus 1% (7.75% at December 31,
2001).  Interest earned on the restricted  collateral  deposit is payable to Mr.
Berg.  The interest  payable by the Company to Mr. Berg is reduced by the amount
of interest earned on the restricted collateral deposit. The principal amount of
the note will be due at the end of its term on October 26, 2003,  with  interest
to be paid quarterly. Under certain circumstances,  including at the election of
Mr. Berg and Focus,  the promissory  note and any accrued and unpaid interest is
convertible  into shares of Focus common  stock at a  conversion  price of $1.25
which  represented the average closing bid and ask price of the Company's common
stock on the day preceding the agreement.  The  promissory  note is secured by a
security  agreement in favor of Mr. Berg granting him a first priority  security
interest, over substantially all of the assets of Focus. On May 7, 2001, $46,000
of  outstanding  interest  due  under the note was  converted  into 38 shares of
Series B Preferred  Stock. See "Note 8.  Stockholders  Equity - Preferred Stock"
for more information. In February 2002, in connection with the settlement of the
CRA Systems Inc. case,  the bond was liquidated and excess  proceeds of $145,000
were used to pay down a portion of this note.  As of March 31,  2002 the Company
had  unpaid   principal  and  accrued  interest  due  under  the  note  totaling
approximately $2,306,000.

     On  February  28,  2001,  Carl Berg  agreed to loan Focus  $2.0  million to
support the Company's  working capital needs. The promissory note has a due date
of October 26, 2003 and bears interest at a rate of prime plus 1%. The principal
amount of the note will be due at the end of its term,  with interest to be paid
quarterly. On April 24, 2001, the note was amended to provide that under certain
circumstances,  including at the election of Mr. Berg and Focus,  the promissory
note and any accrued and unpaid  interest  is  convertible  into shares of Focus
preferred  stock at a  conversion  price of $1,190 per share  which  represented
1,000 (each  share of  preferred  is  convertible  into 1,000  shares of common)
multiplied by 125% of the trailing 30-day average of the Company's  common stock
ending April 23, 2001. The promissory note is secured by a security agreement in
favor of Mr.  Berg  granting  him a security  interest  in first  priority  over
substantially  all of the assets of Focus.  On May 7, 2001,  the Company and Mr.
Berg agreed to the conversion of $1,000,000 of the outstanding principal balance
and $16,000 of accrued interest into 854 shares of Series B Preferred Stock. See
"Note 8.  Stockholders  Equity - Preferred  Stock" for more  information.  As of
March 31, 2002 the Company had principal and accrued interest due under the note
totaling approximately $1,072,000.

     On June 29, 2001, the Company issued a convertible  promissory  note to Mr.
Berg in the amount up to  $650,000  to support  the  Company's  working  capital
needs.  The promissory note has a due date of January 3, 2003 and bears interest
at a rate of prime plus 1%. The principal  amount of the note will be due at the
end of its term, with interest to be paid  quarterly.  The note provides that at
the  election of Mr.  Berg and Focus,  the  promissory  note and any accrued and
unpaid interest is convertible  into shares of Focus series C Preferred Stock at
a conversion  price of $1,560 per share which  represented  1,000 (each share of
preferred is convertible into 1,000 shares of common)  multiplied by 125% of the
trailing 30-day average of the Company's  common stock ending June 28, 2001. The
promissory note is secured by a security agreement in favor of Mr. Berg granting
him a security  interest in first priority over  substantially all of the assets
of Focus.  As of March 31, 2002 the Company had principal  and accrued  interest
due under the note totaling approximately $687,000.

     On January 16, 2001 in connection with the Videonics merger,  Focus assumed
an  unsecured  note payable to Carl Berg in the amount of  $1,035,000.  The note
earned  interest at 8% per year and was due on January 16, 2002. On May 7, 2001,
the  entire  outstanding  principal  balance  of  $1,035,000  and  approximately
$169,000  of accrued  interest  were  converted  into  1,012  shares of Series B
Preferred Stock.

     Restricted Collateral Deposit

     In connection with the CRA Systems,  Inc. ("CRA") 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  stockholder of the
Company obtained the bond on Focus' behalf in exchange for a secured convertible
note in the same

                                       7
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

amount as described in  "Convertible  Notes Payable to Stockholder"  above.  The
bond was irrevocable and was  collateralized  by a certificate of deposit in the
amount of $2,363,000.  In February,  2002, the Company  utilized the bond to pay
CRA Systems Inc., $2,216,000 in accordance with the judgment,  consisting of the
accrued legal judgment of $2,073,000  and accrued  interest  related  thereto of
$143,000.  As the case was settled for less than the bond,  $145,000 was used to
pay down a portion of the convertible note payable to Mr. Berg. See "CRA Systems
Inc." for further discussion.

     Class Action Suit

     Focus  and  one of  its  directors  have  been  named  as  defendants  in a
securities class action pending in United States District Court for the District
of Massachusetts.  The complaint  includes a class of stockholders who purchased
Focus  shares  during the period from July 17, 1997 to February  19,  1999.  The
complaint,  which was  initially  filed in November of 1999 and has been amended
several  times,  alleges  violations  of the federal  securities  laws and seeks
unspecified  monetary damages.  The defendants moved to dismiss the action.  The
Federal  District  Court granted  certain  portions of the motion to dismiss and
denied other portions,  allowing the case to go forward into pretrial  discovery
as to certain matters.

     On or about December 7, 2001 the parties  reached an agreement in principle
to  settle  this  case.  The  settlement  is  subject  to the  preparation  of a
settlement stipulation mutually satisfactory to all parties, and court approval,
after notice to stockholders  and a hearing.  It is expected that the settlement
will be funded entirely by proceeds from defendants'  insurance  carrier.  There
can  be no  assurance,  however,  that  the  parties  will  eventually  reach  a
settlement acceptable to all sides.

     CRA Systems, Inc.

     In 1996 Focus  entered  into a  distribution  agreement  with CRA , a Texas
corporation,  the terms and nature of which were  subsequently  disputed  by the
parties.  Focus contended that a particular  transaction in dispute with CRA was
simply a sale of inventory for which it was never paid. CRA contended otherwise.
CRA brought suit against Focus in 1998, for breach of contract and other claims,
contending  that Focus  grossly  exaggerated  the demand for the product and the
margin of profit that was available to CRA. CRA sought to recover  out-of-pocket
losses exceeding  $100,000 and lost profits of $400,000 to $1,000,000.  The case
was removed to the US District  Court for the Western  District of Texas. A jury
trial held in May 2000 in that court  resulted  in a verdict in favor of CRA for
$848,000 in actual  damages and $1,000,000 in 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,
Focus recorded an expense of $2,147,722 in the period ended  September 30, 2000.
The court  overruled a motion for new trial,  and Focus appealed the judgment to
the U.S.  Court of Appeals for the Fifth Circuit in New Orleans,  Louisiana.  On
October  27,  2000,  Focus  submitted a bond in the  approximate  amount of $2.3
million (being the approximate amount of the judgment plus 10% to cover interest
and costs of CRA) and the U.S.  District Court granted a stay of any enforcement
of the judgment  pending  appeal.  The Court of Appeals  held oral  arguments on
December 3, 2001. On January 3, 2002, the Court of Appeals affirmed the judgment
awarded to CRA virtually in its entirety.  As described above, Focus had already
recorded a charge to  operations  to  establish a legal  reserve for such amount
during the third quarter of 2000.  Such accrued  legal  judgement was reduced to
$2,073,000 at December 31, 2001 based on the final amount  affirmed by the Court
of Appeals.  In February,  2002, the Company utilized the bond to pay $2,216,000
in  accordance  with the judgment,  consisting of the accrued legal  judgment of
$2,073,000  and  accrued  interest  related  thereto of  $143,000.  Excess  bond
proceeds of $145,000  were used to pay down a  Convertible  Note  Payable to Mr.
Berg. See "Convertible Notes" for further discussion. This case is now closed.

     General

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

                                       8
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

7. Stockholders' Equity

Preferred Stock

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

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

     The Company is  obligated,  under certain  circumstances,  including at the
election  of Mr.  Berg  and  Focus,  to  convert  the  outstanding  balances  of
convertible  notes payable to Mr. Berg, and any unpaid interest,  into shares of
Focus  preferred  stock.  As of March 31,  2002,  approximately  1,341 shares of
preferred stock were subject to issuance to Mr. Berg pursuant to the convertible
notes payable agreements. See "Note 7. Commitments - Convertible Notes."

Common Stock

     On July 28,  2000,  the  Company  entered  into an  equity  line of  credit
agreement with Euston Investments  Holdings Limited  ("Euston"),  for the future
issuance and purchase of up to 4,000,000 shares of the Company's common stock at
a 10% discount.  In lieu of providing Euston with a minimum  aggregate  drawdown
commitment,  the Company issued to Euston a stock  purchase  warrant to purchase
250,000  shares of common  stock with an exercise  price of $1.625.  The warrant
expires  June 12, 2005.  The Company had sought to register  such shares under a
Registration Statement on Form SB-2. However,  before the registration statement
was declared effective, on January 11, 2002, Focus and Euston mutually agreed to
terminate the agreement.  As  consideration  for terminating the agreement,  the
exercise price of Euston's  warrants to purchase  250,000 shares of Focus common
stock was reduced from $1.625 to $0.75 per share.  The Company recorded a charge
to Other Expenses of approximately  $334,000 in the quarter ended March 31, 2002
based on the fair value of the repriced warrants. The fair value of the warrants
were calculated using the Black-Scholes  option pricing model with the following
assumptions:  contractual  term of 17  months,  volatility  of 140%,  risk  free
interest rate of 2.9% and no dividends during the term of the warrant.

     On January 11, 2002, the Company  completed the sale of 2,434,490 shares of
its common  stock in a private  placement  to four  independent  third  parties,
receiving proceeds of approximately  $2,425,000,  which is net of offering costs
of $325,000. Additionally, the Company incurred $182,000 of costs during 2001 in
connection with this offering  (including  costs  associated with the subsequent
registration of the shares),  resulting in total offering costs of $507,000. The
shares were sold at a 20% discount to the 20-day  average  closing bid prices of
the  Company's  common stock as of December  27, 2001,  the date an agreement in
principle was reached by the parties.  In connection with the private placement,
the Company issued warrants to the four investors to purchase a total of 367,140
shares of common stock at an exercise price of $1.36 per share.  See also, "Note
9. Related Party Transactions."

     On March 1, 2002, the Company issued warrants to purchase 270,000 shares of
common stock as compensation to three unrelated parties for consulting  services
in the areas of investment  advisory,  investor  relations  and public  relation
services.  The warrants are exercisable for a period of two to three years at an
exercise prices between $1.35 and $1.50 per share.  The Company recorded charges
of approximately $238,000 for the quarter ended March 31, 2002 based on the fair
value of the warrants.  Such amounts were recorded as General and administrative
expenses  and  the  fair  value  of  the  warrants  were  calculated  using  the
Black-Scholes option pricing model with the following  assumptions:  contractual
term of 2 to 3 years,  volatility  of 136% to 140%,  risk free  interest rate of
2.9% to 3.6% and no dividends during the term of the warrant.

                                       9
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

     As  of  March  31,  2002,   the  Company  was   obligated   under   certain
circumstances, to issue the following additional shares of common stock pursuant
to derivative securities, instruments or agreements:

                                                           March 31, 2002
                                                           --------------
         Warrants to purchase common stock                    1,470,219
         Options to purchase common stock                     6,159,457
         Notes payable convertible into common stock          1,844,800
         Preferred Stock convertible into common stock        1,904,000
                                                             ----------
              Total shares of common stock obligated, under
               certain circumstances, to issue               11,378,476
                                                             ==========

     In addition, the Company is obligated under certain circumstances, to issue
up to 1,341 shares of preferred stock upon the conversion of $1,759,000 debt and
accrued interest. See "Note 7. Commitments - Convertible Notes."

8. Related Party Transactions

     During the quarter ended March 31, 2002, in connection  with its efforts to
find investors in the private placement  completed on January 11, 2002, vFinance
Investments  Inc.  received  $275,000 in cash and a warrant to purchase  123,690
shares of common stock of Focus at $1.36 per share.  Timothy  Mahoney,  who is a
Focus director, is a principal of vFinance.

9. Significant Customers

     Three unrelated customers,  each with sales in excess of 10% of our revenue
accounted  for 35% of total  revenue for the quarter  ended March 31,  2002.  In
addition,  three customers,  each with accounts receivable balances in excess of
10% of our accounts receivable accounted for 58% of total accounts receivable at
March 31, 2002.  One unrelated  customer  accounted for 12% of total revenue for
the quarter ended March 31, 2001. In addition, two customers, each with accounts
receivable  balances in excess of 10% of our accounts  receivable  accounted for
31% of total accounts receivable at March 31, 2001.

                                       10
<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, 2001.

Certain Factors That May Affect Future Results

     From time to time,  information  provided by the Company or statements made
by its employees may contain "forward looking" information within the meaning of
the Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and as
such, may involve risks and uncertainties. Forward-looking statements, which are
based  on  certain  assumptions  and  describe  future  plans,  strategies,  and
expectations,  are generally identifiable by the use of words or phrases such as
"believe",  "plan", "expect",  "intend",  "anticipate",  "estimate",  "project",
"forecast",   "may  increase",  "may  fluctuate",   "may  improve"  and  similar
expressions or future or conditional  verbs such as "will",  "should",  "would",
and "could".  These  forward-looking  statements  relate to, among other things,
expectations of the business environment in which Focus operates,  opportunities
and   expectations   regarding   technologies,    anticipated   performance   or
contributions   from  new  and  existing   employees,   projections   of  future
performance,  possible  changes  in laws and  regulations,  potential  risks and
benefits arising from the implementation of the Company's strategic and tactical
plans, perceived  opportunities in the market,  potential actions of significant
stockholders  and  investment  banking  firms,  and  statements   regarding  the
Company's  mission and vision.  The Company's actual results,  performance,  and
achievements  may  differ   materially  from  the  results,   performance,   and
achievements  expressed or implied in such  forward-looking  statements due to a
wide range of factors.  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.  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, "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, 2001,  including,  but not
limited to, the section therein entitled "Certain Factors That May Affect Future
Results"  and  "Risk  Factors."  Focus  does  not  undertake,  and  specifically
disclaims any obligation,  to update any  forward-looking  statements to reflect
occurrences  or  unanticipated  events or  circumstances  after the date of such
statements.

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.

     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 these areas have been consolidated  into the company's  Campbell,
California facility. In March 2001, the Company 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.

                                       11
<PAGE>

Results of Operations

Net Revenues

     Net revenues for the  three-months  ended March 31, 2002 were $4,758,000 as
compared  with  $5,009,000  for the  three-month  period  ended March 31, 2001 a
decrease of $251,000, or 5%.

     For the three  months ended March 31, 2002,  net sales to  Professional  AV
customers  were  approximately  $2,170,000  compared to $3,331,000  for the same
period in 2001, a decrease of $1,161,000 or 35%. The decrease  partially related
to an  interruption  in  manufacturing  at one of our vendors located in Mexico,
which we estimate will cause  approximately  $300,000 of orders to move into the
second quarter. Additionally,  there has been a decrease in business to business
sales  since the  September  11, 2001  terrorist  attacks and as a result of the
slowdown in the economy.

     For the three  months  ended March 31,  2002,  net sales to OEM  customers,
which includes contract revenues,  were approximately  $1,232,000 as compared to
$441,000  for the same period in 2001,  an  increase  of  $791,000 or 179%.  The
increase is primarily  attributable to contract revenue of $700,000  included in
the first quarter of 2002, while no contract revenues were recorded in the first
quarter of 2001.

     For the  three  months  ended  March  31,  2002,  net  sales  to  Resellers
consisting  of  Distributors,  Retailers,  VAR's  and  Education  segments  were
approximately  $1,356,000 as compared to $1,237,000 for the same period in 2001,
an  increase  of $119,000  or 10%.  The slight  increase  in sales is  primarily
related to lower than expected sales in the first quarter of 2001 as a result of
production issues encountered during the Company's merger with Videonics,  which
were resolved during the second quarter of 2001.  Overall sales to resellers has
been  trending  lower as a result of a reduction of nationwide  computer  sales,
decreased  educational  spending and a trend by certain customers to incorporate
our scan conversion chips in televisions and video conferencing systems.

     As  of  March  31,  2002,   the  Company  had  a  sales  order  backlog  of
approximately $855,000.

Cost of Goods Sold

     Cost  of  goods  sold  were  $3,033,000,  or  64%  of net  sales,  for  the
three-months  ended March 31, 2002, as compared with  $3,219,000,  or 64% of net
sales, for the three-months  ended March 31, 2001, a decrease of $186,000 or 6%.
The Company's  gross profit margin for the three months ended March 31, 2002 and
2001 was 36%. Costs of good sold as a percentage of revenue for the three months
ended March 31, 2002 was impacted by product mix, as revenues were composed of a
higher  percentage  of contract  revenues that are at lower margins than product
sales.  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 the moving of inventory to Campbell,
California. The Company closed its Wilmington facility on March 31, 2001.

Sales, Marketing and Support Expenses

     Sales,  marketing  and  support  expenses  were  $1,386,000,  or 29% of net
revenues,   for  the  three-months  ended  March  31,  2002,  as  compared  with
$1,460,000, or 29% of net revenues, for the three-months ended March 31, 2001, a
decrease of $74,000 or 5%. The 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,
2002 were $673,000 or 14% of net  revenues,  as compared with $743,000 or 15% of
net revenues for the three-months ended March 31, 2001, a decrease of $70,000 or
9%.  The  decrease  is  primarily  the  result of  decreased  payroll  expenses,
consulting and legal fees. This decrease was offset by charges of  approximately
$238,000  associated with the issuance of warrants in connection with consulting
services.

                                       12
<PAGE>

Research and Development Expenses

     Research and development expenses for the three-months ended March 31, 2002
were approximately $922,000 or 19% of net revenues, as compared with $995,000 or
20% of net  revenues  for the  three-months  ended March 31, 2001, a decrease of
$73,000  or 7%.  The  decrease  in  research  and  development  expenses  is due
primarily to the  allocation  of research and  development  expenses to costs of
sales as the  Company  performed  development  work  under  contract.  Partially
offsetting this reduction was an increase in payroll expenses between comparable
periods.

Amortization

     Amortization  expenses for the three-month period ended March 31, 2002 were
$291,000  or 6% of  net  revenues,  as  compared  with  $576,000  or  11% of net
revenues,  for the three-months  ended March 31, 2001, a decrease of $285,000 or
49%.  The  decrease in terms of  absolute  dollars  and as a  percentage  of net
revenues is  primarily  due to the  Company's  adoption of FAS 142 on January 1,
2002, under which goodwill is no longer amortized.  On a pro forma basis had the
amortization of goodwill  ceased on January 1, 2001, the Company's  amortization
expense  for the three  months  ended  March 31,  2001 would have  decreased  by
$333,000,  and the Company would have reported a net loss of $2,391,000 or $0.08
per share. As of March 31, 2002, no impairment of goodwill had been  recognized.
There can be no assurance that future goodwill  impairment tests will not result
in a charge to earnings. See also "Note 4. Recent Accounting Pronouncements."

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.

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, 2002 was
$83,000, or 2% of net revenues,  as compared to $123,000, or 2% of net revenues,
for the three-months  ended March 31, 2001, a decrease of $40,000.  The decrease
in interest expense is primarily  attributable to a decrease of debt obligations
and lower interest rates.

Other Expense, Net

     Net other  expense  for the  three-month  period  ended  March 31, 2002 was
$24,000,  or 1% of net revenues,  as compared to $79,000, or 2% of net revenues,
for the three-months ended March 31, 2001, a change of $55,000.

     Other  expense for the period ended March 31, 2002 is comprised of a charge
of $334,000 related to the repricing of warrants associated with the termination
of an equity line of credit offset by gains on the  settlement of debts for less
than original amounts of $310,000.  Other expense for the period ended March 31,
2001 is  primarily  related to charges of $90,000  associated  with the untimely
registering  of AMRO  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.

Liquidity and Capital Resources

     The  accompanying  condensed  consolidated  financial  statements have been
prepared on a going concern basis,  which contemplates the realization of assets
and the  satisfaction  of liabilities in the normal course of business.  For the
three  months ended March 31, 2002 and the year ended  December  31,  2001,  the
Company incurred net losses of $1,654,000 and $6,658,000 , respectively, and net
cash used in operating activities of $4,510,000,  and $3,452,000,  respectively.
These factors indicate that the Company may potentially be unable to continue as
a going concern.

                                       13
<PAGE>

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

     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, 2002 and 2001 was $4,510,000 and  $1,081,000,  respectively.  In first
quarter of 2002, net cash used in operating  activities consisted primarily of a
net loss of $1,654,000  adjusted for  depreciation and amortization of $370,000,
gain on debt settlement  totaling  $263,000,  a decrease in accounts  payable of
$1,284,000 and payment of legal judgment of $2,073,000,  partially  offset by an
increase in inventories  totaling  $189,000.  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.

     Three customers, each with accounts receivable balances in excess of 10% of
our accounts  receivable,  accounted for 58% of our total accounts receivable at
March 31, 2002.

     We expect that our operating  cash flows may fluctuate in future periods as
a result of  fluctuations  in our  operating  results,  shipment  linearity  and
accounts  receivable  collections,  inventory  management,  and  the  timing  of
payments among others.

     Net cash provided by investing  activities for the three-months ended March
31, 2002 and 2001 was  $2,316,000  and  $1,044,000,  respectively.  In the first
quarter of 2002, cash provided in investing  activities was principally from the
decrease in restricted collateral deposit of $2,363,000, partially offset by the
purchase of property  and  equipment of $47,000.  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.

     Net cash provided by financing activities for the three-month periods ended
March 31, 2002 and 2001 was $2,270,000 and $870,000,  respectively. In the first
quarter of 2002,  the Company  received  $2,425,000 in net proceeds from private
offerings  of  common  stock  which  were  partially   offset  by  repayment  of
convertible  notes payable to shareholder  of $145,000.  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

     As of March 31, 2002,  the Company had working  capital of  $3,603,000,  as
compared to $2,038,000 at December 31, 2001, an increase of $1,565,000.

     The Company has incurred losses and negative cash flows from operations for
the three  months  ended  March 31, 2002 and each of the two years in the period
ended  December 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.  For
the three  months  ended  March 31,  2002,  the Company  received  approximately
$2,425,000 in proceeds from private  offerings of common stock,  which is net of
financing  costs of $325,000.  Additionally,  the Company  incurred  $182,000 of
costs during 2001 in connection with this offering  (including  costs associated
with the  subsequent  registration  of the shares),  resulting in total offering
costs of $507,000.

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

                                       14
<PAGE>

     At March 31, 2002, the Company owed Mr. Berg  approximately $4.1 million in
principal and accrued interest on various notes.

     Management  has taken steps to reduce  costs,  including the closure of its
Wilmington,  MA facility on April 1, 2001. All operations,  customer support and
finance were moved into the Campbell,  CA,  facility.  In  connection  with this
restructuring,  the Company reduced overall  personnel by 13%. In April of 2002,
the Company further reduced its personnel by 9%.

     Management  is  assessing  its  product  lines to  identify  how to enhance
existing or create new distribution  channels. In addition, the Company released
three new products in the third quarter of 2001, and expects to release at least
three new  products in 2002.  Although  there can be no  assurances,  management
expects the Company's sales for 2002 to increase over consolidated  revenues for
2001, as the Company begins shipments of its new products.

     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.  As of March 31,  2002,  the  Company had 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  stockholders  and any  additional  debt  financing  may result in
higher interest expense.

     There is no assurance  that  management's  plans will be  successful  or if
successful,  that they will result in the Company continuing as a going concern.
However,  the Company  believes that its current  cash,  its  borrowings  from a
stockholder,  its recent  private  equity  placement,  anticipated  increases in
revenues and  decreases in operating  expenses,  will be  sufficient to meet the
Company's  requirements for working capital,  and capital  expenditures  through
December 31, 2002.

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, together with the other information described elsewhere in
this  prospectus.  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 class  actions  alleging  violations  of
federal securities laws.

     We are subject to two class action lawsuits alleging that Focus and certain
present and former officers violated federal  securities laws in connection with
a number of allegedly  false or  misleading  statements.  On May 10,  2001,  the
Federal  District  Court  dismissed  one of the  class  action  lawsuits  in its
entirety. Additionally, on or about December 7, 2001 the we reached an agreement
in principle with the plaintiffs in principle to settle the second class action.
A Stipulation of Settlement was subsequently filed. The settlement is subject to
court  approval,  after notice to plaintiff  stockholders  and a hearing.  It is
expected  that  the  settlement   will  be  funded  entirely  by  proceeds  from
defendants'  insurance  carrier.  We believe that we have consistently  complied
with the  federal  securities  laws,  and do not  believe at this time that this
litigation will result in a material adverse effect on our financial  condition.
Nonetheless, the management time and resources that could be required to respond
effectively to such claims and to defend us vigorously in such litigation  could
adversely impact our management's  administrative  capabilities and there can be
no  assurances  as to  whether  the  eventual  outcome  of the cases will have a
material adverse effect on our financial condition or operations. See "Part II -
Other Information, Item 1 - Legal Proceedings."

                                       15
<PAGE>

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

     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 recently:

<TABLE>
<CAPTION>
                                         Private Offerings Of      Issuance of         Exercise of Stock
                                             Common Stock             Debt            Options and Warrants
                                             ------------             ----            --------------------
<S>                                            <C>                   <C>                  <C>
           First quarter 2002                 $2,425,000                   --                     --
           Fiscal 2001                                --           $2,650,000               $199,000
           Fiscal 2000                        $1,284,000           $2,363,000             $1,121,000
</TABLE>

     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 or convertible debt would result in dilution to
our  then-existing  stockholders  and could have a negative effect on the market
price of our common stock. Furthermore, any additional debt financing may result
in higher interest expense.

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

We have a significant amount of derivative  securities that will dilute existing
shareholders upon conversion.

     At March 31, 2002,  we had  35,873,690  and  1,904  shares  of  common  and
preferred shares issued and outstanding,  respectively,  and 1,470,219  warrants
and 6,159,457  options that are  exercisable  into shares of common  stock.  The
1,904 shares of preferred  stock are  convertible  into 1,904,000  shares of our
common stock. We also may issue additional  shares in acquisitions and may grant
1,099,453  additional  stock options to our employees,  officers,  directors and
consultants under our current stock option plans.

     In addition, the Company is obligated under certain circumstances, to issue
up to 1,341 shares of preferred stock upon the conversion of $1,759,000 debt and
accrued interest. See "Note 7. Commitments - Convertible Notes."

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

     We have relied upon the ability of Carl Berg,  a director  and  significant
owner of our common stock for interim  financing needs. As of March 31, 2001, we
had an aggregate of approximately  $4.1 million in debt outstanding to Mr. Berg.
There can be no  assurances  that Mr. Berg will continue to provide such interim
financing should we need additional funds.

We have a long history of operating losses.

     As of March 31, 2002,  we had an  accumulated  deficit of  $57,020,000.  We
incurred net losses of  $1,654,000,  $6,658,000  and  $12,029,000  for the three
months  ended  March 31, 2002 and the years  ended  December  31, 2001 and 2000,
respectively.  There  can  be no  assurance  that  we  will  become  profitable.
Additionally,  our  auditors  have  included an  explanatory  paragraph in their
report on our  financial  statements  for the year ended  December 31, 2001 with
respect to uncertainties  about our ability to continue as a going concern.  The
financial  statements do not include any  adjustment  that might result from the
outcome of that uncertainty.

We rely on certain vendors for a significant portion of our manufacturing.

     Over 60% of the components for our products are  manufactured  on a turnkey
basis by four vendors,  Furthertech Company, Ltd., Sicon International,  Samsung
Semiconductor Inc., and Asemtec  Corporation.  In addition,  certain of products
are  assembled  by a  single  vendor  in  Mexico.  If these  vendors  experience
production or shipping problems for

                                       16
<PAGE>

any reason, we in turn could experience delays in the production and shipping of
our products, which would have an adverse effect on our results of operations.

We are dependent on our suppliers.

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

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

     Three unrelated customers,  each with sales in excess of 10% of our revenue
accounted  for 35% of total  revenue for the quarter  ended March 31,  2002.  In
addition,  three customers accounted for 58% of our total accounts receivable at
March 31, 2002.  We do not have  long-term  contracts  requiring any customer to
purchase any minimum amount of products.  There can be no assurance that we will
continue to receive  orders of the same  magnitude as in the past from  existing
customers  or we will be able to market its current or proposed  products to new
customers.  Loss of any major customer  would have a material  adverse effect on
the Focus business as a whole.

Our products may become obsolete very quickly.

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

We may not be able to protect our proprietary information.

     We have a total of  eight  patents  issued,  of which  five  relate  to our
PC-to-TV  video-graphics  products.  We treat our technical data as confidential
and  rely  on  internal  non-disclosure  safeguards,  including  confidentiality
agreements with employees,  and on laws protecting trade secrets, to protect our
proprietary  information.  There can be no assurance  that these  measures  will
adequately protect the  confidentiality of our proprietary  information or prove
valuable in light of future technological developments.

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

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

     o   changing product specifications;

     o   difficulties in hiring and retaining necessary personnel;

     o   difficulties in reallocating  engineering  resources and other resource
         limitations;

     o   difficulties with independent contractors;

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

     o   undetected errors or failures in software and hardware; and

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

                                       17
<PAGE>

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

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

     o   both license and internally develop leading  technologies useful in our
         business;

     o   enhance our existing technologies;

     o   develop new  services  and  technology  that  address the  increasingly
         sophisticated and varied needs of our prospective customers; and

     o   respond to technological  advances and emerging industry  standards and
         practices on a cost-effective and timely basis.

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

We typically operate without a significant amount of backlog.

     We  typically  operate  with a small  amount of  backlog.  Accordingly,  we
generally do 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 current  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 or revenues. 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 our operating results,  cash
flows and liquidity would likely be adversely affected.

In the past, our common stock has not met the minimum levels to remain listed on
the Nasdaq SmallCap Market. If we were to be delisted,  it could make trading in
our stock more difficult.

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

     o   We must maintain stockholders' equity of $2,500,000. At March 31, 2002,
         we had total  stockholders'  equity of $7.1  million.  To the extent we
         continue  losing  money  and  do  not  raise  additional  capital,  our
         stockholders' equity will be reduced.

     o   We are  required to maintain a minimum bid price of $1.00 per share for
         our common  stock.  The closing  price of our common stock on March 31,
         2002 was $1.37.  Between  October 1, 2001 and March 31, 2002, our stock
         closed below $1.00 a share on 15 of 124 trading days.

     If we fail these Nasdaq  SmallCap  requirements  in the future,  our common
stock could be delisted,  eliminating  the only  established  trading market for
shares of our  common  stock.  Any sales of our common  stock at a  discount  to
market 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.

                                       18
<PAGE>
Our common stock price is volatile.

     The  market  price for our  common  stock is  volatile  and has  fluctuated
significantly  to date.  For example,  between April 1, 2001 and March 31, 2002,
the per  share  price of our stock has  fluctuated  between  $0.78 and $2.18 per
share, closing at $1.37 at March 31, 2002. The trading price of our common stock
is likely to continue to be highly volatile and subject to wide  fluctuations in
response to factors including, but not limited to, the following:

     o   actual or anticipated variations in our quarterly operating results;

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

     o   changes in financial estimates by securities analysts;

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

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

     o   additions or departures of key personnel; and

     o   sales of common stock.

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

Risks Related to Our Industry

International sales are subject to significant risk.

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

Our businesses are very competitive.

     The  computer   peripheral  markets  are  extremely   competitive  and  are
characterized  by  significant  price  erosion  over the life of a  product.  We
currently  compete 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  we are not  currently  aware of any  announcements  by its
competitors that would have a material impact on its operations, there can be no
assurance  that  we  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  we  will  be  able  to  compete
successfully against current and future competitors in this market.

     Often our competitors have greater financial,  technical,  marketing, sales
and customer  support  resources,  greater name recognition and larger installed
customer bases than we possess. 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.

                                       19
<PAGE>

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

     The western United States (and  California in particular)  has  experienced
repeated episodes of diminished  electrical power supply and fluctuating  energy
costs. This has resulted in uncertainty  regarding the settlement of the various
financial  components  of the  crisis.  These  financial  components  include  a
potential  adverse  impact  on the  State  of  California's  general  fund,  the
determination  of which energy  customers  will bear what cost burdens,  and the
resolution of the financial status of the two largest utilities in the State.

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

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

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

                                       20
<PAGE>

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Class Action Suits

     Focus and one of our  directors  were named as  defendants  in a securities
class  action  pending  in United  States  District  Court for the  District  of
Massachusetts.  The  complaint  includes a class of  stockholders  who purchased
Focus  shares  during the July 17, 1997 to February  19, 1999 period  (C.A.  No.
99-12344-DPW).  The complaint  was  initially  filed in November of 1999 and has
been amended several times. The complaint  purports to allege  violations of the
federal securities laws and seeks unspecified monetary damages. Defendants moved
to dismiss the action.  The Federal  District Court granted certain  portions of
our motion to dismiss and denied other portions, allowing the case to go forward
into pretrial discovery as to certain matters.

     On or about December 7, 2001 the parties  reached an agreement in principle
to settle this case. A Stipulation of Settlement  was  subsequently  filed.  The
settlement  is subject to court  approval,  after notice to  stockholders  and a
hearing.  It is expected that the settlement will be funded entirely by proceeds
from our insurance carrier.

CRA Systems, Inc.

     In 1996 we  entered  into an  agreement  with CRA  Systems,  Inc.,  a Texas
corporation,  the terms and nature of which were  subsequently  disputed  by the
parties.  We contended that the  transaction  was simply a sale of inventory for
which we were 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 and other
claims,  contending  that we grossly  exaggerated the demand for the product and
the margin of profit that was  available  to CRA  regarding  this  project.  CRA
sought to recover  out-of-pocket  losses exceeding  $100,000 and lost profits of
$400,000 to  $1,000,000.  The case was removed to the US District  Court for the
Western District of Texas, Waco, Texas (Civil No. W-99-CA-031).  A jury trial in
May 2000 in that court resulted in a verdict in favor of CRA for $848,000 actual
damages and $1,000,000 punitive damages. On October 10, 2000, the court rendered
a judgment  in favor of CRA for actual  damages,  punitive  damages,  attorney's
fees,  costs,  and interest.  In connection  with this judgment,  we recorded an
expense  of  $2,147,722  in the  period  ended  September  30,  2000.  The court
overruled  the motion for new trial that we filed,  and we appealed the judgment
to the U.S. Court of Appeals for the Fifth Circuit in New Orleans, Louisiana. On
October 27, 2000, we submitted a bond in the approximate  amount of $2.3 million
(being the  approximate  amount of the judgment  plus 10% to cover  interest and
costs of CRA) and the U.S.  District Court granted a stay of any  enforcement of
the judgment pending appeal. The Court of Appeals held oral argument on December
3, 2001. On January 3, 2002, the Court of Appeals  affirmed the judgment awarded
to CRA virtually in its entirety. We had already recorded a charge to operations
to establish a legal  reserve for such amount  during the third quarter of 2000.
Therefore, in February 2002, the Company utilized the bond to pay CRA $2,215,600
in accordance with the judgement.  Excess bond proceeds of $145,000 were used to
pay down a Convertible  Note Payable to Mr. Berg.  See  "Convertible  Notes" for
further discussion. This case is now closed.

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.

                                       21

<PAGE>


Item 2. Changes in Securities

     (a) (None)

     (b) (None)

     (c) On January 11, 2002, the Company completed the sale of 2,434,490 shares
         of its common stock in a private  placement to four  independent  third
         parties, receiving net proceeds of approximately $2,425,000. The shares
         were sold at a 20% discount to the 20-day average closing bid prices of
         the  Company's  common  stock  as of  December  27,  2001,  the date an
         agreement in principle was reached by the parties.  In connection  with
         the  private  placement,  the  Company  issued  warrants  to  the  four
         investors  to purchase a total of 367,140  shares of common stock at an
         exercise price of $1.36 per share. Furthermore,  in connection with its
         efforts to find investors in the private  placement,  vFinance received
         $275,000  in cash and a warrant to  purchase  123,690  shares of common
         stock of Focus at $1.36 per share.

Item 3. Defaults Upon Senior Securities

         (None)

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

         (None)

Item 5. Other Information

         (None)

Item 6. Exhibits and Reports on Form 8-K

         (a) Exhibits

         (None)

         (b) Reports on Form 8-K

         (None)


                                       22
<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 14, 2002                                  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)