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

                                   FORM 10-QSB

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

              For the quarterly period ended September 30, 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. [X] Yes [_] No

    As of September 30, 2002,  there were 36,158,269  shares of the Registrant's
Common Stock Outstanding.

<PAGE>

                            Focus Enhancements, Inc.
                      Condensed Consolidated Balance Sheets
                        (in thousands, except share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                               September 30,   December 31,
                                                                                    2002         2001 (1)
                                                                                  --------       --------
<S>                                                                               <C>            <C>
                                   ASSETS
Current assets:
  Cash and cash equivalents                                                       $    720       $    449
  Restricted collateral deposit                                                       --            2,363
  Accounts receivable, net of allowances of $474 and $666 at
    September 30, 2002 and December 31, 2001, respectively                           2,300          3,314
  Inventories, net of reserves of $944 and $819 at September 30, 2002
    and December 31, 2001, respectively                                              2,556          4,009
  Prepaid expenses and other current assets                                            217            230
                                                                                  --------       --------
    Total current assets                                                             5,793         10,365

Property and equipment, net                                                            249            411
Capitalized software development costs                                                 125            379
Other assets                                                                            88            107
Intangibles, net                                                                     1,183          2,181
Goodwill                                                                             5,191          4,654
                                                                                  --------       --------
    Total assets                                                                  $ 12,629       $ 18,097
                                                                                  ========       ========

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Obligations under capital leases, current portion                               $     42       $     42
  Accounts payable                                                                   2,190          4,295
  Accrued liabilities                                                                1,854          1,917
  Accrued legal judgment                                                              --            2,073
                                                                                  --------       --------
    Total current liabilities                                                        4,086          8,327

Convertible notes payable to stockholder                                             3,867          4,012
Obligations under capital leases, non-current                                           14             45
                                                                                  --------       --------

    Total liabilities                                                                7,967         12,384
                                                                                  --------       --------

Commitments and contingencies (Note 6)

Stockholders' equity
  Preferred stock, $.01 par value; authorized 3,000,000 shares;
      1,904 shares issued at September 30, 2002 and December 31, 2001
      (aggregate liquidation preference $2,267)                                       --             --
  Common stock,  $.01 par value;  50,000,000 shares authorized,
      36,608,269 and 33,423,403 shares issued at September 30, 2002
      and December 31, 2001, respectively                                              366            334
  Additional paid-in capital                                                        65,152         61,616
  Accumulated deficit                                                              (60,076)       (55,366)
  Deferred compensation and price protection                                           (80)          (171)
  Treasury stock at cost, 450,000 shares                                              (700)          (700)
                                                                                  --------       --------
  Total stockholders' equity                                                         4,662          5,713
                                                                                  --------       --------
    Total liabilities and stockholders' equity                                    $ 12,629       $ 18,097
                                                                                  ========       ========
</TABLE>

         (1) Derived from the December 31, 2001 audited  consolidated  financial
statements

          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 September 30,
                                                   2002           2001
                                                 --------       --------
Net product revenues                             $  4,091       $  6,024
Contract revenues                                    --              693
                                                 --------       --------
  Total net revenues                                4,091          6,717

Cost of revenues:
  Products                                          2,659          3,833
  Contract                                           --              554
                                                 --------       --------
  Total cost of revenues                            2,659          4,387
                                                 --------       --------

  Gross profit                                      1,432          2,330
                                                 --------       --------

Operating expenses:
  Sales, marketing and support                      1,141          1,425
  General and administrative                          423            467
  Research and development                          1,042            617
  Amortization expense                                217            700
  Restructuring expense                                96           --
                                                 --------       --------
    Total operating expenses                        2,919          3,209
                                                 --------       --------

    Loss from operations                           (1,487)          (879)

  Interest expense, net                               (57)           (44)
  Other income (expense), net                        --               33
                                                 --------       --------

    Net loss                                     $ (1,544)      $   (890)
                                                 ========       ========

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


Weighted average common shares outstanding:
  Basic and diluted                                35,777         32,520
                                                 ========       ========


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

                                       3
<PAGE>

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


                                              Nine Months ended September 30,
                                                   2002           2001
                                                 --------       --------
Net product revenues                             $ 12,602       $ 17,194
Contract revenues                                     759          1,021
                                                 --------       --------
  Total net revenues                               13,361         18,215

Cost of revenues:
  Products                                          8,099         10,483
  Contract                                            499            817
                                                 --------       --------
  Total cost of revenues                            8,598         11,300
                                                 --------       --------

  Gross profit                                      4,763          6,915
                                                 --------       --------

Operating expenses:
  Sales, marketing and support                      3,857          4,531
  General and administrative                        1,638          1,683
  Research and development                          3,007          2,515
  Amortization expense                                725          1,976
  Restructuring expense                                96             33
  Write-off of in-process technology                 --              505
                                                 --------       --------

    Total operating expenses                        9,323         11,243
                                                 --------       --------

    Loss from operations                           (4,560)        (4,328)

  Interest expense, net                              (174)          (267)
  Other income (expense), net                          24            (62)
                                                 --------       --------

    Net loss                                     $ (4,710)      $ (4,657)
                                                 ========       ========

Loss per common share:
  Basic and diluted                              $  (0.13)      $  (0.15)
                                                 ========       ========


Weighted average common shares outstanding:
  Basic and diluted                                35,428         31,329
                                                 ========       ========

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

                                       4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      Nine Months Ended September 30,
                                                                                           2002            2001
                                                                                         -------         -------
<S>                                                                                      <C>             <C>
Cash flows from operating activities:
Net loss                                                                                 $(4,710)        $(4,657)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                              950           2,328
  Deferred compensation expense                                                               91             209
  Gain on debt settlement                                                                   (311)           --
  Warrant issue expense                                                                      573            --
  In process research and development                                                       --               505
  Changes in operating assets and liabilities, net of the effects of acquisitions:
   Decrease (increase) in accounts receivable                                              1,014          (1,245)
   Decrease in inventories                                                                 1,453              56
   Decrease (increase) in prepaid expenses and other assets                                   23             (66)
   Increase (decrease) in accounts payable                                                (1,470)             78
   Decrease in accrued liabilities                                                          (364)           (160)
   Payment of legal judgement                                                             (2,073)           --
                                                                                         -------         -------

  Net cash used in operating activities                                                   (4,824)         (2,952)
                                                                                         -------         -------

Cash flows from investing activities:
  Decrease in restricted certificates of deposit                                            --               965
  Decrease in restricted collateral deposit                                                2,363            --
  Additions to property and equipment                                                        (64)           (169)
  Net cash from acquisition of Videonics                                                    --               360
                                                                                         -------         -------

Net cash provided by investing activities                                                  2,299           1,156
                                                                                         -------         -------

Cash flows from financing activities:
  Payments on notes payable and long-term debt                                              --              (400)
  Proceeds from convertible notes payable to shareholder                                    --             2,650
  Repayment of convertible notes payable to shareholder                                     (145)           --
  Payments under capital lease obligations                                                   (31)           (106)
  Net proceeds from private offerings of common stock                                      2,435            --
  Net proceeds from exercise of common stock options                                         537             123
  Payments for registration of common stock                                                 --              (117)
                                                                                         -------         -------

Net cash provided by financing activities                                                  2,796           2,150
                                                                                         -------         -------

Net increase in cash and cash equivalents                                                    271             354
Cash and cash equivalents at beginning of  period                                            449             352
                                                                                         -------         -------

Cash and cash equivalents at end of period                                               $   720         $   706
                                                                                         =======         =======

Supplemental Cash Flow Information:
  Interest paid                                                                          $   280         $    13
  Income taxes paid                                                                         --              --
  Acquisition of Videonics, Inc., for common stock and options                              --             8,813
  Conversion of note payable to shareholder to preferred stock                              --             2,266
  Conversion of accounts payable to common stock                                              23            --
  Conversion of accrued liabilities and notes payable to common stock                       --               578
  Stock issued for expenses associated with delayed registration                            --               150
  Issuance of common stock to investment banker in connection with the
   Videonics acquisition                                                                    --               251
</TABLE>

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

                                       5

<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 September 30, 2002 and for the three and nine month
periods  ended  September  30, 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)  considered  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 nine month period ended  September
30, 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 nine
months ended  September 30, 2002 and year ended  December 31, 2001,  the Company
incurred a net loss of $4,710,000 and $6,658,000, and net cash used in operating
activities  totaled  $4,824,000  and  $3,452,000,  respectively.  These  factors
indicate  that the  Company  may  potentially  be unable to  continue as a going
concern.  Additionally,  our auditors included an explanatory paragraph in their
report on our financial statements for the year ended December 31, 2001 included
in the  Company's  Annual  Report on Form 10-KSB 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 the Company's products to identify
how to enhance existing product lines or create new  distribution  channels.  In
addition,  the Company  released  three new products in the first nine months of
2002, and expects to release at least one more new product by year-end.

         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  in  Chelmsford,  MA. In April of 2002,  the
Company  further  reduced its  personnel by 9%.  Additionally,  during the three
months ended  September 30, 2002, the Company closed its  Chelmsford,  MA office
(resulting in a $96,000 restructuring charge) and furloughed 7% of its personnel
through December 31, 2002 with the eventual return to work dependent on business
conditions at that date.

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

                                       6

<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.  In
accordance  with SFAS 142 the  Company was  required to complete a  transitional
goodwill impairment test six months from the date of adoption.  Accordingly,  as
of the date of the test,  goodwill  did not  appear to be  impaired  and as such
there  was  no  impact  on the  Company's  financial  position  and  results  of
operations.  In connection with the adoption of SFAS No. 142, the Company ceased
amortization of the assembled  workforce  intangible  asset  associated with the
acquisition of Videonics,  and  reclassified to goodwill the net carrying amount
of the intangible asset, in the amount of $537,000.

The following table represents the impact on net loss and basic and diluted loss
per share from the reduction of  amortization of goodwill as if SFAS No. 142 was
adopted on January 1, 2001:

<TABLE>
<CAPTION>

                                                                     Three months ended            Nine months ended
                                                                        September 30,                September 30,
(Dollars in thousands, except for per share amounts)                 2002           2001          2002          2001
                                                                     ----           ----          ----          ----
<S>                                                               <C>             <C>          <C>           <C>
Reported net loss                                                 $ (1,544)       $  (890)     $ (4,710)     $ (4,657)
Workforce amortization                                                  --             75            --           212
Goodwill amortization                                                   --            392            --         1,117
Adjusted net loss                                                 $ (1,544)       $  (423)     $ (4,710)     $ (3,328)

Basic and diluted loss per share:

Reported basic and diluted loss per share                         $  (0.04)       $ (0.03)     $  (0.13)     $  (0.15)
Workforce amortization per share                                        --             --            --            --
Goodwill amortization per share                                         --           0.02            --          0.04
Adjusted basic and diluted loss per share                         $  (0.04)       $ (0.01)    $   (0.13)     $  (0.11)


Common and common equivalent shares used in calculation:
Basic and diluted                                                   35,777         32,520        35,428        31,329
</TABLE>


         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.

                                       7
<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

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 as of January 1, 2002.  The  adoption of SFAS No. 144
did not have a material impact on the Company's financial statements.

         In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal  Activities,  which addresses accounting for restructuring
and similar costs. SFAS 146 supersedes previous accounting guidance, principally
Emerging  Issues Task Force Issue No. 94-3. SFAS 146 requires that the liability
for costs  associated  with an exit or disposal  activity be recognized when the
liability  is  incurred.  Under  Issue 94-3,  a  liability  for an exit cost was
recognized  at the date of the Company's  commitment  to an exit plan.  SFAS 146
also establishes that the liability should initially be measured and recorded at
fair  value.  The  Company  will  adopt the  provisions  of SFAS 146 for exit or
disposal activities that are initiated after December 31, 2002.

5. Inventories

         Inventories are stated at lower of cost (first-in, first-out) or market
and at September 30, 2002 and December 31, 2001, consist of the following:

                                                   2002            2001
                                               -----------    ----------
    Raw materials                               $1,076,000    $1,678,000
    Work in process                                213,000       825,000
    Finished goods                               1,267,000     1,506,000
                                               -----------    ----------
    Totals                                      $2,556,000    $4,009,000
                                               ===========    ==========

6. Commitments

         Convertible Promissory Notes

         On October 26,  2000,  Carl Berg, a Company  director and  shareholder,
loaned the Company  $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%
(4.75% at September  30, 2002).  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 was  originally  due on October 26,
2003,  but was amended on November 4, 2002,  to provide for an  extension of the
maturity  date to April 25,  2004,  with  interest to be paid  quarterly.  Under
certain  circumstances,  including  at the election of Mr. Berg and the Company,
the  promissory  note and any accrued and unpaid  interest is  convertible  into
shares  of the  Company's  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 the Company.  On May 7, 2001, $46,000 of
outstanding interest due under the note was converted into 38 shares of Series B
Preferred  Stock. 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  September  30, 2002 the Company
had  unpaid   principal  and  accrued  interest  due  under  the  note  totaling
approximately $2,357,000.

         On February 28, 2001, Carl Berg agreed to loan the Company $2.0 million
to support the Company's  working capital needs,  bearing  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 the  Company,  the  promissory  note and any accrued and unpaid
interest  is  convertible  into  shares of the  Company's  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 the  Company.  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

                                       8

<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

B Preferred  Stock.  On November 4, 2002, the note was amended to provide for an
extension  of  the  maturity  date  for  the  remaining   principal  balance  of
$1,000,000,  from the  original  maturity  date of October 26, 2003 to April 25,
2004. As of September  30, 2002 the Company had  principal and accrued  interest
due under the note totaling approximately $1,095,000.

         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 had an original due date of January 3, 2003 which was
extended  to January 3, 2004 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 the
Company,  the promissory note and any accrued and unpaid interest is convertible
into shares of the Company's  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 the Company.
As of  September  30, 2002 the Company had  principal  and accrued  interest due
under the note totaling approximately $702,000.

         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 obtained the bond on the
Company's  behalf in exchange for a secured  convertible note in the same 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.
See "CRA Systems Inc." for further discussion.

         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.  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. 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  Promissory 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.

                                       9

<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

7. Stockholders' Equity

Preferred Stock

         On  April  24,  2001,  the  Company's  board  of  directors  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 the Company's common stock.

         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 September 31, 2002,  approximately  1,370 shares of
preferred stock were subject to issuance to Mr. Berg pursuant to the convertible
notes payable  agreements.  See "Note 6.  Commitments  - Convertible  Promissory
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
was 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  $2,435,000,  which is net of offering costs
of $315,000. 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 $497,000. 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
8. 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 ranging from $1.35 to $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 was  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.

                                       10

<PAGE>

                            Focus Enhancements, Inc.
              Notes To Unaudited Consolidated Financial Statements

         As of  September  30, 2002,  the Company was  obligated  under  certain
circumstances, to issue the following additional shares of common stock pursuant
to derivative securities, instruments or agreements:

             Warrants to purchase common stock                        1,134,569
             Options to purchase common stock                         6,681,527
             Notes payable convertible into common stock              1,885,978
             Preferred Stock convertible into common stock            1,904,000
                                                                     ----------
                  Total shares of common stock obligated, under
                   certain circumstances, to issue                   11,606,074
                                                                     ==========

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  from the  Company  $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

         No customer  accounted  for greater  than 10% of total  revenue for the
three-months  ended  September  30, 2002.  Three  customers,  each with accounts
receivable  balances in excess of 10% of our accounts  receivable  accounted for
48% of total accounts  receivable at September 30, 2002. One customer  accounted
for 11% of total revenue for the  three-months  ended  September  30, 2001.  One
customer accounted for 22% of total accounts receivable at September 30, 2001.

                                       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, 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.  On  September  29,  2002 the  Company  vacated  its  Chelmsford,
Massachusetts  facility  and  authorized  its sales  personnel to work from home
offices.  Focus  has  notified  the  landlord  and  attempted  to  enter  into a
settlement agreement.  To date, no agreement has been reached.  Accordingly,  on
September  29, 2002,  Focus  accrued the entire  amount of the  remaining  lease
obligation, totaling $96,000. See "Restructuring Expenses."

                                       12

<PAGE>

Results of Operations

Net Revenues

         Net  revenues  for the  three-months  ended  September  30,  2002  were
$4,091,000 as compared with $6,717,000 for the three-months  ended September 30,
2001 a decrease of $2,626,000,  or 39%. Net revenues for the  nine-months  ended
September  30,  2002 were  $13,361,000  as  compared  with  $18,215,000  for the
nine-months ended September 30, 2001, a decrease of $4,854,000 or 27%.

         For  the  three  months  ended   September  30,  2002,   net  sales  to
Professional AV customers were approximately  $3,061,000  compared to $3,873,000
for the same period in 2001,  a decrease of $812,000 or 21%. For the nine months
ended   September  30,  2002,  net  sales  to  Professional  AV  customers  were
approximately  $8,290,000 compared to $10,940,000 for the same period in 2001, a
decrease of $2,650,000 or 24%. The decrease  between  comparison  periods is the
result of a decrease in business to business  sales as a result of the  slowdown
in the economy.

         For the  three  months  ended  September  30,  2002,  net  sales to OEM
customers,  which includes contract  revenues,  were  approximately  $452,000 as
compared to $1,539,000  for the same period in 2001, a decrease of $1,087,000 or
70% (net sales to OEM  customers  for the three months ended  September 30, 2001
have been reduced by $158,000,  from  previously  reported  amounts,  as certain
products  are now being  reported  within  consumer  sales.) For the nine months
ended  September  30,  2002,  net  sales  to OEM  customers  were  approximately
$2,244,000 as compared to $2,908,000  for the same period in 2001, a decrease of
$664,000 or 23%.  (net sales  reported for the nine months ended  September  30,
2001 have been reduced by $301,000, from previously reported amounts, as certain
products are now being  reported  within  consumer  sales.) The decrease for the
three and nine months ended  September 30, 2002 is primarily  attributable  to a
decrease in contract  revenues of $693,000  and  $263,000,  respectively,  and a
decline in scan converter sales as a result of the slowdown in the economy.

         For the three months ended  September 30, 2002,  net consumer  sales to
Resellers  consisting of Distributors,  Retailers,  VAR's and Education segments
were  approximately  $578,000 as compared to  $1,305,000  for the same period in
2001,  a decrease of $727,000 or 56%. For the nine months  ended  September  30,
2002,  net sales to  Resellers  were  approximately  $2,826,000  as  compared to
$4,367,000 for the same period in 2001, a decrease of $1,541,000 or 35%. Overall
sales to  resellers  has been  trending  lower as a  result  of a  reduction  of
nationwide  computer  sales,  decreased  educational  spending and the Company's
discontinuance of sales of its products to certain retail accounts.

         As of  September  30,  2002,  the Company had a sales order  backlog of
approximately $212,000.

Cost of Goods Sold

         Cost of  goods  sold  were  $2,659,000,  or 65% of net  sales,  for the
three-months  ended September 30, 2002, as compared with  $4,387,000,  or 65% of
net sales,  for the  three-months  ended  September  30,  2001,  a  decrease  of
$1,728,000 or 39%. The Company's  gross profit margin for the third  quarters of
2002 and 2001 was 35%. Cost of goods sold were $8,598,000,  or 64% of net sales,
for the nine-months ended September 30, 2002, as compared with  $11,300,000,  or
62% of net sales,  for the  nine-months  ended September 30, 2001, a decrease of
$2,702,000 or 24%. The Company's gross profit margin for the nine-month  periods
of 2002 and 2001 were 36% and 38%, respectively. The majority of the decrease in
gross profit as a percentage of revenue for the nine-month comparison periods is
primarily due to a higher percentage of fixed costs in relation to revenues as a
result of decreased revenue.  The three-months ended September 30, 2002 also was
impacted by an inventory  obsolescence  charge of $250,000 to reserve for excess
and obsolete inventory, offset somewhat by a $163,000 reversal of an accrual the
Company had  established in the fourth quarter of 2000. The accrual related to a
disputed  claim between the Company and the seller as to the  product's  quality
and the  Company's  ability to return.  The  accrual  was reduced as the Company
settled for less than the amount originally reserved.

                                       13

<PAGE>

Sales, Marketing and Support Expenses

         Sales,  marketing and support expenses were  $1,141,000,  or 28% of net
revenues,  for the  three-months  ended  September  30, 2002,  as compared  with
$1,425,000,  or 21% of net revenues,  for the  three-months  ended September 30,
2001, a decrease of $284,000 or 20%. Sales,  marketing and support expenses were
$3,857,000,  or 29% of net revenues,  for the  nine-months  ended  September 30,
2002, as compared with $4,531,000,  or 25% of net revenues,  for the nine-months
ended  September 30, 2001, a decrease of $674,000 or 15%. The decrease in sales,
marketing  and support  expenses in absolute  dollars is primarily the result of
lower staffing, decreased commission and reduced marketing expenses.

General and Administrative Expenses

         General  and   administrative   expenses  for  the  three-months  ended
September  30, 2002 were  $423,000  or 10% of net  revenues,  as  compared  with
$467,000 or 7% of net revenues for the three-months  ended September 30, 2001, a
decrease  of  $44,000  or  9%.  General  and  administrative  expenses  for  the
nine-months ended September 30, 2002 were $1,638,000 or 12% of net revenues,  as
compared  with  $1,683,000  or 9% of net  revenues  for  the  nine-months  ended
September  30,  2001,  a decrease  of  $45,000.  The  decrease  in  general  and
administrative  expense  for  the  three-months  ended  September  30,  2002  is
primarily  attributable to reduced payroll expenses,  consulting and legal fees,
which includes an insurance  deductible refund of $100,000,  partially offset by
increased   investor   relations   expenses.   The   decrease   in  general  and
administrative expense for the nine-months ended September 30, 2002 is primarily
attributable  to reduced  payroll  expenses,  consulting  and legal fees,  which
includes an insurance deductible refund of $100,000, partially offset by charges
of approximately $238,000 associated with the issuance of warrants in connection
with consulting services,  increased investor relations expenses and an increase
in bad debt expenses.

Research and Development Expenses

         Research and development  expenses for the three-months ended September
30, 2002 were approximately  $1,042,000 or 25% of net revenues, as compared with
$617,000 or 9% of net revenues for the three-months ended September 30, 2001, an
increase  of  $425,000  or  69%.  Research  and  development  expenses  for  the
nine-months ended September 30, 2002 were approximately $3,007,000 or 23% of net
revenues, as compared with $2,515,000 or 14% of net revenues for the nine-months
ended  September  30,  2001,  an increase of  $492,000 or 20%.  The  increase in
research  and  development   expenses  was  due  primarily  to  a  reduction  in
engineering  work  performed  under  contract  and, as such,  less  research and
development  personnel  expenses  were  allocated  to costs of sales than in the
prior year.

Amortization

         Amortization expenses for the three-months ended September 30, 2002 was
$217,000  or 5% of  net  revenues,  as  compared  with  $700,000  or  10% of net
revenues,  for the three-months ended September 30, 2001, a decrease of $483,000
or 69%.  Amortization  expense for the nine-months ended September 30, 2002 were
$725,000  or 4% of net  revenues,  as  compared  with  $1,976,000  or 11% of net
revenues, for the nine-months ended September 30, 2001, a decrease of $1,251,000
or 63%.  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 and the assembled workforce  intangible asset ceased on
January 1,  2001,  the  Company's  amortization  expense  for the three and nine
months  ended  September  30,  2001  would  have  decreased  by  $467,000,   and
$1,130,000,  respectively,  and the  Company  would have  reported a net loss of
$423,000  or $0.01  per  share and net loss of  $3,327,000  or $0.11 per  share,
respectively.  As of September  30,  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-months  ended  September 30, 2002, the Company  recorded
restructuring   expenses   totaling  $96,000  related  to  the  closure  of  its
Chelmsford,  MA,  facility.  For the  nine-months  ended September 30, 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, the Company recorded a
charge for purchased in-process  technology of $505,000 during the first quarter
of 2001.

                                       14

<PAGE>

Interest Expense, Net

         Net interest expense for the three-months  ended September 30, 2002 was
$57,000,  or 1% of net revenues,  as compared to $44,000, or 1% of net revenues,
for the  three-months  ended  September  30,  2001,  a increase of $13,000.  Net
interest expense for the nine-months  ended September 30, 2002 was $174,000,  or
1% of net  revenues,  as compared to $267,000,  or 1% of net  revenues,  for the
nine-months  ended  September  30, 2001, a decrease of $93,000.  The decrease in
interest  expense  for the  nine-month  period is  primarily  attributable  to a
decrease in debt obligations and lower interest rates.

Other Income (Expense), Net

         Net other  income for the  three-months  ended  September  30, 2002 was
zero,  as  compared  to net other  expense  of  $33,000,  or less than 1% of net
revenues,  for the  three-months  ended September 30, 2001, a change of $33,000.
Net other income for the nine-month period ended September 30, 2002 was $24,000,
or less than 1% of net revenues, as compared to net other expense of $62,000, or
less than 1% of net revenues,  for the  nine-months  ended September 30, 2001, a
change of $86,000.

         Other expense for the nine-months ended September 30, 2002 is primarily
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 $360,000.

         The increase in other income for the  three-months  ended September 30,
2001 is primarily attributable to gains of approximately $128,000 related to the
settlement  of debts  for less than the  amounts  initially  accrued,  offset by
charges of $69,000  associated with the untimely  registering of AMRO Investment
International's  1,400,000 shares which were issued in connection with a private
placement in which the Company  received  gross  proceeds of  $1,500,000 in June
2000. The Company  registered  these shares in February of 2002. The increase in
other  expense  for the  nine-months  ended  September  30,  2001  is  primarily
attributable to charges of $374,000 associated with the untimely  registering of
AMRO Investment  International's shares.  Offsetting these charges were gains of
approximately $328,000 related to the settlement of debts for less than original
amounts accrued.

Liquidity and Capital Resources

         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
nine-months  ended  September 30, 2002 and the year ended December 31, 2001, the
Company incurred net losses of $4,710,000 and $6,658,000,  respectively, and net
cash used in operating activities of $4,824,000,  and $3,452,000,  respectively.
These factors indicate that the Company may potentially be unable 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.

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

         Net  cash  used  in  operating  activities  for the  nine-months  ended
September 30, 2002 and 2001 was $4,824,000 and $2,952,000,  respectively. In the
first  nine  months of 2002,  net cash used in  operating  activities  consisted
primarily of a net loss of $4,170,000 adjusted for depreciation and amortization
of  $950,000,  warrant  issue  expense of $573,000  and gain on debt  settlement
totaling  $311,000,  a decrease in accounts payable of $1,470,000 and payment of
legal  judgment  of  $2,073,000,  partially  offset by an  decrease  in accounts
receivable of $1,014,000 and a decrease in inventories totaling  $1,453,000.  In
first  nine  months of 2001,  net cash used in  operating  activities  consisted
primarily of a net loss of $4,657,000 adjusted for depreciation and amortization
of $2,328,000, the write-off of in-process technology related to

                                       15

<PAGE>

the acquisition of Videonics totaling $505,000, deferred compensation expense of
$209,000,  a decrease in accrued expenses  totaling  $160,000 and an increase in
accounts  receivable of $1,260,000,  partially offset by an increase in accounts
payable of $78,000.

         Three customers,  each with accounts  receivable  balances in excess of
10% of our  accounts  receivable,  accounted  for  48%  of  our  total  accounts
receivable at September 30, 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  nine-months  ended
September 30, 2002 and 2001 was $2,300,000 and $1,156,000, respectively. For the
first nine months of 2002, cash provided in investing activities was principally
from the decrease in restricted collateral deposit of $2,363,000,  offset by the
purchase  of property  and  equipment  of $64,000.  For the first nine months of
2001, cash was provided by a reduction in restricted  certificates of deposit of
approximately  $965,000  and  net  cash  provided  through  the  acquisition  of
Videonics on January 16, 2001, of $360,000,  offset by additions to property and
equipment of $169,000.  The  acquisition  of Videonics  was  accounted  for as a
purchase and made through the issuance of approximately  5,135,000 shares of the
Company's common stock.

         Net cash provided by financing  activities for the  three-months  ended
September 30, 2002 and 2001 was $2,796,000 and $2,150,000,  respectively. In the
first nine months of 2002, the Company received  $2,435,000 in net proceeds from
private offerings of common stock and $537,000 from the exercise of common stock
options which were  partially  offset by $145,000 in  repayments on  convertible
notes to a  shareholder.  In the first nine  months of 2001,  cash  provided  by
financing  activities occurred primarily from the issuance of notes payable to a
stockholder  and director of the Company of  $2,650,000  offset by repayments of
$400,000 to a bank.

         As  of  September  30,  2002,  the  Company  had  working   capital  of
$1,707,000,  as compared to  $2,038,000  at December  31,  2001,  an decrease of
$331,000.

         The Company has incurred losses and negative cash flows from operations
for the  nine-months  ended  September 30, 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 the sale of common stock in private placements. For the nine-months
ended September 30, 2002, the Company received  approximately  $537,000 from the
exercise  of common  stock  options and  $2,435,000  in  proceeds  from  private
offerings  of  common  stock,  which  is net of  financing  costs  of  $315,000.
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 $497,000.

         On February 28, 2001,  and June 29, 2001,  the Company and Carl Berg, a
director  and  stockholder  of the Company,  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.

         At September  30, 2002,  the Company owed Mr. Berg  approximately  $4.2
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%.  Additionally,  during the
three-months  ended  September  30,  2002,  the Company  closed its  Chelmsford,
Massachusetts  office and  furloughed 7% of its personnel  through  December 31,
2002 with the eventual  return to work dependent on business  conditions at that
date.

         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 first nine months of 2002,  and expects to release at
least one

                                       16

<PAGE>

more new product by  year-end.  There can be no  assurances  as to the amount of
revenue these new products will produce.

         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.  Additional  financings  may be
required in 2002 as the Company  implements  its business  plan. As of September
30,  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.

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 a long history of operating losses.

         As of September 30, 2002, we had an accumulated deficit of $60,076,000.
We  incurred  net losses of $4,710,  000,  $6,658,000  and  $12,029,000  for the
nine-months  ended  September 30, 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 adjustments  that might result from the
outcome of that uncertainty.

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 our  operations.  Set forth
below is information regarding net proceeds received recently:

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

First nine months 2002      $2,435,000                --           $537,000
Fiscal 2001                         --        $2,650,000           $199,000
Fiscal 2000                 $1,284,000        $2,363,000         $1,121,000

         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 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.


                                       17

<PAGE>

         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 convertible securities that will dilute existing
shareholders upon conversion.

         At September 30, 2002, we had 36,158,269 and 1,904 shares of common and
preferred shares issued and outstanding,  respectively,  and 1,134,569  warrants
and 6,681,527  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
187,702  additional  stock  options to our  employees,  officers,  directors and
consultants  under our current stock option  plans.  Any  additional  plans will
further dilute existing shareholders.

         In addition,  at September 30, 2002,  the Company was  obligated  under
certain  circumstances,  to issue up to 1,370 shares of preferred stock upon the
conversion of $1,797,000 debt and accrued interest.

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
September  30, 2002, we had an aggregate of  approximately  $4.2 million in debt
and accrued  interest  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 rely on certain vendors for a significant portion of our manufacturing.

         Over 50% 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 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.
There can be no  assurance  that labor  problems,  supply  shortages  or product
discontinuations 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.

         No customer  accounted  for greater  than 10% of total  revenue for the
quarter ended September 30, 2002, however,  three customers accounted for 48% of
our total  accounts  receivable at September 30, 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
our current or proposed  products to new  customers.  Loss of any major customer
would have a material  adverse  effect on our business as a whole.  Furthermore,
many of our products are dependent  upon the overall  success of our  customer's
product, over which we often have no control.

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

                                       18

<PAGE>

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;  difficulties in hiring and
                  retaining necessary personnel;

         o        difficulties in reallocating  engineering  resources and other
                  resource limitations;

         o        difficulties with independent contractors;

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

         o        undetected errors or failures in software and hardware; and

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

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

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

         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.

                                       19

<PAGE>

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
                  September 30, 2002, we had total stockholders'  equity of $4.6
                  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 November 12, 2002 was $1.20.

         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.

Our common stock price is volatile.

         The market price for our common  stock is volatile  and has  fluctuated
significantly  to date.  For example,  between  October 1, 2001 and November 12,
2002, the price of our stock has  fluctuated  between $0.73 and $2.24 per share,
closing at $1.20 at November 12, 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  or  issuance   of  other   dilutive
                  securities.

         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 reduce demand for our products and therefore
have a material adverse effect on our revenue or operating results.


                                       20

<PAGE>

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 our
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.

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. Furthermore, 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.

We  are  exposed  to  general   economic   conditions   that  have  resulted  in
significantly  reduced sales levels. If such adverse economic conditions were to
continue or worsen,  our business,  financial  condition  and operating  results
could be adversely impacted.

         If the adverse economic  conditions in the United States and throughout
the world  economy  continue or worsen,  we may  experience  a material  adverse
impact on our business,  operating results, and financial condition. We continue
to take actions and charges to reduce our cost of sales and  operating  expenses
in order to address  these  adverse  conditions.  A  prolonged  continuation  or
worsening of sales trends may require  additional  actions and charges to reduce
cost of sales and operating expenses in subsequent quarters. We may be unable to
reduce cost of sales and operating  expenses at a rate and to a level consistent
with such a future  adverse  sales  environment.  If we must  undertake  further
expense  reductions,  we  may  incur  significant  incremental  special  charges
associated  with such expense  reductions  that are  disproportionate  to sales,
thereby  adversely  affecting  our business,  financial  condition and operating
results.  Continuing  weakness  in the  economy  could  decrease  demand for our
products,  increase  delinquencies  in payments  and  otherwise  have an adverse
impact on our business.

Recent corporate bankruptcies,  accounting  irregularities,  and alleged insider
wrong doings have negatively  affected  general  confidence in the stock markets
and the  economy,  further  depressing  the stock  market and  causing  the U.S.
Congress to enact sweeping legislation.

         In an effort to  address  these  growing  investor  concerns,  the U.S.
Congress  passed,  and on July 30,  2002,  President  Bush signed into law,  the
Sarbanes-Oxley  Act  of  2002.  This  sweeping  legislation   primarily  impacts
investors,  the  public  accounting  profession,  public  companies,   including
corporate duties and responsibilities, and securities analysts.

                                       21

<PAGE>

         Some highlights  include  establishment of a new independent  oversight
board for public accounting firms,  enhanced disclosure  requirements for public
companies and their insiders,  required  certification by CEO's and CFO's of SEC
financial  filings,  prohibitions  on certain  loans to offices  and  directors,
efforts to curb potential securities analysts' conflicts of interest, forfeiture
of profits by certain  insiders in the event financial  statements are restated,
enhanced board audit  committee  requirements,  whistleblower  protections,  and
enhanced civil and criminal  penalties for violations of securities  laws. It is
difficult to predict the impact of such  legislation,  however it will  increase
the costs of securities  law compliance  for publicly  traded  companies such as
Focus.

Continued  terrorism  threats  and  potential  war in the Middle East have had a
negative impact on the U.S. economy.

         The adverse  consequences of potential war and the effects of terrorism
have had a negative affect on the U.S. economy.  For example,  the potential for
war in Iraq has further depressed the stock markets.  Any prolonged  conflict(s)
could negatively  impact our ability to raise additional funds if needed and our
revenues will be adversely affected if consumers and businesses  continue to cut
back spending.

                                       22

<PAGE>

Item 3. Controls and Procedures

         In accordance  with Section 302 of the  Sarbanes-Oxley  Act of 2002 and
the  Securities  Exchange  Act of  1934  Section  13(a)  or  Section  15(d),  we
implemented  disclosure  controls and  procedures  pursuant to which  management
under the supervision and with the  participation of the chief executive officer
("CEO") and chief financial officer ("CFO") carried out, within 90 days prior to
the  filing  of  this  quarterly   report,   a  review  and  evaluation  of  the
effectiveness  of these controls and procedures.  Based on this review,  our CEO
and CFO have concluded that our disclosure controls and procedures are effective
in timely  alerting  them to  material  changes in  information  required  to be
included in our periodic Securities and Exchange Commission filings.

         There were no significant  changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above.


                                       23

<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 and on or about May 23, 2002 the case was settled
and a final  judgement  was entered by the United  States  District  Court.  The
settlement was funded entirely by proceeds from defendants'  insurance  carrier.
The case is now closed.

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 "See Note 6. Commitments -
Convertible Promissory 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.


                                       24

<PAGE>

Item 2. Changes in Securities

         (a)      (None)

         (b)      (None)

         (c)      During the nine months ended September 30, 2002, the Focus has
                  sold the following  securities that were not registered  under
                  the  Securities  Act.  The  purchases  and sales  were  exempt
                  pursuant  to  Section  4(2)  of  the   Securities  Act  and/or
                  Regulation D  promulgated  thereunder  as  transactions  by an
                  issuer not involving a public  offering,  where the purchasers
                  represented their intention

                  1.       On January 11, 2002, we sold in a private  placement,
                           2,434,490   shares  of  our  common   stock  to  four
                           investors  for  gross  proceeds  of  $2,750,000.  The
                           proceeds were used for general corporate purposes. In
                           connection with the private placement, we also issued
                           warrants to purchase  367,140  shares of common stock
                           at  $1.36  per  share.   The  securities  were  later
                           registered  on a  Registration  Statement on Form S-3
                           deemed effective on February 12, 2002.

                  2.       On January  18,  2002 and March 26,  2002,  we issued
                           5,607  and  10,190   shares  of  our  common   stock,
                           respectively,  to  two  unrelated  third  parties  in
                           settlement  of an  aggregate  of $23,000 in  accounts
                           payable.

                  3.       In  September  2002,  we received  gross  proceeds of
                           $187,500  from the  issuance  of  250,000  shares  of
                           common  stock  resulting  from the exercise of common
                           stock warrants initially issued pursuant to a private
                           placement with an unaffiliated investor. The proceeds
                           from the  warrants  were used for  general  corporate
                           purposes.  The warrants and  underlying  common stock
                           were  registered on a Registration  Statement on Form
                           S-3 deemed effective on February 12, 2002.

         The  issuance of the  securities  described  above were  exempt  either
pursuant to Rule 701 under the  Securities  Act, as a transaction  pursuant to a
compensatory  benefit plan,  or pursuant to Section 4(2) as a transaction  by an
issuer not involving a public  offering.  The  recipients  in such  transactions
represented  their  intention to acquire the securities for investment  only and
not with a view to or for sale in connection with any distribution  thereof, and
appropriate  legends  were  affixed to the share  certificates  and  instruments
issued in such transactions.  All recipients had adequate access,  through their
relationships with us, to information about us. No underwriters were employed in
any of the above  transactions.  Appropriate  legends  were affixed to the share
certificates and warrants issued in the transactions.

         (d)      See (c) above.

Item 3. Defaults Upon Senior Securities

         (None)

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

         (None)

Item 5. Other Information

         (None)

                                       25

<PAGE>

Item 6. Exhibits and Reports on Form 8-K

         (a)      Exhibits


              Exhibit 10.40 - Employment  agreement  between Focus  Enhancements
              and Brett Moyer
              Exhibit 99.1 - CEO 906 Certification
              Exhibit 99.2 - CFO 906 Certification

         (b)      Reports on Form 8-K

                  On August 23, 2002,  the Company  filed a Form 8-K  announcing
                  that its FS454  Semiconductor  had been accepted for the X Box
                  Video Game System.

                  On August 27, 2002,  the Company  filed a Form 8-K  announcing
                  the  retirement of its president and the  appointment of a new
                  president.


                                       26

<PAGE>

                                   SIGNATURES

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




   November 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)


<PAGE>

                Certification of the Principal Executive Officer
                 (Section 302 of the Sarbanes-Oxley Act of 2002)


         I,  Brett  Moyer,  President  and  Chief  Executive  Officer  of  Focus
Enhancements, Inc. certify that:

1. I have reviewed this  quarterly  report on Form 10-QSB of Focus  Enhancements
Inc.

2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) designed  such  disclosure  controls and  procedures  to ensure that
         material  information   relating  to  the  registrant,   including  its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this quarterly report
         is being prepared;

         b) evaluated the effectiveness of the registrant's  disclosure controls
         and  procedures as of a date within 90 days prior to the filing date of
         this quarterly report (the "Evaluation Date"); and

         c)  presented  in this  quarterly  report  our  conclusions  about  the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

         a) all significant  deficiencies in the design or operation of internal
         controls  which  could  adversely  affect the  registrant's  ability to
         record,   process,   summarize  and  report  financial  data  and  have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

         b) any fraud,  whether or not  material,  that  involves  management or
         other  employees  who  have a  significant  role  in  the  registrant's
         internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: November 13, 2002

                                           /s/ Brett Moyer
                                           ---------------
                                           Brett Moyer
                                           President and Chief Executive Officer


<PAGE>

                Certification of the Principal Financial Officer
                 (Section 302 of the Sarbanes-Oxley Act of 2002)


I, Gary L. Williams, Chief Financial Officer of Focus Enhancements, Inc. certify
that:

1. I have reviewed this  quarterly  report on Form 10-QSB of Focus  Enhancements
Inc.

2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) designed  such  disclosure  controls and  procedures  to ensure that
         material  information   relating  to  the  registrant,   including  its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this quarterly report
         is being prepared;

         b) evaluated the effectiveness of the registrant's  disclosure controls
         and  procedures as of a date within 90 days prior to the filing date of
         this quarterly report (the "Evaluation Date"); and

         c)  presented  in this  quarterly  report  our  conclusions  about  the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

         a) all significant  deficiencies in the design or operation of internal
         controls  which  could  adversely  affect the  registrant's  ability to
         record,   process,   summarize  and  report  financial  data  and  have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

         b) any fraud,  whether or not  material,  that  involves  management or
         other  employees  who  have a  significant  role  in  the  registrant's
         internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: November 13, 2002

                                                         /s/ Gary L. Williams
                                                         -----------------------
                                                         Gary L. Williams
                                                         Chief Financial Officer