FORM 10-QSB


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


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


                 For the quarterly period ended: March 31, 1998


             [ ] 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.
        (Exact name of small business issuer as specified in its charter)


                           Delaware                         04-3186320
            (State or other jurisdiction of              (IRS Employer
            incorporation or organization)               identification No.)


                                 142 North Road
                                Sudbury, MA 01776
                    (Address of principal executive offices)


                                 (978) 371-2000
                           (Issuer's telephone number)


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15 (d) of the  Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes X No_____


As of March 31, 1998, there were outstanding  15,551,086 shares of Common Stock,
$.01 par value per share.
<PAGE>
                            FOCUS ENHANCEMENTS, INC.
                                   FORM 10-QSB


                                QUARTERLY REPORT
                                 March 31, 1998


                                TABLE OF CONTENTS


                                                                          Page


Facing Page                                                                1
Table of Contents                                                          2

PART I.       FINANCIAL INFORMATION

         Item 1. Consolidated Financial Statements:

                  Consolidated Balance Sheets at March 31, 1998
                       and December 31, 1997                               3


                  Consolidated Statements of Operations
                       for the Three Months Ended March 31, 1998
                       and 1997                                            4

                  Consolidated Statements of Cash Flows
                       for the Three Months Ended March 31, 1998
                       and 1997                                            5

                  Statement of Changes in Equity for the
                       Three Months Ended March 31, 1998                   6

                  Statement of Changes in Equity for the
                       Three Months Ended March 31, 1997                   7


                  Notes to Consolidated Financial Statements 
                                                                          8-10
         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                    11-14


PART II.          OTHER INFORMATION


         Item 1. Legal Proceedings                                         15 
         Item 2. Changes in Securities                                     15
         Item 3. Defaults Upon Senior Securities                           15
         Item 4. Submission of Matters to a Vote of Security Holders       15
         Item 5. Other Information                                       15-16
         Item 6. Exhibits and Reports on Form 8-K                          16


SIGNATURES                                                                 17


                                       2
<PAGE>
<TABLE>
<CAPTION>
                                           FOCUS ENHANCEMENTS, INC.
                                         CONSOLIDATED BALANCE SHEETS
                                                 (UNAUDITED)

                                     ASSETS
                                                                                  March 31,    December 31,
                                                                                    1998           1997
                                                                                -----------   ------------
<S>                                                                          <C>             <C>
Current Assets:
  Cash and cash equivalents                                                   $  1,164,624    $    719,851
  Securities available for sale                                                    652,097         595,000
  Accounts receivable, net of allowances of $447,837 and $820,998
       at March 31, 1998 and December 31, 1997, respectively                     7,000,359       5,538,132
  Inventories                                                                    3,983,066       3,989,604
  Prepaid expenses and other current assets                                        362,063         470,907
                                                                              ------------    ------------
       Total current assets                                                     13,162,209      11,313,494

Property and equipment, net                                                      1,149,519       1,068,918
Other assets, net                                                                  283,173         288,482
Goodwill, net                                                                    2,477,238       1,249,750
                                                                              ------------    ------------

       Total assets                                                           $ 17,072,139    $ 13,920,644
                                                                              ============    ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Notes payable                                                               $  2,519,953    $  2,220,000
  Obligations under capital leases                                                  66,010         102,320
  Accounts payable                                                               4,060,468       5,515,913
  Accrued liabilities                                                              690,707         855,961
                                                                              ------------    ------------
       Total current liabilities                                                 7,337,138       8,694,194

Notes payable
Deferred Income                                                                     84,212          84,212
Obligations under capital leases                                                    69,439          73,855
                                                                              ------------    ------------
       Total liabilities                                                         7,490,789       8,852,261
                                                                              ------------    ------------
Stockholders' equity
  Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued             --              --
  Common stock, $.01 par value; 25,000,000 shares authorized,
       15,551,086 and 14,010,186 shares issued and outstanding at
       March 31, 1998 and December 31, 1997, respectively                          155,511         140,102
  Additional paid-in capital                                                    31,415,605      27,339,892
  Accumulated deficit                                                          (22,046,863)    (22,411,611)
  Accumulated other comprehensive income                                            57,097              --
                                                                              ------------    ------------
       Total stockholders' equity                                                9,581,350       5,068,383
                                                                              ------------    ------------
       Total liabilities and stockholders' equity                             $ 17,072,139    $ 13,920,644
                                                                              ============    ============

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                       3
<PAGE>
                            FOCUS ENHANCEMENTS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

                                                Three Months Ended
                                          March 31,              March 31,
                                             1998                  1997
                                        ------------          ------------

Net sales                               $  5,251,948          $  4,801,550 
Cost of goods sold                         2,781,936             3,267,841
                                        ------------          ------------
    Gross profit                           2,470,012             1,533,709
                                        ------------          ------------
Operating expenses:                                          
                                                             
    Sales, marketing and support           1,166,327               952,964
    General and administrative               541,231               385,092
    Research and development                 310,801               179,402
                                        ------------          ------------
       Total operating expenses            2,018,359             1,517,458
                                        ------------          ------------
Income from operations                       451,653                16,251

Interest expense, net                        (77,039)              (67,240)
Other income, net                                634                69,015
                                        ------------          ------------
Income before income taxes                   375,248                18,026

Income tax expense                            10,500                 1,550
                                        ------------          ------------
Net income                              $    364,748          $     16,476
                                        ============          ============
Net income per common share                           
       Basic                            $       0.03          $       0.00
                                        ============          ============
       Diluted                          $       0.02          $       0.00
                                        ============          ============
                                                             
Weighted average common and common                           
    equivalent shares outstanding                            
        Basic                             14,528,419            11,530,607
                                        ============          ============
        Diluted                           15,875,315            12,158,128
                                        ============          ============
                                                 
               The accompanying notes are an integral part of the
                       consolidated financial statements.
        
                                        4
<PAGE>
<TABLE>
<CAPTION>
                                           FOCUS ENHANCEMENTS, INC.
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                 (UNAUDITED)

                                                                                       Three Months Ended
                                                                                    March 31,      March, 31,
                                                                                      1998            1997
                                                                                  ------------   ------------
<S>                                                                              <C>            <C>
Cash flows from operating activities:
  Net income                                                                      $   364,748    $    16,476
  Adjustments to reconcile net income to net cash used in
     operating activities:
       Depreciation and amortization                                                  153,272         92,319
       Gain on the forgiveness of accounts payable                                         --        (71,304)
       Changes in operating assets and liabilities, net of the
          effects of acquisition;
            (Increase) decrease in accounts receivable                             (1,297,886)    (2,007,873)
            Decrease (increase) in inventories                                         67,154        224,087
            Decrease (increase) in prepaid expenses and other assets                  108,844        (35,305)
            Decrease (increase) in accounts payable                                (1,455,445)       909,071
            Decrease (increase) in accrued liabilities                               (205,254)        (2,195)
                                                                                  -----------    -----------
       Net cash used in operating activities                                       (2,264,567)      (874,724)
                                                                                  -----------    -----------

Cash flows from investing activities:
  Purchase of property and equipment                                                 (188,452)      (234,806)
  Cash paid in acquisition of Digital Vision, Inc.                                     (6,980)            --
                                                                                  -----------    -----------

       Net cash used in investing activities                                         (195,432)      (234,806)
                                                                                  -----------    -----------

Cash flows from financing activities:
  Payments on notes payable                                                           (30,000)       (20,000)
  Payments under capital lease obligations                                            (40,725)        (5,819)
  Net proceeds from private offerings of common stock                               2,827,355      1,996,813
  Net proceeds from exercise of common stock options and warrants                     148,142         25,359
                                                                                  -----------    -----------
       Net cash provided by financing activities                                    2,904,772      1,996,353
                                                                                  -----------    -----------

Net increase in cash and cash equivalents                                             444,773        886,823

Cash and cash equivalents at beginning of period                                      719,851        413,894
                                                                                  -----------    -----------

Cash and cash equivalents at end of period                                        $ 1,164,624    $ 1,300,717
                                                                                  ===========    ===========

Supplemental Cash Flow Information:

       Interest paid                                                              $    77,039    $   274,000
       Income taxes paid                                                          $     6,411    $    10,312
       Issuance of Common Stock Warrants                                          $      --      $    42,000

Supplemental  schedule of noncash investing and financing  activities:
On March 31, 1998, the Company purchased  certain assets and assumed certain
liabilities of Digital Vision, Inc. as follows:

Fair value of tangible assets acquired                                                224,957 
Fair value of liabilities assumed                                                    (329,953)
                                                                                  -----------
Fair value of net assets acquired                                                    (104,996)
                                                                                  
Common stock issued                                                                (1,115,625)
Cash paid                                                                              (6,980)
Accrued cash payments                                                                 (40,000)
                                                                                  ===========
Excess of cost over fair value of net assets acquired                             ($1,267,601)
                                                                                  ===========
                                                     
             The accompanying notes are an integral part of the consolidated financial statements.

</TABLE>
                                                       5
<PAGE>


<TABLE>
<CAPTION>

                                                      FOCUS ENHANCEMENTS, INC.
                                                   STATEMENT OF CHANGES IN EQUITY
                                             FOR THE THREE MONTHS ENDED MARCH 31, 1998


                                                                                              Accumulated
                                                                                                  Other
                                                               Comprehensive    Accumulated   Comprehensive    Common      Paid-in
                                                    Total        Income           Deficit        Income        Stock       Capital
                                                ------------   -------------  -------------   -------------  ---------- ------------

<S>                                            <C>            <C>            <C>             <C>            <C>        <C>         
Beginning balance                               $  5,068,383   $          0   ($22,411,611)   $          0   $ 140,102  $ 27,339,892

Comprehensive Income
  Net income                                         364,748        364,748
  Other comprehensive income, net of tax      
       Unrealized gains on securities, net of 
            reclassification adjustment               57,097         57,097
                                              
                                                               ------------
Comprehensive income                                           $    421,845                        421,845
                                                               ============

Common stock issued                                4,091,122                                                    15,409     4,075,713

                                                ------------                  ------------    ------------   ---------  ------------
Ending balance                                  $  9,581,350                  ($22,411,611)   $    421,845   $ 155,511  $ 31,415,605
                                                ============                  ============    ============   =========  ============

                        The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                                                  6
<PAGE>
<TABLE>
<CAPTION>

                                                      FOCUS ENHANCEMENTS, INC.
                                                   STATEMENT OF CHANGES IN EQUITY
                                             FOR THE THREE MONTHS ENDED MARCH 31, 1997
                                                                                              Accumulated
                                                                                                  Other
                                                               Comprehensive    Accumulated   Comprehensive    Common      Paid-in
                                                    Total        Income           Deficit        Income        Stock       Capital
                                                ------------   -------------  -------------   -------------  ---------- ------------

<S>                                            <C>            <C>            <C>             <C>            <C>        <C>         

Beginning balance                               $  2,536,502   $          0   ($18,861,553)   $          0   $113,018   $ 21,285,037
                                                
Comprehensive Income                            
  Net income                                          16,476         16,476
  Other comprehensive income, net of tax        
       Unrealized gains on securities, net of   
            reclassification adjustment                    0              0
                                                
                                                               ------------
Comprehensive income                                           $     16,476                         16,476
                                                               ============
                                                
Common stock issued                                2,022,172                                                   14,128      2,008,044
                                                
                                                ------------                  ------------    ------------   ---------  ------------
Ending balance                                  $  4,575,150                  ($18,861,553)   $     16,476   $127,146   $ 23,293,081
                                                ============                  ============    ============   =========  ============

                        The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>                                       
                                                                 7
<PAGE>


                            FOCUS ENHANCEMENTS, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.       BASIS OF PRESENTATION

         The consolidated financial statements of FOCUS Enhancements, Inc. ("the
Company") as of March 31, 1998 and for the three month  periods  ended March 31,
1998  and  1997  are  unaudited  and  should  be read in  conjunction  with  the
consolidated  financial statements and notes thereto for the year ended December
31, 1997  included in the  Company's  Annual  Report on Form 10-KSB for the year
ended  December 31, 1997.  The  consolidated  financial  statements  include the
accounts of the Company and its wholly owned  subsidiaries  Lapis  Technologies,
Inc., TView, Inc., FOCUS Enhancements b. v. and Focus Networking,  Inc. On March
31, 1998, the Company acquired certain assets and assumed certain liabilities of
Digital Vision, Inc. in a transaction accounted for under the purchase method of
accounting. These assets and liabilities are included in the balance sheet as of
March 31, 1998. The operations  pursuant to this acquisition will be recorded in
the Company's  financial  statements  beginning April 1, 1998, In the opinion of
management,  the  consolidated  financial  statements  include  all  adjustments
(consisting  only  of  normal  recurring   adjustments)  necessary  for  a  fair
presentation  of the results of the interim  periods.  The results of operations
for the three month period ended March 31, 1998 are not  necessarily  indicative
of the results that may be expected for any future period.

2.       ACCOUNTING POLICY

         Securities - Available for Sale

         Securities - available for sale consist of common stock carried at fair
value, with unrealized gains and losses as a separate component of stockholders'
equity.

3.       NET INCOME PER SHARE

         In February 1997,  the Financial  Accounting  Standards  Board ("FASB")
issued Statement of Financial  Accounting Standards ("SFAS") No. 128 - "Earnings
Per Share" which  requires  earnings per share to be  calculated  on a basic and
dilutive basis.  Basic earnings per share represents  income available to common
stock divided by the weighted-average number of common shares outstanding during
the period.  Diluted earnings per share reflects  additional  common shares that
would have been outstanding if dilutive potential common shares had been issued,
as well  as any  adjustment  to  income  that  would  result  from  the  assumed
conversion.  Potential  common  shares that may be issued by the Company  relate
solely to outstanding  stock options and warrants,  and are determined using the
treasury  stock method.  The assumed  conversion of  outstanding  dilutive stock
options and warrants would increase the shares outstanding but would not require
an  adjustment  to income as a result of the  conversion.  For the three  months
ended March 31, 1998 and 1997,  options and  warrants  applicable  to  5,460,505
shares and 6,011,659 shares,  respectively were  anti-dilutive and excluded from
the diluted  earnings per share  computation.  The  statement  is effective  for
interim and annual  periods  ending after  December  15, 1997,  and requires the
restatement of all prior period earnings per share data presented.  Accordingly,
the Company has restated  all earnings per share data for prior years  presented
herein.

                                       8

<PAGE>
4.       COMPREHENSIVE INCOME

         In June  1997,  FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income",   effective  for  fiscal  years  beginning  after  December  15,  1997.
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Certain FASB statements,  however, require
entities  to  report  specific  changes  in  assets  and  liabilities,  such  as
unrealized  gains and  losses on  available-for-sale  securities,  as a separate
component of the equity section of the balance sheet. Such items, along with net
income, are components of comprehensive  income.  SFAS No. 130 requires that all
items of  comprehensive  income be  reported in a  financial  statement  that is
displayed with the same prominence as other financial statements.  Additionally,
SFAS No. 130 requires that the accumulated balance of other comprehensive income
be displayed separately form retained earnings and additional paid-in-capital in
the equity section of the balance sheet.  The Company  adopted these  disclosure
requirements  in the  first  quarter  of  1998  and  has  presented  comparative
disclosure  for the quarter  ended March 31, 1997.  In 1997,  the Company had no
other components of comprehensive income other than net income.

5.       INCOME TAXES

       The  Company  has  utilized  its  net  operating  loss  carryforwards  in
estimating  its provision for income taxes in the three month period ended March
31,1998.

6.       INVENTORIES

         Inventories consist of the following:
                                                   
                                                  March 31,         December 31,
                                                   1998                 1997
                                                 ----------         -----------
Finished goods                                   $3,498,716          $3,304,444
Raw materials                                       484,350             685,160
                                                 ----------          ----------
                                                 $3,983,066          $3,989,604
                                                 ==========          ==========

7.       NOTES PAYABLE

         Lines of Credit,  Banks.  The Company  maintains  a  revolving  line of
credit with a bank, which is fully drawn as of March 31, 1998.  Borrowings under
the line are payable upon demand and are  collateralized by all of the assets of
the Company,  except as noted below.  Borrowings,  aggregating $690,000 at March
31,  1998,  bear  interest  at the bank's  prime rate plus 1% (9.5% at March 31,
1998) and are personally  guaranteed by an investor.  In March 1998, the line of
credit was extended to June 8, 1998.

         Term Line of Credit.  At March 31, 1998, the Company owed $1,500,000 to
an unrelated  individual under a term line of credit  originated in October 1994
in the principal amount of $2,500,000.  Borrowings under the line of credit were
made  pursuant to a  promissory  note that was due on March 31, 1997 and was not
paid.  The Company is in the process of  renegotiating  the terms and expiration
date of this  loan with the  lender.  Pending  an  agreement  pertaining  to the
payment or renegotiation of this line of credit,  the Company  continues to make
quarterly  payments of interest  under the original  terms of this note.  In the
event that the  unaffiliated  lender  does not extend the due date,  the Company
would be required to pay the amounts  outstanding  from working  capital or from
equity or debt financing.

                                       9
<PAGE>
         Term Loan, Bank. At March 31, 1998, the Company owed $329,953 to a bank
resulting  from the  purchase of certain  assets and the  assumption  of certain
liabilities of Digital  Vision,  Inc. The  borrowings  bear interest at the Wall
Street  Journal prime rate plus 2% (10.5% at March 31,  1998).  The terms of the
note  require  payment  of  interest  only  through   September  30,  1998.  The
outstanding  balance at  September  30,  1998 is payable  thereafter  in monthly
installments, with interest, until the loan expiration date of March 31, 1999.

8.          COMMON STOCK TRANSACTIONS

         On March 3, 1998,  the Company  completed a financing of  approximately
$3,000,000 in gross  proceeds from the sale of 1,092,150  shares of Common Stock
and warrants to purchase  327,645 of common  stock in a private  placement to an
unaffiliated  accredited  investor.  The warrants are exercisable until March 3,
2005 if during the period ending August 25, 1999, the average of the closing bid
prices of the Company's  common stock during any  consecutive 20 trading days is
equal to or less  than  $2.7469.  The  shares  issued  in  connection  with this
transaction and issuable upon exercise of the warrants were registered under the
Securities Act of 1933 on April 22, 1998. Fees and expenses associated with this
offering amounted to approximately $172,600 yielding net proceeds of $2,827,400.
In connection with this transaction, the Board of Directors authorized the grant
of warrants to the  placement  agent to purchase  21,429 shares of the Company's
common  stock at a price of $4.2118 per share  exercisable  for a period of five
years.

         On March 31, 1998, the Company issued  approximately  350,000 shares of
common  stock  valued  at  approximately  $1,115,600  in  conjunction  with  the
acquisition  of certain  assets of Digital  Vision,  Inc. Under the terms of the
asset purchase agreement,  the shares issued as part of this transaction will be
registered  under the  Securities  Act of 1933 on or before  June 30,  1998.  In
addition,  the Company agreed to pay  approximately  $47,000 in cash for the net
assets with a  preliminary  estimated  fair value of  approximately  ($105,000),
consisting of accounts receivable ($164,400),  inventory ($60,600) offset by the
assumption of notes payable ($330,000).  The resulting goodwill of approximately
$1,267,000 will be amortized over its estimated benefit period of ten years. The
preliminary  fair value of the assets are included in the balance sheet at March
31, 1998,  with the  operations  of Digital  Vision,  Inc. to be included in the
financial statements of the Company beginning April 1, 1998.

                                       10
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

INTRODUCTION

         The  following  information  should  be read in  conjunction  with  the
consolidated  financial  statements  and notes thereto in Part I, Item 1 of this
Quarterly  Report and with  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations  contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997.

         The  Company  does  not  provide  forecasts  of  the  future  financial
performance of the Company.  However, from time to time, information provided by
the Company or statements  made by its employees may contain  "forward  looking"
information  that involves risks and  uncertainties.  In particular,  statements
contained in this Form 10-QSB which are not historical facts constitute  forward
looking  statements and are made under the safe harbor provisions of the Private
Securities  Litigation Reform Act of 1995. Each forward looking statement should
be read in  conjunction  with the  consolidated  financial  statements and notes
thereto in Part I, Item 1, of this  Quarterly  Report  and with the  information
contained in Item 2, including,  but not limited to,  "Certain  Factors That May
Affect  Future  Results"  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, 1997,  including,  but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."

RESULTS OF OPERATIONS

               Three-Month Period Ended March 31, 1998 As Compared
                With The Three-Month Period Ended March 31, 1997

Net Sales

         Net sales for the  three-month  period  ended  March 31, 1998 ("Q1 98")
were  $5,251,948 as compared with  $4,801,550 for the  three-month  period ended
March 31, 1997 ("Q1 97"), an increase of $450,398 or 9%. The growth in net sales
is attributed to increased  sales to US resellers  offset by decreased  sales to
international resellers and OEM/Licensing customers.  Specifically, net sales in
Q1 98 to the Company's US resellers  increased 48% to $4,280,000 from $2,899,000
in Q1 97. Net sales to  international  resellers  declined 45% to $425,000  from
$770,000  for the same  quarter in 1997.  Net sales to  OEM/Licensing  customers
decreased 52% to $547,000 in Q1 98 from $1,133,000 for the same quarter in 1997.
This  decrease  reflects   primarily  a  reduction  in  OEM  sales  to  a  major
manufacturer  of personal  computers.  During Q1 97, net sales to this  customer
represented 4% of the Company's  revenues  compared to 15% of revenues  during a
comparable quarter in 1997.

         As of  March  31,  1998,  the  Company  had a sales  order  backlog  of
approximately $2.2 million.

                                       11
<PAGE>
 Cost of Goods Sold

         Cost  of  goods  sold  were  $2,781,936  or 52% of net  sales,  for the
three-month  period ended March 31, 1998, as compared with  $3,267,841 or 68% of
net sales,  for the  three-month  period  ended  March 31,  1997,  a decrease in
absolute  dollars of $485,905 or 15%. The Company's  gross profit margins for Q1
98 and Q1 97 were 48% and 32%, respectively.  The decrease in cost of goods sold
in absolute  dollars and as a percentage of sales is due  principally to reduced
manufacturing  costs  achieved  as a result  of the use of the  Company's  FS300
integrated circuit in manufacturing of the Company's  products,  combined with a
decrease in OEM sales on which margins are typically lower.

Sales, Marketing and Support Expenses

         Sales,  marketing and support  expenses  were  $1,166,327 or 22% of net
sales,  for the  three-month  period  ended March 31,  1998,  as  compared  with
$952,964,  or 20% of net sales, for the three-month period ended March 31, 1997,
an  increase  of  $213,363  or 22%.  The  increase  in  absolute  dollars is due
primarily to increased  sales  commissions  as a result of increased  sales from
period to period and, an increase in  advertising  and trade show events as well
as increased domestic channel expansion efforts.

General and Administrative Expenses

         General and  administrative  expenses for the three-month  period ended
March 31, 1998 were $541,231 or 10% of net sales, as compared with $385,092,  or
8% of net sales for the  three-month  period ended March 31, 1997, a increase of
$156,139  or 41%.  The  increase  in  absolute  dollars  is due  primarily  to a
increases in  depreciation  of $52,000,  goodwill  amortization  associated with
TView,  Inc.  and Lapis of $9,000  and  increased  costs of  employee  benefits,
recruiting and temporary services of $60,000.

Research and Development Expenses

         Research  and  development  expenses for the  three-month  period ended
March 31, 1998 were $310,801, or 6% of net sales, as compared to $179,402, or 4%
of net sales,  for  three-month  period  ended  March 31,  1997,  an increase of
$131,399 or 73%.  The  increase is due  principally  to increases in payroll and
employee  benefits  of  $70,000,  in  recruiting  expenses  of  $18,000,  and in
consulting expenses of $39,000.

Interest Expense, Net

         Net interest  expense for the  three-month  period ended March 31, 1998
was $77,039, or 1.5% of net sales, as compared to $67,240, or 1.4% of net sales,
for the  three-month  period  ended March 31,  1997,  an increase of $9,799,  or
14.5%. The increase is primarily attributable to fees incurred for the extension
of the Company's revolving line of credit.

Other Income

         Other Income for the  three-month  period ended March 31, 1998 was $634
as compared to $69,015,  for the three-month  period ended March 31, 1997. Other
income for Q1 97 of $69,015  resulted from the  settlement  of certain  accounts
payable obligations.

Net Income 

          For the quarter ended March 31, 1998, the Company  reported net income
of $364,748, or $0.03 per share, as compared to $16,476, or $0.00 per share, for
the quarter ended March 31, 1997

                                       12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

         Net cash used in operating activities for the three-month periods ended
March 31, 1998 and 1997 was ($2,264,567) and ($874,724), respectively. In Q1 98,
net cash used in  operating  activities  consisted  primarily  of an increase in
accounts  receivable of $1,297,886 and decreases in accounts payable and accrued
liabilities  of  $1,455,445  and  $205,254,  respectively.  This was  offset  by
increases in prepaid  expenses of $108,844,  in  depreciation  and  amortization
(non-cash charge) of $153,272, and net income of $364,748. As of March 31, 1998,
accounts  receivable from a major distributor and from a major national retailer
represented   approximately  31%  and  10%,  respectively,   of  total  accounts
receivable.   In  Q1  98,  the  Company  wrote-off   approximately  $400,000  of
uncollectable  accounts receivable against a reserve established at December 31,
1997. In Q1 98, the Company  continued to record provisions for potential future
uncollectable accounts. The Company continually monitors inventory levels at its
resellers,  and  during  Q1  98  experienced  improved  sell-through  and  lower
inventory levels of its products in its distribution channels.

         In the three months ended March 31, 1997,  net cash used in  operations
consisted  primarily of an increase in accounts  receivable of $2,007,873.  This
was offset by an increase in accounts payable of $909,071.

         Net cash used in investing activities for the three month periods ended
March 31, 1998 and 1997 was ( $195,432) and  ($234,806)  respectively.  In Q1 98
and Q1 97, cash used in investing activities was principally for the purchase of
property and equipment.

         Net cash from financing  activities for the  three-month  periods ended
March 31, 1998 and 1997 was $2,904,772 and $1,996,353,  respectively.  In Q1 98,
the Company received $2,827,355 in net proceeds from private offerings of common
stock and $148,142 from the exercise of common stock  options and warrants.  The
Company's  financing  proceeds  were  offset by  payments  on notes  payable and
capital  lease  obligations.  In the same period in 1997,  the Company  received
$1,996,813  in net proceeds  from private  offerings of Common Stock and $25,359
from the  exercise of common  stock  options and  warrants.  The Q1 97 financing
proceeds were offset by payments on notes payable and capital lease obligations.

         As of March 31, 1998, the Company had working capital of $5,825,071, as
compared to  $2,619,300  at December 31, 1997,  an increase of  $3,298,412.  The
Company's  cash position  increased to $1,164,624 at March 31, 1998, an increase
of $444,773, or 62%, over amounts at December 31, 1997.

         On March 3, 1998, the Company sold 1,092,150 shares of common stock and
warrants to purchase 327,645 of common stock for gross proceeds of $3,000,000 in
a private  placement to an unaffiliated  accredited  investor.  The warrants are
exercisable until March 3, 2005 if during the period ending August 25, 1999, the
average of the  closing  bid prices of the  Company's  common  stock  during any
consecutive 20 trading days is equal to or less than $2.7469.  The shares issued
in connection  with this  transaction and issuable upon exercise of the warrants
were  registered  under the Securities  Act of 1933 on April 22, 1998.  Fees and
expenses  associated  with this  offering  amounted  to  approximately  $172,600
yielding net proceeds of $2,827,400.  In connection with this  transaction,  the
Board of Directors  authorized  the grant of warrants to the placement  agent to
purchase  21,429 shares of the Company's  common stock at a price of $4.2118 per
share exercisable for a period of five years.

         Although  the  Company  has  been  successful  in the  past in  raising
sufficient  capital to fund its  operations,  there can be no assurance that the
Company will achieve sustained  profitability or obtain sufficient  financing in
the  future to provide  the  liquidity  necessary  for the  Company to  continue
operations.
                                                                     
         At March 31,  1998,  the  Company  was in  violation  of  certain  debt
covenants  relating to the line of credit  with its  commercial  bank.  In March
1998, the Company received a waiver of the covenants from the commercial bank, a
revision of the loan covenants and an agreement to extend the line until June 8,

                                       13
<PAGE>
1998. In addition,  the Company is currently  negotiating  with its unaffiliated
lender to extend the March 1998 due date for the $1.5 million note payable which
was in default as of the date of this report. In the event that the unaffiliated
lender does not extend the due date,  the  Company  would be required to pay the
amounts outstanding from working capital or from equity or debt financing.

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.

Environmental Liability

         The Company has no known environmental violations or assessments.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

                                       14
<PAGE>
                           PART II - OTHER INFORMATION


ITEM 1.       LEGAL PROCEEDINGS

         The Company is not party to any pending legal  proceedings,  other than
routine  litigation  that is  incidental  to the  business,  which  would have a
material  adverse  effect on the  Company's  financial  position  or  results of
operations for the three month period ended March 31, 1998.

ITEM 2.       CHANGES IN SECURITIES

         None

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

         In October 1994, the Company  borrowed  $2,500,000 from an unaffiliated
lender under a term note due February 1, 1996. The term note accrues interest at
the prime rate plus 2%, payable quarterly in arrears, and is collateralized by a
second  security  interest in all the assets of the Company.  At March 31, 1998,
the Company owed $1,500,000 to the lender under the term note. This note was due
on  March  31,  1997  and  was  not  paid.  The  Company  is in the  process  of
renegotiating the terms and expiration date of this loan with the lender.


ITEM 4.       SUBMISSION OF MATTERS TO A VOTE

         None

ITEM 5.       OTHER INFORMATION

Sale of Common Stock

         On March 3, 1998,  the Company  completed a financing of  $3,000,000 in
gross proceeds from the sale of 1,092,150 shares of Common Stock and warrants to
purchase  327,645  of common  stock in a private  placement  to an  unaffiliated
accredited investor.  The warrants are exercisable until March 3, 2005 if during
the period ending August 25, 1999,  the average of the closing bid prices of the
Company's  common  stock during any  consecutive  20 trading days is equal to or
less than $2.7469.  The shares issued in connection  with this  transaction  and
issuable upon exercise of the warrants were registered  under the Securities Act
of 1933 on April 22,  1998.  Fees and  expenses  associated  with this  offering
amounted to  approximately  $172,600  yielding  net proceeds of  $2,827,400.  In
connection with this transaction, the Board of Directors authorized the grant of
warrants to the  placement  agent to  purchase  21,429  shares of the  Company's
common  stock at a price of $4.2118 per share  exercisable  for a period of five
years.

                                       15
<PAGE>

Purchase of Digital Vision, Inc.

         On March 31,  1998,  the Company  acquired  certain  assets and assumed
certain  liabilities of Digital  Vision,  Inc. The Company issued  approximately
350,000 shares of common stock and agreed to pay  approximately  $47,000 in cash
to acquire all of Digital Vision's accounts receivable,  inventory, all tangible
assets including  equipment and computer hardware and all intellectual  property
rights including  trademarks,  customer lists and contract  rights.  The Company
also assumed  approximately  $330,000 of liabilities  in  conjunction  with this
acquisition,  resulting in goodwill of approximately  $1,267,600,  which will be
amortized over its estimated  benefit period of ten years.  The preliminary fair
value of the assets  purchased  and  liabilities  assumed  are  included  in the
balance sheet as of March 31, 1998. The operations of Digital  Vision,  Inc will
be included in the financial statements of the Company beginning April 1, 1998.


ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K


a.       The following exhibits are filed herewith:


         11    Statement Re: Computation of Per Share Earnings



b.       Reports on Form 8-K

         The Company  did not file any  reports on Form 8-K  reports  during the
         quarter ended March 31, 1998.

                                       16
 
<PAGE>

                                   SIGNATURES

In accordance with the  requirements of the Exchange Act, the Registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.


                                             FOCUS Enhancements, Inc.




     May 15, 1998                        By: \s\ Thomas L. Massie
                                             Thomas L. Massie
                                             Chief Executive Officer and
                                             Chairman of the Board
                                             (Principal Executive Officer)



     May 15, 1998                        By: \s\ Gary M. Cebula
                                             Gary M. Cebula
                                             Vice President of Finance
                                             and Administration
                                             (Principal Accounting Officer)


                                       17