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: June 30, 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 June 30, 1998, there were outstanding  17,458,357  shares of Common Stock,
$.01 par value per share.
<PAGE>

                            FOCUS ENHANCEMENTS, INC.
                                   FORM 10-QSB

                                QUARTERLY REPORT
                                  June 30, 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 June 30, 1998
             and December 31, 1997                                        3

             Consolidated Statements of Income
             for the Three Months Ended June 30, 1998 and 1997            4

             Consolidated Statements of Income
             for the Six Months Ended June 30, 1998 and 1997              5

             Consolidated Statement of Changes in Stockholders' Equity 
             for the Six Months Ended June 30, 1998                       6

             Consolidated Statement of Changes in Stockholders' Equity 
             for the Six Months Ended June 30, 1997                       7

             Consolidated Statements of Cash Flows
             for the Six Months Ended June 30, 1998 and 1997              8

             Notes to Consolidated Financial Statements                  9-11

     Item 2.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations                       12-17

PART II. OTHER INFORMATION

     Item 1. Legal Proceedings                                            18
     Item 2. Changes in Securities                                        18
     Item 3. Defaults Upon Senior Securities                              18
     Item 4. Submission of Matters to a Vote of Security Holders          18 
     Item 5. Other Information                                            19
     Item 6. Exhibits and Reports on Form 8-K                             20


SIGNATURES                                                                21

                                       2
<PAGE>

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


                                                    ASSETS

                                                                                   June 30,      December 31,
                                                                                     1998            1997
                                                                                 ------------    ------------
<S>                                                                             <C>             <C>
Current Assets:
     Cash and cash equivalents                                                   $  6,028,980    $    719,851
     Securities available for sale                                                    794,373    $    595,000
     Accounts receivable, net of allowances of $432,150 and $820,998  
        at June 30, 1998 and December 31, 1997, respectively                        9,569,257       5,538,132
     Inventories                                                                    3,007,492       3,989,604
     Prepaid expenses and other current assets                                        394,457         470,907
                                                                                 ------------    ------------
        Total current assets                                                       19,794,559      11,313,494

Property and equipment, net                                                         1,165,886       1,068,918
Other assets, net                                                                     280,770         288,482
Goodwill, net                                                                       2,501,280       1,249,750
                                                                                 ------------    ------------
        Total assets                                                             $ 23,742,495    $ 13,920,644
                                                                                 ============    ============

                                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable                                                               $  2,429,476    $  2,220,000
     Obligations under capital leases                                                  46,836         102,320
     Accounts payable                                                               3,947,993       5,515,913
     Accrued liabilities                                                              175,226         855,961
                                                                                 ------------    ------------
        Total current liabilities                                                   6,599,531       8,694,194


Deferred Income                                                                        84,212          84,212
Obligations under capital leases                                                       65,205          73,855
                                                                                 ------------    ------------
        Total liabilities                                                           6,748,948       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,
         17,458,357 and 14,010,186 shares issued and outstanding at
        June 30, 1998 and December 31, 1997, respectively                             174,584         140,102
     Additional paid-in capital                                                    38,050,804      27,339,892
     Accumulated deficit                                                          (21,431,214)    (22,411,611)
     Accumulated other comprehensive income                                           199,373            --
                                                                                 ------------    ------------
        Total stockholders' equity                                                 16,993,547       5,068,383
                                                                                 ------------    ------------
        Total liabilities and stockholders' equity                               $ 23,742,495    $ 13,920,644
                                                                                 ============    ============


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

                                                       3

<PAGE>

                            FOCUS ENHANCEMENTS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)

                                                        Three Months Ended
                                                   June 30,          June 30,
                                                     1998              1997
                                                 ------------      ------------

Net sales                                        $  6,872,086      $  6,124,867
Cost of goods sold                                  4,065,355         4,057,809
                                                 ------------      ------------

      Gross profit                                  2,806,731         2,067,058
                                                 ------------      ------------

Operating expenses:

      Sales, marketing and support                  1,281,010         1,012,253
      General and administrative                      590,751           474,476
      Research and development                        244,923           252,436
                                                 ------------      ------------
          Total operating expenses                  2,116,684         1,739,165
                                                 ------------      ------------

Income from operations                                690,047           327,893

Interest expense, net                                 (60,371)          (67,703)
Other income (expense), net                             5,134           (26,883)
                                                 ------------      ------------

Income before income taxes                            634,810           233,307

Income tax expense                                     19,161             1,600
                                                 ------------      ------------

Net income                                       $    615,649      $    231,707
                                                 ============      ============

Net income per common share
          Basic                                  $       0.04      $       0.02
                                                 ============      ============
          Diluted                                $       0.04      $       0.02
                                                 ============      ============

Weighted average common 
      shares outstanding
          Basic                                    16,203,388        12,716,005
                                                 ============      ============
          Diluted                                  17,407,893        13,337,853
                                                 ============      ============


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

                                       4
<PAGE>
                            FOCUS ENHANCEMENTS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)

                                                          Six Months Ended
                                                     June 30,         June 30,
                                                      1998             1997
                                                 ------------      ------------

Net sales                                        $ 12,124,034      $ 10,926,417
Cost of goods sold                                  6,847,291         7,325,650
                                                 ------------      ------------
      Gross profit                                  5,276,743         3,600,767
                                                 ------------      ------------

Operating expenses:

      Sales, marketing and support                  2,447,337         1,965,217
      General and administrative                    1,131,982           859,568
      Research and development                        555,724           431,838

                                                 ------------      ------------
           Total operating expenses                 4,135,043         3,256,623
                                                 ------------      ------------

Income from operations                              1,141,700           344,144

Interest expense, net                                (137,410)         (134,943)
Other income, net                                       5,768            42,132
                                                 ------------      ------------

Income before income taxes                          1,010,058           251,333

Income tax expense                                     29,661             3,150
                                                 ------------      ------------

Net income                                       $    980,397      $    248,183
                                                 ============      ============

Net income per common share
           Basic                                 $       0.06      $       0.02
                                                 ============      ============
           Diluted                               $       0.06      $       0.02
                                                 ============      ============

Weighted average common 
      shares outstanding
           Basic                                   15,367,771        12,123,306
                                                 ============      ============
           Diluted                                 16,604,378        12,538,386
                                                 ============      ============

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

                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                      FOCUS ENHANCEMENTS, INC.
                                      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                               FOR THE SIX MONTHS ENDED JUNE 30, 1998


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

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

 Comprehensive Income:
  Net income                                        $   980,397                                  980,397                    980,397
  Other comprehensive income, net of tax
    Unrealized gains on securities, net of
       reclassification adjustment                      199,373                                              $199,373       199,373
                                                    -----------
 Comprehensive income                               $ 1,179,770                                               
                                                    ===========

 Common stock issued                                                  34,482    10,710,912                               10,745,394
                                                                   ---------   -----------  ------------     --------   -----------
 Ending balance                                                    $ 174,584   $38,050,804  $(21,431,214)    $199,373   $16,993,547
                                                                   =========   ===========  ============     ========   ===========

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

</TABLE>
                                                                 6

<PAGE>
<TABLE>
<CAPTION>
                                                      FOCUS ENHANCEMENTS, INC.
                                      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                               FOR THE SIX MONTHS ENDED JUNE 30, 1997


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

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

 Beginning balance                                                 $ 113,018   $21,285,037  $(20,425,532)               $   972,523

 Comprehensive Income:
   Net income                                       $   248,183                                  248,183                    248,183
   Other comprehensive income, net of tax
     Unrealized gains on securities, net of
        reclassification adjustment                          --                                               $    --           --
                                                    -----------
 Comprehensive income                               $   248,183                                                  
                                                    ===========

 Common stock issued                                                  14,172     2,023,466                                2,037,638
                                                                   ---------   -----------  ------------     --------   -----------

 Ending balance                                                    $ 127,190   $23,308,503  $(20,177,349)    $     --   $ 3,258,344
                                                                   =========   ===========  ============     ========   ===========


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

</TABLE>
                                                                 7


<PAGE>
<TABLE>
<CAPTION>
                                       FOCUS ENHANCEMENTS, INC.
                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                             (UNAUDITED)

                                                                               Six Months Ended
                                                                             June 30,       June 30,
                                                                              1998           1997
                                                                          -----------    -----------
<S>                                                                      <C>           <C>
Cash flows from operating activities:
    Net income                                                            $   980,397    $   248,183
    Adjustments to reconcile net income to net cash used in
       operating activities:
       Depreciation and amortization                                          356,499        191,681
       Gain on the forgiveness of accounts payable                               --          (70,202)
       Changes in operating assets and liabilities, net of the
          effects of acquisition;
            (Increase) decrease in accounts receivable                     (3,866,784)    (2,643,714)
            Decrease (increase) in inventories                              1,042,728       (328,363)
            Decrease (increase) in prepaid expenses and other assets           76,450        (11,092)
            Decrease (increase) in other assets                                 7,712        (25,490)
            (Decrease) increase in accounts payable                        (1,622,462)     1,983,615
            (Decrease) increase in accrued liabilities                       (680,735)       (71,364)
                                                                          -----------    -----------
       Net cash used in operating activities                               (3,706,195)      (726,746)
                                                                          -----------    -----------
Cash flows from investing activities:
    Purchase of property and equipment                                       (382,854)      (396,772)
    Cash paid in acquisition of Digital Vision, Inc.                          (46,980)          --
                                                                          -----------    -----------
       Net cash used in investing activities                                 (429,834)      (396,772)
                                                                          -----------    -----------
Cash flows from financing activities:
    Payments on notes payable                                                (120,477)       (20,000)
    Payments under capital lease obligations                                  (64,134)       (45,468)
    Net proceeds from private offerings of common stock                     2,827,355      1,996,813
    Net proceeds from exercise of common stock options and warrants         6,802,414         40,825
                                                                          -----------    -----------
       Net cash provided by financing activities                            9,445,158      1,972,170
                                                                          -----------    -----------
Net increase in cash and cash equivalents                                   5,309,129        848,652

Cash and cash equivalents at beginning of period                              719,851        413,894
                                                                          -----------    -----------
Cash and cash equivalents at end of period                                $ 6,028,980    $ 1,262,546
                                                                          ===========    ===========
Supplemental Cash Flow Information:

       Interest paid                                                      $   137,410    $   134,943
       Income taxes paid                                                  $    29,661    $     3,150
       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                                            (384,495)
                                                                          -----------
Fair value of net assets acquired                                            (159,538)

Common stock issued                                                        (1,115,625)
Cash paid                                                                     (46,980)
                                                                          ===========
Excess of cost over fair value of net assets acquired                     $(1,322,143)
                                                                          ===========

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

</TABLE>
                                                  8
<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 June 30, 1998 and for the three- and  six-month  periods  ended
June 30, 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.

The results of  operations  of Digital  Vision,  Inc.  have been included in the
accompanying   consolidated  financial  statements  since  April  1,  1998.  The
following unaudited pro forma information presents a summary of the consolidated
results  of  operations  of the  Company  and  Digital  Vision,  Inc.  as if the
acquisition had occurred at the beginning of the six-month period, presented.

                                              Pro forma Results
                                              Six Months Ended
                                                  June 30,

                                             1998         1997
                                          -----------------------

Net Sales                                 $12,375,000  $11,425,000
Income From Operations                      1,175,000      395,000
Net Income                                  1,000,000      265,000
Net Income
  Per Common Share  (Basic And Diluted)   $     0.06   $     0.02
                                          ----------   ----------

         In the opinion of management,  the  consolidated  financial  statements
include  all  adjustments  (consisting  only of  normal  recurring  adjustments)
necessary for a fair  presentation  of the results of the interim  periods.  The
results of operations  for the three- and six-month  periods ended June 30, 1998
are not  necessarily  indicative  of the results  that may be  expected  for any
future period.




                                       9
<PAGE>

2.       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 six- months ended
June 30, 1998 and 1997, options and warrants  applicable to 6,881,303 shares and
3,468,158 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 periods presented herein.

3.       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 from 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  six  months  ended  June  30,  1998  and  June  30,  1997,
respectively.  In 1997,  the Company had no other  components  of  comprehensive
income other than net income.

4.       INCOME TAXES

         The  Company has  utilized  its net  operating  loss  carryforwards  in
estimating  its provision  for income taxes in the three- and six-month  periods
ended June 30,1998.

5.       INVENTORIES

         Inventories consist of the following:

                              June 30,              December 31,
                               1998                     1997
                            ----------              -----------

Finished goods              $2,596,981              $3,304,444
                                                  
Raw materials                  410,511                 685,160
                            ----------              ----------
                            $3,007,492              $3,989,604                
                            ==========              ==========
                                       


                                       10
<PAGE>
6.       NOTES PAYABLE

         Lines of Credit,  Banks.  The Company  maintains  a  revolving  line of
credit with a bank,  which is fully drawn as of June 30, 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 $680,000 at June 30,
1998, bear interest at the bank's prime rate plus 1% (9.5% at June 30, 1998) and
are personally  guaranteed by a stockholder.  In August 1998, the line of credit
was extended to October 8, 1998.

         Term Line of Credit.  At June 30, 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 June 30, 1997 and was not
paid. The Company repaid this obligation, in full, on July 10, 1998.
         
         Term Loan, Bank. On March 31, 1998, the Company assumed a $329,953 bank
loan 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 June 30,  1998).  The terms of the
note  require  payment  through  September  30,  1998,  of  interest  only.  The
outstanding  balance at  September  30,  1998 is payable  thereafter  in monthly
installments, with interest, until the loan expiration date of June 30, 1999. At
June 30, 1998, the outstanding amount owed on this loan was $249,476.

7.       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 shares 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,  shares issued as part of this  transaction have been
registered under the Securities Act of 1933. In addition,  the Company agreed to
pay  approximately  $47,000  in  cash  for  net  assets  with  a fair  value  of
approximately   ($160,000),   consisting  of  accounts  receivable   ($164,400),
inventory  ($60,600)  offset by the  assumption of notes payable  ($330,000) and
accounts payable ($55,000).  The resulting goodwill of approximately  $1,322,000
will be amortized over its estimated benefit period of ten years. The operations
of Digital  Vision,  Inc. have been included in the financial  statements of the
Company since April 1, 1998.

         In the six-month period ended June 30, 1998, the Company received gross
proceeds  of  $6,146,887.50  as a  result  of the  exercise  of  910,650  of the
Company's  Redeemable Common Stock Purchase Warrants (the "Warrants")  issued in
connection  with the Company's  initial public offering in May 1993. The Company
issued  1,649,202  shares of common  stock as a result  of the  exercise  of the
Warrants. In accordance with the anti-dilution  provisions of the Warrants,  the
holder was  entitled to receive  1.811  shares of common  stock for each Warrant
exercised.  The Warrants were  exercisable at a price of $6.75 per Warrant until
May 26, 1998.

                                       11
<PAGE>
8.       SUBSEQUENT EVENTS

Purchase of PC Video Conversion, Inc.

         On July 29,  1998,  the  Company  acquired  certain  assets and assumed
certain  liabilities of PC Video Conversion,  Inc. ("PC Video"). At the closing,
the Company paid PC Video  $700,000 in cash and  delivered a promissory  note in
the principal amount of $1,000,000  providing  payment of principal and interest
over a period of 36 months.  In addition,  the Company  issued 122,796 shares of
common  stock and agreed to  register  the common  stock with the United  States
Securities  and  Exchange  Commission  within  one  hundred  twenty  days of the
closing. The Company purchased all of PC Video'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  $79,650 of  liabilities  in
connection  with this  acquisition.  The acquisition is being accounted for as a
purchase and resulted in goodwill of approximately $1,566,500. The operations of
PC Video  Conversion,  Inc. will be included in the financial  statements of the
Company beginning August 1, 1998.


                                       12
<PAGE>

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

INTRODUCTION

         The  following  information  should  be read in  conjunction  with  the
consolidated  financial  statements  and notes thereto in Part I, Item 1 of this
Quarterly  Report and with  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations  contained in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 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 June 30, 1998 As Compared
                 With The Three-Month Period Ended June 30, 1997

Net Sales

         Net sales for the three-month period ended June 30, 1998 ("Q2 98") were
$6,872,086 as compared with $6,124,867 for the three-month period ended June 30,
1997 ("Q2 97"),  an  increase  of  $747,219  or 12%.  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
Q2 98 to the Company's US resellers  increased 51% to $5,330,000 from $3,540,000
in Q2 97. Net sales to  international  resellers  declined  88% to $81,000  from
$648,000  for the same  quarter in 1997 due to the  transition  from the sale of
networking  products  (which  constituted a significant  portion of net sales in
1997) to the sale of PC to TV  products.  Net sales to  OEM/Licensing  customers
decreased  25% to $1,461,000  in Q2 98 from  $1,937,000  for the same quarter in
1997.  This  decrease  reflects  primarily a  reduction  in OEM sales to a major
manufacturer of personal computers and to a manufacturer of televisions.  During
Q2 98,  there  were no sales  to  these  two  customers  whereas  sales to these
customers were  approximately  29% of revenues during the comparable  quarter in
1997.


         As of  June  30,  1998,  the  Company  had a  sales  order  backlog  of
approximately $550,000.

                                       13
<PAGE>
Cost of Goods Sold

         Cost  of  goods  sold  were  $4,065,355  or 59% of net  sales,  for the
three-month  period ended June 30, 1998, as compared  with  $4,057,809 or 66% of
net sales,  for the  three-month  period  ended June 30,  1997,  an  increase in
absolute dollars of $7,546 or 0.2%. The Company's gross profit margins for Q2 98
and Q2 97 were 41% and 34%,  respectively.  As a  percentage  of sales,  cost of
goods sold was lower in Q2 98  principally  due to reduced  manufacturing  costs
achieved as a result of the use of the  Company's  FS300  integrated  circuit in
manufacturing  of the  Company's PC to TV 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  $1,281,010 or 19% of net
sales,  for the  three-month  period  ended  June 30,  1998,  as  compared  with
$1,012,253, or 17% of net sales, for the three-month period ended June 30, 1997,
an  increase  of  $268,757  or 27%.  The  increase  in  absolute  dollars is due
primarily to increased spending for 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
June 30, 1998 were $590,751 or 9% of net sales, as compared with $474,476, or 8%
of net sales for the  three-month  period  ended June 30,  1997,  an increase of
$116,275 or 25%. The increase in absolute  dollars is due primarily to increases
in depreciation of $78,000 and payroll of $38,000.

Research and Development Expenses

         Research and development expenses for the three-month period ended June
30, 1998 were $244,923,  or 4% of net sales,  as compared to $252,436,  or 4% of
net sales,  for three-month  period ended June 30, 1997, a decrease of $7,513 or
3%. The decrease is due  principally to a decrease in consulting fees of $68,000
offset by an increase in payroll of $59,000.

Interest Expense, Net

         Net interest expense for the three-month period ended June 30, 1998 was
$60,371,  or .8% of net sales, as compared to $67,703, or 1.1% of net sales, for
the three-month  period ended June 30, 1997, a decrease of $7,332, or 10.8%. The
decrease is primarily  attributable to a reduction in outstanding  debt balances
and the  reduction of certain fees  incurred with the extension of the Company's
revolving line of credit.

Other Income (Expense)

         Other Income  (Expense) for the three-month  period ended June 30, 1998
was $5,134 as compared to ($26,883),  for the three-month  period ended June 30,
1997.  Other (Expense) in the three-month  period ended June 30, 1997 was due to
the write-off of approximately $28,000 of unamortized license fees.

Net Income

                  For the quarter ended June 30, 1998, the Company  reported net
income of $615,649,  or $0.04 per share,  as compared to $231,707,  or $0.02 per
share, for the quarter ended June 30, 1997.


                                       14
<PAGE>
                Six-Month Period Ended June 30, 1998 As Compared
                  With The Six-Month Period Ended June 30, 1997

Net Sales

         Net  sales  for the  six-month  period  ended  June 30,  1998  (the "98
Period") were  $12,124,034 as compared with $10,926,417 for the six-month period
ended June 30, 1997 (the "97  Period"),  an increase of  $1,197,617  or 11%. 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 the 98 Period to the Company's US resellers increased
50% to $9,672,000 from $6,439,000 in the 97 Period.  Net sales to  international
resellers  declined 67% to $469,000 in the 98 period from  $1,418,000 for the 97
Period  due to the  transition  from  the  sale of  networking  products  (which
constituted a significant  portion of net sales in 1997) to the sale of PC to TV
products.  Net sales to OEM/Licensing  customers  decreased 35% to $1,983,000 in
the 98  Period  from  $3,069,000  for  the 97  Period.  This  decrease  reflects
primarily a reduction in OEM sales to a major manufacturer of personal computers
and to a manfuacturer of televisions.  During the 98 Period,  net sales to these
two customers  represented 2% of the Company's  revenues  whereas sales to these
customers were approximately 12% of revenues during the 97 Period.


Cost of Goods Sold

         Cost  of  goods  sold  were  $6,847,291  or 56% of net  sales,  for the
six-month  period ended June 30, 1998, as compared with $7,325,650 or 67% of net
sales,  for the  six-month  period  ended June 30,  1997, a decrease in absolute
dollars of $478,359 or 7%. The Company's  gross profit margins for the 98 Period
and the 97 Period were 44% and 33%, respectively. As a percentage of sales, cost
of  goods  sold  was  lower  in  the  98  Period   principally  due  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  $2,447,337 or 20% of net
sales,  for  the  six-month  period  ended  June  30,  1998,  as  compared  with
$1,965,217,  or 18% of net sales,  for the six-month period ended June 30, 1997,
an  increase  of  $482,120  or 25%.  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 six-month period ended June
30, 1998 were $1,131,982 or 9% of net sales, as compared with $859,568, or 8% of
net sales for the six-month  period ended June 30, 1997, an increase of $272,414
or 32%.  The  increase in absolute  dollars is due  primarily  to  increases  in
depreciation  of  $176,000,  payroll of $50,000  and  professional  services  of
$40,000.

Research and Development Expenses

         Research and development  expenses for the six-month  period ended June
30, 1998 were $555,724,  or 5% of net sales,  as compared to $431,838,  or 4% of
net sales,  for six-month period ended June 30, 1997, an increase of $123,886 or
29%.  The  increase is due  principally  to increases in payroll of $107,000 and
recruiting expenses of $15,000.

                                       15
<PAGE>
Interest Expense, Net

         Net interest  expense for the six-month  period ended June 30, 1998 was
$137,410,  or 1.1% of net sales, as compared to $134,943,  or 1.2% of net sales,
for the six-month  period ended June 30, 1997,  an increase of $2,467,  or 1.8%.
The  increase is  primarily  attributable  to  additional  interest  paid to the
unrelated individual lender during the extended term of the promissory note.

Other Income

         Other Income for the six-month period ended June 30, 1998 was $5,768 as
compared  to $42,132,  for the  six-month  period  ended June 30,  1997.  In the
six-month  period ended June 30, 1997, the Company  realized higher other income
as a result of favorable settlements of certain accounts payable obligations.

Net Income

         For the six months ended June 30, 1998, the Company reported net income
of $980,397,  or $0.06 per share,  as compared to $248,183,  or $0.02 per share,
for the six months ended June 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash used in operating  activities for the six-month  periods ended
June 30, 1998 and 1997 was ($3,706,195) and ($726,746),  respectively. In the 98
Period, net cash used in operating activities consisted primarily of an increase
in accounts  receivable  of  $3,866,784  and  decreases  in accounts  payable of
$1,622,462 and accrued liabilities of $680,735. This was offset by a decrease in
inventory of $1,042,728,  non-cash  charges for depreciation and amortization of
$356,499,  and net income of $980,397.  As of June 30, 1998, accounts receivable
from  a  major  distributor  and  from a  major  national  retailer  represented
approximately 29% and 32%, respectively, of total accounts receivable. In the 98
Period, the Company wrote-off  approximately  $400,000 of uncollectable accounts
receivable against a reserve established at December 31, 1997. In the 98 Period,
the Company  continued to record  provisions for potential future  uncollectable
accounts.  The Company  continually  monitors inventory levels at its resellers,
and during the 98 Period experienced  improved  sell-through and lower inventory
levels of its products in its distribution channels.

         For the six months  ended June 30,  1997,  net cash used in  operations
consisted  primarily of  increases in accounts  receivable  and  inventories  of
$2,643,714  and  $328,363,  respectively.  This was  offset  by an  increase  in
accounts payable of $1,983,615.

         Net cash used in investing  activities for the six-month  periods ended
June 30, 1998 and 1997 was ($429,834) and  ($396,772),  respectively.  In the 98
Period and the 97 Period, cash used in investing  activities was principally for
the purchase of property and equipment.

         Net cash from financing activities for the six-month periods ended June
30, 1998 and 1997 was $9,445,158 and $1,972,170, respectively. In the 98 Period,
the Company received $2,827,355 in net proceeds from private offerings of common
stock and $6,802,414 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  six-month  period in 1997, the Company
received  $1,996,813 in net proceeds from private  offerings of Common Stock and
$40,825 from the exercise of common stock  options and  warrants.  The 97 Period
financing  proceeds  were offset by payments on notes  payable and capital lease
obligations.

                                       16
<PAGE>
         As of June 30, 1998, the Company had working capital of $13,195,028, as
compared to  $2,619,300 at December 31, 1997,  an increase of  $10,575,728.  The
Company's cash position increased to $6,028,980 at June 30, 1998, an increase of
$5,309,129, 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  shares of common  stock for gross  proceeds  of
approximately  $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.

         In the 98 Period,  the Company received gross proceeds of $6,146,887.50
as a result of the exercise of 910,650 of the Company's  Redeemable Common Stock
Purchase  Warrants  (the  "Warrants")  issued in  connection  with the Company's
initial  public  offering in May 1993. The Company  issued  1,649,202  shares of
common stock as a result of the exercise of the Warrants. In accordance with the
anti-dilution  provisions  of the  Warrants,  the holder was entitled to receive
1.811  shares of common  stock for each Warrant  exercised.  The  Warrants  were
exercisable at a price of $6.75 per Warrant until May 26, 1998.

         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 June  30,  1998,  the  Company  was in  violation  of  certain  debt
covenants  relating to the line of credit with its  commercial  bank.  In August
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 October
8, 1998.

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.

Year 2000

         The Company has conducted a review of its computer  systems to identify
the programs  that could be affected by the "Year 2000" issue and has  developed
an implementation plan to resolve the issue. The Year 2000 problem is the result
of computer  programs  being written using two digits rather than four to define
the  applicable   year.   This  could  result  in  a  major  system  failure  or
miscalculations.  The Company  presently  believes that, with  modifications  to
existing software or converting to new software,  the Year 2000 problem will not
pose significant

                                       17
<PAGE>
operational  problems  for the  Company's  computer  systems as so modified  and
converted.  The  expenditures  for the  modifications  and  conversions  are not
expected to have a material impact on the operations of the Company. However, if
such  modifications  and  conversions  are not completed  timely,  the Year 2000
problem may have a material impact on the operations of the Company.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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


                                       18
<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 six month period ended June 30, 1998.

ITEM 2. CHANGES IN SECURITIES

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE

         On June 30, 1998,  the Board of Directors  caused to be  distributed to
stockholders  of record as of June 23,  1998,  a Notice  of  Annual  Meeting  of
Stockholders,  Proxy and Proxy Statement for the Annual Meeting held on July 31,
1998.  As of the record date,  17,410,498  of Common Stock  (excluding  treasury
shares) were entitled to vote.

         At the meeting,  the stockholders  acted upon the following  proposals:
(i) election of two Class II  directors;  and (ii)  ratification  of the firm of
Wolf & Company,  P.C. as  independent  auditors.  All of the above  matters were
approved by the stockholders.

         Votes  "For"   represent   affirmative   votes  and  do  not  represent
abstentions  or broker  non-votes.  In cases where a signed proxy was  submitted
without  direction,  the  shares  represented  by proxy  were  voted  "For" each
proposal in the manner  disclosed in the Proxy  Statement and Proxy.  The voting
results were as follows:

I.   Election of Director
                                   FOR        AGAINST           WITHHOLD
                                   ---        -------           --------

     William B. Coldrick       14,941,383        250             46,879
     Timothy E. Mahoney        14,941,633          0             46,629


II.  Ratification of Independent Auditors

                                   FOR        AGAINST           WITHHOLD
                                   ---        -------           --------

                              14,933,023      27,700             27,539


                                       19
<PAGE>

ITEM 5. OTHER INFORMATION

Exercise of Common Stock Warrants

         In the six-months  ended June 30, 1998,  the Company  issued  1,649,202
shares of common stock as a result of the  exercise of 910,650 of the  Company's
Redeemable Common Stock Purchase Warrants (the "Warrants")  issued in connection
with the Company's  initial public  offering in May 1993.  The Company  received
gross proceeds of $6,146,887.50 as a result of the exercise of the Warrants.  In
accordance  with the  anti-dilution  provisions of the Warrants,  the holder was
entitled to receive 1.811 shares of common stock for each Warrant exercised. The
Warrants were exercisable at a price of $6.75 per Warrant until May 26, 1998.

Purchase of PC Video Conversion, Inc.

         On July 29,  1998,  the  Company  acquired  certain  assets and assumed
certain  liabilities of PC Video Conversion,  Inc. ("PC Video"). At the closing,
the Company paid PC Video  $700,000 in cash and  delivered a promissory  note in
the principal amount of $1,000,000  providing  payment of principal and interest
over a period of 36 months.  In addition,  the Company  issued 122,796 shares of
common  stock and agreed to  register  the common  stock with the United  States
Securities  and  Exchange  Commission  within  one  hundred  twenty  days of the
closing. The Company purchased all of PC Video'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  $79,650 of  liabilities  in
connection  with this  acquisition.  The acquisition is being accounted for as a
purchase and resulted in goodwill of approximately  1,566,500. The operations of
PC Video  Conversion,  Inc. will be included in the financial  statements of the
Company beginning August 1, 1998.


                                       20
<PAGE>



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.       The following exhibits are filed herewith:

         2.1      Purchase & Sale Agreement  between FOCUS  Enhancements,  Inc.,
                  FOCUS Acquisition  Corp., and PC Video Conversion,  Inc. dated
                  July 29, 1998.

         4.1      Registration Rights Agreement between FOCUS Enhancements, Inc.
                  and PC Video Conversion, Inc.

         4.2      Certificate of Warrant Adjustment dated May 6, 1998.

         11       Statement Re: Computation of Per Share Earnings

         27       Financial Data Schedule

b. Reports on Form 8-K

         The Company  did not file any  reports on Form 8-K  reports  during the
         quarter ended June 30, 1998.

                                       21
<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.




August 14, 1998                    By: \s\  Thomas L. Massie 
                                       Thomas L. Massie
                                       Chief Executive Officer and
                                       Chairman of the Board
                                       (Principal Executive Officer)



August 14, 1998                    By: \s\  Gary M. Cebula 
                                       Gary M. Cebula
                                       Vice President of Finance
                                       and Administration
                                       (Principal Accounting Officer)


                                       22