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: September 30, 1996

[ ]      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)

                                (508) 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 October  22,  1996,  there were  outstanding  10,797,051  shares of Common
Stock, $.01 par value per share.

                                        1
<PAGE>



                            FOCUS ENHANCEMENTS, INC.
                                   FORM 10-QSB

                                QUARTERLY REPORT
                               September 30, 1996

                                TABLE OF CONTENTS


Page

Facing Page                                                                    1

Table of Contents                                                              2

PART I.       FINANCIAL INFORMATION

     Item 1. Consolidated Financial Statements:

          Consolidated Balance Sheets at September 30, 1996
          and December 31, 1995                                                3

          Consolidated Statements of Operations
          for the Three Months Ended September 30, 1996 and 1995               4

          Consolidated Statements of Operations
          for the Nine Months Ended September 30, 1996 and 1995                5

          Consolidated Statements of Cash Flows
          for the Nine Months Ended September 30, 1996 and 1995                6

          Notes to Consolidated Financial Statements                         7-9

     Item 2. Management's Discussion and Analysis of Financial
                       Condition and Results of Operations                 10-17

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                                                18
     Item 6. Exhibits and Reports on Form 8-K                                 18

SIGNATURES                                                                    19

Exhibit 11- Computation of Primary and Fully Diluted Earnings Per Share

                                        2
<PAGE>





<TABLE>
<CAPTION>
                                           FOCUS ENHANCEMENTS, INC.
                                          CONSOLIDATED BALANCE SHEETS
                                                  (Unaudited)
                                    
                                    
                                                    ASSETS
                     
                                                                                 September 30,           December 31,
                                                                                     1996                    1995
                                                                               --------------            -----------

<S>                                                                            <C>                       <C>    
       Current Assets:
          Cash and cash equivalents                                            $     672,216             $2,140,043
          Accounts receivable, net of allowance of $499,110 and $296,887
             at September 30, 1996 and December 31, 1995, respectively             4,900,176              1,860,592
          Inventories                                                              1,925,496              1,862,335
          Prepaid expenses and other current assets                                  266,350                346,458
                                                                               --------------            -----------
          Total current assets                                                     7,764,238              6,209,428

       Property and equipment, net                                                   397,512                417,849
       Other assets, net                                                                   -                105,379
       Goodwill, net                                                               1,369,728              2,227,723
                                                                               --------------            -----------

           Total assets                                                         $  9,531,478             $8,960,379
                                                                               ==============            ===========



<CAPTION>
                                       LIABILITIES AND STOCKHOLDERS' EQUITY

<S>                                                                            <C>                       <C> 
       Current liabilities:
          Notes payable                                                         $  2,547,458             $3,637,458
          Obligations under capital leases                                            41,821                133,497
          Accounts payable                                                         3,417,557              1,228,860
          Accrued liabilities                                                      1,641,770                346,928
                                                                               --------------            -----------
             Total current liabilities                                             7,648,606              5,346,743

       Obligations under capital leases                                              178,488                 26,310
                                                                               --------------            -----------

             Total liabilities                                                     7,827,094              5,373,053
                                                                               --------------            -----------

       Stockholders' equity                                         
          Preferred stock, $.01 par value; 3,000,000 shares authorized;                    -                      -
            none issued
          Common stock, $.01 par value: 16,000,000 shares authorized,                       
            10,797,051 and 7,171,862 shares issued and outstanding at
            September 30, 1996 and December 31, 1995, respectively.                  107,971                 71,719
          Additional paid-in capital                                              20,470,273             13,168,730
          Accumulated deficit                                                    (18,873,860)            (9,653,123)
                                                                               --------------            -----------
             Total stockholders' equity                                            1,704,384              3,587,326
                                                                               --------------            -----------

             Total liabilities and stockholders' equity                         $  9,531,478             $8,960,379
                                                                               ==============            ===========
</TABLE>

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

                                        3
<PAGE>





                            FOCUS ENHANCEMENTS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


                                                       Three Months Ended
                                                   September 30,  September 30,
                                                      1996            1995
                                                ---------------- ---------------

    Net sales                                       $ 3,327,228      $4,126,078

    Cost of goods sold                                3,479,135       1,567,275
                                                ---------------- ---------------

       Gross profit (loss)                             (151,907)      2,558,803
                                                ---------------- ---------------

    Operating expenses:             

       Sales, marketing and support                     940,860         803,559

       General and administrative                     1,960,508         789,524

       Research and development                         532,319         243,855

       Purchased research and development             2,000,000               -
                                                ---------------- ---------------

          Total operating expenses                    5,433,687       1,836,938
                                                ---------------- ---------------

       Income (loss) from operations                 (5,585,594)        721,865

       Interest expense, net                            (65,504)       (132,403)
       Other income (expense)                                 -               -
                                                ---------------- ---------------

       Income (loss) before income taxes             (5,651,098)        589,462

       Income tax expense                                6,541                -
                                                ---------------- ---------------

       Net income (loss)                           $(5,657,639)     $   589,462 
                                                ================ ===============

       Net income (loss) per common share        
               Primary                             $      (0.60)   $       0.08
                                                ================ ===============
               Fully Diluted                       $      (0.60)   $       0.07
                                                ================ ===============

       Weighted average common and common        
          equivalent shares outstanding          
               Primary                                9,476,462       7,771,617
                                                ================ ===============
               Fully Diluted                          9,476,462       8,306,036
                                                ================ ===============

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

                                        4
<PAGE>





                              FOCUS ENHANCEMENTS, INC.
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (Unaudited)

                                                    Nine Months Ended
                                              September 30,      September 30,
                                                 1996               1995
                                           -----------------  ----------------

    Net sales                                   $11,498,362       $12,834,953

    Cost of goods sold                           11,193,421         7,321,988
                                           -----------------  ----------------

       Gross profit                                 304,941         5,512,965
                                           -----------------  ----------------

    Operating expenses:              

       Sales, marketing and support               2,917,645         2,229,170

       General and administrative                 3,192,833         1,728,622

       Research and development                   1,150,260           726,292

       Purchased research and development         2,000,000                 -
                                           -----------------  ----------------

          Total operating expenses                9,260,738         4,684,084
                                           -----------------  ----------------

    Income (loss) from operations                (8,955,797)          828,881
                                 
    Interest expense, net                          (235,607)         (408,227)
    Other income(expense)                           (12,792)          276,081
                                           -----------------  ----------------
                                 
    Income before income taxes                   (9,204,196)          696,735
                                  
    Income tax expense                               16,541                 -
                                           -----------------  ----------------
    
    Net income (loss)                          $ (9,220,737)     $    696,735
                                           =================  ================

    Net income (loss) per common share      
          Primary                            $        (1.09)   $         0.11
                                           =================  ================
          Fully Diluted                      $        (1.09)   $         0.10
                                           =================  ================

    Weighted average common and common      
       equivalent shares outstanding        
          Primary                                 8,477,011         6,393,333
                                           =================  ================
          Fully Diluted                           8,477,011         7,190,035
                                           =================  ================

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

                                        5

<PAGE>





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

                                                                                Nine Months Ended
                                                                          September 30,     September 30,
                                                                              1996              1995
                                                                        ----------------  ----------------
<S>                                                                     <C>               <C>  
    Cash flows from operating activities:                               
       Net income (loss)                                                   $ (9,220,737)     $    696,735
          Adjustments to reconcile net income (loss) to net cash
           used in operating activities:
            Depreciation and amortization                                     3,747,824           697,328
            Amortization of deferred compensation                                     -            63,998
            Gain on forgiveness of accounts payable                                   -          (272,647)
            Changes in operating assets and liabilities:                
                (Increase) decrease in accounts receivable                   (3,001,627)          897,894
                Increase in notes receivable                                    (37,957)                -
                Decrease (increase) in inventories                              (63,161)          124,873
                Decrease(increase) in prepaid expenses and other assets          80,108           (96,144)
                Increase (decrease) in accounts payable                       2,188,697        (1,266,900)
                Increase in accrued liabilities                               1,294,843           143,380
                                                                        ----------------  ----------------

            Net cash used in operating activities                            (5,012,010)           988,517
                                                                        ----------------  ----------------

    Cash flows from investing activities:                               
       Purchase of property and equipment                                      (214,895)          (57,071)
       Investment in TView, Inc.                                               (569,728)                -
       Purchase of intangible assets                                                  -           (85,547)
                                                                        ----------------  ----------------

            Net cash used in investing activities                              (784,623)         (142,618)
                                                                        ----------------  ----------------

    Cash flows from financing activities:                               
       Payments on notes payable                                             (1,090,000)         (642,891)
       Payments under capital lease obligations                                  60,502          (128,572)
       Net proceeds from private offering of common stock                     4,363,538         1,119,641
       Net proceeds from exercise of warrants                                   894,015                 -
       Proceeds from exercise of common stock options and warrants              100,751            22,871
                                                                        ----------------  ----------------

            Net cash provided by financing activities                         4,328,806           371,049
                                                                        ----------------  ----------------

    Net increase (decrease) in cash and cash equivalents                     (1,467,827)        1,216,948

    Cash and cash equivalents at beginning of period                          2,140,043            81,181
                                                                        ----------------  ----------------

    Cash and cash equivalents at end of period                             $    672,216       $ 1,298,129
                                                                        ================  ================
</TABLE>

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

                                        6
<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  September  30,  1996 and for the three and nine month  periods
ended  September  30,  1996  and  1995  are  unaudited  and  should  be  read in
conjunction with the consolidated financial statements and notes thereto for the
year ended  December 31, 1995  included in the  Company's  Annual Report on Form
10-KSB  for the  year  ended  December  31,  1995.  The  consolidated  financial
statements   include  the   accounts   of  the  Company  and  its   wholly-owned
subsidiaries,  Lapis  Technologies,  Inc. and FOCUS  Enhancements  bv. Effective
September 30, 1996, the Company completed the acquisition of TView,  Inc., which
will operate as a third wholly-owned  subsidiary.  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 nine
months ended  September 30, 1996 are not  necessarily  indicative of the results
that may be expected for any future period.


2.       NET INCOME (LOSS) PER SHARE

         Per share amounts are calculated  using the weighted  average number of
common shares and common share  equivalents  outstanding  during  periods of net
income.  Common share  equivalents are attributable to unexercised stock options
and warrants and are computed using the treasury stock method. Per share amounts
are  calculated  using  only  the  weighted  average  number  of  common  shares
outstanding during periods of net loss.

3.       NOTE RECEIVABLE

         On January 5, 1996, an officer of the Company  borrowed $40,000 under a
promissory  note,  bearing  interest  at 8.5% per annum  and due not later  than
January 5, 1997.  At  September  30,  1996,  the balance is included in accounts
receivable.

4.       INVENTORIES

         Inventories consist of the following:

                                   September 30,             December 31,
                                        1996                      1995

Finished goods                       $    1,343,534               $ 1,669,003
Raw materials                               581,962                   193,332
                               ---------------------      --------------------
                                        $ 1,925,496               $ 1,862,335
                               =====================      ====================


5.       NOTES PAYABLE

         The  Company  maintains  a line of  credit  with a bank  which  permits
borrowings  up to $900,000.  Borrowings  under the line of credit are payable on
demand  and are  collateralized  by all of the assets of the  Company  except as
noted below. Borrowings aggregating $850,000 at September 30, 1996 bear interest
at the bank's prime rate plus 1% and are  personally  guaranteed by an investor.
On June 25,  1996,  the line of credit was extended by the lender until March 7,
1997. As of September 30, 1996, the Company is in violation of certain covenants
under its

                                        7
<PAGE>



agreement for the line of credit with the bank. The Company is in the process of
negotiating with the bank for a waiver with respect to the violations.

         In October  1994,  the Company  borrowed  $2,500,000  from an unrelated
individual  under a term line of credit note (the "term  note") due  February 1,
1996.  The term  note  accrues  interest  at the  prime  rate  plus 2%,  payable
quarterly  in  arrears,  and was  originally  collateralized  by the  inventory,
accounts  receivable and contract rights related to the Company's  business with
Apple  Computer,  Inc. In January  1996,  the Company  repaid  $1,000,000 of the
amount owed under the term note.  On June 28, 1996,  the Company  negotiated  an
amendment  to the term note with the  lender to extend  the due date of the term
note to March 31, 1997. In consideration of the extension, the Company granted a
second  security  interest on all of the assets of the Company and issued 50,000
warrants  to the lender  exercisable  for a period of three  years at a price of
$2.07 per share.  At September  30, 1996,  the Company  owed  $1,500,000  to the
lender under the term note.

         Additionally,  in  June  1996,  the  Company  entered  into a  security
agreement with its largest inventory  supplier regarding certain amounts owed by
the Company to the supplier.  At September 30, 1996, the outstanding amount owed
the supplier  was  approximately  $2,100,000.  The amounts owed the supplier are
secured by a third security interest in the Company's assets.


6.       COMMON STOCK TRANSACTIONS

         In the third  quarter  ended  September  30,  1996,  the  Company  sold
approximately 790,000 shares of common stock for gross proceeds of approximately
$1,500,000  in  connection  with a private  offering to foreign  investors.  The
common  stock is  unregistered  and  subject to  restrictions  on trading in the
United States for a period of forty-one  days. In connection  with the offering,
the Company incurred fees and expenses of approximately  $162,000.  Net proceeds
of the offering were approximately $1,338,000.

         For the nine month period ended  September  30, 1996,  the Company sold
approximately   2,019,000   shares  of  common  stock  for  gross   proceeds  of
approximately  $4,825,000  in  connection  with  private  offerings  to  foreign
investors.  The common  stock is  unregistered  and subject to  restrictions  on
trading in the United States for a period of forty-one  days. In connection with
the offerings, the Company incurred fees and expenses of approximately $357,000.
Net proceeds of the offerings were approximately $4,468,000.

         For the nine month period ended  September 30, 1996, the Company issued
approximately  793,000 shares of common stock upon the exercise of approximately
786,000 public and private  warrants,  receiving gross proceeds of approximately
$1,021,000.

7.       ACQUISITION OF TVIEW, INC.

         On October 18, 1996, FOCUS  Enhancements,  Inc, a Delaware  corporation
("FOCUS" or the "Company")  consummated the acquisition of all the capital stock
of TView,  Inc  ("TView").,  a Delaware  corporation,  pursuant to the terms and
conditions set forth in the Agreement and Plan of Merger,  dated as of September
30, 1996 (the  "Agreement  and Plan of Merger"),  by and among FOCUS,  TView and
FOCUS Acquisition  Corp., a Delaware  corporation and wholly owned subsidiary of
FOCUS.

         In  consideration  for the capital stock of TView,  the Company paid to
TView  stockholders  an aggregate of  $2,000,000  in FOCUS  Enhancements  common
stock, $.01 par value per share,  which aggregated 732,869 shares of such stock.
In addition,  Thomas  Hamilton and Steve Morton,  former  officers and principal
stockholders of TView, became Vice President - Research and Development and Vice
President -

                                        8
<PAGE>
Hardware Engineering, respectively, of the Company. Each of Messrs. Hamilton and
Morton entered into one year employment  agreements and two year non competition
agreements. Messrs. Hamilton and Morton will be paid annual salaries of $110,000
and  received  options  to  purchase  80,000  shares of common  stock  under the
Company's Stock Option Plan.

         The merger is being  accounted for as a tax free  reorganization  under
the provisions of Section  368(a)(2)(D) if the Internal Revenue Code of 1986, as
amended.  Due to the amount of assets  purchased as compared to the total assets
of the Company,  the  transaction  qualifies as the acquisition of a significant
business under Regulation S-X of the Securities Act of 1933, as amended.

         In accordance  with  Regulation  S-X,  Rules 3.05 and 11.01,  financial
statements for the business  being  acquired along with the pro forma  financial
information showing the combined financial  statements of the Company and TView,
Inc. are required to be filed. However, it is currently impracticable to provide
such financial  information due to the unavailability of financial statements of
TView, Inc.

         As a  result  of the  forgoing,  the  Company  undertakes  to file  the
required  financial  statements  along with the pro forma financial  information
within 60 days from the date of the closing of the acquisition.

         In connection with the acquisition of TView,  the Company  reviewed its
existing  technology  and  concluded  that it was  appropriate  to write  down a
portion of the remaining goodwill related to the Lapis acquisition. Accordingly,
the Company  took a charge of  approximately  $1,273,000  in the  quarter  ended
September 30, 1996.



                                        9
<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, 1995.

         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, 1995,  including,  but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."

RESULTS OF OPERATIONS

              Three-Month Period Ended September, 1996 As Compared
              With The Three-Month Period Ended September 30, 1995

Net Sales

         Net sales for the  three-month  period  ended  September  30, 1996 were
$3,327,228  as  compared  with  $4,126,078  for  the  three-month  period  ended
September  30,  1995,  a decrease of  $798,850  or 19%.  The decline in revenues
resulted  primarily  from the  continued  reduction in orders from Apple for the
Company's  L-TV  product  and  orders  for the  Company's  graphics/connectivity
products for Apple's PowerBook 190 and 5300 laptop computers. This was offset by
increased OEM revenues related to sales of the Company's PC to TV products under
the  agreement  with  Zenith   Electronics  which  accounted  for  approximately
$1,850,000 or 55% of the Company's third quarter revenues.

         During the quarter ended September 30, 1996, sales to Apple represented
1% of  the  Company's  revenues  as  compared  to  67% of  revenues  during  the
comparable quarter in 1995.

         As of  September  30,  1996,  the Company had a sales order  backlog of
approximately $718,000.


Cost of Goods Sold

         Cost of  goods  sold  were  $3,479,135  or 105% of net  sales,  for the
three-month  period ended September 30, 1996, as compared with $1,567,275 or 38%
of net sales,  for the three months  ended  September  30, 1995,  an increase of
$1,911,860 or 122%. The increase in cost of goods sold in both absolute  dollars
and on a percentage  basis is due  principally  to lower margin OEM sales volume
for the Company's  Micro  Presenter  and PC to TV products to Zenith,

                                       10
<PAGE>
inventory  refurbishment  costs of  approximately  $300,000  associated with the
Company's  graphics/connectivity  products  for Apple's  PowerBook  190 and 5300
laptop computers and increased inventory reserves for inventory  obsolescence of
approximately $400,000. By comparison,  cost of goods for the three month period
ended  September  30, 1995 were  favorably  impacted by the high volume of Apple
royalty revenue.


Sales, Marketing and Support Expenses

         Sales,  marketing  and  support  expenses  were  $940,860 or 28% of net
sales,  for the  three-month  period ended  September 30, 1996, as compared with
$803,559,  or 19% of net sales,  for the three-month  period ended September 30,
1995,  an  increase of $137,301 or 17%.  The  increase in sales,  marketing  and
support  expenses in absolute dollars and on a percentage basis is primarily the
result of increased promotion expenditures related to domestic and international
channel expansion efforts.

General and Administrative Expenses

         General and  administrative  expenses for the three-month  period ended
September  30,  1996 were  $1,960,508  or 58% of net  sales,  as  compared  with
$789,524,  or 19% of net sales for the  three-month  period ended  September 30,
1995, an increase of  $1,170,984 or 148%.  The increase is due to the write down
of intangibles of approximately  $1,273,000  associated with the Company's prior
acquisitions of Lapis and Inline partially  offset by cost reductions  initiated
by management during the third quarter.

Research and Development Expenses

         Research  and  development  expenses for the  three-month  period ended
September 30, 1996 were $532,319,  or 16% of net sales, as compared to $243,855,
or 6% of net sales, for three-month  period ended September 30, 1995 an increase
of $288,464 or 118%. The increase in research and  development  expenses in both
absolute dollars and as a percentage of revenue is due to higher staffing levels
and related expenses  associated with new product development and enhancement of
the Company's current and future product offerings.

Purchased Research and Development

         Effective as of September 30, 1996, the Company acquired TView, Inc, in
a  purchase  transaction  for  approximately  $2,570,000.   The  Company  issued
$2,000,000  of its Common  Stock and assumed net  liabilities  of  approximately
$570,000.  As a result of the  acquisition,  the Company  charged  $2,000,000 to
operations,  representing  the portion of the  purchase  price  allocated  to in
process research and development.


Interest Expense, Net

         Net interest  expense for the  three-month  period ended  September 30,
1996 was  $65,504,  or 2% of net sales,  as compared to  $132,403,  or 3% of net
sales,  for the  three-month  period  ended  September  30,  1995 a decrease  of
$66,899, or 51%. Interest expense for the three-month period ended September 30,
1996 arose primarily from the $2,500,000 term note,  which the Company issued in
October  1994 to an  unrelated  party,  and a $900,000  line of credit  with its
commercial bank.

                                       11
<PAGE>
RESULTS OF OPERATIONS

             Nine-Month Period Ended September 30, 1996 As Compared
               With The Nine-Month Period Ended September 30, 1995

Net Sales

         Net sales for the  nine-month  period  ended  September  30,  1996 were
$11,498,362  as  compared  with  $12,834,953  for the  nine-month  period  ended
September 30, 1995, a decrease of  $1,336,591  or 10%. In May 1995,  the Company
restructured  its agreement with Apple Computer,  Inc.  ("Apple")  regarding the
Company's L-TV product so that it could  recognize  royalty  revenue rather than
product  sales with  related cost of goods sold,  as it had in its  transactions
with Apple during the first quarter of 1995. The  restructuring of the agreement
resulted from the severe  liquidity and cash flow  problems  experienced  by the
Company at the end of 1994 and during the first six months of 1995.  In the nine
months ended September 30, 1996, the Company  recognized  royalty  revenues from
Apple of  approximately  $340,000 or 3% of net sales,  with 100% gross margin as
compared to  approximately  $3,623,000  for the  comparable  period in 1995. The
Company  expects  that royalty  revenues  from the Apple  agreement  will not be
material for the remainder of 1996.

         In addition,  net sales in the  nine-month  period ended  September 30,
1996,  were lower due to a  significant  reduction  in orders from Apple for the
Company's  L-TV  product  and  orders  for the  Company's  graphics/connectivity
products for Apple's PowerBook 190 and 5300 laptop computers. During the period,
sales to Apple  represented  9% of the Company's  revenues as compared to 53% of
revenues in the first nine months of 1995. It is anticipated  that revenues from
Apple will continue to decline,  on a percentage basis, as the Company continues
to diversify its distribution channels.

         The  Company  recognized  revenues  under  its  agreement  with  Zenith
Electronics  for  its PC to TV  products  during  the  nine-month  period  ended
September 30, 1996 of approximately  $3,270,000 or 28% of total revenues.  There
were no sales to Zenith Electronics in the first nine months of 1995.


 Cost of Goods Sold

         Cost of  goods  sold  were  $11,193,421  or 97% of net  sales,  for the
nine-month  period ended  September 30, 1996, as compared with $7,321,988 or 57%
of net sales,  for the nine months  ended  September  30,  1995,  an increase of
$3,871,433 or 53%. The increase in cost of goods sold in absolute dollars and as
a percentage of sales is due principally to the write down and  refurbishment of
inventory  related  to the  Company's  graphics/connectivity  products  for  the
Powerbook 190 and 5300 laptop computer,  as well as, additional  provisions made
for inventory obsolescence.

         As previously  disclosed in the Company's  Annual Report on Form 10-KSB
for the year ended  December 31, 1995,  the Company  experienced  a  significant
reduction in orders for the  Company's  L-TV  product and  graphics/connectivity
products for the Powerbook 190 and 5300 laptop computers during the period ended
September  30,  1996.  During the first five months of 1996,  management  became
aware of various  product  quality and  sell-through  issues relating to Apple's
Powerbook 190 and 5300 products,  including a recall by Apple of the products in
May 1996.  Because of the  uncertainty  with respect to these Apple products and
the likelihood that demand for the Company's graphic/connectivity products would
be significantly below the Company's then existing inventory levels,  management
decided to minimize the  Company's

                                       12
<PAGE>
inventory exposure and recorded a charge of $2.2 million in the first quarter of
1996. In the second quarter of 1996,  this inventory was liquidated  through the
Company's  distribution  channels which had the result of reducing cost of goods
sold as a percentage of total revenues.

Sales, Marketing and Support Expenses

         Sales,  marketing and support  expenses  were  $2,917,645 or 25% of net
sales,  for the  nine-month  period ended  September  30, 1996, as compared with
$2,229,170,  or 17% of net sales, for the nine-month  period ended September 30,
1995,  an  increase of $688,475 or 31%.  The  increase in sales,  marketing  and
support  expenses in both  absolute  dollars and as a percentage of net sales is
primarily  the  result  of  increased   staffing,   marketing  and   advertising
expenditures  related to the Company's  distribution  channel  expansion efforts
both domestically and internationally.

General and Administrative Expenses

         General and  administrative  expenses for the  nine-month  period ended
September  30,  1996 were  $3,192,833  or 28% of net  sales,  as  compared  with
$1,728,622  or 13% of net sales for the  nine-month  period ended  September 30,
1995,  an increase of  $1,474,211  or 84%. The increase is due  primarily to the
write  down of  intangibles  of  approximately  $1,273,000  associated  with the
Company's prior acquisitions of Lapis and Inline and higher than expected audit,
legal and outside  consulting  fees associated with the Company's 1995 audit and
related filings.

Research and Development Expenses

         Research  and  development  expenses  for the  nine-month  period ended
September  30,  1996  were  $1,150,260,  or 10% of net  sales,  as  compared  to
$726,292, or 6% of net sales, for nine-month period ended September 30, 1995, an
increase of $423,968 or 58%. The increase in research and  development  expenses
in both  absolute  dollars and as a  percentage  of revenue is due to  increased
staffing levels and related expenses associated with new product development and
enhancement of the Company's  current and future product  offerings,  as well as
the transition of activities to Beaverton, Oregon as a result of the acquisition
of TView, Inc.

Purchased Research and Development

         Effective as of September 30, 1996, the Company acquired TView, Inc, in
a  purchase  transaction  for  approximately  $2,570,000.   The  Company  issued
$2,000,000  of its Common  Stock and assumed net  liabilities  of  approximately
$570,000.  As a result of the  acquisition,  the Company  charged  $2,000,000 to
operations,  representing  the portion of the  purchase  price  allocated  to in
process research and development.

Interest Expense, Net

         Net interest expense for the nine-month period ended September 30, 1996
was $235,607,  or 2% of net sales, as compared to $408,227,  or 3% of net sales,
for the nine-month  period ended September 30, 1995, a decrease of $101,941,  or
38%.  Interest expense for the nine-month  period ended September 30, 1996 arose
primarily  from the  $2,500,000  term note,  which the Company issued in October
1994 to an unrelated  party,  and a $900,000 line of credit with its  commercial
bank.  In addition,  expenses  related to the issuance of warrants to lenders in
1995 and 1996 are included in interest  expense for the period  ended  September
30, 1996.


LIQUIDITY AND CAPITAL RESOURCES

                                       13
<PAGE>
         For the  nine  months  ended  September  30,  1996,  net  cash  used in
operating  activities  was  $5,567,186  consisting  primarily  of a net  loss of
$9,220,737  and an increase in accounts  receivable  of  $3,035,541.  These were
partially offset by increased accounts payable and accrued liabilities  totaling
$2,722,957  as well  as  depreciation  of  property,  plant  and  equipment  and
amortization of goodwill  relating to the Lapis acquisition and the write off of
purchased  research and development  totaling  $3,747,824.  Net cash provided by
financing  activities was $4,150,318 due primarily to proceeds of  approximately
$5,358,000  from the exercise of warrants,  stock options and issuance of shares
of common  stock in  private  placements  described  below.  The  proceeds  were
partially  offset by the  payment of notes  payable  totaling  $1,090,000  which
included the  repayment  of  $1,000,000  of the amount owed under the  Company's
$2,500,000 term note.

         As of  September  30,  1996,  the  Company  had a  working  capital  of
$115,632,  as compared to working  capital of $862,686 at December  31,  1995, a
decrease of $747,054.  The decrease is primarily attributable to the increase in
accounts receivable of approximately  $2,998,000 offset by increases in accounts
payable of  approximately  $1,697,000 and accrued  liabilities of  approximately
$1,026,000 from December 31, 1995.

         For the nine month period ended  September  30, 1996,  the Company sold
approximately   2,019,000   shares  of  common  stock  for  gross   proceeds  of
approximately  $4,825,000  in  connection  with a private  offering  to  private
investors.  This stock is  unregistered  and subject to  restrictions on private
trading in the United States for a period of forty-one  days. In connection with
the offering, the Company incurred fees of approximately  $357,000. Net proceeds
of the offering were approximately $4,468,000.

         From  January  1  through   September  30,  1996,  the  Company  issued
approximately  793,000 shares of common stock upon the exercise of approximately
786,000 private and public  warrants,  receiving gross proceeds of approximately
$1,021,000.

         From its inception through September 30, 1996, the Company has incurred
approximately  $18.9 million of  accumulated  losses.  The report of independent
accountants on the Company's financial  statements as of and for the years ended
December 31, 1995 and 1994 includes an explanatory  paragraph to the effect that
the  Company's  ability to continue  as a going  concern is  dependent  upon the
Company's  ability to achieve  its fiscal 1996  operating  plan,  including  the
achievement  of sustained  profitability,  and obtaining  additional  sources of
financing.  In 1995,  the  Company  redefined  its  operating  model to  achieve
profitability by discontinuing sales of lower- margin, non-proprietary products,
by focusing its marketing  efforts on its  higher-margin  proprietary  products,
emphasizing  sales to OEMs and the reseller channel,  limiting  inventory levels
and reducing  operating  costs.  In 1996, the Company expects to continue to use
this business model. The Company's  ability to achieve  profitability in 1996 is
dependent upon its securing additional contracts from OEM partners such as Apple
and Zenith  Electronics,  Inc.,  as well as,  increasing  revenues  through  its
domestic and international distributors.  The Company does not have any material
commitments  for  capital  expenditures.  Management  anticipates  that  current
working  capital,  funds  generated  through the  revised  business  model,  and
additional  funds that may be  received  from debt or equity  financing  will be
sufficient to fund  operations for at least 12 months.  The Company has extended
the term of its $900,000  line of credit and its  $2,500,000  term note with its
commercial bank and its  unaffiliated  lenders to extend until March 1997. There
can be no assurance  that the Company will achieve  sustained  profitability  or
obtain sufficient  financing to provide the liquidity  necessary for the Company
to continue operations.


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

         The following  discussion of the Company's  risk factors should be read
in conjunction  with the financial  statements  and related notes  thereto.  The
following factors among others,  could

                                       14
<PAGE>
cause  actual  results  to differ  materially  from those  contained  in forward
looking  statements  contained or  incorporated  by reference in this report and
presented by management from time to time. Such factors,  among others, may have
a material adverse effect upon the Company's business, results of operations and
financial condition.

         Reliance on Major  Customers.  Approximately  50% of the  Company's net
sales  during the year  ended  December  31,  1995 and  approximately  9% of the
Company's net sales during the nine months ended September 30, 1996 were derived
from sales of the Company's L-TV product to Apple Computer,  Inc. ("Apple").  In
August 1994, the Company entered into a two year Master Purchase  Agreement with
Apple under which  Apple  agreed to bundle and  distribute  the  Company's  L-TV
product with Apple's  "Presentation  System" product  offering.  Although orders
under this  agreement  represented  over 50% of the Company's  revenues in 1995,
management  believes  that  orders  under  this  agreement  in 1996  will not be
material to the Company's revenues for the year as a whole. The Company believes
it may  secure  additional  contracts  from  Apple in the  future,  however,  no
assurances  can be given that the Company will be  successful in securing one or
more additional contracts.

         In the first  quarter of 1996,  the Company began  shipments  under its
agreement  with  Zenith  Electronics  for  its  PC to TV  convergence  products.
Revenues   through  the  nine  month  period  ended   September  30,  1996  were
approximately  $3,270,000  or 28% of revenues.  Management  believes that orders
under this agreement will continue  throughout 1996,  however, no assurances can
be given as to the estimated  annual revenue to be generated from this agreement
in 1996. On October 17, 1996, the Company  announced a exclusive  agreement with
Zenith Electronics for its PC to TV technology products.  The agreement includes
a guarantee of  $12,000,000  in revenues  through the end of 1997 and includes a
nonbinding option to extend its exclusive agreement through the end of 1998 with
potential purchases up to $30,000,000.

         Future Capital Needs.  At September 30, 1996, the Company had a working
capital of $115,632 cash and cash equivalents of $644,967 and was fully drawn on
its $900,000 line of credit with its bank and its $2.5 million term note with an
unaffiliated  lender.  Historically,  the Company has been  required to meet its
short- and  long-term  cash needs  through  debt and the sale of Common Stock in
private placements in that cash flow from operations has been  insufficient.  In
December 1995,  the Company  received gross proceeds of $1 million from the sale
of Common  Stock to four  investors  in a private  placement.  In the first nine
months of 1996, the Company received  approximately  $5,338,000 in proceeds from
the exercise of warrants, stock options and sale of common stock.

         The Company's future capital  requirements will depend on many factors,
including  cash flow from  operations,  continued  progress in its  research and
development programs,  competing technological and market developments,  and the
Company's ability to market its products successfully.  During 1996, the Company
may be required to raise additional  funds through equity or debt financing,  of
which there can be no assurance.  Any equity  financing could result in dilution
to the  Company's  then-existing  stockholders  that the Company will be able to
obtain.  Sources of debt financing may result in higher  interest  expense.  Any
financing, if available, may be on terms unfavorable to the Company. If adequate
funds are not  available,  the Company may be required to curtail its activities
significantly.

         Limited Availability of Capital under Credit Arrangements with Lenders.
The Company  maintains a $900,000 line of credit with Silicon Valley Bank. As of
September 30, 1996, approximately $850,000 is owed to the Bank under the line of
credit.  Pursuant to its agreement with the Bank, the line of credit  terminated
in April 1996, and has been extended until March 7, 1997.

                                       15
<PAGE>
         In October 1994, the Company  borrowed  $2,500,000 from an unaffiliated
lender to help finance its  inventory and accounts  receivable  under its Master
Purchase  Agreement with Apple. The Company issued to this  unaffiliated  lender
its term note in the aggregate  principal  amount of  $2,500,000.  The term note
accrues interest at the revolving rate of prime plus 2%, is payable quarterly in
arrears at the end of December, March, June, and September, and was due February
1, 1996. The term note was originally  secured by those specific assets financed
under the agreement with Apple,  including accounts receivable,  finished goods,
inventory, raw materials,  work-in-process and contract rights arising under the
Apple  agreement.  The Company has fully utilized the proceeds of this term note
to finance  purchase  orders  received from Apple.  In January 1996, the Company
repaid  approximately $1 million of the amount owed under the term note. On June
28, 1996,  the Company  negotiated an amendment to the term note with the lender
to extend the due of the term note to March 31, 1997. Pursuant to the amendment,
the Company granted the lender a second  security  interest in all the assets of
the Company.

         Component Supply Problems.  The Company purchases all of its parts from
outside suppliers and from time to time experiences difficulty in obtaining some
components or  peripheral  devices.  The Company  attempts to reduce the risk of
supply interruption by evaluating and obtaining  alternative sources for various
components or peripheral devices. However, there can be no assurance that supply
shortages  will not occur in the future which could  significantly  increase the
cost,  or delay of  shipment  of, the  Company's  products,  which in turn could
adversely affect its results of operations.

         Dependence  on Apple  Macintosh  Platform:  Adverse  Effects of Reduced
Apple  Macintosh  Sales.  Historically,  a substantial  portion of the Company's
sales have been derived from  products  designed for use on the Apple  Macintosh
family of personal computers. The Company expects that sales of products for use
with Macintosh  computers will represent a smaller  portion of its net sales for
the  foreseeable  future.  Although sales of Macintosh  computers have increased
from year to year, there can be no assurance that such sales will continue to be
widely accepted as a platform for high performance applications. Also, there can
be no assurance that other computer platforms will not gain increased acceptance
in the  Company's  markets as these  platforms  evolve to  support  applications
similar  to those  offered  for the  Macintosh.  In  addition,  there  can be no
assurance  that  the  Company  will  be  able  to  make  timely  and  successful
introductions of products for other platforms.

         Reliance on Single Vendor.  Approximately 60% of the components for the
Company's products are manufactured on a turnkey basis by a single vendor,  Pagg
Corporation.  In the event that the vendor were to cease  supplying the Company,
management  believes  there are  alternative  vendors for the components for the
Company's products.  However, the Company would experience  short-term delays in
the shipment of its products.

         Market   Acceptance.   The  Company's  sales  and  marketing   strategy
contemplates  sales of its  products  to the  personal  computer  and  Macintosh
enhancements  markets.  There can be no assurance  that the Company's  marketing
strategy will be effective and that consumers of personal  computer or Macintosh
enhancements  will buy the  Company's  products.  The  failure of the Company to
penetrate these  enhancements  markets would have a material adverse effect upon
its  operations and prospects.  Market  acceptance of the Company's  current and
proposed products will depend upon the ability of the Company to demonstrate the
advantages of its products over other computer enhancement products.

         Competition. The personal computer and Macintosh enhancements market is
extremely  competitive.  The  Company  competes  with  computer  retail  stores,
including superstores, certain hardware and software vendors which sell directly
to end-users,  and other direct marketers of personal  computer and/or Macintosh
enhancements  and  peripheral  products.  Many  of  the  Company's  competitors,
including Apple,  Radius and Asante, have greater market recognition

                                       16
<PAGE>
and  greater  financial,  technical,  marketing  and  human  resources  than the
Company. Although the Company is not currently aware of any announcements by its
competitors  that would have a material impact on the Company or its operations,
there can be no assurance that the Company will be able to compete  successfully
against existing companies or new entrants to the marketplace.

         Technological  Obsolescence.  The personal  computer and  Macintosh and
enhancements  market is characterized by extensive  research and development and
rapid technological  change resulting in product life cycles of nine to eighteen
months.  Development  by  others  of  new or  improved  products,  processes  or
technologies may take the Company's  products or proposed  products  obsolete or
less competitive. The Company will be required to devote substantial efforts and
financial  resources  to  enhance  its  existing  products  and to  develop  new
products.  There can be no  assurance  that the Company  will succeed with these
efforts.

         Protection of  Proprietary  Information.  The Company does not have any
patents.  The Company  treats its technical data as  confidential  and relies on
internal nondisclosure  safeguards,  including  confidentiality  agreements with
employees,  and on laws  protecting  trade  secrets to protect  its  proprietary
information.  There can be no  assurance  that these  measures  will  adequately
protect the  confidentiality  of the Company's  proprietary  information or that
others will not independently develop products or technology that are equivalent
or superior to those of the  Company.  While it may be necessary or desirable in
the  future  to  obtain  licenses  relating  to one or more of its  products  or
relating to current or future  technologies,  there can be no assurance that the
Company will be able to do so on commercially reasonable terms.

         Dependence  on  Key  Personnel.  The  Company's  success  depends  to a
significant extent, upon a number of key employees.  The loss of services of one
or more of these employees, especially the Company's Chief Executive Officer and
President,  Thomas  L.  Massie,  could  have a  material  adverse  effect on the
business of the Company.  The Company believes that its future success will also
depend in part upon its  ability  to  attract,  retain  and  motivate  qualified
personnel.  Competition for such personnel in the computer  industry is intense.
Although the Company has not in the past  experienced  difficulty  in attracting
and retaining  qualified  personnel,  there can be no assurance that the Company
will be successful in attracting and retaining such personnel in the future.

         Volatility of Stock Price.  The price of the Company's Common Stock and
Redeemable  Common Stock Purchase  Warrants has  fluctuated  widely in the past.
Management  believes  that such  fluctuations  may have been caused by quarterly
fluctuations in the Company's results of operations and other factors, including
changes in the personal computer market generally and in the market for products
related  to  the  Apple  operating  system  in  particular.  Due  to  the  rapid
technological  changes and highly competitive nature of the computer industry as
a whole,  prices for the  securities of technology  companies  have  experienced
extreme  volatility  over  the  past  several  months  and  can be  expected  to
experience extreme volatility in the future.  Such price volatility could have a
material  adverse effect on the Company's  ability to raise capital at favorable
valuations,  as  well  as  reduce  the  ability  of a  holder  of the  Company's
securities to sell them at favorable prices.

                                       17
<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
operation for the three and nine month periods ended September 30, 1996.


ITEM 2.       CHANGES  IN SECURITIES

         No  instruments  defining  the  rights of the  holders  of any class of
registered  securities  have  been  materially  modified  nor  have  the  rights
evidenced  by any class of  registered  securities  been  materially  limited or
qualified by the issuance or modification of any other class of securities.

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE

     None

ITEM 5.       OTHER INFORMATION

         On  October 3,  1996,  the  Company  announced  that it had  reached an
agreement  in  principle  to acquire  all the issued  and  outstanding  stock of
Digital  Vision,  Inc., a developer of PC to TV multimedia  products,  for up to
700,000 shares of the Company's  common stock. On November 14, 1996, the Company
and Digital Vision, Inc. mutually agreed to terminate the acquisition.

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

            a.   The following exhibits are filed herewith:

                  11 -   Statement Re: Computation of Per Share Earnings

                  27 -   Financial Data Schedule

            b. Reports on Form 8-K

            During the quarter covered by this report,  the following reports on
            Form 8-K were filed:

            Date of Form 8-K  Summary of Item
            ----------------  -------------------

            November 4, 1996  Registrant reported the acquisition of TView, Inc.


                                       18
<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.




     November  14, 1996                 By: /s/ Thomas L. Massie
                                            ------------------------
                                            Thomas L. Massie
                                               President,
                                       Chief Executive Officer and
                                          Chairman of the Board
                                       (Principal Executive Officer)




     November  14, 1996                 By: /s/ Jeremiah J. Cole, Jr.
                                            ---------------------------
                                            Jeremiah J. Cole, Jr.
                                          Vice President of Finance
                                        (Principal Accounting Officer)






















                                       19