FORM 10-QSB/A
                                (Amendment No.2)


                     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, 1999


             [ ] 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.)


                                 1370 Dell Ave.
                               Campbell, CA 95008
                    (Address of principal executive offices)


                                 (408) 866-8300
                           (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, 1999, there were outstanding  18,608,898  shares of Common Stock,
$.01 par value per share.

<PAGE>



                            FOCUS ENHANCEMENTS, INC.
                                  FORM 10-QSB/A


                                QUARTERLY REPORT
                                  June 30, 1999


                                TABLE OF CONTENTS

     In  connection  with its review of the impact of SAB 101, the Company found
that certain  transactions  that were  recorded as sales in the second and third
quarters  of 1999  should  not have been  recorded  as sales.  As a result,  the
Company has restated the financial statements of the aforementioned  quarters to
correct the amount of accounts  receivable,  inventory,  revenue,  cost of goods
sold and net income previously reported in those quarters.

      In addition,  in its quarterly financial statements for the year 1999, the
Company  is  providing  a  reserve  for  estimated  sales  returns  based on the
estimated sales value of the sales returns rather than a gross margin reserve.

                                                                          Page


Facing Page                                                                 1
Table of Contents                                                           2

PART I.       FINANCIAL INFORMATION

         Item 1. Consolidated Financial Statements:


                  Consolidated Balance Sheets at June 30, 1999
                  and December 31, 1998                                     3


                  Consolidated Statements of Operations
                  for the Three Months Ended June 30, 1999 and 1998         4


                  Consolidated Statements of Operations
                  for the Six Months Ended June 30, 1999 and 1998           5

                  Statement of Changes in Equity for the Six
                  Months Ended June 30, 1999                                6

                  Statement of Changes in Equity for the Six
                  Months Ended June 30, 1998                                7

                  Consolidated Statements of Cash Flows
                  for the Six Months Ended June 30, 1999 and 1998          8-9


                  Notes to Consolidated Financial Statements              10-12

         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                     13-20

PART II.          OTHER INFORMATION

         Item 1. Legal Proceedings                                          21
         Item 2. Changes in Securities                                      21
         Item 3. Defaults Upon Senior Securities                            21
         Item 4. Submission of Matters to a Vote of Security Holders      21-22
         Item 5. Other Information                                          22
         Item 6. Exhibits and Reports on Form 8-K                           22


SIGNATURES                                                                  23

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

                                                              ASSETS
                                                                                               June 30,             December 31,
                                                                                                1999                   1998
                                                                                            ------------           ------------
                                                                                           (As Restated,
                                                                                               Note 2)
<S>                                                                                        <C>                    <C>
Current assets:
    Cash and cash equivalents                                                               $     37,129           $  1,128,380
    Certificate of deposit                                                                        90,000                253,067
    Securities available for sale                                                                  6,423                248,983
    Accounts receivable, net of allowances of $983,011 and $649,987 at
    June 30, 1999 and December 31, 1998, respectively                                          3,030,849              2,553,139
    Inventories                                                                                4,846,110              5,948,624
    Prepaid expenses and other current assets                                                    307,423                217,092
                                                                                            ------------           ------------
      Total current assets                                                                     8,317,934             10,349,285

    Property and equipment, net                                                                2,384,682              1,272,477
    Other assets, net                                                                            274,650                304,498
    Goodwill, net                                                                                717,476                810,673
                                                                                            ------------           ------------
      Total assets
                                                                                            $ 11,694,742           $ 12,736,933
                                                                                            ============           ============

                                               LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Notes payable                                                                           $  2,127,403           $    702,057
    Obligations under capital leases                                                             127,691                119,536
    Current portion of long-term debt                                                            297,539                283,180
    Accounts payable                                                                           4,307,585              5,999,694
    Accrued liabilities                                                                          647,175              1,810,025
                                                                                            ------------           ------------
      Total current liabilities                                                                7,507,393              8,914,492

    Deferred income                                                                                 --                   84,212
    Obligations under capital leases                                                             270,696                321,760
    Long-term debt, net of current portion                                                       386,158                538,597
                                                                                            ------------           ------------

      Total liabilities                                                                        8,164,247              9,859,061
                                                                                            ------------           ------------

Stockholders' equity
    Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued                       --                     --
    Common stock, $.01 par value; 25,000,000 shares authorized,
        18,608,898 and 18,005,090 shares issued at June 30, 1999 and
        December 31, 1998, respectively                                                          186,089                180,051
    Additional paid-in capital                                                                39,446,369             38,913,304
    Accumulated deficit                                                                      (35,082,623)           (35,198,935)
    Accumulated other comprehensive income                                                         1,427                   --
    Note receivable, common stock                                                               (320,637)              (316,418)
    Treasury stock at cost, 450,000 shares                                                      (700,130)              (700,130)
                                                                                            ------------           ------------
      Total stockholders' equity                                                               3,530,495              2,877,872
                                                                                            ------------           ------------
      Total liabilities and stockholders' equity                                            $ 11,694,742           $ 12,736,933
                                                                                            ============           ============

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

                                                            Three Months Ended
                                                        June 30,         June 30
                                                         1999              1998
                                                     ------------      ------------
                                                    (As Restated,
                                                        Note 2)
<S>                                                 <C>               <C>
Net sales                                            $  3,684,497      $  6,872,086
Cost of goods sold                                      1,776,596         4,065,355
                                                     ------------      ------------

     Gross profit                                       1,907,901         2,806,731
                                                     ------------      ------------

Operating expenses:

  Sales, marketing and support                            996,789         1,281,010
  General and administrative                              427,228           420,691
  Research and development                                270,325           244,923
  Depreciation and amortization expense                   133,856           170,060

                                                     ------------      ------------
     Total operating expenses                           1,828,198         2,116,684
                                                     ------------      ------------

Income from operations                                     79,703           690,047

Interest expense, net                                    (145,496)          (60,371)
Other income, net                                          79,115             5,134
                                                     ------------      ------------

Income before income taxes                                 13,322           634,810

Income tax expense                                           --              19,161
                                                     ------------      ------------

Net income                                           $     13,322      $    615,649
                                                     ============      ============

Net income per common share
     Basic                                           $       0.00      $       0.04
                                                     ============      ============
     Diluted                                         $       0.00      $       0.04
                                                     ============      ============

Weighted average common shares outstanding

     Basic                                             18,011,725        15,367,771
                                                     ============      ============
     Diluted                                           18,012,361        16,604,378
                                                     ============      ============

<FN>
 The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
                                          4
<PAGE>
<TABLE>
<CAPTION>
                               FOCUS ENHANCEMENTS, INC.
                        CONSOLIDATED STATEMENTS OF OPERATIONS
                                     (UNAUDITED)

                                                             Six Months Ended
                                                        June 30,         June 30
                                                         1999              1998
                                                     ------------      ------------
                                                    (As Restated,
                                                        Note 2)
<S>                                                 <C>               <C>
Net sales                                            $  8,751,576      $ 12,124,034
Cost of goods sold                                      4,713,730         6,847,291
                                                     ------------      ------------

     Gross profit                                       4,037,846         5,276,743
                                                     ------------      ------------
Operating expenses:

  Sales, marketing and support                          2,020,484         2,447,337
  General and administrative                              781,170           775,483
  Research and development                                762,806           555,724
  Depreciation and amortization expense                   273,226           356,499

                                                     ------------      ------------
     Total operating expenses                           3,837,686         4,135,043
                                                     ------------      ------------

Income from operations                                    200,160         1,141,700

Interest expense, net                                    (166,861)         (137,410)
Other income, net                                          83,013             5,768
                                                     ------------      ------------

Income before income taxes                                116,312         1,010,058

Income tax expense                                           --              29,661
                                                     ------------      ------------

Net income                                           $    116,312      $    980,397
                                                     ============      ============

Net income per common share
     Basic                                           $       0.01      $       0.06
                                                     ============      ============
     Diluted                                         $       0.01      $       0.06
                                                     ============      ============

Weighted average common shares outstanding
     Basic                                             18,008,426        16,203,388
                                                     ============      ============
     Diluted                                           18,009,062        17,407,893
                                                     ============      ============

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

                                          5
<PAGE>
<TABLE>
<CAPTION>
                                                      FOCUS ENHANCEMENTS, INC.
                                                   STATEMENT OF CHANGES IN EQUITY
                                               FOR THE SIX MONTHS ENDED JUNE 30, 1999

                                                                                  Accum-
                                                                                  ulated
                                                                                  Other        Notes
                                                    Additional                    Compre-    Receivable
                                           Common    Paid-in      Accumulated     hensive      Common       Treasury
                                            Stock    Capital        Deficit       Income       Stock         Stock         Total
                                          --------  -----------   ------------   ---------   ----------    ----------    ----------

<S>                                      <C>       <C>           <C>              <C>       <C>           <C>           <C>
Beginning balance                         $180,051  $38,913,304   $(35,198,935)    $ --      $(316,418)    $(700,130)    $2,877,872


Comprehensive income:
  Net income, As restated (Note 2)            --        --             116,312       --          --             --          116,312
  Other comprehensive income, net of tax
    Unrealized gains on securities            --        --                --        1,427        --             --            1,427

                                                                                                                         ----------
Comprehensive income                                                                                                        117,739
                                                                                                                         ----------

Reclassification of common stock                38          (38)                                                               --

Common stock issued                          6,000      533,103                                                             539,103

Notes receivable, common stock                                                                  (4,219)                      (4,219)

                                          -----------------------------------------------------------------------------------------
Ending balance                            $186,089  $39,446,369   $(35,082,623)    $1,427    $(320,637)    $(700,130)    $3,530,495
                                          =========================================================================================


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

                                                      FOCUS ENHANCEMENTS, INC.

                                                   STATEMENT OF CHANGES IN EQUITY
                                               FOR THE SIX MONTHS ENDED JUNE 30, 1998

                                                                                    Accum-
                                                                                    ulated
                                                                                    Other        Notes
                                                     Additional                     Compre-    Receivable
                                           Common     Paid-in       Accumulated     hensive      Common      Treasury
                                            Stock     Capital         Deficit       Income       Stock        Stock        Total
                                          --------   -----------    ------------   ---------   ----------   ----------  -----------

<S>                                      <C>        <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
  Other comprehensive income, net of tax
    Unrealized gains on securities            --          --               --         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
                                          =========================================================================================


<FN>
                        The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
                                                                 7
<PAGE>
<TABLE>
<CAPTION>
                                                   FOCUS ENHANCEMENTS, INC.
                                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                         (UNAUDITED)

                                                                                                  Six Months Ended
                                                                                            June 30,            June 30,
                                                                                             1999                  1998
                                                                                          ------------         ------------
                                                                                         (As Restated,
                                                                                             Note 2)
<S>                                                                                      <C>                  <C>
Cash flows from operating activities:
    Net income                                                                            $   116,312          $   980,397
    Adjustments to reconcile net income to net cash provided by
   (used in) operating activities:
        Depreciation and amortization                                                         273,226              356,499
        Deferred Income                                                                       (84,212)                --
        Increase in accrued interest on notes receivable, common stock                         (4,219)                --
        Changes in operating assets and liabilities, net of the effects of acquisition:
            (Increase) decrease in accounts receivable                                       (233,723)          (3,866,784)
            Decrease (increase) in inventories                                              1,102,514            1,042,728
            Decrease (increase) in prepaid expenses and other assets                          (60,483)              84,162
            (Decrease) increase in accounts payable                                           148,447           (1,622,462)
            (Decrease) increase in accrued liabilities                                     (1,162,850)            (680,735)

                                                                                          -----------          -----------
        Net cash provided by (used in) operating activities                                    95,012          (3,706,195)
                                                                                          -----------          -----------

Cash flows from investing activities:
    Decrease (increase) in certificates of deposit                                            163,067                 --
    Purchase of property and equipment                                                     (1,292,234)            (382,854)
    Cash paid in acquisitions, net of cash received                                              --                (46,980)

                                                                                          -----------          -----------
        Net cash used in investing activities                                              (1,129,167)            (429,834)
                                                                                          -----------          -----------

Cash flows from financing activities:
    Payments on notes payable                                                              (1,027,057)            (120,477)
    Payments under capital lease obligations                                                  (42,909)             (64,134)
    Payments on long-term debt                                                               (138,080)                --
    Net changes in accounts receivable financing                                              611,847                 --
    Net proceeds from private offerings of common stock                                       539,103            2,827,355
    Net proceeds from exercise of common stock options and warrants                              --              6,802,414
                                                                                          -----------          -----------

        Net cash provided by (used in) financing activities                                   (57,096)           9,445,158
                                                                                          -----------          -----------

Net increase (decrease) in cash and cash equivalents                                       (1,091,251)           5,309,129

Cash and cash equivalents at beginning of period                                            1,128,380              719,851
                                                                                          -----------          -----------

Cash and cash equivalents at end of period                                                $    37,129          $ 6,028,980
                                                                                          ===========          ===========

Supplemental Cash Flow Information:

        Interest paid                                                                     $   166,861          $   137,410
        Income taxes paid                                                                        --                 29,661

</TABLE>
                                                              8
<PAGE>

Supplemental schedule of non-cash 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.

                                       9
<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, 1999 and for the three,  and  six-month  periods  ended
June 30, 1999 and 1998 are unaudited and should be read in conjunction  with the
consolidated  financial statements and notes thereto for the year ended December
31, 1998  included in the  Company's  Annual  Report on Form 10-KSB for the year
ended  December 31, 1998.  The  consolidated  financial  statements  include the
accounts of the Company and its wholly owned  subsidiaries PC Video  Conversion,
Inc., Lapis  Technologies,  Inc.,  TView,  Inc., and FOCUS  Enhancements B.V. 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.  On July 29, 1998, the Company  acquired  certain
assets  and  assumed  certain  liabilities  of PC Video  Conversion,  Inc.  in a
transaction  accounted  for  under  the  purchase  method  of  accounting.   All
intercompany accounts and transactions have been eliminated upon consolidation.

         The results of operations of Digital Vision, Inc. have been included in
the  accompanying  consolidated  financial  statements  since April 1, 1998. The
results of  operations  of PC Video  Conversion,  Inc. have been included in the
accompanying   consolidated  financial  statements  since  July  29,  1998.  The
following unaudited pro forma information presents a summary of the consolidated
results of operations of the Company as if the  acquisitions had occurred at the
beginning of the six-month period presented

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

                  Net sales                      $12,475,000
                  Income from operations           1,175,000
                  Net income                       1,000,000
                  Net income per common share
                      Basic                      $     .06
                      Diluted                    $     .06


         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, 1999
are not  necessarily  indicative  of the results  that may be  expected  for any
future period.

2. RESTATEMENT

     In  connection  with its review of the impact of SAB 101, the Company found
that certain  transactions  that were  recorded as sales in the second and third
quarters  of 1999  should  not have been  recorded  as sales.  As a result,  the
Company has restated the financial statements of the aforementioned  quarters to
correct the amount of accounts  receivable,  inventory,  revenue,  cost of goods
sold and net income previously reported in those quarters.

      In addition,  in its quarterly financial statements for the year 1999, the
Company  is  providing  a  reserve  for  estimated  sales  returns  based on the
estimated sales value of the sales returns rather than a gross margin reserve.
<TABLE>
     The items in the financial statements that are affected by the restatement
are as follows:
<CAPTION>

                                                        (In Thousands)

                                    Three Months Ended                  Six Months Ended
                              June 30, 1999    June 30, 1999     June 30, 1999    June 30, 1999
                                Previously           As            Previously           As
                                 Reported(1)      Restated          Reported(1)      Restated

   INCOME STATEMENT
  ---------------------------------------------------------------------------------------------
<S>                               <C>              <C>                <C>             <C>
      Revenue                     $4,077           $3,684             $9,144          $8,752
      Cost of Goods Sold           2,128            1,777              5,065           4,714
      Net Income                      55               13                158             116


                              June 30, 1999    June 30, 1999
                                Previously           As
                                 Reported(1)      Restated

   BALANCE SHEET
  ------------------------------------------------------------
      Accounts Receivable         $3,296           $3,031
      Inventory                    4,622            4,846
      Current Assets               8,359            8,318

<FN>
(1) The Company restated its June 30, 1999 financial  statements in its June 30,
2000 10-QSB filed on August 21, 2000.
</FN>
</TABLE>
3.       NET INCOME PER SHARE

       In February  1997,  the Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial  Accounting Standards ("SFAS") No. 128 - "Earnings
Per Share" which  requires  earnings per share to be  calculated  on a basic and
dilutive basis.  Basic earnings per share represents  income available to common
stock divided by the weighted-average number of common shares outstanding during
the period.  Diluted earnings per share reflects  additional  common shares that
would have been outstanding if dilutive potential common shares had been issued,
as well  as any  adjustment  to  income  that  would  result  from  the  assumed
conversion.  Potential  common  shares that may be issued by the Company  relate
solely to outstanding  stock options and warrants,  and are determined using the
treasury  stock method.  The assumed  conversion of  outstanding  dilutive stock
options and warrants would increase the shares outstanding but would not require
an adjustment to income as a result of the conversion.  For the six-months ended
June 30, 1999 and 1998, options and warrants  applicable to 4,447,671 shares and
6,881,303 shares,  respectively were anti-dilutive and excluded from the diluted
earnings per share computation.

                                       10
<PAGE>

4.       INCOME TAXES

       The  Company  has  utilized  its  net  operating  loss  carryforwards  in
estimating its provision for income taxes in the six-month period ended June 30,
1999 and 1998.

5.       INVENTORIES

         Inventories consist of the following:

                                    June 30,            December 31,
                                    --------            ------------
                                      1999                  1998
                                      ----                  ----

          Finished goods           $4,686,542           $5,718,260
          Raw materials               159,568              230,364
                                   ----------           ----------
                                   $4,846,110           $5,948,624
                                   ==========           ==========

6.       NOTES PAYABLE

         Line of Credit, Bank. As of December 31, 1998, the Company maintained a
revolving  line of credit with a bank with  outstanding  borrowings of $620,000.
Borrowings bear interest at the bank's prime rate plus 1% (8.75% at December 31,
1998),  are payable upon demand and are  collateralized  by all of the assets of
the  Company,  except  as noted  below.  Under  the  terms of the line of credit
agreement, the Company was required to comply with certain restrictive covenants
and was in  violation of certain of these  covenants  at December  31, 1998.  On
March 31,  1999,  the  Company  repaid  all  monies  owed on this line of credit
totaling  approximately  $637,000  from  proceeds  received  under a  $2,000,000
accounts receivable  financing agreement with its commercial bank. The agreement
allows for  advances  on  accounts  receivable  not to exceed  80% of  qualified
invoices.  Interest is charged on the outstanding balance at a rate of the prime
lending  rate  plus  4.5%  (12.5%  at June 30,  1999).  Under  the terms of this
agreement the bank has been issued  warrants to purchase  100,000  shares of the
Company's common stock at a price of $1.70 per share. The Company recorded stock
option  compensation  charges of $6,900 for the six months  ended June 30,  1999
pursuant to this issuance.  At June 30, 1999,  the Company had borrowings  under
this agreement of approximately $611,850.

         Long-Term  Debt. On July 29, 1998, the Company issued a $1,000,000 note
payable  to a related  party in  conjunction  with the  acquisition  of PC Video
Conversion  providing  for the payment of principal and interest at 3.5 % over a
period of 36 months.  The  Company  computed a discount  of $89,915 on this note
based on its incremental  borrowing rate. The balance owed on this note payable,
net of discount at June 30, 1999 was  $683,696.  Maturities of this note at June
30, 1999 are as follows:

                     1999   $145,099
                     2000    312,556
                     2001    226,041
                            --------
                    Total   $683,696
                            ========

                                       11
<PAGE>

         Term Loan,  Vendor.  On April 20, 1999, the Company  converted  certain
accounts payable due to a contract  manufacturer to a term note in the amount of
$1,700,000. Interest at a rate of 12% per annum is payable weekly until the loan
expiration date of June 30, 1999. In addition,  Mr. Thomas L. Massie,  President
and CEO of the Company, agreed to personally guarantee payment of this term note
up to an amount not to exceed $600,000.  However,  the holder of the note defers
recourse on the guarantee  provision  until December 31, 1999. At June 30, 1999,
the Company was in violation of the payment  provisions and maintained a balance
due of $1,282,981.

7.       COMMON STOCK TRANSACTIONS

         On February 22, 1999,  the Company issued  warrants to purchase  30,000
shares of common  stock as  partial  compensation  to an  unaffiliated  investor
relations  firm.  The warrants  are  exercisable  until  February 22, 2002 at an
exercise price of $1.063 per share.  These  warrants were  terminated on May 31,
1999  as a  result  of the  termination  of the  agreement  with  this  investor
relations firm.

         On February 22, 1999, the Company issued  warrants to purchase  100,000
shares of common stock as partial  compensation  to an  unaffiliated  investment
advisor.  The warrants are  exercisable  until  September 9, 2002 at an exercise
price of $1.063  per share.  The  Company  recorded  stock  option  compensation
charges of $5,000  for the six  months  ended  June 30,  1999  purusant  to this
issuance.

         On February 22, 1999,  the Company issued  warrants to purchase  50,000
shares  of  common  stock  pursuant  to a debt  financing  arrangement  with  an
unrelated individual. The warrants are exercisable until February 22, 2004 at an
excise price of $1.063. The Company recorded stock option  compensation  charges
of $1,500 for the six months ended June 30, 1999 purusant to this issuance.

         On March 22,  1999,  the Company  issued  warrants to purchase  100,000
shares of common stock  representing  partial fees pursuant to a debt  financing
arrangement  with an unaffiliated  commercial bank. The warrants are exercisable
until March 22, 2006 at an excise  price of $1.70.  The Company  recorded  stock
option  compensation  charges of $6,900 for the six months  ended June 30,  1999
purusant to this issuance.

         On June 4, 1999,  the Company  completed a financing  of  approximately
$1,200,000 in gross  proceeds from the sale of 1,200,000  shares of Common Stock
and warrants to purchase  120,000 of common  stock in a private  placement to an
unaffiliated  accredited  investor.  The warrants are exercisable until June 30,
2004 at an  excise  price  of  $1.478125.  The  Company  recorded  stock  option
compensation  charges of $6,600 for the six months ended June 30, 1999  purusant
to this  issuance.  The  Registration  Statement  for the shares to be issued in
connection  with this  transaction  and issuable  upon  exercise of the warrants
under the  Securities  Act of 1933 was filed June 21,  1999.  The  Company  will
receive  proceeds  from this  transaction  in two  tranches  of  $600,000,  less
applicable  fees.  The first  tranche for 600,000  shares was funded on June 14,
1999 for  $600,000  less fees and  expenses  associated  with this  offering  of
$60,897 yielding net proceeds of $539,103. The second tranche for 600,000 shares
valued at $600,000 less  applicable fees will be funded upon the approval of the
Registration Statement filed on June 21, 1999.

         On June 30,  1999,  as a result of a  reconciliation  with its transfer
agent,   the  Company   determined  that  3,808  shares  of  common  stock  were
misclassified between common stock and additional paid-in capital.  Accordingly,
on June 30, 1999 the Company adjusted its records to properly reflect its common
stock outstanding.

                                       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, 1998.

       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, 1998,  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, 1999 As Compared
                 With The Three-Month Period Ended June 30, 1998

Net Sales

       Net sales for the  three-month  period ended June 30, 1999 ("Q2 99") were
$3,684,497 as compared with $6,872,086 for the three-month period ended June 30,
1998 ("Q2 98"),  a decrease of  $3,187,589  or 46%. The decrease in net sales is
principally  attributable to the consolidation and restructuring of a segment of
the  Company's  retail  channel  that  resulted  in the  elimination  of certain
non-performing resellers of the Company's video conversion product line in North
America effective in fourth quarter of 1998. Specifically, net sales in Q2 99 to
the Company's US resellers decreased 55% to $2,442,000 from $5,263,000 in Q2 98.
Net sales to  OEM/Licensing  customers  decreased  57% to $631,000 in Q2 99 from
$1,461,000  for the same quarter in 1998.  This decrease is primarily the result
of a delay in the  development  and  production of the Company's new FS400 ASIC.
Net sales of the Company's  professional AV products  totaled  $611,000 in Q2 99
versus $ -0- in Q2 98. The  Company  began  distributing  this  product  line on
August 1, 1998 as a result of the acquisition of PC Video Conversion, Inc.

       As  of  June  30,  1999,  the  Company  had  a  sales  order  backlog  of
approximately $500,000.

                                       13
<PAGE>

Cost of Goods Sold

         Cost  of  goods  sold  were  $1,776,596  or 48% of net  sales,  for the
three-month  period ended June 30, 1999, as compared  with  $4,065,355 or 59% of
net sales,  for the  three-month  period  ended June 30,  1998,  an  decrease in
absolute dollars of $2,288,759 or 56%. The Company's gross profit margins for Q2
99 and Q2 98 were 52% and 41%,  respectively.  As a percentage of sales, cost of
goods sold was lower in Q2 99 principally due to reduced  manufacturing costs of
consumer products combined with incremental sales of professional AV products at
margins that are considerably  greater.  Sales to OEM customers on which margins
are typically  lower declined in Q2 99 also  contributing to higher margins as a
percentage of sales.

Sales, Marketing and Support Expenses

       Sales,  marketing and support expenses were $996,789 or 27% of net sales,
for the  three-month  period ended June 30, 1999, as compared with $1,281,010 or
19% of net sales, for the three-month period ended June 30, 1998, an decrease of
$284,221 or 22%. The decrease in absolute dollars is due primarily to reductions
in channel marketing expenditures resulting from market restructuring efforts.

General and Administrative Expenses

         General and  administrative  expenses for the three-month  period ended
June 30, 1999 were $427,228 or 12% of net sales,  as compared with $420,691,  or
6% of net sales for the  three-month  period ended June 30, 1998, an increase of
$6,537 or 2%. The increase in absolute  dollars is principally  due to increases
in consulting fees  ($26,700),  legal fees  ($18,400),  investor  relations fees
($25,700) and stock option  compensation  charges ($20,000) offset by a decrease
in payroll and employee benefits of $83,300.

Research and Development Expenses

       Research and development  expenses for the three-month  period ended June
30, 1999 were $270,325,  or 7% of net sales,  as compared to $244,923,  or 4% of
net sales, for three-month period ended June 30, 1998, an increase of $25,402 or
10%. The increases were due principally to increased staffing, employee benefits
and operating  expenses resulting from the acquisition of PC Video Conversion in
July 1998.

Interest Expense, Net

       Net interest  expense for the three-month  period ended June 30, 1999 was
$145,496,  or 4% of net sales, as compared to $60,371,  or 1% of net sales,  for
the three-month period ended June 30, 1998, an increase of $85,125, or 141%. The
increase  is  primarily  attributable  to an increase  in  outstanding  interest
bearing debt for the three months ended June 30, 1999.

Other Income (Expense)

         Other Income  (Expense) for the three-month  period ended June 30, 1999
was $79,115 as compared to $5,134,  for the  three-month  period  ended June 30,
1998. The increase is principally due to approximately $85,000 from gains on the
sales of marketable securities in Q2 99.

Net Income

       For the quarter ended June 30, 1999,  the Company  reported net income of
$13,322,  or $0.00 per share, as compared to $615,649,  or $0.04 per share,  for
the quarter ended June 30, 1998.

                                       14
<PAGE>

                Six-Month Period Ended June 30, 1999 As Compared
                  With The Six-Month Period Ended June 30, 1998

Net Sales

       Net sales for the six-month  period ended June 30, 1999 (the "99 Period")
were $8,751,576 as compared with $12,124,034 for the six-month period ended June
30, 1998 (the "98 Period"), a decrease of $3,372,458 or 28%. The decrease in net
sales is primarily due to the  consolidation  and  restructuring of a segment of
the  Company's  retail  channel  that  resulted  in the  elimination  of certain
non-performing resellers of the Company's video conversion product line in North
America in fourth quarter of 1998.  Specifically,  net sales in the 99 Period to
the Company's US resellers decreased 32% to $6,409,000 from $9,463,000 in the 98
Period. Net sales to OEM/Licensing  customers decreased 35% to $1,308,000 in the
99 Period from  $2,001,000  for the 98 period.  This  decrease is primarily  the
result of a delay in the  development  and production of the Company's new FS400
ASIC. Net sales of the Company's  professional AV products totaled $1,035,000 in
the 99 Period versus $ -0- in the 98 Period. The Company began distributing this
product  line on  August  1,  1998 as a result  of the  acquisition  of PC Video
Conversion, Inc.

Cost of Goods Sold

       Cost of goods sold were $4,713,730 or 54% of net sales, for the six-month
period ended June 30, 1999, as compared with $6,847,291 or 56% of net sales, for
the  six-month  period ended June 30,  1998,  a decrease in absolute  dollars of
$2,133,561  or 31%.  The  decrease  in cost of sales  in  absolute  dollars  was
principally the result of a decrease in revenues in the 99 Period as compared to
the 98 Period.

Sales, Marketing and Support Expenses

       Sales,  marketing  and support  expenses  were  $2,020,484  or 23% of net
sales, for the six-month period ended June 30, 1999, as compared with $2,447,337
or 20% of net sales,  for the six-month  period ended June 30, 1998, an decrease
of  $426,853  or 17%.  The  decrease in  absolute  dollars is due  primarily  to
reductions in channel marketing expenditures resulting from market restructuring
efforts.

General and Administrative Expenses

       General and  administrative  expenses for the six-month period ended June
30, 1999 were $781,170 or 9% of net sales,  as compared with $775,483,  or 6% of
net sales for the six-month period ended June 30, 1998, an increase of $5,687 or
1%.

Research and Development Expenses

       Research and development expenses for the six-month period ended June 30,
1999 were  $762,806 or 9% of net sales,  as compared to  $555,724,  or 5% of net
sales, for six-month period ended June 30, 1998, an increase of $207,082 or 37%.
The increase was due principally to increased  staffing,  employee  benefits and
operating expenses resulting from the acquisition of PC Video Conversion in July
1998.

                                       15
<PAGE>

Interest Expense, Net

       Net  interest  expense for the  six-month  period ended June 30, 1999 was
$166,861,  or 2% of net sales, as compared to $137,410,  or 1% of net sales, for
the  six-month  period ended June 30,  1998, a increase of $29,451,  or 21%. The
increase is primarily  attributable to an increase in outstanding  debt balances
for the 99 period compared to the 98 Period.

Other Income

       Other Income for the six-month  period ended June 30, 1999 was $83,013 as
compared to $5,768,  for the six-month  period ended June 30, 1998. The increase
is  principally  due to gains on the sales of  marketable  securities  in the 99
Period.

Net Income

       For the six-month  period ended June 30, 1999,  the Company  reported net
income of $116,312 or $0.01 per share,  as  compared to  $980,397,  or $0.06 per
share, for the six-month period ended June 30, 1998.


LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided by (used in) operating  activities  for the six-month
periods ended June 30, 1999 and 1998 was $95,012 and ($3,706,195), respectively.
In the 99 Period, net cash provided by operating  activities consisted primarily
of a decrease in inventory of $1,102,514, and an increase in accounts payable of
$148,447,  combined with non-cash  charges for  depreciation and amortization of
$273,226  and net income of  $116,312.  This was offset by increases in accounts
receivable of $233,723 and prepaid expenses of $60,483, combined with a decrease
in accrued  liabilities of $1,162,850.  As of June 30, 1999, accounts receivable
from  a  major  distributor  represented  approximately  35% of  total  accounts
receivable.  In the 99 Period,  the Company  continued to record  provisions for
potential  future  uncollectable  accounts and  continually  monitors  inventory
levels at its resellers and maintains reserves for potential product returns.

         For the six months  ended June 30,  1998,  net cash used in  operations
consisted  primarily of  increases  in accounts  receivable  of  $3,866,784  and
decreases in accounts  payable and accrued  expenses of $1,622,462 and $680,735,
respectfully. This was offset by a decrease in inventory of $1,042,728.

         Net cash used in investing  activities for the six-month  periods ended
June 30, 1999 and 1998 was ($1,129,167) and ($429,834), respectively.  In the 99
Period and the 98 Period, cash used in investing  activities was principally for
the purchase of property and equipment and capitalized ASIC development costs.

         Net cash provided by (used in) financing  activities  for the six-month
periods ended June 30, 1999 and 1998 was ($57,096) and $9,445,158, respectively.
In the 99 Period,  the Company  received  $539,103 in net proceeds  from private
offerings of common  stock.  The  Company's  financing  proceeds  were offset by
payments on notes  payable,  accounts  receivable  financing  and capital  lease
obligations.  In the  same  six-month  period  in  1998,  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 98 Period financing
proceeds were offset by payments on notes payable and capital lease obligations.

                                       16
<PAGE>

         As of June 30, 1999,  the Company had working  capital of $810,541,  as
compared to  $1,434,793  at December  31,  1998,  a decrease  of  $624,252.  The
Company's cash position at June 30, 1999 was $37,129 , a decrease of $1,091,251,
from cash balances at December 31, 1998.

         At  June  30,  1999,  the  Company  was in  violation  of  the  payment
provisions  of a term note payable to a contract  manufacturer  in the amount of
$1,282,981.  The Company is in negotiation with the holder to amend the terms of
the note. The note is secured by certain  inventory  manufactured by the holder.
In addition, Mr. Thomas L. Massie, President and CEO of the Company,  personally
guaranteed  payment  of this term note up to an amount  not to exceed  $600,000.
However, the holder of the note defers recourse on the guarantee provision until
December  31,  1999.  In addition,  the Company is pursuing  additional  capital
funding to improve working capital.

       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.

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

       General

       The Company's Year 2000 compliance  project ("The Project") is proceeding
on  schedule.  The  Project is  addressing  the issue of computer  programs  and
embedded  computer chips being unable to  distinguish  between the year 1900 and
the year 2000. In early 1999, in order to improve access to business information
and to  strengthen  its  infrastructure  through  common,  integrated  computing
systems  across the Company,  the Company began a business  systems  replacement
project with systems that use programs from a nationally known business software
company ("System").  The installation of the new systems,  which are expected to
make  approximately 90 percent of the Company's  business  computer systems Year
2000  compliant,  is scheduled for  completion by September 30, 1999. The System
will replace a non-compliant accounting and manufacturing system. Implementation
of  the  System  is on  schedule  and  approximately  90  percent  complete.  To
facilitate  the  Project,  The Company has  retained  outside  consultants  with
expertise   in  wide  area   networking   ("WAN"),   systems   integration   and
business/contact data management.

         The Company has developed a contingency  plan to make the programs that
are scheduled to be replaced by the System Year 2000 compliant.  The contingency
plan includes contracted on-site support, workflow modification, and integration
of Year 2000  compliant  systems.  At the end of first quarter 1999,  management
agreed that there was no need to implement  the  contingency  plan at that time.
The decision will be re-evaluated  monthly through year-end.  Remaining business
software  programs  are  expected  to be made Year 2000  compliant  through  The
Project,  including those supplied by vendors, or they will be retired.  None of
the Company's other information technology ("IT") projects have been delayed due
to the implementation of The Project.

                                       17
<PAGE>

         Project

         The Project is being  implemented in two phases:  Phase I, installation
of the hardware and business applications, preceded the WAN installation and the
integration of various communications systems. Phase I was 95% completed on June
30, 1999. Phase II is expected to be completed by September 30, 1999.

         The Project is divided  into two major  sections -  infrastructure  and
applications  software (sometimes  collectively referred to as "IT Systems") and
third-party  suppliers and customers  ("External  Agents").  The general  phases
common to all sections  are: (1)  inventorying  Year 2000 items;  (2)  assigning
priorities to identified  items; (3) assessing the Year 2000 compliance of items
determined to be material to the Company;  (4)  repairing or replacing  material
items that are determined not to be Year 2000  compliant;  (5) testing  material
items; and (6) designing and implementing  contingency and business continuation
plans for each organization and Company location.

         At September 30, 1998, the inventory and priority  assessment phases of
each section of the Project had been completed.  While  substantially  complete,
the  process  of  assessing  Year  2000  compliance  of its  material  items and
repairing or replacing such items continues on an ongoing basis.  Material items
are  those  believed  by the  Company  to have a risk  involving  the  safety of
individuals,  or that may cause damage to property or the  environment,  or that
have a material  effect on the  Company's  revenues.  The testing  phases of the
Project  will be  performed  by the  Company  and will be ongoing as hardware or
system software is remedied, upgraded or replaced.

         The  infrastructure  portion of the IT section consists of hardware and
systems software other than  applications  software.  The Company estimates that
approximately  95 percent of the activities  required to achieve  infrastructure
Year 2000  compliance had been  completed at June 30, 1999.  All  infrastructure
activities are expected to be completed by August 31, 1999. Contingency planning
for infrastructure is also substantially complete.

         The application  software  portion of the IT section  includes both the
conversion of  applications  software that is not Year 2000 compliant and, where
available  from the supplier,  the  replacement  of such  software.  The Company
estimates  that the  software  conversion  phase was  approximately  90  percent
complete at June 30,  1999,  and the  remaining  conversions  are expected to be
completed by September 30, 1999.

         The testing phase for  application  software is ongoing and is expected
to be completed by September  30, 1999.  The vendor  software  replacements  and
upgrades are installed as of July 19, 1999 and the testing of this  applications
is expected to be  completed by September  30,  1999.  Contingency  planning for
application software has begun and is scheduled for completion by mid-1999.

         The External  Agents section  includes the process of  identifying  and
prioritizing critical suppliers and customers at the direct interface level, and
communicating  with them about their plans and progress in addressing  their own
Year 2000 issues.  Detailed  evaluations of the most critical third parties have
been  initiated.  These  evaluations  will be  followed  by the  development  of
contingency plans, which are scheduled for completion by September 30, 1999. The
Company estimates that this section was on schedule at June 30, 1999.  Follow-up
reviews of External  Agents are expected to be undertaken  through the remainder
of 1999.

                                       18
<PAGE>

       Costs

       The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the  Company's  financial  position.
The estimated  total cost of the Project is  approximately  $300,000.  The total
amount  expended on the Project  through June 30, 1999,  was $250,000,  of which
approximately  $200,000  related to the cost to repair or replace  software  and
related  hardware  problems,  and  approximately  $50,000 related to the cost of
identifying and communicating with External Agents. The estimated future cost of
completing  the Project is estimated  to be  approximately  $50,000;  $25,000 to
repair or replace  software  and related  hardware  and $25,000 to identify  and
communicate  with  External  Agents.  Funds for the Project are provided  from a
separate budget of $300,000 for all items other than External Agent costs, which
are included in existing operating budgets.  Ancillary costs of implementing the
System are not included in these cost estimates.

       Risks

       The failure to correct a material  Year 2000  problem  could result in an
interruption  in,  or a  failure  of,  certain  normal  business  activities  or
operations.  Such failures could  materially and adversely  affect the Company's
results of  operations,  liquidity and financial  condition.  Due to the general
uncertainty  inherent  in the Year  2000  problem,  resulting  in part  from the
uncertainty of the Year 2000  readiness of third-party  suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000  failures  will  have  a  material  impact  on  the  Company's  results  of
operations,  liquidity  or  financial  condition.  The  Project is  expected  to
significantly  reduce the  Company's  level of  uncertainty  about the Year 2000
problem and, in particular,  about the Year 2000 compliance and readiness of its
material External Agents.  The Company believes that, with the implementation of
new business systems and completion of the Project as scheduled, the possibility
of significant interruptions of normal operations should be reduced.

         Readers are cautioned that forward-looking  statements contained in the
year 2000 Update should be read in  conjunction  with the Company's  disclosures
under the heading: "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS" herein.

         The Company is including  the  following  cautionary  statement to take
advantage of the "safe harbor" provisions of the PRIVATE  SECURITIES  LITIGATION
REFORM ACT OF 1995 for any  forward-looking  statement made by, or on behalf of,
the Company.  The factors identified in this cautionary  statement are important
factors (but not  necessarily  all  important  factors)  that could cause actual
results  to  differ  materially  from  those  expressed  in any  forward-looking
statement made by, or on behalf of, the Company.

         Where any such  forward-looking  statement  includes a statement of the
assumptions or bases  underlying  such  forward-looking  statement,  the Company
cautions that,  while it believes such assumptions or bases to be reasonable and
makes them in good faith,  assumed facts or bases almost always vary from actual
results,  and the differences  between assumed facts or bases and actual results
can be material,  depending on the circumstances.  Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future  results,  such  expectation  or belief is expressed in good faith and
believed to have a  reasonable  basis,  but there can be no  assurance  that the
statement of expectation or belief will result, or be achieved or accomplished.

       Taking into  account the  foregoing,  the  following  are  identified  as
important  risk  factors  that could cause  actual  results  with respect to the
Company's Year 2000 compliance to differ  materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:

                                       19
<PAGE>


     o   The dates on which the Company believes the Project will be completed
and the System will be implemented  are based on  management's  best  estimates,
which were derived utilizing  numerous  assumptions of future events,  including
the continued availability of certain resources,  third-party modification plans
and other factors.  However, there can be no guarantee that these estimates will
be achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the Project.

     o   A delay in the implementation  of the System could impact the Company's
readiness for  transactions  involving the Euro currency in connection  with the
Company's European sales activities.

     o   Other  specific factors  that  might  cause  differences   between  the
estimates and actual results  include,  but are not limited to, the availability
and cost of personnel  trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers,  the ability to implement  interfaces between the new systems and
the systems not being replaced, and similar uncertainties.

     o   Due to the  general  uncertainty inherent  in the  Year  2000  problem,
resulting  in  part  from  the   uncertainty  of  the  Year  2000  readiness  of
third-parties and the  interconnection of global businesses,  the Company cannot
ensure its ability to timely and  cost-effectively  resolve problems  associated
with the Year 2000 issue that may materially and adversely affect its operations
and business, or expose it to third-party liability.


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 and the Company's
ability  to  achieve  Year  2000  compliance  on a timely  basis  as more  fully
described above.


                                       20
<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, 1999.

ITEM 2.       CHANGES IN SECURITIES

       None

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

         At  June  30,  1999,  the  Company  was in  violation  of  the  payment
provisions  of a term note payable to a contract  manufacturer  in the amount of
$1,282,981.  The Company is in negotiation with the holder to amend the terms of
the note. The note is secured by certain  inventory  manufactured by the holder.
In addition, Mr. Thomas L. Massie, President and CEO of the Company,  personally
guaranteed  payment  of this term note up to an amount  not to exceed  $600,000.
However, the holder of the note defers recourse on the guarantee provision until
December 31, 1999. As of August 16, 1999,  the unpaid  arrearge of principal and
interest totaled $1,282,981.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE

       On June 25, 1999,  the Board of  Directors  caused to be  distributed  to
stockholders  of record as of June 21,  1999,  a Notice  of  Annual  Meeting  of
Stockholders,  Proxy and Proxy Statement for the Annual Meeting held on July 26,
1999.  As of the record date,  18,608,898  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 I directors;  (II)  approval of FOCUS  Enhancements,  Inc.
Employee Stock Purchase Plan; (III) approval of 1998 Non-qualified  Stock Option
Plan;  (IV) approval of Amendment to  Certificate of  Incorporation  to increase
authorized  shares of common stock;  and (V)  ratification of the firm of Wolf &
Company, P.C. as independent auditors. All of the above matters were approved by
the shareholders.

         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:
<TABLE>
<CAPTION>

                                             FOR        AGAINST       WITHHOLD       BROKER NON-VOTES
                                             ---        -------       --------       ----------------
    <S>                                  <C>            <C>          <C>              <C>

     I.  Election of Class I Directors

           Thomas L. Massie               15,790,078       --          570,947              --
           John C. Cavalier               15,790,078       --          570,947              --

     II.   Approval of Employee
           Stock Option Plan               4,965,216     661,587       116,050          10,618,172

     III.  Approval of 1998 Non-
           Qualified Stock Option
           Plan                            4,510,032   1,121,845       110,976          10,618,172

                                       21
<PAGE>
<CAPTION>

                                             FOR        AGAINST       WITHHOLD       BROKER NON-VOTES
                                             ---        -------       --------       ----------------
    <S>                                  <C>            <C>          <C>                 <C>

     IV.   Approval to Amend Certificate
           of Incorporation               14,944,296   1,244,535       172,194             --

     V.    Ratification of
           Independent Auditors           15,908,857     244,443       227,725             --
</TABLE>

ITEM 5.       OTHER INFORMATION

Sale of Common Stock

       On June 4, 1999,  the  Company  completed a  financing  of  approximately
$1,200,000 in gross  proceeds from the sale of 1,200,000  shares of Common Stock
and warrants to purchase  120,000 of common  stock in a private  placement to an
unaffiliated  accredited  investor.  The warrants are exercisable until June 30,
2004 at an exercise  price of  $1.478125.  The  Registration  Statement for the
shares to be issued  in  connection  with this  transaction  and  issuable  upon
exercise of the  warrants  under the  Securities  Act of 1933 was filed June 21,
1999. The Company will receive proceeds from this transaction in two tranches of
$600,000,  less applicable fees. The first tranche for 600,000 shares was funded
on June 14,  1999 for  $600,000  less  fees and  expenses  associated  with this
offering of $60,897  yielding net proceeds of $539,103.  The second  tranche for
600,000 shares valued at $600,000 less  applicable  fees will be funded upon the
approval of the Registration Statement filed on June 21, 1999.

Closure of FOCUS Enhancements B.V.

         On July 26, 1999, in a continued  effort to consolidate  operations and
reduce  expenses,  the Company closed its European  sales office in Leiden,  The
Netherlands.  In  conjunction  with this  closure,  the  Company  dissolved  its
subsidiary FOCUS  Enhancements  B.V. The cost of closing the European  operation
totaled approximately $53,000.

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

a.       The following exhibits are filed herewith:


         11.       Statement Re: Computation of Per Share Earnings

b.       Reports on Form 8-K

         The Company  did not file any  reports on Form 8-K  reports  during the
quarter ended June 30, 1999.

                                       22
<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.




     January 9, 2002            By:  \s\  Michael D'Addio
                                   -----------------------------
                                        Michael D' Addio
                                   Chief Executive Officer and
                                            President
                                  (Principal Executive Officer)



     January 9, 2002            By:   \s\  Gary Williams
                                   -----------------------------
                                          Gary Williams
                                    Vice President of Finance
                                            and CFO
                                  (Principal Accounting Officer)



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