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, 1997

      [  ] 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 September 30, 1997,  there were  outstanding  13,816,516  shares of Common
Stock, $.01 par value per share.



<PAGE>

                            FOCUS ENHANCEMENTS, INC.
                                   FORM 10-QSB

                                QUARTERLY REPORT
                               September 30, 1997

                                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, 1997
           and December 31, 1996                                        3
                                       
           Consolidated Statements of Operations
           for the Three Months Ended September 30, 1997
           and 1996                                                     4
                           
           Consolidated Statement of Operations
           for the Nine Months Ended September 30, 1997
           and 1996                                                     5

           Consolidated Statements of Cash Flows
           for the Nine Months Ended September 30, 1997
           and 1996                                                     6

           Notes to Consolidated Financial Statements                  7-10

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations                        11-19

PART II. OTHER INFORMATION

     Item 1. Legal Proceedings                                           20
     Item 2. Changes in Securities                                       20
     Item 3. Defaults Upon Senior Securities                             20
     Item 4. Submission of Matters to a Vote of Security Holders         20
     Item 5. Other Information                                           20
     Item 6. Exhibits and Reports on Form 8-K                            21

SIGNATURES                                                               22

                                       2

<PAGE>
<TABLE>
<CAPTION>

                                            FOCUS ENHANCEMENTS, INC.
                                           CONSOLIDATED BALANCE SHEETS
                                                   (UNAUDITED)


                                                     ASSETS

                                                                                  September 30,     December 31,
                                                                                       1997            1996
                                                                                 --------------    -------------
<S>                                                                               <C>            <C>
Current Assets:
     Cash and cash equivalents                                                     $  2,492,705    $    413,894
     Securities - Available for Sale                                                    595,000            --
     Accounts receivable, net of allowances of $802,494 and $488,605                  7,728,398       3,213,565
     Inventories                                                                      2,582,754       1,975,381
     Prepaid expenses and other current assets                                          415,245         243,829
                                                                                   ------------    ------------
       Total current assets                                                          13,814,102       5,846,669

Property and equipment, net                                                             970,493         483,591
Other assets, net                                                                       154,982         110,001
Goodwill, net                                                                         1,304,089       1,467,106

                                                                                   ------------    ------------
       Total assets                                                                $ 16,243,666    $  7,907,367

                                                                                   ============    ============

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable                                                                 $  2,249,122    $  2,517,458
     Obligations under capital leases                                                   136,718         124,132
     Accounts payable                                                                 5,225,828       3,584,284
     Accrued liabilities                                                              1,042,092         628,304
                                                                                   ------------    ------------
       Total current liabilities                                                      8,653,760       6,854,178

Deferred Income                                                                          84,212              --
Obligations under capital leases                                                         87,908          80,666
                                                                                   ------------    ------------

       Total liabilities                                                              8,825,880       6,934,844
                                                                                   ------------    ------------

Commitments

Stockholders' equity
     Preferred stock, $.01 par value;  3,000,000 shares authorized;  none issued
     Common stock, $.01 par value; 25,000,000 shares authorized,
       13,816,516 and 11,301,845 shares issued and outstanding at
       September 30, 1997 and December 31, 1996 respectively                            138,165         113,018
     Additional paid-in capital                                                      27,043,064      21,285,037
     Accumulated deficit                                                            (19,763,443)    (20,425,532)
                                                                                   ------------    ------------
       Total stockholders' equity                                                     7,417,786         972,523
                                                                                   ------------    ------------

       Total liabilities and stockholders' equity                                  $ 16,243,666    $  7,907,367
                                                                                   ============    ============

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


                                                       3
<PAGE>
                            FOCUS ENHANCEMENTS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


                                                 Three Months Ended
                                           September 30,     September 30,
                                               1997              1996
                                           ------------      -------------
                                                           
Net sales                                  $ 6,913,013       $ 3,327,228
Cost of goods sold                           4,764,299         3,479,135
                                           -----------       -----------
      Gross profit (loss)                    2,148,714          (151,907)
                                           -----------       -----------
                                                           
Operating expenses:                                        
      Sales, marketing and support           1,147,392           940,860
      General and administrative               525,361         1,960,508
      Research and development                 331,318           532,319
      Purchased research and development            --         2,000,000     
                                           -----------       -----------
          Total operating expenses           2,004,071         5,433,687
                                           -----------       -----------
                                                           
Income (loss) from operations                  144,643        (5,585,594)

Interest expense, net                          (72,466)          (65,504)
Other income (expense)                         351,279                --  
                                           -----------       -----------
                                                           
Income before income taxes                     423,456        (5,651,098)

Income tax expense                               9,550             6,541
                                           -----------       -----------
Net income (loss)                          $   413,906       $(5,657,639)
                                           ===========       ===========
                                                           
Net income (loss) per common share                         
          Primary                          $      0.03       $     (0.60)
                                           ===========       ===========
          Fully Diluted                    $      0.03       $     (0.60)
                                           ===========       ===========
                                                           
Weighted average common and common                      
      equivalent shares outstanding
          Primary                           14,582,324         9,476,462
                                           ===========       ===========
          Fully Diluted                     15,172,554         9,476,462
                                           ===========       ===========

               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
                                              Sept 30,          Sept 30,
                                                1997              1996
                                           ------------       ------------

Net sales                                  $ 17,839,430       $ 11,498,362
Cost of goods sold                           12,089,949         11,193,421
                                           ------------       ------------
      Gross profit                            5,749,481            304,941
                                           ------------       ------------
                                                             
Operating expenses:                                          
      Sales, marketing and support            3,112,609          2,917,645
      General and administrative              1,384,928          3,192,833
      Research and development                  763,156          1,150,260
      Purchased research and development           --            2,000,000
                                           ------------       ------------
          Total operating expenses            5,260,693          9,260,738
                                           ------------       ------------
                                                             
Income (loss) from operations                   488,788         (8,955,797)

Interest expense, net                          (209,109)          (235,607)
Other income (expense)                          395,110            (12,792)
                                           ------------       ------------
                                                             
Income (loss) before income taxes               674,789         (9,204,196)

Income tax expense                               12,700             16,541
                                           ------------       ------------
Net income (loss)                          $    662,089       $ (9,220,737)
                                           ============       ============
                                                             
Net income (loss) per common share                           
          Primary                          $       0.05       $      (1.09)
                                           ============       ============
          Fully Diluted                    $       0.05       $      (1.09)
                                           ============       ============

Weighted average common and common
      equivalent shares outstanding
          Primary                            12,787,591          8,477,011
                                           ============       ============
          Fully Diluted                      13,031,965          8,477,011
                                           ============       ============

               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,
                                                                              1997                1996
                                                                         --------------      --------------
<S>                                                                      <C>                 <C>

Cash flows from operating activities:
      Net income (loss)                                                  $   662,089         $(9,220,737)
      Adjustments to reconcile net income (loss) to net cash used in
         operating activities:
         Depreciation and amortization                                       301,267           1,747,824
         Purchased research and development                                       --           2,000,000
         Gain on forgiveness of accounts payable                            (125,427)                 --
         Deferred Income                                                      84,212                  --
         Changes in operating assets and liabilities:
              (Increase) decrease in accounts receivable                  (4,514,833)         (2,997,584)
              (Increase) decrease in notes receivable                             --             (37,957)
              (Increase) decrease in marketable securities                  (595,000)                 --
              Decrease (increase) in inventories                            (607,373)            108,950
              Decrease (increase) in prepaid expenses and other assets      (217,546)            109,361
              Increase (decrease) in accounts payable                      1,766,971           1,697,341
              Increase (decrease) in accrued liabilities                     413,788           1,025,616
                                                                         -----------         -----------

         Net cash used in operating activities                            (2,831,852)         (5,567,186)
                                                                         -----------         -----------

Cash flows from investing activities:
      Purchase of property and equipment                                    (534,932)            (78,207)
      Net proceeds from sale of fixed assets                                     800                  --
      Net proceeds from acquisition of TView, Inc.                                --              27,248
                                                                         -----------         -----------

         Net cash used in investing activities                              (534,132)            (50,959)
                                                                         -----------         -----------

Cash flows from financing activities:
      Payments on notes payable                                             (268,336)         (1,090,000)
      Payments under capital lease obligations                               (70,043)           (117,986)
      Net proceeds from private offerings of common stock                  5,650,099           4,363,538
      Net proceeds from exercise of common stock options and warrants        133,075             994,766
                                                                         -----------         -----------

         Net cash provided by financing activities                         5,444,795           4,150,318
                                                                         -----------         -----------

Net increase (decrease) in cash and cash equivalents                       2,078,811          (1,467,827)

Cash and cash equivalents at beginning of period                             413,894           2,140,043
                                                                         -----------         -----------

Cash and cash equivalents at end of period                               $ 2,492,705         $   672,216
                                                                         ===========         ===========


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

                                                     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,  1997 and for the three and nine month  periods
ended  September  30,  1997  and  1996  are  unaudited  and  should  be  read in
conjunction with the consolidated financial statements and notes thereto for the
year ended  December 31, 1996  included in the  Company's  Annual Report on Form
10-KSB  for the  year  ended  December  31,  1996.  The  consolidated  financial
statements include the accounts of the Company and its wholly owned subsidiaries
Lapis  Technologies,  Inc.,  TView,  Inc.,  FOCUS  Enhancements  b. v. and Focus
Networking,  Inc.  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 month periods ended
September  30, 1997 are not  necessarily  indicative  of the results that may be
expected for any future period.

2.       RESTATEMENT OF FINANCIAL STATEMENTS

         The Company issued its financial statements for the year ended December
31, 1996 in its annual  report on Form  10-KSB,  filed with the  Securities  and
Exchange Commission ("SEC") on March 31, 1997. The financial  statements for the
year ended  December 31, 1996 included the sale in the fourth quarter of 1996 of
certain   graphics/connectivity   and  other  products  to  a  barter   exchange
organization in exchange for $1,700,000 in value of barter credits.  As a result
of a review of the Company's financial  statements conducted by The Nasdaq Stock
Market in August  1997,  the  Company  concluded  that its  recording  of barter
credits  totaling  approximately  $1.2 million as "Other Assets" at December 31,
1996 was inconsistent with generally accepted accounting principles. The Company
had recorded the barter credits as an asset based on the estimated fair value of
the inventory exchanged which was determined by management's  interpretation and
application of the accounting literature. The Nasdaq Stock Market disagreed with
management's  application  of the  accounting  literature,  and as a result,  in
October  1997 the  Company  reduced  the amount  originally  reported  as "Other
Assets" by  approximately  $1.2  million on its  Consolidated  Balance  Sheet at
December 31, 1996.

         In addition,  the Company also recorded at December 31, 1996 additional
reserves,  totaling  approximately  $400,000,  for potential stock balancing and
other product return transactions.  Although the Company provided allowances for
potential uncollectible amounts,  estimated future returns,  exchanges and price
protection  credits  prior to the  restatement,  it did not  provide for returns
resulting from stock balancing  transactions  as required by generally  accepted
accounting principles.  As a result of the Company's discussions with the NASDAQ
Stock Market,  management  agreed to provide  additional  reserves for estimated
returns  resulting  from stock  balancing  transactions  and amended its revenue
recognition accounting policy.

         The impact of the  restatement  on the Company's  Consolidated  Balance
Sheet as of December 31, 1996 is summarized as follows:

                                                Year Ended December 31, 1996
                                               -------------------------------
                                                    As                 As
                                                 Reported           Restated

Accounts receivable                            $  3,613,565     $  3,213,565
Total current assets                              6,246,669        5,846,669
Other assets, net                                 1,273,980          110,001
Total assets                                      9,471,346        7,907,367
Accumulated deficit                             (18,861,553)     (20,425,532)
Total stockholders' equity                        2,536,502          972,523
Total liabilities and stockholders' equity        9,471,346        7,907,367


3.       ACCOUNTING POLICY

         Securities-Available For Sale 

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


                                       7
<PAGE>

4.       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.

          In February  1997,  the Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards No. 128 - Earnings Per Share. This
Statement  is effective  for  financial  statements  for both interim and annual
periods  ending after December 15, 1997.  Earlier  application is not permitted.
However,  an entity is permitted to disclose pro forma  earnings per share (EPS)
amounts  computed using this Statement in the notes to the financial  statements
in periods  prior to required  adoption.  After the  effective  date,  all prior
period EPS data  presented  shall be restated to conform with the  provisions of
this Statement.

         The  Company has  elected to  disclose  pro forma EPS amounts  computed
using this Statement, as follows:
<TABLE>
<CAPTION>
                                                   Three Months Ended September 30,
                                -----------------------------------------------------------------------
                                                1997                                   1996
                                                ----                                   ----
                                       Shares            Per Share           Shares            Per Share
                                                          Amount                                 Amount
       <S>                          <C>                   <C>              <C>                 <C>
        Basic EPS                    14,582,324            $.03             9,476,462            $(.60)
                                     ==========            ====             =========            =====

        Diluted EPS                  15,172,554            $.03             9,476,462            $(.60)
                                     ==========            ====             =========            =====
<CAPTION>
                                                   Nine Months Ended September 30,
                                -----------------------------------------------------------------------
                                                1997                                   1996
                                                ----                                   ----
                                       Shares            Per Share           Shares            Per Share
                                                          Amount                                 Amount
       <S>                          <C>                   <C>              <C>                 <C>
        Basic EPS                    12,787,591            $.05             8,477,011           $(1.09)
                                     ==========            ====             =========            =====

        Diluted EPS                  13,031,965            $.05             8,477,011           $(1.09)
                                     ==========            ====             =========            =====
</TABLE>

5.       INCOME TAXES

         The  Company has  utilized  its net  operating  loss  carryforwards  in
estimating  its  provision  for income taxes in the three and nine month periods
ended September 30, 1997.

                                       8
<PAGE>

6.       INVENTORIES

         Inventories consist of the following:


                          September 30,        December 31,
                              1997                1996
                          -------------        ------------

Finished goods             $1,883,196           $1,555,812
Raw materials                 699,558              419,569
                           ----------           ----------
                           $2,582,754           $1,975,381
                           ==========           ==========

7.       NOTES PAYABLE

         Lines of Credit,  Banks.  The Company  maintains  a  revolving  line of
credit with a bank,  which is fully drawn as of September  30, 1997.  Borrowings
under the line are  payable  upon  demand and are  collateralized  by all of the
assets of the Company, except as noted below.  Borrowings,  aggregating $750,000
at September  30, 1997,  bear interest at the bank's prime rate plus 1% (9.5% at
September 30, 1997) and are personally guaranteed by an investor. In March 1997,
the line of credit was extended to March 8, 1998.

         On September 18, 1997, the Company repaid another line of credit in the
amount of $197,458, plus accrued interest.

         Term Line of Credit. At September 30, 1997, the Company owed $1,500,000
to an unrelated  individual  under a term line of credit  originated  in October
1994 in the principal amount of $2,500,000.  Borrowings under the line of credit
were made  pursuant to a promissory  note that was due on March 31, 1997 and was
not  paid.  The  Company  is in the  process  of  renegotiating  the  terms  and
expiration date of this loan with the lender. In the event that the unaffiliated
lender does not extend the due date,  the  Company  would be required to pay the
amounts outstanding from working capital or from equity or debt financing.

8.       SALE OF NETWORKING DIVISION

         Effective  September  30,  1997,  the Company sold its line of computer
connectivity  products to Advanced  Electronic  Support  Products,  Inc. (AESP).
Consideration  for this purchase  totaled  189,701  shares of AESP common stock.
Included in the sale were FOCUS  Enhancements  networking  division's  U. S. and
European  customer list and the rights to use the Focus Networking brand name to
market the existing FOCUS computer  connectivity product line as well as certain
of AESP's  complementary  products.  In connection  with this  transaction,  the
Company  recorded  other  non-operating   income  in  the  amount  of  $348,727,
securities  available  for sale in the  amount of  $595,000  (discounted  15% to
reflect  restricted common stock),  and deferred income of $71,712.  In addition
the Company sold networking inventory to AESP in the amount of $159,000 at cost.

         Mr. William Coldrick,  a director of the Company, is also a director of
AESP. The Company's Board of Directors, with Mr. Coldrick abstaining,  relied on
the opinion of an independent  valuation firm in determining that the sale price
was fair to the Company from a financial point of view.

                                       9
<PAGE>

9.       COMMON STOCK TRANSACTIONS

         In January 1997,  the Company sold  approximately  75,000 shares of its
common stock,  valued at  approximately  $138,750,  in connection with a private
offering  to  foreign  investors.  This  stock is  unregistered  and  subject to
restrictions  on  trading in the United  States for a period of forty  days.  In
connection  with the  offering,  the Company paid  approximately  $26,250 to the
underwriter. Net proceeds of the private offering were approximately $112,500.

         On February 12, 1997, the Company sold approximately  218,181 shares of
common stock for gross proceeds of  approximately  $338,181 in connection with a
private offering to foreign investors. This stock is unregistered and subject to
restrictions  on  trading in the United  States for a period of forty  days.  In
connection with the offering,  the Company  incurred fees of $38,181,  receiving
net proceeds of $300,000.

         On March 27, 1997, the Company  completed a financing of  approximately
$1,650,000 in gross proceeds for the sale of  approximately  1,100,000 shares of
Common Stock in a private placement to unaffiliated  accredited  investors.  The
shares issued as part of this transaction were registered  through Form S-3 with
the  Securities  and  Exchange  Commission  on May 12,  1997.  Fees and expenses
associated  with this  offering  amounted to $76,000  yielding  net  proceeds of
$1,574,000.  In  connection  with  this  transaction,  the  Board  of  Directors
authorized  the grant of warrants  to the  Placement  Agent to purchase  110,000
shares of the  Company's  common  stock at a price per share equal to the common
stock price on the date of the closing  ($1.6875  per share)  exercisable  for a
period of five years.

         On  September   10,  1997,   the  Company   completed  a  financing  of
approximately  $3,810,000 in gross proceeds from the sale of 1,000,000 shares of
Common Stock in a private placement to the Smith Barney  Fundamental Value Fund,
Inc. In the event that the last sale price of the Company's Common Stock is less
than $3.00 per share for 20 consecutive  trading days during the 12 month period
following  the  closing,  the  Company  will also issue  seven year  warrants to
purchase  333,000  shares of Common Stock  exercisable  at $3.00 per share.  The
shares issued and issuable as part of this  transaction  will be registered on a
Form S-3  registration  statement to be filed with the  Securities  and Exchange
Commission  no later than 90 days from the closing date of the  financing.  Fees
and expenses  associated with this offering amounted to approximately  $190,000,
yielding net proceeds of $3,620,000.  In connection with this  transaction,  the
Board of Directors  authorized  the grant to the Placement  Agent of warrants to
purchase  100,000  shares  of the  Company's  Common  Stock at $6.00  per  share
exercisable for a period of five years.

10.      REDEEMABLE COMMON STOCK PURCHASE WARRANTS

         The Company has filed with the  Securities  and  Exchange  Commission a
post-effective amendment on Form S-3 to the registration statement on Form SB-2,
declared  effective  February  19, 1996  relating to the shares of Common  Stock
issuable  upon  exercise  of the  Company's  Redeemable  Common  Stock  Purchase
Warrants (the  "Warrants").  Upon being declared  effective by the Commission of
which  there can be no  assurance,  the shares  issuable  upon  exercise  of the
Warrants  will be fully  transferable  under  the  Securities  Act of  1933,  as
amended.

                                       10

<PAGE>



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

INTRODUCTION

         The  following  information  should  be read in  conjunction  with  the
consolidated  financial  statements  and notes thereto in Part I, Item 1 of this
Quarterly  Report and with  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations  contained in the Company's Annual Report on
Form 10-KSB/A-1 for the year ended December 31, 1996.

         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/A-1 for the year ended
December 31, 1996,  including,  but not limited to, the section therein entitled
"Certain Factors That May Affect Future Results."

RESULTS OF OPERATIONS

             Three-Month Period Ended September 30, 1997 As Compared
              With The Three-Month Period Ended September 30, 1996

Net Sales

         Net sales for the three-month period ended September 30, 1997 ("Q3 97")
were  $6,913,013 as compared with  $3,327,228 for the  three-month  period ended
September 30, 1996 ("Q2 96"),  an increase of $3,585,785 or 108%.  The growth in
net sales is  attributed  to orders from new  customers  and  increased  product
awareness and acceptance of the Company's PC-to-TV products.  Specifically,  net
sales in Q3 97 to the Company's US resellers  increased 194% to $2,702,000  from
$918,000  in Q3 96.  Net  sales to US  resellers  include  net  sales  totalling
$1,126,000 to Ingram Micro D ("Ingram")  representing  16% of total net sales in
Q3 97. Net sales to  international  resellers rose 34% to $752,000 from $562,000
for the same quarter in 1996. Net sales from OEM/Licensing  customers  increased
87% to  $3,459,000  in Q3 97 from  $1,847,000  for the  same  quarter  in  1996.
OEM/Licensing  revenues  include sales to SCI Systems,  Inc.  ("SCI")  totalling
$1,666,000 and sales to Zenith Electronics, Inc. ("Zenith") totalling $1,471,000
or 48% and 43% respectively,  of total  OEM/Licensing  sales. In Q3 97, sales to
Zenith  and SCI  represented  20% and 24%  respectively,  of total  sales in the
quarter as compared to 12% and 0% respectively, of total sales in Q3 96.

         As of  September  30,  1997,  the Company had a sales order  backlog of
approximately $2.7 million.



                                       11
<PAGE>

Cost of Goods Sold

         Cost  of  goods  sold  were  $4,764,299  or 69% of net  sales,  for the
three-month period ended September 30, 1997, as compared with $3,479,135 or 105%
of net sales,  for the three-month  period ended September 30, 1996, an increase
in absolute dollars of $1,285,164 or 37%. The Company's gross profit margins for
Q3 97 and Q3 96 were 31% and (5)%,  respectively.  The increase in cost of goods
sold in absolute dollars is due principally to the increased sales volume of the
Company's  PC-to-TV  products.  Cost of  goods  sold as of  September  30,  1996
included approximately $300,000 of inventory refurbishment costs 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.

Sales, Marketing and Support Expenses

         Sales,  marketing and support  expenses were $1,147,392 or 16.5% of net
sales,  for the  three-month  period ended  September 30, 1997, as compared with
$940,860,  or 28% of net sales,  for the three-month  period ended September 30,
1996,  an increase of $206,532 or 22%. The  increase in absolute  dollars is due
primarily to increased  sales  commissions  as a result of increased  sales from
period to period and, an increase in  advertising  and trade show events as well
as increased domestic channel expansion efforts.

General and Administrative Expenses

         General and  administrative  expenses for the three-month  period ended
September  30,  1997  were  $525,361  or 7.5% of net  sales,  as  compared  with
$1,960,508,  or 59% of net sales for the three-month  period ended September 30,
1996, a decrease of $1,435,147  or 73%. The decrease in absolute  dollars is due
primarily  to a Q3 96 write  down of  intangibles  of  approximately  $1,237,000
associated with the Company's prior acquisitions of Lapis and Inline.

Research and Development Expenses

         Research  and  development  expenses for the  three-month  period ended
September 30, 1997 were $331,318,  or 5% of net sales,  as compared to $532,319,
or 16% of net sales, for three-month period ended September 30, 1996, a decrease
of $201,001 or 38%. The decrease is due  principally to reductions in consulting
expenses of $67,000,  product  refurbishment  costs of $100,000,  and other cost
reductions initiated by management.

Purchased Research and Development

         On September 30, 1996, the Company  completed its acquisition of TView,
Inc. in a purchase transaction for approximately $2,570,000.  The Company issued
$2,000,000 in FOCUS Enhancements,  Inc. 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  for
in-process research and development for the technology purchased.

Interest Expense, Net

         Net interest  expense for the  three-month  period ended  September 30,
1997 was  $72,466,  or 1% of net sales,  as compared  to  $65,504,  or 2% of net
sales,  for the  three-month  period ended  September  30, 1996,  an increase of
$6,692, or 10%. The increase is primarily  attributable to fees incurred for the
extension of the Company's revolving line of credit.

                                       12
<PAGE>

Other Income (Expense)

         Other Income  (Expense) for the three-month  period ended September 30,
1997 was $351,279 as compared to $0, for the three-month  period ended September
30, 1996. Other income includes  $55,224 for certain  forgiveness of vendor debt
and  $348,727  from the sale of the  Company's  networking  division  offset  by
$52,672 of other expenses.

Net Income

         For the quarter  ended  September  30, 1997,  the Company  reported net
income  of  $413,906,  or  $0.03  per  share,  as  compared  to a  net  loss  of
$(5,657,639), or $(.60) per share, for the quarter ended September 30, 1996.

Results of Operations

             Nine-Month Period Ended September 30, 1997 As Compared
               With The Nine-Month Period Ended September 30, 1996

Net Sales

         Net sales for the nine-month  period ended  September 30, 1997 (the "97
Period") were $17,839,430 as compared with $11,498,362 for the nine-month period
ended  September 30, 1996 (the "96  Period"),  an increase of $6,341,068 or 55%.
The growth in net sales is  attributable  primarily  to  increased  orders  from
global  reseller  customers  as a result  of  increased  product  awareness  and
acceptance of the Company's  PC-to-TV products.  Specifically,  in the 97 Period
net  sales to the  Company's  US  resellers  increased  72% to  $9,138,000  from
$5,321,000  in the 96  Period.  Net  sales to US  resellers  include  net  sales
totalling  $3,969,000  to Ingram  representing  22% of total net sales in the 97
Period.  In the 96 Period,  net sales to Ingram  totalled  $1,741,000  or 15% of
total net sales. Net sales to international  resellers in the 97 Period declined
(3)% to $2,170,000  from  $2,229,000 for the same period in 1996. Net sales from
OEM/Licensing  customers  increased  65% to  $6,531,000  in the 97  Period  from
$3,948,000 for the same period in 1996. The increase in  OEM/Licensing  revenues
reflects  primarily  the  increase in sales to SCI and to Apple  Computer,  Inc.
("Apple") during Q2 and Q3 97 and to Zenith during Q3 97. In the 97 Period,  net
sales to SCI  represented  19% of total net sales as compared to no sales during
the comparable period in 1996. In the 97 Period, net sales to Zenith represented
11% of the Company's  revenues as compared to 28% of revenues in the  comparable
period in 1996.

Cost of Goods Sold

         Cost of  goods  sold  were  $12,089,949  or 68% of net  sales,  for the
nine-month  period ended September 30, 1997, as compared with $11,193,421 or 97%
of net sales, for the nine month period ended September 30, 1996, an increase of
$896,528 or 8%. The cost of goods sold for  September  30, 1996 includes a write
down and  refurbishment of inventory,  in the amount of approximately  $700,000,
related to the Company's  graphics/connectivity products for the Apple PowerBook
190 and 5300.  The Company's  gross profit  margins for the 97 Period and the 96
Period were 32% and 3% of net sales,  respectively.  The gross profit margin for
the 97 Period  represents the approximate  margins  achievable for the Company's
PC-to-TV  products  with the  present mix of sales to global  resellers  and OEM
accounts.

Sales, Marketing and Support Expenses

         Sales,  marketing and support  expenses  were  $3,112,609 or 17% of net
sales,  for the  nine-month  period ended  September  30, 1997, as compared with
$2,917,645 or 25% of net sales,  for the nine-month  period ended  September 30,
1996,  an increase of  $194,964 or 7%. The  increase in absolute  dollars is due
primarily to the combination of increased  payroll  expenses for domestic sales,
marketing  and customer  service  departments  and  increased  sales  commission
expenses as a result of increased sales from period to period  partially  offset
by  decreased  costs in  direct  display  advertising,  mail  order  promotional
expenditures, and trade show events.

                                       13
<PAGE>


General and Administrative Expenses

         General and  administrative  expenses for the  nine-month  period ended
September  30,  1997  were  $1,384,928  or 8% of net  sales,  as  compared  with
$3,192,833  or 28% of net sales for the  nine-month  period ended  September 30,
1996, a decrease of  $1,807,905 or 57%. The decrease is due primarily to a Q3 96
write  down of  intangibles  of  approximately  $1,273,000  associated  with the
Company's acquisition of Lapis and Inline, and a reduction in 1997 audit, legal,
consulting, and utilities, of approximately $350,000.

Research and Development Expenses

         Research  and  development  expenses  for the  nine-month  period ended
September 30, 1997 were $763,156, or 4% of net sales, as compared to $1,150,260,
or 10% of net sales,  for the  nine-month  period  ended  September  30, 1996, a
decrease of $387,104 or 34%. The decrease is due  principally  to a reduction in
consulting  expenses of $110,000,  product  refurbishment  of $100,000,  product
tooling  and  testing  of  $67,000  and other net  reductions  in  company  wide
engineering costs.  During the nine months ended September 1997, FOCUS completed
the  development of the ASIC relating to the Company's  PC-to-TV  products.  The
engineering  in-process  costs to manufacture the ASIC masks during this period,
amounting to approximately  $220,000, have been capitalized as a fixed asset and
will be amortized over the expected life of the ASIC technology,  with licensing
and product revenues.

Purchased Research and Development

         On September 30, 1996, the Company  completed its acquisition of TView,
Inc. in a purchase transaction for approximately $2,570,000.  The company issued
$2,000,000 in FOCUS Enhancements,  Inc. 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  for in
process research and development for the technology purchased.

Interest Expense, Net

         Net interest expense for the nine-month period ended September 30, 1997
was $209,109,  or 1.2% of net sales, as compared to $235,607 or 2% of net sales,
for the nine-month  period ended  September 30, 1996, a decrease of $26,490,  or
11%.  Interest expense decreased in absolute dollars due to the reduction in the
principal  amount  outstanding  of a note payable to an unrelated  investor from
$2.5  million  to $1.5  million  during Q1 96, and due to the  reduction  of the
Company's  line of credit from  $900,000 at September 30, 1996 to $750,000 as of
September 30, 1997. 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.

Other Income (Expense)

         For the  nine-month  period  ended  September  30,  1997,  the  Company
realized other income of $395,110,  primarily as a result of the recognized gain
on  the  sale  of  the  Company's  networking  division  for  $348,727  and  the
recognition  of  vendor  forgiveness  of  $125,427  offset by  $79,044  of other
expenses.  For the nine month  period  ended  September  30,  1996,  the Company
incurred other expenses of $(12,792).

Net Income (Loss)

         For the nine months ended September 30, 1997, the Company  reported net
income  of  $662,089,  or  $0.05  per  share,  as  compared  to a  net  loss  of
$(9,220,737), or $(1.09) per share, for the same period in 1996.

                                       14
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Net cash used in operating  activities for the nine-month  period ended
September 30, 1997 and 1996 was $2,831,832 and $5,567,186,  respectively. In the
97 Period,  net cash used in  operating  activities  consisted  primarily  of an
increase in accounts  receivable  and  inventory  of  $4,514,833  and  $607,373,
respectively.  This was offset by an increase in accounts payable of $1,766,971,
depreciation and amortization  (non-cash charge) of $301,267,  and net income of
$662,089.  As  of  September  30,  1997,  Ingram,  Zenith  and  SCI  represented
approximately 31%, 19% and 13%,  respectively,  of accounts receivable.  For the
same period in 1996,  net cash used in operations  consisted  primarily of a net
loss of $(9,220,737) and an increase in accounts  receivable of $2,997,584.  The
1996 uses were  partially  offset by  increased  accounts  payable  and  accrued
liabilities    totaling    $2,722,957    as    well    as    depreciation    and
amortization/non-cash charge of $1,747,824.

         Net cash used in investing  activities  for the nine month period ended
September  30, 1997 and 1996 was $534,132 and $50,959,  respectively  due to the
purchase of property and equipment.

         Net cash from  financing  activities  for the  nine-month  period ended
September 30, 1997 and 1996 was $5,444,795 and $4,150,318,  respectively. In the
97  Period,  the  Company  received  $5,650,099  in net  proceeds  from  private
offerings of Common Stock and $133,075 from the exercise of common stock options
and warrants.  The Company's financing proceeds were offset by payments on notes
payable and capital lease obligations. During Q3 97, the Company repaid $197,458
on another  revolving  line of credit.  In the same period in 1996,  the Company
received  $4,363,538 in net proceeds from private  offerings of Common Stock and
$994,766  from the  exercise of common  stock  options and  warrants.  The Q3 96
financing  proceeds  were offset by  $1,207,986 in payments on notes payable and
capital lease obligations.

         As  of  September  30,  1997,  the  Company  had  working   capital  of
$5,160,342,  as compared to a working  capital  deficiency  of  $(1,007,509)  at
December  31, 1996,  an increase of  $6,167,851.  The  Company's  cash  position
increased to $2,492,705 at September  30, 1997,  an increase of  $2,078,811,  or
502%, over amounts at December 31, 1996.

         On January 15, 1997,  the Company sold  approximately  75,000 shares of
its Common Stock for gross  proceeds of  approximately  $138,750,  in connection
with a private  offering to foreign  investors.  This stock is unregistered  and
subject to  restrictions  on trading in the United  States for a period of forty
days. In connection with the offering, the Company paid approximately $26,250 to
the  underwriter.  Net  proceeds  of the  private  offering  were  approximately
$112,500.

         On February 12, 1997, the Company sold approximately  218,181 shares of
common stock for gross proceeds of  approximately  $338,181 in connection with a
private offering to foreign investors. This stock is unregistered and subject to
restrictions  on  trading in the United  States for a period of forty  days.  In
connection with the offering, the Company incurred fees of $38,181 receiving net
proceeds of $300,000.

         On March 27, 1997, the Company  completed a financing of  approximately
$1,650,000 in gross proceeds for the sale of  approximately  1,100,000 shares of
Common Stock in a private placement to unaffiliated  accredited  investors.  The
shares issued as part of this transaction were registered  through Form S-3 with
the  Securities  and  Exchange  Commission  on May 12,  1997.  Fees and expenses
associated  with this  offering  amounted to $76,000  yielding  net  proceeds of
$1,574,000.  In  connection  with  this  transaction,  the  Board  of  Directors
authorized  the grant of warrants  to the  Placement  Agent to purchase  110,000
shares of the  Company's  common  stock at a price per share equal to the common
stock price on the date of the closing  ($1.6875  per share)  exercisable  for a
period of five years.


                                       15
<PAGE>

         On  September   10,  1997,   the  Company   completed  a  financing  of
approximately  $3,810,000 in gross proceeds from the sale of 1,000,000 shares of
Common Stock in a private placement to the Smith Barney  Fundamental Value Fund,
Inc. In the event that the last sale price of the Company's Common Stock is less
than $3.00 per share for 20 consecutive  trading days during the 12 month period
following  the  closing,  the  Company  will also issue  seven year  warrants to
purchase  333,000  shares of Common Stock  exercisable  at $3.00 per share.  The
shares issued and issuable as part of this  transaction  will be registered on a
Form S-3  registration  statement to be filed with the  Securities  and Exchange
Commission  no later than 90 days from the closing date of the  financing.  Fees
and expenses  associated with this offering amounted to approximately  $190,000,
yielding net proceeds of $3,620,000.  In connection with this  transaction,  the
Board of Directors  authorized  the grant to the Placement  Agent of warrants to
purchase  100,000  shares  of the  Company's  Common  Stock at $6.00  per  share
exercisable for a period of five years.

         Although  the  Company  has  been  successful  in the  past in  raising
sufficient  capital to fund its  operations,  there can be no assurance that the
Company will achieve sustained  profitability or obtain sufficient  financing in
the  future to provide  the  liquidity  necessary  for the  Company to  continue
operations.

         As of September  30, 1997,  the Company has an  accumulated  deficit of
approximately  $19.8 million.  The report of the independent  accountants on the
Company's  financial  statements as of and for the year ended  December 31, 1996
included 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  1997  operating  plan,   including  the  achievement  of  sustained
profitability,  and obtaining additional sources of financing. In 1995 and 1996,
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 expanding its distribution and reseller channels, limiting inventory
levels and reducing operating costs. In 1997, the Company expects to continue to
use  this  business   model.   The  Company's   ability  to  achieve   continued
profitability in 1997 is dependent upon its securing  additional  contracts from
OEM partners such as Apple and Zenith,  increasing revenues through its domestic
and  international  distributors  and reducing  expenses as a percentage  of net
sales.  The  Company  does not  have any  significant  commitments  for  capital
expenditures.  Management anticipates that expected funds to be generated during
1997  through its  present  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.

         At December  31,  1996,  the Company was in  violation  of certain debt
covenants  relating to the line of credit  with its  commercial  bank.  In March
1997, the Company received a waiver of the covenants from the commercial bank, a
revision of the loan  covenants  and an agreement to extend the line until March
1998. In addition,  the Company is currently  negotiating  with its unaffiliated
lender to extend the March 1997 due date for the $1.5 million note payable which
was in default as of the date of this report. In the event that the unaffiliated
lender does not extend the due date,  the  Company  would be required to pay the
amounts outstanding from working capital or from an equity or debt financing.


Effects of Inflation and Seasonality

         The Company believes that inflation has not had a significant impact on
the  Company's  sales or operating  results.  The  Company's  business  does not
experience  substantial  variations  in revenues or operating  income during the
year due to seasonality.

Environmental Liability

         The Company has no known environmental violations or assessments.

                                       16
<PAGE>


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 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.

         Future  Capital  Needs.  At September 30, 1997, the Company had working
capital of  $5,160,342,  cash and cash  equivalents  of $2,492,705 and was fully
drawn on its line of credit (approximately  $750,000 at September 30, 1997) with
its  bank  and  its  $1.5  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.  During 1996, the Company
received approximately $6,116,000 in net proceeds from the exercise of warrants,
stock options and the sale of Common  Stock.  During the nine month period ended
September  30,  1997,  the  Company  received  approximately  $5,783,174  in net
proceeds  from the  exercise of warrants,  stock  options and the 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  effectively  in  technological  and  market
developments,  and the  Company's  ability to market its products  successfully.
During  1997,  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.
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.

         Reliance on Major  Customers.  For the nine months ended  September 30,
1997, approximately 22% of the Company's revenues were derived from the sales to
Ingram Micro D ("Ingram"), approximately 19% of revenues were derived from sales
to SCI,  approximately  12% of revenues  were derived  from sales to Apple,  and
approximately  11% of revenues  were  derived  from sales to Zenith.  Management
expects  that sales to Ingram,  SCI and Zenith  will  continue  to  represent  a
significant  percentage of the Company's future  revenues.  In October 1996, the
Company  entered into a two-year  exclusive  agreement with Zenith,  under which
Zenith must purchase at least  $12,000,000  of PC-to-TV  conversion  products in
1997 and at least  $30,000,000  of these  products  in 1998 in order to maintain
exclusivity.  For the nine months ended  September 30, 1997, the Company shipped
approximately  $1,987,000 of PC-to-TV products to Zenith and projects that total
shipments  through  December 31, 1997 will be less than the $12 million contract
minimum.  As a result,  under the terms of the agreement Zenith has ceased to be
an exclusive OEM for the Company's PC-to-TV products in the television market.

                                       17
<PAGE>

         History of  Operating  Losses.  The  Company  has  experienced  limited
profitability  since its inception and at September 30, 1997, had an accumulated
deficit of $19,763,443. Although the Company reported net income of $662,089 for
the nine-month  period ended September 30, 1997,  there can be no assurance that
the Company will remain profitable during the remainder of 1997.

         The  Company's   independent  auditors  have  included  an  explanatory
paragraph in their report on the  Company's  financial  statements  for the year
ended December 31, 1996 to the effect that the Company's  ability to continue as
a going  concern is contingent  upon its ability to secure  financing and attain
profitable operations. In addition, the Company's ability to continue as a going
concern must be considered in light of the problems,  expenses and complications
frequently  encountered  by  its  entrance  into  established  markets  and  the
competitive environment in which the Company operates.

         Limited Availability of Capital under Credit Arrangements with Lenders.
The Company maintains a line of credit with Silicon Valley Bank, which was fully
drawn as of  September  30,  1997.  At  December  31,  1996,  the Company was in
violation of certain  debt  covenants  relating to the line of credit.  In March
1997,  the Company  received a waiver of the covenants from the bank, a revision
of the loan  covenants  and an agreement to extend the line until March 1998. As
of September 30, 1997, approximately $750,000 is owed to the bank under the line
of credit.

         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. 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 date 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.  The Company
is currently negotiating an additional extension with the lender, however, there
can be no assurances  that the term note will be extended on terms  favorable to
the Company.

         Market  Acceptance.  The  Company's  sales and  marketing  strategy  is
targeted to sales of its PC-to-TV video-graphics products to the Windows, MAC OS
markets,  including computer manufacturers,  VGA graphic card developers and VGA
chip developers,  as well as to television  manufacturers.  Although the Company
has to date experienced  success in penetrating  these markets,  there can be no
assurance  that the Company's  marketing  strategy will continue to be effective
and that current customers will continue to buy the Company's  products.  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
PC-to-TV video-graphics and connectivity products.

                                       18
<PAGE>

         Reliance on Single Vendor. In the nine months ended September 30, 1997,
approximately 68% of the components for the Company's  products were secured and
manufactured  on a turnkey basis by a single vendor,  Pagg  Corporation.  In the
event that the vendor was 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.

         Dependence on Timely  Delivery of the FOCUS Scan 300 Chip. In the third
quarter of 1997, the Company  completed  development of an ASIC called the FOCUS
Scan 300 Chip  which the  Company  expects to  incorporate  into all of its next
generation  PC-to-TV  video-graphics  products.  The  Company  is  relying on an
outside vendor to manufacture its  requirements  for the Chip that it intends to
ship in Q4 97. A significant portion of the Company's  anticipated  revenues and
gross  margins  for Q4 1997 are  dependent  on  timely  delivery  of  sufficient
quantities  of the FOCUS Scan 300 Chip in order to fill pending  orders.  In the
event that the Company  does not receive  sufficient  quantities  of the chip to
fill  orders,  the  Company's  revenues  and  profitability  for  1997  could be
adversely effected.

         Technological  Obsolescence.   The  Windows  and  MAC  OS  markets  are
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 make 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.

         Competition.  The Windows and MAC OS markets are extremely competitive.
The Company  currently  competes with other  developers  of PC-to-TV  conversion
products  and with  video-graphic  integrated  circuit  developers.  Many of the
Company's  competitors  have greater market  recognition 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.

         Component Supply Problems.  The Company purchases all of its parts from
outside  suppliers and from time to time  experiences  delays 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  shipment  of,  the  Company's  products,  which  in turn  could
adversely affect its results of operations.

         Protection of Proprietary  Information.  Although the Company has filed
three  patents  and is in the  process of filing two  additional  patents in the
fourth quarter of 1997 with respect to its PC-to-TV video-graphics products, the
Company does not currently  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.

                                       19

<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 nine month period ended September 30, 1997.

ITEM 2.  CHANGES IN SECURITIES

         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         In October 1994, the Company  borrowed  $2,500,000 from an unaffiliated
lender under a term note due February 1, 1996. The term note accrues interest at
the prime rate plus 2%, payable quarterly in arrears, and is collateralized by a
second  security  interest in all the assets of the Company.  At  September  30,
1997, the Company owed  $1,500,000 to the lender under the term note.  This note
was due on March 31,  1997 and was not paid.  The  Company is in the  process of
renegotiating the terms and expiration date of this loan with the lender.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None

ITEM 5.  OTHER INFORMATION

Sale of Common Stock

         On  September   10,  1997,   the  Company   completed  a  financing  of
approximately  $3,810,000 in gross proceeds for the sale of 1,000,000  shares of
Common Stock in a private placement to the Smith Barney  Fundamental Value Fund,
Inc. In the event that the last sales  price of the  Company's  Common  Stock is
less than  $3.10 per share for twenty  consecutive  trading  days  during the 12
month period  following the closing,  the Company will issue seven year warrants
to purchase  333,000 shares of Common Stock  exercisable at $3.00 per share. The
shares issued and issuable as part of this  transaction  will be registered on a
Form S-3  registration  statement to be filed with the  Securities  and Exchange
Commission  no later than 90 days from the closing date of the  financing.  Fees
and expenses  associated with this offering amounted to approximately  $190,000,
yielding net proceeds of $3,620,000.  In connection with this  transaction,  the
Board of Directors  authorized  the grant to the Placement  Agent of warrants to
purchase  100,000  shares  of the  Company's  Common  Stock at $6.00  per  share
exercisable for a period of five years.

Sale of Networking Division

         Effective  September  30,  1997,  the Company sold its line of computer
connectivity  products to Advanced  Electronic  Support  Products,  Inc. (AESP).
Consideration  for this purchase  totaled  189,701  shares of AESP common stock.
Included in the sale were FOCUS  Enhancements  networking  division's  U. S. and
European  customer list and the rights to use the Focus Networking brand name to
market the existing FOCUS computer  connectivity product line as well as certain
of AESP's  complementary  products.  In connection  with this  transaction,  the
Company  recorded  other  non-operating   income  in  the  amount  of  $348,727,
securities  available  for sale in the  amount of  $595,000  (discounted  15% to
reflect  restricted common stock),  and deferred income of $71,712.  In addition
the Company sold networking inventory to AESP in the amount of $159,000 at cost.

         Mr. William  Coldrich,  a director of the Company is also a director of
AESP. The Company's Board of Directors, with Mr. Coldrich abstaining,  relied on
the opinion of an independent  valuation firm in determining that the sale price
was fair to the Company from a financial point of view.

Restatement of Financial Statements

         The Company issued its financial statements for the year ended December
31, 1996 in its annual  report on Form  10-KSB,  filed with the  Securities  and
Exchange  Commission  ("SEC") on March 31, 1997.  The Company  issued  financial
statements  for the quarter  ended March 31, 1997 and June 30, 1997 in its Forms
10-QSB,  filed with the SEC on May 15, 1997 and August 15,  1997,  respectively.
The financial  statements for the year ended December 31, 1996 included the sale
in the  fourth  quarter  of  1996 of  certain  graphics/connectivity  and  other
products to a barter exchange organization in exchange for $1,700,000 in value

                                       20
<PAGE>

of barter credits. As a result of a review of the Company's financial statements
conducted by The Nasdaq Stock Market in August 1997, the Company  concluded that
its recording of barter credits  totaling  approximately  $1.2 million as "Other
Assets" at December 31, 1996 was inconsistent with generally accepted accounting
principles. The Company had recorded the barter credits as an asset based on the
estimated  fair  value  of the  inventory  exchanged  which  was  determined  by
management's  interpretation and application of the accounting  literature.  The
Nasdaq Stock Market  disagreed with  management's  application of the accounting
literature,  and as a result,  in October  1997 the  Company  reduced the amount
originally  reported  as "Other  Assets" by  approximately  $1.2  million on its
Consolidated Balance Sheet at December 31, 1996.

         In addition,  the Company also recorded at December 31, 1996 additional
reserves,  totaling  approximately  $400,000,  for potential stock balancing and
other product return transactions.  Although the Company provided allowances for
potential uncollectible amounts,  estimated future returns,  exchanges and price
protection  credits  prior to the  restatement,  it did not  provide for returns
resulting from stock balancing  transactions  as required by generally  accepted
accounting principles.  As a result of the Company's discussions with the NASDAQ
Stock Market,  management  agreed to provide  additional  reserves for estimated
returns  resulting  from stock  balancing  transactions  and amended its revenue
recognition accounting policy.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


a.       The following exhibits are filed herewith:


11       Statement Re: Computation of Per Share Earnings

99.1     Press  Release  dated  September  26,  1997  Regarding   Investment  by
         Travelers Group

99.2     Press  Release  dated  October  9, 1997  Regarding  Sale of  Networking
         Division

99.3     Press Release  dated,  October 20, 1997  Regarding  Restatement of 1996
         Results.


b. Reports on Form 8-K


During the quarter covered by this report,  the following report on form 8-K was
filed:


Date of Form 8-K                                  Summary of Item

September 10, 1997                   Registrant reported the sale of  1,000,000
                                     shares of the Company's Common Stock 
                                     raising gross proceeds of $3,810,000.

The Company did not file any other reports  during the quarter  ended  September
30, 1997.
                        
                                       21

<PAGE>



                                   SIGNATURES

                        

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

                                           FOCUS Enhancements, Inc.


     November 14, 1997                 By: /s/  Thomas L. Massie
                                              Thomas L. Massie
                                          Chief Executive Officer and
                                             Chairman of the Board
                                         (Principal Executive Officer)

                                                             

     November 14, 1997                 By:   /s/  Harry G. Mitchell 
                                                Harry G. Mitchell
                                              Senior Vice President,
                                       Chief Financial Officer and Treasurer
                                           (Principal Accounting Officer)

                                       22