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, 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.)


                               600 Research Drive
                              Wilmington, MA 10887
                    (Address of principal executive offices)


                                 (978) 988-5888
                           (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, 1999,  there were  outstanding  20,252,481  shares of Common
Stock, $.01 par value per share.

<PAGE>



                            FOCUS ENHANCEMENTS, INC.
                                   FORM 10-QSB

                                QUARTERLY REPORT
                               September 30, 1999

                                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, 1999
            and December 31, 1998                                            3

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

            Consolidated Statements of Operations
            for the Nine Months Ended September 30, 1999 and 1998            5
            Statement of Changes in Equity for the Nine
            Months Ended September 30, 1999                                  6

            Statement of Changes in Equity for the Nine
            Months Ended September 30, 1998                                  7

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

            Notes to Consolidated Financial Statements                    10-13
   Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                           14-20

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
         Item 5. Other Information                                          21
         Item 6. Exhibits and Reports on Form 8-K                           22


SIGNATURES                                                                  23

                                       2

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

                                                        ASSETS
                                                                                September 30,            December 31,
                                                                                     1999                    1998
                                                                               ---------------         --------------

<S>                                                                            <C>                     <C>
Current assets:
    Cash and cash equivalents                                                   $    752,046            $  1,128,380
    Certificate of deposit                                                           140,000                 253,067
    Securities available for sale                                                         --                 248,983
    Accounts receivable, net of allowances of $558,095 and $649,987 at
    September 30, 1999 and December 31, 1998, respectively                         3,510,667               2,553,139
    Inventories                                                                    3,514,949               5,948,624
    Prepaid expenses and other current assets                                        407,821                 217,092
                                                                                ------------            ------------
      Total current assets                                                         8,325,483              10,349,285

    Property and equipment, net                                                    2,651,920               1,272,477
    Other assets, net                                                                275,690                 304,498
    Goodwill, net                                                                    670,876                 810,673
                                                                                ------------            ------------
      Total assets
                                                                                $ 11,923,969            $ 12,736,933
                                                                                ============            ============

                                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Notes payable                                                               $  2,340,086            $    702,057
    Obligations under capital leases                                                 130,327                 119,536
    Current portion of long-term debt                                                304,963                 283,180
    Accounts payable                                                               3,111,828               5,999,694
    Accrued liabilities                                                              393,078               1,810,025
                                                                                ------------            ------------
      Total current liabilities                                                    6,280,282               8,914,492

    Deferred income                                                                       --                  84,212
    Obligations under capital leases                                                 237,006                 321,760
    Long-term debt, net of current portion                                           307,081                 538,597
                                                                                ------------            ------------

      Total liabilities                                                            6,824,369               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,
        20,252,481 and 18,005,090 shares issued at September 30, 1999 and
        December 31, 1998, respectively                                              202,525                 180,051
    Additional paid-in capital                                                    40,824,064              38,913,304
    Accumulated deficit                                                          (34,899,894)            (35,198,935)
    Note receivable, common stock                                                   (326,965)               (316,418)
    Treasury stock at cost, 450,000 shares                                          (700,130)               (700,130)
                                                                                ------------            ------------
      Total stockholders' equity                                                   5,099,600               2,877,872
                                                                                ------------            ------------

      Total liabilities and stockholders' equity                                $ 11,923,969            $ 12,736,933
                                                                                ============            ============
<FN>
 The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>

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

                                                    Three Months Ended
                                            September 30,       September 30,
                                                 1999               1998
                                            --------------      -------------

Net sales                                    $  3,906,065        $  7,266,180
Licensing fees                                    200,000                  --
                                             ------------        ------------
Net revenues                                 $  4,106,065        $  7,266,180

Cost of goods sold                              2,165,524           4,207,259
                                             ------------        ------------

     Gross profit                               1,940,541           3,058,921
                                             ------------        ------------

Operating expenses:

     Sales, marketing and support                 886,620           1,473,426
     General and administrative                   387,942             571,280
     Research and development                     305,762             323,073
     Depreciation and amortization expense        144,638             218,091

                                             ------------        ------------
         Total operating expenses               1,724,962           2,585,870
                                             ------------        ------------

Income from operations                            215,579             473,051

Interest expense, net                            (156,890)            (16,819)
Other income, net                                  82,670              11,493
                                             ------------        ------------

Income before income taxes                        141,359             467,725

Income tax expense                                     --                  --
                                             ------------        ------------

Net income                                   $    141,359        $    467,725
                                             ============        ============

Net income per common share
         Basic                               $       0.01        $       0.03
                                             ============        ============
         Diluted                             $       0.01        $       0.03
                                             ============        ============

Weighted average common shares outstanding
         Basic                                 19,061,111          17,427,999
                                             ============        ============
         Diluted                               19,389,684          18,118,926
                                             ============        ============

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

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

                                                     Nine Months Ended
                                             September 30,       September 30
                                                  1999                1998
                                            ---------------      -------------

Net sales                                    $ 13,413,400        $ 19,390,215
Licensing fees                                    200,000                  --
                                             ------------        ------------
Net revenues                                 $ 13,613,400        $ 19,390,215

Cost of goods sold                              7,593,643           11,054,551
                                             ------------         ------------

     Gross profit                               6,019,757            8,335,664
                                             ------------         ------------

Operating expenses:

     Sales, marketing and support               2,907,104            3,920,763
     General and administrative                 1,169,112            1,346,764
     Research and development                   1,068,568              878,797
     Depreciation and amortization expense        417,864              574,590

                                             ------------         ------------
         Total operating expenses               5,562,648            6,720,914
                                             ------------         ------------

Income from operations                            457,109            1,614,750

Interest expense, net                            (323,751)            (154,229)
Other income, net                                 165,683               17,261
                                             ------------         ------------

Income before income taxes                        299,041            1,477,782

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

Net income                                   $    299,041         $  1,448,121
                                             ============         ============

Net income per common share
         Basic                               $       0.02         $       0.09
                                             ============         ============
         Diluted                             $       0.02         $       0.09
                                             ============         ============

Weighted average common shares outstanding
         Basic                                 18,210,783           16,054,513
                                             ============         ============
         Diluted                               18,673,763           16,702,305
                                             ============         ============

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

                                       5
<PAGE>
<TABLE>
<CAPTION>
                                                                              STATEMENT OF CHANGES IN EQUITY
                                                                       FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999




                                                    Additional                      Receivable
                                           Common    Paid-in      Accumulated        Treasury
                                            Stock    Capital        Deficit           Stock         Stock         Total
                                          --------  -----------   ------------      ----------    ----------    ----------

<S>                                      <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                                     --           --        299,041             --            --       299,041

Reclassification of common stock                 38          (38)            --             --            --            --

Common stock issued                          22,436    1,910,798                                                 1,933,234

Interest on notes receivable, common stock                                             (10,547)                    (10,547)

                                          --------------------------------------------------------------------------------
Ending balance                            $ 202,525 $ 40,824,064  $ (34,899,894)     $ (326,965)  $ (700,130)   $5,099,600
                                          ================================================================================
<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 NINE MONTHS ENDED SEPTEMBER 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                                     --           --     1,448,121         --             --           --     1,448,121
  Other comprehensive income, net of tax
    Unrealized gains on securities               --           --                 (156,316)            --           --      (156,316)
                                                                                                                        -----------
Comprehensive income                                                                                                      1,291,805
                                                                                                                        -----------

Common stock issued                          36,276   11,265,853            --         --             --           --    11,302,129

Treasury stock purchased                                                                                     (700,130)     (700,130)
                                          ---------  -----------  ------------  ---------      ---------    ---------   -----------
Ending balance                            $ 176,378  $38,605,745  $(20,963,490) $(156,316)     $      --    $(700,130)  $16,962,187
                                          =========  ===========  ============  =========      =========    =========   ===========

<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)

                                                                                                     Nine Months Ended
                                                                                            September 30,       September 30,
                                                                                                1999                 1998
                                                                                          ----------------     ---------------
<S>                                                                                      <C>                    <C>
Cash flows from operating activities:
    Net income                                                                            $   299,041            $ 1,448,121
    Adjustments to reconcile net income to net cash provided by (used in)
     operating activities:
        Depreciation and amortization                                                         417,864                574,590
        Deferred income                                                                       (84,212)                    --
        Amortization of discount on note payable                                                5,563                  4,583
        Increase in accrued interest on note receivable, common stock                         (10,547)                    --
        Changes in operating assets and liabilities, net of the effects of acquisition:
            (Increase) decrease in accounts receivable                                       (957,528)            (3,864,571)
            Decreses in securities available for sale                                         248,983                     --
            Decrease (increase) in inventories                                              2,433,675              1,096,996
            Decrease (increase) in prepaid expenses                                          (190,729)               (47,102)
            Decrease (increase) other assets                                                   28,808                     --
            (Decrease) increase in accounts payable                                          (254,510)            (2,043,512)
            (Decrease) increase in accrued liabilities                                     (1,416,474)              (621,285)
                                                                                          -----------            -----------
        Net cash provided by (used in) operating activities                                   519,934             (3,452,180)
                                                                                          -----------            -----------

Cash flows from investing activities:
    Decrease in certificates of deposit                                                       113,067                     --
    Purchase of property and equipment                                                     (1,678,656)              (618,394)
    Cash paid in acquisitions, net of cash received
                                                                                                   --               (930,563)

                                                                                          -----------            -----------
        Net cash used in investing activities                                              (1,565,589)            (1,548,957)
                                                                                          -----------            -----------

Cash flows from financing activities:
    Payments on notes payable                                                              (1,447,057)            (1,740,478)
    Payments under capital lease obligations                                                  (73,963)              (105,078)
    Payments for purchase of treasury stock                                                        --               (700,130)
    Payments on long-term debt                                                               (209,733)                    --
    Net changes in accounts receivable financing                                              451,730                     --
    Net proceeds from private offerings of common stock                                     1,784,588              2,827,355
    Net proceeds from exercise of common stock options and warrants                           163,756              7,009,149
                                                                                          -----------            -----------
        Net cash provided by (used in) financing activities                                   669,321              7,290,818
                                                                                          -----------            -----------

Net change in cash and cash equivalents                                                      (376,334)             2,289,681

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

Cash and cash equivalents at end of period                                                $   752,046            $ 3,009,532
                                                                                          ===========            ===========
Supplemental Cash Flow Information:

        Interest paid                                                                     $   364,091            $   154,229
        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)
                                                                  ============



On July 29,  1998,  the Company  purchased  certain  assets and assumed  Certain
liabilities of PC Video Conversion, Inc. as follows:

Fair value of tangible assets acquired                                 613,336
Fair value of liabilities assumed                                      (80,367)
                                                                  ------------
Fair value of net assets acquired                                      532,969

Common stock issued                                                   (350,000)
Cash paid                                                             (700,000)
Note payable                                                          (910,085)
Acquisition costs                                                     (229,781)
                                                                  ------------
Excess of cost over fair value of net assets acquired             $ (1,656,897)
                                                                  ============


         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 September  30, 1999 and for the  three- and  nine-month periods
ended  September  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,  BV. 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 nine-month period presented.

                                                    Nine Months Ended
                                                    -----------------
                                                      September 30,
                                                      -------------
                                                           1998
                                                           ----

                  Net sales                           $ 21,391,000
                  Income from operations                 1,718,000
                  Net income                             1,526,333
                  Net income per common share
                       Basic                          $        .09
                       Diluted                        $        .09



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

2.       NET INCOME PER SHARE

         In February 1997,  the Financial  Accounting  Standards  Board ("FASB")
issued Statement of Financial  Accounting Standards ("SFAS") No. 128 - "Earnings
Per Share" which  requires  earnings per share to be  calculated  on a basic and
dilutive basis.  Basic earnings per share represents  income available to common
stock divided by the weighted-average number of common shares outstanding during
the period.  Diluted earnings per share reflects  additional  common shares that
would have been outstanding if dilutive potential common shares had been issued,
as well  as any  adjustment  to  income  that  would  result  from  the  assumed
conversion.  Potential  common  shares that may be issued by the Company  relate
solely to outstanding  stock options and warrants,  and are determined using the
treasury  stock method.  The assumed  conversion of  outstanding  dilutive stock
options and warrants would increase the shares outstanding but would not require
an adjustment to income as a result of the conversion. For the nine months ended
September 30, 1999 and 1998, options and warrants applicable to 4,261,221 shares
and 1,940,040  shares,  respectively  were  anti-dilutive  and excluded from the
diluted earnings per share computation.

                                       10
<PAGE>

3.       INCOME TAXES

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

4.       INVENTORIES

         Inventories consist of the following:

                                 September 30,       December 31,
                                 -------------       ------------
                                     1999                1998
                                     ----                ----

          Finished goods          $3,093,433          $5,718,260
          Raw materials              421,516             230,364
                                  ----------          ----------
                                  $3,514,949          $5,948,624
                                  ==========          ==========

5.       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% (12.75% at September 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 $10,697 for the nine months ended September 30,
1999  pursuant  to this  issuance.  At  September  30,  1999,  the  Company  had
borrowings under this agreement of approximately $452,000.

         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 September 30, 1999 was  $612,044.  Maturities of this note at
September 30, 1999 are as follows:

                     1999   $ 73,447
                     2000    312,556
                     2001    226,041
                            --------
                    Total   $612,044
                            ========

         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 was payable  weekly  until the
loan expiration  date of September 30, 1999. 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.  Under the terms of the guarantee,
the holder of the note defers recourse on the guarantee until December 31, 1999.
At  September  30, 1999,  the Company was in  violation  of the balloon  payment
provision and  maintained a balance due of  $1,375,000.  On October 1, 1999, the
Company  paid  $368,742.50  on this note  reducing  the balance

                                       11
<PAGE>

outstanding  to  $1,006,257.50.  The  holder of the note has  brought  an action
against the  Company,  which is discussed in detail in Item 1 of Part II of this
Report, for payment under the note.

6.       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  compensation  charges of
$16,704 for the nine months ended September 30, 1999 pursuant 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
exercise price of $1.063.  The Company  recorded stock  compensation  charges of
$3,341 for the nine months ended September 30, 1999 pursuant 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 exercise price of $1.70.  The Company  recorded stock
compensation  charges of $10,697 for the nine months  ended  September  30, 1999
pursuant to this issuance.

         On June 4, 1999,  the Company  completed a financing of  $1,200,000  in
gross  proceeds  from the sale of 1,200,000  shares  of  common  stock and the
issuance of a warrant to purchase an additional  120,000  shares of common stock
in a private placement to an unaffiliated  accredited  investor.  The warrant is
exercisable until June 30, 2004 at a per-share exercise price of $1.478125.  The
company filed a registration  statement under the Securities Act of 1933 for the
shares issued in connection with this  transaction and issuable upon exercise of
the  warrant  . The  Company  received  proceeds  from this  transaction  in two
tranches of $600,000, less applicable fees. The first tranche 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 less
applicable  fees of $42,015  yielding  net  proceeds of  $557,985  was funded on
August 18, 1999, which was the date on which the  above-referenced  registration
statement became effective.

         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.

         On September 17, 1999, the Company  completed a financing of $1,500,000
in gross  proceeds  from the sale of  1,500,000  shares of common  stock and the
issuance of a warrant to purchase an additional  150,000  shares of common stock
in a private placement to an unaffiliated  accredited  investor.  The warrant is
exercisable  until September 17, 2002 at a per-share  exercise price of $1.5375.
The shares issued in connection with this transaction and issuable upon exercise
of the warrant will be registered  under the Securities Act of 1933. The Company
will receive  proceeds from this  transaction in two tranches of $750,000,  less
applicable fees. The first tranche was funded on September 21, 1999 for $750,000
less fees and expenses  associated  with this  offering of $62,515  yielding net
proceeds of $687,485.  The second tranche for $750,000 less applicable fees will
be funded at the time when the above-referenced registration becomes effective.

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

Net Sales

         Net sales for the three-month period ended September 30, 1999 ("Q3 99")
were  $4,106,065 as compared with  $7,266,180 for the  three-month  period ended
September  30, 1998 ("Q3 98"), a decrease of  $3,160,115 or 43%. 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
Q3 99 to the Company's US resellers  decreased 46% to $3,059,000 from $5,641,000
in Q3 98. Net sales to OEM/Licensing  customers  decreased 74% to $210,000 in Q3
99 from  $830,000 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. In Q3 99, the Company received an initial  licensing fee of $200,000.  Net
sales of the Company's professional AV products totaled $533,000 in Q3 99 versus
$ 406,000 in Q3 98, an increase of $127,000 or 31%. This increase is principally
the result of favorable market penetration of the professional  product lines in
the teleconferencing and home theater markets.

Licensing Fees

     In Q3 99, the Company received an initial licensing fee of $200,000 as
compared with $-0- in Q3 98.

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

                                       13
<PAGE>

 Cost of Goods Sold

         Cost  of  goods  sold  were  $2,165,524  or 53% of net  sales,  for the
three-month  period ended September 30, 1999, as compared with $4,207,259 or 58%
of net sales, for the three-month period ended September 30, 1998, a decrease in
absolute dollars of $2,041,735 or 49%. The Company's gross profit margins for Q3
99 and Q3 98 were 47% and 42%,  respectively.  As a percentage of sales, cost of
goods sold was lower in Q3 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 Q3 99 also  contributing to higher margins as a
percentage of sales.

Sales, Marketing and Support Expenses

Sales, marketing and support expenses were $886,620 or 22% of net sales, for the
three-month  period ended September 30, 1999, as compared with $1,473,426 or 20%
of net sales, for the three-month period ended September 30, 1998, a decrease of
$586,806 or 40%. 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
September 30, 1999 were $387,942 or 9% of net sales,  as compared with $571,280,
or 8% of net sales for the  three-month  period  ended  September  30,  1998,  a
decrease  in  absolute  dollars of  $183,338  or 32%.  The  decrease in absolute
dollars is  principally  due to  decreases  in  payroll  and  employee  benefits
($140,000), investor relations fees ($17,000) and bad debt provisions ($27,000).

Research and Development Expenses

         Research  and  development  expenses for the  three-month  period ended
September 30, 1999 were $305,762,  or 7% of net sales,  as compared to $323,073,
or 4% of net sales, for three-month  period ended September 30, 1998, a decrease
in absolute  dollars of $17,311 or 5%. The  decrease  was due  principally  to a
reduced payroll and employee benefits offset by a full three months of operating
expenses  in Q399 in  comparison  to two months  operating  expenses in the Q398
period resulting from the acquisition of PC Video Conversion on July 29, 1998.

Interest Expense, Net

         Net interest  expense for the  three-month  period ended  September 30,
1999 was $156,890,  or 4% of net sales,  as compared to $16,819,  or 0.2% of net
sales,  for the  three-month  period ended  September  30, 1998,  an increase of
$140,071.  The increase is primarily  attributable to an increase in outstanding
interest bearing debt for the three months ended September 30, 1999.

Other Income (Expense)

         Other Income  (Expense) for the three-month  period ended September 30,
1999 was  $82,670 as  compared  to $11,493,  for the  three-month  period  ended
September 30, 1998. The increase is principally due to a negotiated reduction of
vendor debt due to product quality issues.

Net Income

          For the quarter  ended  September 30, 1999,  the Company  reported net
income of $141,359,  or $0.01 per share,  as compared to $467,725,  or $0.03 per
share, for the quarter ended September 30, 1998.

                                       14
<PAGE>

             Nine-Month Period Ended September 30, 1999 As Compared
               With The Nine-Month Period Ended September 30, 1998

Net Sales

         Net sales for the nine-month  period ended  September 30, 1999 (the "99
Period") were $13,613,400 as compared with $19,390,215 for the nine-month period
ended September 30, 1998 (the "98 Period"), a decrease of $5,776,815 or 30%. 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 the fourth quarter of 1998.  Specifically,  net sales in the
99 Period  to the  Company's  US  resellers  decreased  36% to  $9,596,000  from
$15,103,000 in the 98 Period. Net sales to OEM/Licensing customers decreased 46%
to $1,501,000 in the 99 Period from $2,831,000 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. In the 99 Period,  the Company recorded licensing fees
of  $200,000.  Net  sales of the  Company's  professional  AV  products  totaled
$1,568,000  in the 99 Period  versus  $406,000 in the 98 Period,  an increase of
$1,162,000 or 286%. The Company began  distributing  this product line on August
1, 1998 as a result of the acquisition of PC Video Conversion, Inc.

Licensing Fees

         In the 99 Period,  the  Company  recorded  licensing  fees of  $200,000
compared with $-0- in the 98 Period. Cost of Goods Sold

         Cost  of  goods  sold  were  $7,577,024  or 56% of net  sales,  for the
nine-month  period ended September 30, 1999, as compared with $11,054,551 or 57%
of net sales, for the nine-month  period ended September 30, 1998, a decrease in
absolute dollars of $3,477,527 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  $2,907,104 or 22% of net
sales,  for the  nine-month  period ended  September  30, 1999, as compared with
$3,920,763 or 20% of net sales,  for the nine-month  period ended  September 30,
1998,  a decrease in absolute  dollars of  $1,013,659  or 26%.  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  nine-month  period ended
September  30,  1999  were  $1,169,112  or 9% of net  sales,  as  compared  with
$1,346,764,  or 7% of net sales for the  nine-month  period ended  September 30,
1998,  a decrease  in  absolute  dollars of  $177,652  or 13%.  The  decrease in
absolute  dollars  is  principally  due to  decreases  in payroll  and  employee
benefits   ($125,000),   temporary  help  ($25,000)  and  bad  debt   provisions
($129,000),  offset by  increases  in telephone  ($22,000),  investor  relations
($27,000) and legal expenses ($55,000).

                                       15
<PAGE>

Research and Development Expenses

Research and development  expenses for the nine-month period ended September 30,
1999 were $1,068,568 or 8% of net sales,  as compared to $878,797,  or 5% of net
sales,  for nine-month  period ended September 30, 1998, an increase in absolute
dollars of  $189,771 or 22%.  The  increase  was due  principally  to  increased
staffing,   employee  benefits  and  operating   expenses   resulting  from  the
acquisition of PC Video Conversion on July 29, 1998,  representing  nine month's
activity in the 99 Period as compared to two month's activity in the 98 Period.

Interest Expense, Net

Net interest  expense for the  nine-month  period ended  September  30, 1999 was
$323,751,  or 2% of net sales, as compared to $154,229,  or 1% of net sales, for
the nine-month  period ended September 30, 1998, an increase in absolute dollars
of $169,522,  or 110%. 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  nine-month  period ended  September  30, 1999 was
$165,683 as compared to $17,261,  for the nine-month  period ended September 30,
1998.  The  increase  is  principally  due to gains on the  sales of  marketable
securities and debt forgiveness due to vendor quality issues in the 99 Period.

Net Income

          For the  nine-month  period  ended  September  30,  1999,  the Company
reported net income of $299,041 or $0.02 per share,  as compared to  $1,448,121,
or $0.09 per share, for the nine-month period ended September 30, 1998.


LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided for (used in) operating activities for the nine-month
periods  ended  September  30,  1999  and 1998 was  $519,934  and  ($3,452,180),
respectively.  In the 99  Period,  net cash  provided  by  operating  activities
consisted  primarily  of a decrease in  inventory of  $2,433,675  combined  with
non-cash charges for depreciation and amortization of $417,864 and net income of
$299,041.  This was offset by increases in accounts  receivable  of $957,528 and
prepaid  expenses of $190,729,  combined with decreases in securities  available
for sale of $248,983,  accounts  payable of $254,510 and accrued  liabilities of
$1,416,474.  As  of  September  30,  1999,  accounts  receivable  from  a  major
distributor represented  approximately 26% 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  nine  months  ended  September  30,  1998,  net  cash  used in
operations consisted primarily of increases in accounts receivable of $3,864,571
and  decreases  in  accounts  payable and accrued  expenses  of  $2,043,512  and
$621,285,   respectfully.  This  was  offset  by  a  decrease  in  inventory  of
$1,096,996.

         Net cash used in investing  activities for the nine-month periods ended
September 30, 1999 and 1998 was ($1,565,589) and ($1,548,957),  respectively. In
the 99  Period,  cash  used in  investing  activities  was  principally  for the
purchase of property and equipment and capitalized  ASIC  development  costs. In
the 98  Period,  cash  used in  investing  activities  was for the  purchase  of
property and equipment and capitalized ASIC development costs ($618,394) and for
cash  paid  resulting  from  the  acquisition  of  PC  Video  Conversion,   Inc.
($930,563).

                                       16
<PAGE>

         Net cash provided by financing  activities for the  nine-month  periods
ended September 30, 1999 and 1998 was $669,321 and $7,290,818,  respectively. In
the 99 Period,  the Company  received  $1,784,588  in net proceeds  from private
offerings of common stock and $163,756 from the exercise of common stock options
and warrants.  The Company's financing proceeds were offset by payments on notes
payable,  accounts  receivable  financing and capital lease obligations.  In the
same nine-month period in 1998, the Company received  $2,827,355 in net proceeds
from  private  offerings  of common  stock and  $7,009,149  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.


         As  of  September  30,  1999,  the  Company  had  working   capital  of
$2,045,201,  as compared to  $1,434,793  at December  31,  1998,  an increase of
$610,408.  The  Company's  cash  position at September 30, 1999 was $752,046 , a
decrease of $376,334 from cash balances at December 31, 1998.

         At  September  30,  1999,  the Company was in  violation of the balloon
payment  provision  of a term note  payable  to a contract  manufacturer  in the
amount of  $1,375,000.  The holder of the note has brought an action against the
Company,  which is discussed in detail in Item 1 of Part II of this Report,  for
payment under the note. Mr. Thomas L. Massie,  President and CEO of the Company,
has  personally  guaranteed  payment  of this term  note up to an amount  not to
exceed $600,000. Under the terms of the guarantee, the holder of the note defers
recourse on the  guarantee  until  December  31, 1999.  On October 1, 1999,  the
Company  paid  $368,742.50  on this note  reducing  the balance  outstanding  to
$1,006,257.50. In addition, the Company is pursing 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 November 30, 1999.
The System will replace a  non-compliant  accounting and  manufacturing  system.
Implementation  of the  System  is on  schedule  and  approximately  95  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.

                                       17
<PAGE>

         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.

         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
September 30, 1999. Phase II is expected to be completed by November 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, 1999,  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 has completed the
activities  required  to  achieve  infrastructure  Year  2000  compliance  as of
September 30, 1999.

         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 100  percent  complete  at
September 30, 1999.

         The  testing  phase  for  application   software  is  ongoing  and  was
substantially  completed by September 30, 1999. The vendor software replacements
and upgrades were installed as of July 19, 1999 and the initial testing of these
applications  was  completed by September  30, 1999.  The Company will  continue
testing the applications on an ongoing basis through December 31, 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 November 30, 1999. The
Company  estimates  that this  section was on schedule at  September  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  September 30, 1999, was $265,000,
of which  approximately  $200,000  related  to the  cost to  repair  or  replace
software and related hardware problems, and approximately $65,000 related to the
cost of identifying and communicating with External Agents. The estimated future
cost of completing the Project is estimated to be approximately $35,000; $10,000
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.

                                       19
<PAGE>

       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:

        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.

        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.

        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.

        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  has been named as the  defendant  in an action  brought by
PAGG  Corporation  and Via  Systems,  Inc. in the Superior  Court for  Middlesex
County, Commonwealth of Massachusetts,  filed on or about November 2, 1999. PAGG
and Via are former contract manufacturers of the Company and are seeking payment
by the  Company for  certain  amounts  alleged to be  receivable  for  inventory
manufactured  for the Company and pursuant to an  outstanding  secured note from
the Company to PAGG. The amount in controversy is approximately $1,800,000. PAGG
holds  a  security  interest  in all  of the  Company's  assets.  Management  is
responding  to this suit by  contesting  this  case  vigorously,  including  the
assertion of the defense  against the claim on  non-payment  under the note that
PAGG has refused to take returns of defective products  manufactured by PAGG for
the Company.

         The Company has recently  been made aware of a lawsuit  filed in United
States District Court for the District of Massachusetts, on or about November 9,
1999, on behalf of Frank E. Ridel and other currently-unnamed  person(s) who are
alleged to have purchased common stock of Focus  Enhancements from July 17, 1997
to February 19, 1999.  The complaint  alleges that the Company and the Company's
CEO violated  Federal  Securities  Laws in connection with a number of allegedly
false or misleading  statements  and seeks  certification  as a class action and
certain  unquantified  damages. The suit was filed only recently and the Company
had not yet been  formally  served as of November  12,  1999.  Accordingly,  the
Company has not yet had an  opportunity  to evaluate the  allegations.  However,
management believes it has consistently complied with Federal Securities Laws.


ITEM 2.       CHANGES IN SECURITIES

              None

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

         At  September  30,  1999,  the Company was in  violation of the balloon
payment  provision  of a term note  payable  to a  contract  manufacturer,  PAGG
Corporation,  in the  amount of  $1,375,000.  As  described  in detail in Item 1
above,  the Company is in litigation  with the holder of the note. The President
and CEO of the Company  has personally  guaranteed payment of the note up to an
amount  not to exceed  $600,000.  However,  the holder of the note has agreed to
defer recourse on Mr. Massie's  guarantee  provision until December 31, 1999. On
October 1, 1999,  the Company paid  $368,742.50 on the note reducing the balance
outstanding to $1,006,257.50, thus obviating the personal guarantee.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE

              None

ITEM 5.       OTHER INFORMATION

         On November  11, 1999,  the Company and  Faroudja,  Inc. of  Sunnyvale,
California  ("Faroudja")  jointly  announced  that the Copmany and  Foroudja had
agreed to terminate  their  discussions  regarding a proposed  merger of the two
companies.  The Company had  initially  announced on October 5, 1999 that it had
entered into a non-binding  letter of intent dated October 4, 1999 with Faroudja
regarding a proposed merger of the Company with Faroudja. A copy of the parties'
joint press release  pertaining  to their  announcement  that their  discussions
pursuant  to the letter of intent  have been  terminated  is included as Exhibit
99.1 to this Report on Form 10-QSB.

                                       21
<PAGE>


ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

a.       The following exhibits are filed herewith:

         11.      Statement Re: Computation of Per Share Earnings
         27.      Financial data schedule
         99.1     Press Release issued on November 11, 1999

b.       Reports on Form 8-K

         The  Company  filed a Current  Report on Form 8-K on  October  8, 1999,
         pursuant  to which it  reported  its  having  entered  into a letter of
         intent  dated  October 4, 1999  pertaining  to a proposed  merger  with
         Faroudja, Inc. of Sunnyvale, California.


                                       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.




     November 15, 1999                 By: \s\  Thomas L. Massie
                                            Thomas L. Massie
                                        Chief Executive Officer and
                                           Chairman of the Board
                                       (Principal Executive Officer)



     November 15, 1999                 By: \s\  Gary M. Cebula
                                             Gary M. Cebula
                                         Vice President of Finance
                                            and Administration
                                       (Principal Accounting Officer)




                                       23