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:   March 31, 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 March 31, 1997, there were outstanding  12,714,625 shares of Common Stock,
$.01 par value per share.




                            FOCUS ENHANCEMENTS, INC.
                                   FORM 10-QSB

                                QUARTERLY REPORT
                                 March 31, 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 March 31, 1997
                        and December 31, 1996                                  3
                    Consolidated Statements of Operations
                        for the Three Months Ended March 31, 1997 and 1996     4
                    Consolidated Statements of Cash Flows
                        for the Three Months Ended March 31, 1997 and 1996     5
                    Notes to Consolidated Financial Statements               6-8

         ITEM 2.    Management's Discussion and Analysis of Financial
                       Condition and Results of Operations                  9-17

PART II. OTHER INFORMATION

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

SIGNATURES                                                                    21

Exhibit 11 -        Statement Re:  Computation of Per Share Earnings          22


                                       2




                            FOCUS ENHANCEMENTS, INC.

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                          ASSETS

                                                                                     March 31,             December 31,
                                                                                        1997                  1996
                                                                                   ---------------       ----------------

<S>                                                                                <C>                  <C>
Current Assets:
     Cash and cash equivalents                                                      $   1,300,717        $       413,894
     Accounts receivable, net of allowance of $340,833 and $488,605
        at  March 31, 1997 and December 31, 1996, respectively                          5,621,438              3,613,565
     Inventories                                                                        1,751,294              1,975,381
     Prepaid expenses and other current assets                                            252,121                243,829
                                                                                   ---------------       ----------------
        Total current assets                                                            8,925,570              6,246,669

Property and equipment, net                                                               679,329                483,591
Other assets, net                                                                       1,300,993              1,273,980
Goodwill, net                                                                           1,413,855              1,467,106
                                                                                   ---------------       ----------------

        Total assets                                                                $  12,319,747         $    9,471,346
                                                                                   ===============       ================



                                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable                                                                  $   2,497,458        $     2,517,458
     Obligations under capital leases                                                     124,132                124,132
     Accounts payable                                                                   4,422,051              3,584,284
     Accrued liabilities                                                                  626,109                628,304
                                                                                   ---------------       ----------------
        Total current liabilities                                                       7,669,750              6,854,178

Obligations under capital leases                                                           74,847                 80,666
                                                                                   ---------------       ----------------

        Total liabilities                                                               7,744,597              6,934,844
                                                                                   ---------------       ----------------


Stockholders' equity
     Preferred stock, $.01 par value; 3,000,000 shares authorized; none issued                  -                      -
     Common stock, $.01 par value; 20,000,000 shares authorized,
        12,714,625 and 11,301,845 shares issued and outstanding at
        March 31, 1997 and December 31,1996, respectively.                                127,146                113,018
     Additional paid-in capital                                                        23,293,081             21,285,037
     Accumulated deficit                                                              (18,845,077)           (18,861,553)
                                                                                   ---------------       ----------------
        Total stockholders' equity                                                      4,575,150              2,536,502
                                                                                   ---------------       ----------------

        Total liabilities and stockholders' equity                                  $  12,319,747         $    9,471,346
                                                                                   ===============       ================





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

</TABLE>


                                        3

                            FOCUS ENHANCEMENTS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>


                                                                         Three Months Ended
                                                                 March 31,                 March 31,
                                                                   1997                      1996
                                                           ----------------------      ------------------

<S>                                                          <C>                         <C>
Net Sales                                                    $          4,801,550          $   3,801,879

Cost of goods sold                                                      3,267,841              5,125,810
                                                           ----------------------      ------------------

    Gross profit (loss)                                                 1,533,709             (1,323,931)
                                                           ----------------------      ------------------

Operating expenses:

Sales, marketing and support                                              952,964              1,147,129

General and administrative                                                385,092                768,354

Research and development                                                  179,402                283,252

                                                           ----------------------      ------------------
      Total operating expenses                                          1,517,458              2,198,735
                                                           ----------------------      ------------------

Income (loss) from operations                                              16,251             (3,522,666)

Interest expense, net                                                     (67,240)              (104,374)
Other income (expense)                                                     69,015                (10,311)
                                                           ----------------------      ------------------

Income (loss) before income taxes                                          18,026             (3,637,351)

Income tax expense                                                          1,550                  7,500
                                                           ----------------------      ------------------

Net income (loss)                                           $              16,476      $      (3,644,851)
                                                           ======================      ==================


Net income (loss) per common share


      Primary                                               $                   0      $           (0.49)
                                                           ======================      ==================
      Fully Diluted                                         $                   0      $           (0.49)
                                                           ======================      ==================

Weighted average common and common
equivalent shares outstanding
      Primary                                                          12,158,128              7,382,665
                                                           ======================      ==================
      Fully Diluted                                                    12,158,128              7,382,665
                                                           ======================      ==================



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

</TABLE>


                                        4



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

                                                                                              Three Months Ended
                                                                                        March 31,            March 31,
                                                                                          1997                  1996
                                                                                    ----------------    -------------------
<S>                                                                                  <C>               <C>
Cash flows from operating activities:
      Net income (loss)                                                              $       16,476     $       (3,644,851)
      Adjustments to reconcile net income (loss) to net cash provided (used in)
         operating activities:
         Depreciation and amortization                                                       92,319                204,324
         Gain on forgiveness of accounts payable                                            (71,304)                            -
         Changes in operating assets and liabilities:
              (Increase) decrease in accounts receivable                                 (2,007,873)            (1,739,646)
              (Increase) decrease in notes receivable                                             -                (40,000)
              Decrease (increase) in inventories                                            224,087                 95,632
              Decrease (increase) in prepaid expenses and other assets                      (35,305)               123,393
              Increase (decrease) in accounts payable                                       909,071                994,310
              Increase (decrease) in accrued liabilities                                     (2,195)             2,132,533
                                                                                    ----------------    -------------------

         Net cash provided (used in) operating activities                                  (874,724)            (1,874,305)
                                                                                    ----------------    -------------------

Cash flows from investing activities:
      Purchase of property and equipment                                                   (234,806)               (35,772)
                                                                                    ----------------    -------------------

         Net cash used in investing activities                                             (234,806)               (35,772)
                                                                                    ----------------    -------------------

Cash flows from financing activities:
      Payments on notes payable                                                             (20,000)            (1,030,000)
      Payments under capital lease obligations                                               (5,819)               (44,070)
      Net proceeds from private offerings of common stock                                 1,996,813                890,357
      Net proceeds from exercise of common stock options and warrants                        25,359                960,215
                                                                                    ----------------    -------------------

         Net cash provided by financing activities                                        1,996,353                776,502
                                                                                    ----------------    -------------------

Net increase (decrease) in cash and cash equivalents                                        886,823             (1,133,575)

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

Cash and cash equivalents at end of period                                            $   1,300,717      $       1,006,468
                                                                                    ================    ===================





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

</TABLE>


                                        5







                            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 March 31, 1997 and for the three month  periods  ended March 31,
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. and FOCUS Enhancements b.v. 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 month period
ended March 31, 1997 are not  necessarily  indicative of the results that may be
expected for any future period.

2.       NET INCOME (LOSS) PER SHARE

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

     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:

                                  Three Months Ended March 31,
                 ---------------------------------------------------------------
                             1997                             1996
                             ----                             ----
                    Shares         Per Share        Shares      Per Share Amount
                                    Amount

Basic EPS         11,530,607         $0.00         7,382,665         $ (0.49)
                  ==========         =====         =========         ========

Diluted EPS       12,158,128         $0.00         7,382,665         $ (0.49)
                  ==========         =====         =========         ========


                                       6



3.       INVENTORIES

         Inventories consist of the following:

                                        March 31,            December 31,
                                          1997                   1996
                                          ----                   ----

Finished goods                              $1,165,195            $ 1,555,812
Raw materials                                  586,099                419,569
                                    -------------------    -------------------
                                            $1,751,294            $ 1,975,381
                                    ===================    ===================


4.       NOTES PAYABLE


     Lines of Credit,  Banks. As of December 31, 1996, the Company  maintained a
revolving line of credit with a bank which permitted  borrowings up to $900,000.
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
$800,000 at March 31, 1997, bear interest at the bank's prime rate plus 1% (9.5%
at March 31, 1997) and are personally guaranteed by an investor. Under the terms
of the line of credit agreement,  the Company is required to comply with certain
restrictive  covenants  and was in  violation  of certain of these  covenants at
December 31, 1996. The Company has received a waiver of the covenant  violations
from the bank and the line,  which  expired in March 1997,  has been extended to
March 8, 1998.

     The  Company  has  another  revolving  line  of  credit  with a bank  which
permitted borrowings up to $200,000 through April 1, 1995.  Borrowings under the
line are payable upon demand and are  collateralized by certain inventory of the
Company and  marketable  securities of certain  affiliates.  Interest is payable
monthly at 1.5% above the prime  rate,  as defined  (10.00% at March 31,  1997).
Borrowings  outstanding  under  the line of  credit  as of March  31,  1997 were
$197,458. The Company has not renewed the line.

     Term Line of Credit.  At March 31, 1997, the Company owed  $1,500,000 to an
unrelated  individual under a term line of credit originated in October 1994 for
$2,500,000.  In connection  with this line, the Company issued a promissory note
with detachable warrants to purchase 200,000 shares of unregistered common stock
at $2.00 per share.  The warrants are exercisable  from April 1, 1995 to October
31, 1997. No value was ascribed to these warrants at that time. In June 1995, in
consideration  for extending the line, the Company reduced the exercise price of
the  warrants to $1.05 per share.  The Company  valued the  repriced  warrant at
$40,047. In January



                                       7


1996,  the  Company  repaid  $1,000,000  of the amount owed under the term note.
Additionally,  the note was  extended in June 1996 by the lender until March 31,
1997. In consideration  of the extension,  the Company granted a second security
interest in all of the assets of the Company and issued  50,000  warrants to the
lender  exercisable for the period of three years at a price of $2.07 per share.
The term note  accrues  interest  at the prime  rate plus 2% (10.5% at March 31,
1997),  payable quarterly in arrears.  The Company recorded an additional charge
in 1996 for interest in the amount of approximately  $42,000.  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. 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.



5.       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  are  not  registered  under  the
Securities Act of 1933,  however,  the Company has agreed to register the shares
within 90 days from the date of issuance. Fees and expenses associated with this
offering  will  be  approximately  $65,000  (exclusive  of  registration  costs)
yielding net proceeds of $1,585,000.  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.



                                       8


    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, 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  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 March 31, 1997 As Compared
                With The Three-Month Period Ended March 31, 1996

NET SALES

         Net sales for the three-month  period ended March 31, 1997 (Q1 97) were
$4,801,550 as compared with  $3,801,879 for the  three-month  period ended March
31, 1996 (Q1 96),  an increase of $999,671 or 26.3%.  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 Q1 97
to the Company's US resellers  increased 57% to $2,899,000 from $1,843,000 in Q1
96. Net sales to international  resellers rose 55% to $770,000 from $496,000 for
the same quarter in 1996. Net sales from OEM/Licensing  customers  decreased 23%
to  $1,133,000  in Q1 97 from  $1,463,000  for the same  quarter  in 1996.  This
decrease reflects primarily the reduction of OEM sales to Apple Computer. During
Q1 97, net sales to Apple represented 15% of the Company's  revenues as compared
to 24% of revenues during the comparable quarter in 1996.



                                       9


          During the quarter ended March 31, 1996,  the Company  recognized  OEM
royalty revenues from Apple of approximately  $317,000, or 8% of net sales, with
100% gross  margins.  If the Company had  recognized  Apple revenue on a product
sale rather than a royalty  basis in Q1 96, net sales on a proforma  basis would
have been approximately  $4,927,000,  slightly greater than the Company's actual
net sales during Q1 97.

         As of  March  31,  1997,  the  Company  had a sales  order  backlog  of
approximately $2.0 million.

 COST OF GOODS SOLD

         Cost  of  goods  sold  were  $3,267,841  or 68% of net  sales,  for the
three-month  period ended March 31, 1997, as compared with $5,125,810 or 135% of
net sales,  for the three  month  period  ended  March 31,  1996,  a decrease of
$(1,857,969) or (36.2)%. The decrease in cost of goods sold was primarily due to
the write down of $2.2 million of  inventory  in Q1 96 related to the  Company's
graphics/connectivity  products  for  Apple  Computer's  Powerbook  190 and 5300
products.  Excluding this write-down,  the proforma cost of goods sold for Q1 96
would have been approximately $2.9 million or 76% of net sales. This decrease in
cost of goods sold as a percentage  of net sales for Q1 97 is  primarily  due to
the product  sales mix of PC-to-TV  video  products  versus sales of  networking
products which have lower margins.

SALES, MARKETING AND SUPPORT EXPENSES

         Sales,  marketing  and  support  expenses  were  $952,964 or 20% of net
sales,  for the  three-month  period  ended March 31,  1997,  as  compared  with
$1,147,129,  or 30% of net sales,  for the  three-month  period  ended March 31,
1996, a decrease of $(194,165) or (16.9)%.  The decrease is due primarily to the
combination of cost control  measures adopted by management for Q1 97, reduction
in direct display advertising, mail order promotional expenditures,  and reduced
sales department salaries. These reductions were offset by the increase in costs
for the Company's technical support / customer service department.

GENERAL AND ADMINISTRATIVE EXPENSES

         General and  administrative  expenses for the three-month  period ended
March 31, 1997 were $385,092 or 8% of net sales,  as compared with $768,354,  or
20% of net sales for the three-month  period ended March 31, 1996, a decrease of
$(383,262)  or (49.9)%.  The decrease is due  primarily  to the lower  personnel
related costs of approximately  $100,000,  a decrease in administrative costs of
$104,000,  and a reduction in facility  expenses of $42,000.  In  addition,  the
amortization  of goodwill was  approximately  $111,000 lower in Q1 97 due to the
write down in 1996 of certain intangible costs related to the Lapis acquisition.

RESEARCH AND DEVELOPMENT EXPENSES

                                       10



         Research  and  development  expenses for the  three-month  period ended
March 31, 1997 were $179,402, or 4% of net sales, as compared to $283,252, or 7%
of net sales,  for  three-month  period  ended  March 31,  1996,  a decrease  of
$(103,850)  or (36.7)%.  The  decrease  is due  principally  to a  reduction  in
consulting expenses of $18,000, R & D facility expenses of $33,000 and other net
reductions in company wide engineering costs.  During Q1 97, FOCUS completed the
majority of development  efforts for an ASIC relating to the Company's  PC-to-TV
products.  The engineering in-process costs to manufacture the ASIC masks during
Q1 97,  amounting to  approximately  $156,000 have been  capitalized  as a fixed
asset  and will be  amortized  over  the  expected  life of the ASIC  technology
licensing and product sales, expected to commence in the third quarter of 1997.

INTEREST EXPENSE, NET

         Net interest  expense for the  three-month  period ended March 31, 1997
was $(67,240),  or 1.4% of net sales, as compared to $(104,374),  or 2.7% of net
sales,  for the three-month  period ended March 31, 1996, a decrease of $37,134,
or (35.6)%.  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 $910,000 at March 31, 1996 to $800,000 as of March
31, 1997.

OTHER INCOME (EXPENSE)

         For the three month period ended March 31, 1997,  the Company  realized
other income of $69,015 in connection  with the  settlement of certain  accounts
payable  obligations.  For the three  month  period  ended March 31,  1996,  the
Company incurred other expense of $(10,311).

NET INCOME (LOSS)

         For the quarter ended March 31, 1997,  the Company  reported net income
of $16,476,  or $0.00 per share, as compared to a net loss of  $(3,644,851),  or
$(0.49) per share, for the quarter ended March 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash used in operating activities for the three month periods ended
March 31, 1997 and 1996 was ($874,724) and ($1,874,305), respectively. In Q1 97,
net cash used in  operating  activities  consisted  primarily  of an increase in
accounts  receivable of  $2,007,873.  This was offset by an increase in accounts
payable of $909,071,  a decrease in  inventories of $224,087,  depreciation  and
amortization of $92,319,  and net income of $16,476. For Q1 96, net cash used in
operations was $1,874,305  consisting  primarily of a net loss of $3,644,851 and
an increase in accounts  receivable  of  $1,739,646.  These uses were  partially
offset by increased accounts payable and accrued liabilities totaling $3,126,843
as well as depreciation and amortization of $204,324.



                                       11


         Net cash used in investing activities for the three month periods ended
March 31, 1997 and 1996 was $234,806 and $35,772,  respectively. In Q1 97 and Q1
96, cash used in investing  activities was expended for the purchase of property
and equipment.

         Net cash from  financing  activities  for the three month periods ended
March 31, 1997 and 1996 was $1,996,353 and $776,052, respectively. In Q1 97, the
Company  received  $1,996,813 in net proceeds  from private  offerings of Common
Stock and $25,359 from the exercise of common stock  options and  warrants.  The
Company's  financing  proceeds  were  offset by  payments  on notes  payable and
capital  lease  obligations.  In Q1 96, the  Company  received  $890,357  in net
proceeds  from private  offerings of Common Stock and $960,215 from the exercise
of common stock options and warrants.  The Q1 96 financing  proceeds were offset
by $1,074,070 in payments on notes payable and capital lease obligations.

         As of March 31, 1997, the Company had working capital of $1,255,820, as
compared to a working capital  deficiency of $(607,509) at December 31, 1996, an
increase of $1,863,329.  The Company's cash position  increased to $1,300,717 at
March 31, 1997, an increase of $886,823,  or 214%,  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 $1,650,000 in
gross  proceeds  for the sale of  1,100,000  shares of Common Stock in a private
placement to  unaffiliated  accredited  investors.  The shares issued as part of
this transaction are not registered  under the Securities Act of 1933,  however,
the Company has agreed to  register  the shares  within 90 days from the date of
issuance.  Fees and expenses  associated  with this offering were  approximately
$65,000   yielding  net  proceeds  of  $1,585,000.   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  closing bid price of the Common  Stock on the date
of the closing ($1.6875 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.

                                       12


         From its  inception  through  March 31, 1997,  the Company has incurred
approximately $18.8 million of accumulated losses. 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  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 funds  generated  through  its  present  business  model,  and
additional  funds that may be received  from debt or equity  financings  will be
sufficient to fund operations for at least 12 months.

         During 1996,  the Company  extended  the terms of its $900,000  line of
credit  with its  commercial  bank and its  $1,500,000  line of credit  with its
unaffiliated  lender until March 1997. 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.



                                       13




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 March 31, 1997, the Company had working capital of
$1,255,820,  cash and cash  equivalents of $1,300,717 and was fully drawn on its
$900,000 line of credit (approximately $800,000 at March 31, 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 three month period ended March
31, 1997 the Company received approximately  $1,997,000 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 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.  In the year ended  December  31,  1996,
approximately  23% and 15% of the Company's  revenues were derived from sales to
Zenith Electronics,  Inc. ("Zenith") and Ingram Micro D, a national distributor,
respectively.  For the three months ended March 31, 1997,  approximately  29% of
the  Company's  revenues  were  derived from sales to Ingram Micro D, a national
distributor, and approximately 8% were derived from sales to Zenith Electronics,
Inc.  Management  expects  that  sales to Zenith  and Ingram  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. There can be no assurances,  however, that Zenith will purchase the
indicated quantities.  Further, if the contract were to be terminated by Zenith,
there would be a material adverse effect to the Company and its business.



                                       14


      In the year ended  December  31, 1996 and for the three months ended March
31, 1997,  approximately  8% and 15%,  respectively,  of the Company's net sales
were derived from sales of the Company's  L-TV product to Apple  Computer,  Inc.
("Apple").  In August 1994, the Company  entered into a two year Master Purchase
Agreement  with Apple  under  which Apple  agreed to bundle and  distribute  the
Company's L-TV product with Apple's "Presentation System" product offering. This
agreement  expired in August  1996.  In the first  quarter of 1997,  the Company
received  significant  additional  volume  orders from Apple for shipment in the
first and second quarters of 1997. The Company believes that in 1997, Apple will
be a major customer. Although the orders are irrevocable and non-cancelable,  no
assurances  can be given  that  Apple  will take  delivery  on the  products  or
continue to order products from the Company.

         History of  Operating  Losses.  The  Company  has  experienced  limited
profitability  since its inception.  Although the Company reported net income of
$328,761 in the year ended December 31, 1995, the Company incurred net losses of
$3,726,606,  $4,458,483,  and  $9,208,431 in the years ended  December 31, 1993,
1994,  and 1996,  respectively.  There can be no assurance that the Company will
return to profitability in 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 $900,000 line of credit with Silicon Valley Bank. As of
March 31,  1997,  approximately  $800,000  is owed to the Bank under the line of
credit.  Pursuant to its agreement with the Bank, the line of credit  terminated
in April 1996,  and was extended  until March 7, 1997. 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 October  1994,  the Company  borrowed  $2,500,000  from an  unaffiliated
lender to help finance its  inventory and accounts  receivable  under its Master
Purchase  Agreement with Apple. The Company issued to this  unaffiliated  lender
its term note in the aggregate  principal  amount of  $2,500,000.  The term note
accrues interest at the revolving rate of prime plus 2%, is payable quarterly in
arrears at the end of December, March, June, and September, and was due February
1, 1996. The term note was originally  secured by those specific assets financed
under the agreement with Apple,  including accounts receivable,  finished goods,
raw materials,  work-in-process  inventories,  and contract rights arising under
the Apple  agreement.  The Company  utilized  the  proceeds of this term note to
finance purchase orders received from Apple. In January 1996, the Company repaid
approximately $1 million of the amount owed under the term



                                       15


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  videographics 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 videographics and connectivity products.

         Reliance on Single  Vendor.  In the three  months ended March 31, 1997,
approximately 60% 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 were to cease supplying the Company,  management  believes
there are  alternative  vendors for the components  for the Company's  products.
However,  the Company would  experience short term delays in the shipment of its
products.

         Adverse Effects of Reduced Apple Macintosh Sales.  Although in the year
ended  December  31,  1996,  the Company  increased  the sales of Windows  based
products as a percentage of total sales, a substantial  portion of the Company's
sales to date have been derived from  products  designed for use on MAC OS based
personal computers,  and the Company expects that sales of products for use with
Macintosh computers may represent up to 35% (including direct sales to Apple) of
its net sales in 1997. Although sales of Macintosh computers have increased from
year to year, there can be no assurance that the Macintosh operating system will
continue  to be  accepted  as a platform  for  personal  computer  applications.
Management believes that other computer platforms,  such as Windows, have gained
greater  acceptance in the Company's  markets as these platforms have evolved to
support  applications  similar to those offered for the Macintosh.  In addition,
there can be no  assurance  that the  Company  will be able to make  timely  and
successful introductions of products for other platforms.

         Dependence on Timely  Delivery of the FOCUS Scan 300 Chip.  The Company
is currently  completing  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  videographics   products.  A  significant  portion  of  the  Company's
anticipated  revenues  and gross  margins for 1997 are  dependent  on the timely
completion  and delivery of the FOCUS Scan 300 Chip.  In the event that the Chip
is not  available  before the end of the second  calendar  quarter of 1997,  the
Company's revenues and profitability for 1997 could be adversely effected.


                                       16


         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  expects to compete in the  future  with  videographic  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 difficulty in obtaining some
components or  peripheral  devices.  The Company  attempts to reduce the risk of
supply interruption by evaluating and obtaining  alternative sources for various
components or peripheral devices. However, there can be no assurance that supply
shortages  will not occur in the future which could  significantly  increase the
cost,  or delay  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
two patents and expects to file one  additional  patent in the second quarter of
1997 with respect to its PC-to-TV  videographics  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.

         Dependence  upon Key Personnel.  The Company's  success  depends,  to a
significant extent, upon a number of key employees.  The loss of services of one
or more of these employees, especially the Company's Chief Executive Officer and
President,  Thomas  L.  Massie,  could  have a  material  adverse  effect on the
business of the Company.  The Company believes that its future success will also
depend in part upon its  ability  to  attract,  retain  and  motivate  qualified
personnel.  Competition for such personnel in the computer  industry is intense.
Although the Company has not in the past  experienced  difficulty  in attracting
and retaining


                                       17



qualified  personnel,  there  can be no  assurance  that  the  Company  will  be
successful in attracting and retaining such personnel in the future.














                                        18

                                        







                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

         The Company is not party to any pending legal  proceedings,  other than
routine  litigation  that is  incidental  to the  business,  which  would have a
material  adverse  effect on the  Company's  financial  position  or  results of
operation for the three month period ended March 31, 1997.


ITEM 2.  CHANGES  IN SECURITIES

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


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

     In October 1994, the Company  borrowed  $2,500,000 from an unrelated 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 March 31, 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

         On February 18, 1997,  the Board of Directors  caused to be distributed
to  stockholders  of record as of February 14, 1997, a Notice of Special Meeting
of  Stockholders,  Proxy and Proxy Statement for a Special Meeting held on March
18, 1997. As of the record date,  11,366,303 of Common Stock (excluding treasury
shares) were entitled to vote.


              At the meeting,  the stockholders acted upon a proposal to approve
an amendment  to the  Company's  Certificate  of  Incorporation  to increase the
number of  authorized  shares of Common  Stock  from  16,000,000  to  20,000,000
shares.

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

The voting results were as follows:

                                For         Against      Abstain
                                ---         -------      -------

                             8,751,422      212,968      39,100



                                       19



ITEM 5.  OTHER INFORMATION


None


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a.   The following exhibits are filed herewith:


              11 -   Statement Re: Computation of Per Share Earnings


         b. Reports on Form 8-K

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

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



January 6, 1997                 In accordance  with  Regulation  S-B, Item 3.10,
                                Registrant  filed an  amendment  to the Form 8-K
                                dated   November  4,  1996  that   included  the
                                financial  statements of TView,  Inc.  which was
                                acquired  in  October  1996,  together  with the
                                proforma  financial   information   showing  the
                                combined financial statements of the Company and
                                TView.

January 15, 1997                Registrant  reported the sale of 449,444  shares
                                of its Common Stock  pursuant to Regulation S to
                                three non-US entities.

March 3, 1997                   Registrant  reported the sale of 218,181  shares
                                of its Common Stock  pursuant to Regulation S to
                                one non-US entity.


                                       20





                                   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.




     May 15, 1997                   By:          /s/ Thomas L. Massie
                                       ----------------------------------------
                                                  Thomas L. Massie
                                                     President,
                                             Chief Executive Officer and
                                                Chairman of the Board
                                            (Principal Executive Officer)



      May 15, 1997                      By:        /s/ Harry G. Mitchell
                                           -------------------------------------
                                                   Harry G. Mitchell
                                                  Senior Vice President,
                                           Chief Financial Officer and Treasurer
                                              (Principal Accounting Officer)





                                       21