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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-KSB

|           |  |                                                                                       
|---------- |  | --------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                       
|þ          |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934.   
|          
|           |  | For the fiscal year ended December 31,
    2002                                       
|          
|           |  | OR                                                                                    
|          
|o          |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the fiscal year
    from          to                                              

Commission File Number 000-22235



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Video Network Communications, Inc.

(Name of Small Business Issuer in Its
Charter)


|                                                                                                  |  |                                     
|------------------------------------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                                                          |  | 54-1707962                          
|(State or Other Jurisdiction of
    Incorporation or Organization)                                |  | (I.R.S. Employer Identification No.)
|                                                                                                 
|50 International Drive,
    Portsmouth, New Hampshire(Address of Principal Executive
    Offices) |  | 03801(Zip Code)                     

(603) 334-6700

(Issuers Telephone Number, Including
Area Code)


Securities registered under Section 12(b) of
the Act: None.

Securities registered pursuant to
Section 12(g) of the Exchange Act:

Common Stock, Par Value $0.01

Redeemable Common Stock Purchase
Warrant


(Title of Class)

Check whether the issuer: (1) has 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 þ          No o

Check if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-B contained
in this Form, and no disclosure will be contained, to the best
of issuers knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this
Form 10-KSB.     o

State issuers revenues for its most recent
fiscal year. $824,459

The aggregate market value of the voting common
equity held by non-affiliates as of March 31, 2003, was
$9,744,858.

The number of shares of the issuers Common
Stock outstanding as of March 31, 2003, was 58,176,919 shares.

Transitional Small Business Disclosure Format
(check
one):     Yes o          No þ



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TABLE OF CONTENTS

|     |     |  |  |                                                                                                                         |  |  |    | 
|---- | --- |  |  | ----------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Item |     |  |  | Page                                                                                                                   
|     |     |  |  |                                                                                                                        
|     |     |  |  | PART I                                                                                                                  |  |  |    | 
|     | 1.  |  |  | Business                                                                                                                |  |  | 1  | 
|     | 2.  |  |  | Properties                                                                                                              |  |  | 8  | 
|     | 3.  |  |  | Legal Proceedings                                                                                                       |  |  | 9  | 
|     | 4.  |  |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  |  | 9  | 
|     |     |  |  | PART II                                                                                                                 |  |  |    | 
|     | 5.  |  |  | Market for Common Equity and Related Stockholder
    Matters                                                            |  |  | 9  | 
|     | 6.  |  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                               |  |  | 15 | 
|     | 7.  |  |  | Financial Statements                                                                                                    |  |  | 27 | 
|     | 8.  |  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure                                |  |  | 28 | 
|     |     |  |  | PART III                                                                                                                |  |  |    | 
|     | 9.  |  |  | Directors, Executive Officers, Promoters and
    Control Persons; Compliance with Section 16(a) of the Exchange
    Act |  |  | 28 | 
|     | 10. |  |  | Executive Compensation                                                                                                  |  |  | 28 | 
|     | 11. |  |  | Security Ownership of Certain Beneficial Owners
    and Management                                                      |  |  | 28 | 
|     | 12. |  |  | Certain Relationships and Related Transactions                                                                          |  |  | 28 | 
|     | 13. |  |  | Exhibits and Reports on Form 8-K                                                                                        |  |  | 29 | 
|     | 14. |  |  | Controls and Procedures                                                                                                 |  |  | 33 | 
|     | 15. |  |  | Signatures                                                                                                              |  |  | 34 | 

DOCUMENTS INCORPORATED BY REFERENCE

Sections of our definitive proxy statement for
our 2003 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission no later than
April 15, 2003, are incorporated by reference into Part III
of this Form 10-KSB to the extent stated herein.

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PART I

Unless otherwise indicated, all information in
this Form 10-KSB gives effect to a one-for-five reverse
stock split of our common stock effective as of February 5,
2002.

Some of the statements in this
Form 10-KSB are forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995 and involve a number of risks and uncertainties. We
have made these statements based on currently available
operating, financial and competitive information. However,
actual results and future events may differ significantly from
the results contemplated in the forward-looking statements
because of a number of factors, including product and technology
development, customer and market acceptance of our product,
demand for our product, the impact of competitive products and
pricing and other risks detailed in this Form 10-KSB and in
our other Securities and Exchange Commission filings.

In this Form 10-KSB, we refer to Video
Network Communications, Inc., a Delaware corporation, as we, the
Company, VNCI or Video Network Communications. We refer to
B2BVideo Network, Corp., our wholly owned subsidiary, as
B2BVideo Network or B2BVideo.

Item 1.  Business

Video Network Communications is a Delaware
corporation formed in 1993 to design, develop and market
full-motion, high resolution, cost-effective video network
systems as a state-of-the-art, business collaborative tool.
Users of the VidPhone video network system can view broadcast
video, collaborate in multi-party videoconferences, and retrieve
stored video on demand. Our VidPhone system bypasses the
bottleneck of local data networks to distribute video to and
from desktop and laptop personal computers and conference rooms
configured with VidPhone stations over the same wiring used by
the telephone. During 2002, we added numerous features to the
VidPhone system to allow it to more seamlessly integrate into
managed wide area network video solutions for network carriers
and other channel partners.

On May 16, 2002 Moneyline Networks, LLC
(Moneyline), a wholly owned subsidiary of Moneyline
Telerate Holdings made a majority investment in VNCI. As of
March 31, 2003, Moneyline owns approximately 57% of the
outstanding common stock of VNCI. See the section entitled
Recent Sales of Unregistered Securities in
Part II for details of this transaction. In connection with
this investment, VNCI also acquired B2BVideo Network Corp.
(B2BVideo) in a merger transaction. See the section
entitled Acquisition of B2BVideo Network in
Part II for details of this transaction. In the first
quarter of 2003, VNCI acquired the webcasting assets of Wiltel
Communications. This transaction broadened VNCIs
multi-media communications product suite. See the section
entitled Subsequent Events in this Part I for
further details of this transaction.

Industry Background

VNCI is part of the rich media conferencing and
collaboration industry with a strategic emphasis on visual
communications. Business demand for visual communications,
historically limited primarily to video conferencing, is driven
by the desire to achieve the most effective means of
communication. Information that is exchanged or presented
visually, such as during in-person meetings or video
presentations, has a stronger impact on the end-user than
non-visual communication. People cannot always exchange or
present information in person, and technology limitations and
cost constraints have restricted the use of video applications.
Consequently, people rely on non-visual forms of communication,
such as telephony, voice mail and e-mail. Recent video
application developments such as targeted broadcasting and
conferencing,

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along with improved data collaboration tools,
achieve the effectiveness of face-to-face meetings while
retaining the convenience of a telephone call.


We believe that video enabled networks that fully
support video broadcast, video retrieval as well as video
conferencing and other collaborative applications, address many
of the communications requirements of the business community.
Video enabled, collaborative networks can improve worker
productivity by facilitating the efficient exchange of
information between geographically dispersed parties and
reducing travel expenses. In addition, they can enable the use
of video material for training and research at the convenience
of the user rather than the presenter and permit businesses to
access business broadcasts, such as CNN, CNNfn and CNBC, at a
desktop or laptop computer. To date, however, infrastructure and
transmission constraints, costs and other limitations have
precluded business quality video broadcast, retrieval and
conferencing applications at individual desktops.

Currently, most video communications systems are
constrained to conference room video conferencing systems. These
systems are expensive for most businesses. Most conference room
video conferencing systems require substantial capital
expenditures and trained personnel for set up and maintenance
during video conferencing calls. Most conference room systems
also do not provide video quality adequate for video broadcast
and retrieval and are frequently limited by distracting latency,
transmission delays that result in unsynchronized audio and
video. In addition, these systems normally require the use of
the public telephone system for all video calls, including those
within a building or across a small business campus, thereby
incurring telephone usage charges for each call.

Over the past decade, video conferencing systems
have begun to evolve from high cost, low quality, stand-alone
conference room systems to small group and desktop systems.
However, desktop systems have not yet been widely adopted. We
believe that this is primarily because most video network
systems, and the wide area networks they connect to, typically
produce inadequate video quality and performance for business
purposes.

Most desktop video conferencing systems use
either dedicated, premise telephone lines or the local area
network (LAN) to transmit video data. Some desktop
video conferencing systems use dedicated Integrated Services
Digital Network (ISDN) lines to achieve acceptable
video quality (384 KBPS) for business purposes. However, to
achieve this quality, a minimum of three dedicated ISDN lines
with six associated telephone numbers must be provided to each
desktop. The installation costs of these additional lines and
line use charges render this approach prohibitively expensive on
any significant scale. In addition, these systems require the
installation of either expensive and complex hardware
coder-decoders (CODECs) in each PC, or software
CODECs that render the PC unavailable for other applications
during video conferencing.

Some video conferencing systems attempt to use
the LAN rather than dedicated telephone lines. These are
referred to as IP or H.323 systems. LAN-based systems also
require the installation of hardware or software CODECs in each
users desktop or laptop computer. Data LANs were not
designed for isochronous (i.e., time dependent) data such
as video and audio. LANs were designed to be shared by
individuals using the transmission medium for short periods of
time. Most LANs today do not have the intelligence or bandwidth
to accommodate the volume or quality of service
(QoS) of data inherent in full-motion video
applications. Consequently, even a single videoconference
significantly diminishes the capacity of most LANs to support
other users. Information technology managers resist LAN-based
video applications because of the additional volume of data and
new infrastructure and the associated maintenance required to
support them. Although high speed Ethernet and gigabit routing
switches may alleviate some of the bandwidth problems resulting
from the transmission of video on the LAN, we believe that these
new technologies do not adequately address the transmission
delay problems plaguing such systems. We do not believe that
asynchronous transfer mode (ATM) will reach desktop
computers due to the high cost.

We do not expect business users to adopt video
applications on any significant scale until premise video
systems and the wide area networks they connect to are capable
of providing fully integrated, cost-effective, TV-quality video
and FM-quality stereo audio service. We believe that our
VidPhone video

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network uniquely meets the premise system
requirements because it takes advantage of existing telephone
wiring and supports high quality two-way video and audio, but it
does not interfere with the existing telephone systems or
LAN-based computer systems or impede the performance of an
individual desktop or laptop computer. Furthermore,
VidPhones extended software capabilities render it fully
integratable with the most advanced IP-based wide area networks
that have the requisite QoS to meet the performance demands of
the typical business client.


Products and Technology

Our VidPhone system is a full-motion, high
resolution, cost-effective video network system that uses the
same wiring as the telephone, which gives it a competitive cost
advantage over other types of video network systems. Users of
the VNCI video distribution system can view broadcast video,
retrieve stored video on demand and participate in multi-party
videoconferences from desktop personal computers and conference
rooms. In addition, our VidPhone Software was enhanced in 2002
to efficiently integrate best of breed video gateways and
directory services to enable the VidPhone system to be
seamlessly integrated into a Managed Video Solution over the
wide area network.

The core components of our VidPhone system are as
follows:

VidPhone Switch.The
VidPhone switch is the heart of our Video Network System. The
switch, similar to a PBX, is a communications server that uses
VNCIs patented technology to deliver full-motion
TV-quality video and FM-quality stereo audio throughout a
building or campus  and does so over the same single
twisted pair of telephone wire that is already part of the
telephony infrastructure without disrupting telephone service.

VidPhone Station.A
VidPhone station is a users computer enhanced by
incorporation of a VidModem, VidPhone station software and some
non-proprietary equipment such as speakers, a microphone and a
camera. Users at a VidPhone station are capable of utilizing all
VidPhone system functionality. VidPhone stations may be located
up to 1,250 feet from the VidPhone switch when using category 3
wiring and up to 2,000 feet when using category 5 wiring. We
believe that most modern business telephone systems use at least
category 3 wire. VidPhone stations do not need terminal-resident
ISDN or ATM CODECs. Each station connects directly to the
VidPhone switch and CODECs are shared resources available to
anyone on the system. VidPhone stations may be modified easily
and inexpensively to support VidPhone system functionality in
conference rooms. The VidPhone system supports all video network
applications in a large screen, multi-party conference room
setting.

VidModem.The
VidModem connects individual desktops and conference rooms with
the VidPhone switch using the existing telephone wiring. The
desktop/conference room and VidPhone switch versions of VidModem
incorporate patented VidModem technology that enables
distribution of TV-quality video, retrieval of stored video on
demand and FM-quality stereo audio and data over the single
twisted pair of copper wire that connects the telephone to the
PBX or CENTREX. The transmission does not require compression or
decompression of data. The connection is transparent to the
telephone and the PBX, so the user can use the telephone
concurrently with the VidPhone system. The telephone operates
independently of all video applications.

VidPhone Station Software.VidPhones Java-based station
software supports various desktop operating systems
(OS), including Windows/ NT, MAC, Sun and SGI. It
provides an easy-to-use graphical user interface for all video
applications offered by the VidPhone system and transforms each
users desktop or laptop computer into a VidPhone station
as a multi-media, collaborative network interface. The
users computer is also configured with non-proprietary
equipment such as a microphone, speakers and a camera.

Universal Gateway.Our Universal Gateway is a dual port
device that allows a wide variety of third party CODECs (H.320,
H.323, MPEG-2 etc.) to connect seamlessly to the VidPhone
system. The Universal Gateway provides an interface between the
VidPhone switch and stand-alone system CODECs. The Universal
Gateway allows users of these third party CODECs to protect and
leverage their investment

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in those CODECs by making them available to all
users of the VidPhone system to originate or receive WAN calls.


VidServer.VidServers are shared resources that
provide video on demand capabilities to the VidPhone system and
individual users. VCR-like controls from the desktop provide
users with full control over the video stored on the VidServer
 play, pause, stop, skip forward and skip backward 
with a single mouse click. These software controls are
integrated with our VidPhone station software.

During 2002, we added numerous features to the
VidPhone system to allow it to more seamlessly integrate into
managed wide area network video solutions for network carriers
and other channel partners. New features include; integration
with industry standard CODECs, encoders and gateways, enhanced
directory services and call setup, SNMP monitoring, and improved
quality to support sharing of video conferencing resources
between conference room and desktops.

During the first quarter of 2003, we took steps
to diversify our revenue base, which included the acquisition of
a webcasting business of Wiltel Communications. The acquired
webcasting business has two product suites, Activcast and
Talkpoint. Talkpoint is a self-serve webcasting service that
allows users to conduct interactive presentations over the
internet incorporating PowerPoint slides and streaming audio.
The application includes audience polling, chat, and has
self-publishing capabilities for on demand viewing. Activecast
is an interactive presentation service that incorporates
streaming video, audio, and PowerPoint slides over the Internet.
Both services include, secure registration, authentication, pay
per view functionality, and customized web based reporting. See
the section entitled Subsequent Events for
additional details on this acquisition.

System Functionality

The VidPhone system can support three business
video and collaborative requirements.

Broadcast Video.Sources of broadcast video material
include, but are not limited to, satellite broadcasts, cable
television and narrowcasts over an ATM network. These sources
are connected to the VidPhone switch through a specially
designed circuit card. The user selects the desired broadcast
from a menu using standard point-and-click techniques. The
non-blocking architecture of the VidPhone switch permits
multiple users to simultaneously access the same broadcast video
source without degrading system performance.

Video Conferencing.The VidPhone system supports two-way
and multi-party video conferencing. A VidPhone system user can
maintain a telephone directory and contact other VidPhone users
using standard point-and-click techniques at any time without
prior coordination.

Retrieval of Stored Video.VidPhone system users can access video
material stored on a variety of different types of devices, such
as a video server, a VCR and a DVD player. Users access stored
video using point-and-click techniques similar to those used to
access broadcast video.

Sales and Marketing

Our sales and marketing strategies are focused on
developing channel relationships for our VidPhone system as an
integrated component in a managed video service.

Strategic Alliances.We recognize that we are a small
company with limited resources that constrain our ability to
market and sell our video network systems. As we evaluate the
potential advances in technology and our markets, we interact
with other companies that provide technology, information
systems integration, network services and other products and
services that are complementary to our product and services
offerings. Appropriate strategic alliances can have a material
positive impact on our business through increased exposure of
our products to broader markets, additional financial, technical
and personnel resources and a broader established customer base.

A key alliance for VNCI is between VNCI and
Moneyline (see Recent Sales of Unregistered Securities).
In addition to having been a critical source of timely
investment, this alliance has

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been at the center of VNCIs efforts to
overcome the challenges of scale and name recognition in
attempting to commercialize its unique technology. Moneyline is
VNCIs exclusive distributor of equipment to the financial
services market.


Sales.We have
senior level, selling and business development resources focused
on (i) promoting our video network solutions in the
healthcare, government, education, financial services and
security and surveillance sectors, (ii) creating reference
accounts in major markets and (iii) developing and
supporting third-party reseller relationships and opportunities.

Customer Service and Support.We provide primary level support to
end customers and secondary level support to resellers. As our
resellers become more familiar with the VidPhone networking
system, we expect that they will provide primary customer
support for our products to their customers, and that our
customer support department will become a secondary customer
support, focusing on providing service regarding issues such as
software performance and hardware re-engineering requirements.

Customers

We have a limited customer base and several
customers historically provided in excess of 10% of our total
revenues. We generally grant uncollateralized credit terms to
our customers and have not experienced any credit-related
losses. Three customers accounted for 32%, 16%, and 13%,
respectively, of our total revenues in the year ended
December 31, 2002. Two customers accounted for 50% and 30%,
respectively, of our total revenues in the year ended
December 31, 2001. Three customers accounted for 74%, 14%,
and 12% of our accounts receivable at December 31, 2002,
and four customers accounted for 30%, 16%, 13% and 10% of our
accounts receivable at December 31, 2001. Failure to
diversify this customer concentration could result in our
inability to generate revenues sufficient to support operations.
As discussed in the section entitled Subsequent
Events, we took significant steps to diversify our revenue
and customer base in the first quarter of 2003.

Product Research and Development

During 2001 and 2002, our research and
development has focused on:



| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | adding new features to existing product lines
    requested by our customers;                                                                                                      
|
| |  | creating new products in response to customer
    demand;                                                                                                                          
|
| |  | adding additional user capacity to the VidPhone
    system;                                                                                                                        
|
| |  | adding conference room support;                                                                                                                                                    
|
| |  | improving system compatibility with industry
    standard video conferencing, bridging and reservations equipment
    and services;                                                
|
| |  | lowering production costs; and                                                                                                                                                     
|
| |  | adding features to allow the VidPhone system to
    be more seamlessly integrated into managed wide area network
    video solution for network carriers or other channel partners.

New features include: integration with industry
standard CODECs, encoders and gateways, enhanced directory
services and call setup, SNMP monitoring, and improved quality
to support sharing of video

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conferencing resources between conference room
and desktops. Our engineering staff closely monitors technical
developments and works with our customers and partners to assess
evolving business video network requirements. We will monitor
emerging technologies that support new video and collaborative
applications for business and tailor our research and
development accordingly. In addition to our internal research
and development resources, we engage contract-engineering
services when we believe that the use of such services will be
efficient. Research and development efforts target both hardware
and software enhancements to video network capabilities. Our
research and development efforts are complemented by internal
quality assurance procedures.


Our research and development expenditures were
approximately $2,774,000 during 2001 and approximately
$3,222,800 during 2002. None of these expenditures were borne by
our customers.

Intellectual Property

Our proprietary VidModem transmission technology,
incorporated in our VidPhone system, is covered by U.S. Patent
No. 5,621,455 issued in April 1997, U.S. Patent
No. 5,786,844 issued in July 1998, Taiwan Patent
No. NI-098004 issued in November 1998 and Canadian Patent
No. 2,206,521 issued in January 2001. These patents relate
to a method and apparatus for transmitting video information
over telephone wiring. Corresponding patent applications are
pending in Mexico, China and Japan.

We also have obtained U.S. Patent
No. 6,147,991, Taiwan Patent No. NI-122636 and Canadian
Patent No. 2,303,296 on a scalable high-speed packet
switch. Corresponding applications for this invention are
pending in Europe.

We have received notification from the U.S.
Patent and Trademark Office that U.S. Patent No. 6,346,964
was issued on February 12, 2002. This patent relates to a
broadband switching system.

Further, we have obtained U.S. Patent
No. 6,134,222 and Taiwan Patent No. NI-133136 for a
U-channel interface device that permits multiple ISDN lines to
be combined for higher bandwidth. Additional applications on
this invention are pending in Taiwan, Europe and Canada. We
received an initial report from the European Patent Office
indicating that the invention meets the criteria for
patentability.

We also received Taiwan Patent No. NI-105797
on an interoffice broadband communication system, issued in
1999. Corresponding patent applications on this invention are
pending in the United States, Europe and Japan.

We cannot predict when we will receive a
dispositive ruling from the U.S. Patent and Trademark Office or
from foreign patent offices concerning pending patent
applications. The success of our products depends in part on our
continuing ability to obtain and protect patents, licenses and
other intellectual property rights covering our significant
hardware and software products. We have registered the
trademarks Video Network Communications, VidPhone and VidModem.

The process of seeking patent and trademark
protection can be long and expensive, and there can be no
assurance that patents and trademarks will be issued from
currently pending or future applications.

Manufacturing

We outsource the manufacture and assembly of
components used in the VidPhone system. In particular, we
outsource the production of the VidPhone switch to various
contract manufacturers. Several manufacturers are producing
smaller sub-assemblies and components for us. We believe we will
be able to continue to outsource production and that there are a
number of manufacturers qualified to produce components of our
VidPhone system because the production process is relatively
routine and does not require any unique expertise. Although our
products incorporate unique, patented technology, we also
believe that all of the components used in our equipment are
readily available from commercial suppliers. As a result, we do
not believe that we depend on any single manufacturer or
supplier to a material extent. All products produced by
third-party manufacturers are shipped to us for final assembly,
systems

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integration and quality assurance testing. We
plan to retain test and quality assurance functions until
subcontractors can be certified with respect to quality. Any
difficulties encountered with third-party manufacturers could
result in product defects, production delays, cost overruns or
the inability to fulfill orders on a timely basis. Any of these
difficulties could have a material adverse effect on us.


Competition

The market for our video network products is new,
highly competitive and rapidly evolving. We believe that the
principal competitive factors in the markets in which we compete
are product performance, price and product support. Our direct
competitors in the video network market are Viewcast, FVC.com
and Avistar. We also expect to compete with new entrants in the
market and with providers supporting IP and LAN-based video
networks, including Intel, Microsoft and Cisco. To date, no
desktop system has captured any significant portion of the
potential market.

Our video network system permits users to view
broadcast video, participate in multi-party videoconferences and
retrieve stored video on demand, all from their individual
desktops. As a result, we also compete with companies that offer
video broadcast and video retrieval products. Competitors in the
video broadcast market include cable television and direct
satellite broadcast system providers such as DirecTV, TCI and
News Network Vision.

While not truly competitive in the video
distribution network market, there are several video
conferencing companies that represent competition for the video
conferencing application of our network. These video
conferencing companies include Polycom, VTel and Tandberg, with
Polycom being the market leader. These companies provide
point-to-point video conferencing, normally over long distances.
They do not provide an enterprise video distribution solution
but do represent cost-effective video conferencing for a limited
number of endpoints i.e., one to five.

The competitive landscape in the webcasting
business is comprised of two types of companies: Webcasters and
Web conferencers. The webcasters include Yahoo Broadcast, On24,
and Visual data among others. Over the past few years, the
landscape has changed significantly through consolidation and
attrition. Companies have focused on specific vertical or
geographic markets where they have had success. Web conferencers
include companies such as Webex and Placeware. These service
offerings are self-serve, less event driven, and focus on
smaller user groups.

Government Regulation

The FCC regulates the operation of
telecommunications equipment for use in the United States. The
VidModem and VidPhone switch components of the VidPhone system
must comply with certain FCC regulations.

VidModem.The
VidModem is a Class A digital device that may be operated
without an individual license. Under FCC regulations, we will be
required to follow a verification procedure consisting of a
self-certification that the radio frequency device complies with
applicable regulations. A qualified, independent testing
facility tested the VidModem, and it was found to comply with
applicable FCC regulations.

VidPhone.We
obtained equipment registration from the FCC for certain
VidPhone system components, including the VidPhone switch, that
are connected to the public switched telephone network.

Future government regulations could increase the
cost of bringing products to market or adversely affect our
ability to market and sell our products or technology.

Employees

As of December 31, 2002, we had
approximately 48 full time employees, including employees of
B2BVideo. We also use the services of temporary administrative
staff, technical consultants and subcontractors on an as-needed
basis. Each employee and consultant has executed a
confidentiality agreement. We have employment agreements with
Carl Muscari, our Chief Executive Officer, James Cali,

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our Executive Vice President of Sales and
Marketing, and Roger Booker, our Senior Vice President of
Business Development. In the first quarter of 2003, the Company
implemented a restructuring of the VidPhone business. As part of
this transaction, 37 employees were terminated and three
employees were transferred to Moneyline. The addition of
Wiltels webcasting business has added 44 employees.


Subsequent Events

On February 14, 2003, we purchased from
Williams Communications, LLC (WCLLC) and Williams
Communications Procurement, LP (together with WCLLC, the
Sellers), each a wholly owned subsidiary of Wiltel
Communications Group, Inc. (WCG), WCLLCs
webcasting business, including certain equipment and other
assets used by WCLLC in this business for $750,000 in cash and
$850,000 security on the leased space. The purchased webcasting
business includes the production and distribution of multimedia
presentation materials using streaming media technology.

The acquisition of the webcasting business will
enable us to provide a full suite of interactive multimedia
services. The webcasting product suite, including Activecast and
Talkpoint, allows for a broader reach within our targeted
customers and provides ubiquity with distribution of voice and
video over the internet. This service model does not require
capital investment by our customers. Users can leverage the
services and toolset by using standard internet browsers and
media players. In addition to the new technology acquired, the
transaction includes active customers, which we plan to leverage
to market our legacy service and technology.

In the first quarter of 2003, we implemented a
restructuring of the VidPhone business to right size the expense
base to take into account the Companys anticipation of
lower sales. The restructuring included:



| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Termination of 37 employees, primarily in sales,
    engineering and administrative capacities.                                                                                                                                                                                            
|
| |  | Transfer of three employees to Moneyline.
    Employees transferred are primarily focused on channel
    management and business development for the managed video
    service.                                                                                                            
|
| |  | Remaining employees will focus on operating the
    webcasting business and supporting the Moneyline Strategic
    Alliance Agreement. See the section entitled Sales &
    Marketing for additional details on this agreement.                                                          
|
| |  | Transfer of direct sales responsibility for the
    VidPhone System to the direct sales team of the webcasting
    business.                                                                                                                                                               
|
| |  | Election of Alexander Russo as Chairman of the
    Board of Directors, the appointment of Nicholas Balletta as
    President of the Company and his election as a director of the
    Company, and the appointment of Frank Joanlanne as the Senior
    Vice President Webcasting Services.

Item 2.  Properties

We lease a facility in Portsmouth, New Hampshire
at a current rental rate of $12.00 per square foot under a lease
that expires in March 2008. Rent on the facility increases over
the term of the lease from an initial rate of $11.00 per square
foot to $15.00 per square foot. That facility consists of
approximately 26,000 square feet, of which approximately 13,000
square feet is office space, approximately 6,500 square feet is
a research and development laboratory and approximately 6,500
square feet is a production facility used for equipment assembly
and testing, customer support and training.

We lease a facility in Rutherford, New Jersey at
a current rental rate of $26.50 per square foot under a lease
that expires in May 2005. The facility consists of approximately
5,000 square feet, of which approximately 4,000 square feet is
office space, and approximately 1,000 square feet is data center
space for a Video Network Operations Center. We are negotiating
with the landlord for early termination of this lease as a
result of shutting down the B2BVideo business.

-8-



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##### 



With the acquisition of Wiltels webcasting
business, we assumed the lease for a facility in New York City,
New York at a current rental rate of $30.00 per square foot
under a lease that expires in July 2009. Rent on the facility
increases over the term of the lease from the current rate of
$30.00 per square foot to $32.00 per square foot. This facility
consists of approximately 31,000 square feet, of which
approximately 16,000 square feet is office space, approximately
10,000 square feet is a state of the art data center and
approximately 5,000 square feet is a production facility used
for content acquisition, production, encoding, publishing,
hosting and internet distribution.

Item 3.  Legal
Proceedings

The Company is aware of a grand jury
investigation being conducted by the Antitrust Division of the
United States Department of Justice with respect to funds
allocated by the Schools and Libraries Universal Service Fund
(E-Rate Funds). The Company understands that the
Antitrust Division has established a task force to conduct
Universal Service Fund investigations comprised of attorneys in
each of the Antitrust Divisions seven field offices and
the National Criminal Office. The Company has received a grand
jury subpoena requiring production of documents to the
Department of Justice, and has responded to it in full. The
Company has been notified that, at the present time, it is not a
target of the investigation. The Company is not in a position to
predict the direction or outcome of the investigation and is
cooperating with the Department of Justice. We are not party to
any other legal proceedings as of the date of filing of this
Form 10-KSB.

Item 4.  Submission of Matters
to a Vote of Security Holders

No matters were submitted to a vote of our
security holders during the quarter ended December 31, 2002.

PART II

Item 5.  Market for Common
Equity and Related Stockholder Matters

Market Information

From May 3, 1999 to November 1, 2001,
our common stock traded on The NASDAQ SmallCap Market. Since
November 1, 2001, our common stock has been quoted on the
OTC. Quotations reflect inter-dealer prices, without retail mark
up, mark down or commissions and may not represent actual
transactions. The following table sets forth, for the periods
indicated, the range of high and low closing sales prices per
share reported on such quotation systems. The share prices
listed below have been adjusted to reflect a one share for five
shares reverse split in our common stock, approved by our
stockholders on February 4, 2002 and effected on
February 5, 2002:

|                   |  |             |        |     |  |   |       | 
|------------------ |  | ----------- | ------ | --- |  | - | ----- | 
|                   |  |            
|                   |  | As Adjusted
|                   |  |            
|Period Ending      |  | High        |        | Low
|                   |  |             |        |    
|March 31, 2001     |  | $           | 13.750 |     |  | $ | 7.500 | 
|June 30, 2001      |  |             | 12.500 |     |  |   | 8.550 | 
|September 30, 2001 |  |             | 10.200 |     |  |   | 1.950 | 
|December 31, 2001  |  |             | 7.650  |     |  |   | 2.050 | 
|March 31, 2002     |  |             | 3.230  |     |  |   | 0.750 | 
|June 30, 2002      |  |             | 3.520  |     |  |   | 2.600 | 
|September 30, 2002 |  |             | 2.660  |     |  |   | 0.960 | 
|December 31, 2002  |  |             | 1.100  |     |  |   | 0.520 | 
|March 31, 2003     |  |             | 0.640  |     |  |   | 0.390 | 

On March 31, 2003, the last sale price per
share of our common stock as reported on the OTC was $0.390 per
common share.

-9-



---



##### 



Our Public Warrants traded on The NASDAQ SmallCap
Market from September 1, 1999 to November 1, 2001.
Since November 1, 2001, our Public Warrants have been
quoted on the OTC. The following table sets forth, for the
periods indicated, the range of high and low closing sales
prices per warrant as reported on The NASDAQ SmallCap Market and
the OTC. The prices listed below for the Public Warrants have
been adjusted for the one share for five shares reverse stock
split, and the adjusted closing sales prices have been
calculated in the same manner as for the common stock (i.e.,multiplying each closing sale price by five). The Public
Warrants adjust contractually for the one-for-five reverse stock
split by reducing the number of underlying shares from one share
of common stock per Public Warrant to two-tenths of a share of
common stock per Public Warrant.

|                   |  |      |       |     |  |   |       | 
|------------------ |  | ---- | ----- | --- |  | - | ----- | 
|Period Ending      |  | High |       | Low
|                   |  |      |       |    
|March 31, 2001     |  | $    | 4.690 |     |  | $ | 3.125 | 
|June 30, 2001      |  |      | 4.400 |     |  |   | 3.125 | 
|September 30, 2001 |  |      | 3.750 |     |  |   | 0.800 | 
|December 31, 2001  |  |      | 0.450 |     |  |   | 0.030 | 
|March 31, 2002     |  |      | 0.060 |     |  |   | 0.010 | 
|June 30, 2002      |  |      | 0.100 |     |  |   | 0.050 | 
|September 30, 2002 |  |      | 0.070 |     |  |   | 0.050 | 
|December 31, 2002  |  |      | 0.050 |     |  |   | 0.010 | 
|March 31, 2003     |  |      | 0.030 |     |  |   | 0.010 | 

On March 31, 2003, the last sale price per
Public Warrant as reported on the OTC was $0.010 per warrant.

Holders

As of March 31, 2003, there were
approximately 278 record holders of our common stock.

Dividend Policy

We have never paid cash dividends on our common
stock. We currently intend to retain all earnings generated by
our operations for the development and growth of our business
and, therefore, do not anticipate paying any cash dividends to
our stockholders in the foreseeable future. The payment of
future dividends on the common stock and the rate of such
dividends, if any, will be determined by our Board of Directors
in light of our earnings, financial condition, capital
requirements, general economic conditions and other relevant
factors.

Recent Sales of Unregistered
Securities

In August 2000, we completed a private placement
(the August 2000 Private Placement) of 1,760,000
Units (individually, a Unit and collectively, the
Units), each Unit consisting of two-tenths of one
share of common stock and one redeemable common stock purchase
warrants (individually, a Warrant and collectively,
the Warrants). The Warrants offered in the August
2000 Private Placement entitle the holder to purchase two-tenths
on one share of common stock for an initial exercise price of
$4.00 per Warrant (an effective price of $20.00 per underlying
share of common stock) during the period (the Exercise
Period) commencing on February 26, 2001, and ending
on June 15, 2004, subject to prior redemption. The Warrants
are identical to our outstanding Public Warrants to purchase up
to 920,000 shares of our common stock at an initial exercise
price of $20.00 per share ($4.00 per warrant, two tenths of a
share underlying each warrant), which are currently trading on
the OTC Bulletin Board under the symbol VNCIW,
except that the Warrants could not be exercised until
February 26, 2001.

We offered the Units through EarlyBirdCapital,
Inc (EBC), as the exclusive placement agent, on a
best efforts, all or none basis. The Units were
offered and sold only to persons who qualified as
accredited investors as defined in Rule 501(a)
under the Securities Act. The sale and issuance of the

-10-



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##### 



Units were affected in reliance upon the
exemption from registration afforded by Section 4(2) of the
Securities Act and Regulation D and Rule 506
promulgated there under. The price per Unit was $1.50.


As partial compensation to EBC for its services
as placement agent, we issued to EBC an option (the
Purchase Option) to purchase 52,800 shares of common
stock and 264,000 Warrants (each two tenths of one share of
common stock and one Warrant must be purchased together as a
unit) at an exercise price of $10.625 per unit. The sale and
issuance of the Purchase Option were affected in reliance upon
the exemption from registration afforded by Section 4(2) of
the Securities Act and Regulation D and Rule 506
promulgated there under.

Our net proceeds from the August 2000 Private
Placement were approximately $2,200,000, after paying
commissions, a non-accountable expense allowance, blue sky fees
and other offering expenses of approximately $439,000. We used
the net proceeds of the August 2000 Private Placement for
research and development, product sales and marketing, and
customer support operations, to repay a portion of certain debt
outstanding to Sanmina and our legal counsel, and for working
capital.

In connection with the August 2000 Private
Placement, we agreed to file a registration statement for the
offering and resale of the securities issued in the August 2000
Private Placement and to use our best efforts to have such a
registration statement declared effective by the Securities and
Exchange Commission (the Commission) no later than
December 23, 2000. In connection with the August 2000
Private Placement, we issued, on December 23, 2000,
January 23, 2001 and February 23, 2001, to the
purchasers of Units in the August 2000 Private Placement and to
EBC, extra warrants (the Extra Warrants) to purchase
a total of 60,699 shares of common stock at an initial purchase
price of $20.00 per share. We were obligated to issue such Extra
Warrants because a registration statement covering the offering
and resale of the securities issued in the Private Placement had
not been declared effective by the Commission by
December 23, 2000. The Extra Warrants have the same terms
as the Warrants. We were also required to issue Extra Warrants
on each monthly anniversary of December 23, 2000 until the
earlier of the effective date of a registration statement
covering the offering and sale of the securities issued in the
Private Placement, or July 23, 2002. We issued the Extra
Warrants in reliance on an exemption provided by
Section 4(2) of the Securities Act of 1933 and
Regulation D and Rule 506 promulgated there under. We
have withdrawn this registration statement and have issued
additional Extra Warrants through July 2002. In addition to the
Extra Warrants issued as noted above, we issued additional Extra
Warrants for 77,830 shares of our common stock through
December 31, 2001 and additional Extra Warrants for 54,166
shares of our common stock in 2002.

In September and October 2001, we issued warrants
to purchase 400,000 shares of common stock at an exercise price
of $2.00 per share in conjunction with our issuance of secured
notes with aggregate principal value of $1,000,000. The exercise
price of these warrants contractually reset to $0.60 per share
in conjunction with our Private Placement and merger transaction
completed on May 16, 2002.

In November and December 2001, we issued warrants
to purchase 669,993 shares of common stock at an exercise price
of $2.75 per share in conjunction with our issuance of notes
with an aggregate principal value of $1,674,982. The exercise
price of these warrants was reset to $0.60 per share based on a
note conversion agreement between us and the holder that was
entered into in connection with our Private Placement and merger
transaction that was completed on May 16, 2002.

In December 2001, we negotiated an extension of
the maturity date of the First Bridge Secured Notes and, as
consideration, issued the noteholders warrants to purchase
200,000 shares of common stock with an exercise price of $2.00
per share with an aggregate value of $456,000, which was charged
to interest expense in 2001. The exercise price of these
warrants was reset to $0.60 per share based on a note conversion
agreement between us and the holder that was entered into in
connection with our Private Placement and merger transaction
that was completed on May 16, 2002.

In January 2002, we issued warrants to purchase
200,000 shares of common stock at an exercise price of $1.30 per
share in conjunction with issuance of notes with an aggregate
principal value of $500,000. The exercise price of these
warrants was reset to $0.60 per share in conjunction a note
conversion agreement

-11-



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##### 



between us and the holder in conjunction with our
Private Placement and merger transaction completed on
May 16, 2002.


In March 2002, we issued warrants to purchase
698,000 shares of common stock at an exercise price of $1.30 per
share in conjunction with issuance of notes with an aggregate
principal value of $349,000. The exercise price of these
warrants contractually reset to $0.60 per share in conjunction
with the Companys Private Placement and merger transaction
completed on May 16, 2002.

In April 2002, we issued warrants to purchase
400,000 shares of common stock at an exercise price of $1.30 per
share in conjunction with issuance of notes with an aggregate
principal value of $200,000. The exercise price of these
warrants contractually reset to $0.60 per share in conjunction
with our Private Placement and merger transaction completed on
May 16, 2002.

On May 16, 2002, we entered into the
Agreement with Moneyline. Pursuant to the Agreement Moneyline
purchased 25,000,000 new unregistered shares of common stock
(representing approximately 51.4% of the outstanding common
stock at May 16, 2002, for aggregate cash consideration of
$15,000,000 and received a warrant to purchase an additional
11,250,000 shares of common stock, with an exercise price of
$0.60 per share and a cashless exercise mechanism.

Simultaneously, certain existing and new
investors purchased 7,750,000 newly issued unregistered shares
of common stock at $0.60 per share, providing aggregate gross
proceeds of $4,650,000.

Also as part of the above transaction, the
following took place:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | payment of $1,100,000 was made to Sanmina Corp.
    to extinguish a secured promissory note issued to Sanmina by us,
    with an outstanding principal balance of $2,900,000 and accrued
    interest of $587,145. We recognized an extraordinary gain of
    $2,387,145 relating to the extinguishment of this debt;                                                                                                                                                                                                                                                          
|
| | (b) | payment to Shaw Pittman LLP, a supplier of ours,
    of $250,000 to settle outstanding invoices of approximately
    $378,000. We recognized an extraordinary gain or approximately
    $128,000 relating to the extinguishment of this liability; and                                                                                                                                                                                                                                                                                                                         
|
| | (c) | promissory notes in the aggregate principal
    amount of $3,723,982 and accrued interest of $143,843 were
    exchanged for 6,446,376 shares of the Companys common
    stock. Warrants to purchase an aggregate of 2,567,992 shares of
    common stock previously issued to the holders of promissory
    notes were repriced. The exercise price of such warrants, which
    ranged from $1.30 to $2.75 per share, was reduced to $0.60 per
    share. The increase in the fair value of the warrants, in the
    amount of $4,913,894, was recorded as a deemed dividend.

We incurred estimated costs and expenses of
approximately $3,226,000 in connection with the Agreement and
the acquisition of B2BVideo. Fifty percent (50%) of these costs,
which are comprised primarily of legal, investment banking and
accounting fees, were allocated to the Agreement and fifty
percent (50%) were allocated to the acquisition of B2BVideo. The
expenses allocated to the Agreement, in the amount of
approximately $1,613,000, have been recorded as a reduction of
additional paid-in capital.

Pursuant to the Agreement, Moneyline has the
right to appoint a majority of the members of the VNCIs
Board of Directors.

On July 9, 2002, Moneyline elected to
partially exercise its warrant pursuant to the cashless exercise
provision. As a result of this cashless exercise Moneyline
received 8,189,824 shares of the Companys common stock.
Moneyline retains the right, pursuant to the remaining portion
of the warrant, to purchase up to 100,000 shares of common stock
at a price of $0.60 per share.

Acquisition of B2BVideo Network

On May 16, 2002, we acquired B2BVideo
Network, which was formed in December 1999 to deliver to
business users managed enterprise video services. B2BVideo
Network delivers broadcast quality video over an Internet
Protocol (IP) Multicast network for delivery to the
desktop. IP Multicast enables

-12-



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##### 



B2BVideo Network to provide multiple streams of
high quality video to thousands of points on the network.
B2BVideo Network offers products and services that enable
businesses to integrate all of their video applications onto a
single platform for delivery of broadcast quality video to the
desktop. B2BVideo Network customers can: (1) distribute
their own programming to employees, clients and other audiences
over Private Video Networks (PVNs), (2) access a wide range
of business programming (i.e. television programs, training
videos, industry conferences, etc.), and (3) conduct video
calls and videoconferences. As a result of the acquisition,
B2BVideo Network became a wholly owned subsidiary of the Company.


In the past, our core video network technology
solution has been utilized to support video collaboration in
various vertical markets. Our network technology has been
primarily contained within the local business enterprise.
Connectivity through the wide area network (WAN) has
typically been established through less reliable and bandwidth
constrained integrated services digital network
(ISDN) service connections. While VNCIs technology
has resulted in various high profile customer installations, we
recognized the need to enhance its video technology solution
into the WAN. In addition, we began to see the strategic
advantages of offering a managed service end-to-end video
solution. B2BVideo Networks product offerings focus on
delivering highly reliable, high quality end-to-end managed
video service that solves the traditional shortcomings of WAN
video distribution. The acquisition of B2BVideo Networks
customer and programming guide was intended to accelerate the
Companys capabilities for supporting the WAN requirements
of customers and channel partners.

The following consideration was issued in
connection with the acquisition of B2BVideo Network:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | B2BVideo Networks common and preferred
    shareholders were issued 3,000,014 shares of our common stock;                                                                                                                                                                                                                                                                                                 
|
| | (b) | Options to purchase B2BVideo Networks
    Series A Preferred Stock were exchanged for options to
    purchase 139,123 shares of our common stock;                                                                                                                                                                                                                                                         
|
| | (c) | Options to purchase 2.75 Units of B2BVideo
    Network, each Unit consisting of (A) 50,000 shares of
    B2BVideo Network s Series B Preferred Stock and
    (B) warrants to purchase 50,000 shares of B2BVideo Network
    s common stock, were exchanged for options to purchase an
    aggregate of 192,977 shares of our common stock and warrants to
    purchase 46,374 shares of our common stock;
|
| | (d) | Warrants to purchase 3,176,000 shares of B2BVideo
    Network s common stock issued and outstanding immediately
    prior to the closing date were exchanged for warrants to
    purchase 1,214,223 shares of our common stock;                                                                                                                                                                           
|
| | (e) | Warrants to purchase 3,449,000 shares of B2BVideo
    Network s common stock were terminated upon consummation
    of the acquisition of B2BVideo Network;                                                                                                                                                                                                                                                



| |     |                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (f) | Holders of senior secured promissory notes of
    B2BVideo Network with an aggregate principal balance of
    $2,500,000 and accrued interest were exchanged for 4,282,956
    shares of our common stock and;



| |     |                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (g) | Options to purchase 681,771 shares of our common
    stock were issued to employees of B2BVideo Network in exchange
    for outstanding vested B2BVideo Network options. These options
    were 100% vested at the date of issuance.

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The following table sets forth the components of
the purchase price:

|                                         |  |   |           | 
|---------------------------------------- |  | - | --------- | 
|Common stock issued                      |  | $ | 4,369,782 | 
|Options issued to employees              |  |   | 242,185   | 
|Warrants issued                          |  |   | 461,726   | 
|Options issued to non-employees          |  |   | 123,578   | 
|Payment for B2BVideo Network liabilities |  |   | 156,355   | 
|Estimated transaction costs              |  |   | 1,612,788 | 
|                                         |  |   |           | 
|Total purchase price                     |  | $ | 6,966,414 | 
|                                         |  |   |           | 

The consideration issued to holders of
B2BVideos equity instruments and debt holders in
connection with the acquisition of B2BVideo Network was valued
as follows:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | VNCIs Common Stock  The value of
    our common stock was determined to be $0.60 per share, the price
    at which we sold our common stock to Moneyline and certain
    existing and new investors on May 16, 2002;                                                                                                                                                                                                                                                                  
|
| | (b) | Options issued to B2BVideo Networks
    employees  All outstanding options held by employees
    to purchase B2BVideo Networks common stock have been
    exchanged for options to purchase 681,771 shares of our common
    stock. The options have varying exercise prices and were 100%
    vested at the date of issuance. We valued such stock options
    using the Black-Scholes option-pricing model at $242,185. The
    calculation was based on the following assumptions:

|                        |  |  |         | 
|----------------------- |  |  | ------- | 
|Volatility              |  |  | 144%    | 
|Expected life           |  |  | 3 years | 
|Risk free interest rate |  |  | 3.8 %   | 
|Dividend Rate           |  |  | None    | 



| |     |                                                                                                                                                                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) | Warrants  Warrants to purchase our
    common stock issued in connection with the acquisition were also
    valued using the Black Scholes option-pricing model. The
    warrants have varying exercise prices. We valued such warrants
    at $461,726. The calculation was based on the same assumptions
    as discussed in (b) above; and        
|
| | (d) | Options issued to non-employees 
    Options to purchase our common stock issued in connection with
    the acquisition were valued using the Black Scholes
    option-pricing model. The options have varying exercise prices.
    We valued such options at $123,578. The calculation was based on
    the same assumptions discussed in (b) above.

During the fourth quarter of 2002, we completed
our review of the assets acquired and the liabilities assumed in
the acquisition of B2BVideo. This review resulted in the write
down of fixed assets by approximately $315,000 and an increase
in the amount allocated to goodwill. In addition, an adjustment
to reduce depreciation expense to reflect the write down of
fixed assets was recorded to the Statement of Operations. The
determination was made based upon an independent third party
appraisal.

-14-



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##### 



The final allocation of purchase price
consideration to the assets acquired and liabilities assumed as
of the acquisition date is as follows:

|                                                            |  |   |            |  
|----------------------------------------------------------- |  | - | ---------- | -
|Cash and cash equivalents                                   |  | $ | 18,334     |  
|Accounts receivable                                         |  |   | 129,466    |  
|Inventories                                                 |  |   | 531,662    |  
|Other current assets                                        |  |   | 3,841      |  
|Property and equipment, net                                 |  |   | 662,640    |  
|Other noncurrent assets                                     |  |   | 208,059    |  
|Accounts payable                                            |  |   | (1,075,063 | )
|Accrued liabilities                                         |  |   | (213,680   | )
|Capital lease obligations                                   |  |   | (45,134    | )
|                                                            |  |   |            |  
|Fair value of net assets acquired                           |  |   | 220,125    |  
|                                                            |  |   |            |  
|Goodwill                                                    |  |   | 6,746,289  |  
|                                                            |  |   |            |  
|Fair value of net assets acquired and recorded
    goodwill |  | $ | 6,966,414  |  
|                                                            |  |   |            |  

During the fourth quarter of 2002, management,
with the Board of Directors approval, made a decision to shut
down and cease all operations of B2BVideo. This resulted in an
asset impairment charge being recorded in December 2002. In
addition, we settled certain trade payables and other vendor
liabilities during the fourth quarter of 2002 which resulted in
an extraordinary gain of $652,000. We have terminated
substantially all B2BVideo employees and commenced negotiations
with the landlord of the B2BVideo office space to terminate the
lease agreement.



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 6. | Managements Discussion and Analysis of
    Financial Condition and Results of Operations

Some of the statements in this
Form 10-KSB are forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995 and involve a number of risks and uncertainties. We
have made these statements based on currently available
operating, financial and competitive information. However,
actual results and future events may differ significantly from
the results contemplated in the forward-looking statements
because of a number of factors, including product and technology
development, customer and market acceptance of our product,
demand for our products, the impact of competitive products and
pricing and other risks detailed in this Form 10-KSB and in
our other Securities and Exchange Commission filings.

You should read the following discussion of
our operating results in conjunction with the audited financial
statements and notes thereto appearing elsewhere in this Annual
Report on Form 10-KSB.

Overview

Organization and Business

Video Network Communications is a Delaware
corporation formed in 1993 to design, develop and market
full-motion, high resolution, cost-effective video network
systems as a state-of-the-art, business collaborative tool.
Users of the VidPhone video network system can view broadcast
video, collaborate in multi-party videoconferences, and retrieve
stored video on demand. Our VidPhone system bypasses the
bottleneck of local data networks to distribute video to and
from desktop and laptop personal computers and conference rooms
configured with VidPhone stations, over the same wiring used by
the telephone. At the same time, the VidPhone system software
provides the user with seamless access and control to
communicate over, or access video content on, private, wide
area, IP networks. We believe that the VidPhone system, in
combination with suitable IP networks, represents a high
performance, end-to-end, collaborative solution for corporate
users of video technology and related services.

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On May 16, 2002, we acquired 100% of the
outstanding common stock of B2BVideo Network. B2BVideo Network
offered a comprehensive range of services to support
business-to-business video communications. B2BVideo Network
provided an integrated, scalable platform for the delivery of
television quality video to the desktop. Its solution enabled
companies to integrate a variety of video applications, such as
business television broadcasting, videoconferencing, training,
and streaming, onto a single network that uses their existing
infrastructure yet does not interfere with existing local or
wide area networks (LANs and WANs).

B2BVideo Networks broadband video platform
provided television quality video from any desktop to any
desktop on the network and supported a variety of applications
including videoconferencing, video broadcasting and access to
third party business programming. B2BVideo Network offered its
services in certain major cities internationally via its unique
Broadband Video IP Multicast Network. The acquisition of
B2BVideo Networks customer and programming guide was
intended to accelerate our capabilities for supporting the WAN
requirements of customers and channel partners. The acquisition
of B2BVideo was intended to accelerate our capabilities for
supporting Wide Area Networking requirements of customers and
channel partners.

During the fourth quarter of 2002,
B2BVideos marquee and only customer terminated its
contract with B2BVideo. Based on the cancellation of the
contract, the significant capital expenditures deemed necessary
to build and maintain the required proprietary network, the
required technological changes and the lack of future business
prospects, management, with the Board of Directors approval,
made a decision to shutdown and cease all operations of
B2BVideo. This resulted in a $7,276,000 asset impairment charge
recorded in December 2002. In addition, we settled certain trade
payables and other vendor liabilities during the fourth quarter
of 2002, which resulted in a gain on extinguishment of debt of
approximately $652,000. Since our merger with B2BVideo in May
2002, we have terminated 21 B2BVideo employees, four in the
fourth quarter. This represents substantially all B2BVideo
employees. We have commenced negotiations with the landlord of
the B2BVideo office space to terminate the lease agreement.
There were no restructuring accruals required or recorded as of
December 31, 2002.

As overall sales continue to be limited by a weak
economy, we will continue to focus on identifying new potential
customers for whom video and collaborative applications are
mission critical because we believe these potential
customers will be able to realize the most compelling return on
their investment or an overall cost savings as the result of an
investment in a video network system.

The tragic events of September 11, 2001
generated significant new interest in our video network products
as corporate America and the Federal government evaluates
alternatives to business travel and the increased use of video
for surveillance and security. We believe this new interest in
visual communications will accelerate the adoption of video
networks by large, complex organizations. During the second
quarter of 2002, we announced the release of EyeNet, a rapidly
deployable security network that can integrate key surveillance
technologies such as television quality video with digital video
recording, two-way video communications, alarm monitoring,
emergency response and biometrics such as facial recognition.
Ideal applications for EyeNet include airport and mass transit
security, highway surveillance, military installation security,
and campus monitoring. However, we cannot predict when or if
this new interest will result in orders for our products
especially given the current weak economic environment.

In 2003, we intend to intensify our focus on
selling and marketing our video network solutions through our
Strategic Alliance Agreement with Moneyline. In addition, in the
first quarter of 2003, we took significant steps to diversify
our revenue base by acquiring the webcasting business of Wiltel
Communications. The acquired webcasting business includes two
product suites Activecast and Talkpoint. Talkpoint is a
self-serve webcasting service that allows users to conduct
interactive presentations over the internet incorporating
PowerPoint slides and streaming audio. The transaction included
a direct sales force with over 70 active customer relationships.
See the section entitled Subsequent Events for
additional detail on this acquisition.

This operating plan is subject to a number of
risks and uncertainties, including our ability to sell and
market our product and develop market awareness of our video
network system and our ability to obtain financing when
required. We have subcontracted all major manufacturing and
production activities and

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plan to continue doing so for the foreseeable
future, but we will continue to retain test and quality
assurance functions until all subcontractors are certified with
respect to quality.


We have suffered recurring losses from
operations, have experienced recurring negative cash flow from
operations, have had a working capital deficiency and have a
significant accumulated deficit. We expect to continue to incur
significant operating expenses to sustain our product
development while maximizing our sales and marketing
opportunities. At this stage, it is difficult to predict with
accuracy the level of our sales in future periods, or when
marketing initiatives will result in sales. We have required
substantial funding through debt and equity financings since our
inception to complete our development plans and pursue
full-scale operations. These conditions raise substantial doubt
about our ability to continue as a going concern. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.

Critical Accounting Policies and Significant
Estimates

The SEC recently issued disclosure guidance for
critical accounting policies. The SEC defines
critical accounting policies as those that require
application of managements most difficult, subjective or
complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.

The following listing is not intended to be a
comprehensive list of all of our accounting policies. See Note 2
to the Consolidated Financial Statements included in this Annual
Report on Form 10-KSB for the year ended December 31,
2002. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles
generally accepted in the United States of America, with no need
for managements judgment in their application. There are
also areas in which managements judgment in selecting any
available alternative would not produce a materially different
result.

Inventory

Inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
Inventory consists primarily of subassembly components. Total
charges taken for slow-moving inventory during the year ended
December 31, 2002 were approximately $562,000. We reduce
the carrying value of our inventory for estimated obsolescence
or excess inventory by the difference between the cost of
inventory and its estimated net realizable value based upon
assumptions about future demand and market conditions. There can
be no assurance that we will not have to take additional
inventory provisions in the future, based upon a number of
factors including: changing business conditions; the
introduction of new products and the effect of new technology.

Revenue Recognition

Revenues from sales of our hardware products are
recognized when the equipment has been delivered to the
customer, title has passed, the equipment has been accepted by
the customer, the collection of the sales price is probable and,
no further obligations to the customer exist. Certain sales of
equipment include software that enables the customer to utilize
network services provided by us. Such sales are deferred and
revenue is recognized ratably over the life of the associated
network service contract, which is generally two years. Network
services revenue is recognized in the period in which the
contract services are provided to the customer. Recognition of
sales starts at the time of acceptance of the customer, which is
30 days from installation of the equipment. The customer
has a right of return within 30 days of installation. The
customer is also granted a one-year warranty for the proper
functioning of the equipment and software. Any losses on
contracted sales are recognized in the period the loss has been
determined. Service revenues associated with time and materials
consulting projects are recognized at the time the services are
rendered, collection is probable, and we have no further
obligations to the customer. Revenues from maintenance contracts
are recognized ratably over the term of the contract as services
are performed. The Company records a liability for product
warranty obligations at the time of sale based upon historical
warranty experience. The term of the warranty is generally
twelve months. The Company also records an additional

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liability for specific warranty matters when they
become known and are reasonably estimable. The Companys
product warranty obligations are included in accrued expenses.


Deferred Revenue

Amounts received prior to the delivery of
equipment or contracted services are recognized as a liability
and revenue recognition is deferred until such time that all
revenue recognition criteria have been met. Revenue recognition
for equipment sales is deferred until the equipment has been
delivered, title has passed to the customer, collection is
probable and the equipment has been accepted by the customer.
Deferred revenues related to service contracts are deferred
until such time that the services have been performed. Revenues
related to sales of equipment and software associated with
network services contracts are recognized ratably over the term
of the network services contract. We had deferred revenues of
$28,263 and $141 at December 31, 2001 and December 31,
2002, respectively.

Impairment of Long-Lived Assets

Our long-lived assets consist primarily of
property and equipment. As described in Note 7 to the Notes to
Consolidated Financial Statements, during 2002, we shutdown and
ceased all operations of B2BVideo. In connection with this
transaction, we recorded an impairment loss of approximately
$530,000. Management periodically reviews the future cash flows
to be derived from its long lived assets including trademarks,
patents, goodwill and fixed assets. When a material change in
projected cash flows from long lived assets is apparent, an
appropriate impairment of the respective asset(s) is recorded.

Deferred Tax Assets

We record a valuation allowance against deferred
tax assets when we believe that it is more likely than not that
these assets will not be realized. Because of our recurring
losses and negative cash flows, we have provided a valuation
allowance against all deferred taxes as of December 31,
2001 and 2002.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results will differ from those estimates. Significant
accounting estimates used in the preparation of our consolidated
financial statements include the fair value of acquired assets,
purchase price allocations, the realizability of deferred tax
assets, the carrying value of inventory and depreciation and
amortization.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 retains the requirements of SFAS
No. 121 to recognize an impairment loss only if the
carrying value of a long-lived asset is not recoverable from its
estimated undiscounted cash flows and to measure an impairment
loss as the difference between the carrying value and fair value
of the asset, but it establishes new standards for long-lived
assets to be disposed of. In connection with the B2BVideo
acquisition and subsequent decision to shut down the B2BVideo
operations in the fourth quarter of 2002, we determined that
certain assets were impaired. We have recorded an impairment
charge of $7,276,000 for the year ended December 31, 2002.

In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an
extraordinary item of income and requires that such gain or loss
be evaluated for extraordinary classification under the criteria
of Accounting Principles Board (APB) No. 30
Reporting Results of Operations. Certain
provisions of this statement

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will be effective for us for the year ending
December 31, 2003, other provisions are effective for
transactions occurring after May 15, 2002 or to financial
statements issued after May 15, 2002. The extraordinary
gains resulting from early extinguishment of debt (see Note 11
of Notes to Consolidated Financial Statements) will be
reclassified to a component of other income within the
Consolidated Statements of Operations upon adoption on
January 1, 2003.


In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 will supersede Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that costs
associated with an exit or disposal plan be recognized when
incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31,
2002. The restructuring activities that management has
undertaken in the first quarter of 2003 (see Note 17 of Notes to
Consolidated Financial Statements) will be accounted for under
SFAS No. 146.

In November 2002, the FASB issued Interpretation
(FIN) No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 elaborates on
the existing disclosure requirements for most guarantees. FIN 45
requires that at the time a company issues certain guarantees,
the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and
annual financial statements. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31,
2002. FIN 45s disclosure requirements are effective for
financial statements of interim or annual periods ending after
December 15, 2002 and are applicable to all guarantees
issued by the guarantor subject to FIN 45s scope,
including guarantees issued prior to the issuance of FIN 45. The
disclosure requirements of FIN 45 are applicable for financial
statements of interim or annual periods ending December 31,
2002. We will adopt the recognition and measurement requirements
of FIN No. 45 in the first quarter of fiscal year 2003 and
have included the new disclosure requirements in the Notes to
the Consolidated Financial Statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends SFAS
No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
employee compensation, and also amends the disclosure provision
of SFAS No. 123 to require disclosure in the summary of
significant accounting policies the effects of an entitys
accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in
annual and interim financial statements. The disclosure
provision is required for all companies with stock-based
employee compensation, regardless of whether the company
utilizes the fair value method of accounting described in SFAS
No. 123 or the intrinsic value method described in APB
Opinion No. 25 Accounting for Stock Issued to Employees.SFAS No. 148s amendment of the transition and
annual disclosure provisions of SFAS No. 123 are effective
for fiscal years ending after December 15, 2002. The
disclosure requirements for interim financial statements
containing condensed consolidated financial statements are
effective for interim periods beginning after December 15,
2002. We currently account for stock based compensation
utilizing the intrinsic value method of accounting for stock
based employee compensation described by APB No. 25. We have
complied with the disclosure requirements of SFAS No. 148
in the Notes to the Consolidated Financial Statements.

Results of Operations

Comparison Of The Years Ended
December 31, 2002 And December 31, 2001

Revenues.We
recognized approximately $824,000 in revenues during 2002
compared to approximately $12,976,000 recognized in 2001, a
decrease of approximately $12,152,000, or 94%. Of these
revenues, $554,000 related to product sales in 2002 compared to
approximately $3,389,000 in 2001. The decrease in product sales
was attributed to a declining number of customers in 2002
compared to 2001;

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approximately 15 in 2002 compared to
approximately 25 in 2001 with fewer than five new customers in
2002, as the effects of the recession in the telecommunications
sector continued. Revenues related to installation and other
services were $270,000 during 2002 compared to $9,587,000 in
2001. Services revenue in 2001 included substantial amounts
related to a systems integration project and to management fees
that did not recur in 2002. The systems integration project was
a unique project undertaken by the Company in 2001 at a
customers request. Systems integration is not a standard
offering or core competency of VNCI. Included in services
revenue in 2002 were approximately $74,000 related to the
activities of B2BVideo Network. In the fourth quarter of 2002,
we decided to shut down and cease the operations of B2BVideo
(see Note 4 of Notes to Consolidated Financial Statements).


Cost of Sales.We
recognized approximately $1,820,000 in cost of sales in 2002
compared to approximately $11,343,000 in 2001, a decrease of
approximately $9,523,000, or 84%. Of the cost of sales
recognized in 2002, approximately $519,000 was related to
product sales compared to $2,830,000 in 2001; approximately
$739,000 was related to the cost of providing installation and
other services in 2002 compared to $5,513,000 in 2001; and
approximately $562,000 pertained to the increase in the
inventory reserve in 2002 compared to $3,000,000 in 2001.

Gross Margin on
Sales.The overall gross margin on
revenues recognized in 2002 was negative $996,000 compared to
overall gross margin achieved in 2001 of $1,633,000, or 13%.
2002 gross margin derived from product sales was approximately
$35,000; approximately negative $469,000 from service revenues.
The overall decline in gross margin percentage in 2002 compared
to 2001 is primarily a result of under- absorption of production
costs due to the low level of sale activity and the inability to
cover fixed costs as a result of decreased sales.

Research and Development.Research and development costs
increased to approximately $3,223,000 in 2002, from $2,774,000
in 2001, representing an increase of approximately $449,000, or
16%. $855,000 of the increase was due to the inclusion of
B2BVideo Network during 2002. In the fourth quarter of 2002, we
made the decision to shut down and cease the operations of
B2BVideo (see Note 4 of Notes to Consolidated Financial
Statements). Research and Development spending at VNCI decreased
by approximately $406,000 during 2002 relative to the prior year
due to reduced engineering staffing, lower depreciation, and
lower materials and testing costs.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased to approximately $6,628,000
during 2002 from approximately $6,136,000, representing an
increase of $492,000, or 8%. Included in selling, general and
administrative expense for 2002 is approximately $1,396,000
incurred by B2BVideo Network. In the fourth quarter of 2002, we
made the decision to shut down and cease the operations of
B2BVideo (see Note 4 of Notes to Consolidated Financial
Statements).

Excluding the effects of B2BVideo Network, sales
and marketing expenses at VNCI decreased approximately
$1,126,000 in 2002 as compared to 2001. Staffing costs declined
by $469,000 as fewer staff were employed in customer support and
in the sales department. Travel and entertainment costs declined
by approximately $266,000. A write down of certain demonstration
equipment of $219,000 was recorded in 2001.

General and administrative costs increased by
approximately $1,068,000 in 2002 compared to 2001. The 2002
results include approximately $847,000 related to B2BVideo
Network. Excluding the effects of B2BVideo Network, general and
administrative costs at VNCI increased by approximately
$221,000. Significantly higher legal and accounting costs during
the year were partially offset by reductions in investor
relations costs.

Asset Impairment Charges.Under SFAS No. 142, goodwill
impairment occurs if the net book value of a reporting unit
exceeds its estimated fair value. Management concluded based
upon the cancellation of B2BVideo Networks only customer
contract, the significant capital expenditures associated with
building and maintaining a proprietary network, and the result
of an extensive review of the B2BVideo Network technology and
business prospects, that it was unlikely to derive any net
positive cash flow from that business in the future. As a result
the book value of the B2BVideo reporting unit exceeded its fair
value.

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Upon completion of the annual assessment, we
recorded a non-cash impairment charge of $6,746,000 to reduce
the carrying value of goodwill to zero.


During 2002, VNCI recognized impairment losses of
approximately $7,276,000 related to the write down of certain
B2BVideo assets. The write-down of goodwill associated with the
acquisition of B2BVideo in May 2002 accounted for approximately
$6,746,000 of the charge. The remaining $530,000 of the charge
related to the write-down of the net book value of certain fixed
and other assets. The impairment loss was calculated as the
difference between the carrying value and fair value of the
assets.

Interest (Income)
Expense.We recorded net interest
expense of approximately $1,289,000 in 2002 compared to net
interest expense recorded in 2001 of approximately $1,579,000.
Interest expense in 2002 was approximately $1,357,000 compared
to approximately $1,600,000 recorded in 2001. Included in
interest expense in 2002 was $1,151,000 related to the
amortization of costs assigned to warrants issued in connection
with obtaining debt financing. Interest income was approximately
$68,000 in 2002 compared to $21,000 recognized in 2001,
primarily due to increased cash balances in 2002 offset by
declining interest rates.

Extraordinary Gain.During 2002, we recorded extraordinary
gain on the extinguishment of debt in the amount of
approximately $3,791,000. This amount is comprised of the
extinguishment of the Sanmina debt and related accrued interest
in May 2002, which resulted in an extraordinary gain of
$2,387,000. The remaining gain of approximately $1,404,000
relates to the settlement of VNCI and B2BVideo vendor payables.
The extraordinary gain will be reclassified, to a component of
other income within the Consolidated Statements of Operations
upon adoption of SFAS No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Correctionson
January 1, 2003.

Net Loss.As a
result of the foregoing factors, the net loss for 2002 increased
to approximately $15,619,000 from $9,025,000 in 2001, an
increase of approximately $6,594,000 or 73%.

Liquidity and Capital Resources

We have an accumulated deficit balance of
$83,292,000 from our inception through December 31, 2002.
We expect to incur additional operating losses for the
foreseeable future, principally as a result of expenses
associated with product development efforts and anticipated
sales, marketing, and general and administrative expenses.
During 2002, we satisfied our cash requirements principally from
cash on hand as of December 31, 2001, from the proceeds of
bridge financings obtained in early 2002, and from the
investments by Moneyline and other investors completed on
May 16, 2002.

We had cash and cash equivalents of $6,498,000 at
December 31, 2002 compared to $507,000 at December 31,
2001, an increase of $5,991,000. The increase in cash and cash
equivalents was primarily the result of cash from investments by
Moneyline and other investors on May 16, 2002.

Net cash used in operations during 2002 was
approximately $10,475,000. The net loss in 2002, reduced by
depreciation, amortization, non-cash compensation and other
non-cash charges was approximately $5,770,000. Inventory
decreased by approximately $286,000 during 2002 due to an
increase of approximately $562,000 in the provision for excess
inventory reserves and sales of product made during the period,
offset by inventory purchases. Accounts receivable decreased by
$675,000 during 2002 due to lower sales in 2002 compared to 2001
and as cash was collected from customers. Accounts payable
declined by approximately $1,123,000 during 2002 due to
repayment of accounts payable with the proceeds from the
Moneyline and other investors investment and due to
reductions in amounts claimed by certain vendors as a result of
pre-investment negotiations.

We used approximately $1,968,000 in investing
activities during 2002. Payments of approximately $1,751,000,
net of cash acquired, were made to cover costs associated with
the acquisition of B2BVideo Network. Capital spending on
equipment was approximately $184,000. A further amount of
approximately $31,000 was used to acquire and protect the
Companys intellectual property.

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We generated approximately $18,433,000 in cash
from financing activities during 2002. Prior to the investment
made in May 2002 by Moneyline and other investors, we raised
approximately $1,049,000 by issuing short-term notes, which were
subsequently converted to common equity. Moneyline and other
investors provided approximately $18,037,000 in cash in
connection with their investment in VNCI. Immediately prior to
the investment, the Company reached an agreement with Sanmina
Corporation to settle the outstanding debt VNCI owed Sanmina
whereby Sanmina would accept a one-time payment of $1,100,000 in
return for Sanminas forgiveness of all other outstanding
debt and related accrued interest. This payment was made
coincident with the closing of the Moneyline investment and
resulted in an extraordinary gain for debt forgiveness of
$2,387,000. A consultant to the Company exercised options, which
resulted in an inflow of cash of $10,300 to the Company during
the year.

As discussed in Note 17 to the Consolidated
Financial Statements, we have a Strategic Alliance Agreement
with Moneyline under which we expect to incur significant costs
over the next year. Our ability to generate cash from operations
will be dependent upon sales we generate as a result of
Moneyline acting as our exclusive distributor of our products to
the financial services industry. In addition, we may rely on
Moneyline for certain administrative support in 2003 which may
result in costs being incurred and paid to Moneyline.

We have fixed contractual obligations under
various lease agreements. Our contractual obligations, including
obligations associated with our acquisition subsequent to
December 31, 2002 are as follows:

|                                   |  |                               |           |      |  |       |           |       |  |       |           |  |  |   |           |  |  |   |   | 
|---------------------------------- |  | ----------------------------- | --------- | ---- |  | ----- | --------- | ----- |  | ----- | --------- |  |  | - | --------- |  |  | - | - | 
|                                   |  |                              
|                                   |  | Payments Due By Period (000s)
|                                   |  |                              
|                                   |  |                               |           | <1   |  | 13   |           | 46   |  | 710 
|Contractual Obligations            |  | Total                         |           | Year |  | Years |           | Years |  | Years
|                                   |  |                               |           |      |  |       |           |       |  |      
|Capital lease obligations          |  | $                             | 36,632    |      |  | $     | 11,288    |       |  | $     | 25,344    |  |  | $ |          |  |  | $ |  | 
|Operating leases                   |  |                               | 8,461,319 |      |  |       | 1,399,331 |       |  |       | 4,042,301 |  |  |   | 3,019,687 |  |  |   |  | 
|                                   |  |                               |           |      |  |       |           |       |  |       |           |  |  |   |           |  |  |   |   | 
|Total contractual cash obligations |  | $                             | 8,497,951 |      |  | $     | 1,410,619 |       |  | $     | 4,067,645 |  |  | $ | 3,019,687 |  |  | $ |  | 
|                                   |  |                               |           |      |  |       |           |       |  |       |           |  |  |   |           |  |  |   |   | 

Subsequent Events

On February 14, 2003, the Company purchased
from Williams Communications, LLC (WCLLC) and
Williams Communications Procurement, LP (together with
WCLLC, the Sellers), each a wholly owned subsidiary
of Wiltel Communications Group, Inc. (WCG).
WCLLCs webcasting business, including certain equipment
and other assets used by WCLLC in this business for $750,000 in
cash and $850,000 security on the leased space. The purchased
webcasting business includes the production and distribution of
multimedia presentation materials using streaming media
technology.

The acquisition of the webcasting business will
enable the Company to provide a full suite of interactive
multimedia services. The webcasting product suite, including
Activecast and Talkpoint, allow for a broader reach within our
targeted customers and provides ubiquity with distribution of
voice and video over the internet. This service model does not
require capital investment by our customers. Users can leverage
the services and toolset by using standard internet browsers and
media players. In addition to the new technology acquired, the
transaction includes active customers, which we plan to leverage
to market our legacy service and technology.

In the first quarter of 2003, the Company
implemented a restructuring of the VidPhone business to right
size the expense base to take into account the Companys
anticipation of lower sales. The restructuring included:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Termination of 37 employees, primarily in
    sales, engineering and administrative capacities.                                                                                            
|
| |  | Transfer of three employees to Moneyline.
    Employees transferred are primarily focused on channel
    management and business development for the managed video
    service.            
|
| |  | Remaining employees will focus on supporting the
    Moneyline Strategic Alliance Agreement. See the section
    entitled Sales & Marketing for additional
    details on this agreement.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Transfer of direct sales responsibility for the
    VidPhone System to the direct sales team of the webcasting
    business.                                                                                                                                                                                                                                                             
|
| |  | Election of Alexander Russo as Chairman of the
    Board of Directors, and the appointment of Nicholas Balletta as
    President of the Company and his election as a director of the
    Company and Frank Joanlanne, who was appointed Senior Vice
    President Webcasting Services of the Company. We entered into
    employment agreements with Mr. Balletta and
    Mr. Joanlanne.

During the last quarter of 2002, management, with
the Board of Directors approval, made a decision to shutdown and
cease all operations of B2BVideo. Subsequent to year-end, the
Company commenced negotiations with the landlord of the B2BVideo
office space to terminate the lease agreement.

With the restructuring complete and with the
integration of the webcasting business, management believes the
Company has sufficient cash to fund operations through the
fourth quarter of 2003. We intend to pursue financing in the
second quarter of 2003 for the continued funding of operations
and for the development of new product enhancements and further
expansion of both its webcasting and VidPhone businesses. The
Company will pursue existing investors as well as outside
strategic investors. In the event that additional funding is not
available, the company will pursue other strategic alternatives
including the sale of the Company, the sales of its assets, or
liquidation.

Risk Factors

The following risk factors should be read in
conjunction with the Subsequent Events section in
Managements Discussion and Analysis of Financial Condition
and Results of Operations and Note 16 to the Financial
Statements. Subsequent events may have a material effect on some
of these risk factors.

A Failure to Obtain Necessary Additional
Capital in the Future on Acceptable Terms Could Prevent us from
Executing our Business Plan.

We may need additional capital in the future to
fund our operations, finance investments in equipment and
corporate infrastructure, expand our network, increase the range
of services we offer and respond to competitive pressures and
perceived opportunities. Cash flow from operations, and cash on
hand may not be sufficient to cover our operating expenses,
working capital and capital investment needs. We cannot assure
you that additional financing will be available on terms
acceptable to us, if at all. A failure to obtain additional
funding could prevent us from making expenditures that are
needed to allow us to grow or maintain our operations.

If we raise additional funds by selling equity
securities, the relative equity ownership of our existing
investors could be diluted or the new investors could obtain
terms more favorable than previous investors. If we raise
additional funds through debt financing, we could incur
significant borrowing costs. The failure to obtain additional
financing when required could result in us being unable to grow
as required to attain profitable operations.

Dependency upon Moneyline Telerate
(MLT)

We are dependent on MLT to build revenue for our
video products in the financial services market, which is key to
the overall, long-term development of revenue for our video
technology. Our dependence has been further increased by our
decision in the first quarter of 2003 to limit our sales efforts
in other markets. We cannot be assured that MLT will be
successful in developing this market. In addition, we are
dependent on MLT for certain support activities and our
financing needs.

We Will Be Focusing A Significant Amount Of
The Companys Resources On Building A Recently Acquired
Business

As discussed in the section entitled,
Subsequent Events, we recently right-sized our
VidPhone business and acquired a webcasting business. In the
future a significant amount of our resources will be focused on
developing the webcasting business. While an experienced
management team joined us in

-23-



---



##### 



connection with the acquisition, we have limited
experience running a webcasting business and do not have a
proven track record of operating this type of business
profitably. We cannot assure you that we will be successful in
operating this webcasting business.


Customers May Not Buy Our Products Due To
Concerns Over Our Viability

Due to our recurring losses from operations and
lack of cash, some potential customers may decide not to
purchase our video network system because of concerns that we
may be unable to service, enhance or upgrade the systems. If we
are not able to alleviate concerns about our long-term
viability, we may not be able to market and sell our video
network system successfully and continue operations.

We Have a Limited Customer Base and Attendant
Risk Concentration; We Are Dependent Upon a Few Significant
Customers

We have a limited customer base with several
customers providing in excess of 10% of our total revenues. We
generally grant uncollateralized credit terms to our customers
and have not experienced any credit-related losses. Three
customers accounted for 32%, 16%, and 13%, respectively, of our
total revenues in the year ended December 31, 2002. Two
customers accounted for 50% and 30%, respectively, of our total
revenues in the year ended December 31, 2001 Three
customers accounted for 74%, 14%, and 12% of our accounts
receivable at December 31, 2002 and four customers
accounted for 30%, 16%, 13% and 10% of our accounts receivable
at December 31, 2001. Failure to diversify this customer
concentration could result in our inability to continue to
generate revenues sufficient to support operations.

We Have Accumulated a Substantial Deficit; We
Have a History of Losses and Limited Revenue and Expect Losses
to Continue

We have incurred substantial losses from
operations to date and had an accumulated deficit of $83,292,000
through December 31, 2002. There is substantial doubt about
our ability to continue as a going concern.

We recognized $824,000 in revenues during the
year ended December 31, 2002, compared to $12,976,000
during 2001, including approximately $6,500,000 from a data
infrastructure project that was not a recurring revenue source,
and $8,769,000 in revenues during 2000. Accordingly, there is
limited historical basis to expect that we will be able to
realize sufficient operating revenues or profits in the future
to support continuing operations. We have a limited backlog for
revenue, and we cannot predict with accuracy what our revenues
will be in the future. Our ability to generate sales and to
recognize operating revenues in the future will depend on a
number of factors, certain of which are beyond our control,
including:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | customer acceptance of products shipped and
    installed to date and in the future; 
|
| |  | our ability to generate new sales of products and
    secure customer acceptance; and
|
| |  | customer payments.                                                                   

We Expect to Continue to Experience Quarterly
Fluctuations in our Operating Results

In the past we have experienced quarterly
fluctuations in revenues and operating results as a result of a
number of factors, including the fact that the typical cost of
our system is relatively high, each purchase of our video
network system constitutes a substantial portion of our revenues
for the period in which it is accepted by our customer, the
timing of our sales and marketing campaigns and the costs
associated with those efforts, and our overall expenses during
the period. Customers generally pay for our products and
services only after they are installed and accepted and we
typically incur the costs associated with the sales and
installation of our video network systems prior to receipt of
any customer payments. We expect these to continue and
accordingly, we expect to continue to experience quarterly
fluctuations in our revenues and operating results for the
foreseeable future.

-24-



---



##### 



We May Not Be Able To Develop Direct Sales And
Marketing Capabilities.

We expect to depend on the marketing efforts of
our resellers for the foreseeable future. However, we are
developing a small direct marketing capability to promote our
video network system and to support our resellers. We cannot
assure you that we will be able to create awareness of, and
demand for, our products through our marketing efforts, or that
the development of our direct marketing capabilities will lead
to sales of our products and services. If we cannot successfully
develop our own sales and marketing capabilities, we may not
succeed in building brand-name recognition of the VidPhone
system, and we will remain solely dependent on reseller efforts.

We May Not Be Able to Penetrate the Financial
Services Market.

VNCI and Moneyline have entered into a Strategic
Alliance Agreement and certain technology license agreements
pursuant to which VNCI will license software and network
processes and sell video equipment to Moneyline. Moneyline will
be the exclusive distributor of VNCIs equipment to the
financial services market. To assist Moneyline in being
successful at selling VNCI hardware, VNCI is making its
executives and sales personnel available to Moneyline for
prospect calls. Sales to Moneyline are expected to generate a
significant part of our future revenues. However, we have sold
only a limited number of video network systems and components
under this arrangement and to date have recognized minimal
revenues from those sales. We currently have limited orders from
Moneyline for additional sales of VidPhone systems. If Moneyline
fails to market and sell our products, or our products fail to
become an accepted part of Moneylines product offerings,
the value of your investment could be reduced.

The Market for Video Communications Products
Is Evolving and May Not Support Our Revenue Expectations; Our
Business Has Been Adversely Affected by the General Slowdown in
the Economy

The market for video communications products
continues to evolve rapidly, and demand for and market
acceptance of new products is unpredictable. As is typical for a
new technology, demand for and market acceptance of new products
is unpredictable. The cost of video communications systems
typically represents a substantial investment by the customer
and have tended to be discretionary purchases. Accordingly, we
cannot predict whether the renewed interest in video networking
products will result in higher overall sales of video
communications equipment. If the market for video communications
products develops more slowly than expected or is adversely
affected by a slow down in the economy, our business and
financial condition could be materially and adversely affected.

Our Industry is Subject to Rapid Technological
Change; If We Are Not Able to Adequately Respond to Changes, Our
Products May Become Obsolete or Less Competitive and Our
Operating Results May Suffer

We may not be able, especially given our lack of
financial resources, to respond effectively to the technological
requirements of a changing market, including the need for
substantial additional capital expenditures that may be required
as a result of these changes. The video network systems industry
is characterized by rapidly changing technology and continuing
process development. The future success of our business will
depend in large part upon our ability to maintain and enhance
our technological capabilities and successfully anticipate or
respond to technological changes on a cost-effective and timely
basis. In addition, our industry could in the future encounter
competition from new or revised technologies that render
existing technology less competitive or obsolete.

The Protection of Our Intellectual Property is
Uncertain

Our success will depend, in part, on our ability
to protect our intellectual property rights to our proprietary
hardware products. Toward that end, we rely in part on
trademark, copyright and trade secret laws to protect our
intellectual property in the U.S. and abroad. The degree of
protection provided by patents is uncertain and involves largely
unresolved complex legal and factual questions.

The process of seeking patent and trademark
protection can be long and expensive, and there is no assurance
that any pending or future applications will result in patents
and/or registered trademarks.

-25-



---



##### 



Further, although we have some patents on our
technology, we cannot assure you that these or any other
proprietary rights granted will provide meaningful protection or
any commercial advantage to us. We also cannot assure you that
claims for infringement will not be asserted or prosecuted
against us in the future, although we are not presently aware of
any basis for claims. A number of companies have developed and
received proprietary rights to technologies that may be
competitive with our technologies. Most of these entities are
larger and have significantly greater resources than we do.
Given the rapid development of technology in the
telecommunications industry, we cannot assure you that our
products do not or will not infringe upon the proprietary rights
of others.


We Are Dependent on Third Parties for
Manufacturing

We outsource the manufacturing and assembly of
many of the components of our products. We cannot assure you
that our subcontractors will continue to perform under our
agreements with them or that we will be able to negotiate
continuing arrangements with these manufacturers on acceptable
terms and conditions, or at all. If we cannot maintain
relationships with our current subcontractors, we may not be
able to find other suitable manufacturers. Any difficulties
encountered with these manufacturers could cause product defects
and/or delays and cost overruns and may cause us to be unable to
fulfill orders on a timely basis. Any of these difficulties
could materially adversely affect us.

Future Government Regulation Could
Adversely Affect Our Marketing and Sales

Several components of our video network system,
including the VidModem and VidPhone Switch, must comply with
certain regulations of the Federal Communications Commission
(FCC). Under FCC regulations, we will be required to
follow a verification procedure consisting of a
self-certification that the VidModem complies with applicable
regulations pertaining to radio frequency devices. A qualified,
independent testing facility tested the VidModem, and it was
found to comply with FCC regulations. We obtained equipment
registrations from the FCC for certain VidPhone system
components, including the VidPhone switch that is connected to
the public switched telephone network.

Although we believe that at present the VidPhone
system complies with all applicable government regulations,
future government regulations could increase the cost of
bringing products to market or adversely affect our ability to
market and sell our products and technology.

-26-



---



##### 



Item 7.  Financial
Statements

|                                                                                                                            |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                            |  | Page
|                                                                                                                            |  |     
|Independent Auditors Reports                                                                                               |  |      | F-1 | 
|Consolidated Balance Sheets as of
    December 31, 2001 and 2002                                                            |  |      | F-3 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2001 and 2002                                    |  |      | F-4 | 
|Consolidated Statements of Changes in
    Stockholders Equity (Deficit) for the years ended
    December 31, 2001 and 2002 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001 and 2002                                    |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                                  |  |      | F-7 | 

-27-



---



##### 



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of 
 Video Network Communications, Inc.:

We have audited the accompanying balance sheet of
Video Network Communications, Inc. (the Company) as
of December 31, 2001, and the related statements of
operations, changes in stockholders equity (deficit), and
cash flows for the year then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the 2001 financial statements
referred to above present fairly, in all material respects, the
financial position of Video Network Communications, Inc. at
December 31, 2001, and the results of its operations and
its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

The accompanying 2001 financial statements have
been prepared assuming that the Company will continue as a going
concern. As more fully described in Note 1 to the financial
statements, the Company has incurred recurring losses from
operations, has negative cash flows from operations, has a
working capital deficiency, and has an accumulated deficit.
These conditions raise substantial doubt about the
Companys ability to continue as a going concern.
Managements plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome
of this uncertainty.



|                          |                  
|------------------------- | -----------------
|Manchester, New Hampshire | Ernst & Young LLP

April 4, 2002, except for Note 16, as


to which the date is May 17, 2002


F-1



---



##### 



INDEPENDENT AUDITORS REPORT

To The Board of Directors and Stockholders of 
 Video Network Communications, Inc. 
 Portsmouth, New Hampshire

We have audited the accompanying consolidated
balance sheet of Video Network Communications, Inc. and
subsidiary (collectively, the Company) as of
December 31, 2002, and the related statement of operations,
stockholders equity (deficit), and cash flows for the year
then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on
our audit. The consolidated financial statements of the Company
for the year ended December 31, 2001 were audited by other
auditors whose report, dated April 4, 2002 (except for
Note 16, as to which the date is May 17, 2002),
expressed an unqualified opinion and included an explanatory
paragraph that disclosed uncertainty about the Companys
ability to continue as a going concern.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.

In our opinion, such 2002 consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2002,
and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Companys recurring
losses and negative cash flows from operations raise substantial
doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also
described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.

As described in Note 1, in 2002 the Company
had significant intercompany activity with its majority
investor. The Company is dependent on its majority investor for
a significant portion of its sales, certain support activities
and its financing needs. The accompanying financial statements
may not necessarily be indicative of the conditions that would
have existed or the results of operations had the Company
operated as an unaffiliated entity.

Deloitte & Touche LLP

Boston, Massachusetts


March 7, 2003

F-2



---



##### 



VIDEO NETWORK COMMUNICATIONS, INC.

Consolidated Balance Sheets

|                                                                                                                     |                                                                                                                 |              |             |              |  |   |             |   | 
|-------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------ | ----------- | ------------ |  | - | ----------- | - | 
|                                                                                                                     |                                                                                                                 | December 31, |             | December 31,
|                                                                                                                     |                                                                                                                 | 2001         |             | 2002        
|                                                                                                                     |                                                                                                                 |              |             |             
|ASSETS                                                                                                              
|Current assets:                                                                                                      |                                                                                                                 |              |             |              |  |   |             |  
|Cash and cash equivalents                                                                                            |                                                                                                                 | $            | 507,396     |              |  | $ | 6,497,643   |  
|Accounts receivable                                                                                                  |                                                                                                                 |              | 604,921     |              |  |   | 59,249      |  
|Inventories                                                                                                          |                                                                                                                 |              | 1,194,749   |              |  |   | 878,070     |  
|Amount due from related party                                                                                        |                                                                                                                 |              |            |              |  |   | 426,971     |  
|Other current assets                                                                                                 |                                                                                                                 |              | 61,480      |              |  |   | 79,173      |  
|                                                                                                                     |                                                                                                                 |              |             |              |  |   |             |  
|Total current assets                                                                                                 |                                                                                                                 |              | 2,368,546   |              |  |   | 7,941,106   |  
|Property and equipment, net                                                                                          |                                                                                                                 |              | 276,729     |              |  |   | 364,727     |  
|Trademarks and patents, less accumulated
    amortization of $81,888 and $106,621 in 2001 and 2002,
    respectively |                                                                                                                 |              | 285,435     |              |  |   | 291,646     |  
|Other assets                                                                                                         |                                                                                                                 |              | 8,309       |              |  |   | 2,840       |  
|                                                                                                                     |                                                                                                                 |              |             |              |  |   |             |  
|                                                                                                                     |                                                                                                                 | $            | 2,939,019   |              |  | $ | 8,600,319   |  
|                                                                                                                     |                                                                                                                 |              |             |              |  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)                                                                  
|Current liabilities:                                                                                                 |                                                                                                                 |              |             |              |  |   |             |  
|Accounts payable                                                                                                     |                                                                                                                 | $            | 2,335,933   |              |  | $ | 883,128     |  
|Deferred revenue                                                                                                     |                                                                                                                 |              | 28,263      |              |  |   | 141         |  
|Accrued liabilities                                                                                                  |                                                                                                                 |              | 1,200,579   |              |  |   | 1,201,556   |  
|Notes payable                                                                                                        |                                                                                                                 |              | 5,095,739   |              |  |   | 20,000      |  
|Current portion of capital lease obligations                                                                         |                                                                                                                 |              | 20,742      |              |  |   | 8,432       |  
|                                                                                                                     |                                                                                                                 |              |             |              |  |   |             |  
|Total current liabilities                                                                                            |                                                                                                                 |              | 8,681,256   |              |  |   | 2,113,257   |  
|Capital lease obligations, less current portion                                                                      |                                                                                                                 |              | 29,003      |              |  |   | 21,344      |  
|COMMITMENTS AND CONTINGENCIES                                                                                        |                                                                                                                 |              |             |              |  |   |             |  
|Stockholders equity (deficit):                                                                                      |                                                                                                                 |              |             |              |  |   |             |  
|Preferred stock, par value $.01                                                                                      |                                                                                                                 |              |            |              |  |   |            |  
|                                                                                                                     | Authorized shares  2,500,000, no
    shares issued or outstanding                                              |              |             |              |  |   |             |   | 
|Common stock, par value $.01                                                                                         |                                                                                                                 |              | 21,336      |              |  |   | 581,769     |  
|                                                                                                                     | Authorized shares  30,000,000 and
    90,000,000 as of December 31, 2001 and 2002, respectively                |              |             |              |  |   |             |   | 
|                                                                                                                     | Issued and outstanding shares 
    2,133,594 and 58,176,919 as of December 31, 2001 and 2002,
    respectively |              |             |              |  |   |             |   | 
|Additional paid-in capital                                                                                           |                                                                                                                 |              | 61,879,866  |              |  |   | 89,175,653  |  
|Accumulated deficit                                                                                                  |                                                                                                                 |              | (67,672,442 | )            |  |   | (83,291,704 | )
|                                                                                                                     |                                                                                                                 |              |             |              |  |   |             |  
|Total stockholders equity (deficit)                                                                                 |                                                                                                                 |              | (5,771,240  | )            |  |   | 6,465,718   |  
|                                                                                                                     |                                                                                                                 |              |             |              |  |   |             |  
|                                                                                                                     |                                                                                                                 | $            | 2,939,019   |              |  | $ | 8,600,319   |  
|                                                                                                                     |                                                                                                                 |              |             |              |  |   |             |  

See Notes to Consolidated Financial
Statements.

F-3



---



##### 



VIDEO NETWORK COMMUNICATIONS, INC.

Consolidated Statements of
Operations

|                                                            |                      |                                                                        |            |           |       |   |             |         |      |  
|----------------------------------------------------------- | -------------------- | ---------------------------------------------------------------------- | ---------- | --------- | ----- | - | ----------- | ------- | ---- | -
|                                                            |                      |                                                                       
|                                                            |                      | For the Years Ended                                                   
|                                                            |                      | December 31,                                                          
|                                                            |                      |                                                                       
|                                                            |                      | 2001                                                                   |            | 2002     
|                                                            |                      |                                                                        |            |          
|Revenues:                                                   |                      |                                                                        |            |           |       |   |             |        
|                                                            | Products             |                                                                        | $          | 3,388,527 |       |   | $           | 554,097 |     
|                                                            | Services             |                                                                        |            | 9,587,188 |       |   |             | 270,362 |     
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Total revenues                                              |                      |                                                                        | 12,975,715 |           |       |   | 824,459     |        
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Cost of revenues:                                           |                      |                                                                        |            |           |       |   |             |        
|                                                            | Products             |                                                                        |            | 2,829,968 |       |   |             | 518,910 |     
|                                                            | Inventory writedowns |                                                                        |            | 3,000,000 |       |   |             | 561,988 |     
|                                                            | Services             |                                                                        |            | 5,512,979 |       |   |             | 739,130 |     
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Total cost of revenues                                      |                      |                                                                        | 11,342,947 |           |       |   | 1,820,028   |        
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Gross margin                                                |                      |                                                                        | 1,632,768  |           |       |   | (995,569    | )      
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Operating expenses:                                         |                      |                                                                        |            |           |       |   |             |        
|Research and development                                    |                      |                                                                        | 2,774,336  |           |       |   | 3,222,763   |        
|Selling, general and administrative(1)                      |                      |                                                                        | 6,135,632  |           |       |   | 6,627,566   |        
|Asset impairment charges                                    |                      |                                                                        | 168,728    |           |       |   | 7,275,468   |        
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Total operating expenses                                    |                      |                                                                        | 9,078,696  |           |       |   | 17,125,797  |        
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Loss from operations                                        |                      |                                                                        | (7,445,928 | )         |       |   | (18,121,366 | )      
|Interest income                                             |                      |                                                                        | 21,003     |           |       |   | 67,990      |        
|Interest expense                                            |                      |                                                                        | (1,600,040 | )         |       |   | (1,357,031  | )      
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Loss before extraordinary gain                              |                      |                                                                        | (9,024,965 | )         |       |   | (19,410,407 | )      
|Extraordinary item  Gain on
    extinguishment of debt     |                      |                                                                        |           |           |       |   | 3,791,145   |        
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Net loss                                                    |                      |                                                                        | (9,024,965 | )         |       |   | (15,619,262 | )      
|Deemed dividend attributable to warrant repricing           |                      |                                                                        |           |           |       |   | (405,488    | )      
|Deemed dividend on exercise of warrant                      |                      |                                                                        |           |           |       |   | (4,913,894  | )      
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Net loss attributable to common shareholders                |                      | $                                                                      | (9,024,965 | )         |       | $ | (20,938,644 | )      
|                                                            |                      |                                                                        |            |           |       |   |             |        
|Loss per share  basic and diluted                          |                      |                                                                        |            |           |       |   |             |        
|                                                            |                      | Loss attributable to common shareholders before
    extraordinary gain |            | $         | (4.23 | ) |             | $       | (.69 | )
|                                                            |                      | Extraordinary gain                                                     |            | $         |      |   |             | $       | .11  |  
|                                                            |                      | Net loss attributable to common shareholders                           |            | $         | (4.23 | ) |             | $       | (.58 | )
|Weighted average shares outstanding 
    basic and diluted |                      |                                                                        | 2,133,594  |           |       |   | 35,842,949  |        
|                                                            |                      |                                                                        |            |           |       |   |             |        



---



|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes $26,180 and $104,434 of noncash
    amortization of stock-based compensation, for the years ended
    December 31, 2001 and 2002, respectively.

See Notes to Consolidated Financial
Statements.

F-4



---



##### 



VIDEO NETWORK COMMUNICATIONS, INC.

Consolidated Statements of Changes in
Stockholders Equity (Deficit)

for the years ended December 31, 2001 and
2002


|                                                                             |  |        |            |        |  |            |         |             |  |       |            |   |  |   |             |   |  |   |             |  
|---------------------------------------------------------------------------- |  | ------ | ---------- | ------ |  | ---------- | ------- | ----------- |  | ----- | ---------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                             |  |        |            |        |  | Additional |         |             |  |      
|                                                                             |  |        |            | Common |  | paid-in    |         | Accumulated |  |      
|                                                                             |  | Shares |            | Stock  |  | Capital    |         | Deficit     |  | Total
|                                                                             |  |        |            |        |  |            |         |             |  |      
|Balance, January 1, 2001                                                     |  |        | 2,133,594  |        |  | $          | 21,336  |             |  | $     | 60,196,065 |   |  | $ | (58,647,477 | ) |  | $ | 1,569,924   |  
|Issuance of warrants in connection with notes
    payable                    |  |        |           |        |  |            |        |             |  |       | 1,820,824  |   |  |   |             |   |  |   | 1,820,824   |  
|Costs associated with efforts to register
    restricted stock               |  |        |           |        |  |            |        |             |  |       | (163,203   | ) |  |   |            |   |  |   | (163,203    | )
|Compensation expense related to non-employee
    options                     |  |        |           |        |  |            |        |             |  |       | 26,180     |   |  |   |            |   |  |   | 26,180      |  
|Net loss                                                                     |  |        |           |        |  |            |        |             |  |       |           |   |  |   | (9,024,965  | ) |  |   | (9,024,965  | )
|                                                                             |  |        |            |        |  |            |         |             |  |       |            |   |  |   |             |   |  |   |             |  
|Balance, December 31, 2001                                                   |  |        | 2,133,594  |        |  |            | 21,336  |             |  |       | 61,879,866 |   |  |   | (67,672,442 | ) |  |   | (5,771,240  | )
|Issuance of common stock in Private Placement,
    net of expenses           |  |        | 32,750,000 |        |  |            | 327,500 |             |  |       | 17,709,712 |   |  |   |            |   |  |   | 18,037,212  |  
|Issuance of warrants in connection with notes
    payable                    |  |        |           |        |  |            |        |             |  |       | 639,208    |   |  |   |            |   |  |   | 639,208     |  
|Conversion of VNCI notes payable to common stock                             |  |        | 6,446,376  |        |  |            | 64,464  |             |  |       | 3,803,361  |   |  |   |            |   |  |   | 3,867,825   |  
|Conversion of B2BVideo notes payable to common
    stock                     |  |        | 4,282,956  |        |  |            | 42,830  |             |  |       | 2,526,944  |   |  |   |            |   |  |   | 2,569,774   |  
|Issuance of common stock to acquire B2BVideo
    common stock                |  |        | 3,000,014  |        |  |            | 30,000  |             |  |       | 1,770,008  |   |  |   |            |   |  |   | 1,800,008   |  
|Issuance of options and warrants in connection
    with B2BVideo acquisition |  |        |           |        |  |            |        |             |  |       | 827,459    |   |  |   |            |   |  |   | 827,459     |  
|Issuance of common stock upon cashless conversion
    of warrants            |  |        | 9,553,979  |        |  |            | 95,539  |             |  |       | (95,539    | ) |  |   |            |   |  |   |            |  
|Compensation expense related to non-employee
    options                     |  |        |           |        |  |            |        |             |  |       | 104,434    |   |  |   |            |   |  |   | 104,434     |  
|Exercise of non-employee options                                             |  |        | 10,000     |        |  |            | 100     |             |  |       | 10,200     |   |  |   |            |   |  |   | 10,300      |  
|Net loss                                                                     |  |        |           |        |  |            |        |             |  |       |           |   |  |   | (15,619,262 | ) |  |   | (15,619,262 | )
|                                                                             |  |        |            |        |  |            |         |             |  |       |            |   |  |   |             |   |  |   |             |  
|Balance, December 31, 2002                                                   |  |        | 58,176,919 |        |  | $          | 581,769 |             |  | $     | 89,175,653 |   |  | $ | (83,291,704 | ) |  | $ | 6,465,718   |  
|                                                                             |  |        |            |        |  |            |         |             |  |       |            |   |  |   |             |   |  |   |             |  

See Notes to Consolidated Financial
Statements.

F-5



---



##### 



VIDEO NETWORK COMMUNICATIONS, INC.

Consolidated Statements of Cash
Flows

|                                                                                |                                                                       |                                           |            |            |            |   |             |            |             |  
|------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ---------- | ---------- | ---------- | - | ----------- | ---------- | ----------- | -
|                                                                                |                                                                       |                                          
|                                                                                |                                                                       | For the Years ended December 31,         
|                                                                                |                                                                       |                                          
|                                                                                |                                                                       | 2001                                      |            | 2002      
|                                                                                |                                                                       |                                           |            |           
|Cash flows from operating activities:                                           |                                                                       |                                           |            |            |            |   |             |           
|Net loss                                                                        |                                                                       | $                                         | (9,024,965 | )          |            | $ | (15,619,262 | )         
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                       |                                           |            |            |            |   |             |           
|                                                                                | Depreciation                                                          |                                           |            | 297,889    |            |   |             | 444,029    |            
|                                                                                | Amortization                                                          |                                           |            | 23,415     |            |   |             | 24,733     |            
|                                                                                | Interest expense related to issuance of warrants                      |                                           |            | 1,354,422  |            |   |             | 1,150,394  |            
|                                                                                | Non-cash compensation expense                                         |                                           |            | 26,180     |            |   |             | 104,434    |            
|                                                                                | Provision for excess and obsolete inventory                           |                                           |            | 3,000,000  |            |   |             | 561,988    |            
|                                                                                | Gain on forgiveness of debt                                           |                                           |            |           |            |   |             | (3,791,145 | )          
|                                                                                | Goodwill impairment                                                   |                                           |            |           |            |   |             | 6,746,289  |            
|                                                                                | Write-off of other assets                                             |                                           |            |           |            |   |             | 214,546    |            
|                                                                                | Write-off of fixed assets                                             |                                           |            | 168,728    |            |   |             | 315,079    |            
|                                                                                | Other non-cash charges                                                |                                           |            | 159,520    |            |   |             |           |            
|Changes in operating assets and liabilities:                                    |                                                                       |                                           |            |            |            |   |             |           
|                                                                                | Accounts receivable                                                   |                                           |            | 2,415,456  |            |   |             | 675,138    |            
|                                                                                | Amounts due from related party                                        |                                           |            |           |            |   |             | (426,971   | )          
|                                                                                | Other current assets                                                  |                                           |            | 121,156    |            |   |             | 59,628     |            
|                                                                                | Inventories                                                           |                                           |            | 474,189    |            |   |             | 286,353    |            
|                                                                                | Accounts payable                                                      |                                           |            | 848,984    |            |   |             | (1,123,379 | )          
|                                                                                | Deferred revenues                                                     |                                           |            | (2,595,040 | )          |   |             | (28,122    | )          
|                                                                                | Accrued liabilities                                                   |                                           |            | (444,937   | )          |   |             | (68,860    | )          
|                                                                                |                                                                       |                                           |            |            |            |   |             |           
|                                                                                |                                                                       | Net cash used in operating activities     |            |            | (3,175,003 | ) |             |            | (10,475,128 | )
|                                                                                |                                                                       |                                           |            |            |            |   |             |           
|Cash flows from investing activities:                                           |                                                                       |                                           |            |            |            |   |             |           
|                                                                                | Deposits                                                              |                                           |            |           |            |   |             | (1,667     | )          
|                                                                                | Increase in trademarks and patents                                    |                                           |            | (39,821    | )          |   |             | (30,944    | )          
|                                                                                | Purchase of property and equipment                                    |                                           |            | (28,531    | )          |   |             | (184,306   | )          
|                                                                                | Purchase of B2BNetwork, net of cash acquired                          |                                           |            |           |            |   |             | (1,750,839 | )          
|                                                                                |                                                                       |                                           |            |            |            |   |             |           
|                                                                                |                                                                       | Net cash used in investing activities     |            |            | (68,352    | ) |             |            | (1,967,756  | )
|                                                                                |                                                                       |                                           |            |            |            |   |             |           
|Cash flows from financing activities:                                           |                                                                       |                                           |            |            |            |   |             |           
|                                                                                | Proceeds from the issuance of common stock, net
    of issuance costs |                                           |            | (163,203   | )          |   |             | 18,037,212 |            
|                                                                                | Net proceeds from the issuance of notes payable                       |                                           |            | 2,515,460  |            |   |             | 1,049,000  |            
|                                                                                | Net proceeds from the exercise of stock options                       |                                           |            |            |            |   |             | 10,300     |            
|                                                                                | Repayments of notes payable                                           |                                           |            | (247,111   | )          |   |             | (598,278   | )          
|                                                                                | Principal payments on capital leases                                  |                                           |            | (14,446    | )          |   |             | (65,103    | )          
|                                                                                |                                                                       |                                           |            |            |            |   |             |           
|                                                                                |                                                                       | Net cash provided by financing activities |            |            | 2,090,700  |   |             |            | 18,433,131  |  
|                                                                                |                                                                       |                                           |            |            |            |   |             |           
|Net increase (decrease) in cash and cash
    equivalents                        |                                                                       |                                           | (1,152,655 | )          |            |   | 5,990,247   |           
|Cash and cash equivalents, at beginning of year                                 |                                                                       |                                           | 1,660,051  |            |            |   | 507,396     |           
|                                                                                |                                                                       |                                           |            |            |            |   |             |           
|Cash and cash equivalents, at end of year                                       |                                                                       | $                                         | 507,396    |            |            | $ | 6,497,643   |           
|                                                                                |                                                                       |                                           |            |            |            |   |             |           
|Interest payments                                                               |                                                                       | $                                         | 5,080      |            |            | $ | 205,145     |           
|Non cash financing and investing activity
    (Note 13)                         |                                                                       |                                           |            |            |            |   |             |           

See Notes to Consolidated Financial
Statements.

F-6



---



##### 



Notes to Consolidated Financial
Statements

Unless otherwise indicated, all information in
the Notes to Consolidated Financial Statements gives retroactive
effect to a one-for-five reverse stock split of our common stock
approved by Stockholders on February 4, 2002 and effected
February 5, 2002.



|   |                                                 
|-- | ------------------------------------------------
|1. | Nature of Business and Basis of
    Presentation

Nature of Business:

Video Network Communications, Inc. (the
Company or VNCI) is a Delaware
corporation formed in 1993 to design, develop and market
full-motion, high resolution, cost-effective video network
systems as a state-of-the-art, business collaborative tool.
Users of the VidPhone video network system can view broadcast
video, collaborate in multi-party videoconferences, and retrieve
stored video on demand. Our VidPhone system bypasses the
bottleneck of local data networks to distribute video to and
from desktop and laptop personal computers and conference rooms
configured with VidPhone stations, over the same wiring used by
the telephone. At the same time, the VidPhone system software
provides the user with seamless access and control to
communicate over, or access video content on, private, wide
area, IP networks.

On May 16, 2002, the Company acquired
B2BVideo Network, Corp. (B2BVideo) which was formed
in December 1999 to deliver to business users managed enterprise
video services. B2BVideo delivers broadcast quality video over
an Internet Protocol (IP) Multicast network for
delivery to desktops. IP Multicast positioned B2BVideo to
provide multiple streams of high quality video to thousands of
points on the network. B2BVideo offered services that would
enable businesses to integrate all of their video applications
onto a single platform for delivery of broadcast quality video
to the desktop. B2BVideo customers could: (1) distribute
their own programming to employees, clients and other audiences
over private video networks (PVNs), (2) access a wide range
of business programming (e.g., television programs, training
videos, industry conferences, etc.), and (3) conduct video
calls and videoconferences. As a result of the acquisition,
B2BVideo became a wholly owned subsidiary of the Company.

In the past, the Companys core video
network technology solution has been utilized to support video
collaboration in various vertical markets. The Companys
network technology has been primarily contained within the local
business enterprise. Connectivity through the wide area network
(WAN) has typically been established through less
reliable and bandwidth constrained integrated services digital
network (ISDN) service connections. While the
Companys technology has resulted in various high profile
customer installations, the Company recognized the need to
extend its video technology solution into the WAN. In addition,
the Company began to see the strategic advantages of offering a
managed service end-to-end video solution inherent in
B2BVideos technology focus. It held the promise of
delivering highly reliable, high quality end-to-end managed
video service that solved the traditional shortcomings of WAN
video distribution. The acquisition of B2BVideos marquee
customer and programming guide was intended to accelerate the
Companies capabilities for supporting the WAN requirements of
customers and channel partners.

The acquisition of B2BVideo was intended to
accelerate the Companys capabilities for supporting Wide
Area Networking requirements of customers and channel partners.
During the fourth quarter of 2002 B2BVideos marquee and
only customer terminated its contract with B2BVideo. Based on
the cancellation of the contract, the significant capital
expenditures deemed necessary to build and maintain the required
proprietary network, the required technological changes and the
lack of future business prospects, management, with the Board of
Directors approval, made a decision to shutdown and cease all
operations of B2BVideo (Note 4).

Basis of Presentation:

As shown in the consolidated financial statements
the Company has incurred recurring losses from operations since
inception and had net losses of $9,024,965 and $15,619,262 for
the years ended

F-7



---



##### 



December 31, 2001 and 2002 respectively. The
Company has experienced recurring negative cash flow from
operations, and had used cash of $3,175,003 and $10,475,128
during 2001 and 2002 respectively to fund operating activities.
In addition, the Company has historically had a working capital
deficiency and, has a significant accumulated deficit at
December 31, 2002. The Company expects to continue to incur
significant operating expenses to sustain its continued product
development efforts while maximizing sales and marketing
opportunities. At this stage, it is difficult to predict with
accuracy the level of its sales in future periods, or when
marketing initiatives will result in sales. The Company has
required substantial funding through debt and equity financings
since inception to complete its development plans and pursue
full-scale operations. These conditions raise substantial doubt
about the Companys ability to continue as a going concern.


The Company continues to evaluate all options
regarding the financing of operations. The Company believes that
the financing received in May 2002 and the Strategic
Alliance Agreement with Moneyline Network, LLC
(Moneyline), a wholly-owned subsidiary of Moneyline
Telerate Holdings, will enable it to significantly enhance its
sales and marketing programs required to realize its sales
projections and to generate sufficient operating cash flow.
However, the Company has recognized that given the general
economic slow down, the markets for its VidPhone product line
are likely to develop more slowly than originally anticipated.
Accordingly, in the first quarter of 2003 the company has taken
significant steps to diversify its revenue base by acquiring the
webcasting business of Wiltel Communications and right-sizing
the expense base of the VidPhone business to match the scaled
back revenue expectations. See Note 18, Subsequent Events,
for further details of these transactions

If the Company is not successful in either
realizing its sales projections or in securing continued funding
from either its majority investors or another party, the Company
will be forced to consider alternative methods of maximizing
shareholder value, which could include sales of the
Companys assets or a sale of the Company.

These financial statements are presented under
the assumption that the Company will continue as a going
concern. They do not contemplate the uncertainties disclosed
above nor do they include any adjustments that might result form
these uncertainties.

Since its investment in the Company in
May 2002, Moneyline and its affiliates have utilized
services of the Company relating to the development of an
additional value-added video service to its existing customer
base. They also have provided development related to a managed
video distribution network services that could accelerate the
acceptance of the Companys video distribution technology.
Moneyline and its affiliates have provided certain
administrative, sales and management support to the Company. In
addition, in conjunction with its investment, Moneyline entered
into a Strategic Alliance Agreement (the Agreement)
with the Company whereby Moneyline has the exclusive right to
sell, market and distribute VNCI video equipment to customers in
the financial services industry. Transactions with Moneyline are
more fully disclosed in Note 17 Related Party Transactions. The
accompanying financial statements may not necessarily be
indicative of the conditions that would have existed or results
of operations had the Company been operated as an unaffiliated
entity.

2. Summary of Significant Accounting
Policies

Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary,
B2BVideo. All significant intercompany transactions have been
eliminated in consolidation.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results will differ from those estimates.

F-8



---



##### 



Inventory

Inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
Inventory consists primarily of raw materials in the form of
components. Total charges taken for slow-moving inventory during
the year ended December 31, 2002 were $561,988. Management
periodically reviews inventory for excess on hand quantities and
obsolescence. Appropriate amounts are reserved to reflect the
findings of these reviews.

Revenue Recognition

Revenues from sales of the Companys
hardware products are recognized when the equipment has been
delivered to the customer, title has passed, the equipment has
been accepted by the customer, the collection of the sales price
is probable, and no further obligations to the customer exist.
Certain sales of equipment include software that enables the
customer to utilize network services provided by the Company.
Such sales are deferred and revenue is recognized ratably over
the life of the associated network service contract, which is
generally two years. Network services revenue is recognized in
the period in which the contract services are provided to the
customer. Recognition of sales starts at the time of acceptance
by the customer, which is 30 days from installation of the
equipment. The customer has a right of return within
30 days of installation. The customer is also granted a
one-year warranty for the proper functioning of the equipment
and software. Any losses on contracted sales are recognized in
the period the loss has been determined. Service revenues
associated with time and materials consulting projects are
recognized at the time the services are rendered, collection is
probable, and the Company has no further obligations to the
customer. Revenues from maintenance contracts are recognized
ratably over the term of the contract as services are performed.
Management fee revenue recognized in 2001 was recognized upon
receipt of cash and after an evaluation of any potential refunds
of these fees. The royalty revenue from Moneyline will be
recognized when earned, collectibility is probable and no future
obligations exist.

Deferred Revenue

Amounts received prior to the delivery of
equipment or contracted services are recognized as liability and
revenue recognition is deferred until such time that all revenue
recognition criteria have been met. Revenue recognition for
equipment sales is deferred until the equipment has been
delivered, title has passed to the customer, collectibility is
reasonably assured and the customer has accepted the equipment.
Deferred revenues related to service contracts are deferred
until such time that the services have been performed. Revenues
related to sales of equipment and software associated with
network services contracts are recognized ratably over the term
of the network services contract. The Company had deferred
revenues of $28,263 and $141 at December 31, 2001 and
December 31, 2002, respectively.

Product Warranty Obligation

The Company records a liability for product
warranty obligations at the time of sale based upon historical
warranty experience. The term of the warranty is generally
twelve months. The Company also records an additional liability
for specific warranty matters when they become known and are
reasonably estimable. The Companys product warranty
obligations are included in accrued expenses.

Changes in product warranty obligations for the
years ended December 31 are as follows:

|                           |  |      |          |      |  |   |          |  
|-------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                           |  | 2001 |          | 2002
|                           |  |      |          |     
|Balance, beginning of year |  | $    | 326,098  |      |  | $ | 142,318  |  
|New warranties             |  |      | 142,318  |      |  |   | 23,272   |  
|Adjustments                |  |      | (326,098 | )    |  |   | (146,449 | )
|                           |  |      |          |      |  |   |          |  
|Balance, end of year       |  | $    | 142,318  |      |  | $ | 19,141   |  
|                           |  |      |          |      |  |   |          |  

F-9



---



##### 



Costs of Goods and Services
Sold

Costs of goods sold include those expenses
directly relating to the delivery and installation of the
Companys hardware and software products. Costs of goods
sold related to equipment and software sales made in conjunction
with network services contracts are deferred and amortized
ratably over the life of the associated network service contract
to ensure proper matching against revenues that are deferred.
Costs relating to providing network services, primarily
consisting of communication costs, are expensed when incurred.
Costs of services include those expenses directly relating to
providing consulting, implementation and maintenance services to
the Companys customers. At December 31, 2001 and
December 31, 2002, the Company did not have any deferred
costs of goods or services sold.

Research and Development and Software
Development Costs

Software development costs are included in
research and development and are expensed as incurred. The
capitalizable costs of computer software to be sold have been
insignificant, since the period between achieving technological
feasibility and the general availability of such software has
been short. Accordingly, the Company has not capitalized any
software development costs.

Income Taxes

Income taxes are accounted for under the asset
and liability method pursuant to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, whereby deferred tax assets
and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to be in effect for
the year in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period
that includes the enactment date. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of,
the deferred tax assets will not be realized.

Net Income (Loss) Per Share

The Company computes basic and diluted earnings
per share in accordance with SFAS No. 128, Earnings per
Share. Net income (loss) per common share is based on
the weighted average number of common shares and dilutive common
share equivalents outstanding during the periods presented.
Basic income (loss) per share is calculated by dividing net
income available to common shareholders by the weighted average
shares outstanding. Diluted income (loss) per share
reflects the dilutive effect of stock options and warrants and
is presented only if the effect is not anti-dilutive.

Fair Value of Financial
Instruments

The Companys financial instruments
including cash and cash equivalents, accounts receivable, other
current assets, capital leases, accounts payable, and accrued
expenses are carried at cost, which approximates fair market
value because of the short-term maturity of those instruments.
Based on interest rates currently available to the Company for
borrowings with similar terms and maturities, the carrying value
of the Companys short-term notes payable approximates its
current fair value.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and
investments with original maturities of three months or less.

Property and Equipment

Property and equipment are stated at cost. The
annual provisions for depreciation have been computed based on
the following ranges of estimated useful lives: computer and
laboratory equipment, 3 to

F-10



---



##### 



5 years; computer software, 3 years;
service bureau equipment, 3 years; furniture and fixtures,
5 years; and office equipment, 5 years (Note 6).
Expenditures for maintenance and repairs are charged to expense
as incurred. Upon retirement or disposition of property and
equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is
reflected in income.


Trademarks and Patents

Trademarks and patents are stated at cost and are
amortized on a straight-line basis over 15 years.
Amortization expense recorded for the years ended
December 31, 2001 and 2002 was $23,415 and $24,733,
respectively.

Scheduled amortization expenses of intangible
assets over the next five years are as follows:

|     |  |   |        | 
|---- |  | - | ------ | 
|2003 |  | $ | 26,551 | 
|2004 |  | $ | 26,551 | 
|2005 |  | $ | 26,551 | 
|2006 |  | $ | 26,551 | 
|2007 |  | $ | 26,551 | 

Impairment of Long-Lived
Assets

The Companys long-lived assets consist
primarily of trademarks and patents, and property and equipment.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for
fiscal 2002, the Company periodically evaluates the net
realizable value of long-lived assets and measures the
impairment loss, if any, as determined by the difference between
the carrying value and fair value of the asset. In connection
with the B2BVideo acquisition and subsequent decision to shut
down the B2BVideo operations in the fourth quarter of 2002, the
Company evaluated the related long-lived assets. As a result of
such evaluation in the fourth quarter the Company recorded an
impairment charge of approximately $530,000 on fixed and other
assets.

Concentration of Credit Risk

Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist
principally of cash and cash equivalents and accounts
receivable. The Companys cash and cash equivalents are
held with a U.S. commercial bank. The Company generally grants
uncollateralized credit terms to its customers and has not
experienced any credit-related losses. Two customers accounted
for 50% and 30%, of the Companys total revenues in the
year ended December 31, 2001. Three customers accounted for
32%, 16%, and 13%, of the Companys total revenues in the
year ended December 31, 2002. Four customers accounted for
30%, 16%, 13% and 10% of the Companys accounts receivable
at December 31, 2001 and three customers accounted for 74%,
14%, and 12% of the Companys accounts receivable at
December 31, 2002.

Intangible Assets

The Companys intangible assets consist of
(1) goodwill, which in accordance with the adoption of SFAS
No. 142 is not being amortized commencing in 2002 and
beyond; and (2) amortizing intangibles, which consist of
patents and trademarks, which are being amortized over their
useful lives. All intangible assets are subject to impairment
tests on a periodic basis.

In connection with adoption of SFAS No. 142,
Goodwill and Intangible Assets, on January 1, 2002,
the Company has an annual impairment methodology that the
Company will employ on January 1st of each year in calculating
the recoverability of goodwill. This same impairment test will
be performed at other times during the course of the year should
an event occur which suggests that the recoverability of
goodwill may be impacted. Amortizing intangibles are currently
evaluated for impairment using the methodology set forth in SFAS
No. 144. Recoverability of these assets is assessed only when
events have

F-11



---



##### 



occurred that may give rise to an impairment.
When a potential impairment has been identified, forecasted
undiscounted net cash flows of the operations to which the asset
relates are compared to the current carrying value of the
long-lived assets present in that operation. If such cash flows
are less than such carrying amounts, long-lived assets,
including such intangibles, are written down to their respective
fair values.


As a result of the B2BVideo acquisition in May
2002, and subsequent decision to shut down the B2BVideo
operations in the fourth quarter of 2002, the Company performed
an impairment test. As a result of performing the impairment
test, an impairment charge related to the goodwill associated
with the B2BVideo acquisition, was recorded for approximately
$6,746,000 in the fourth quarter of 2002.

Prior to 2002, the Company employed the
impairment methodologies set forth in SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of.These methodologies did
not differ substantially from SFAS No. 144 as they related
to amortizing intangibles.

Advertising Expense

The Company recognizes advertising expense as
incurred. Advertising expenses of $87,437 and $50,010 were
incurred in 2001 and 2002, respectively.

Stock-Based Compensation

The Company accounts for its options granted to
employees and directors in accordance with Accounting Principals
Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. Accordingly, no compensation
expense has been recognized for the options granted to employees
or directors, since the exercise price of the options has been
in excess of or equal to the fair value of the options on the
date of grant, as determined by the Board of Directors. For
options granted to consultants, the Company recognizes an
appropriate compensation expense in accordance with Emerging
Issues Task Force 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. The Company has
disclosed the pro forma net loss and loss per share in
accordance with the measurement provisions of SFAS No. 123,
Accounting for Stock-Based Compensation.

Had the compensation cost for the plans been
determined based on the fair value at the grant dates for awards
under the plans, consistent with the method described in SFAS
No. 123, the Companys net income (loss) and
basic and diluted net income (loss) per common share on a
pro forma basis would have been:

|                                                                                                            |                                 |                             |             |       |   |   |             |      |  
|----------------------------------------------------------------------------------------------------------- | ------------------------------- | --------------------------- | ----------- | ----- | - | - | ----------- | ---- | -
|                                                                                                            |                                 |                            
|                                                                                                            |                                 | For Year Ended December 31,
|                                                                                                            |                                 |                            
|                                                                                                            |                                 | 2001                        |             | 2002 
|                                                                                                            |                                 |                             |             |      
|Net loss, as reported                                                                                       |                                 | $                           | (9,024,965  | )     |   | $ | (15,619,262 | )   
|Total stock-based employee compensation expense
    determined under fair value based method for all awards |                                 |                             | (1,575,922  | )     |   |   | (468,013    | )   
|                                                                                                            |                                 |                             |             |       |   |   |             |     
|Pro forma net loss                                                                                          |                                 | $                           | (10,600,887 | )     |   | $ | (16,087,275 | )   
|                                                                                                            |                                 |                             |             |       |   |   |             |     
|Earnings (loss) per share:                                                                                  |                                 |                             |             |       |   |   |             |     
|                                                                                                            | Basic and diluted  as reported |                             | $           | (4.23 | ) |   | $           | (.44 | )
|                                                                                                            | Basic and diluted  pro forma   |                             | $           | (4.97 | ) |   | $           | (.45 | )

The preceding pro forma results were calculated
using the Black-Scholes option-pricing model. The following
assumptions were used for the years ended December 31, 2001
and 2002, respectively: (1) risk-free interest rates of
4.1% and 4.29%, respectively; (2) dividend yields of 0.0%;
(3) expected lives of 5 and 5 years, respectively; and
(4) volatility of 132% and 140%, respectively. Results may
vary depending on the assumptions applied within the model.

F-12



---



##### 



Comprehensive Income

Comprehensive income (loss) as defined,
includes all changes in equity (net assets) during a period from
non-owner sources. For the years ended December 31, 2001
and 2002 the Company had no comprehensive income other than net
loss.

Segment Information

The Company operates in one business segment; the
design, development, and marketing of a video network system.

Reclassifications

Certain prior year amounts have been reclassified
to conform to the current year presentation.

Recent Accounting
Pronouncements

In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an
extraordinary item of income and requires that such gain or loss
be evaluated for extraordinary classification under the criteria
of Accounting Principles Board No. 30 Reporting
Results of Operations. The relevant provisions of this
statement will be effective for the Company for the year ending
December 31, 2003. The extraordinary gains resulting from
early extinguishment of debt (Note 14) will be reclassified
to a component of operating income within the Consolidated
Statements of Operations upon adoption of SFAS No. 145 on
January 1, 2003.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 will supersede Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).SFAS No. 146 requires that costs associated with an
exit or disposal plan be recognized when incurred rather than at
the date of a commitment to an exit or disposal plan. SFAS
No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The
restructuring activities that management has undertaken in the
first quarter of 2003 (Note 18) will be accounted for under
SFAS No. 146.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 elaborates on the
existing disclosure requirements for most guarantees.
FIN 45 requires that at the time a company issues certain
guarantees, the Company must recognize an initial liability for
the fair value, or market value, of the obligations it assumes
under that guarantee and must disclose that information in its
interim and annual financial statements. The Company will adopt
the recognition and measurement requirements of
FIN No. 45 in the first quarter of fiscal year 2003
and have included the new disclosure requirements in the Notes
to the Consolidated Financial Statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB StatementNo. 123. SFAS No. 148
amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements
of Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The disclosure
requirements of SFAS No. 148 have been implemented and the
Company will adopt the interim disclosure requirements in the
first quarter of fiscal year 2003.

F-13



---



##### 



3. Stock Purchase Agreement

On May 16, 2002, the Company entered into a
Stock Purchase Agreement (the Agreement) with
Moneyline. Pursuant to the Agreement Moneyline purchased
25,000,000 new shares of the Companys common stock
(representing approximately 51.4% of the Companys
outstanding common stock at June 30, 2002) for aggregate
cash consideration of $15,000,000 and received a warrant to
purchase an additional 11,250,000 shares of the Companys
common stock, with an exercise price of $0.60 per share and
a cashless exercise mechanism.

Simultaneously, certain existing and new
investors purchased 7,750,000 newly issued shares of the
Companys common stock at $0.60 per share, providing
aggregate gross proceeds of $4,650,000 to the Company.

Also as part of the above transaction, the
following took place:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | payment of $1,100,000 was made to Sanmina Corp.
    (Sanmina) to extinguish a secured promissory note
    issued to Sanmina by the Company, with an outstanding principal
    balance of $2,900,000 and accrued interest of $587,145. The
    Company recognized an extraordinary gain of $2,387,145 relating
    to the extinguishment of this debt, which is included as a
    component of extraordinary gain in the Consolidated Statement of
    Operations (Note 14);                                                                                                               
|
| | (b) | payment to Shaw Pittman LLP, a supplier of the
    Company, of $250,000 to settle outstanding obligations of
    approximately $378,000 and recognized an extraordinary gain of
    approximately $128,000 relating to the extinguishment of this
    debt, which is included as a component of extraordinary gain in
    the Consolidated Statement of Operations (Note 14); and,                                                                                                                                                                                                          
|
| | (c) | promissory notes in the aggregate principal
    amount of $3,723,982 and accrued interest of $143,843 were
    exchanged for 6,446,376 shares of the Companys common
    stock (Note 11). Warrants to purchase an aggregate of 2,567,992
    shares of common stock previously issued to the holders of
    promissory notes were repriced. The exercise price of such
    warrants, which ranged from $1.30 to $2.75 per share, was
    reduced to $0.60 per share. The increase in the fair value of
    the warrants, in the amount of $4,913,894 was recorded as a
    deemed dividend.

The Company incurred estimated costs and expenses
of approximately $3,226,000 in connection with the Agreement and
the acquisition of B2BVideo (discussed below). Fifty percent
(50%) of these costs, which are comprised primarily of legal,
investment banking and accounting fees, were allocated to the
Agreement and fifty percent (50%) were allocated to the
acquisition of B2BVideo. The expenses allocated to the
Agreement, in the amount of approximately $1,613,000, have been
recorded as a reduction of additional paid-in capital.

Pursuant to the Agreement, Moneyline has the
right to appoint a majority of the members of the Companys
Board of Directors.

4. Acquisition of B2BVideo Network
Corp.

On May 16, 2002, the Company acquired 100%
of the common stock of B2BVideo, a Delaware corporation.
B2BVideo was formed in December 1999 to deliver to business
users managed enterprise video services. B2BVideo delivers
broadcast quality video over an Internet Protocol
(IP) Multicast network for delivery to the desktop.
IP Multicast enables B2BVideo to provide multiple streams of
high quality video to thousands of points on the network.
B2BVideo offers products and services that enable businesses to
integrate all of their video applications onto a single platform
for delivery of broadcast quality video to the desktop. B2BVideo
customers can: (1) distribute their own programming to
employees, clients and other audiences over Private Video
Networks (PVNs), (2) access a wide range of business
programming (i.e. television programs, training videos, industry
conferences, etc.), and (3) conduct video calls and
videoconferences. As a result of the acquisition, B2BVideo
became a wholly owned subsidiary of the Company.

F-14



---



##### 



In the past, VNCIs core video network
technology solution has been utilized to support video
collaboration in various vertical markets. VNCIs network
technology has been primarily contained within the local
business enterprise. Connectivity through the wide area network
(WAN) has typically been established through less
reliable and bandwidth constrained integrated services digital
network (ISDN) service connections. While VNCIs
technology has resulted in various high profile customer
installations, the Company recognized the need to enhance its
video technology solution into the WAN. In addition, the Company
began to see the strategic advantages of offering a managed
service end-to-end video solution. B2BVideos product
offerings focus on delivering highly reliable, high quality
end-to-end managed video service that solve the traditional
shortcomings of WAN video distribution. The acquisition of
B2BVideo Networks marquee customer and programming guide
was intended to accelerate the Companys capabilities for
supporting the WAN requirements of customers and channel
partners.

The following consideration was issued in
connection with the acquisition of B2BVideo:



| |     |                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | B2BVideos common and preferred shareholders
    were issued 3,000,014 shares of VNCI common stock;                                                                                                                                                                                                                                                                                  
|
| | (b) | Options to purchase B2BVideo Series A
    Preferred Stock were exchanged for options to purchase 139,123
    shares of VNCIs common stock at strike prices ranging from
    $.50 to $5.93;                                                                                                                                                                                          
|
| | (c) | Options to purchase 2.75 Units of B2BVideo, each
    Unit consisting of (A) 50,000 shares of B2BVideo
    Series B Preferred Stock and (B) warrants to purchase
    50,000 shares of B2BVideos common stock, were exchanged
    for options to purchase an aggregate of 182,977 shares of
    VNCIs common stock and warrants to purchase 46,374 shares
    of VNCIs common stock;
|
| | (d) | Warrants to purchase 3,176,000 shares of B2BVideo
    common stock issued and outstanding immediately prior to the
    closing date were exchanged for warrants to purchase 1,214,223
    shares of VNCIs common stock at a strike price of $.60 per
    share;                                                                                                                     
|
| | (e) | Holders of senior secured promissory notes of
    B2BVideo, with an aggregate principal balance of $2,500,000 plus
    accrued interest, were exchanged for 4,282,956 shares of
    VNCIs common stock and;                                                                                                                                                                         



| |     |                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (f) | Options to purchase 681,771 shares of VNCIs
    common stock were issued to employees of B2BVideo in exchange
    for outstanding vested B2BVideo options. These options were 100%
    vested at the date of issuance.

The following table sets forth in tabular format
the information discussed above:

|                     |                                  |   |           |           | 
|-------------------- | -------------------------------- | - | --------- | --------- | 
|Noncash:             |                                  |   |           |          
|                     | Common stock issued              |   | $         | 4,369,782 | 
|                     | Options issued to employees      |   |           | 242,185   | 
|                     | Warrants issued                  |   |           | 461,726   | 
|                     | Options issued to non-employees  |   |           | 123,578   | 
|Cash:                |                                  |   |           |          
|                     | Payment for B2BVideo liabilities |   |           | 156,355   | 
|                     | Estimated transaction costs      |   |           | 1,612,788 | 
|                     |                                  |   |           |          
|Total purchase price |                                  | $ | 6,966,414 |          
|                     |                                  |   |           |          

The consideration issued to holders of
B2BVideos equity instruments and debt holders in
connection with the acquisition of B2BVideo was valued as
follows:



| |     |                                                                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | VNCIs Common Stock  The value of
    VNCIs common stock was determined to be $0.60 per share,
    the price at which VNCI sold its common stock to Moneyline and
    certain existing and new investors on May 16, 2002;

F-15



---



##### 





| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Options issued to B2BVideos
    employees  All outstanding options held by employees
    to purchase B2BVideos common stock have been exchanged for
    options to purchase 681,771 shares of VNCIs common stock.
    The options have varying exercise prices and were 100% vested at
    the date of issuance. The Company valued such stock options
    using the Black Scholes option-pricing model at $242,185. The
    calculation was based on the following assumptions:

|                        |  |  |         | 
|----------------------- |  |  | ------- | 
|Volatility              |  |  | 144%    | 
|Expected life           |  |  | 3 years | 
|Risk free interest rate |  |  | 3.8%    | 
|Dividend Rate           |  |  | None    | 



| |     |                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) | Warrants  Warrants to purchase the
    Companys common stock issued in connection with the
    acquisition were also valued using the Black Scholes
    option-pricing model. The warrants have varying exercise prices.
    The Company valued such warrants at $461,726. The calculation
    was based on the same assumptions as discussed in b) above; and,           
|
| | (d) | Options issued to non-employees 
    Options to purchase the Companys common stock issued in
    connection with the acquisition were valued using the Black
    Scholes option-pricing model. The options have varying exercise
    prices. The Company valued such options at $123,578. The
    calculation was based on the same assumptions discussed in b)
    above.

During the fourth quarter of 2002, the Company
completed its review of the assets acquired and the liabilities
assumed in the acquisition of B2BVideo. This review resulted in
the reallocation of purchase price between fixed assets and
goodwill. In addition, an adjustment to reduce depreciation
expense to reflect the write down of fixed assets was recorded
in the Statement of Operations. The determination was made based
upon an independent third party appraisal received by the
Company in the fourth quarter of 2002.

The final allocation of purchase price
consideration to the assets acquired and liabilities assumed as
of the acquisition date is as follows:

|                                                            |  |   |            |  
|----------------------------------------------------------- |  | - | ---------- | -
|Cash and cash equivalents                                   |  | $ | 18,334     |  
|Accounts receivable                                         |  |   | 129,466    |  
|Inventories                                                 |  |   | 531,662    |  
|Other current assets                                        |  |   | 3,841      |  
|Property and equipment, net                                 |  |   | 662,640    |  
|Other noncurrent assets                                     |  |   | 208,059    |  
|Accounts payable                                            |  |   | (1,075,063 | )
|Accrued liabilities                                         |  |   | (213,680   | )
|Capital lease obligations                                   |  |   | (45,134    | )
|                                                            |  |   |            |  
|Fair value of net assets acquired                           |  |   | 220,125    |  
|                                                            |  |   |            |  
|Goodwill                                                    |  |   | 6,746,289  |  
|                                                            |  |   |            |  
|Fair value of net assets acquired and recorded
    goodwill |  | $ | 6,966,414  |  
|                                                            |  |   |            |  

None of the goodwill associated with the
acquisition of B2BVideo will be deductible for tax purposes.

The results of operations for the year ended
December 31, 2002 include the operating results of B2BVideo
subsequent to its date of acquisition. Prior to the acquisition
of B2BVideo the Company had one reportable segment. The
acquisition of B2BVideo did not create a new reportable segment
as B2BVideo is also engaged in the design, development, and
marketing of video network systems and has economic
characteristics similar to VNCI.

F-16



---



##### 



Prior to its acquisition of B2BVideo the Company
held 750,000 shares of B2BVideos common stock, which had
no carrying value. During the year ended December 31, 2002
the Company recognized revenue of $266,000 for equipment sales
to B2BVideo prior to its acquisition by the Company.

The following unaudited pro forma summary
financial information presents the consolidated results of
operations of the Company as if the acquisition of B2BVideo had
occurred on January 1, 2001. The pro forma results are
shown for illustrative purposes only and do not purport to be
indicative of the results of the Company that would have been
reported had the acquisition actually occurred on
January 1, 2001 or indicative of results that may occur in
the future.

|                                                                                                                       |  |                         |             |      |  |   |             |  
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | ---- |  | - | ----------- | -
|                                                                                                                       |  |                        
|                                                                                                                       |  | (Unaudited)            
|                                                                                                                       |  | Year ended December 31,
|                                                                                                                       |  |                        
|                                                                                                                       |  | 2001                    |             | 2002
|                                                                                                                       |  |                         |             |     
|Revenues                                                                                                               |  | $                       | 12,844,979  |      |  | $ | 975,375     |  
|Loss before extraordinary gain                                                                                         |  | $                       | (14,370,383 | )    |  | $ | (19,099,114 | )
|Gain on extinguishment of debt                                                                                         |  |                         |            |      |  | $ | 3,791,145   |  
|Net loss                                                                                                               |  | $                       | (14,370,383 | )    |  | $ | (15,307,969 | )
|Deemed dividend                                                                                                        |  |                         |            |      |  | $ | (5,319,382  | )
|Net loss attributable to common shareholders                                                                           |  | $                       | (14,370,383 | )    |  | $ | (20,627,351 | )
|Income (loss) per share  basic
    and diluted Loss attributable to common shareholders before
    extraordinary gain |  | $                       | (0.30       | )    |  | $ | (0.46       | )
|Extraordinary gain                                                                                                     |  |                         |            |      |  |   | 0.07        |  
|Net loss attributable to common shareholders                                                                           |  | $                       | (0.30       | )    |  | $ | (0.39       | )

During the fourth quarter of 2002, management,
with the Board of Directors approval, made a decision to
shutdown and cease all operations of B2BVideo. This resulted in
an asset impairment charge being recorded in December 2002, in
addition, the Company settled certain B2BVideo trade payables
and other vendor liabilities during the fourth quarter of 2002,
which resulted in a gain on extinguishment of debt of $652,000.
The Company has terminated substantially all B2BVideo employees
and has commenced negotiations with the landlord of the B2BVideo
office space to terminate the lease agreement (Note 8).



|   |            
|-- | -----------
|5. | Inventories

Inventories, net of allowances, consist of the
following at:

|                                            |  |              |            |      |  |   |            |  
|------------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                                            |  |             
|                                            |  | December 31,
|                                            |  |             
|                                            |  | 2001         |            | 2002
|                                            |  |              |            |     
|Raw materials                               |  | $            | 5,044,749  |      |  | $ | 4,416,579  |  
|Allowance for excess and obsolete inventory |  |              | (3,850,000 | )    |  |   | (3,538,509 | )
|                                            |  |              |            |      |  |   |            |  
|                                            |  | $            | 1,194,749  |      |  | $ | 878,070    |  
|                                            |  |              |            |      |  |   |            |  

The Company recorded a provision for excess and
obsolete inventory of $3,000,000 in 2001 and $561,988 in 2002.

F-17



---



##### 



6. Property and Equipment

Property and equipment consist of the following
at:

|                                          |  |              |            |      |  |   |            |  
|----------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                                          |  |             
|                                          |  | December 31,
|                                          |  |             
|                                          |  | 2001         |            | 2002
|                                          |  |              |            |     
|Computer and laboratory equipment         |  | $            | 3,105,490  |      |  | $ | 3,143,880  |  
|Computer software                         |  |              | 470,426    |      |  |   | 520,426    |  
|Service bureau equipment                  |  |              |           |      |  |   | 254,820    |  
|Furniture and fixtures                    |  |              | 876,322    |      |  |   | 877,993    |  
|Office equipment                          |  |              | 205,333    |      |  |   | 205,333    |  
|                                          |  |              |            |      |  |   |            |  
|                                          |  |              | 4,657,571  |      |  |   | 5,002,452  |  
|Accumulated depreciation and amortization |  |              | (4,380,842 | )    |  |   | (4,637,725 | )
|                                          |  |              |            |      |  |   |            |  
|                                          |  | $            | 276,729    |      |  | $ | 364,727    |  
|                                          |  |              |            |      |  |   |            |  

Depreciation expense for the years ended
December 31, 2001 and 2002 was $297,889 and $444,029,
respectively.



|   |                         
|-- | ------------------------
|7. | Asset Impairment Charges

During the fourth quarter of 2002, the Company
recognized impairment losses of approximately $7,276,000 related
to certain assets of B2BVideo. The write-down of goodwill,
associated with the acquisition of B2BVideo in May 2002
accounted for approximately $6,746,000 of the charge. The
remaining $530,000 of the charge related to the net book value
of certain fixed and other assets. The write down of the assets
to fair value was determined based upon undiscounted cash flows
of the B2BVideo business. Since the acquisition in May 2002,
B2BVideo has lost its only customer and has generated no sales
since losing that customer in the third quarter of 2002. In
addition, management of VNCI and Moneyline no longer views the
private network built by B2BVideo as a useful component of the
managed video services offering.



|   |                              
|-- | -----------------------------
|8. | Commitments and Contingencies

Leases  The Company leases office and
manufacturing space and office equipment under various operating
and capital leases. Commitments for minimum rentals under
non-cancelable leases at December 31, 2002 are as follows:

|                                            |  |         |        |           |  |              |           |  |  |   |         | 
|------------------------------------------- |  | ------- | ------ | --------- |  | ------------ | --------- |  |  | - | ------- | 
|                                            |  |         |        |           |  | Operating   
|                                            |  | Capital |        | Operating |  | Leases to be
|                                            |  | Leases  |        | Leases    |  | Cancelled(1)
|                                            |  |         |        |           |  |             
|2003                                        |  | $       | 11,288 |           |  | $            | 335,851   |  |  | $ | 133,480 | 
|2004                                        |  |         | 8,448  |           |  |              | 342,297   |  |  |   | 133,480 | 
|2005                                        |  |         | 8,448  |           |  |              | 342,297   |  |  |   | 55,616  | 
|2006                                        |  |         | 8,448  |           |  |              | 378,611   |  |  |   |        | 
|2007                                        |  |         |       |           |  |              | 386,775   |  |  |   |        | 
|Thereafter                                  |  |         |       |           |  |              | 80,578    |  |  |   |        | 
|                                            |  |         |        |           |  |              |           |  |  |   |         | 
|Total minimum lease payments                |  | $       | 36,632 |           |  | $            | 1,866,409 |  |  | $ | 322,576 | 
|                                            |  |         |        |           |  |              |           |  |  |   |         | 
|Less amount representing interest           |  |         | (6,856 | )         |  |              |           |  |  |   |         | 
|                                            |  |         |        |           |  |              |           |  |  |   |         | 
|Present value of net minimum lease payments |  |         | 29,776 |           |  |              |           |  |  |   |         | 
|Less amount representing current portion    |  |         | (8,432 | )         |  |              |           |  |  |   |         | 
|                                            |  |         |        |           |  |              |           |  |  |   |         | 
|                                            |  | $       | 21,344 |           |  |              |           |  |  |   |         | 
|                                            |  |         |        |           |  |              |           |  |  |   |         | 



| |     |                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The Company is engaged in active negotiations
    with the landlord for early termination of this lease
    obligation. The exact outcome of this negotiation cannot yet be
    determined.

F-18



---



##### 



In January 2003, in conjunction with the Wiltel
webcasting business acquisition, the Company entered into a
lease for a 31,000 square foot facility in New York City, New
York at a current monthly rental rate of $30.00 per square foot.
The lease expires in July 2009. Rent on the facility increases
over the term of the lease from the current rate of $30.00 per
square foot going to $32.00 per square foot in March 2007.

Property and equipment at year-end include the
following amounts for capitalized leases:

|                         |  |      |         |      |  |   |         |  
|------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                         |  | 2001 |         | 2002
|                         |  |      |         |     
|Office equipment         |  | $    | 96,545  |      |  | $ | 96,545  |  
|Accumulated depreciation |  |      | (56,204 | )    |  |   | (76,153 | )
|                         |  |      |         |      |  |   |         |  
|                         |  | $    | 40,341  |      |  | $ | 20,392  |  
|                         |  |      |         |      |  |   |         |  

Rent payments made in 2001 and 2002 were $325,000
and $556,755, respectively.

The Company has employment agreements with five
senior executives that bind the Company to pay an aggregate of
up to approximately $744,000, should the employees be terminated
for reasons other than for cause. One of these individuals was
transferred to an affiliated company early in 2003. Their
employment agreement and the potential associated severance pay
of $107,688 were transferred to the new employer.



|   |                    
|-- | -------------------
|9. | Accrued Liabilities

Accrued liabilities consisted of the following at:

|                                 |  |              |           |      |  |   |           | 
|-------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2001         |           | 2002
|                                 |  |              |           |     
|Accrued compensation expenses    |  | $            | 291,385   |      |  | $ | 551,136   | 
|Accrued legal and audit expenses |  |              | 30,000    |      |  |   | 206,182   | 
|Accrued rent expense             |  |              |          |      |  |   | 138,057   | 
|Accrued warranty expenses        |  |              | 142,318   |      |  |   | 19,141    | 
|Accrued interest                 |  |              | 550,165   |      |  |   |          | 
|Other accrued expenses           |  |              | 186,711   |      |  |   | 287,040   | 
|                                 |  |              |           |      |  |   |           | 
|                                 |  | $            | 1,200,579 |      |  | $ | 1,201,556 | 
|                                 |  |              |           |      |  |   |           | 

F-19



---



##### 





|    |             
|--- | ------------
|10. | Income Taxes

The components of the Companys net deferred
tax position and the tax effects of the temporary differences
giving rise to the Companys deferred tax assets
(liabilities) as of December 31, 2001 and 2002 are as
follows:

|                        |                                   |      |        |             |   |   |       |             |  
|----------------------- | --------------------------------- | ---- | ------ | ----------- | - | - | ----- | ----------- | -
|                        |                                   | 2001 |        | 2002       
|                        |                                   |      |        |            
|Deferred Tax Assets:    |                                   |      |        |             |   |   |       |            
|                        | Net operating loss carry forwards |      | $      | 20,619,000  |   |   | $     | 23,168,000  |  
|                        | Accrued liabilities               |      |        | 149,000     |   |   |       | 165,000     |  
|                        | Reserves                          |      |        | 1,842,000   |   |   |       | 2,063,000   |  
|                        | Depreciation and amortization     |      |        | 230,000     |   |   |       | 270,000     |  
|                        |                                   |      |        |             |   |   |       |            
|                        | Gross deferred tax asset          |      |        | 22,840,000  |   |   |       | 25,666,000  |  
|                        | Valuation allowance               |      |        | (22,820,000 | ) |   |       | (22,663,000 | )
|                        |                                   |      |        |             |   |   |       |            
|                        |                                   |      | 20,000 |             |   |   | 3,000 |            
|Deferred tax liability: |                                   |      |        |             |   |   |       |            
|                        | Allowance for bad debts           |      |        | (17,000     | ) |   |       |            |  
|                        | Intangible assets                 |      |        | (3,000      | ) |   |       | (3,000      | )
|                        |                                   |      |        |             |   |   |       |            
|Net deferred tax asset  |                                   | $    |       |             |   | $ |      |            
|                        |                                   |      |        |             |   |   |       |            

At December 31, 2002, the Company has
available net operating loss carry forwards for federal tax
purposes of approximately $63,050,000 that may be available to
offset future federal income tax liabilities and expire at
various dates through 2021. As of December 31, 2002, a
valuation allowance of $22,663,000 has been recorded against
total gross deferred tax assets, due to the uncertainty
surrounding their realization in the future. Ownership changes,
as defined in the Internal Revenue Code Section 382, have
significantly limited the amount of net operating loss carry
forwards that can be utilized annually to offset future taxable
income. Subsequent ownership changes could further effect the
limitation in future years.



|    |              
|--- | -------------
|11. | Notes Payable

The following table summarizes the Companys
indebtedness:

|                             |                         |          |           |           |  |   |        |   | 
|---------------------------- | ----------------------- | -------- | --------- | --------- |  | - | ------ | - | 
|                             |                         | 12/31/01 |           | 12/31/02 
|                             |                         |          |           |          
|Bridge Financings:           |                         |          |           |           |  |   |        |  
|                             | April 2002              |          | $         |          |  |   | $      |  | 
|                             | March 2002              |          |           |          |  |   |        |  | 
|                             | January 2002            |          |           |          |  |   |        |  | 
|                             | November/ December 2001 |          |           | 1,674,982 |  |   |        |  | 
|                             | September/ October 2001 |          |           | 1,000,000 |  |   |        |  | 
|Sanmina note                 |                         |          | 2,900,000 |           |  |   |       |  
|Other notes                  |                         |          | 31,943    |           |  |   | 20,000 |  
|Less: Debt discount on notes |                         |          | (511,186  | )         |  |   |       |  
|                             |                         |          |           |           |  |   |        |  
|Total                        |                         | $        | 5,095,739 |           |  | $ | 20,000 |  
|                             |                         |          |           |           |  |   |        |  

Sanmina Note

In January 1999, the Company converted
outstanding accounts payable to Sanmina Corporation to a
$4,300,000 three-year term note accruing interest at 7% per
annum. As consideration for the restructuring of accounts
payable balances to a long-term note, the Company issued Sanmina
a warrant to purchase

F-20



---



##### 



7,857 shares of its common stock, with an
exercise price of $96.25 per share. An independent appraisal
assigned a market value of $127,759 to this warrant. The Company
recorded the value of the warrant as a debt discount and
amortized the value of the warrant over the life of the note. In
June of 1999, the Company repaid $1,100,000 of the note
principal.


In January 2000, the Company defaulted on the
interest payment due to Sanmina and did not make subsequent
interest and principal payments to Sanmina when due through
August 2000. In August 2000, the Company renegotiated the terms
of the note to Sanmina. Under the amended terms of the note, the
Company paid $150,000 on August 25, 2000 and $150,000 in
November 2000. Commencing February 2001, the Company was
obligated to pay an amount each month equal to a percentage of
the accounts receivable that it collected in the previous
calendar month, with the percentage ranging from 0% to 5%, based
upon the net amount of accounts receivable collected. Any
principal and accrued interest thereon remaining on the note was
due in full on January 12, 2002. The Sanmina note was
collateralized by the Companys personal property and
certain other assets, and as of May 16, 2002, the Company
was in default of this note.

On May 17, 2002, the Company made a payment
of $1,100,000 to Sanmina with respect to all its outstanding
claims under this note, which claims consisted of an outstanding
principal balance of $2,900,000 and accrued interest of
$587,145. This payment resulted in a gain on the extinguishment
of debt of $2,387,145. Such gain was recognized as an
extraordinary gain in the Consolidated Statement of Operations
(Note 14).

Bridge Financing

January 2002 Bridge Financing:On January 24, 2002, the Company
completed a private placement of $500,000 of 9% unsecured
promissory notes and warrants to purchase 200,000 shares of the
Companys common stock at an exercise price of $1.30 per
share. The unsecured notes were due and payable upon the earlier
of April 24, 2002 or the date on which the Company
completed its next debt or equity financing in which it raised
in excess of $2,500,000 in gross proceeds. The holders of the
unsecured promissory notes had the right to convert all or any
portion of the principal amount of the notes into the securities
that the Company issues in its next financing. The holders of
the unsecured notes were required to elect to convert by the
closing of the financing. If the holders did not elect to
convert by the closing date, the right to convert terminated.
The notes accrued interest at a rate of 9% per annum. Interest
accrued from January 24, 2002 through the date on which the
notes become due and payable. In the event the notes were not
paid at maturity, the interest rate would increase to 18% until
the notes were paid.

The warrants were exercisable beginning on
July 24, 2002 and will be exercisable until July 23,
2007. The initial exercise price for the warrants of $1.30 per
share is subject to adjustment in certain limited circumstances.
The warrants have a cashless exercise provision. The fair value
of the warrants, calculated using the Black Scholes
option-pricing model, in the amount of $172,000 was recorded as
a debt discount and was amortized over the life of the notes to
interest expense. On May 16, 2002 the principal balance of
the notes and accrued interest in the aggregate amount of
$513,808 were exchanged for 857,292 shares of the Companys
common stock pursuant to the terms and conditions of the Stock
Purchase Agreement (Note 3).

March 2002 Bridge Financing:On March 28, 2002, the Company
borrowed the aggregate principal amount of $349,000 pursuant to
a 9% unsecured promissory note. In connection with the loan, the
Company also issued to the lenders warrants to purchase 698,000
shares of the Companys common stock at an initial exercise
price of $1.30 per share. The fair value of the warrant,
calculated using the Black Scholes option-pricing model, in the
amount of $299,000 was recorded as a debt discount and was
amortized over the life of the note to interest expense. The
notes were due and payable on the earlier of June 26, 2002
or the date on which the Company completed its next debt or
equity financing in which it raised an aggregate, on a
cumulative basis, in excess of $2,500,000 in gross proceeds. The
notes accrued interest at a rate of 9% per annum. Interest
accrued from March 28, 2002 through the date on which the
notes became due and payable. On May 16, 2002 the principal
balance of the notes and accrued interest

F-21



---



##### 



in the aggregate amount of $353,217 were
exchanged for 588,792 shares of the Companys common stock
pursuant to the terms and conditions of the Agreement
(Note 3).


April 2002 Bridge Financing:On April 25, 2002, the Company
borrowed $200,000 pursuant to a 9% unsecured promissory note. In
connection with the loan, the Company also issued to the lender
a warrant to purchase 400,000 shares of the Companys
common stock at an initial exercise price of $1.30 per share.
The fair value of the warrant, calculated using the Black
Scholes option-pricing model, in the amount of $167,000 was
recorded as interest expense. The note was due and payable on
demand or on the date on which the Company completes its next
debt or equity financing in which it raises in the aggregate, on
a cumulative basis, in excess of $2,500,000 in gross proceeds.
The note accrued interest at a rate of 9% per annum. Interest
accrued from April 25, 2002, through the date on which the
note was payable. In the event the note was not paid at
maturity, the interest rate would increase to 18% until the note
was paid. On May 16, 2002 the note and accrued interest in
the aggregate amount of $201,036 were exchanged for 335,083
shares of the Companys common stock pursuant to the terms
and conditions of the Agreement (Note 3).

November and December 2001 Bridge Financing:The Company had outstanding at
December 31, 2001 $1,674,982 principal amount of notes
issued in November and December of 2001. The outstanding
principal amount of and accrued interest at the rate of 9% per
annum on the notes is due and payable on the earlier of
February 19, 2002, or the date on which a financing closes.

September and October 2001 Bridge Financing:As of December 31, 2001, we had
outstanding $1,000,000 principal amount of notes, issued in
September and October of 2001, on which the outstanding
principal, and interest at the rate of 9% per annum, originally
due and payable on December 24, 2001, and extended to the
earlier of February 15, 2002, or the date on which a
financing closes.

At May 16, 2002, the Company was in default
of the 9% senior secured promissory notes issued in September
and October of 2001 and its 9% unsecured promissory notes issued
in November and December of 2001. The aggregate principal
balance of these notes in default was approximately $2,675,000.
Certain of such notes were secured by all of the Companys
assets and intellectual property. These notes and accrued but
unpaid interest thereon were exchanged for 4,665,209 shares of
the Companys common stock on May 16, 2002, pursuant
to the terms and conditions of the Agreement (Note 3).



|    |                           
|--- | --------------------------
|12. | Capital Stock Transactions

Common Stock

At a Special Meeting of Stockholders convened on
February 4, 2002, the stockholders approved a resolution to
increase the number of authorized shares of common stock from
30,000,000 shares to 90,000,000 shares.

On May 16, 2002, the Company entered into an
Agreement with Moneyline, a wholly owned subsidiary of Moneyline
Telerate Holdings. Pursuant to the Agreement Moneyline purchased
25,000,000 shares of the Companys common stock
(representing approximately 51.4% of the Companys
outstanding common stock at June 30, 2002) for aggregate
cash consideration of $15,000,000 and received a warrant to
purchase an additional 11,250,000 shares of the Companys
common stock, with an exercise price of $0.60 per share and a
cashless exercise mechanism.

Simultaneously, certain existing and new
investors purchased 7,750,000 newly issued shares of the
Companys common stock at $0.60 per share, providing
aggregate gross proceeds of $4,650,000 to the Company
(Note 3).

On May 16, 2002, the Company acquired
B2BVideo, a Delaware corporation. B2BVideo was formed in
December 1999 to deliver to business users managed enterprise
video services (Note 4).

In June of 2002, the holders of warrants to
purchase 518,044 shares of the Companys common stock at an
exercise price of $0.60 per share elected to exercise their
warrants implementing the cashless

F-22



---



##### 



exercise provision in the warrants and these
holders were issued 410,864 shares of the Companys common
stock.


In July of 2002, the holders of warrants to
purchase 12,470,172 shares of the Companys common stock at
an exercise price of $0.60 per share elected to exercise their
warrants implementing the cashless exercise provision in the
warrants and these holders were issued 9,141,686 shares of the
Companys common stock.

In November of 2002, the holder of warrants to
purchase 10,000 shares of the Companys common stock at an
exercise price of $0.60 per share elected to exercise his
warrants implementing the cashless exercise provision in the
warrants and the holder was issued 1,429 shares of the
Companys common stock.

Warrants

In connection with the August 2000 Private
Placement, the Company issued, on December 23, 2000,
January 23, 2001 and February 23, 2001, to the
purchasers of Units in the August 2000 Private Placement and to
EBC, Extra Warrants to purchase a total of 60,699 shares of
Common Stock at an initial purchase price of $20.00 per share.
The Company was obligated to issue such Extra Warrants because
the SEC had not declared a registration statement, covering the
offering and resale of the securities issued in the private
placement, effective by the target date. The Extra Warrants have
the same terms as the Warrants issued at the time of the August
2000 Private Placement. The Company was also required to issue
Extra Warrants on each monthly anniversary of December 23,
2000 until the earlier of the effective date of a registration
statement covering the offering and sale of the securities
issued in the Private Placement, or July 23, 2002. The
Company issued the Extra Warrants in reliance on an exemption
provided by Section 4(2) of the Securities Act of 1933 and
Regulation D and Rule 506 promulgated there under. The
Company has withdrawn this registration statement and has issued
additional Extra Warrants through July 2002. In addition to the
Extra Warrants issued as noted above, the Company issued 77,380
of additional Extra Warrants through December 31, 2001 and
54,166 additional Extra Warrants in 2002.

In September and October 2001, the Company issued
warrants to purchase 400,000 shares of common stock at an
exercise price of $2.00 per share. The exercise price of these
warrants was reset to $0.60 per share in conjunction with the
Companys Private Placement and merger transaction
completed on May 16, 2002.

In November and December 2001, the Company issued
warrants to purchase 669,993 shares of common stock at an
exercise price of $2.75 per share. The exercise price of these
warrants was reset to $0.60 per share in conjunction with the
Companys Private Placement and merger transaction
completed on May 16, 2002.

In December 2001, the Company negotiated an
extension of the maturity date of the First Bridge Secured Notes
and, as consideration, issued the note holders warrants to
purchase 200,000 shares of common stock with an exercise price
of $2.00 per share with an aggregate value of $456,000, which
was charged to interest expense in 2001. The exercise price of
these warrants was reset to $0.60 per share in conjunction with
the Companys Private Placement and merger transaction
completed on May 16, 2002.

The aggregate value of the above warrants was
approximately $1,821,000, of which $1,312,000 was amortized to
interest expense in 2001. The remaining balance of $509,000 was
recorded against the face amount of the notes and amortized over
the remaining life of the notes, all of which converted into the
Companys common stock on May 16, 2002.

On January 24, 2002, the Company completed a
private placement of $500,000 of 9% unsecured promissory notes
and warrants to purchase 200,000 shares of the Companys
common stock at an initial exercise price of $1.30 per share.

The warrants were exercisable beginning on
July 24, 2002 and will be exercisable until July 23,
2007. The $1.30 per share initial exercise price for the
warrants is subject to adjustment in certain limited
circumstances. The warrants have a cashless exercise provision.
The fair value of the warrants, calculated

F-23



---



##### 



using the Black Scholes option-pricing model, in
the amount of $172,000 was recorded as a debt discount and was
amortized over the life of the notes to interest expense.


On March 28, 2002, the Company borrowed the
aggregate principal amount of $349,000 pursuant to a 9%
unsecured promissory note. In connection with the loan, the
Company also issued to the lenders warrants to purchase 698,000
shares of the Companys common stock at an initial exercise
price of $1.30 per share. The fair value of the warrant,
calculated using the Black Scholes option-pricing model, in the
amount of $299,000 was recorded as a debt discount and was
amortized over the life of the note to interest expense.

On April 25, 2002, the Company borrowed
$200,000 pursuant to a 9% unsecured promissory note. In
connection with the loan, the Company also issued to the lender
a warrant to purchase 400,000 shares of the Companys
common stock at an initial exercise price of $1.30 per share.
The fair value of the warrant, calculated using the Black
Scholes option-pricing model, in the amount of $167,000 was
recorded as interest expense. The note was due and payable on
demand or on the date on which the Company completes its next
debt or equity financing in which it raises in the aggregate, on
a cumulative basis, in excess of $2,500,000 in gross proceeds.
The note accrued interest at a rate of 9% per annum. Interest
accrued from April 25, 2002, through the date on which the
note was payable. In the event the note was not paid at
maturity, the interest rate would increase to 18% until the note
was paid. On May 16, 2002 the note and accrued interest in
the amount of $201,036 were exchanged for 335,181 shares of the
Companys common stock pursuant to the terms and conditions
of the Agreement (Note 3).

On May 16, 2002 (i) the Company issued
warrants to purchase 11,250,000 shares of the Companys
common stock with an exercise price of $0.60 per common share in
conjunction with the Companys Private Placement
(Note 3).

In conjunction with the merger of the Company
with B2BVideo Network, Corp. on May 16, 2002,



| |     |                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Options to purchase 2.75 Units of B2BVideo, each
    Unit consisting of (A) 50,000 shares of B2BVideo
    Series B Preferred Stock and (B) warrants to purchase
    50,000 shares of B2BVideos common stock, were exchanged
    for options to purchase an aggregate of 182,977 shares of
    VNCIs common stock and warrants to purchase 46,374 shares
    of VNCIs common stock;
|
| | (b) | Warrants to purchase 3,176,000 shares of B2BVideo
    common stock issued and outstanding immediately prior to the
    closing date were exchanged for warrants to purchase 1,214,223
    shares of VNCIs common stock (see Note 4, Acquisition of
    B2BVideo Network Corp.).                                                                                                     

As a result of the Companys sale of common
stock for $0.60 per share on May 16, 2002, certain warrants
issued by the Company in August 1998 underwent both a
quantitative and price reset. In total, warrants for 1,532
shares of the Companys common stock with an exercise price
of $93.75 converted into warrants for 6,391 shares of the
Companys common stock with an exercise price of $22.47.

In June of 2002, the holders of warrants to
purchase 518,044 shares of the Companys common stock at an
exercise price of $0.60 per share elected to exercise their
warrants implementing the cashless exercise provision in the
warrants and these holders were issued 410,864 shares of the
Companys common stock.

In July of 2002, the holders of warrants to
purchase 12,470,172 shares of the Companys common stock at
an exercise price of $0.60 per share elected to exercise their
warrants implementing the cashless exercise provision in the
warrants and these holders were issued 9,141,686 shares of the
Companys common stock.

In November of 2002, the holder of warrants to
purchase 10,000 shares of the Companys common stock at an
exercise price of $0.60 per share elected to exercise his
warrants implementing the cashless exercise provision in the
warrants and the holder was issued 1,429 shares of the
Companys common stock.

F-24



---



##### 



Warrant activity during 2002 is summarized as
follows:

|                                                                         |  |  |             |  
|------------------------------------------------------------------------ |  |  | ----------- | -
|Balance, January 1, 2001                                                 |  |  | 2,692,115   |  
|Warrants issued in connection with the January
    2002 bridge financing |  |  | 200,000     |  
|Warrants issued in connection with the March 2002
    bridge financing   |  |  | 698,000     |  
|Warrants issued in connection with the April 2002
    bridge financing   |  |  | 400,000     |  
|Warrants issued to Moneyline in connection with
    private placement    |  |  | 11,250,000  |  
|Warrants issued to B2BVideo in connection with
    merger                |  |  | 1,214,223   |  
|Warrants issued to EBC                                                   |  |  | 54,166      |  
|Issuance of other warrants                                               |  |  | 4,878       |  
|Forfeiture of warrants                                                   |  |  | (1,467      | )
|Exercise of warrants                                                     |  |  | (12,998,216 | )
|                                                                         |  |  |             |  
|Balance, December 31, 2002                                               |  |  | (3,513,699  | )
|                                                                         |  |  |             |  

A summary of the number of shares of common stock
subject to purchase under all warrant agreements and related
exercise prices as of December 31, 2002 is as follows:

|                 |           |                |  |   |       | 
|---------------- | --------- | -------------- |  | - | ----- | 
|Number of Shares |           | Exercise Price
|                 |           |               
|                 | 7,857     |                |  | $ | 96.25 | 
|                 | 1,142     |                |  |   | 92.95 | 
|                 | 6,391     |                |  |   | 22.47 | 
|                 | 1,464,310 |                |  |   | 20.00 | 
|                 | 446,881   |                |  |   | 5.93  | 
|                 | 101,180   |                |  |   | 3.94  | 
|                 | 48,894    |                |  |   | 2.00  | 
|                 | 1,437,044 |                |  |   | .60   | 
|                 |           |                |  |   |       | 
|                 | 3,513,699 |                |  |   |       | 
|                 |           |                |  |   |       | 

Stock Options

On September 9, 1999, stockholders of VNCI
approved the Companys 1999 Stock Incentive Plan (the
Plan). The Plan authorized the Company to issue
options to employees, directors, consultants and others to
purchase up to 528,000 shares of common stock. The Company was
restricted to having 402,000 of these issued and outstanding
prior to June 18, 2000 as a result of an agreement with the
Companys lead investment banker on its June 1999 public
offering. At a Special Meeting of Stock Holders held
February 4, 2002, the stockholders of VNCI authorized an
increase in the maximum number of shares available in the Plan
to 8,000,000. However, the Company has only registered 2,528,000
shares under this Plan. The maximum exercise period for options
granted under the Plan is ten years. Vesting and exercise
periods for each individual grant are delineated in the
individual grant agreement. The Companys 1996 Stock
Incentive Plan closed on that date and no additional grants are
available through the 1996 Stock Incentive Plan or any of the
Companys other prior stock option plans. Similarly, the
maximum exercise period for options granted under the 1996 Stock
Incentive Plan was ten years. Vesting and exercise periods for
each individual grant were delineated in the individual grant
agreement.

F-25



---



##### 



Stock option activity during the periods
indicated is summarized as follows:

|                                                                                                                             |  |           |           |                  |  |   |        | 
|---------------------------------------------------------------------------------------------------------------------------- |  | --------- | --------- | ---------------- |  | - | ------ | 
|                                                                                                                             |  | Number of |           | Weighted Average
|                                                                                                                             |  | Shares    |           | Exercise Price  
|                                                                                                                             |  |           |           |                 
|2001                                                                                                                         |  |           |           |                  |  |   |        | 
|Outstanding at beginning of year                                                                                             |  |           | 477,350   |                  |  | $ | 26.870 | 
|Granted                                                                                                                      |  |           | 79,580    |                  |  | $ | 4.820  | 
|Forfeited                                                                                                                    |  |           | (19,120   | )                |  | $ | 16.817 | 
|Exercised                                                                                                                    |  |           |          |                  |  |   |       | 
|Outstanding at end of year                                                                                                   |  |           | 537,810   |                  |  | $ | 23.958 | 
|                                                                                                                             |  |           |           |                  |  |   |        | 
|Exercisable                                                                                                                  |  |           | 312,759   |                  |  | $ | 31.018 | 
|                                                                                                                             |  |           |           |                  |  |   |        | 
|2002                                                                                                                         |  |           |           |                  |  |   |        | 
|Outstanding at beginning of year                                                                                             |  |           | 537,810   |                  |  | $ | 23.958 | 
|Granted (Includes 1,003,871 options granted to
    holders of B2BVideo options upon the Companys merger with
    B2BVideo.) |  |           | 1,258,913 |                  |  | $ | 2.790  | 
|Forfeited                                                                                                                    |  |           | (602,908  | )                |  | $ | 11.517 | 
|Exercised                                                                                                                    |  |           | (10,000   | )                |  | $ | 1.030  | 
|Outstanding at end of year                                                                                                   |  |           | 1,183,815 |                  |  | $ | 6.351  | 
|                                                                                                                             |  |           |           |                  |  |   |        | 
|Exercisable                                                                                                                  |  |           | 1,017,405 |                  |  | $ | 6.124  | 
|                                                                                                                             |  |           |           |                  |  |   |        | 
|Available for grant                                                                                                          |  |           | 6,787,020 |                  |  |   |        | 
|                                                                                                                             |  |           |           |                  |  |   |        | 

The following table summarizes information about
stock options outstanding at December 31, 2002:

|                |         |             |  |                  |         |                     |  |                     |           |                |  |  |     |  |  |   |         |  |  |  |           |  |  |   |         | 
|--------------- | ------- | ----------- |  | ---------------- | ------- | ------------------- |  | ------------------- | --------- | -------------- |  |  | --- |  |  | - | ------- |  |  |  | --------- |  |  | - | ------- | 
|                |         |             |  |                  |         |                     |  |                    
|                |         |             |  |                  |         | Options Outstanding |  | Options Exercisable
|                |         |             |  |                  |         |                     |  |                    
|                |         |             |  |                  |         | Weighted-Average    |  |                     |           |               
|                |         |             |  | Remaining        |         |                     |  |                    
|Range of        |         | Number      |  | Contractual Life |         | Weighted-Avg.       |  | Number              |           | Weighted-Avg. 
|Exercise Prices |         | Outstanding |  | (years)          |         | Exercise Price      |  | Exercisable         |           | Exercise Price
|                |         |             |  |                  |         |                     |  |                     |           |               
|$               | 0.499   |             |  | $                | 2.001   |                     |  |                     | 493,684   |                |  |  | 7.1 |  |  | $ | 1.048   |  |  |  | 399,417   |  |  | $ | 1.027   | 
|$               | 2.699   |             |  | $                | 5.941   |                     |  |                     | 476,149   |                |  |  | 4.8 |  |  | $ | 4.348   |  |  |  | 439,447   |  |  | $ | 4.362   | 
|$               | 9.529   |             |  | $                | 21.876  |                     |  |                     | 201,163   |                |  |  | 1.8 |  |  | $ | 13.058  |  |  |  | 167,007   |  |  | $ | 13.145  | 
|$               | 69.999  |             |  | $                | 105.001 |                     |  |                     | 5,146     |                |  |  | 1.5 |  |  | $ | 72.124  |  |  |  | 5,146     |  |  | $ | 72.124  | 
|$               | 139.990 |             |  | $                | 192.501 |                     |  |                     | 2,837     |                |  |  | 1.5 |  |  | $ | 143.424 |  |  |  | 2,837     |  |  | $ | 143.424 | 
|$               | 231.874 |             |  | $                | 463.751 |                     |  |                     | 4,836     |                |  |  | 1.5 |  |  | $ | 315.652 |  |  |  | 3,551     |  |  | $ | 262.060 | 
|                |         |             |  |                  |         |                     |  |                     |           |                |  |  |     |  |  |   |         |  |  |  |           |  |  |   |         | 
|                |         |             |  |                  |         |                     |  |                     | 1,183,815 |                |  |  |     |  |  |   |         |  |  |  | 1,017,405 |  |  |   |         | 
|                |         |             |  |                  |         |                     |  |                     |           |                |  |  |     |  |  |   |         |  |  |  |           |  |  |   |         | 

All stock options granted by the Company from its
inception through December 31, 2002 were granted with an
exercise price per share equal to the fair value of the
Companys common stock on the date of grant. Those options
and warrants that became part of the Companys 1999 Stock
Incentive Plan as a result of the merger with B2BVideo on
May 16, 2002 have an exercise price as delineated in the
Merger Agreement between the two entities.

F-26



---



##### 



The following table provides a summary of all
compensation plan data at December 31, 2002.

|                                                |  |                    |       |             |  |                |        |                |  |        |        |  |  |   |           |  |  |  |           | 
|----------------------------------------------- |  | ------------------ | ----- | ----------- |  | -------------- | ------ | -------------- |  | ------ | ------ |  |  | - | --------- |  |  |  | --------- | 
|                                                |  |                   
|                                                |  | Compensation Plans
|                                                |  |                   
|                                                |  | Director Stock     |       | 1994 Stock  |  | 1996 Stock     |        | 1999 Stock     |  |       
|December 31, 2002                               |  | Option Plan        |       | Option Plan |  | Incentive Plan |        | Incentive Plan |  | Totals
|                                                |  |                    |       |             |  |                |        |                |  |       
|Outstanding Options and Warrants at end of year |  |                    | 4,433 |             |  |                | 2,097  |                |  |        | 6,289  |  |  |   | 1,170,996 |  |  |  | 1,183,815 | 
|Average Weighted Exercise Price                 |  | $                  | 70.00 |             |  | $              | 140.00 |                |  | $      | 131.35 |  |  | $ | 4.45      |  |  |  |           | 
|Available for Grant                             |  |                    |      |             |  |                |       |                |  |        |       |  |  |   | 6,787,020 |  |  |  | 6,787,020 | 



|    |                                                  
|--- | -------------------------------------------------
|13. | Non-cash Financing and Investing
    Transactions

The following is a summary of non-cash financing
and investing transactions for the years ended December 31,
2001, and 2002:

|                                                                       |  |      |           |      |  |   |           | 
|---------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                                       |  | 2001 |           | 2002
|                                                                       |  |      |           |     
|Current asset financed by issuance of note payable                     |  | $    | 139,747   |      |  | $ | 73,480    | 
|Capital lease obligations                                              |  |      | 32,000    |      |  |   |          | 
|Conversion of notes payable, and interest
    thereon, to common stock |  |      |          |      |  |   | 3,867,825 | 
|Investment in B2BVideo                                                 |  |      |          |      |  |   | 5,197,241 | 
|Warrants issued with bridge notes                                      |  |      | 1,820,866 |      |  |   | 639,208   | 



|    |                                                   
|--- | --------------------------------------------------
|14. | Extraordinary Gain from Extinguishment of
    Debt

The Company recorded an extraordinary gain from
extinguishment of debt during 2002 in the amount of $3,791,145.
Approximately, $2,387,145 of the gain relates to the
extinguishment of a three year term note (Note 11). The
remaining $1,404,000 relates to the settlement of VNCI and
B2BVideo vendor payables. The following table presents the
components of the extraordinary gain.

|               |                             |   |           |           | 
|-------------- | --------------------------- | - | --------- | --------- | 
|Settlement of: |                             |   |           |          
|               | B2BVideo vendor payables    |   | $         | 652,000   | 
|               | VNCI vendor payables        |   |           | 624,000   | 
|               | Sanmina note                |   |           | 2,387,145 | 
|               | Shaw Pittman legal expenses |   |           | 128,000   | 
|               |                             |   |           |          
|Total          |                             | $ | 3,791,145 |          
|               |                             |   |           |          



|    |                      
|--- | ---------------------
|15. | Employee Benefit Plan

The Company implemented a profit-sharing plan
under Section 401(k) of the Internal Revenue Code (the
Code) covering substantially all employees. The plan
allows employees to make contributions up to the maximum allowed
by the Code. Until December 2001 the Company contributed one
dollar to an employees account for each two dollars contributed
by the employee until the employees contribution equaled
6% of the employees annual salary. The Company contributed
$71,000 to employee accounts during 2001. Effective
January 1, 2002, the Company no longer provides any 401(k)
matching funds.



|    |              
|--- | -------------
|16. | Foreign Sales

Revenues were generated geographically as follows:

|           |  |               |            |       |  |       |        |  |  |   |            | 
|---------- |  | ------------- | ---------- | ----- |  | ----- | ------ |  |  | - | ---------- | 
|Year-ended |  | United States |            | Other |  | Total
|           |  |               |            |       |  |      
|2001       |  | $             | 12,905,915 |       |  | $     | 69,800 |  |  | $ | 12,975,715 | 
|2002       |  | $             | 817,739    |       |  | $     | 6,720  |  |  | $ | 824,459    | 

F-27



---



##### 





|    |                           
|--- | --------------------------
|17. | Related Party Transactions

On May 16, 2002, Company completed a private
placement for which EBC acted as placement agent, for which it
received a fee of $1,595,000, which was deducted from the
transaction proceeds (Note 3).

On May 16, 2002, the Company acquired
B2BVideo, a customer and equity investor of the Company
(Note 4).

On May 16, 2002, the Company entered into a
Strategic Alliance Agreement and certain technology license
agreements with Moneyline pursuant to which the Company will
license software and network processes and sell video equipment
to Moneyline. Moneyline will be the exclusive distributor of the
Companys equipment to the financial services market. As of
December 31, 2002, the Company transferred $294,729 of
demonstration and evaluation equipment to Moneyline. The Company
had also incurred, on Moneylines behalf, approximately
$110,000 in salary expenses relating to activities supporting
the development of the Managed Video Services market. Moneyline
has agreed to reimburse the Company in 2003 for these costs.
Since its investment in the Company, in May 2002, Moneyline
provided certain administrative, management and sales support
services to the Company. The Chief Financial Officer of
Moneyline also serves as the Chief Financial Officer of the
Company. Moneylines policy has been only to charge back
directly allocable costs of providing such support to the
Company, as such the charge backs to the Company totaled $63,000
for 2002. Offsetting these charges is a credit of $85,000
relating to amounts previously paid by the Company for certain
equipment which was subsequently not purchased.

As a result of the transactions between Moneyline
and the Company outlined in the preceding paragraph, the Company
has a receivable from Moneyline as of December 31, 2002 of
approximately $427,000.



|    |                  
|--- | -----------------
|18. | Subsequent Events

On February 14, 2003, we purchased from
Williams Communications, LLC (WCLLC) and Williams
Communications Procurement, LP (together with WCLLC, the
Sellers), each a wholly owned subsidiary of Wiltel
Communications Group, Inc. (WCG). WCLLCs
webcasting business, including certain equipment and other
assets used by WCLLC in this business for $750,000 in cash and
$850,000 security on the leased space. The purchased webcasting
business includes the production and distribution of multimedia
presentation materials using streaming media technology.

The acquisition of the webcasting business will
enable the Company to provide a full suite of interactive
multimedia services. The webcasting product suite, including
Activecast and Talkpoint, allows for a broader reach within our
targeted customers and provides ubiquity with distribution of
voice and video over the internet. This service model does not
require capital investment by the Companys customers.
Users can leverage the services and tool set by using standard
internet browsers and media players. In addition to the new
technology acquired, the transaction includes active customers,
which the Company plans to leverage to market its legacy service
and technology.

In the first quarter of 2003, the Company
implemented a restructuring of the VidPhone business to right
size the expense base to take into account the Companys
anticipation of lower sales. The restructuring included:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Termination of 37 employees, primarily in sales,
    engineering and administrative capacities.                                                                 
|
| |  | Transfer of three employees to Moneyline.
    Employees transferred are primarily focused on business and
    product development for the managed video service.
|
| |  | Remaining employees will solely focus on
    supporting the Moneyline Strategic Alliance Agreement
    (Note 17).                                               
|
| |  | Transfer of direct sales responsibility for the
    VidPhone System to the direct sales team of the webcasting
    business.                                    

F-28



---



##### 





| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Election of Alexander Russo as Chairman of the
    Board of Directors, the appointment of Nicholas Balletta as
    President of the Company and his election as a director of the
    Company, and the appointment of Frank Joanlanne as the Senior
    Vice President Webcasting Services.

During the last quarter of 2002, management, with
the Board of Directors approval, made a decision to shutdown and
cease all operations of B2BVideo. Subsequent to year-end, the
Company commenced negotiations with the landlord of the B2BVideo
office space to terminate the lease agreement.

F-29



---



##### 





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 8. | Changes In and Disagreements with Accountants
    on Accounting and Financial Disclosure

Effective July 19, 2002, Video Network
Communications, Inc. (the Company) dismissed
Ernst & Young LLP (E&Y), as the
Companys independent public accountant. This decision was
made by the Companys board of directors in connection with
the majority equity position taken in the Company by Moneyline
Telerate Holdings.

The report of E&Y on the financial statements
of the Company since E&Ys engagement on June 26,
2001 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or
accounting principles, except that the report of the financial
statements as of and for the year ended December 31, 2001
included an explanatory paragraph expressing substantial doubt
regarding the Companys ability to continue as a going
concern. In addition, for the year ended December 31, 2001,
E&Y identified a reportable condition in the Companys
internal controls relative to its ability to report in a timely
manner as required under the Securities Exchange Act of 1934.

From E&Ys engagement on June 26,
2001 until their dismissal on July 19, 2002, there were no
disagreements with E&Y on any matter of accounting
principles or practices, financial statement disclosure, or
other auditing scope or procedure, which disagreements if not
resolved to the satisfaction of E&Y would have caused them
to make reference thereto in their report on the financial
statements.

Effective on July 19, 2002, the Company
engaged Deloitte & Touche LLP (D&T) as
its independent auditors to audit the Companys financial
statements, which engagement was approved by the Companys
board of directors. The Company has not consulted D&T
regarding any of the matters or events set forth in
Item 304(a)(2)(i) and (ii) of Regulation S-B.

PART III



|        |                                                                                                                        
|------- | -----------------------------------------------------------------------------------------------------------------------
|Item 9. | Directors, Executive Officers, Promoters and
    Control Persons; Compliance with Section 16(a) of the
    Exchange Act

The information required by this Item 9 is
incorporated in this report by reference from our definitive
proxy statement for our 2003 Annual Meeting of Stockholders,
which will be filed with the Securities and Exchange Commission
no later than April 15, 2003. You will find our response to
this Item 9 in the sections entitled Directors and
Executive Officers, Section 16(a) Beneficial
Ownership Reporting Compliance and Election of
Directors.

Item 10.  Executive
Compensation

The information required by this Item 10 is
incorporated by reference in this report from the sections of
our proxy statement entitled Executive Compensation
and Directors and Executive Officers  Director
Compensation.



|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 11. | Security Ownership of Certain Beneficial
    Owners and Management

The information required by this Item 11 is
incorporated by reference in this report from the section of our
proxy statement entitled Security Ownership.

Item 12.  Certain Relationships
and Related Transactions

The information required by this Item 12 is
incorporated by reference in this report from the sections of
our proxy statement entitled Certain Transactions.

-28-



---



##### 



Item 13.  Exhibits and Reports
on Form 8-K

(a) Exhibits

The following exhibits are filed herewith or are
incorporated herein by reference, as indicated.

| |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1  |  |  | Stock Purchase Agreement, dated May 16,
    2001, by and among Moneyline Networks, LLC, B2BVideo Network
    Corp. and the Registrant (Incorporated by reference to
    Exhibit 2.1 to the Registrants Current Report on
    Form 8-K filed with the Securities and Exchange Commission
    on May 28, 2002 (the May 2002 8-K)).                                                                                                       
| | 2.2  |  |  | Asset Purchase Agreement, dated as of
    January 27, 2003, by and among Video Network
    Communications, Inc., Williams Communications, LLC and Williams
    Communications Procurement, LP (Incorporated by reference
    to Exhibit 2.1 to the Registrants Current Report on
    Form 8-K filed with the Securities and Exchange Commission
    on May 28, 2002 (the February 2003 8-K)).                                          
| | 2.3  |  |  | First Amendment to the Asset Purchase Agreement,
    dated as of February 14, 2003, by and among Video Network
    Communications, Inc., Wiltel Communications, LLC (formerly
    Williams Communications, LLC) and Williams Communications
    Procurement, LP (Incorporated by reference to Exhibit 2.2
    to the February 2003 8-K).                                                                                                  
| | 3.1  |  |  | Fourth Amended and Restated Certificate of
    Incorporation of the Registrant (incorporated by reference to
    Exhibit 3.1 to the Registrants Quarterly Report on
    Form 10-QSB for the quarter ended September 30, 1999
    (the Third Quarter 1999 Form 10-QSB) filed with
    the Securities and Exchange Commission under the Securities Act
    of 1933, as amended).                                                         
| | 3.2+ |  |  | Certificate of Amendment of the Fourth Amended
    and Restated Certificate of Incorporation of the Registrant,
    dated February 5, 2002 (increasing the number of authorized
    shares).                                                                                                                                                                                                                                              
| | 3.3+ |  |  | Certificate of Amendment to the Fourth Amended
    and Restated Certificate of Incorporation of the Registrant,
    dated February 5, 2002 (effecting a stock split).                                                                                                                                                                                                                                                                     
| | 3.4+ |  |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                            
| | 4.1  |  |  | Form of Warrant for the purchase of shares of
    common stock, issued in connection with the private placement of
    $2,000,000 aggregate principal amount of Bridge Notes
    (Incorporated by reference to Exhibit 3.4 to the
    Registrants Registration Statement on Form SB-2 (File
    No. 333-20625) filed with the Securities and Exchange
    Commission under the Securities Act of 1933, as amended (the
    1997 SB-2)).
| | 4.2  |  |  | Form of Warrant for the purchase of shares of
    common stock, issued in connection with the private placement of
    units in June 1995 and August 1996 (Incorporated by reference to
    Exhibit 3.5 to the 1997 SB-2).                                                                                                                                                                                                                
| | 4.3  |  |  | Form of Warrants for the purchase of 100,000
    shares of common stock, issued in connection with the private
    placement of Series A Convertible Preferred Stock and
    warrants in December 1996 and January 1997 (Incorporated by
    reference to Exhibit 3.7 to the 1997 SB-2).                                                                                                                                                  
| | 4.4  |  |  | Form of Option for the purchase of 180,000 shares
    of common stock, issued to Barington Capital Group, L.P.
    (Incorporated by reference to Exhibit 3.8 to the
    1997 SB-2).                                                                                                                                                                                                                                                       
| | 4.5  |  |  | Form of Stock Option Agreement, dated
    December 18, 1997, by and between the Registrant and
    Barington Capital Group, L.P. (Incorporated by reference to
    Exhibit 10.8 to the Registrants Annual Report on
    Form 10-KSB for the year ended December 31, 1997).                                                                                                                                                               
| | 4.6  |  |  | Specimen certificate evidencing shares of common
    stock of the Registrant (Incorporated by reference to
    Exhibit 4.2 to the 1997 SB-2).                                                                                                                                                                                                                                                                                             
| | 4.7  |  |  | Form of Warrant issued in connection with the
    Series B 5% Cumulative Convertible Preferred Stock of the
    Registrant (Incorporated by reference to Exhibit 4.11 to
    the Registrants Registration Statement on Form S-3
    (File No. 333-62971) filed with the Securities and Exchange
    Commission under the Securities Act of 1933, as amended (the
    1998 S-3).                                                        

-29-



---



##### 



| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.8   |  |  | Form of Warrant for the purchase of 275,000
    shares of common stock, issued to Sanmina Corporation
    (Incorporated by reference to Exhibit 4.12 to the 1998
    Form 10-KSB).                                                                                                                                                                                                                                                                                   
| | 4.9   |  |  | Form of Warrant for the purchase of 40,000 shares
    of common stock, issued to Shaw Pittman (Incorporated by
    reference to Exhibit 4.13 to the 1998 Form 10-KSB).                                                                                                                                                                                                                                                                                               
| | 4.10  |  |  | Form of Unsecured Promissory Note, issued on
    February 4, 1999 to various subscribers in a private
    placement (Incorporated by reference to Exhibit 4.14 to the
    Registrants Registration Statement on Form SB-2 (File
    No. 333-72429) filed with the Securities and Exchange
    Commission under the Securities Act of 1933, as amended (the
    1999 Form SB-2)).                                                                                  
| | 4.11  |  |  | Specimen certificate evidencing Redeemable Common
    Stock Purchase Warrant (Incorporated by reference to
    Exhibit 4.16 to the 1999 SB-2).                                                                                                                                                                                                                                                                                                                       
| | 4.12  |  |  | Form of Warrant Agreement (Incorporated by
    reference to Exhibit 4.17 to the 1999 Form SB-2).                                                                                                                                                                                                                                                                                                                                                                     
| | 4.13  |  |  | Specimen certificate evidencing unit issued in
    connection with the Registrants June 1999 public offering
    of units (Incorporated by reference to Exhibit 4.18 to the
    1999 Form SB-2).                                                                                                                                                                                                                                                                    
| | 4.14  |  |  | Form of First Amendment to Warrant Agreement
    dated August 2000 by and among the Registrant, EarlyBirdCapital,
    Inc. and Continental Stock Transfer & Trust Company
    (Incorporated by reference to Exhibit 4.2 to the
    Registrants Current Report on Form 8-K dated
    August 25, 2000 and filed with the Securities and Exchange
    Commission on August 28, 2000 under the Securities Exchange
    Act of 1934, as amended (the August 2000 8-K)).
| | 4.15  |  |  | Specimen certificate, as supplemented, evidencing
    Redeemable Stock Purchase Warrant (Incorporated by reference to
    Exhibit 4.4 to the August 2000 8-K).                                                                                                                                                                                                                                                                                                       
| | 4.16  |  |  | Form of Placement Agents Purchase Option
    (Incorporated by reference to Exhibit 4.5 to the August
    2000 8-K).                                                                                                                                                                                                                                                                                                                                                 
| | 4.17  |  |  | Warrant to Purchase 11,250,000 Shares (Subject to
    Adjustment) of Common Stock of Video Network Communications,
    Inc. between Video Network Communications, Inc., a Delaware
    corporation, and Moneyline Networks, LLC, a Delaware limited
    liability company, dated as of May 16, 2002 (Incorporated
    by reference to Exhibit 4.1 to the May 2002 8-K).                                                                                              
| | 10.1* |  |  | 1994 Stock Option Plan (Incorporated by reference
    to Exhibit 10.1 to the 1997 SB-2).                                                                                                                                                                                                                                                                                                                                                                             
| | 10.2* |  |  | 1996 Stock Incentive Plan (Incorporated by
    reference to Exhibit 10.2 to the 1997 SB-2).                                                                                                                                                                                                                                                                                                                                                                          
| | 10.3  |  |  | Form of Consulting Agreement by and between the
    Registrant and Barington Capital Group, L.P. (Incorporated by
    reference to Exhibit No. 10.4 to the 1997 SB-2).                                                                                                                                                                                                                                                                                               
| | 10.4  |  |  | Letter Agreement, dated October 7, 1996,
    between Barington Capital Group and the Registrant (Incorporated
    by reference to Exhibit 10.5 to the 1997 SB-2).                                                                                                                                                                                                                                                                                                    
| | 10.5  |  |  | Letter Agreement, dated December 5, 1995, by
    and among PVR Securities, Inc., the Registrant, Steven A.
    Rogers and John B. Torkelsen (Incorporated by reference to
    Exhibit 10.6 to the 1997 SB-2).                                                                                                                                                                                                                                                        
| | 10.6  |  |  | Form of Stock Option Agreement, dated
    December 18, 1997, by and between the Registrant and
    Barington Capital Group, L.P. (Incorporated by reference to
    Exhibit 10.8 to the Registrants Annual Report on
    Form 10-KSB, as amended, for the year ended
    December 31, 1997).                                                                                                                                                                         
| | 10.7  |  |  | Strategic Alliance and Marketing Agreement
    between the Registrant and Unisys Corporation (Incorporated by
    reference to Exhibit 10.9 to the 1998 Form 10-KSB).                                                                                                                                                                                                                                                                                                
| | 10.8  |  |  | Agency Agreement, dated as of January 25,
    1999, between Southeast Research Partners, Inc. and the
    Registrant (Incorporated by reference to Exhibit 10.11 to
    the 1999 Form SB-2).                                                                                                                                                                                                                                                                         
| | 10.9  |  |  | Form of Subscription Agreement, dated
    January 25, 1999, between the Registrant and certain
    investors (Incorporated by reference to Exhibit 10.12 to
    the 1999 Form SB-2).                                                                                                                                                                                                                                                                                 

-30-



---



##### 



| |         |  |  |                                                                                                                                                                                                                                                                                     
| | ------- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.10*  |  |  | Employment Agreement, dated July 13, 1998,
    between the Registrant and James F. Bunker (Incorporated by
    reference to Exhibit 10.13 to the 1999 Form SB-2).                                                                                                                   
| | 10.11   |  |  | Letter Agreement dated January 12, 1999,
    between the Registrant and Sanmina Corporation (Incorporated by
    reference to Exhibit 10.15 to the 1998 Form 10-KSB).                                                                                                               
| | 10.12   |  |  | Letter Agreement dated January 21, 1999
    between the Registrant and Shaw Pittman Potts &
    Trowbridge (Incorporated by reference to Exhibit 10.16 to
    the 1998 Form 10-KSB).                                                                                                
| | 10.13   |  |  | Form of Letter Agreement between the Registrant
    and the holders of the 5% Convertible Debentures due 2003, dated
    May 1999 (Incorporated by reference to Exhibit 10.17 to the
    1999 Form SB-2).                                                                           
| | 10.14*  |  |  | Amendment to Employment and Consulting Agreement
    by and between the Registrant and James F. Bunker dated as of
    September 9, 1999 (Incorporated by reference to
    Exhibit 10.17 to the Registrants Annual Report on
    Form 10-KSB for the year ended December 31, 1999).
| | 10.15*+ |  |  | Employment Agreement by and between the
    Registrant and Carl Muscari dated May 16, 2002.                                                                                                                                                                                         
| | 10.17*+ |  |  | Employment Agreement by and between the
    Registrant and Roger Booker dated November 1, 2002.                                                                                                                                                                                     
| | 10.18*+ |  |  | Employment Agreement by and between the
    Registrant and Nicholas Balletta dated February 19, 2003.                                                                                                                                                                               
| | 10.19*+ |  |  | Employment Agreement by and between the
    Registrant and Frank Joanlanne, dated February 20, 2003.                                                                                                                                                                                
| | 10.20*  |  |  | 1999 Stock Incentive Plan (Incorporated by
    reference to Exhibit 10.15 to the Third Quarter 1999
    Form 10-QSB).                                                                                                                                                               
| | 10.21   |  |  | Form of Agency Agreement dated August 2000 by and
    between the Registrant and EarlyBirdCapital, Inc. (Incorporated
    by reference to Exhibit 4.0 to the August 2000 8-K).                                                                                                      
| | 10.22   |  |  | Form of Subscription Agreement/ Investor
    Information Statement dated August 2000 by and among the
    Registrant and certain Investors (Incorporated by reference to
    Exhibit 4.1 to the August 2000 8-K).                                                                   
| | 10.23   |  |  | Form of Escrow Agreement dated August 2000 by and
    among the Registrant, EarlyBirdCapital, Inc. and Continental
    Stock Transfer & Trust Company (Incorporated by
    reference to Exhibit 4.3 to the August 2000 8-K).                                                        
| | 10.24+  |  |  | Stockholders Agreement, dated May 16, 2003,
    by and among Moneyline Networks, LLC, the Registrant and the
    Management Stockholders.                                                                                                                                           
| | 11.1+   |  |  | Statement re: computation of per share earnings.                                                                                                                                                                                                                                    
| | 16.1    |  |  | Letter, dated August 8, 2002 from Ernst
    & Young LLP to the Securities and Exchange Commission
    (Incorporated by reference to Exhibit 16.1 to the
    Form 8-K/ A filed with the Securities and Exchange
    Commission on August 8, 2002).                                   
| | 21+     |  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                     
| | 23.1+   |  |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                   
| | 23.2+   |  |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                       
| | 99.1+   |  |  | Certification of CEO and CFO Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                      



| | 
| | 
| | 



| |   |                                                             
| | - | ------------------------------------------------------------
| | * | Management contract or compensatory plan or
    arrangement.
|
| | + | Filed Herewith.                                             

-31-



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##### 



(b) Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Current Report on Form 8-K, dated
    January 24, 2002 and filed with the Securities and Exchange
    Commission on January 25, 2002 reporting under Item 5
    the completion of the Companys third short-term bridge
    financing.                                                                                                                                                                                                                                                                                                                        
|
| | Current Report on Form 8-K, dated
    March 28, 2002 and filed with the Securities and Exchange
    Commission on April 5, 2002 reporting under Item 5 the
    completion of the Companys fourth short-term bridge
    financing.                                                                                                                                                                                                                                                                                                                            
|
| | Current Report on Form 8-K, dated
    April 12, 2002 and filed with the Securities and Exchange
    Commission on April 12, 2002 reporting under Item 5
    the delay in the filing of the Companys Form 10-KSB
    for 2002 and projecting its submission within thirty days.                                                                                                                                                                                                                                                                               
|
| | Current Report on Form 8-K, dated
    May 16, 2002 and filed with the Securities and Exchange
    Commission on May 17, 2002 reporting under Item 5 a
    copy of a press release announcing Video Network Communications,
    Inc.s had entered into a Stock Purchase Agreement with
    Moneyline Telerate Holdings and an Agreement and Plan of Merger
    with B2BVideo Network, Corp.                                                                                                                                                                   
|
| | Current Report on Form 8-K, dated
    May 20, 2002 and filed with the Securities and Exchange
    Commission on May 20, 2002 reporting under Item 5
    (i) a filing with respect to its restructuring and merger
    transaction, and (ii) that the Company expected to file its
    Form 10-QSB within five to ten days.                                                                                                                                                                                                                                    
|
| | Current Report on Form 8-K, dated
    May 16, 2002 and filed with the Securities and Exchange
    Commission on May 28, 2002 reporting under Item 1
    (i) the indirect acquisition by Moneyline Telerate Holdings
    (Moneyline) of 25,000,000 newly-issued shares of the
    Companys common stock; (ii) the issuance to Moneyline
    of warrants to purchase an additional 1,250,000 shares of Common
    Stock.                                                                                                                                     
|
| | Current Report on Form 8-K, dated
    July 19, 2002 and filed with the Securities and Exchange
    Commission on July 25, 2002 reporting under Item 4
    (i) the dismissal of the Companys independent public
    accountants, Ernst & Young LLP (E&Y);
    and (ii) the Companys engagement of
    Deloitte & Touche LLP (D&T) as its
    independent public accountants.                                                                                                                                                                             
|
| | Current Report on Form 8-K/ A, dated
    July 19, 2002 and filed with the Securities and Exchange
    Commission on July 30, 2002 reporting under Item 4
    that with respect to the Companys July 25, 2002
    filing regarding the change to the Companys independent
    public accountants.                                                                                                                                                                                                                                                            
|
| | Current Report on Form 8-K/ A, dated
    July 19, 2002 and filed with the Securities and Exchange
    Commission on July 30, 2002 reporting under Item 4
    with respect to the Companys July 25, 2002 and
    July 30, 2002 Current Report on Form 8-K filings
    regarding the change to the Companys independent public
    accountants.                                                                                                                                                                                                               
|
| | Current Report on Form 8-K, dated
    May 16, 2002 and filed with the Securities and Exchange
    Commission on September 4, 2002 reporting under Item 5
    (i) audited financial statements for B2BVideo Network Corp.
    (B2BVideo) for the years ended December 31,
    2001 and 2000, (ii) B2BVideos unaudited financial
    statements for the three months ended March 31, 2002 and
    (iii) the Companys unaudited pro forma condensed
    combined financial information giving effect to the merger of
    B2BVideo with and into the Company.
|
| | Current Report on Form 8-K/ A, dated
    May 16, 2002 and filed with the Securities and Exchange
    Commission on September 9, 2002 reporting under Item 5
    the amendment of the Current Report on Form 8-K filed on
    September 4, 2002 with respect to the Companys
    unaudited pro forma condensed combined financial information
    giving effect to the merger of B2BVideo with and into the
    Company.                                                                                                                                      

-32-



---



##### 



Item 14.  Controls and
Procedures



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Evaluation of disclosure controls and procedures.
    Our senior management team, led by our chief executive officer
    and chief financial officer, after evaluating the effectiveness
    of our disclosure controls and procedures (as defined in
    Exchange Act Rules 13a-14(c) and 15d-14(c)) within 90 days
    of the filing date of this report, has concluded that there were
    deficiencies in the operation of our internal controls which
    adversely affected our ability to record, process, summarize and
    report financial data.                    
|   
|(b) | Changes in Internal Controls. As a result of the
    conclusions discussed above, under the direction of the Audit
    Committee and the Board of Directors, we are in the process of
    determining the appropriate corrective action to strengthen our
    internal controls and procedures to ensure that information
    required to be disclosed in the reports that we file or submit
    under the Securities Exchange Act of 1934 is recorded,
    processed, summarized and accurately reported, within the time
    periods specified in the SECs rules and forms.

-33-



---



##### 



SIGNATURES

In accordance with Section 13 or 15(d) of
the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned, there under duly authorized.

Date: April 11, 2003



| |                                   
| | ----------------------------------
| | VIDEO NETWORK COMMUNICATIONS, INC.
| | (Registrant)                      



| |     |                 
| | --- | ----------------
| | By: | /s/ CARL MUSCARI

| |                        
| | -----------------------
| |                        
| | Carl Muscari           
| | Chief Executive Officer

In accordance with the Exchange Act, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the dates indicated.

|                                             |  |                                   |  |                |  | 
|-------------------------------------------- |  | --------------------------------- |  | -------------- |  | 
|                                             |  |                                   |  |               
|Signatures                                   |  | Title                             |  | Date          
|                                             |  |                                   |  |               
|/s/ ALEXANDER RUSSOAlexander Russo           |  | Chairman of the Board             |  | April 11, 2003
|                                            
|/s/ CARL MUSCARICarl Muscari                 |  | Chief Executive Officer, Director |  | April 11, 2003
|                                            
|/s/ LAWRENCE KINSELLALawrence Kinsella       |  | Chief Financial Officer           |  | April 11, 2003
|                                            
|/s/ CHARLES F. AUSTERCharles F. Auster       |  | Director                          |  | April 11, 2003
|                                            
|/s/ NICHOLAS BALLETTANicholas Balletta       |  | Director                          |  | April 11, 2003
|                                            
|/s/ BERNARD BATTISTABernard Battista         |  | Director                          |  | April 11, 2003
|                                            
|/s/ EUGENE R. CACCIAMANIEugene R. Cacciamani |  | Director                          |  | April 11, 2003
|                                            
|/s/ DAVID WALSHDavid Walsh                   |  | Director                          |  | April 11, 2003

-34-



---



##### 



CERTIFICATIONS

I, Carl Muscari, Chief Executive Officer of Video
Network Communications, Inc. (VNCI), certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-KSB of VNCI;                                                                                                                                                                                                                                                                              
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                        



| |     |                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the (
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;



| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and



| |     |                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) | Presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;



| |    |                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |     |                                                                                                                                                                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | All significant deficiencies in the design or
    operation of internal controls which could adversely ( affect
    the registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |     |                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                               
| | ------------------------------
| | Date: April 11, 2003          
|
| | /s/ CARL MUSCARI              
| |                               
| | Name: Carl Muscari            
| | Title: Chief Executive Officer

-35-



---



##### 



I, Lawrence Kinsella, Chief Financial Officer of
Video Network Communications, Inc. (VNCI),
certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-KSB of VNCI;                                                                                                                                                                                                                                                                              
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                        



| |     |                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the (
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;



| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and



| |     |                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) | Presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;



| |    |                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |     |                                                                                                                                                                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | All significant deficiencies in the design or
    operation of internal controls which could adversely ( affect
    the registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |     |                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                               
| | ------------------------------
| | Date: April 11, 2003          
|
| | /s/ LAWRENCE KINSELLA         
| |                               
| | Name: Lawrence Kinsella       
| | Title: Chief Financial Officer

-36-