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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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                                    FORM 10-K

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         Annual Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 2000

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                           Commission File No. 1-10927

                              VSI ENTERPRISES, INC.

                             A Delaware Corporation

                  (IRS Employer Identification No. 84-1104448)

                            5801 Goshen Springs Road

                             Norcross, Georgia 30071

                                 (770) 242-7566

                 Securities Registered Pursuant to Section 12(b)

                     of the Securities Exchange Act of 1934:

                                      None

                 Securities Registered Pursuant to Section 12(g)

                     of the Securities Exchange Act of 1934:

                     Common Stock, $.001 par value per share
                     ---------------------------------------


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of the common stock of the registrant held
by non-affiliates of the registrant 12,892,044 shares on March 28, 2001 was
approximately $16,372,896, based on the closing price of the registrant's common
stock as quoted on the Over The Counter Bulletin Board on March 28, 2001. For
the purposes of this response, officers, directors and holders of 5% or more of
the registrant's common stock are considered to be affiliates of the registrant
at that date.

         The number of shares outstanding of the registrant's common stock, as
of March 28, 2001: 15,208,672 shares of $.001 par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive proxy statement to be delivered
to shareholders in connection with the 2001 Annual Meeting of Shareholders
scheduled to be held on June 13, 2001, are incorporated by reference in response
to Part III of this Report.


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                               PART I

ITEM 1.  BUSINESS.

GENERAL

         VSI Enterprises, Inc., an Atlanta-based holding company, was
incorporated under the laws of Delaware on September 19, 1988 as Fi-Tek III,
Inc. to raise capital and to seek out business opportunities in which to acquire
an interest. On August 21, 1990, we acquired 89.01% of the total common stock
and common stock equivalents then issued and outstanding of Videoconferencing
Systems, Inc., a Delaware corporation. Videoconferencing Systems was founded in
1985 through the acquisition of a portion of the assets of a Sprint Corporation
videoconferencing subsidiary. In December 1990, the name was changed from Fi-Tek
III, Inc. to VSI Enterprises, Inc. During the first half of 1991, we acquired
the remaining additional outstanding shares of common stock of Videoconferencing
Systems.

         We primarily conduct our operations under (1) Videoconferencing
Systems, Inc., a wholly-owned subsidiary, which designs, manufactures, markets
and supports software-based command and control systems, including
videoconferencing control systems, which operate on PC platforms; (2) Simtrol,
Inc., a wholly-owned subsidiary, which designs, manufactures, markets and
supports our new Ongoer software-based audio visual control systems designed to
run on third-party hardware; and (3) VSI Network Solutions, Inc., a majority
owned subsidiary, doing business as Eastern Telecom which is engaged in the
business of marketing and selling telecommunications services and products. On
February 18, 2000, we entered into a definitive agreement to sell Eastern
Telecom, which was completed on May 18, 2000.

         Our principal executive offices and manufacturing facilities are
located at 5801 Goshen Springs Road, Norcross, Georgia 30071, and our telephone
number is (770) 242-7566.

RECENT DEVELOPMENTS

         Acquisition of QSA. On March 10, 2001 we signed a definitive agreement
to purchase Quality Software Associates, Inc. of Carlsbad, California ("QSA").
QSA is a leading developer of custom audio/visual software solutions for Panja
and Creston A/V controllers, and develops custom software for other complex
PC-based applications and real-time embedded software systems. This transaction
closed on March 28, 2001 and was accounted for using the purchase method of
accounting. We exchanged 45,454 shares of our common stock valued at $59,544 for
QSA's shares. As part of the transaction, Mr.Mark Scovel, president of QSA,
was granted incentive stock options to purchase 100,000 shares of our common
stock.

         Private Placement. On March 10, 2000, we raised $4,054,876 million
through the private sale of 1,351,625 common shares at $3.00 per share to 38
accredited investors. Additionally, certain Eastern Telecom minority interest
holders exchanged 240,265 shares of Eastern Telecom for 524,126 shares of our
common stock. We have registered these shares.

         Sale of Eastern Telecom. On February 18, 2000, we entered into a
definitive agreement to sell substantially all the assets of Eastern Telecom to
PentaStar Communications, Inc., a Denver, Colorado based communications services
agent. The Eastern Telecom assets were combined with the assets of
USTeleCenters, Inc. and Vermont Network Services Corporation, which were
acquired directly by PentaStar on February 18, 2000, rather than through Eastern
Telecom as had been originally contemplated. Terms of the transaction include
initial cash consideration in the amount of $1,787,835, $500,000 of which is
held in escrow until specified accounts receivable have been collected,
PentaStar common stock valued at $1,142,000, and PentaStar's assumption of
certain liabilities. The definitive agreement was subject to approval by our
shareholders, which was granted, at the annual meeting held on May 18, 2000. We
realized a gain of approximately $814,000 on the sale. A portion of the cash
proceeds were used to repurchase the remaining Eastern Telecom minority interest
shares pursuant to the terms of a shareholders agreement.


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         Debt Restructuring. On August 31, 1999, we restructured our debt with
Thomson Kernaghan & Co., Ltd., which totaled $1,089,750 at that date. We made a
cash payment of $150,000 at closing, and the remaining balance was exchanged for
a 7% secured convertible debenture, with a one-year term. The debenture was
secured by a lien on our ownership interest in Eastern Telecom, which was junior
to our converting term note holders and new investors, as discussed below.
Thomson Kernaghan had the option to commence converting the debenture into
shares of our common stock at the initial rate of 7.5% per month beginning
January 1, 2000. The conversion price was the lesser of $1.00 per share or the
five-day average closing bid price of our common stock prior to the date of any
such conversion, with a floor of $0.50 per share. Kernaghan converted $144,747
of principal plus accrued interest into 216,945 shares of VSI Common Stock
during January and February 2000. On March 1, 2000, we repaid the remaining
balance of the debt, including accrued interest.

         As part of closing the August 31, 1999 Thomson Kernaghan transaction,
$1,213,000 of our 18-month term notes due March 31, 2000 were converted into
195,099 shares of Eastern Telecom common stock which were owned by us,
representing a 19.5% minority interest in Eastern Telecom. In addition,
$1,040,000 of new capital was raised by selling a 16.0% minority interest in
Eastern Telecom. The consideration received for the sale of shares of common
stock of Eastern Telecom was based on an internal valuation of Eastern Telecom.
Under the terms of the Thomson Kernaghan agreement, we agreed to sell our
remaining interest in Eastern Telecom at not less than fair market value,
provided the terms of any such transaction were otherwise acceptable to us.
Additionally, Eastern Telecom's minority shareholders had a put option, which
gave them the right to put their Eastern Telecom shares back to us after one
year, and we had a call option to reacquire shares of Eastern Telecom at any
time, both at a price of $6.50 per share of Eastern Telecom common stock.
Furthermore, on February 24, 2000 we exchanged 524,126 of our common shares for
240,265 shares of Eastern Telecom held by minority shareholders. As described
above, we sold Eastern Telecom on May 18, 2000, and the remaining Eastern
Telecom minority interest was repurchased.

         Participants in the term note conversion and new equity participants
also received 1,098,492 and 396,497 warrants to acquire shares of our common
stock at an exercise price of $0.50 and $1.00 per share, respectively.

         Co-Development Agreement with ACIS, Inc. VSI has developed an advanced
state-of-the-art operating kernel under a co-development agreement with ACIS,
Inc., a Texas-based software technology company. VSI has licensed this
technology from ACIS to support VSI's PC-based controls. As part of this
co-development agreement, VSI and ACIS agreed to an equity transaction whereby
VSI exchanged 500,000 shares of its common stock for 250,000 shares of common
stock of ACIS, representing approximately 5.0% of ACIS' outstanding shares. This
equity exchange occurred on February 29, 2000 and on March 7, 2000, the United
States Patent and Trademark office issued the patent certificate to ACIS. VSI
received an additional 50,000 shares of ACIS common stock as consideration for
developing the kernel. Lastly, VSI received a warrant to acquire additional
shares in ACIS at an exercise price of $2.00 per share. Once exercised, VSI's
total ownership in ACIS would be 20% of the then outstanding ACIS shares. The
20% maximum is determined on a fully diluted basis and includes the 300,000
shares issued by ACIS, as described above. This option is exercisable at any
time within 18 months following the date the patent certificate was received by
ACIS and may be exercised by VSI for cash or the issuance of shares of VSI
common stock. VSI's chief technology officer, Richard Mays, is the founder and
controlling shareholder of ACIS. VSI's chairman of the board, Larry Carr, also
serves on the board of directors of ACIS. VSI expects this technology to provide
it with a more robust, full featured and cost-effective controller for
videoconferencing and other complex audio/visual applications.

PRODUCTS

VIDEOCONFERENCING SYSTEMS

         Our core business is the design, manufacture, marketing and support of
software-based command and control systems, including videoconferencing control
systems, which operate on PC platforms. Our videoconferencing products are
designed to allow multiple participants at geographically dispersed sites to see
and hear each other on live television and share graphical and pictorial
information using standard commercially available telecommunications
transmission facilities. We integrate standard video, audio and transmission
components with our own proprietary video, audio and computer control components
and patented software under the trade name Omega(TM). A typical customer is a
large, multi-site organization that utilizes sophisticated audio, video and
communications network technologies that require complex command and control
solutions. These


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solutions can be used in a variety of settings, including corporate meetings and
conferences, distance learning and judicial arraignment systems. These customers
also require superior after-the-sale service.

         Each videoconferencing system (the "VSI System") is designed with open
software and modular subsystems, which allow a VSI System to be expanded or
reconfigured as technologies, user requirements or new applications evolve. Our
products are designed to allow multiple participants at geographically dispersed
sites to see and hear each other on live television and share graphical and
pictorial information using standard commercially available telecommunications
transmission facilities. We integrate standard video, audio and transmission
components with our own proprietary video, audio and computer control components
and software.

         Our open software and modular subsystems streamline production and
allow the product to be tailored to meet customers' specific needs, with or
without the necessity of custom design. Our lead products are marketed under the
trade name Omega(TM). Customers are offered a variety of option packages to fit
specific applications. Customers are also offered upgrade packages that make our
new products compatible with older models. To date, we have sold over 1,800
videoconferencing systems to approximately 330 customers, including Bank of
America, Bell Atlantic, Boeing, Duracell, WorldCom, General DataComm, Lockheed
and Johnson & Johnson; various foreign, U.S. and state government departments
and agencies; educational institutions; and health care facilities.

         VSI Systems enable participants in multiple locations to hold
interactive group meetings remotely, thus avoiding costly and time-consuming
travel. Participants at any connected location can be seen and heard by all
other participants. If the VSI System is equipped with the appropriate options,
the participants can also utilize slides, graphs, plain paper drawings,
computer-generated graphics, computer data, laser discs and videotape,
interactively. Unlike audio teleconferencing systems which only allow voice
communications, audiographic teleconferencing which is limited to voice plus
still images, and business television which does not provide for interaction
among the participants (also known as one-way videoconferencing), we believe VSI
Systems foster the look and feel of live, face-to-face meetings and promote a
natural interaction among the participants.

         A typical videoconference involves three major elements: (i) access to
transmission services, (ii) a "codec" for coding/decoding digitized signal
transmissions, and (iii) the VSI System, which contains television monitors,
cameras, audio system, microphones, cabinetry, various control systems for
interfacing the components to the user, and various optional components specific
to the user's application.

         As the name implies, codecs are used to encode and decode (or compress
and decompress) various types of data -- particularly those that would otherwise
use up inordinate amounts of disk space, such as sound and video files. Common
codecs include those for converting analog video signals into compressed video
files (such as MPEG) or analog sound signals into digitized sound (such as
RealAudio). Codecs can be used with either streaming (live video or audio) or
files-based (AVI, WAV) content.

         We develop, manufacture, assemble, install and service the VSI Systems,
and have nonexclusive marketing agreements with codec manufacturers to resell
the codecs. Customers secure the transmission services independently through
telecommunications carriers for either fixed monthly or hourly usage prices.
These transmission services may vary, depending upon the customer's application
and preferences, and include a range of transmission bandwidths. In general, the
higher the bandwidth the better the quality of the transmitted images, although
the choice of codec will affect image quality for a given speed. The VSI Systems
operate over the range of available transmission bandwidths and are compatible
with all major brands of codecs known by us to be currently available; they also
operate without codecs, for certain specialized networks.

         The primary users of our videoconferencing products and services are
major corporations, government agencies, educational institutions and health
care facilities.

         Corporate and government organizations often use meetings to provide
information, review operations, make plans, resolve problems, introduce new
ideas or products, conduct training sessions and communicate with customers and
vendors. Such conventional group meetings usually require at least some of the
participants to travel to the meeting site. When meetings are required on a
frequent, repetitive or emergency basis, travel costs and productivity losses
can be substantial. VSI Systems provide users with the ability to hold two-way
and multi-way meetings, often at significant savings over the costs of travel
and lost productivity while traveling. As an added, and in some cases, a more
important benefit, it may be more economic for more people to participate via


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videoconferencing, which eliminates travel time and costs. This causes direct
dissemination of pertinent information to more parties simultaneously, which may
improve efficiency in problem solving and decision-making.

         We also supply and install the VSI Systems for use in educational and
training settings to connect one or more distant classrooms with a centrally
based instructor. These "distance learning" applications of videoconferencing
are used by corporations, state and federal governments, hospitals and clinics,
high schools, technical school, colleges and universities.

         We also provide "judicial systems" to state and local governments.
Judicial systems equip court systems with the ability to link court rooms with
prisons and jails, thereby reducing the costs and security risks associated with
inmate-related travel including: arraignments, attorney/client conferences,
booking and prisoner processing and depositions.

         The key features of the Omega(TM) platform include:

         -        Compression Technology Independence - Separating control
                  system from compression technology
         -        Open Network Architecture - Wide support for options and
                  peripherals; flexibility; support for most network connection
                  technologies; and centralized network management
         -        Ease of Use - "Point-and-click" camera control and on-screen
                  icons to control all functions
         -        System Management - Remote management support and open system
                  support of industry standards
         -        Software-Based System - Remote upgrades of software;
                  customization; and sign-on security and system accounting

         The Omega(TM) product line offers a complete range of solutions from
single monitor rollabout systems to sophisticated customer room solutions.
Customers are offered a menu of options, which allows them to tailor systems to
meet their specific needs.

         The Omega(TM) is sold on a standalone basis, with or without codec. The
Omega(TM) is offered with single, dual or more color monitors of 27" to 35"
size, for rollabout cabinets or in-the-wall installation. Other options include:
audio and video expansion packages, multiple cameras (either single or three
chip), a graphics stand, a computer graphics interface, facsimile transmission
and reception, transmission network interface, and a variety of videocassette
recorders, slides chains and peripheral devices.

AUDIO VISUAL CONTROL SYSTEMS

         We have developed a new software-based A/V control system named
ONGOER(TM), which is designed to run on commercially available third-party
hardware. This system is marketed and sold by our new subsidiary, Simtrol, Inc.

         ONGOER(TM) allows end users to operate, as a single system, a broad
range of electronic equipment such as projectors, VCRs, computers, sound
systems, lighting and temperature controls and other audio and video devices in
a variety of settings. This is a significant departure from the products
currently available on the A/V control systems market in that it is a
software-based system that can be installed and run on third-party hardware
available on the open market. Major competitors' A/V control systems are based
on proprietary hardware components employing code written in proprietary
scripting languages. In order to grow sales and to reach and maintain
profitability, management believes that we can better leverage our technological
and service competencies by marketing and selling ONGOER(TM) through third-party
resellers and system integrators specializing in the sale, installation, support
and service of A/V equipment, and by entering new markets for control systems
technology.

         The core concept of ONGOER(TM) is that it can be operated from any PC
running Windows(R) 2000. All interfaces, cables and cards can be purchased on
the open market, as can the controller itself. Integrators can put together
their own setup, or can purchase turnkey core control systems from Simtrol. With
its unique open architecture based on patented CycleFree(TM) methodology by
ACIS, Inc., this software delivers real-time control to audiovisual-system
management. ONGOER's software-based technology allows integrators to change
configurations with ease. Any device that can be connected to a PC can be
controlled with ONGOER(TM).


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         We have developed OnROAD, ONGOER's remote operations, administration
and diagnostics utility, which is intended to harness the power and the reach of
the Internet to facilitate detection and correction of system problems from
anywhere. Integrators will no longer have to travel to customers' locations to
fix minor problems. OnROAD allows integrators to diagnose and repair the vast
majority of system conflicts remotely. Simtrol provides OnROAD as an integral
part of the base software package. There's no need to purchase additional
hardware or software.

         ONGOER(TM) utilizes the CycleFree(TM) foundation. Removing cycles from
software makes it immune to many of the errors that plague commercial software
and operating systems. CycleFree(TM) methodology, combined with the tested
stability of Windows(R) 2000, results in software that is more reliable, easy to
write and maintain, and that provides the high performance needed for real-time
systems.

         Until now, audiovisual control systems have been inextricably bound to
proprietary hardware. ONGOER(TM) is a PC-based platform specifically designed to
run on third-party hardware. It can operate on any PC running Windows(R) 2000.
All interfaces, cables and cards can be purchased on the open market, as can the
controller itself. Integrators can choose their own hardware from the universe
of hardware available, or we can provide a turnkey system.

         The PC controller is the heart of the ONGOER(TM) control system. The
flexibility of ONGOER(TM) lets integrators choose the controller: anything from
a single-box chassis to a multiprocessor server. There's no need to bring in an
additional PC -- the controller can handle all of the system's computing needs,
as well as any additional software required for presentations and other
applications.

         ONGOER(TM) not only makes a PC a nerve center for myriad third-party
audiovisual devices, its broad range of connection methods extends the
flexibility further. One may choose his device and make the connection.

          The part of the control systems the end user has the most (and often
the only) contact with is the user interface. ONGOER(TM) provides a great deal
of flexibility in creating methods for human interaction with the system.
Because it relies on third-party hardware, integrators can choose to incorporate
a wide range of devices as user interfaces -- everything from inexpensive VGA
monitors to sophisticated touch screens, personal digital assistants like Palm
Pilots and Visors, and even cell phones. Graphical user interfaces can be
created quickly and easily with Microsoft(R) Visual Basic. We also provide
OnLooker as an integral portion of the base software package. OnLooker includes
a library of artwork and customized ActiveX controls to provide integrators with
a wide range of choices that allow them to expedite the user interface
development process.

PROPRIETARY TECHNOLOGY

VIDEOCONFERENCING SYSTEMS

         The Omega(TM) utilizes internally developed proprietary software and
products as key elements in differentiating our systems in the marketplace.
Since VSI Systems use standards-based codecs, they are interoperable with
systems of other standards-compliant manufacturers.

         The heart of the Omega(TM) is the System Controller, a proprietary
software suite that must be installed on a properly configured personal
computer. The software suite includes the Omega(TM) real time operating system,
Omega(TM) videoconferencing application package, device drivers, and a third
party SQL database engine (as licensed to VSI for resale). This software is
delivered in object code format. We also develop and manufacture certain
proprietary components: Omega(TM) Audio Processor, Omega(TM) Video Processor,
Omega(TM) Power Supply, the Omega(TM) Basic/Serial IQ Connectors, the Omega(TM)
Pan/Tilt/Zoom/Focus Controller, the Omega(TM) Infra-red User Control Panel and
proprietary cabinetry. These proprietary hardware components are designed to
work exclusively with the Omega(TM) System Controller software.

         We regard our Omega(TM) software as proprietary and have implemented
protective measures of both a legal (copyright) and practical nature. We derive
considerable practical protection for its software by supplying and licensing
only a non-modifiable run-time version to our customers and keeping confidential
all versions that can be modified. By licensing the software rather than
transferring title, we in most cases have been able to incorporate restrictions
in the licensing agreements, which impose limitations on the disclosure and
transferability of the


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software. No determination has been made as to the legal or practical
enforceability of these restrictions, or the extent of customer liability for
violations.

         To date, we have been granted seven patents from the U.S. Patent and
Trademark Office that cover certain aspects of the Omega(TM) user interface,
remote management and system architecture (which is a network videoconferencing
system that combines the advantages of central and distributed intelligence
systems). The patents protect our innovative technology and enable us to pursue
opportunities to license our technology to other manufacturers.

         We have developed proprietary technology in the areas of
videoconferencing control systems, system diagnostics, information access and
communications access.

         We also have confidentiality agreements with all employees and have
implemented other security measures.

AUDIO VISUAL CONTROL SYSTEMS

         ONGOER(TM) is based on the ACIS Willie kernel (as further described
below in "-- Product Development Strategies") and CycleFree(TM) technology. The
software system has been organized according to a layered architecture, a
vertical stack comprised of five major sections:

         Application Layer. The application layer provides most of ONGOER's
         visible program features. The user interface, diagnostics,
         administration, and configuration of ONGOER(TM) all occur in the
         Application Layer. Microsoft(R) Visual Basic is the primary tool for
         tailoring the user interface to different application requirements.
         Application code generally consists of separate program executables
         communicating with ONGOER's services provided by the Broker Layer.
         Diagnostics, administration, and configuration are all provided in the
         application layer by separate program executables.

         Broker Layer. The broker layer executes the protocols that connect the
         device control features of ONGOER(TM) to the various application
         programs. The broker layer receives service requests from the
         application layer, and dispatches the necessary commands to the
         appropriate component modules. Applications typically request services
         via a command protocol over a TCP/IP connection. The broker layer
         listens for application requests for connections, and then creates a
         session to communicate with the application.

         Component Layer. The component layer contains the component technology
         modules written in W++ (a CycleFree(TM) variant of C++) to handle the
         most demanding complex real-time device requirements. The component
         layer is where the true value of the CycleFree(TM) methodology comes
         into full play. Once physical connectivity has been established to a
         device, the code to program the behavior of a device is contained in
         component technology modules in the component layer.

         Delivery Layer. The delivery layer contains the code to interface to
         physical connections or cards within the PC. Some devices are supported
         by Windows services while others are supported using CycleFree
         services. The layer provides the code to connect ONGOER(TM) to the
         myriad number of physical device interfaces. Connections to serial
         ports, parallel ports, IR transmitters and TCP/IP sockets are all
         provided by the delivery layer.

         Engine Layer. The engine layer contains the low-level routines used by
         all the layers above it. This layer includes the Windows(R) operating
         system and the CycleFree(TM) Willie kernel. Windows is the underlying
         engine on top of which all ONGOER(TM) software executes. Windows
         provides powerful mechanisms to support the concurrency needed for
         real-time software development: the creation and synchronization of
         threads. The thread mechanisms allow the construction of responsive
         real-time software; however, the explicit management and
         synchronization of threads is a tricky job. Highly concurrent programs
         often suffer from transient errors caused by deadlock or unprotected
         critical sections. The Willie kernel provides ONGOER(TM) a second
         engine that can run CycleFree software. The Willie kernel manages
         thread creation and synchronization implicitly, creating real-time
         solutions that are protected from many potential sources



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         of transient program error. The engine layer provides ONGOER(TM) with
         two run-time engines for the execution of Windows(R) and CycleFree(TM)
         applications.

         We regard our ONGOER(TM) software as proprietary and have implemented
protective measures of both a legal (copyright) and practical nature. We derive
considerable practical protection for its software by supplying and licensing
only a non-modifiable run-time version to our customers and keeping confidential
all versions that can be modified. By licensing the software rather than
transferring title, we in most cases have been able to incorporate restrictions
in the licensing agreements, which impose limitations on the disclosure and
transferability of the software. No determination has been made as to the legal
or practical enforceability of these restrictions, or the extent of customer
liability for violations.

PRODUCT DEVELOPMENT STRATEGIES

         We believe that the videoconferencing world is evolving into a
"networks of systems" where all systems from boardroom to rollabout to desktop
will have to interconnect. We believe that most systems in use today are not
equipped to handle these demands.

         In order to increase sales and to reach and maintain profitability,
management believes that we can better leverage our technological and service
competencies by shifting software-based A/V control systems, ONGOER(TM), to
third-party resellers and system integrators who specialize in the sale,
installation, support and service of audio-visual equipment. This shift provides
an opportunity to enter new markets, and ends our dependence on the shrinking
high-end videoconferencing market.

         This strategic shift resulted from a thorough review and analysis of
our business and our target markets, conducted by management. In addition to
redefining our business strategy, management identified opportunities for
improving short-term operating results. We closed operations that were
unprofitable or inconsistent with our core strategy, reduced administrative
overhead and negotiated the restructuring of our short- and long-term debt. We
implemented a new pricing strategy thereby improving gross margins, instituted
more focused marketing and sales support campaigns, realigned our
videoconferencing product families and implemented new operating procedures and
financial controls. Once fully implemented, our shift to channel resellers
should expand sales, lower the cost of sales and shorten the sales cycle for its
products and services.

         These strategic initiatives have enabled us to reposition our product
line and to expand our presence in the A/V control systems market. This market,
which to some degree overlaps the high-end videoconferencing market already
served by us, is almost exclusively maintained by thousands of resellers and A/V
system integrators. Our products are being re-engineered such that they may also
be sold through these third-party channels. We believe that, once product
development has been completed, we will offer a functionally superior, lower
cost, fully integrated solution that provides command and control and remote
diagnostics for audio, visual and room environment devices, and for network
connectivity.

         Cutting-edge software allows us to custom design systems that
consistently perform a wide variety of complicated functions. With a simple
touch of a control panel, a technician in the A/V control room can perform any
number of customer specified tasks in rooms linked up to an ONGOER(TM) control
system. Our program engineers designed complex systems that have the ability to
play a VCR tape, run a ceiling projector, re-position a camera, start a player
piano in a different room, or open window draperies - simultaneously when
necessary - all with precision. Our new web-based delivery system and
configuration tools will allow third-party system integrators to sell and
install the software which we believe will improve margins and our customer
reach.

         As a part of a co-development agreement, we have partnered with ACIS to
assist in the development of an advanced operating kernel (the "Kernel"). We
licensed the Kernel to support ONGOER(TM), our new product architecture for
PC-based device control. We believe ONGOER(TM) will be the most robust,
full-featured and cost-effective controller for all complex A/V applications on
the market today. In the fourth quarter of 2000, we formally launched
ONGOER(TM), and we are moving aggressively to establish ONGOER(TM) as the
preferred solution for complex A/V control applications.

         Once established in the A/V control systems market, we envision
developing additional applications for other control system markets, including
process control applications in manufacturing environments and the


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burgeoning home entertainment market. This may involve licensing aspects of the
patented Omega(TM) technology to manufacturers, in addition to third-party
reseller channels.

CUSTOMER SERVICE

VIDEOCONFERENCING SYSTEMS

         We generally provide a warranty for parts and labor on systems for 90
days from the date of delivery. We maintain videoconference rooms and the
necessary transmission facilities and codecs to provide on-line assistance to
our installed customers at our executive offices in Norcross, Georgia. We also
provide a telephone help line to assist customers in the diagnosis of system
failures. Approximately 90% of all customer calls for assistance are generally
resolved through telephone or videoconference contact. The remaining 10% are
resolved by the removal and replacement of field replaceable units by customer
personnel or us. We maintain a spare parts inventory, and our policy is to
replace failed units, which are under warranty or subject to a service contract
within 24 hours of notification.

         We offer several different maintenance programs, ranging from "help
line" telephone consultation to extended field service on a contract basis,
which includes parts, labor, and travel service with a guaranteed on-site
response within 48 hours. Warranty and contract service is provided from our
Norcross, Georgia location.

AUDIO VISUAL CONTROL SYSTEMS

         We offer custom component-technology development to support the
integration of complex devices, and custom user interface creation. In addition,
in order to encourage integrators to choose ONGOER(TM) the first time, we intend
to provide assistance in the installation process. Simtrol representatives will
be there on site when needed. Simtrol also coordinates on-site help for
ONGOER(TM) control systems after installation and for service. Our OnROAD
technology and our support team provide 24-hour remote diagnoses.

MARKETS

VIDEOCONFERENCING SYSTEMS

         For our videoconferencing control systems we have defined our target
market as the "Fortune 1000" companies in North America. Typically, these large
companies, often with numerous offices in different cities, are more likely to
realize significant savings on travel and related costs by installing a
videoconferencing network. Prior to purchasing a system, our customers generally
perform their own cost/benefit analyses. In addition, we have targeted a
secondary market consisting of small to mid-sized companies, as well as
educational institutions, governments and healthcare providers. Our systems are
marketed through a direct sales force, as well as through a select group of
co-marketing partners and distributors, including "partners" for whom we are an
original equipment manufacturer ("OEM").

         For each of the fiscal years ended December 31, 2000, 1999, and 1998,
international sales (sales outside of the United States and Canada) represented
approximately 0%, 9%, and 22%, respectively, of our total sales. Net product
sales attributable to Videoconferencing Systems, n.v. ("VSI Europe") decreased
from approximately $664,000 in 1999 to approximately $0 in 2000, principally as
a result of the sale of the subsidiary. Net product sales attributable to VSI
Europe decreased from approximately $2.9 million during 1998 to $664,000 in
1999. VSI Europe had historically contributed substantially all of our
international sales, although sales in China of $2.3 million were recorded in
1998 by VSI.

AUDIO VISUAL CONTROL SYSTEMS

         Marketing and selling ONGOER(TM) successfully will require a business
model quite different from the one used to sell videoconferencing systems.
Simtrol has adopted a tiered sales model for ONGOER(TM). Instead of hiring sales
representatives as employees, we've recruited a network of manufacturers'
representatives covering the continental U.S.


                                       9
<PAGE>   10

Manufacturers' representatives include:

         ANEW CT, in Denver, CO, covering Colorado, Idaho, Montana, New Mexico,
         Utah and Wyoming

         E.D.A. Marketing, in Atlanta, GA, covering Alabama, Arkansas, Florida,
         Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South
         Carolina, Tennessee, and Texas

         Loomis Associates, in Fremont, CA, covering Northern California, Oregon
         and Washington

         Rep-Presents, in Columbus, OH, covering Illinois, Indiana, Iowa,
         Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North
         Dakota, Ohio, Pennsylvania, South Dakota, West Virginia, and Wisconsin

         SYMCO, in Stirling, NJ, covering New York, New Jersey, Pennsylvania,
         Delaware, Maryland, Washington DC, Virginia and New England

         With these companies, we have effectively hired a sales staff of 23
representatives experienced in selling A/V equipment and systems. After
representatives have attended an ONGOER(TM) control systems sales training
course in our Norcross offices during the first quarter of 2001, they will be
qualified to re-sell the system to A/V system integrators in their territories.

CUSTOMERS

VIDEOCONFERENCING SYSTEMS

         Our customers include Fortune 1000 companies, mid-sized corporations,
agencies of state, local and federal governments, and health care facilities.
They include Bank of America, Boeing, WorldCom, Duracell, BellSouth, Bell
Atlantic and Johnson & Johnson.

AUDIO VISUAL CONTROL SYSTEMS

         In 2001, our manufacturers' representatives will target the top 10% of
U.S. audio-visual systems integrators, who will in turn re-sell ONGOER(TM) to
end users. Fortune 1000 companies who act as their own systems integrators will
also be targeted.

COMPETITION

VIDEOCONFERENCING SYSTEMS

         We compete in the audio/visual command and control industry, including
videoconferencing by providing application-specific and custom solutions
(products and services) for our customers' needs. Because our videoconferencing
systems are compression technology-independent, they can be sold to customers
with standard codecs, high-speed codecs, board-level codecs or specialty codecs,
as well as with direct links to ATM and fiber optic networks.

         The videoconferencing industry covers a broad spectrum of
videoconferencing services available to businesses and others, all of which are,
in a general sense, competitive with our systems. The VSI Systems, however, are
designed and marketed primarily for the group and custom videoconferencing
segment of the industry. Within this segment of the industry, we presently
compete primarily with two companies that have significantly greater resources
and market shares than VSI. In addition, five suppliers of codecs directly
compete with us in the group videoconferencing segment. They are PictureTel
Corporation, Vtel Corporation, VCON Inc., Tandberg Inc. and Polycom, Inc.


                                       10
<PAGE>   11
AUDIO VISUAL CONTROL SYSTEMS

         Within the audio/visual control system market, we primarily compete
with two companies, both of which have significantly greater resources and
market share. Both companies offer control solutions based on proprietary
hardware and software. We offer control solutions utilizing open PC technology.

         Our two major competitors in the A/V control systems market are Panja
and Crestron. They currently share 80% of all sales in this market.

         Panja, headquartered in Richardson, Texas, was established in 1982 as
AMX. This publicly traded company employs about 130 people, with dealers and
distributors in 40 countries. Panja has a strong foothold in Fortune 500
companies. Typical Panja applications include control of devices in corporate
boardrooms, meeting facilities, professional sporting arenas, museums, hospital
operating rooms, transportation systems, and schools.

         Headquartered in Rockleigh, New Jersey, Crestron designs and
manufactures control and automation systems for corporate, industrial,
educational, and residential markets.

         Both Crestron and Panja offer hardware-based control systems, the cores
of which are proprietary controllers, 486 PCs fitted with proprietary cards and
connectors manufactured by or for them, and running proprietary operating
systems. These proprietary controllers communicate with controlled devices by
means of code written in proprietary languages (each company has developed their
own). Integrators who re-sell systems from each of these companies must send
their technical personnel to training courses offered by the companies
themselves and by several independent organizations.

         Because ONGOER(TM) is a software-based control systems designed to run
on commodity hardware, we believe we have several advantages over Panja and
Crestron:

         -        With its unique open architecture, ONGOER(TM) software
                  delivers real-time control to A/V systems management. No
                  matter how many devices it controls, the response will be
                  immediate and precise.

         -        Robust CycleFree(TM) software design allows rapid addition of
                  new features without compromises to software reliability.

         -        It can run on any PC running Windows(R) 2000. When the PC
                  becomes outdated, integrators can avoid obsolescence
                  inexpensively by replacing individual hardware components or
                  the entire machine with any PC available on the open market.
                  ONGOER(TM) and Windows(R) 2000 take advantage of new hardware
                  as soon as it's available. Prices of PC's continue to drop,
                  while performance continues to increase. Utilizing commodity
                  hardware increases A/V integration project profit margins.

         -        No need to add an additional PC to run presentation software
                  or other applications - they can be run from the ONGOER(TM)PC
                  controller.

         -        PC controllers can maintain detailed data logging operations.
                  If something does go wrong, diagnosis and correction will be
                  much quicker with the availability of detailed operations
                  logs.

         -        Any device that can be connected to a PC can be controlled by
                  ONGOER(TM). Support for PC cards, cables and outboard boxes
                  expand it's connectivity options, and provides protection
                  against obsolescence. Connection methods include but are not
                  limited to serial, infrared (IR), radio frequency (RF), Sony
                  S-link, Wireless Ethernet, and USB.

         -        OnROAD capitalizes on Windows 2000's built-in web server to
                  provide complete control of any ONGOER(TM) system from any
                  browser, anywhere in the world. OnROAD is an integral feature
                  of the core ONGOER(TM) software package. No need to purchase
                  additional hardware or software.

         -        OnROAD will help integrators increase the profit margin on any
                  project by drastically reducing the number of visits to client
                  sites to correct problems. Diagnosing and correcting the
                  majority of problems can be accomplished remotely.


                                       11
<PAGE>   12
         -        Windows(R) 2000 is one of the most stable operating systems to
                  date. Additionally, it provides access to even more features
                  that can be integrated into ONGOER(TM) -- voice activation,
                  multi-monitor support, event scheduling and more.

         -        ONGOER(TM) provides a wide range of options for user interface
                  devices. SVGA monitors, wireless touch panels, handheld
                  personal digital assistants (PDAs) like Palm Pilots and Visors
                  can be employed.

         -        Microsoft(R) Visual Basic is the chief user interface
                  development tool. More than 50% of professional programmers in
                  the US use Visual Basic. Locating and training technical
                  talent will require minimal effort on the part of integrators.

         -        OnLooker user interface development tool augments the visual
                  Basic development environment, providing pre-designed artwork
                  and code that significantly reduces UI development time.

RESEARCH AND DEVELOPMENT

         All of our product engineering, including costs associated with design
and configuration of fully developed VSI Systems for particular customer
applications is accounted for in our financial statements as research and
development expenses. During the years ended December 31, 2000, 1999, and 1998,
our aggregate expenditures for research and development of new products or new
components of our ONGOER and existing VSI Systems were $495,589, $416,225 and
$786,103, respectively. During fiscal 2000, our research and development
expenses increased by approximately 19% due principally to an increase in
personnel to aid in the development of the new ONGOER(TM) product line. Fiscal
1999 expenditures for research and development decreased approximately 47% from
1998 due to the capitalization of $180,000 in costs related to the development
of our new PC-based command and control product.

EMPLOYEES

         As of March 15, 2001, we employed 31 persons full time, including four
executive officers. Of the full-time employees who were not executive officers,
three were engaged in sales and marketing, three in production, four in service,
eleven in research and development, and six in general administration. Employee
relations are considered good, and we have no collective bargaining contracts
covering any of our employees.

ITEM 2.  PROPERTIES.

         We maintain our executive and sales offices, as well as our production
facilities, in 26,140 square feet of leased office and warehouse space in
Norcross, Georgia, under a five-year lease, which expires in October 2002. We
also lease 18,000 square feet of office and warehouse space in an adjoining
facility, which is currently being subleased on a month-to-month basis.

ITEM 3.  LEGAL PROCEEDINGS.

         In November 2000 we were named as a defendant in a lawsuit filed by the
bankruptcy trustee of VSI Network Services, Inc., a subsidiary of ours that
filed for Chapter 7 bankruptcy in 1999. This lawsuit, filed in the Northern
District of Georgia, Atlanta Division was for an accounting and to seek recovery
of alleged preferential transfers of funds. The lawsuit is seeking to recover
approximately $740,000 in alleged preference payments from us. We believe this
case is without merit and intend to vigorously oppose the litigation, however,
given the early stage of the proceedings, the ultimate outcome of the lawsuit
cannot be determined at this time. Accordingly, no provision for any liability
that might result from this litigation has been made.

         The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.


                                       12
<PAGE>   13
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There has been no occurrence requiring a response to this Item.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         Our common stock is traded on the OTC Bulletin Board under the symbol
"VSIN." Our common stock had been traded on the Boston Stock Exchange under the
symbol "VSI" from November 1991 until February 18, 1998, when we voluntarily
delisted from the exchange. The common stock was quoted on the Nasdaq SmallCap
Market from February 28, 1992 through September 22, 1999, when we were delisted.

         On January 15, 1999, we implemented a 1-for-4 reverse split of shares
of our common stock. The following table sets forth the quarterly high and low
bid quotations per share of common stock on the Nasdaq SmallCap Market and/or
OTC Bulletin Board, as applicable, as reported for the periods indicated,
adjusted to reflect the effects of the reverse split. These prices also
represent inter-dealer quotations without retail mark-ups, markdowns, or
commissions and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                                       HIGH            LOW
                                                                       ----            ---
             <S>                                                    <C>            <C>
             FISCAL YEAR ENDED DECEMBER 31, 1999
             First Quarter                                          $   1.38       $   0.25
             Second Quarter                                             0.75           0.38
             Third Quarter                                              1.00           0.28
             Fourth Quarter                                             0.63           0.31

             FISCAL YEAR ENDED DECEMBER 31, 2000
             First Quarter                                          $   8.00       $   0.47
             Second Quarter                                             6.25           1.94
             Third Quarter                                              3.62           2.25
             Fourth Quarter                                             3.16           0.88
</TABLE>


         As of March 15, 2001, we had approximately 554 holders of record of
common stock and in excess of 7,000 beneficial holders of VSI common shares.

         We have never paid cash dividends on our common stock and have no plans
to pay cash dividends in the foreseeable future. The policy of our Board of
Directors is to retain all available earnings for use in the operation and
expansion of our business. Whether dividends may be paid on the Common Shares in
the future will depend upon our earnings, capital requirements, financial
condition, prior rights of the preferred stockholders, and other relevant
factors.

ITEM 6.  SELECTED FINANCIAL DATA.

         The following selected financial data for the five years ended December
31, 2000, 1999, 1998, 1997, and 1996 are derived from our consolidated financial
statements. All financial information prior to 1997 was restated to reflect the
June 1996 acquisition of Integrated Network Services, Inc., which was accounted
for as a pooling of interest. Integrated Network Services was closed in December
1998, so its results for each year listed below are stated as discontinued
operations. Information for the years ended December 31, 2000, 1999, 1998 and
1997 includes Eastern Telecom, which was acquired in October 1996. We sold
Eastern Telecom on May 18, 2000, so its results for each year listed below are
also stated as discontinued operations. See Note B to the consolidated financial
statements. Information for the years ended December 31, 2000, 1999, 1998, 1997
and 1996 includes VSI Solutions Inc., which was acquired in April 1995. The data
should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.


                                       13
<PAGE>   14
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                           -----------------------------------------------------------------------------
                                              2000            1999             1998              1997            1996
                                           -----------------------------------------------------------------------------
                                                                 (in thousands, except per share data)
<S>                                        <C>             <C>             <C>                 <C>              <C>
STATEMENT OF INCOME DATA:
Revenue                                    $ 4,041         $ 7,132         $ 13,574            $ 12,168         $ 11,160
Cost of revenues                             2,309           3,716           12,243               9,687            9,116
Gross Profit                                 1,732           3,416            1,331               2,481            2,044
Operating and other expenses                 4,044           5,936            9,558               8,418            8,523
                                           -------         -------         --------            --------         --------
Net loss from continuing operations
 before taxes                               (2,312)         (2,520)          (8,227)(1)          (5,937)          (6,479)
Income tax benefit                             325
Net (loss) from continuing
  operations                                (1,987          (2,520)          (8,227)             (5,937)          (6,479)

Income (loss) from discontinued
  operations                                   456            (320)          (8,709)(1)             120             (228)
                                           -------         -------         --------            --------         --------

Net loss                                   $(1,531)        $(2,840)        $(16,936)           $ (5,817)        $ (6,707)
                                           =======         =======         ========            ========         ========

Net loss per share from:

Continuing operations                      $ (0.14)        $ (0.20)        $  (0.69)           $  (0.54)        $  (0.71)
Discontinued operations                       0.03           (0.03)           (0.73)               0.01            (0.03)
                                           -------         -------         --------            --------         --------
                                           $ (0.11)        $ (0.23)        $  (1.42)           $  (0.53)        $  (0.74)
                                           =======         =======         ========            ========         ========

<CAPTION>

                                                                   December 31,
                                       ---------------------------------------------------------------------
                                           2000         1999          1998          1997          1996
                                       ---------------------------------------- ----------------------------
                                                                  (in thousands)
<S>                                        <C>             <C>             <C>                 <C>              <C>
BALANCE SHEET DATA:
Working capital                            $   993         $  (951)        $    (49)           $  3,690         $  5,634
Total assets                                 7,234           4,911            8,275              20,809           22,965
Long-term debt                                  42              --            1,106                  --            4,250
Stockholders' equity                         5,487          (1,197)           1,003              15,591           13,819
</TABLE>

---------------

(1)  The Company took a non-cash and non-recurring charge of approximately $10.3
     million in 1998. The charge included: the write-down of obsolete or
     slow-moving videoconferencing and demonstration inventory ($1.88 million);
     the loss from the sale of investments in two companies ($450,000); a
     write-down of capitalized software development costs ($180,000); and the
     write-off of most of the goodwill from the acquisitions of VSI Europe in
     1992 and Eastern Telecom in 1996 ($7.76 million).

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

         The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto included elsewhere
in this Form 10-K.

FORWARD-LOOKING STATEMENTS

         Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements relating to financial results and plans for future
business development activities, and are thus prospective. All statements other
than statements of historical fact we


                                       14
<PAGE>   15
make in this report are forward-looking. Such forward-looking statements are
subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to; economic conditions, competition and other uncertainties set out
below under "Factors Affecting Future Performance" and as detailed from time to
time in our Securities and Exchange Commission filings.

OVERVIEW

         VSI Enterprises, Inc. is an Atlanta-based holding company. Our core
business is the design, manufacture, marketing and servicing of software based
command and control systems, including videoconferencing control systems, which
operate on PC platforms, through our wholly owned subsidiary, Videoconferencing
Systems, Inc. We also design, manufacture, market, service and support our new
Ongoer software-based audio control system designed to run on third-party
hardware, through our wholly owned subsidiary, Simtrol, Inc. In addition, we
resold voice and data services and equipment on behalf of large
telecommunications companies, through our majority-owned subsidiary, VSI Network
Solutions, Inc., doing business as Eastern Telecom. We sold Eastern Telecom to
PentaStar Communications, Inc.; a Denver, Colorado based communications services
agent on May 18, 2000. The consolidated statements of operations have been
adjusted to reflect the discontinuance of Eastern Telecom's operations.

         Our command and control solutions allow end users to operate, as a
single system, a broad range of electronic equipment such as projectors, VCRs,
computers, sound systems, lighting and temperature controls and other
audio/video devices in a variety of settings. Our videoconferencing products are
designed to allow multiple participants at geographically dispersed sites to see
and hear each other on live television and share graphical and pictorial
information using standard commercially available telecommunications
transmission facilities. We integrate standard video, audio and transmission
components with our own proprietary video, audio and computer control components
and patented software under the trade name ONGOER and Omega. A typical customer
is a large, multi-site organization that utilizes sophisticated audio, video and
communications network technologies that require complex command and control
solutions. These solutions can be used in a variety of settings, including
corporate meetings and conferences, distance learning and judicial arraignment
systems. These customers also require superior after-the-sale service.
Historically, we have utilized a direct sales model. However, in order to grow
sales and to reach and maintain profitability, management believes that we can
better leverage our technological and service competencies by marketing and
selling our products through third party resellers and system integrators, who
specialize in the sale, installation, support and service of audio/visual
equipment, and by entering new markets for our control system technology.

         During 2000, we undertook a restructuring of our business operations
and balance sheet that are intended to achieve profitable operations and provide
positive operating cash flows. As part of this restructuring, we raised
additional equity capital and paid off our debt holders. This restructuring
included raising additional equity capital through the private sale of common
stock and exchanging our common stock for shares of Eastern Telecom held by its
minority interest holders, restructuring and then subsequently retiring our
debt, selling non-strategic assets and aggressively managing accounts receivable
and inventory.

         These restructuring initiatives have enabled us to reposition our
product line and to expand our presence in the audio/visual command and control
systems market. This market, which to some degree overlaps the high-end
videoconferencing market historically served by us, is almost exclusively
maintained by thousands of resellers and system integrators. Our products have
been re-engineered such that they may also be sold through these third party
channels. We believe we offer a functionally superior, lower cost, fully
integrated solution which provides command and control and remote diagnostics
for audio, visual and room environment devices, and for network connectivity.

         Once established in the audio/visual command and control market, we
envision developing additional applications for other command and control system
markets, including process control applications in manufacturing environments
and the burgeoning home entertainment market, that may involve licensing our
control software to existing OEM vendors, in addition to third-party reseller
channels.


                                       15
<PAGE>   16
FINANCIAL CONDITION

         During the year ended December 31, 2000, our total assets increased
approximately 47% to $7,234,290 from $4,910,533 at December 31, 1999. A large
part of the increase resulted from an increase in cash of $980,722 and
investments of $3,558,684 due to the sale of Eastern Telecom and the sale of
1,351,625 shares of common stock for $4,054,876 through a private placement in
March. The increase in investments is the result of (1) our co-partnering with
ACIS in the development of an advanced operating kernel in which we invested
$2,302,000 and (2) the 57,122 shares of Pentastar common stock we received as
part of the sale of Eastern Telecom with a fair value of $1,256,684 at December
31, 2000. Accounts receivable decreased $475,052 as a result of lower sales and
increased emphasis on collections. Inventories decreased $369,296 as we continue
our efforts to put in place better inventory management practices. Capitalized
software development costs increased $504,702 due to expenditures related to our
new product ONGOER that is currently being developed.

Current liabilities decreased in 2000 by $2,283,932, or 57%, compared to 1999
principally due to:

         -        the repayment of the Kernaghan debt and other borrowings;

         -        a $1,050,020 decrease in accounts payable and accrued expenses
                  resulting from our on-going efforts to pay down amounts owed
                  to vendors; and

         -        a $297,605 decrease in deferred revenue.

         Additionally, we exchanged 524,126 of our common shares for 240,265
(24%) of the Eastern Telecom shares held by its minority shareholders. By this
transaction, we retired 68% of our put obligations under a shareholders
agreement that gave Eastern Telecom's minority shareholders the rights to put
their shares to VSI at $6.50 per share. The remaining minority interest shares
were repurchased pursuant to the terms of a shareholder agreement at the time of
the sale of Eastern Telecom, which amounted to $759,845.

RESULTS OF OPERATIONS

         Many of the comparisons between 2000, 1999 and 1998 financial results
are significantly impacted by non-recurring charges in 1998, as described below.
Additionally, results for 2000, 1999 and 1998 have been restated to reflect the
discontinuance of operations of Eastern Telecom.

         In 1998, as part of an ongoing effort to restructure and refocus our
strategic direction, and to eliminate assets that were either non-performing,
impaired or unrelated to our core business, we took a non-cash and non-recurring
charge of approximately $10.3 million. The charge included: the write-down of
obsolete or slow-moving videoconferencing and demonstration inventory ($1.88
million); the loss from the sale of investments in two companies ($450,000); a
write-down of capitalized software development costs ($180,000); and the
write-off of most of the goodwill from the acquisitions of VSI Europe in 1992
and Eastern Telecom in 1996 ($7.76 million).

Revenues

         Revenues were $4,041,204, $7,132,248 and $13,574,213 in fiscal 2000,
1999 and 1998, respectively. The decreases of 43% from 1999 to 2000 and 47% from
1998 to 1999 were primarily due to our efforts to only pursue profitable sales
and to become smaller and more efficient, as we reduced our losses and began to
pursue strategies more consistent with our mission.

Gross Margin

         Gross margin as a percentage of revenues was approximately 43%, 48% and
24% (before non-recurring items) in fiscal years 2000, 1999 and 1998,
respectively. The decrease in gross margin in fiscal year 2000 as compared to
fiscal year 1999 was due primarily to the write-off of obsolete inventory of
approximately $208,000. The increase in gross margin in fiscal year 1999 over
fiscal year 1998 was due to the emphasis on shedding low margin products and
services, and higher than usual sales of lower margin videoconferencing products
during fiscal 1998, primarily from a $2.3 million order to a customer in China.


                                       16
<PAGE>   17
Selling, General & Administrative Expenses

         Selling, general and administrative expenses were $3,288,724,
$4,467,821, and $5,939,448 for fiscal 2000, 1999 and 1998, respectively. The 26%
decrease from fiscal 1999 to 2000 and the 25% decrease from fiscal 1999 to 1998
resulted from the consolidation of operations, reductions in personnel and
ongoing efforts to cut costs.

Research and Development Expenses

         We charge research and development costs to expense as incurred until
technological feasibility of a software product has been established. Software
development costs incurred after technological feasibility has been established
are capitalized and amortized over three years or the useful life of the
product, whichever is shorter. These expensed costs were $495,589, $416,225 and
$786,103 for fiscal 2000, 1999 and 1998, respectively. The 19% increase from
fiscal 1999 to fiscal 2000 was the result of adding personnel principally to aid
in the development of the new ONGOER(TM) product line. The 47% decrease from
1998 to 1999 principally resulted from the capitalization of approximately
$180,000 in software development costs related to new products under development
and a reduction in personnel.

Impairment Loss

         In 1998, an impairment loss of $772,233 was charged to operations,
principally due to a $577,077 charge recorded to eliminate all remaining
goodwill related to VSI Europe, and an additional $195,156 charge recorded to
write down VSI Europe's net assets to zero. Management recorded this impairment
in light of VSI Europe's continuing operating losses.

         Additionally, a $6,995,000 write-off of the original goodwill recorded
with our acquisition of Eastern Telecom is reflected in the loss from
discontinued operations. We compared the carrying value of Eastern Telecom at
December 31, 1998 to the undiscounted anticipated cash flows for the next ten
years to determine if there had been impairment. As the anticipated undiscounted
cash flows were lower than the carrying value of Eastern Telecom, we then used
the present value of the estimated expected future cash flows, using a 15%
discount rate (discounted cash flows), to determine the impairment charge. This
evaluation was triggered by Eastern Telecom's net operating loss during 1998, a
reduction in commissions paid to Eastern Telecom by Bell Atlantic during 1998
and an informal valuation of Eastern Telecom performed during the fourth quarter
of 1998.

Loss on Sale of Investments

         The $167,539 loss on the sale of subsidiary in 1999 resulted from the
sale of VSI Europe, and included the write-off of cumulative foreign currency
translation adjustments of $319,000. The loss on the sale of investments in 1998
was the result of the sale of our investment in Global TeleMedix, Inc., which
was sold in October 1998 at a loss of $302,000 and the loss of $150,000 in the
investment in Educational Video Conferencing, Inc., which was sold on December
31, 1998.

Other Expenses

         Other expenses, primarily finance charges, were $259,831, $884,244, and
$1,607,735 for fiscal 2000, 1999 and 1998, respectively. The decrease from 1999
to 2000 was the result of a decrease in interest expense as we paid down our
debt. The decrease from 1998 to 1999 is primarily related to a $1,010,000
decrease in interest expense and debt discount costs; a decrease in foreign
currency exchange losses of $93,000, offset by an increase of $303,000 in
amortization of warrant discounts and an increase in penalties of $111,000
related to state sales tax liabilities.

Net Loss from Continuing Operations

         Net losses from continuing operations were $1,986,872, $2,519,969 and
$8,226,134 for fiscal 2000, 1999 and 1998, respectively. The net loss from
continuing operations in 1998 included non-cash and non-recurring charges,
including the write-down of obsolete or slow-moving videoconferencing and
demonstration inventory ($1.88 million); the loss from the sale of investments
in two companies ($450,000); and a write-down of capitalized software
development costs ($180,000).


                                       17
<PAGE>   18
Discontinued Operations

         We discontinued operations of our system integration subsidiary, VSI
Network Services, Inc. on December 31, 1998. Also, on May 18, 2000, we sold
Eastern Telecom, our network reselling subsidiary; and, as a result have
accounted for Eastern Telecom as discontinued operations. Accordingly, operating
results for both subsidiaries have been reclassified and reported as
discontinued operations. Operating income (loss) from discontinued operations
was $(32,556) in 2000, $(319,625) in 1999 and $(9,054,570) in 1998

Gain on Sale of Subsidiary

         We realized a gain of $488,829, net of taxes of $325,000, from the sale
of our Eastern Telecom, Inc. subsidiary that took place on May 18, 2000. In
1998, we realized a gain of $344,732 on the sale of our system integration
operation.

Net Loss

         The net loss for fiscal 2000 was $1,530,599 or $0.11 per share. The net
loss for fiscal 1999 was $2,839,594 or $0.23 per share. The net loss for fiscal
1998, before non-recurring charges, was approximately $6.6 million, or $0.55 per
share. Including the non-recurring charges of approximately $10.3 million, the
net loss for fiscal 1998 was $16,935,972, or $1.42 per share. The net loss for
2000 was reduced by $1,308,995 due to decreases in overhead and the gain on the
sale of Eastern Telecom of $813,829, including a tax benefit of $325,000. The
1999 net loss, excluding non-recurring charges was reduced by approximately $3.8
million over 1998, primarily due to considerable improvements in gross margins
and decreases in overhead and other expenses.

LIQUIDITY AND SOURCES OF CAPITAL

General

         As of December 31, 2000, we had cash and cash equivalents of
$1,779,548. In March 2000, we raised a total of approximately $5.6 million in
new equity through two related transactions. In the first transaction, we raised
$4,054,876 through the sale of 1,351,625 shares of common stock at $3.00 per
share to 38 accredited investors. Approximately $826,668 of the proceeds was
used to repay the remaining balance of the 7% Secured Convertible Debenture held
by Thompson Kernaghan & Co. Ltd. ("Kernaghan"). Under the terms of a debt
restructuring agreement, Kernaghan had the option to convert the Secured
Convertible Debenture into shares of our common stock beginning January 1, 2000
at the initial rate of 7.5% per month, with a conversion price equal to the
lesser of $1.00 or the 5-day average closing bid price of our common stock prior
to the date of any such transaction, with a floor of $0.50 per share. Kernaghan
had previously converted $144,529 of principal plus accrued interest into
216,945 shares of our common stock.

         In the second transaction, we exchanged 524,126 of our common shares
for 240,265 (24%) of the Eastern Telecom shares held by its minority
shareholders. By this transaction, we retired 68% of our put obligations under a
shareholders agreement that gave Eastern Telecom's minority shareholders the
right to put their shares to us at $6.50 per share. The remaining minority
interest shares were repurchased pursuant to the terms of a shareholders
agreement.

         On May 18, 2000 we received $1,787,000 in cash from the sale of Eastern
Telecom, of which $500,000 was placed in escrow pending the collection of
specified accounts receivable. As of February 15, 2001 approximately $391,000 of
those accounts receivable have been collected but not yet released from escrow.
We also received 57,122 shares of Pentastar Communications stock with a market
value as of December 31, 2000 of $1,256,684. This stock is also held in escrow
and is available to us in three distributions beginning on November 18, 2001 and
every six months thereafter. The Eastern Telecom assets were combined with the
assets of USTeleCenters, Inc. and Vermont Network Services Corporation and under
an earn-out provision in the sales agreement, we were entitled to additional
compensation based on the combined financial results of the combined Eastern
Telecom, USTeleCenters and Vermont Network Services acquired operations for
calendar year 2000. These earn-out targets were not met and no additional
compensation was received.


                                       18
<PAGE>   19
         We believe we have sufficient funds for at least the next 12 months. We
may require additional funding in fiscal 2001 to fund our development
activities. This additional funding could be in the form of the sale of assets,
debt, equity, or a combination of these financing methods. However, there can be
no assurance that we will be able to obtain such financing if and when needed,
or that if obtained, such financing will be sufficient or on terms and
conditions acceptable to the Company.

         We expect to spend approximately $185,000 for capital expenditures in
fiscal 2001.

CONVERTIBLE DEBENTURES/TERM NOTES

         On February 23, 1998, we issued $3,000,000 of 5% Convertible Debentures
due February 2000 ("the Debentures") to Kernaghan, the proceeds of which were
utilized for working capital purposes. During 1998, $710,000 of debentures, plus
accrued interest of $13,531, were converted by the debenture holder into 445,956
shares of our common stock. We also paid $128,858 in accrued interest and fees.
In November 1998, the remaining debentures were converted into a $900,000 term
note to Kernaghan, due May 16, 1999.

         On August 31, 1999, we restructured our debt with Kernaghan, which
totaled $1,089,750 at that date. We made a cash payment of $150,000 at closing,
and the remaining balance was exchanged for a 7% secured convertible debenture,
with a one-year term. The debenture was secured by a lien on our ownership
interest in Eastern Telecom, which was junior to our converting term note
holders and new investors, as discussed below. Kernaghan had the option to
commence converting the debenture into shares of our common stock at the initial
rate of 7.5% per month beginning January 1, 2000. The conversion price was the
lesser of $1.00 per share or the five-day average closing bid price of our
common stock prior to the date of any such conversion, with a floor of $0.50 per
share. Kernaghan converted $144,746 of principal plus accrued interest into
216,945 shares of our common stock during January and February 2000. On March 1,
2000, we repaid the remaining balance of the debt, including interest.

         As part of closing the August 31, 1999 Kernaghan transaction,
$1,213,000 of our 18-month term notes due March 31, 2000 were converted into
195,099 shares of Eastern Telecom common stock which were owned by us,
representing a 19.5% minority interest in Eastern Telecom. In addition,
$1,040,000 of new capital was raised by selling a 16.0% minority interest in
Eastern Telecom. The consideration received for the sale of shares of common
stock of Eastern Telecom was based on an internal valuation of Eastern Telecom.
Under the terms of the Kernaghan agreement, we agreed to sell our remaining
interest in Eastern Telecom at not less than fair market value, provided the
terms of any such transaction are otherwise acceptable to us. Additionally,
Eastern Telecom's minority shareholders have a put option, which gives them the
right to put their Eastern Telecom shares back to us after one year, and we have
a call option to reacquire shares of Eastern Telecom at any time, both at a
price of $6.50 per share of Eastern Telecom common stock. As described above, we
sold Eastern Telecom and repurchased remaining Eastern Telecom minority
interest.

         Participants in the term note conversion and new equity participants
also received 1,098,492 and 396,497 warrants to purchase our common stock at
$0.50 and $1.00 per share, respectively. In conjunction with the issuance of the
warrants, we valued the warrants at $320,968 using the Black-Scholes option
pricing model in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." This warrant value was amortized to interest expense over the
term of the put, which was one year, and was fully expensed upon the sale of
Eastern Telecom.

OPERATING LOSS CARRYFORWARDS

         As of December 31, 2000, we had operating loss carryforwards for U.S.
income tax purposes of approximately $36,014,000 available to reduce future
taxable income through 2015. We also have investment, research and experimental
credits of approximately $152,000 available to reduce future income taxes
payable through 2020. During 1993, we experienced a change in control, as
defined under Section 382 of the Internal Revenue Code. As a result, the
utilization of approximately $7,000,000 in tax loss carryforwards will be
limited to approximately $1,000,000 annually.


                                       19
<PAGE>   20
FACTORS AFFECTING FUTURE PERFORMANCE

         The following summarizes certain of the risks inherent in our business:

We may not be able to obtain additional capital to finance our operations when
needed.

         We will require additional capital or other funding to finance our
operations, new market development and continued growth. We may seek additional
equity financing through the sale of securities on a public or a private
placement basis on such terms as are reasonably attainable. We may not be able
to obtain such financing when needed, or that if obtained, it may not be
sufficient or on terms and conditions acceptable to us. If we sell shares of our
common stock, our existing shareholders will suffer dilution, which could be
material.

We may not be able to achieve or sustain profitability in the future.

         After 15 years of operations, we have not reported any profits for a
full year of operations and, as of December 31, 2000, we had an accumulated
deficit of $51.2 million. We may not be able to achieve or sustain profitability
in the future. We anticipate an increase in expenses as a result of research and
development and marketing for our new products. As a result, we may incur
additional losses and negative cash flow from operations for the foreseeable
future.

If we fail to secure sufficient capital or fail to create a strong marketing
support team, then our efforts to penetrate new markets could fail, resulting in
decreased cash flow.

         Expanding our presence in the audio/visual command and control market
will require capital for further software product development, and the creation
of new sales channels. The inability to secure sufficient capital or the failure
to create a strong sales channel/marketing support organization could result in
a failed effort to penetrate these new markets, and adversely affect operating
results and cash flow.

If we fail to develop competitive products in response to technological changes,
our business will not grow or remain competitive.

         The market for our products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions.
Product introductions are generally characterized by increased functionality and
quality at reduced prices. If we are unable, for technological or other reasons,
to develop competitive products in a timely manner in response to changes in the
industry, our business and operating results would be significantly harmed. For
example, the successful launch of ONGOER(TM), our second-generation PC-based
device controller, depends on our ability to complete the design and development
of complex audio/visual control software built on a new software kernel
co-developed with ACIS, Inc.

         Our ability to successfully develop and introduce on a timely basis new
and enhanced products that embody new technology, and achieve levels of
functionality and prices that are acceptable to the market will be a significant
factor in our ability to grow and to remain competitive. For instance, the
ability to transact business via the Internet is becoming increasingly
important. Accordingly, in order to remain competitive, we are currently
developing a system, that will allow us to deliver products and services to our
customers via the Internet. We may not be able to timely or effectively
implement this strategy.

Operating results could be adversely affected by a disruption in supply or a
significant price increase of videoconferencing components or failure of a third
party supplier to remain competitive in price.

         Substantially all of our videoconferencing components, subsystems and
assemblies are made by outside vendors. Disruption in supply, a significant
increase in price of one or more of these components or failure of a third party
supplier to remain competitive in functionality or price could result in lost
sales. We could experience such problems in the future. Similarly, excessive
rework costs associated with defective components or process errors associated
with our anticipated new product line of videoconferencing systems could
adversely affect our business and operating results.

We depend on purchases from a few significant customers, and any loss
cancellation, or reduction of purchases by these customers could harm our
business.


                                       20
<PAGE>   21
         We currently sell control and videoconferencing systems to a small
number of major customers. During the year ended December 31, 2000,
approximately 58% of our revenues were from four large customers. Further, we do
not have long term contracts with any of our other customers, so our customers
could stop purchasing our products at any time. The loss of any of our major
customers, or any reduction in purchases by these customers, could significantly
harm our business.

If we cannot attract, retain, train or manage our key management or technical
personnel effectively, our ability to develop and sell new products could be
hindered, resulting in a reduction in sales.

         Our development, management of our growth and other activities depend
on the efforts of key management and technical employees. Competition for such
persons is intense. Since we do not have long-term employment agreements with
our key management personnel or technical employees, we could lose one or more
of our key management or technical personnel which could result in significant
harm to our business. Our future success is also dependent upon our ability to
effectively attract, retain, train, motivate and manage our employees, and
failure to do so could hinder the development and marketing of our products and
result in a reduction in sales, and our customers could shift their purchases to
our competitors.

We may not be able to maintain or improve our competitive position because there
are competitors who currently engage in or may enter the market with far greater
technical and financial resources than we have.

         Competition in the command and control and video communications markets
is intense. We expect other competitors, some with significantly greater
technical and financial resources, may enter these markets. If we cannot
continue to offer new command and control and videoconferencing products with
improved performance and reduced cost, our competitive position will erode.
Moreover, competitive price reductions may adversely affect our results of
operations. In the command and control market, our primary competitors are
Panja, Inc. and Crestron Electronics, Inc. In the videoconferencing market, our
primary competitors are PictureTel Corporation, VTEL Corporation, VCON, Inc.,
Tandberg Inc. and Polycom Inc

Fluctuations in our quarterly performance could adversely affect our total
revenues and net income levels.

         Our revenues have historically occurred predominantly in the third
month of each fiscal quarter. Accordingly, our quarterly results of operations
are difficult to predict, and delays in the closing of sales near the end of the
quarter could cause quarterly revenues and, to a greater degree, operating and
net income to fall substantially short of anticipated levels. Our total revenues
and net income levels could also be adversely affected by:

         -        cancellations or delays of orders,
         -        interruptions or delays in the supply of key components
         -        changes in customer base or product mix,
         -        seasonal patterns of capital spending by customers,
         -        delays in purchase decisions due to new product announcements
                  by us or our competitors, and
         -        increased competition and reductions in average selling
                  prices.

We may not be able to regain our Nasdaq listing.

         Effective as of the close of business on September 22, 1999, our common
stock was delisted from the Nasdaq SmallCap Market and began trading on the OTC
Bulletin Board. The delisting occurred as a result of the minimum bid price on
our common stock being less than $1.00 per share and our net tangible assets
being under $2.0 million. Because the requirements for a new listing on the
Nasdaq Stock Market are substantially more onerous than the requirements for
continued listing, we may not be in a position in the future to reapply for
listing on Nasdaq. Because the OTC Bulletin Board is generally a less efficient
market than the Nasdaq Stock Market, the liquidity and volatility of our shares
could be adversely impacted. Furthermore, institutional investors are less
likely to be interested in stocks trading on the OTC Bulletin Board.

The Securities and Exchange Commission's rules regarding penny stocks may
restrict your ability to resell our shares.


                                       21
<PAGE>   22

         Our common stock is subject to Rules 15g-1 through 15g-9 of the
Securities Exchange Act of 1934, which imposes additional sales practice
requirements on broker/dealers who sell such securities to persons other than
established customers and accredited investors. Generally, accredited investors
include institutions with assets in excess of $5,000,000 or individuals with net
worths in excess of $1,000,000 or annual incomes exceeding $200,000 individually
or $300,000 jointly with their spouses. The broker/dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. The broker/dealer must furnish
the purchaser a document outlining the risks associated with investing in penny
stocks. Furthermore, the broker/dealer must inform the purchaser of:

         -        the bid and offer price quotes for penny stock,
         -        the number of shares to which the quoted prices apply;
         -        the brokerage firm's compensation for the trade; and
         -        the compensation received by the brokerage firm's salesperson
                  for the trade.

         Consequently, the rules may adversely affect the ability of
broker/dealers to sell our common stock, which may affect your ability to resell
our common stock.

Resales of our common stock may depress our stock price.

         We currently have effective registration statements covering the resale
of 6,134,616 shares of our common stock by certain shareholders. The sale of
these shares into the market may adversely affect the market price of our common
stock.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         VSI conducts most of its business in the United States and therefore,
we believe our exposure to foreign currency exchange rate risk at December 31,
2000 was not material. The value of our financial instruments is generally not
significantly impacted by changes in interest rates and we have no investments
in derivatives. Fluctuations in interest rates are not expected to have a
material impact on interest expense.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following financial statements are filed with this report:

         Report of Independent Certified Public Accountants

         Consolidated Balance Sheets as of December 31, 2000 and December 31,
         1999

         Consolidated Statements of Operations for Years Ended December 31,
         2000, 1999 and 1998

         Consolidated Statements of Stockholders' Equity for Years Ended
         December 31, 2000, 1999 and 1998

         Consolidated Statements of Cash Flows for Years Ended December 31,
         2000, 1999 and 1998

         Notes to Consolidated Financial Statements


                                       22
<PAGE>   23
               Report of Independent Certified Public Accountants

To the Board of Directors and Stockholders of
VSI Enterprises, Inc.

         We have audited the accompanying consolidated balance sheets of VSI
Enterprises, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2000 and 1999 and the related statements of operations, stockholders' equity,
and cash flows for the years ended December 31, 2000, 1999 and 1998. 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 audits.

         We conducted our audits 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 financial statements referred to above present
fairly, in all material respects, the financial position of VSI Enterprises,
Inc. and subsidiaries as of December 31, 2000, 1999 and 1998, and the results of
their operations and their cash flows for the years ended December 31, 2000,
1999 and 1998, in conformity with accounting principles generally accepted in
the United States.

/s/ GRANT THORNTON LLP

Atlanta, Georgia
March 2, 2001 (except for Note N which date is March 28, 2001)


                                       23






<PAGE>   24
                     VSI Enterprises, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>

                                                                                  December 31,
                                                                    ----------------------------------------
                                                                       2000                          1999
                                                                    ----------                    ----------
<S>                                                                 <C>                           <C>
CURRENT ASSETS

   Cash and cash equivalents                                        $1,779,548                    $  798,826
   Accounts receivable, less allowance
     for doubtful accounts of $244,630
     and $148,289 at December 31, 2000
     and 1999, respectively                                            511,702                       986,754
   Inventories, less allowance for obsolescence
     of $618,656 and $1,772,797 at December 31,
     2000 and 1999, respectively                                       407,044                       776,340
   Net current assets of discontinued operations                            --                       476,153
                                                                    ----------                    ----------

           Total current assets                                      2,698,294                     3,038,073

PROPERTY AND EQUIPMENT, net
   Continuing operations                                               252,701                       166,572
   Discontinued operations                                                  --                       577,676

OTHER ASSETS

   Software development costs, net                                     709,997                       205,295
   Investments                                                       3,558,684                            --
   Other long term assets                                               14,614                        14,614
   Other assets of discontinued operations, net                             --                       908,303
                                                                    ----------                    ----------
                                                                     4,283,295                     1,128,212

                                                                    $7,234,290                    $4,910,533
                                                                    ==========                    ==========
</TABLE>

         The accompanying notes are an integral part of these statements.


                                       24
<PAGE>   25
                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                                                                 December 31,
                                                                                 ---------------------------------------------
                                                                                     2000                             1999
                                                                                 ------------                     ------------
<S>                                                                              <C>                              <C>
CURRENT LIABILITIES
   Current portion of capital lease and short term borrowings                    $     25,000                     $    105,907
   Convertible debentures                                                                  --                          939,750
   Accounts payable                                                                   453,021                          941,301
   Accrued expenses                                                                   440,097                        1,001,837
   Deferred revenue                                                                   702,907                        1,000,512
   Current liabilities of discontinued operations                                      84,350                               --
                                                                                 ------------                     ------------

           Total current liabilities                                                1,705,375                        3,989,307

Capital lease payables, less current portion                                           41,738                               --

REDEEMABLE MINORITY INTEREST                                                               --                        2,118,293
COMMITMENTS AND CONTINGENCIES                                                              --                               --

STOCKHOLDERS' EQUITY
   Preferred stock, $.00025 par value; authorized
     800,000 shares, none issued and outstanding                                           --                               --
   Common stock, authorized 40,000,000 shares of
     $.001 par value; issued and outstanding
     15,163,218 shares at December 31, 2000
     and 12,300,144 at December 31,1999                                                15,163                           12,300
   Additional paid-in capital                                                      56,605,370                       48,508,074
   Accumulated deficit                                                            (51,248,040)                     (49,717,441)
   Accumulated other comprehensive income                                             114,684                               --
                                                                                 ------------                     ------------
                                                                                    5,487,177                       (1,197,067)

                                                                                 $  7,234,290                     $  4,910,533
                                                                                 ============                     ============
</TABLE>

The accompanying notes are an integral part of these statements


                                       25
<PAGE>   26
                     VSI Enterprises, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                   --------------------------------------------------
                                                       2000               1999                1998
                                                   ------------       ------------       ------------
<S>                                                <C>                <C>                <C>
Revenue
   Videoconferencing systems                       $  4,041,204       $  7,132,248       $ 13,574,213

Costs and expenses

   Cost of videoconferencing systems                  2,308,932          3,716,388         12,242,823
   Selling, general and administrative                3,288,724          4,467,821          5,939,448
   Research and development                             495,589            416,225            786,103
   Impairment loss                                           --                 --            772,233
                                                   ------------       ------------       ------------

                                                      6,093,245          8,600,434         19,740,607
                                                   ------------       ------------       ------------

       Loss from operations                          (2,052,041)        (1,468,186)        (6,166,394)

Loss on sale of investments                                  --           (167,539)          (452,005)
Other expenses, primarily financing charges            (259,831)          (884,244)        (1,607,735)
                                                   ------------       ------------       ------------

       Net loss from continuing operations
         before income taxes                         (2,311,872)        (2,519,969)        (8,226,134)

Income taxes - benefit                                  325,000                 --                 --
                                                   ------------       ------------       ------------

       Net loss from continuing operations           (1,986,872)        (2,519,969)        (8,226,134)


Discontinued operations:
   Operating income (loss) from
     discontinued operations                            (32,556)          (319,625)        (9,054,570)
   Gain on sale of a subsidiary, net of taxes           488,829                 --            344,732
                                                   ------------       ------------       ------------


       Net loss                                    $ (1,530,599)      $ (2,839,594)      $(16,935,972)
                                                   ============       ============       ============

Net loss per common share:

   Loss from continuing operations                 $      (0.14)      $      (0.20)      $      (0.69)
   Gain (loss) from discontinued operations                0.03              (0.03)             (0.73)
                                                   ------------       ------------       ------------

                                                   $      (0.11)      $      (0.23)      $      (1.42)
                                                   ============       ============       ============

Weighted average shares outstanding                  14,571,780         12,300,144         11,931,232
                                                   ============       ============       ============
</TABLE>

The accompanying notes are an integral part of these statements


                                       26
<PAGE>   27

                     VSI Enterprises, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

              For the years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                               Common stock                                        Accumulated
                                        -----------------------    Additional                         Other
                                        Number of                   paid-in        Accumulated    comprehensive
                                          Shares      Par value     capital          deficit         income          Total
                                       -----------    ---------   ------------     ------------   -------------   ------------
<S>                                    <C>            <C>         <C>              <C>            <C>             <C>
Balance, December 31, 1997              11,546,242     $11,546    $ 45,976,291     $(29,941,875)    $(455,038)    $ 15,590,924
                                       -----------     -------    ------------     ------------     ---------     ------------
Net loss for the year                           --          --              --      (16,935,972)           --      (16,935,972)
                                       -----------     -------    ------------     ------------     ---------     ------------
   Other comprehensive income
      Foreign currency translation
        adjustment                              --          --              --               --       114,191          114,191
                                       -----------     -------    ------------     ------------     ---------     ------------
       Comprehensive income                     --          --              --      (16,935,972)      114,191      (16,821,781)
                                       -----------     -------    ------------     ------------     ---------     ------------
Issuance of common shares
  for products and services                237,500         238         516,606               --            --          516,844
Issuance of common shares
  for conversion of
  convertible debentures                   445,956         446         702,097               --            --          702,543
Issuance of common shares
 for employee stock                         20,446          20          59,019               --            --           59,039
 purchase plan
Exercise of stock options                   50,000          50         124,969               --            --          125,019
Issuance of stock warrants                      --          --         830,057               --            --          830,057
                                       -----------     -------    ------------     ------------     ---------     ------------

Balance, December 31, 1998              12,300,144      12,300      48,209,039      (46,877,847)     (340,847)       1,002,645
                                       -----------     -------    ------------     ------------     ---------     ------------

Net loss for the year                           --          --              --       (2,839,594)           --       (2,839,594)
   Other comprehensive income
     Foreign currency translation
       adjustment and other                     --          --         (21,932)              --       340,847          318,915
                                       -----------     -------    ------------     ------------     ---------     ------------

       Comprehensive income                     --          --         (21,932)      (2,839,594)      340,847       (2,520,679)
                                       -----------     -------    ------------     ------------     ---------     ------------

Issuance of stock warrants                      --          --         320,967               --            --          320,967
                                       -----------     -------    ------------     ------------     ---------     ------------

Balance, December 31, 1999              12,300,144      12,300      48,508,074      (49,717,441)           --       (1,197,067)
                                       -----------     -------    ------------     ------------     ---------     ------------

Net loss for the year                                                                (1,530,599)           --       (1,530,599)
   Other comprehensive income
     Unrealized gain on investments             --          --              --               --       114,684          114,684
                                       -----------     -------    ------------     ------------     ---------     ------------
       Comprehensive income                     --          --              --       (1,530,599)      114,684       (1,415,915)
                                       -----------     -------    ------------     ------------     ---------     ------------

Issuance of common shares in
  private placement                      1,351,625       1,352       4,053,524               --            --        4,054,876
Issuance of common shares
 in conversion of
 minority interest                         524,126         524       1,572,009                                       1,572,533
Issuance of common shares for
 investment in
ACIS(Note A-9)                             500,000         500       2,154,500               --            --        2,155,000
Exercise of stock warrants                 151,898         152          78,944               --            --           79,096
Exercise of stock options                  118,480         118          93,790               --            --           93,908
Issuance of common shares
 for conversion of
 convertible debentures                    216,945         217         144,529               --            --          144,746
                                       -----------     -------    ------------     ------------     ---------     ------------

Balance, December 31, 2000              15,163,218     $15,163    $ 56,605,370     $(51,248,040)    $ 114,684     $  5,487,177
                                       ===========     =======    ============     ============     =========     ============
</TABLE>



The accompanying notes are an integral part of these statements.


                                       27
<PAGE>   28




                     VSI Enterprises, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                      ----------------------------------------------------
                                                                          2000                1999                 1998
                                                                      -----------         -----------         ------------
<S>                                                                   <C>                 <C>                 <C>
Cash flows from operating activities:
   Net loss                                                           $(1,530,599)        $(2,839,594)        $(16,935,972)
   Adjustments to reconcile net loss to net
     cash used in operating activities:
       Loss on sale of investments                                             --                  --              452,005
       (Gain) loss on sale of subsidiary                                 (813,829)            167,539                   --
       Depreciation and amortization                                      327,381             715,290            1,737,341
       Allowance to reduce inventory to
         lower of cost or market                                               --                  --            1,694,360
       Changes in operating assets and liabilities:
         Accounts receivable                                              856,051           1,985,675              229,973
         Inventories                                                      369,296             204,159              328,906
         Prepaid expenses and other assets                                     --              96,407               61,759
         Accounts payable                                                (488,278)         (1,230,288)            (727,692)
         Accrued expenses                                                (748,493)            130,597              969,611
         Deferred revenue                                                (297,605)           (353,104)           1,077,170
       Effect of operating activities of
         discontinued operations                                           21,340             448,238            8,583,905
                                                                      -----------         -----------         ------------
           Net cash used by operating
              activities                                               (2,304,736)           (675,081)          (2,528,634)

Cash flows from investing activities:
   Purchases of property and equipment, continuing
   operations                                                            (116,141)            (26,161)             (13,163)
   Proceeds from sale of minority interest in subsidiary                       --           1,040,000                   --
   Change in other assets, continuing operations                         (530,399)           (183,434)              17,878
   Proceeds from sale of investments                                           --                  --              492,776
   Proceeds from sale of subsidiary                                     1,287,835                  --                   --
   Effect of investing activities of
     discontinued operations                                               (1,572)           (132,622)            (368,609)
                                                                      -----------         -----------         ------------

           Net cash provided by
              investing activities                                        639,723             697,783              128,882
                                                                      -----------         -----------         ------------

Cash flows from financing activities:
   Net borrowings (payments) on notes
     payable and short term credit facilities                            (861,160)           (317,054)           2,384,237
   Proceeds from exercise of stock options, warrants
     and stock purchase plan                                              173,004                  --              184,058
   Proceeds from private placement, net of  issuance costs              4,054,876
   Payment for minority interest                                         (759,845)                 --                   --
                                                                      -----------         -----------         ------------
           Net cash provided (used) by financing
              activities                                                2,606,875            (317,054)           2,568,295
                                                                      -----------         -----------         ------------
Effect of exchange rate changes on cash
   and cash equivalents                                                        --              21,581              114,190
                                                                      -----------         -----------         ------------
Increase (decrease) in cash and cash equivalents                          941,862            (272,771)             282,733
Cash of subsidiary sold                                                        --             (40,284)                  --
Change in cash and cash equivalents included
   in net current assets of discontinued
   operations                                                              38,860              12,163              494,550

Cash and cash equivalents at beginning
   of the period                                                          798,826           1,099,718              322,435
                                                                      -----------         -----------         ------------

Cash and cash equivalents at end of the period                        $ 1,779,548         $   798,826         $  1,099,718
                                                                      ===========         ===========         ============
Supplementary disclosure:
   Interest paid                                                      $   115,831         $   459,453         $    427,737
                                                                      ===========         ===========         ============
   Income taxes paid                                                  $        --         $        --         $         --
                                                                      ===========         ===========         ============

Supplemental schedule of non cash
  investing and financing activities:
Non cash investing and financing activities:
   Conversion of debt to common stock                                 $   144,746         $        --         $    702,543
                                                                      ===========         ===========         ============
   Conversion of debt to subsidiary's stock                           $ 1,213,000         $        --         $         --
                                                                      ===========         ===========         ============
   Common stock issued for products and
     services                                                         $        --         $        --              516,844
                                                                      ===========         ===========         ============
   Issuance of stock warrants                                         $        --         $   320,967         $         --
                                                                      ===========         ===========         ============
   Issuance of common stock for investment in ACIS                    $ 2,155,000         $        --         $         --
                                                                      ===========         ===========         ============
   Issuance of common stock in conversion of Minority Interest        $ 1,572,533         $        --         $         --
                                                                      ===========         ===========         ============
   Notes payable for capital lease                                    $    66,738         $        --         $         --
                                                                      ===========         ===========         ============
</TABLE>


The accompanying notes are an integral part of these statements.


                                       28
<PAGE>   29


                     VSI Enterprises, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2000 and 1999

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         VSI Enterprises, Inc. was incorporated in Delaware in September 1988
and, together with its majority and wholly-owned subsidiaries (the "Company"),
develops, manufactures, markets and supports software based audio/visual control
systems and videoconferencing products that operate on PC platforms.

    1.   Accounting Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures 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 could differ from those estimates.

    2.   Principles of Consolidation

         The consolidated financial statements include the accounts of the
Company and its wholly-owned and majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.

    3.   Cash and Cash Equivalents

         For financial reporting purposes, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.

    4.   Inventories

         Inventories consist of videoconferencing system components and parts
and are valued at the lower of cost (first-in, first-out method) or market.

    5.   Property and Equipment

         Property and equipment are stated at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated useful lives on a straight-line basis.

    6.   Goodwill

         The excess acquisition cost over the fair value of net assets of
acquired businesses are amortized over 10 years on a straight-line basis. At
December 31, 1998, as a result of continued losses incurred by the Company's
network reselling subsidiary, Eastern Telecom, Inc. ("ETI"), an impairment loss
of $6,995,211 was incurred related to the write-down of the majority of the
original goodwill recorded with the Company's acquisition of ETI in 1996, in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and For Long-Lived Assets to be Disposed of" ("SFAS 121"). As the Company sold
ETI on May 18, 2000, this impairment loss was reclassified to discontinued
operations in the statement of operations for the year ended December 31, 1998
and the remaining unamortized goodwill amount of $860,120 at December 31, 1999
was included in the consolidated balance sheet in the caption "other assets of
discontinued operations." Also in 1998, an additional impairment loss of
$577,077 was recorded to eliminate all remaining goodwill related to the
Company's European subsidiary. Management recorded the impairment loss in light
of the Company's European subsidiary's continuing operating losses and
expectations of future losses. This European subsidiary was sold on September
30, 1999 for $2.00 (Note B). The sale resulted in a loss of $167,539, primarily
as a result of writing off $319,266 of cumulative foreign currency translation
adjustments. Goodwill amortization in the amount of $23,892, $95,569 and
$492,739 for the years ended December


                                       29
<PAGE>   30
   31, 2000, 1999 and 1998, respectively is included in the "operating loss from
   discontinued operations" caption in the consolidated statement of operations
   for each year presented.

   7.   Software Development Costs

        All software development costs are charged to expense as incurred until
   technological feasibility has been established for the product. Software
   development costs incurred after technological feasibility has been
   established are capitalized and amortized, commencing with product release,
   on a straight-line basis over three years or the useful life of the product,
   whichever is shorter. Accumulated amortization of software development costs
   was $1,375,198 and $1,349,502 at December 31, 2000 and 1999, respectively.
   Amortization expense charged to operations was $25,696, $49,653 and $582,703
   for the years ended December 31, 2000, 1999 and 1998, respectively. The
   Company capitalized $530,399, $179,599 and $0 of software development costs
   in 2000, 1999 and 1998, respectively.

   8.   Investments

          Investments consist of investments in equity securities and a 5% cost
   investment in another entity. The investment in equity securities is
   accounted for as available-for-sale and is stated at fair market value with
   unrealized gains and losses on this investment included in the shareholders'
   equity section of the balance sheet. The equity securities consist of 57,122
   shares of PentaStar Communications, Inc. common stock, received in
   conjunction with the Company's sale of ETI. (see note B). These shares have a
   fair value of $1,256,684 at December 31, 2000.

          On March 3, 2000, the Company issued 500,000 shares of its common
   stock in exchange for 250,000 shares of ACIS, Inc. ("ACIS"), representing
   approximately 5% of ACIS' common stock. ACIS is a Texas based, software
   technology Company, majority owned by the Company's Chief Technology Officer.
   ACIS is involved in the development of an advanced operating kernel to
   support the Company's new product architecture for PC-based device control.
   In further consideration of the Company's development contribution, ACIS has
   granted the Company a warrant to acquire up to 20% of ACIS' common stock at
   an exercise price of $2.00 per share. This option is exercisable by the
   Company any time through March, 2002. This investment in ACIS was recorded at
   cost of $2,302,000 and will be carried at cost until such time as the Company
   exercises its warrant to purchase an additional 15% of the shares of ACIS.

          During 1998, the Company sold its cost investments in Global Telemedix
   and Educational Video Conferencing ("EVC") resulting in a loss of $452,005.
   Global Telemedix provides computer hardware and software to healthcare
   providers and EVC acts as a marketing and technological bridge between higher
   education institutions and corporations. There were no receivables
   outstanding from investees at December 31, 2000 and 1999. In addition, sales
   to investees were $116,000 for the year ended December 31, 1998. There were
   no sales to investees in 1999 and 2000.

   9.   Accounting for Impairment of Long-Lived Assets

          Statement of Financial Accounting Standards ("SFAS") No. 121,
   Accounting For The Impairment Of Long-Lived Assets and For Long-Lived Assets
   To Be Disposed Of, requires impairment losses to be recognized for long-lived
   assets used in operations when indicators of impairment are present and the
   undiscounted cash flows are not sufficient to recover the assets' carrying
   amount. The impairment loss is measured by comparing the fair value of the
   asset to its carrying amount. At December 31, 1998, the Company recorded a
   charge against continuing operations of $577,077 related to the writedown of
   goodwill previously recorded upon the Company's acquisition of its European
   subsidiary, and a charge against discontinued operations of $6,995,215
   related to the writedown of goodwill previously recorded upon the Company's
   acquisition of its telephone network reselling subsidiary (Note A-6). Also in
   1998, the Company recorded an additional impairment charge of $195,156
   related to the writedown of its European subsidiary's net asset value to zero
   based on the European subsidiary's continuing losses. Management believes
   that remaining long-lived assets in the accompanying consolidated balance
   sheets at December 31, 2000 are appropriately valued.



                                       30
<PAGE>   31
    10.  Comprehensive Income

         Comprehensive income includes the changes in equity resulting from
transactions with non-owners for the periods reported. For the period ended
December 31, 2000, the unrealized gain on investments was the only component of
comprehensive income. For the period ended December 31, 1999 and 1998 the
components of comprehensive income included translation adjustments of the
Company's foreign subsidiaries, in which the asset and liability accounts of the
Company's foreign subsidiaries were translated into U.S. dollars at the current
exchange rate in effect at the balance sheet date. Stockholders' equity was
translated at historical rates. Income statement items were translated at
average currency exchange rates.


    11.  Revenue Recognition

         Revenue from sales of videoconferencing systems and related maintenance
contracts on these systems are included in videoconferencing systems revenues.
Revenue on system sales are recognized upon shipment. Revenues from installation
of these systems are billed separately and recognized upon completion of the
installation. Revenue on maintenance contracts are recognized over the term of
the related contract.

    12.  Income Taxes

         The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates applied to taxable income. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for
deferred tax assets when it is more likely than not that the asset will not be
realized.

    13.  Stock Based Compensation

         The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Effective in 1995, the Company adopted the disclosure option of
Statement of Financial Accounting Standards ("SFAS") No. 123," Accounting for
Stock-Based Compensation." SFAS No. 123 required that companies that do not
choose to account for stock-based compensation as prescribed by the statement,
shall disclose the pro forma effects on earnings and earnings per share as if
SFAS No. 123 had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS No. 123 (see Note H).

         The Company accounts for common stock issued for goods or services
under SFAS No. 123 whereby the transaction is measured at the fair value of the
common stock issued. No shares were issued for goods or services in the years
ended December 31, 2000 and 1999 while 237,500 common shares were issued for
goods or services in the year ended December 31, 1998.

    14.  Net Loss Per Common Share

         Basic net earnings (loss) per share is computed by dividing net
earnings (loss) available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted net earnings (loss) per
share gives effect to all potentially dilutive securities. There is no
difference between basic loss per share and diluted loss per share for any
period presented.

         During 1998, the shareholders approved a one-for-four reverse common
stock split, effective January 15, 1999 to shareholders of record on January 14,
1999. All references to shares of common stock, stock options and per share
amounts have been restated to reflect this reverse common stock split.

    15.  Fair Value of Financial Instruments

         Management believes that the carrying amounts of certain financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate their fair values as of each balance
sheet date given the relatively short maturity of each of these instruments. The
fair value of the


                                       31
<PAGE>   32

Company's notes payable approximate fair value based on borrowing rates
currently available to the Company for borrowings with comparable terms and
conditions.

    16.  Technological Change and New Products

         The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent product
introductions. Product introductions are generally characterized by increased
functionality and better videoconferencing picture quality at reduced prices.
The introduction of products embodying new technology may render existing
products obsolete and unmarketable. The Company's ability to successfully
develop and introduce on a timely basis new and enhanced products that embody
new technology, and achieve levels of functionality at a price acceptable to the
market, will be a significant factor in the Company's ability to grow and to
remain competitive. If the Company is unable, for technological or other
reasons, to develop competitive products in a timely manner in response to
changes in the industry, the Company's business and operating results will be
materially and adversely affected.

         Management periodically evaluates the realizability of its
technology-related assets, including inventories, software development costs and
goodwill. During the year ended December 31, 1998, the Company recorded
approximately $1,651,000 of additional cost of videoconferencing systems related
to the write-down of certain inventories determined to be technologically
obsolete. No write-down of these inventories was recorded in 1999 and
approximately $209,000 was recorded in 2000. Management believes that no
material impairment of remaining inventories and other assets existed at
December 31, 2000. It is possible, however, that management's estimates may
change in the near term due to technological, regulatory, and other changes in
the Company's industry.

    17.  Dependence on Third Parties

         Substantially all of the Company's components, subsystems and
assemblies are made by outside vendors. Disruption in supply, a significant
increase in the price of one or more of these components, or failure of a third
party supplier to remain competitive in functionality or price could have a
material adverse effect on the Company's business and operating results. There
can be no assurance that the Company will not experience such problems in the
future. Similarly, excessive rework costs associated with defective components
or process errors associated with the Company's anticipated new PC-based control
systems product could adversely affect the Company's business and operating
results.

    18.  Reclassifications

         Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the current year presentation.

NOTE B - DISCONTINUED OPERATIONS AND SALE OF SUBSIDIARIES

         On February 18, 2000, the Company and its network reselling subsidiary,
VSI Network Solutions Inc., doing business as Eastern Telecom ("ETI"), entered
into a definitive agreement to sell substantially all of the assets of ETI to
PentaStar Communications, Inc., a Denver, Colorado based communications services
agent. The definitive agreement was subject to, among other things, stockholder
approval, which occurred at the Annual Meeting held on May 18, 2000. The Company
received initial consideration of approximately $1.8 million in cash, $500,000
of which is held in escrow until specified accounts receivable have been
collected. In addition, the Company received 57,122 shares of PentaStar
Communications, Inc. common stock, with a market value of $1,142,000. The sale
of ETI resulted in a gain of $813,829. As a result of the decision to
discontinue the Company's network reselling business, operating results for ETI
have been reclassified and reported as discontinued operations in accordance
with Accounting Principles Board Opinion No. 30 for all periods presented.

During the fourth quarter of 1998, the Company discontinued operations of its
system integration subsidiary, Integrated Network Services, Inc ("INS") and in
September 1999, INS filed for protection under Chapter 7 of the U.S. Bankruptcy
Code. Accordingly, operating results for this subsidiary has been reclassified
and reported as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30 for all periods presented. Summary operating results of the
discontinued network reselling and system integration operations are as follows:


                                       32
<PAGE>   33

<TABLE>
<CAPTION>
                                                        2000                 1999                 1998
                                                    -----------         ------------         ------------
<S>                                                 <C>                 <C>                  <C>
Revenue:
  Network reselling                                 $ 2,181,341         $  6,449,770         $  5,863,198
  System integration                                         --                   --            1,518,952
                                                    -----------         ------------         ------------
                                                      2,181,341            6,449,770            7,382,150
                                                    -----------         ------------         ------------
Costs and expenses:
  Network reselling                                   2,213,897            6,517,771           14,154,063
  System integration                                         --              251,624            2,282,657
                                                    -----------         ------------         ------------
                                                      2,213,897            6,769,395           16,436,720
                                                    -----------         ------------         ------------

  Income (loss) from discontinued operations        $   (32,556)        $   (319,625)        $ (9,054,570)
                                                    ===========         ============         ============

</TABLE>

         Assets and liabilities of the discontinued network reselling and system
integration operations are included in the consolidated balance sheets as assets
and liabilities of discontinued operations and are made up as follows:

<TABLE>
<CAPTION>
                                                   2000              1999
                                                 --------         -----------
<S>                                              <C>              <C>
Current assets of network reselling              $     --         $ 2,682,800
Current liabilities of network reselling               --          (2,122,297)
                                                 --------         -----------
Net current assets of network reselling                --             560,503

Current assets of system integration               14,545              14,545
Current liabilities of system integration         (98,895)            (98,895)
                                                 --------         -----------
Net current deficit of system integration         (84,350)            (84,350)

Property and equipment, net of network
reselling                                              --             577,676
Property and equipment, net of system
integration                                            --                  --
Other assets of network reselling                      --             908,303
Other assets of system integration                     --                  --
                                                 --------         -----------

  Total assets                                   $(84,350)        $ 1,962,132
                                                 ========         ===========
</TABLE>

         The Company recognized a gain on disposal of the system integration
operation at December 31, 1998 of approximately $345,000.

         On September 30, 1999 the Company sold its European subsidiary,
Videoconferencing Systems, n.v. ("VSINV") to certain members of VSINV's
executive management team for $2.00. As a condition of the sale, the Company was
released from all liabilities including certain guarantees under VSINV's bank
credit agreements and the Company received warrants to purchase up to 24.0% of
VSINV. The sale resulted in a loss of $167,539.


NOTE C - PROPERTY AND EQUIPMENT

         Property and equipment consist of the following as of December 31, 2000
and 1999:

<TABLE>
<CAPTION>
                                                                            Estimated
                                                                             Service
                                        2000                1999             Life
                                     -----------         ----------        ------------
<S>                                  <C>                 <C>               <C>
Machinery and equipment              $ 1,667,099         $ 1,508,857         3-10 years
Furniture and fixtures                   238,179             238,179           10 years
Leasehold improvements                    84,805              60,463            5 years
                                     -----------         ----------
                                       1,990,083           1,807,499
Less accumulated depreciation         (1,737,382)         (1,640,927)
                                     -----------         -----------

                                     $   252,701         $   166,572
                                     -----------         -----------
</TABLE>


                                       33
<PAGE>   34


         Depreciation expense charged to continuing operations was approximately
$95,000, $158,000 and $297,000 for the years ended December 31, 2000, 1999 and
1998, respectively, and is included in selling, general and administrative
expense in the accompanying consolidated statements of operations.

NOTE D - NOTES PAYABLE AND SHORT-TERM BORROWINGS

       Notes Payable

<TABLE>
<CAPTION>
                                                                         2000        1999
                                                                         ----        ----
       <S>                                                               <C>       <C>


       VSI term notes payable, paid in full from proceeds of
       private placement during 2000                                          --    105,907

       ETI line of credit assumed by purchaser upon sale of ETI               --    757,746
                                                                         --------   -------
                                                                              --    863,653
       Current portion of notes payable                                       --    105,907
                                                                         --------   -------
                                                                              --    757,746
       Less notes payable included in net current assets
         of discontinued operations                                           --    757,746
                                                                         --------   -------

                                                                         $    --    $    --
                                                                         =======    =======
</TABLE>

         During September 1998, the Company began offering $3,000,000 of term
   notes. A minimum of $5,000 was required for each subscription and each
   purchaser of the term notes received warrants to purchase shares of common
   stock of the Company on the basis of one warrant for each $8.00 of term notes
   purchased. The warrants had a term of five years, expiring on October 1, 2003
   and were to become exercisable on April 1, 2000 at an exercise price of $1.68
   per share. At December 31, 1998, the Company had issued $1,333,000 of term
   notes and 166,625 warrants. The Company valued these warrants at $270,645
   using the Black-Scholes option-pricing model in accordance with SFAS No. 123,
   Accounting for Stock-Based Compensation. This warrant value was recorded as
   debt discount to be amortized to interest expense over the period until the
   warrants became exercisable on April 1, 2000.

         On August 31, 1999, $1,213,000 of these term notes, including accrued
   interest, were converted into 195,099 shares of the Company's network
   reselling subsidiary, ETI, common stock, representing a 19.5% minority
   interest in ETI. ETI's minority shareholders had a put option, which gave
   them the right to put their ETI shares back to the Company at the price
   converted, at the earlier of the sale of ETI or August 31, 2000, and the
   Company had a call option to reacquire the shares of ETI at any time. Also,
   151,625 of the original warrants were cancelled and the remaining unamortized
   debt discount related to these warrants of $96,548 was charged to interest
   expense in 1999. Total interest expense related to these warrants was
   $223,252 and $43,300 for the years ended December 31, 1999 and 1998,
   respectively. Converting term note holders were issued 318,492 warrants to
   purchase shares of common stock of the Company at $0.50 per share and 136,497
   warrants to purchase shares of common stock of the Company at $1.00 per
   share. These warrants have a term of five years, expiring on August 31, 2004
   and were exercisable immediately. The Company valued these warrants at
   $97,367 using the Black-Scholes option-pricing model in accordance with SFAS
   No. 123, Accounting for Stock-Based Compensation utilizing the following
   assumptions: expected volatility of 117%, risk free interest rate of 6.09%,
   and an expected term of five years. The value of these warrants was to be
   amortized to interest expense over the period to the first date on which the
   shares of ETI are eligible to be put back to the Company, which was August
   31, 2000. Interest expense related to these warrants was $64,911 and $32,456
   for the years ended December 31, 2000 and 1999, respectively. 100,709 of
   these warrants were exercised during 2000.


                                       34
<PAGE>   35

NOTE E - CONVERTIBLE DEBENTURES

         On February 23, 1998, the Company issued $3,000,000 of 5% convertible
   Debentures due February 2000 (the "Debentures"), the proceeds of which were
   utilized for working capital purposes. In addition, the Company issued 9,375
   common stock purchase warrants to the holder of the Debentures and 9,375
   common stock purchase warrants to an agent involved in the transaction. The
   warrants expire on February 23, 2003. Each warrant entitles the holder to
   purchase one common stock share of the Company at the price of $10.00. The
   Debentures were convertible at the lower of (i) $8.00 per share or (ii) 85%
   of the average closing bid price of the Company's common stock. During 1998,
   $710,000 of Debentures plus accrued interest of $13,531 were converted into
   445,956 common shares; $1,440,000 of the Debentures were redeemed by the
   Company at face value and the remaining Debentures were converted into a
   $900,000 term note.

         On November 16, 1998, the Company issued an additional 25,000 stock
   purchase warrants to the holder of the Debentures to enable the Company to
   purchase the $1,440,000 outstanding Debentures at face value. The warrants,
   which expire on November 16, 2003, entitle the holder to shares of the common
   stock of the Company at a price of $2.40 per share. At this time, the Company
   also repriced the 9,375 warrants issued to the Debenture holder on February
   23, 1998 to a price of $2.40 per share. The impact of this repricing was less
   than $10,000 and due to its insignificance, was not expensed by the Company.

         In conjunction with the issuance of the 18,750 common stock warrants to
   the Debenture holder and agent, $529,412 of the debt issuance proceeds
   relating to the issuance of the Debentures was allocated to additional paid
   in capital in the accompanying consolidated balance sheet, to recognize the
   beneficial conversion feature of the Debentures. This debt discount was
   amortized to interest expense upon conversion and redemption of the
   Debentures and is included in other expenses in the consolidated statements
   of operations for the year ended December 31, 1998. In conjunction with the
   issuance of the additional 25,000 purchase warrants, the Company valued the
   warrants at $30,000 using the Black-Scholes option pricing model in
   accordance with SFAS No. 123, Accounting for Stock-Based Compensation. This
   warrant value was recorded as interest expense upon issuance of the warrants.

         Effective August 31, 1999, the Company restructured its note payable,
   which consisted of principal and accrued interest totaling $1,089,750. The
   Company paid $150,000 at closing, and the remaining balance of $939,750 was
   exchanged for a 7% Secured Convertible Debenture, due and payable on August
   31, 2000. In January and February, 2000, the convertible debenture holder
   converted $144,747 of principal and interest into 216,945 shares of the
   Company's common stock. The remaining balance of the convertible debenture
   was paid by the Company on March 1, 2000 using the proceeds from the private
   placement.


NOTE F - REDEEMABLE MINORITY INTEREST

         On August 31, 1999, the Company received $1,040,000 in proceeds from
   the sale of 16.0% of its ownership interest in its subsidiary, ETI. These
   minority shareholders had a put option, which gave them the right to put
   their ETI shares back to the Company at the price paid at the earlier of the
   sale of ETI or August 31, 2000. In conjunction with this transaction, the
   Company issued minority shareholders 780,000 warrants to purchase shares of
   common stock of the company at $0.50 per share and 260,000 warrants to
   purchase shares of common stock of the Company at $1.00 per share. These
   warrants have a term of five years, expiring on August 31, 2004 and were
   exercisable immediately. The Company valued these warrants at $223,600 using
   the Black-Scholes option-pricing model in accordance with SFAS No. 123,
   Accounting for Stock-Based Compensation utilizing the following assumptions:
   expected volatility of 117%, risk free interest rate of 6.09%, and an
   expected term of five years. The value of these warrants was to be amortized
   to interest expense over the period to the first date on which the shares of
   ETI were eligible to be put back to the Company, which was August 31, 2000.
   Interest expense related to these warrants was $149,067 and $74,533 for the
   years ended December 31, 2000 and 1999, respectively.

         As a result of this transaction and the conversion of the term notes
   into shares of ETI as discussed in Note E, at December 31, 1999 the Company
   held a 64.5% majority ownership in ETI. On February 24, 2000, the Company
   exchanged 524,126 of its common shares for 240,265 shares of ETI held by the
   minority shareholders.


                                       35
<PAGE>   36

   The remaining minority interest shares were repurchased pursuant to the terms
   of the shareholders agreement at the time of the sale of ETI, which amounted
   to $709,722.


NOTE G -  PRIVATE PLACEMENT

         On February 24, 2000, the Company issued a private placement memorandum
   for the sale of up to 1,500,000 shares of the Company's stock at $3.00 per
   share. The Company received proceeds of $4,054,876 from the sale of 1,351,625
   shares of common stock at $3.00 per share. Approximately $826,668 of these
   proceeds were used to repay the remaining balance of the 7% Secured
   Convertible Debenture held by Thompson Kernaghan & Co. Ltd. ("Kernaghan").

NOTE H - STOCK OPTIONS, WARRANTS, AND EMPLOYEE STOCK PURCHASE PLAN

    Stock Option Plan and Warrants

         The Company's board of directors has approved a stock option plan which
covers up to 3,662,057 shares of common stock. The plan provides for the
expiration of options ten years from the date of grant and requires the exercise
price of the options granted to be at least equal to 100% of market value on the
date granted. Stock option transactions are summarized below:

<TABLE>
<CAPTION>
                                         2000                     1999                     1998
                                  -----------------------------------------------------------------------
                                              Weighted                 Weighted                  Weighted
                                              Average                   Average                  Average
                                              Exercise                 Exercise                  Exercise
                                    Shares     Price        Shares       Price        Shares      Price
                                  ---------   --------     --------    ----------    --------     -------
<S>                               <C>         <C>          <C>        <C>            <C>         <C>

 Outstanding, beginning of year     530,695   $   3.01      593,322    $     5.46     475,867     $  6.88
   Granted                          754,500       2.59      173,697          0.40     196,250        1.75
   Exercised                      (118,480)       0.79           --            --    (50,000)        2.50
   Forfeited                      (194,517)                (236,324)         7.25    (28,795)        7.82
                                  ---------   --------     --------    ----------    --------     -------
   Outstanding, end of year         972,198   $   2.75      530,695    $     3.01     593,322     $  5.46
                                  =========   ========     ========    ==========    ========     =======
</TABLE>


    The following table summarizes information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
                               Options Outstanding                      Options Exercisable
                 ----------------------------------------------         -------------------
                                      Weighted
                                      Average         Weighted                           Weighted
   Range of          Number          Remaining        Average           Number           Average
   Exercise      Outstanding at     Contractual       Exercise      Exercisable at       Exercise
     Price         31-Dec-00         Life (Years)       Price          31-Dec-00           Price
 --------------- --------------    --------------     ---------     --------------       --------
<S>              <C>               <C>               <C>            <C>                 <C>
 $ 0.34 - $ 1.00      295,029          8.60           $ 0.54            191,022          $ 0.53
 $ 1.12 - $ 1.94      155,000          9.30             1.89            142,450            1.89
 $ 2.50 - $ 4.25      416,501          9.46             3.78             20,001            3.11
 $ 4.60 - $ 5.50       88,668          5.88             5.03             88,668            5.03
 $ 6.94 - $ 9.88        7,500          3.37             9.51              7,500            9.51
 $11.00 - $14.75        7,250          5.40            12.42              7,250           12.42
          $17.25        2,250          4.78            17.25              2,250           17.25
                      -------          ----           ------            -------          ------
                      972,198          8.76           $ 2.75            459,141          $ 2.35
                      =======          ====           ======            =======          ======
</TABLE>


         In connection with the purchase of the outstanding notes payable and
establishment of a line of credit during 1994, 62,500 common stock purchase
warrants were granted to a director at an exercise price of $1.60 per share.
These warrants expire in July 2004.


                                       36
<PAGE>   37

         On May 1, 1999, 325,000 purchase stock warrants were granted to
officers of the Company at an exercise price of $0.53 per share. These warrants
expire May 1, 2004 and vest through May 1, 2000. 45,000 of these warrants were
exercised during 2000. Additionally, on August 17, 1999, 25,000 purchase stock
warrants were granted to an officer of the Company at an exercise price of $0.43
per share. These warrants vested on January 1, 2000 and expire on August 17,
2004.

         In connection with the purchase of the outstanding notes payable and
establishment of a line of credit during 1994, 62,500 common stock purchase
warrants were granted to a director at an exercise price of $1.60 per share.
6,250 of these warrants were exercised during 2000. These warrants expire in
July 2004.

         The Company uses the intrinsic value method in accounting for its stock
option plans and warrants granted to employees. In applying this method, no
compensation cost has been recognized. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant dates
for awards under those plans, the Company's net loss and loss per share would
have resulted in the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                           2000              1999                1998
                                       -----------       ------------        -------------
     <S>                               <C>               <C>                 <C>
     Net loss:
       As reported                     $(1,530,599)      $ (2,839,594)       $(16,935,972)
       Pro forma                        (2,217,893)        (3,148,115)        (17,248,878)

     Net loss per common share:
       As reported                     $     (0.11)      $      (0.23)       $      (1.42)
       Pro forma                             (0.15)             (0.26)              (1.45)
</TABLE>


         For purposes of the pro forma amounts above, the fair value of each
option grant was estimated on the date of grants using the Black-Scholes options
pricing model with the following weighted average assumptions used for grants in
2000, 1999 and 1998, respectively; expected volatility of 125%, 117% and 87%,
risk-free interest rates of 5.5%-5.88%, 4.75%-5.88% and 5.0%-6.1% and expected
lives of 3-7 years for all periods presented.

    Employee Stock Purchase Plan

         The Company has an employee stock purchase plan ("Plan") that provides
for the sale of up to 75,000 shares of common stock to eligible employees. The
purchase price for shares of common stock purchased pursuant to the Plan is the
lesser of: 85% of the fair market value of common stock on the first pay date or
85% of the fair market value of common stock on the last pay date of each plan
period. The Plan was suspended by the Board of Directors in September 1998. The
Company has no current plans to reinstate the Plan. During the year ended
December 31, 1998, 20,446 shares of common stock were purchased by employees
under this Plan.

NOTE I - INCOME TAXES

         The Company's temporary differences result in a net deferred income tax
asset which is reduced to zero by a related deferred tax valuation allowance,
summarized as follows at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                           2000                 1999
                                                     ------------         ------------
<S>                                                  <C>                  <C>
Deferred income tax assets:
  Operating loss carryforwards                       $ 13,907,000         $ 12,927,000
  Nondeductible accruals and allowances                   337,000              636,000
  Capitalized inventory costs                              53,000               94,000
  Tax credit carryforwards                                156,000               89,000
  Other                                                     1,000               52,000
                                                     ------------         ------------
Gross deferred income tax assets                       14,454,000           13,798,000
Deferred income tax asset valuation allowance         (14,412,000)         (13,742,000)
                                                     ------------         ------------
    Net deferred income tax asset                    $     42,000         $     56,000
                                                     ============         ============

Deferred income tax liabilities                      $    (42,000)        $    (56,000)
                                                     ============         ============

Net deferred income tax                              $         --         $         --
                                                     ============         ============
</TABLE>


                                       37
<PAGE>   38

         At December 31, 2000, the Company had net operating loss carryforwards
for U.S. income tax purposes of approximately $36,014,000 available to reduce
future taxable income and approximately $152,000 of investment and research and
experimental credits available to reduce future income taxes payable, which
expire in varying amounts through the year 2020.

         The Company experienced a change in control, as defined under Section
382 of the Internal Revenue Code during calendar year 1993. As a result,
approximately $7,000,000 of the available tax loss carryforwards will be limited
to a maximum utilization of approximately $1,000,000 annually.

NOTE J- MAJOR CUSTOMERS

         Revenue from four customers comprised approximately 58% of consolidated
revenues for the year ended December 31, 2000. At December 31, 2000, related
accounts receivable from these companies comprised 30% of consolidated
receivables.

         Revenue from three customers comprised approximately 50% of
consolidated revenues for the year ended December 31, 1999. At December 31,
1999, related accounts receivable from these companies comprised 30% of
consolidated receivables.

         Revenue from three customers comprised approximately 37% of
consolidated revenues for the year ended December 31, 1998.

         Management believes that concentration of credit risk with respect to
trade receivables is minimal due to the composition of the customer base. The
Company's customers are primarily large national and multinational companies and
agencies of the U.S. government. Allowances are maintained for potential credit
losses, and such losses have been within management's expectations.

NOTE K - OPERATING SEGMENTS AND RELATED INFORMATION

         In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement requires the
disclosure of certain information regarding the Company's operating segments.

         Prior to 1998, the Company's three industry segments were made up of
video conferencing, computer system integration and telephone network reselling.
These industry segments were all operating in separate, one hundred percent
owned, subsidiaries. In 1998, the Company discontinued operations of its
computer system integration subsidiary. On May 18, 2000, the Company sold all of
the assets of its network reselling subsidiary. These segments are included in
discontinued operations in the accompanying consolidated balance sheets and
statements of operations. As a result, at December 31, 2000, the Company is
operating only in the video conferencing segment.

         The Company also had operations in the United States and Europe until
the sale of the European subsidiary on September 30, 1999. The majority of the
European revenue, operating loss, capital expenditures and identifiable assets
detailed below originated in Belgium. Summary information related to the United
States and European operations are as follows:

<TABLE>
<CAPTION>
                                          For the years ended December 31,
                               ---------------------------------------------------------
                                   2000                   1999                   1998
                               -----------           ------------           ------------
<S>                            <C>                   <C>                    <C>
Revenue:
  United States                $ 4,041,204           $  6,467,958           $ 10,652,157
  Europe                                __                664,290              2,922,056
                               -----------           ------------           ------------
                               $ 4,041,204           $  7,132,248           $ 13,574,213
                               ===========           ============           ============

Operating loss:
  United States                $(2,245,566)          $ (1,374,860)          $ (5,736,760)
  Europe                                --           $    (93,326)          $   (429,634)
                               -----------           ------------           ------------
                               $(2,245,566)          $ (1,468,186)          $ (6,166,394)

Capital expenditures:
  United States                $   201,978           $     19,363           $      4,833
  Europe                                --                  6,798                  8,330
                               -----------           ------------           ------------
                               $   201,978           $     26,161           $     13,163
                               ===========           ============           ============
</TABLE>


                                       38
<PAGE>   39

<TABLE>
<CAPTION>
                                         December 31,
                              ------------------------------
                                  2000                1999
                              ----------          ----------
<S>                           <C>                 <C>
Identifiable assets:
  United States               $7,234,290          $4,910,533
  Europe                              --                  --
                              ----------          ----------
                              $7,234,290          $4,910,533
                              ==========          ==========
</TABLE>


NOTE L - COMMITMENTS AND CONTINGENCIES

    Operating Leases

         The Company leases office space and equipment under noncancelable
operating leases expiring at various dates through 2002. Rent expense for the
years ended December 31, 2000, 1999 and 1998 was approximately $292,000,
$388,000 and $660,000, respectively. Approximate minimum annual future rental
payments under the leases are as follows at December 31:

<TABLE>
<CAPTION>
                                   Year ending:

                                   <S>                       <C>
                                   2001...............        $280,000
                                   2002...............         240,000
                                                              --------
                                                              $520,000
                                                              ========
</TABLE>


    Litigation

         In November 2000 the company was named as a defendant in a lawsuit
filed by the bankruptcy trustee of VSI Network Services, Inc., a subsidiary of
the Company that filed for Chapter 7 bankruptcy in 1999. This lawsuit, filed in
the Northern District of Georgia, Atlanta Division was for an accounting and to
seek recovery of alleged preferential transfers of funds. The lawsuit is seeking
to recover approximately $740,000 in alleged preference payments from the
Company. Management believes this case is without merit and intends to
vigorously oppose the litigation, however, given the early stage of the
proceedings, the ultimate outcome of the lawsuit cannot be determined at this
time. Accordingly, no provision for any liability that might result from this
litigation has been made.

         The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.



                                       39
<PAGE>   40





NOTE  M - QUARTERLY FINANCIAL DATA (UNAUDITED)

         The following summarizes certain quarterly results of operations (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                  Quarters ended
                                                   --------------------------------------------
                                                    March 31     June 30    Sept 30      Dec 31
                                                    --------     -------   --------      ------
                 <S>                                <C>          <C>       <C>          <C>
                 Year ended December 31, 2000
                 Net revenue                         $1,654        $1,022    $  908     $   457
                 Loss from operations                  (225)         (445)     (398)       (984)
                 Net income(loss)                      (464)          379      (396)     (1,050)
                 Net earnings per common share
                       Basic                         $(0.04)       $ 0.03    $(0.03)     $(0.07)
                       Diluted                       $(0.04)       $ 0.02    $(0.03)     $(0.07)
</TABLE>

<TABLE>
<CAPTION>
                                                                   Quarters ended
                                                   -----------------------------------------------
                                                    March 31     June 30        Sept 30    Dec 31
                                                    --------     -------       --------    ------
                 <S>                                <C>          <C>           <C>        <C>
                 Year ended December 31, 1999
                 Net revenue                        $ 1,705       $ 1,397       $ 2,051    $ 1,979
                 Loss from operations                  (584)         (686)         (127)       (71)
                 Net income(loss)                    (1,236)         (676)         (600)      (328)
                 Net earnings per common share
                       Basic                        $ (0.10)      $ (0.05)      $ (0.05)   $ (0.03)
                       Diluted                      $ (0.10)      $ (0.05)      $ (0.05)   $ (0.03)
</TABLE>


NOTE N - SUBSEQUENT EVENTS

         On March 28, 2001, the Company acquired Quality Software Associates,
Inc. (QSA), a custom programmer of audio/visual control systems. This merger was
accounted for using the purchase method of accounting. The purchase included the
transfer of 45,454 shares of VSI common stock valued at $59,544 for the
outstanding shares of QSA.



                                       40
<PAGE>   41


               Report of Independent Certified Public Accountants
                                 on Schedule II

Board of Directors
VSI Enterprises, Inc.

         In connection with our audit of the consolidated financial statements
of VSI Enterprises, Inc. and Subsidiaries referred to in our report dated March
2, 2001 (except for Note N which date is March 28, 2001), which is included in
the annual report to security holders and incorporated by reference in Part II
of this form, we have also audited Schedule II for the years ended December 31,
2000, 1999 and 1998. In our opinion, the schedule presents fairly, in all
material respects, the information required to be set forth therein as of and
for the years ending December 31, 2000, 1999 and 1998.

/s/ GRANT THORNTON LLP

Atlanta, Georgia
March 2, 2001



                                       41
<PAGE>   42







                      VSI Enterprises, Inc and Subsidiaries

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                      Column A                        Column B        Column C      Column D          Column E
                      --------                        --------        --------      --------          --------
                                                                      Additions
                                                     Balance at      Charged to                       Balance at
                                                      Beginning       Costs and     Deductions         End of
                    Description                      of Period        Expenses    Describe(1)(2)       Period
                    -----------                      ----------       ---------   --------------    -----------
<S>                                                  <C>             <C>          <C>               <C>
  Year ended December 31, 2000
     Reserve for obsolete inventory                   $ 1,000,000     $  277,405     $ 658,749      $    618,656
     Reserve for doubtful accounts receivable             148,289        204,817       108,476           244,630

  Year ended December 31, 1999
     Reserve for obsolete inventory                   $ 1,677,440     $   56,000     $ 733,440      $  1,000,000
     Reserve for doubtful accounts receivable             360,000        135,669       347,380           148,289

  Year ended December 31, 1998
     Reserve for obsolete inventory                   $   178,235     $ 1,499,205    $       0      $  1,677,440
     Reserve for doubtful accounts receivable             323,079         213,462      176,541           360,000
</TABLE>

(1) - Obsolete items which have been disposed and bad debt write offs.

(2) - Column C-2 "Charged to other accounts" has been omitted as the response is
"none".


                                       42
<PAGE>   43


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

         There have been no disagreements on accounting and financial disclosure
matters which are required to be described by Item 304 of Regulation S-K.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information relating to directors and executive officers of the
Company contained in the registrant's definitive proxy statement to be delivered
to shareholders in connection with the 2001 Annual Meeting of Shareholders
scheduled to be held on June 13, 2001 is incorporated by reference.

ITEM 11.  EXECUTIVE COMPENSATION.

         The information relating to executive compensation contained in the
registrant's definitive proxy statement to be delivered to Shareholders in
connection with the 2001 Annual Meeting of shareholders scheduled to be held on
June 13, 2001 are incorporated hereby by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information relating to security ownership of certain beneficial
owners and management contained in the registrant's definitive proxy statement
to be delivered to shareholders in connection with the 2001 Annual Meeting of
Shareholders scheduled to be held on June 13, 2000 are incorporated hereby by
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information relating to related party transactions contained in the
registrant's definitive proxy statement to be delivered to shareholders in
connection with the 2001 Annual Meeting of Shareholders scheduled to be held on
June 13, 2000 are incorporated hereby by reference.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)        1.  Financial Statements.

         The following financial statements and accountant's report have been
         filed as Item 8 in Part II of this report:

         Report of Independent Certified Public Accountants

         Consolidated Balance Sheets as of December 31, 2000 and December 31,
         1999

         Consolidated Statements of Operations for Years Ended December 31,
         2000, 1999 and 1998

         Consolidated Statements of Stockholders' Equity for Years Ended
         December 31, 2000, 1999 and 1998

         Consolidated Statements of Cash Flows for Years Ended December 31,
         2000, 1999 and 1998

         Notes to Consolidated Financial Statements

         2. Financial Statement Schedules

         The following financial statement schedule of VSI Enterprises, Inc. for
the years ended December 31, 2000, 1999 and 1998 is included pursuant to Item 8:


                                       43
<PAGE>   44

         Report of Independent Certified Public Accountants on Schedule II.

         Schedule II: Valuation and Qualifying Accounts

           3.  Exhibits.

         The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) the Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-18 (File No. 33-27040-D) (referred to as "S-18 No. 1"), (ii)
Post-Effective Amendment No. 2 to the Company's Registration Statement on Form
S-18 (File No. 33-27040-D) (referred to as "S-18 No. 2"), (iii) Post-Effective
Amendment No. 3 to the Company's Registration Statement on Form S-18 (File No.
33-27040-D) (referred to as "S-18 No. 3"); (iv) the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1992 (referred to as "1992
10-Q"); (v) the Company's Annual Report on Form 10-K for the year ended March
31, 1993 (referred to as "1993 10-K"); (vi) the Company's Registration Statement
Form S-1 (File No. 33-85754) (referred to as "S-1"); (vii) the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 (referred to as "1994
10-K"); (viii) the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (referred to as "1995 10-K"); (ix) the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 (referred to as "1997
10-Q"); (x) the Company's Annual Report on Form 10-K for the year ended December
31, 1996 (referred to as "1996 10-K"); (xi) the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as amended (referred to as "1998
10-K/A"), (xii) the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (referred to as "March 1999 10-Q"), (xiii) the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (referred to
as "June 1999 10-Q"), (xiv) the Company's Form S-8 Registration Statement (File
No. 333-18239), (referred to as "Warrant Plan S-8"), (xiii) the Company's Form
S-8 Registration Statement (File No. 333-18237), (referred to as "Option Plan
S-8"), (xv) the Company's Current Report on Form 8-K dated August 31, 1999
(referred to as "1999 8-K"), (xvi) the Company's Registration Statement on Form
S-3 amended January 31, 1999 ("1999 S-3"), (xvii) the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, as amended (referred to as "1999
10-K/A") and (xviii) the Company's Definitive Proxy Statement filed under
Schedule 14A on April 21, 2000 (referred to as "2000 Proxy Statement").

<TABLE>
<CAPTION>
EXHIBIT NO.         DESCRIPTION OF EXHIBIT
-----------         ----------------------
<S>                 <C>

*3.1                Certificate of Incorporation, including Certificate of Stock
                    Designation dated September 25, 1990, and amendments dated
                    December 26, 1990, August 19, 1991 and October 17, 1991
                    (S-18 No. 3, Exhibit 3-1)

*3.2                Amended Bylaws of the Registrant as presently in use (S-18
                    No. 1, Exhibit 3.2)

*3.3                Certificate of Amendment to Certificate of Incorporation
                    filed on February 10, 1993 (1992 10-Q)

*3.6                Certificate of Amendment to Certificate of Incorporation
                    filed on February 13, 1995 (1994 10-K)

*3.7                Certificate of Amendment to Certificate of Incorporation
                    filed on September 8, 1995 (1995 10-K)

*3.9                Certificate of Amendment of Certificate of Incorporation
                    filed on January 13, 1999 (1998 10-K/A)

*3.10               Certificate of Amendment to Certificate of Incorporation
                    filed on June 28, 1999 (June 1999 10-Q)

*10.3               1991 Stock Option Plan (S-18 No. 2, Exhibit 10.1(a))
</TABLE>


                                       44
<PAGE>   45

<TABLE>
<S>                 <C>
*10.3.1             Amendment No. 1 to 1991 Stock Option Plan (1993 10-K)

*10.3.2             Amendment No. 2 to 1991 Stock Option Plan (S-1)

*10.3.3             Amendment No. 3 to 1991 Stock Option Plan (S-1)


*10.3.4             Amendment No. 4 to 1991 Stock Option Plan (Option Plan S-8,
                    Exhibit 4.5)

*10.3.5             Amendment No. 5 to 1991 Stock Option Plan

*10.4               1995 Performance Warrant Plan (Warrant Plan S-8, Exhibit
                    4.1)

*10.5               Employment Agreement dated August 4, 1997, by and between
                    the Registrant and Judi North (1997 10-Q)

*10.6               Consulting Agreement dated May 1, 1999 by and between the
                    Registrant, Taconic Partners, L.L.C., and Richard Harrison
                    (June 1999 10-Q)

*10.7               1994 Employee Stock Purchase Plan (1994 10-K)

*10.8               Promissory Note, dated November 18, 1999, issued to Thomson
                    Kernaghan & Co., Ltd. in the principal amount of $900,000
                    (1998 10-K/A)

*10.9               Assignment of Security Interest in Patents, dated November
                    18, 1999, by and between the Registrant and Thomson
                    Kernaghan & Co., Ltd. (1998 10-K/A)

*10.10              Receivable Sale Agreement, dated October 8, 1998, by and
                    between VSI Network Solutions, Inc. and RFC Capital
                    Corporation (1998 10-K/A)

*10.11              Promissory Note Restructuring Agreement, dated as of August
                    31, 1999, by and between VSI Enterprises, Inc. and Thomson
                    Kernaghan & Co., Ltd. (1999 8-K)

*10.12              7% Secured convertible Debenture, dated August 31, 1999,
                    issued to Thomson Kernaghan & Co., Ltd. in principal amount
                    of $1,089,750 (1999 8-K)

*10.13              Stock Pledge Agreement, dated as of August 31, 1999, by and
                    among VSI Enterprises, Inc., Thomson Kernaghan & Co., Ltd.,
                    the secured parties named therein, and Jackson Walker
                    L.L.P., as Depositary Agent (1999 8-K)

*10.14              License Agreement between ACIS, Inc. and the Registrant
                    dated September 9, 1999 (1999 S-3)

*10.15              Strategic Investment Agreement between the ACIS, Inc. and
                    the Registrant dated September 9, 1999 (1999 S-3)
</TABLE>


                                       45
<PAGE>   46

<TABLE>
<S>                 <C>
*10.16              Stock Purchase Agreement dated as of September 28, 1999, by
                    and among the Registrant, Paul D'Haeyer and Walter De Rop
                    and Videoconferencing Systems, n.v. (1999 10-K/A)

*10.17              Securityholders Agreement dated September 30, 1999, by and
                    among the Registrant, Paul D'Haeyer, and Walter De Rop (1999
                    10-K/A)

*10.18              Warrant Agreement dated September 30, 1999 issued to
                    Registrant by Videoconferencing Systems, n.v. (1999 10-K/A)

*10.19              Form of Subscription Agreement used in connection with
                    Registrant's private placement that closed March 2000 (1999
                    10-K/A)

*10.20              Purchase Agreement among PentaStar Communications, Inc., OC
                    Mergerco 4, Inc. and the Registrant dated February 18, 2000
                    (2000 Proxy Statement)

*21.1               Subsidiaries of the Registrant (1996 10-K)

23.1                Consent of Grant Thornton LLP

</TABLE>


(b)  Reports on Form 8-K.

           There were no reports on Form 8-K filed during the quarter ended
           December 31, 2000


                                       46
<PAGE>   47


                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                   VSI ENTERPRISES,  INC.


                                   By:  /s/ Richard W. Egan
                                     -------------------------------------------
Date:  March 29, 2001                   Richard W. Egan, Chief Executive Officer

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the following
capacities on the dates indicated.

<TABLE>
<CAPTION>
          Signature                                          Title                           Date
          ---------                                          -----                           ----
<S>                                                  <C>                                <C>


  /s/ Larry M. Carr                                  Chairman of the Board              March 29, 2000
  ------------------------------------------
       Larry M. Carr


  /s/ Richard W. Egan                                Chief Executive Officer            March 29, 2000
  ------------------------------------------
       Richard W. Egan


  /s/ Robert W. Morris                               Chief Financial Officer            March 29, 2000
  ------------------------------------------         (Principal Financial and
       Robert W. Morris                              Accounting Officer)


  /s/ Julia B. North                                 Director                           March 29, 2000
  ------------------------------------------
       Julia B. North


  /s/ Edward S. Redstone                             Director                           March 29, 2000
  ------------------------------------------
       Edward S. Redstone
</TABLE>


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