<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

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

                                   FORM 10-K      

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

        Annual Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934
                  For the Fiscal Year Ended December 31, 1996

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

                          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:

                                                     Name of Each Exchange
    Title of Each Class                               on Which Registered    
---------------------------                       ----------------------------
   Common Stock, $.00025                              Boston Stock Exchange
    par value per share

                Securities Registered Pursuant to Section 12(g)
                    of the Securities Exchange Act of 1934:

                   Common Stock, $.00025 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 (35,317,593 shares) on March 3, 1997 was
approximately $50,786,700, based on the closing price of the registrant's
common stock as quoted on the Nasdaq Small Cap Market and on the Boston Stock
Exchange on March 3, 1997.  For the purposes of this response, officers,
directors and holders of 5% or more of the registrant's common stock are
considered the affiliates of the registrant at that date.

The number of shares outstanding of the registrant's common stock, as of March
3, 1997: 40,954,379 shares of $.00025 par value common stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's proxy statement, dated March 24, 1997,
for the 1997 annual meeting of shareholders are incorporated by reference in
response to Part III of this Report.
<PAGE>   2

                                     PART I


ITEM 1.  BUSINESS.

GENERAL

      VSI Enterprises, Inc. (the "Company"), through its five wholly-owned
subsidiaries, is in the network multimedia/videoconferencing business. The
Company, along with its strategic partners, offers customers turnkey solutions
by supplying videoconferencing products and services, as well as transmission
equipment and a complete internal network, to support video, voice and data
applications.  Its core business is the design, manufacture and marketing of
interactive group and desktop videoconferencing systems (the "VSI Systems").
The VSI Systems may be sold individually, or in conjunction with the Company's
businesses that design, market and install network and transmission technology
products and services. Each 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. The Company's
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.  The Company integrates standard
video, audio and transmission components with its own proprietary video, audio
and computer control components and software.

      The Company's open software and modular subsystems streamline production
and allow the product to be tailored to meet customers' specific needs without
the necessity of custom design.  The Company's lead product is 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 the Company's new product compatible with older models.  To date, the
Company has sold over 1,200 videoconferencing systems to approximately 250
customers, including NationsBank, Duracell, BellSouth, NYNEX  and Johnson &
Johnson, as well as various federal and state government departments and
agencies.

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

      On July 31, 1992, the Company acquired substantially all of the
outstanding shares of Common Stock of CyberVision, n.v., a Belgian corporation.
In April 1994, the Company changed the name of CyberVision, n.v. to
Videoconferencing Systems, n.v. (hereinafter referred to as "VSI Europe") to
permit both companies to market products under the common trade name of "VSI."
VSI Europe is a distributor of the Company's videoconference systems in Europe
and has installed videoconference room systems at sites in the United Kingdom,
France, Germany, Belgium, the Netherlands, Luxembourg, Italy, Denmark, Sweden,
Spain, Portugal, Ireland and Switzerland.  VSI Europe has offices located in
London and Antwerp.
<PAGE>   3

      In April 1995, the Company acquired cR Solutions, a software company
whose products include a reservation system for the management of
videoconferencing systems.  This business is being operated by the Company
through its VSI Solutions, Inc. subsidiary ("VSI Solutions").

      On June 28, 1996, the Company acquired Integrated Network Services, Inc.
("INS"), a company engaged in the design, installation and support of local and
wide area networks, primarily for the healthcare industry. This business will
be operated by the Company through its VSI Network Services, Inc. subsidiary
("VSINS").  INS is an integration firm specializing in the connectivity of
multi-protocol environments, ranging from small, local area networks to large,
enterprise-wide networks employing WAN technologies to connect multiple sites.

      On October 2, 1996, the Company acquired Eastern Telecom, Inc. ("ETI"), a
company engaged in the business of marketing and sales of telecommunications
services and products. This business will be operated as a wholly-owned
subsidiary of the Company.  ETI sells network services such as Centrex, frame
relay and basic rate interface, primary rate interface and ISDN connections on
behalf of a number of major telecommunications providers.

      VSI, VSI Europe, VSI Solutions, VSINS and ETI will continue their
respective businesses as operating subsidiaries of the Company.  References to
the Company herein refer to VSI Enterprises, Inc., VSI, VSI Europe, VSI
Solutions, VSINS and ETI as a consolidated operation, unless the context
indicates otherwise.

      The Company's principal executive offices and manufacturing facilities
are located at 5801 Goshen Springs Road, Norcross, Georgia 30071, and its
telephone number is (770) 242-7566.

VSI SYSTEMS & APPLICATIONS

      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 and video tape 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), the Company believes
its VSI Systems foster the look and feel of true live 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 componentry to the user, and various optional components
specific to the user's application.  The Company manufactures, assembles,
installs and services the VSI Systems, and it has nonexclusive remarketing
agreements with codec manufacturers to resell the codecs.  The Company does not
sell the transmission services, which are generally available through the
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,





                                      -2-
<PAGE>   4

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 the Company to be currently
available.

      The primary users of videoconferencing are major corporations and
government agencies.  These organizations often use meetings to provide
information, review operations, make plans, resolve problems, introduce new
ideas or products, 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.  The 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, because travel time and costs are eliminated, it may be more
economic for more people to participate via videoconferencing, thereby causing
the direct dissemination of pertinent information to more parties
simultaneously, which may improve efficiency in problem solving and decision
making.  Users may become more productive.

      In addition to business and government applications, the Company also
supplies and installs 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 schools and universities.

      The Company also provides "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.

      In the area of telemedicine, the Company supplies standalone group and
desktop videoconferencing systems. It also, in an alliance with strategic
partner Global Telemedix, Inc., offers systems used in conjunction with
telemedicine software, specialty devices and desktop/rollabout workstations.
These systems can offer a multimedia platform for use by physicians, medical
researchers and administrators for a wide variety of applications, including:
patient consults, remote mentoring, grand rounds, treatment protocols, research
and administration.

PROPRIETARY TECHNOLOGY

      The Company has developed proprietary technology in the areas of
videoconferencing control systems, system diagnostics, information access and
communications access.  While VSI Systems make use of other manufacturers'
components, the Omega(TM) utilizes internally-developed proprietary software
and products as key elements in differentiating the Company's systems in the
marketplace.  Since VSI Systems use standards based codecs, VSI Systems are
interoperable with systems of other standards compliant manufacturers.  The
heart of the Omega(TM) is the System Controller.  The Omega(TM) System
Controller is a proprietary software suite that must be installed on a properly
configured 486 PC running MS DOS 6.0+ and MS Windows 3.1.  The software suite
includes the Omega(TM) real time operating system, Omega(TM) videoconferencing
application package, device drivers, and a third party SQL database





                                      -3-
<PAGE>   5

engine (as licensed to VSI for resale).  This software is delivered in object
code format.  The Company has also developed and manufactures 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 components are designed to work
exclusively with the Omega(TM) System Controller software.

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

      The Company has 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 which combines the advantages of central and distributed intelligence
systems). The patents protect the Company's innovative technology and enables
the Company to pursue opportunities to license its technology to other
manufacturers.  The Company also has confidentiality agreements with certain of
its employees and has implemented other security measures.

PRODUCTS

      Historically, videoconferencing systems were used to provide
"point-to-point" connectivity through proprietary codecs.  Most
videoconferences were conducted on an intra-company basis.  With the recent
acceptance and implementation of interoperability standards (collectively
referred to as H.320 of the ITU-TS) and the growth of the installed base of
systems, the Company believes that customers are beginning to seek
"one-to-many" system solutions on both an intra-company as well as an
inter-company basis.  This will be a significant shift in use of
videoconferencing, leading to a complex matrix of interconnectivity,
scheduling, service and user interface issues.  The Company believes that the
videoconferencing world is becoming a world of "networks of systems" where all
systems from boardroom to rollabout to desktop will have to interconnect. The
Company believes that most systems in use today are not equipped to handle
these demands.

      The Omega(TM) platform features a system control architecture based upon
a PC486 engine, proprietary software compatible with Microsoft's Windows 3.1
and MS DOS 6.0+ operating systems, and distributed component intelligence. In
addition, the Company introduced a new state of the art 7kHz audio system,
sophisticated 8x8 video switcher/processor a new high speed
pan/tilt/zoom/focus, and new cabinetry.  The key features and benefits of the
Omega(TM) platform include:





                                      -4-
<PAGE>   6


         Compression Technology Independence
                                           

         -       Investment protection, by separating system control from
                 compression technology
         -       Customer choice of compression technology

         Open Network Architecture

         -       Wide support for options and peripherals (e.g., multiple
                 cameras, VCRs, laser disc players, video printers, PC
                 presentations)
         -       Built-in flexibility for adding new devices and advanced
                 technology as it evolves
         -       Support for wide number of network connection technologies
                 (switched 56, ISDN, T1, T3 or ATM)
         -       Network management for centralized administration and
                 diagnostics

         Ease of Use
                   

         -       Easy to understand onscreen icons provide heads up control of
                 all videoconferencing functions
         -       Point and Click camera control provides effortless camera
                 positioning for both local and distant participants
         -       Dialing Directories for both phone and videoconference
                 connections makes initiating a conference as easy as using
                 your phone

         System Management

         -       Remote management support is extended to all devices
                 comprising the videoconferencing system
         -       Device health and status represented locally with 3D graphical
                 display of system components
         -       FTP server integration into the Omega(TM) allows for remote
                 transfer of files between a wide variety of computers
         -       Open system support of industry standards

         Software Based System
                             

         -       Remote upgrades of new Omega(TM) software releases
         -       Custom configuration of icons and system settings
         -       Sign on security and system accounting totals for individual
                 users

         The Omega(TM) product line offers a complete range of group and
desktop videoconferencing systems, including the deluxe, full-featured
Executive series, the economical Flex Plus and Flex rollabout series and the
MVP PC-based desktop series.  The Executive series is engineered for stationary
videoconferencing applications in dedicated boardrooms, classrooms and
courtrooms.  Its dual monitors allow users to see local and remote sites
easily, which is especially helpful when using multimedia tools or
application-specific devices for meetings, presentations and training.  Flex
and Flex Plus models offer a spectrum of options, configurations and
peripherals.  Their single-monitor cabinets are portable and





                                      -5-
<PAGE>   7

move easily between rooms for the widest range of applications in any
environment.  They are also upgradable to the Executive series. The MVP series
adds videoconferencing to almost any 486 IBM-compatible PC and works with
Windows 95 software. It offers flexible configuration through easy-to-use
Windows menus and dialog boxes and supports a wide range of peripheral devices
and multiple video inputs for supporting varied videoconferencing applications.

         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 stand alone
basis, with or without codec.  The Omega(TM) is offered with single or dual
color monitors of 27" or 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.

         The Company began shipping the new Omega(TM) during the first quarter
of calendar 1994.

         The Video Administrator is a software package that facilitates network
management by providing scheduling, reservations and connection services with
minimal human intervention.  Video Administrator is being utilized by BellSouth
for its Multipoint Videoconferencing Service.  Other users include the
University of Tennessee and the Georgia Statewide Academic and Medical System.

NEW PRODUCT DEVELOPMENT

         The Company continues to upgrade its present products and to develop
new and innovative products for the videoconferencing market.  Extensions of
its product line will include a PC desktop and LAN based offering.  The
Omega(TM) products will incorporate data conferencing using standard protocols
such as T.120, shared whiteboard and collaborative computing applications.
Additional system and network management products are under development and are
expected to be released during 1997.

         The Company is also designing application specific packages of the
Omega(TM) videoconferencing system for the distance learning and telemedicine
markets.

CUSTOMER SERVICE

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

         The Company offers several different maintenance programs, ranging
from "helpline" telephone consultation to extended field service on a contract
basis, which includes parts, labor, and travel service





                                      -6-
<PAGE>   8

with a guaranteed on-site response within 48 hours.  Warranty and contract
service is provided from the Company's U.S.  and European locations and through
various service arrangements in the Far East.

MARKETS

         The Company has defined its near-term, primary target markets for its
products as the "Fortune 1000" companies in North America, Europe and the
Pacific Rim.  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.  Cost benefit analyses
are generally performed by the Company's customers themselves prior to
purchasing a system.  In addition, the Company has targeted as a secondary
market small to mid-sized companies, as well as educational institutions and
healthcare facilities. The Company's 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 the Company is an original equipment
manufacturer ("OEM").

         For the fiscal years ended December 31, 1996, 1995 and 1994,
international sales (sales outside of the United States and Canada) represented
approximately 13%, 13% and 19%, respectively, of the Company's total sales. Net
product sales attributable to VSI Europe decreased from $2.7 million during the
year ended December 31, 1995 to $2.3 million for the year ended December 31,
1996.  VSI Europe contributes substantially all of the Company's international
sales.  The Company believes it presently maintains an approximate 1% to 2%
share of the total worldwide videoconferencing equipment market as measured by
1996 total sales volume for the industry.

CUSTOMERS

         The Company's customers include Fortune 1000 companies, agencies of
state, local and federal government, and health care facilities.  They include
NationsBank, Duracell, PacTel, BellSouth, NYNEX and  Johnson & Johnson.

         During fiscal 1996, approximately 14% of the Company's net product
sales were to NYNEX. During fiscal 1995, approximately 12% of the Company's net
product sales were to NYNEX.  No other customers accounted for more than 10% of
the Company's sales during the years ended December 31, 1996 or 1995.

ORDER BACKLOG AND INVENTORY

         As of December 31, 1996, the Company had a backlog of orders for
service and/or equipment of approximately $4.7 million for systems and/or
service to be delivered during the next 12 months. As of December 31, 1995, the
Company had a backlog of orders for service and/or equipment of approximately
$2.9 million. The Company had inventories of approximately $2.8 million at
December 31, 1996.  The Company's inventory is pledged to secure the Company's
line of credit.

COMPETITION

         The Company competes in the videoconferencing industry by providing
custom solutions (products and services) to its customers' videoconferencing
needs.  Because the Company provides





                                      -7-
<PAGE>   9

compression technology independent videoconferencing system, its systems can be
sold to customers with standard codecs, high speed codecs, or specialty codecs
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 the Company's systems.  The VSI
Systems, however, are designed and marketed primarily for the group
videoconferencing segment of the industry.  Within this segment of the
industry, the Company presently competes primarily with three companies, all of
which presently have significantly greater resources and market shares than the
Company. In addition, three of the Company's suppliers of codecs directly
compete with the Company in the group videoconferencing segment.  The Company
believes demand for videoconferencing will continue to increase which will
attract additional competitors to the industry, many of which will have greater
financial and other resources than the Company.

RESEARCH AND DEVELOPMENT

         All of the Company's product engineering, including costs associated
with design and configuration of fully-developed VSI Systems for particular
customer applications, is accounted for in the Company's financial statements
as research and development expenses.  During the years ended December 31,
1996, 1995 and 1994, the Company's aggregate expenditures for research and
development of new products or new components for existing VSI Systems were
$1,192,010, $953,955 and $483,194, respectively.  During fiscal 1996, the
Company's research and development expenses increased due to expanding the
workforce to accommodate efforts related to forthcoming generations of the
Omega(TM) product line and other software products, along with amortization of
costs previously capitalized.

EMPLOYEES

         As of December 31, 1996, the Company employed 195 persons full time,
including four executive officers. Of the full-time employees who are not
executive officers, 76 are engaged in sales and marketing, 29 in production, 35
in service, 15 in research and development, and 36 in general administration.
Employee relations are considered good, and the Company has no collective
bargaining contracts covering any of its employees.

ITEM 2.  PROPERTIES.

         The Company maintains its executive and sales offices, as well as its
production facilities, in 26,140 square feet of leased office and warehouse
space in Norcross, Georgia, under a one-year lease which expires October 1997.
The lease agreement provides for a renewal term at the option of the Company
for up to 60 months.  The Company and some of its subsidiaries -- VSI Europe,
VSINS and ETI -- lease a number of facilities (primarily sales offices) in the
United States and Europe under operating lease agreements which expire at
various dates through 2006.





                                      -8-
<PAGE>   10


ITEM 3.  LEGAL PROCEEDINGS.

         On January 3, 1997, Barry Rosales and Davin Gebauer, shareholders of
the Company, filed a putative class action against the Company and one of its
directors. The lawsuit is styled Barry Rosales and Davin Gebauer v. VSI
Enterprises, Inc. and Richard K. Snelling, Civil Action No. 1:97-CV-0009-WBH,
U.S. District Court for the Northern District of Georgia, Atlanta Division. The
plaintiffs purport to represent a class of all persons who purchased the common
stock of the Company or exercised the Class B Warrants of the Company between
October 6, 1995 and January 8, 1996. The Complaint alleges that during this
interval the defendants made material misrepresentations and omissions in
connection with the financial condition of the Company which had the effect of
artificially inflating the market price of the Company's common stock. The
Complaint alleges that by virtue of this conduct defendants violated Section
10(b) of the Securities Exchange Act of 1934 (the "34 Act") and SEC Rule 10b-5
thereunder. The Complaint also alleges that defendant Richard K.  Snelling was
a controlling person within the meaning of Section 20 of the 1934 Act and is
therefore liable to the plaintiffs on that basis as well. The Complaint seeks
compensatory damages along with pre- and post-judgment interest, reasonable
attorneys fees, expert witness fees and other costs.  On February 18, 1997, the
Company and Mr. Snelling filed a Motion to Dismiss the Complaint.

         Under the provisions of the Company's Certificate of Incorporation,
the Company will advance on behalf of Mr.  Snelling his cost of defense of the
claims against him in this action. The Company has notified its officers and
directors liability insurer of the pending litigation.

         The Company and Mr. Snelling deny any liability with respect to these
claims and intend vigorously to defend them. This action is at an early
procedural stage, however, and it is not possible at this time to determine the
outcome of the lawsuit or the effect of its resolution on the Company's
financial position or operating results. Management believes that the Company's
defenses will have merit; however, there can be no assurance that the Company
will be successful in its defense or that this litigation will not have a
material adverse effect on the Company's results of operations for some period
or on the Company's financial position.

         There are no other material legal proceedings to which the Company is
a party or to which its properties are subject; nor are there any material
proceedings known to the Company to be contemplated by any governmental
authority; nor are there any material proceedings known to the Company, pending
or contemplated, in which any director, officer or affiliate or any principal
security holder of the Company, or any associate of any of the foregoing is a
party or has an interest adverse to the Company.

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

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





                                      -9-
<PAGE>   11


                                   PART II

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

         The Company's Common Stock is traded in the over-the-counter market
under the Nasdaq symbol "VSIN" and on the Boston Stock Exchange under the
symbol "VSI."  The Common Stock has been quoted on the Nasdaq System since
February 28, 1992 and has been traded on the Boston Stock Exchange since
November 1991.  Prior to November 1991, the Company's Common Stock was traded
in the general over-the-counter market.  The following table sets forth the
quarterly high and low bid quotations per Common Share in the over-the-counter
market as reported for the periods indicated.  These prices also represent
inter-dealer quotations without retail mark-ups, mark-downs, or commissions and
may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                                   HIGH              LOW 
                                                                  ------           ------
         <S>                                                      <C>             <C>
         FISCAL YEAR ENDED DECEMBER 31, 1995
                 First Quarter  . . . . . . . . . . .             $1.84            $0.94
                 Second Quarter . . . . . . . . . . .              2.00             1.19
                 Third Quarter  . . . . . . . . . . .              6.63             1.50
                 Fourth Quarter . . . . . . . . . . .              6.22             3.31

         FISCAL YEAR ENDED DECEMBER 31, 1996
                 First Quarter  . . . . . . . . . . .             $4.31           $ 1.88
                 Second Quarter . . . . . . . . . . .              4.06             2.44
                 Third Quarter  . . . . . . . . . . .              3.13             2.00
                 Fourth Quarter . . . . . . . . . . .              3.13             1.88
</TABLE>

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

         As of March 15, 1997, the Company had approximately 600 holders of
record of its Common Shares and in excess of 8,000 beneficial holders of its
Common Shares.

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

Recent Sales of Unregistered Securities.

         On November 12, 1996, the Company issued 6,354 shares of Common Stock
to Paul D'Haeyer, an employee of the Company, in payment of $13,166 of sales
commissions earned by Mr. D'Haeyer.

         On October 2, 1996, the Company issued an aggregate of 2,007,339
shares of Common Stock to the two shareholders of ETI in connection with the
acquisition of ETI by the Company.

         On September 30, 1996, the Company issued $5,000,000 of 5% Convertible
Debentures due September 1999 to three institutional investors, the proceeds of
which were utilized to fund the cash





                                      -10-
<PAGE>   12

portion of the acquisition of ETI and for working capital purposes.  The
debentures are convertible into shares of common stock of the Company. The
debenture holders may convert their interests into the Company's common stock
at the lesser of:  (i) One hundred percent (100%) of the five-day average
closing bid price at the time of funding; or, (ii) Eighty percent (80%) of the
five-day average closing bid price at the time of conversion.  Anytime after
September 30, 1997, provided that a 50% increase in the common stock from the
price of the common stock at funding has occurred, the Company has the option
to force conversion into stock at the lesser of: (i) One hundred percent (100%)
of the five-day average closing bid price at the time of funding; or, (ii)
Eighty percent (80%) of the five-day average closing bid price at the time of
conversion.  As of December 31, 1996, 423,673 shares of Common Stock had been
issued by the Company upon conversion of debentures.

         In July, 1996, the Company completed a private placement of 1,122,361
shares of common stock to 39 accredited investors, resulting in proceeds of
approximately $2.4 million.  The proceeds of this offering were added to the
working capital of the Company and utilized for general corporate purposes.

         On June 28, 1996, the Company issued an aggregate of 481,670 shares of
Common Stock to the shareholders of INS in connection with the acquisition of
INS by the Company.

         On June 5, 1996, the Company issued 244,817 shares of Common Stock to
Larry M. Carr, a director of the Company, in exchange for the cancellation of
$337,113 of indebtedness owed by the Company to Mr. Carr.

         On April 4, 1996 and November 13, 1996, the Company issued an
aggregate of 200,000 shares of Common Stock to NRT Contract Manufacturing,
Inc., a principal supplier of components for the Company's videoconferencing
equipment.  These shares were issued as payment for shipments of components to
the Company.

         On January 2, 1996, the Company issued 104,421 shares of Common Stock
to Richard K. Snelling, the Chairman of the Board and Chief Executive Officer
of the Company.  These shares were issued in lieu of Mr. Snelling's cash
compensation for the year ended December 31, 1995.

         All issuances of securities described above were made in reliance on
the exemption from registration provided by Section 4(2) and/or 3(b) of the
Securities Act of 1933 as transactions by an issuer not involving a public
offering.  All of the securities were acquired by the recipients thereof for
investment and with no view toward the resale or distribution thereof.  In each
instance, the offers and sales were made without any public solicitation and
the stock certificates bear restrictive legends.  No underwriter was involved
in the transactions and no commissions were paid.





                                      -11-
<PAGE>   13


ITEM 6.  SELECTED FINANCIAL DATA.

         The following selected financial data for the three years ended
December 31, 1996, 1995 and 1994, for the nine-month transition period ended
December 31, 1993 and for the year ended March 31, 1993, are derived from the
consolidated financial statements of the Company.  All financial information
has been restated to reflect the June 1996 acquisition by the Company of
Integrated Network Services, Inc., which was accounted for as a pooling of
interest. Information for the year ended December 31, 1996 includes Eastern
Telecom, Inc., which was acquired in October 1996. Information for the years
ended December 31, 1996 and 1995 include VSI Solutions Inc., which was acquired
in April 1995. See Note B to the consolidated financial statements.  The data
should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.

<TABLE>
<CAPTION>
                                                                                    NINE MONTHS
                                                 YEAR ENDED DECEMBER 31,               ENDED          YEAR ENDED
                                             --------------------------------         DEC 31,         MARCH 31,
                                             1996           1995         1994         1993(1)           1993
                                            -------        -------      -------      -------           -------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
 <S>                                       <C>            <C>          <C>           <C>              <C>
 STATEMENT OF INCOME DATA:
 Revenue . . . . . . . . . . . . . .        $17,056        $20,541      $19,226      $12,370           $15,935
 Cost of revenues  . . . . . . . . .         12,103         14,255       13,131        9,141            11,125
 Gross Profit  . . . . . . . . . . .          4,953          6,196        6,095        3,229             4,810
 Operating and other expenses  . . .         11,660         10,764        8,505        6,357             6,323
                                            -------        -------      -------      -------           -------
 Net loss from continuing operations         (6,707)        (4,568)      (2,410)      (3,128)           (1,513)
                                            -------        -------      -------      -------           -------
 Net loss per share from continuing                                                          
    operations   . . . . . . . . . .        $ (0.18)       $ (0.15)     $ (0.11)      $ (0.19)         $ (0.10)
                                            =======        =======      =======       =======          =======
</TABLE>


<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                             ---------------------------------------------------       MARCH 31,
                                             1996           1995         1994            1993(1)         1993
                                             ----           ----         ----            ----            ----
                                                                      (IN THOUSANDS)
 <S>                                     <C>            <C>          <C>            <C>              <C>
 BALANCE SHEET DATA:
 Working capital . . . . . . . . . .     $    5,634     $    6,904   $    1,260     $  1,963         $   3,174
 Total assets  . . . . . . . . . . .         23,298         19,666       13,393       10,001            10,277
 Long-term debt  . . . . . . . . . .          4,250             --           44           68                90
 Stockholders' equity  . . . . . . .         13,819         10,535        4,401        4,242             5,170
</TABLE>

-----------------------
(1)      On October 20, 1993, the Company changed it fiscal year end from March
         31 to December 31.





                                      -12-
<PAGE>   14


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

FINANCIAL CONDITION

         All previously reported financial information has been restated to
reflect the June 28, 1996 acquisition of Integrated Network Services, Inc.
("INS"), which was accounted for as a pooling of interest.

         During the year ended December 31, 1996, the Company's total assets
increased 18% to $23,297,610 from $19,666,094.  This increase of $3,631,516
primarily resulted from a $8,801,980 increase in costs in excess of net assets
acquired, primarily resulting from the acquisition of Eastern Telecom Inc.
(ETI). This increase more than offset decreases in cash (46%), accounts
receivable (43%) and inventories (27%). On December 31, 1995, cash was higher
than historical levels due to the exercise during the fourth quarter of 1995 of
829,740 Class B Common Stock Purchase Warrants of the Company, which yielded
$3.5 million in cash.

         Accounts receivable decreased $2,954,591, primarily due to improved
collection efforts and the receipt of more orders earlier in the fourth quarter
of 1996 than in the previous year. Inventories decreased $1,044,139, primarily
due to the transfer of approximately $800,000 in inventory to the rental and
demonstration inventory category.

         Rental and demonstration inventory increased 431%, to $1,542,667. Many
of the new demonstration units were installed at locations owned by BellSouth,
the Company's strategic partner for a number of sales initiatives in the
Southeast.

         Software development costs decreased 21% from $1,243,510 at December
31, 1995 to $980,110 at December 31, 1996, primarily due to the amortization of
previously capitalized software expense.

         Total current liabilities as of December 31, 1996 decreased
$3,902,127, or 43%, from December 31, 1995, primarily as a result of a 84%
decrease in notes payable and a 27% decrease in accounts payable. These were
repaid using cash raised from a private placement of common stock in 1996, and
by retiring a $337,113 credit facility due Larry Carr, a director of the
Company, by issuing Mr. Carr 244,817 shares of common stock.

         Other liabilities include $4,250,000 remaining of the issuance of
$5,000,000 in 5% convertible debentures due September 1999, the proceeds of
which were used to fund the cash portion of the October 2, 1996 acquisition of
ETI.  Total stockholders' equity increased $3,283,643, or 31%, from December
31, 1995, because of a $10,130,414 increase in paid in capital related to the
acquisition of ETI, a private placement and a conversion of debt, which were
partially offset by a $6,706,894 increase in accumulated deficit as a result of
a net loss for the year.





                                      -13-
<PAGE>   15


RESULTS OF OPERATIONS

         YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Revenues

         Revenues for the year ended December 31, 1996 decreased 17% to
$17,055,947 from the $20,450,958 recorded during the year ended December 31,
1995.  The decrease was due primarily to lower revenues for INS, as the sudden
and unexpected death in early 1996 of INS' then-chairman and CEO, Bill Rogers,
adversely affected sales efforts during the year. Core sales of
videoconferencing systems also declined, due to longer than anticipated sales
cycles in closing key accounts.

         The Company's backlog of purchase orders for service and/or equipment
at December 31, 1996 was approximately $4.7 million, an increase of 62% over
the December 31, 1995 order backlog of approximately $2.9 million.

Gross Margin

         Gross margin as a percentage of revenues was 29% for the year ended
December 31, 1996, a slight decrease from 30% for the year ended December 31,
1995.

Selling, General and Administrative Expenses

         The increase in selling, general and administrative expenses of
$1,091,418, or 12% over the year ended December 31, 1995 is the result of
additional administrative costs associated with the acquisitions of INS and
ETI., the addition of several new salespeople, and an increase in the Company's
sales and marketing expenses to support strategic partner BellSouth's rollout
of its videoconferencing sales and service program. The Company is the primary
system integrator for BellSouth's multipoint videoconferencing service, and is
a part of BellSouth's Network Complementary Applications Program, through which
the company's videoconferencing systems are offered to BellSouth customers. In
addition, sales and marketing expenses were incurred in association with the
introduction of the Omega MVP desktop product line in 1996.

Research and Development Expenses

         The Company charges 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 the useful
life of the product.  For the year ended December 31, 1996, the Company's
research and development expenses were $1,192,010, a 25% increase over the year
ended December 31, 1995.  The increase in expense was a result of expanding the
research and development workforce t accommodate efforts relating to
forthcoming generations of the Omega product line and other software products.
For the year ended December 31, 1996, development costs of $153,007 were
capitalized as software development costs, compared to $345,097 capitalized for
the year ended December 31, 1995.





                                      -14-
<PAGE>   16


Other Expenses

         Non-operating expenses for the year ended December 31, 1996 decreased
62% to $257,610, from $680,616 for the year ended December 31, 1995.  This
decrease was primarily due to a reduction in costs associated with the
Company's secured credit facilities.

Net Loss

         Net loss for the year ended December 31, 1996 was $6,706,894,
representing 39% of revenue, as compared to $5,340,557, or 26% of revenue, for
the year ended December 31, 1995.  The increase in losses was due to a 17%
decrease in revenues as well as a 12% increase in selling, general and
administrative expenses. The decrease in revenues was attributed to lower
revenues for INS during 1996 and a longer than anticipated sales cycle for some
video conferencing orders.

         YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Revenues

         Revenues for the year ended December 31, 1995 increased 6% to
$20,450,958 from $19,226,099 recorded for the year ended December 31, 1995.
The increase resulted from a 37% increase in sales of computer integration
services from INS, which more than offset an 8% decrease in videoconferencing
sales. That decrease resulted from a longer than expected sales cycle in
closing key accounts, delays of orders to end users within the federal
government, delays in the release of the Flex line of rollabout products until
the third quarter of 1995, and the efforts and expenses associated with the
formation and development of strategic alliances with key telecommunications
firms.

         The Company's backlog of orders for service and/or equipment at
December 31, 1995 was approximately $2.9 million, an increase of 61% over the
December 31, 1994 order backlog of $1.8 million.

Gross Margin

         Gross margin as a percentage of revenues was 30% for the year ended
December 31, 1995, a slight decrease from 32% for the year ended December 31,
1994.

Selling, General and Administrative Expenses

         The increase in selling, general and administrative expenses of
$1,630,346, or 22%, over the year ended December 31, 1994 is the result of
additional administrative costs associated with the acquisition of cR
Solutions, additional costs associated with the further expansion of system
integration business at INS, the addition of a new sales office in Boston and
sales personnel in other locations, as well as expenses associated with
developing strategic business partners.  In addition, marketing expenses
increased due to the introduction of the Flex product line.





                                      -15-
<PAGE>   17


Research and Development Expenses

         The Company charges 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 the useful
life of the product.  For the year ended December 31, 1995, the Company's
research and development expenses were $953,955, a 97% increase over the year
ended December 31, 1994.  The increase in expense was a result of expanding the
research and development workforce to accommodate efforts relating to
forthcoming generations of the Omega product line and other software products.
For the year ended December 31, 1995, development costs of $345,097 were
capitalized as software development costs, compared to $293,072 capitalized for
the year ended December 31, 1994.  The increase was primarily due to the
purchase of cR Solutions, a software company that produces a scheduling and
reservation system for the management of videoconferencing systems.

Other Expenses

         Non-operating expenses for the year ended December 31, 1995 increased
71% to $680,616, from $398,516 for the year ended December 31, 1994.  This
increase was primarily due to costs associated with the Company's secured
credit facilities.

Net Loss

         Net loss for the year ended December 31, 1995 was $5,340,557,
representing 26% of revenue, as compared to $2,720,988, or 14% of revenue, for
the year ended December 31, 1994.  The increase in losses was due primarily to
a 22% increase in selling, general and administrative expenses and a 97%
increase in research and development expenses.

LIQUIDITY AND SOURCES OF CAPITAL

         In September 1996, the Company issued $5,000,000 of 5% Convertible
Debentures due September 1999 to three institutional investors, the proceeds of
which were utilized to fund the cash portion of the acquisition of ETI and for
working capital purposes. The debentures are convertible into shares of common
stock of the Company. The debenture holders may convert their interests into
the Company's common stock at the lesser of: (i) One hundred percent (100%) of
the five-day average closing bid price at the time of funding; or, (ii) Eighty
percent (80%) of the five-day average closing bid price at the time of
conversion. Any time after September 30, 1997, provided that a 50% increase in
the common stock from the price of the common stock at funding has occurred,
the Company has the option to force conversion into stock at the lesser of: (i)
One hundred percent (100%) of the five-day average closing bid price at the
time of funding; or, (ii) Eighty percent (80%) of the five-day average closing
bid price at the time of conversion. As of March 13, 1997, approximately $3.3
million of debentures had been converted into approximately 2.0 million shares
of common stock.

         In July 1996, the Company completed a private placement of 1,122,361
shares of common stock to 39 accredited investors, resulting in proceeds of
approximately $2.4 million. The proceeds of this offering were added to the
working capital of the Company and utilized for general corporate purposes.





                                      -16-
<PAGE>   18


         Since June 1995, Videoconferencing Systems, Inc. (VSI), a subsidiary
of the Company, has had a revolving credit and security agreement with Fidelity
Funding of California, Inc.  This credit facility provides the Company with up
to $4.0 million at an interest rate of prime plus 2%.  Funds available under
the credit facility are based on 80% of eligible VSI accounts receivable
invoices, with certain restrictions.  The credit facility is secured by the
accounts receivable, inventory and fixed assets of VSI.  At March 3, 1997
approximately $316,000 was owed to Fidelity Funding under the credit facility.

         In December 1996, INS established a revolving credit and security
agreement with Presidential Financial Corporation. This credit facility
provides INS with up to $750,000 at an interest rate of prime plus 3%. Funds
available under the credit facility are based on 80% of accounts receivable
invoices, inventory and notes receivable, with certain restrictions. At. March
3, 1997 approximately $319,000 was owed to Presidential Financial Corporation.

         As of December 31, 1996, VSI Europe had a secured bank credit facility
of $570,000, of which $127,605 was outstanding at that time.

         As of December 31, 1996, the Company had cash and cash equivalents of
$2,260,185. The Company's liquidity sources also include existing credit
facilities.  In order to meet its cash flow requirements, the Company will
likely require additional financing in 1997. This additional funding could be
in the form of debt, equity or both. A reduction in operating expenses could
also be effected. However, there can be no assurance that the Company 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.

         As of December 31, 1996, the Company had operating loss carryforwards
for income tax purposes of approximately $16,187,000 available to reduce
taxable income through 2010.  The Company also has research and development
credits of approximately $89,000 available to reduce income taxes payable
through 2002.  During 1993, the Company 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.

         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.  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 detailed from time to time in the Company's
Securities and Exchange Commission filings.





                                      -17-
<PAGE>   19


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, 1996 and December 31, 1995

Consolidated Statements of Operations for Years Ended December 31, 1996, 1995
and 1994

Consolidated Statement of Stockholders' Equity for Years Ended December 31,
1996, 1995 and 1994

Consolidated Statements of Cash Flows for Years Ended December 31, 1996, 1995
and 1994

Notes to Consolidated Financial Statements





                                      -18-
<PAGE>   20


Board of Directors
VSI Enterprises, Inc.

     We have audited the accompanying consolidated balance sheet of VSI
Enterprises, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended.  These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial position of VSI
Enterprises, Inc. and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting
principles.

     We previously audited and reported on the consolidated balance sheet of
VSI Enterprises, Inc. and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1995 and 1994, prior to their restatement for the
1996 pooling of interests with Integrated Network Services, Inc.  The
contribution of VSI Enterprises, Inc. and subsidiaries represented 74% of
restated consolidated assets as of December 31, 1995, 58% and 68% of restated
consolidated revenues for 1995 and 1994, respectively, and 86% and 98% of
restated consolidated net loss for 1995 and 1994, respectively.  Separate
financial statements of INS included in the restated consolidated balance sheet
as of December 31, 1995 and the restated consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1995 and
1994 were audited and reported on separately by other auditors.  The INS 1994
financial statements were reported on by other auditors prior to the
restatement for discontinued operations, as described in Note C.

                                     19

<PAGE>   21


     We also audited the adjustments described in Note C that were applied to
restate the 1994 financial statements for the discontinued operations of INS
and the combination of the accompanying consolidated balance sheet as of
December 31, 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1995 and
1994, after restatement for the 1996 pooling of interests; in our opinion, such
adjustments are appropriate and have been properly applied, and such
consolidated statements have been properly combined on the basis described in
Note B of the notes to the consolidated financial statements.

                                        /s/ GRANT THORNTON LLP


Atlanta, Georgia
February 21, 1997





                                       20
<PAGE>   22

                   VSI Enterprises, Inc. and Subsidiaries

                         CONSOLIDATED BALANCE SHEETS

                                December 31,


                                   ASSETS



<TABLE>
<CAPTION>
                                                                           1996                 1995    
                                                                     ----------------    ---------------
                                                                                          (as restated -
                                                                                           see Note B)
<S>                                                                  <C>                 <C>
CURRENT ASSETS
  Cash and cash equivalents                                          $     2,260,185     $     4,202,613
  Accounts receivable, less allowance
    for doubtful accounts of $271,000
    and $658,000 at December 31, 1996
    and 1995, respectively                                                 3,884,446           6,809,037

  Inventories                                                              2,810,231           3,854,370

  Rental and demonstration inventory, net
    of accumulated depreciation of $374,922
    and $135,100, respectively                                             1,542,667             290,555

  Prepaid expenses and other current assets                                  365,435             878,736
                                                                      --------------      --------------

           Total current assets                                           10,862,964          16,035,311

PROPERTY AND EQUIPMENT                                                     1,356,313           1,497,559

OTHER ASSETS
  Costs in excess of net assets acquired                                   9,537,558             735,578
  Software development costs                                                 980,110           1,243,510
  Other                                                                      560,665             154,136
                                                                      --------------      --------------
                                                                          11,078,333           2,133,224
                                                                      --------------      --------------


                                                                     $    23,297,610     $    19,666,094
                                                                      ==============      ==============
</TABLE>


The accompanying notes are an integral part of these statements.





                                       21
<PAGE>   23





                      LIABILITIES AND STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                                           1996                 1995    
                                                                      ----------------     -------------
                                                                                           (as restated -
                                                                                            see Note B)
<S>                                                                   <C>                 <C>
CURRENT LIABILITIES
  Notes payable                                                       $      501,641      $    3,339,420
  Bank credit facilities                                                     127,605             155,676
  Accounts payable                                                         2,410,049           3,299,294
  Accrued expenses                                                         1,463,952           1,900,467
  Deferred revenue                                                           725,662             436,179
                                                                       -------------       -------------

           Total current liabilities                                       5,228,909           9,131,036

CONVERTIBLE DEBENTURES                                                     4,250,000                   -

COMMITMENTS                                                                        -                   -

STOCKHOLDERS' EQUITY
  Preferred stock, $.00025 par value; authorized
    800,000 shares, none issued and outstanding                                    -                   -
  Common stock, authorized 46,000,000 shares of
    $.00025 par value; issued and outstanding
    39,516,249 and 35,007,176 shares at
    December 31, 1996 and 1995, respectively                                   9,879               8,751
  Additional paid-in capital                                              38,222,005          28,091,591
  Accumulated deficit                                                    (24,124,509)        (17,417,615)
  Cumulative translation adjustment                                         (288,674)           (147,669)
                                                                       -------------       ------------- 
                                                                          13,818,701          10,535,058
                                                                       -------------       -------------



                                                                      $   23,297,610      $   19,666,094
                                                                       =============       =============
</TABLE>





                                      22
<PAGE>   24

                     VSI Enterprises, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            Year ended December 31,

<TABLE>
<CAPTION>
                                                                            (as restated - see Note B)  
                                                                        --------------------------------
                                                        1996                1995                1994    
                                                  ---------------     ---------------     --------------
<S>                                                <C>                 <C>                <C>
Revenue
  Videoteleconferencing systems                    $    11,159,943     $   11,920,437     $   13,002,986
  System integration                                     4,346,723          8,530,521          6,223,113
  Commissions                                            1,549,281                  -                  -
                                                    --------------      -------------      -------------
                                                        17,055,947         20,450,958         19,226,099
                                                    --------------      -------------      -------------

Costs and expenses
  Cost of videoteleconferencing systems                  9,115,556          8,344,196          9,058,538
  Cost of system integration                             2,986,724          5,910,559          4,072,203
  Selling, general and administrative                   10,210,941          9,119,523          7,489,177
  Research and development                               1,192,010            953,955            483,194
                                                    --------------      -------------      -------------
                                                        23,505,231         24,328,233         21,103,112
                                                    --------------      -------------      -------------

      Loss from operations                              (6,449,284)        (3,877,275)        (1,877,013)

Other expenses, primarily financing charges                257,610            680,616            398,516
                                                    --------------      -------------      -------------

      Net loss from continuing operations
         before income taxes                            (6,706,894)        (4,557,891)        (2,275,529)

Income taxes                                                     -             10,483            134,792
                                                     -------------      -------------      -------------

      Net loss from continuing operations               (6,706,894)        (4,568,374)        (2,410,321)

Discontinued operations
  Loss from operations (net of tax benefits
    of $236,000 and $60,000 in 1995 and
    1994, respectively)                                          -           (539,053)          (310,667)
  Loss on disposal (net of tax benefit of
    $102,000)                                                    -           (233,130)                 -
                                                    --------------      -------------      -------------
      Loss from discontinued operation                           -           (772,183)          (310,667)
                                                    --------------      -------------      ------------- 

      NET LOSS                                     $    (6,706,894)    $   (5,340,557)    $   (2,720,988)
                                                    ==============      =============      ============= 

Net loss per common share
  Loss from continuing operations                  $          (.18)    $         (.15)    $         (.11)
  Loss from discontinued operations                              -               (.02)              (.01)
                                                    --------------      -------------      ------------- 

                                                   $          (.18)    $         (.17)    $         (.12)
                                                    ==============      =============      ============= 

Weighted average shares outstanding                     36,476,932         31,070,908         21,924,006
                                                    ==============      =============      =============
</TABLE>

The accompanying notes are an integral part of these statements.





                                      23
<PAGE>   25

                     VSI Enterprises, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

              For the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                  Series A                                            
                                               Preferred stock                 Common stock           
                                       ------------------------------    -------------------------    
                                         Number of                          Number of                 
                                           Shares          Par value         Shares        Par value  
                                        ------------       ---------     --------------    ---------  
                                                                                                      
                                                                                                      
<S>                                             <C>     <C>                  <C>          <C>         
Balance, December 31, 1993                       -      $           -        20,558,802   $    5,139  
  (as restated - see Note B)                                                                          
Purchase of treasury stock of INS                -                  -                 -            -  
Private Placement of 3,975,431 common                                                                 
  shares, net of issuance costs of $51,116       -                  -         3,975,431          994  
Exercise of warrants                             -                  -           500,000          125  
Issuance of 743,496 common shares to                                                                  
  vendors for future services                    -                  -           743,496          186        
Issuance of 206,249 common shares for                                                                 
  conversion of notes payable                    -                  -           206,249           51  
Sale of 30,090 common shares for                                                                      
  employee stock purchase plan                   -                  -            30,090            8  
Issuance of 17,800 common shares                                                                      
  in lieu of cash compensation                   -                  -            17,800            4  
Issuance of 450,000 common shares in                                                                  
  connection with debt agreements                -                  -           450,000          113  
Foreign currency translation adjustment          -                  -                 -            -  
Net loss for the year                            -                  -                 -            -  
                                          --------           --------  ----------------     --------  
Balance, December 31, 1994                       -                  -        26,481,868        6,620                        
   (as restated - see Note B)
</TABLE>
                                           


<TABLE>      
                                                  Additional                    Cumulative               
                                                    paid-in       Accumulated   translation                    
                                                    capital         deficit     adjustment       Total      
                                                 -------------  --------------  ------------ ------------  
<S>                                                <C>           <C>           <C>           <C>          
Balance, December 31, 1993                         $13,626,761   $(9,323,329)  $  (67,040)   $  4,241,531 
  (as restated - see Note B)                                                                              
Purchase of treasury stock of INS                     (120,655)      (32,741)       -            (153,396)
Private Placement of 3,975,431 common                                                                     
  shares, net of issuance costs of $51,116           2,181,963         -            -           2,182,957 
Exercise of warrants                                   249,875         -            -             250,000 
Issuance of 743,496 common shares to                                                                      
  vendors for future services                          444,758         -            -             444,944                 
Issuance of 206,249 common shares for                                                                     
  conversion of notes payable                          103,074         -            -             103,125 
Sale of 30,090 common shares for                                                                          
  employee stock purchase plan                          19,553         -            -              19,561 
Issuance of 17,800 common shares                                                                          
  in lieu of cash compensation                           9,999         -            -              10,003 
Issuance of 450,000 common shares in                                                                      
  connection with debt agreements                       85,387         -            -              85,500 
Foreign currency translation adjustment                  -             -          (62,049)        (62,049)
Net loss for the year                                                                                     
                                                         -        (2,720,988)       -          (2,720,988)    
                                                    ----------   -----------     ---------     ----------
Balance, December 31, 1994                          16,600,715   (12,077,058)    (129,089)      4,401,188 
  (as restated - see Note B)                                                                              
</TABLE>     

                                       24
<PAGE>   26

                     VSI Enterprises, Inc. and Subsidiaries

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED

             For the years ended December 31, 1996, 1995 and  1994


<TABLE>
<CAPTION>

                                                                Series A                                              
                                                             Preferred stock                       Common stock       
                                                       ----------------------------       ----------------------------
                                                        Number of                             Number of               
                                                         Shares      Par value                Shares      Par value   
                                                       -----------   ---------            --------------  ---------   
<S>                                                    <C>           <C>                  <C>             <C>     
Purchase of treasury stock of INS                                -           -                       -            -   
Exercise of warrants, net of exercise                                                                                 
  costs of $77,989                                               -           -               6,424,470        1,606   
Exercise of stock options                                        -           -                 298,533           75   
Issuance of 52,975 common shares                                                                                      
  for employee stock purchase plan                               -           -                  52,975           13   
Issuance of 646, 275 common shares                                                                                    
  for conversion of notes payable and                                                                                 
  related costs                                                  -           -                 646,275          161   
Sale of 362,319 common shares                                    -           -                 362,319           91   
Issuance of 452,736 common shares                                                                                     
  in lieu of cash compensation                                                                 452,736          113   
Issuance of 100,000 common shares                                                                                     
  for products and services                                      -           -                 100,000           25   
Issuance of 188,000 common shares                                                                                     
  for acquisition of VSI solutions                               -           -                 188,000           47   
Foreign currency translation adjustment                          -           -                       -            -   
Net loss for the year                                            -           -                       -            -   
                                                            -------    --------             -----------      ------
Balance, December 31, 1995                                       -           -              35,007,176        8,751   
  (as restated - see Note B)                                                                                          
</TABLE>
                                                       


<TABLE>
                                             Additional                    Cumulative               
                                              paid-in      Accumulated     translation               
                                              capital        deficit       adjustment     Total    
                                             -----------  -------------   -----------  -----------
<S>                                          <C>          <C>              <C>          <C>          
Purchase of treasury stock of INS              (163,561)            -             -       (163,561)  
Exercise of warrants, net of exercise                                                                
  costs of $77,989                            8,473,641             -             -      8,475,247   
Exercise of stock options                       372,755             -             -        372,830   
Issuance of 52,975 common shares                                                                     
  for employee stock purchase plan               68,181             -             -         68,194   
Issuance of 646, 275 common shares                                                                   
  for conversion of notes payable and                                                                
  related costs                                 722,739             -             -        722,900   
Sale of 362,319 common shares                   499,909             -             -        500,000   
Issuance of 452,736 common shares                                                                    
  in lieu of cash compensation                  342,376             -             -        342,489   
Issuance of 100,000 common shares                                                                    
  for products and services                     874,083             -             -        874,108   
Issuance of 188,000 common shares                                                                    
  for acquisition of VSI solutions              300,753             -             -        300,800   
Foreign currency translation adjustment               -             -       (18,580)       (18,580)  
Net loss for the year                                 -    (5,340,557)            -     (5,340,557)  
                                             ----------   -----------      --------     ----------   
Balance, December 31, 1995                                                                           
  (as restated - see Note B)                 28,091,591   (17,417,615)     (147,669)    10,535,058   
</TABLE>

                                       25
<PAGE>   27


                     VSI Enterprises, Inc. and Subsidiaries

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED

             For the years ended December 31, 1996, 1995 and  1994


<TABLE>
<CAPTION>
                                                                                              
                                                                                                    
                                              Series A                                                
                                           Preferred stock                       Common stock              
                                    -----------------------------        ----------------------------     
                                         Number of                          Number of                                              
                                          Shares      Par value              Shares        Par value                               
                                       ------------   ---------          --------------    ---------                               
<S>                                        <C>        <C>                    <C>              <C>                                  
Issuance of 110,775 common shares                                                                                                  
  in lieu of cash compensation                    -           -                 110,775           28                               
Issuance of 44,477 common shares                                                                                                   
  for employee stock purchase plan                -           -                  44,477           11                               
Exercise of stock options                         -           -                 305,631           76                               
Issuance of 250,000 common shares                                                                                                  
  for products and services                       -           -                 250,000           63                               
Issuance of 244,817 common shares                                                                                                  
  for conversion of notes payable                 -           -                 244,817           61                               
Private placement of 1,122,361                                                                                                     
  common shares, net of issuance                                                                                                   
  costs of $41,998                                -           -               1,122,361          281                               
Issuance of 2,007,339 common shares                                                                                                
  of acquisition of Eastern Telecom, Inc.         -           -               2,007,339          502                               
Issuance of 423,673 common shares                                                                                                  
  for conversion of convertible debentures        -           -                 423,673          106                               
Foreign currency translation adjustment           -           -                       -            - 
Net loss for the year                             -           -                       -            -                               
                                           --------    --------              ----------       ------                               
Balance, December 31, 1996                        -   $       -              39,516,249       $9,879                               
                                           ========    ========              ==========       ======                               
</TABLE>



<TABLE>
                                                 Additional                    Cumulative                  
                                                  paid-in     Accumulated      translation                  
                                                  capital       deficit        adjustment         Total    
                                                 ----------   -----------      -----------      ----------
<S>                                              <C>          <C>              <C>              <C>        
Issuance of 110,775 common shares                                                                          
  in lieu of cash compensation                       139,464             -             -            139,492
Issuance of 44,477 common shares                                                                           
  for employee stock purchase plan                   109,413             -             -            109,424
Exercise of stock options                            298,789             -             -            298,865
Issuance of 250,000 common shares                                                                          
  for products and services                          599,946             -             -            600,009
Issuance of 244,817 common shares                                                                          
  for conversion of notes payable                    337,052             -             -            337,113
Private placement of 1,122,361                                                                             
  common shares, net of issuance                                                                           
  costs of $41,998                                 2,388,247             -             -          2,388,528
Issuance of 2,007,339 common shares                                                                        
  of acquisition of Eastern Telecom, Inc.          5,499,498             -             -          5,500,000
Issuance of 423,673 common shares                                                                          
  for conversion of convertible debentures           758,005             -             -            758,111
Foreign currency translation adjustment                    -             -      (141,005)          (141,005)
Net loss for the year                                                                                      
                                                           -    (6,706,894)            -         (6,706,894)
                                                  ----------   -----------      --------         ----------
Balance, December 31, 1996                       $38,222,005  $(24,124,509)    $(288,674)       $13,818,701
                                                  ==========   ===========      ========         ==========

</TABLE>


                                      26
<PAGE>   28

                     VSI Enterprises, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended December 31,

<TABLE>
<CAPTION>
                                                                         (as restated - see Note B)   
                                                                      -----------------------------------
                                                      1996                1995                   1994    
                                                  ---------------     ---------------      --------------
<S>                                                <C>                 <C>                 <C>
Increase (Decrease) in Cash and Cash
  Cash Equivalents

Cash flows from operating activities:
  Net loss                                         $   (6,706,894)     $   (5,340,557)     $  (2,720,988)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
      Depreciation and amortization                     1,420,547           1,092,666            636,167
      Provision for doubtful accounts                      62,000             431,512             65,732
      Allowance to reduce inventory to
         lower cost or market                             250,000              78,025             75,000
      Issuance of common stock  in
         lieu of cash compensation                        139,492             342,489             10,003
      Loss on sale of fixed assets                         28,145               1,069              4,317
      Changes in related assets and
         liabilities, net of businesses acquired:
           Accounts receivable                          3,300,380          (1,441,450)           305,043
           Inventories                                    794,139          (1,948,281)          (669,772)
           Rental and demonstration inventory          (1,491,934)            (59,109)          (100,367)
           Prepaid expenses and other assets              344,616            (197,925)          (263,113)
           Accounts payable                              (139,772)            815,555            147,206
           Accrued expenses                              (746,742)            196,400            206,203
           Deferred revenue                               289,483             139,955             80,748
                                                    -------------       -------------        -----------

             Net cash used by operating
               activities                              (2,456,540)         (5,889,651)        (2,223,821)
                                                    -------------       -------------       ------------ 

Cash flows from investing activities:
  Cash paid for business acquisitions,
    net of cash acquired                               (3,668,131)            (62,946)                 
  Proceeds from sale of property and
    equipment                                              30,314              30,213                  -
  Purchases of property and equipment                    (418,304)           (623,625)          (842,392)
  Capitalized software development costs                 (153,007)           (345,097)          (293,072)
  Other assets                                           (405,760)             43,632            (58,273)
                                                    --------------      -------------       ------------

             Net cash used by investing
               activities                              (4,614,888)           (957,823)        (1,193,737)
                                                    -------------       -------------       ------------ 
</TABLE>


                                       27
<PAGE>   29

                     VSI Enterprises, Inc. and Subsidiaries

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                            Year ended December 31,



<TABLE>
<CAPTION>
                                                         1996                1995                1994    
                                                    ---------------     ---------------     --------------
<S>                                                   <C>                <C>                <C>
Cash flows from financing activities:
  Net change in notes payable under revolving
    lines of credit and bank credit facilities          (2,566,194)           402,684          1,049,592
  Proceeds from convertible debentures                   5,000,000                  -                  -
  Borrowings under notes payable
    to shareholders                                              -                  -            125,000
  Principal payments on other notes payable                      -                  -            (38,424)
  Proceeds from exercise of stock options
    and warrants, net of related costs                     298,865          8,848,077            250,000
  Proceeds from issuance of common stock                   109,424            568,194             16,607
  Proceeds from private placements, net
    of issuance costs                                    2,388,528                  -          2,182,957
  Acquisition of treasury stock by INS                           -           (163,561)          (111,860)
                                                     -------------      -------------      ------------- 

         Net cash provided by financing
           activities                                    5,230,623          9,655,394          3,473,872
                                                     -------------      -------------     --------------

Effect of exchange rate changes on cash                   (101,623)           (74,361)           (62,049)
                                                      ------------      -------------      ------------- 

         Increase (decrease) in cash                    (1,942,428)         2,733,559             (5,735)

Cash and cash equivalents at beginning
  of year                                                4,202,613          1,469,054          1,474,789
                                                     -------------      -------------      -------------

Cash and cash equivalents at end of year            $    2,260,185     $    4,202,613     $    1,469,054
                                                     =============      =============      =============
</TABLE>





                                       28
<PAGE>   30

                     VSI Enterprises, Inc. and Subsidiaries

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                            Year ended December 31,



<TABLE>
<CAPTION>
                                                        1996                1995                1994    
                                                   ---------------     ---------------    --------------
<S>                                                 <C>                <C>                <C>
Supplementary disclosure:
  Interest paid                                            357,216            436,059            370,898

Supplemental schedule of noncash
  investing and financing activities:

Noncash investing and financing activities:
  Conversion of debt to common stock                $    1,095,224     $      722,900     $      103,125
  Common stock issued for products and
    services                                               600,009            874,108            444,944
  Common stock issued for debt costs                             -                  -             85,500

Acquisition of businesses
  Fair value of assets acquired                          9,540,923            396,282                  -
  Cash paid                                             (3,685,128)           (78,318)                 -
  Common stock and options issued                       (5,500,000)          (300,800)                 -
                                                     -------------      -------------      -------------

  Liabilities assumed                               $      355,795     $       17,164     $            -
                                                     =============      =============      =============
</TABLE>



        The accompanying notes are an integral part of these statements.

                                      29
<PAGE>   31

                     VSI Enterprises, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



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

  The Company and its subsidiaries provide network multimedia products and
  services including videoteleconferencing systems, software and service;
  design, installation and integration of local and wide area computer
  networks; and commission based reselling of telephone network services for
  telephone operating companies and related communication entities.

  1.  Principles of Consolidation

  The consolidated financial statements include the accounts of VSI
  Enterprises, Inc. (the "Company") and its wholly-owned subsidiaries.  All
  significant intercompany transactions and balances have been eliminated.

  2.  Cash and Cash Equivalents

  For purposes of the statement of cash flows, the Company considers all highly
  liquid debt instruments purchased with a maturity of three months or less to
  be cash equivalents.

  3.  Revenue Recognition

  Revenue from product sales represents sales of videoteleconferencing systems
  and related maintenance contracts.  Revenue on system sales are recognized
  upon shipment.  Revenue on maintenance contracts are recognized over the term
  of the related contract.

  System integration revenues include computer network design, installation and
  integration services and related computer hardware.  Revenues on integration
  services are recognized as services are performed.  Integration hardware
  revenues are recognized upon shipment.

  Commission revenue from telephone network service sales are recognized upon
  receipt of order and when the Company has no further obligation related to
  the order.

  4.  Inventories

  Inventories consist of components and parts and are valued at the lower of
  cost (first-in, first-out method) or market.  Inventories include an
  allowance to reduce inventories to lower of cost or market of approximately
  $494,000 and $244,000 at December 31, 1996 and 1995, respectively.


                                       30
<PAGE>   32

                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

  5.  Property, Equipment, Rental Inventory and Depreciation

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

  6.  Software Development Costs

  In accordance with SFAS No. 86, 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 $652,249 and $235,842 at December 31, 1996 and
  1995, respectively.  Amortization expense charged to operations was $416,407
  and $180,352 for 1996 and 1995, respectively.

  7.  Cost in Excess of Net Assets Acquired

  The excess acquisition cost over the fair value of net assets of acquired
  businesses are amortized over 20 years on a straight-line basis.  Accumulated
  amortization of costs in excess of net assets acquired was $309,846 and
  $153,062 at December 31, 1996 and December 31, 1995, respectively.
  Amortization charged to operations was $156,784, $44,799 and $44,799 for the
  years ended December 31, 1996, 1995 and 1994, respectively.

  Management periodically evaluates the realizability of goodwill related to
  its subsidiaries.  Management believes that no material impairment of
  goodwill exists at December 31, 1996.

  8.  Investments

  The Company accounts for investments in entities in which it owns less than
  20% under the cost method.  At December 31, 1996, other assets included
  $406,000, representing the Company's cost investment in Global Telemedix.
  Global Telemedix provides computer hardware and software to healthcare
  providers.





                                       31
<PAGE>   33

                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

  9.  Foreign Currency Translation

  The balance sheet accounts of the Company's foreign subsidiaries are
  translated at the current exchange rate as of the end of the accounting
  period.  Income statement items are translated at average currency exchange
  rates for the period.  The resulting translation adjustment is recorded as a
  separate component of stockholders' equity.

  Transaction gains and losses were not significant.

  10. 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.

  11. Stock Based Compensation

  The Company's stock option plans are accounted for under the intrinsic value
  method in which compensation expense is recognized for the amount, if any,
  that the fair value of the underlying common stock exceeds the exercise price
  at the date of grant.

  12. Net Loss Per Common Share

  The net loss per common share is based on the weighted average number of
  common and common equivalent shares outstanding during each period.

  Fully diluted information is not presented as fully diluted loss per share is
  not materially different from the primary loss per share presented.

  13. Fair Value of Financial Instruments

  The Company's financial instruments include cash, cash equivalents, notes
  payable and convertible debentures.  Estimates of fair value of these
  instruments are as follows:

  Cash and cash equivalents - The carrying amount of cash and cash equivalents
  approximates fair value due to the relatively short maturity of these
  instruments.





                                       32
<PAGE>   34


                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

  14. Fair Value of Financial Instruments - Continued

  Notes payable and convertible debentures - The carrying amount of the
  Company's notes payable and convertible debentures approximate fair value
  based upon borrowing rates currently available to the Company for borrowings
  with comparable maturities.

  14.  Use of Estimates in the Preparation of Financial Statements

  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.

  15.  Reclassifications

  Certain amounts in the 1994 and 1995 financial statements have been
  reclassified to conform to the 1996 presentation.


                                       33
<PAGE>   35

                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995



NOTE B - MERGER AND ACQUISITIONS

  INS Merger

  On June 25, 1996, the Company, through its wholly-owned subsidiary, INS
  Acquisition Co., issued 481,670 shares of its common stock in exchange for
  all of the outstanding common stock of Integrated Network Services, Inc.
  (INS).  The merger has been accounted for as a pooling of interests and
  accordingly, the Company's consolidated financial statements have been
  restated to include the accounts and operations of INS for all periods prior
  to the merger.  INS provides integration services for local and wide area
  networks.

  Separate results of operations for the periods prior to the merger are as
  follows:


<TABLE>
<CAPTION>
                                                                   Year ended December 31,              
                                                    ----------------------------------------------------
                                                          1996               1995               1994    
                                                    ---------------    ---------------    --------------
    <S>                                            <C>                 <C>               <C>
    Revenue
      VSI                                          $   12,709,224      $   11,920,437    $    13,002,986
      INS                                               4,346,723           8,530,521          6,223,113
                                                    -------------       -------------     --------------

      Combined                                     $   17,055,947      $   20,450,958    $    19,226,099
                                                    =============       =============     ==============

    Net earnings (loss) from
      continuing operations
         VSI                                       $   (5,992,477)     $   (4,592,340)   $    (2,662,354)
         INS                                             (714,417)             23,966            252,033
                                                    -------------       -------------     --------------

         Combined                                  $   (6,706,894)     $   (4,568,374)   $    (2,410,321)
                                                    =============       =============     ============== 

    Net (loss)
      VSI                                          $   (5,992,477)     $   (4,592,340)   $    (2,662,354)
      INS                                                (714,417)           (748,217)           (58,634)
                                                    -------------       -------------     -------------- 

      Combined                                     $   (6,706,894)     $   (5,340,557)   $    (2,720,988)
                                                    =============       =============     ============== 
</TABLE>





                                       34
<PAGE>   36



                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE B - MERGER AND ACQUISITIONS - Continued

  Acquisitions

  In October, 1996, the Company acquired all of the outstanding common stock of
  Eastern Telecom, Inc. (ETI) in exchange for 2,007,339 shares of VSI common
  stock, 127,754 options to purchase VSI common stock at less than $.01 per
  share and $3,500,000 in cash.  The cash portion of the purchase was funded
  from the issuance of $5,000,000 of convertible debentures.  The acquisition
  was valued at approximately $9,185,000 including acquisition costs of
  approximately $185,000.  ETI is engaged in the selling of network services of
  telephone operating companies and long distance carriers.

  In April, 1995, the Company acquired all of the outstanding common stock of
  CR Solutions, Inc. in exchange for 188,000 shares of VSI common stock.  The
  transaction was valued at approximately $379,000, including acquisition costs
  of approximately $78,000.  CR Solutions, whose name was changed to VSI
  Solutions, is engaged in the development of software for
  videoteleconferencing systems.

  The ETI and CR Solutions acquisitions were accounted for as purchases.
  Accordingly, the purchase prices were allocated to assets and liabilities
  based on their estimated fair values at the date of acquisition.  Results of
  operations of ETI and CR Solutions have been included in the consolidated
  financial statements from the respective date of each acquisition.  The
  excess purchase price over net assets acquired of approximately $9,000,000
  related to the ETI purchase is being amortized on a straight-line basis over
  20 years.

  The unaudited pro forma results of operations which follow assume that the
  ETI acquisition had occurred at the beginning of each period presented.  The
  results of operations of CR Solutions were not material.  In addition to
  combining the historical results of operations of the companies, the pro
  forma calculations include adjustments for the estimated effects on the
  Company's historical results of operations for amortization and interest.
  These results are not necessarily indicative of the results that would have
  occurred if the transactions had occurred at the beginning of each period
  presented nor are the results indicative of future results.
<TABLE>
<CAPTION>
                                                                              (Unaudited)               
                                                            ----------------------------------------------
                                                                        Year ended December 31,           
                                                            ----------------------------------------------
                                                                  1996            1995           1994     
                                                            --------------- --------------- --------------
    <S>                                                     <C>              <C>
    Sales                                                     $20,962,562      $25,068,972     $22,489,534
    Net loss from continuing operations                        (5,906,652)      (3,364,029)     (1,627,847)
    Net loss                                                   (5,906,652)      (4,136,212)     (1,938,514)
                                                                                                
    Net loss per common share from                                                              
      continuing operations                                   $      (.16)     $      (.10)    $      (.07)
    Net loss per common share                                        (.16)            (.13)           (.08)
</TABLE>





                                       35
<PAGE>   37

                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995



NOTE C - DISCONTINUED OPERATIONS

  Subsequent to December 31, 1995, INS discontinued the operations of its cable
  television system design and commercial personal computer distribution
  businesses.  These operations are accounted for as discontinued operations,
  and accordingly, their operations are segregated in the accompanying
  consolidated statements of operations.  Net sales, operating expenses and
  other expenses for 1995 and 1994 have been reclassified for amounts
  associated with the discontinued businesses.  The assets and liabilities
  associated with the discontinued businesses were not significant at December
  31, 1995.

  The loss on disposal of discontinued businesses, including provisions to
  reduce related assets to estimated net realizable value and estimated losses
  from operations during the disposal period, was $233,130.  Summary operating
  results of discontinued operations, excluding the loss on disposal, are as
  follows:

<TABLE>
<CAPTION>
                                                                             Year ended December 31,     
                                                                       ----------------------------------

                                                                            1995               1994        
                                                                       -------------       --------------  
      <S>                                                              <C>                <C>
      Revenue                                                          $    6,336,394     $   6,710,883
      Net loss from discontinued operations                                  (539,053)         (310,667)
</TABLE>


NOTE D - PROPERTY AND EQUIPMENT

  Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                    December 31,         December 31,        Estimated
                                                       1996                 1995           service lives
                                                  ----------------     ----------------    -------------
      <S>                                            <C>                   <C>             <C>
      Machinery and equipment                        $3,095,859            $2,772,913      3-10 years
      Furniture and fixtures                            475,068               487,705      10 years
      Leasehold improvements                             65,933                65,933      5 years
                                                      ---------             ---------             
                                                      3,636,860             3,326,551
      Less accumulated depreciation                   2,280,547             1,828,992
                                                      ---------             ---------

                                                     $1,356,313            $1,497,559
                                                      =========             =========
</TABLE>

Rental and demonstration inventory is depreciated on a straight-line basis over
three years.  Depreciation expense charged to operations was approximately
$814,000, $722,000 and $421,000 for the years ended December 31, 1996, 1995 and
1994, respectively.





                                       36
<PAGE>   38



                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995



NOTE E - NOTES PAYABLE AND BANK CREDIT FACILITIES

  Notes Payable

  Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                                        December 31,        
                                                                                ----------------------------
                                                                                     1996           1995    
                                                                               --------------   ------------
    <S>                                                                         <C>              <C>
    INS line of credit. Provides for maximum borrowings of
      $750,000, limited to 80% of eligible accounts receivable.
      Interest payable monthly at the prime rate plus 3%
      (effective rate of 11.25% at December 31, 1996).
      Collateralized by accounts receivable and inventory
      of INS.                                                                   $    181,725     $         -

    INS 1995 line of credit. Repaid and terminated in 1996                                 -       2,674,226

    Note payable to bank of European subsidiary.  Interest
      payable monthly at 5%.                                                         315,278         340,000

    Unsecured note payable to a director.  Interest accrued
      at the greater of the prime rate plus 2% or 12.5%.                                   -         299,656

    Other                                                                              4,638          25,538
                                                                                 -----------      ----------
                                                                                $    501,641     $ 3,339,420
                                                                                 ===========       =========
</TABLE>

  During 1994, the Company entered into a line of credit agreement with a
  director.  The agreement provided for borrowings of up to $1,000,000, which
  was fully utilized at December 31, 1994.  In consideration for the agreement,
  the Company issued 300,000 common shares and 100,000 common stock purchase
  warrants to the director.  The warrants are exercisable over a period of ten
  years at an exercise price of $.40 per share.

  The Company also had a note payable to a director with an outstanding balance
  of $327,642 at December 31, 1994.  In consideration for this note, the
  Company issued 150,000 common shares and 150,000 common stock purchase
  warrants to the director.  The warrants are exercisable over a period of ten
  years at an exercise price of $.40 per share.





                                       37
<PAGE>   39


                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995

NOTE E - NOTES PAYABLE AND BANK CREDIT FACILITIES - Continued

  Notes Payable - Continued

  During 1995, the Company repaid $500,000 under the $1 million line of credit
  and retired the remaining outstanding principal through the issuance of
  363,108 common shares.  The note payable was reduced to $250,000 through the
  issuance of 194,105 common shares.  All accrued and unpaid interest on the
  line of credit and note payable, amounting to $49,656, was added to the
  remaining balance of $250,000, and a new note agreement was executed for
  $299,656.  In consideration for the new note agreement, the Company issued
  37,500 common shares to the director.  All prior note agreements with the
  directors were terminated.  During 1996, the remaining balance of this note
  $299,656 plus accrued interest of $37,457, was retired by the issuance of
  244,817 common shares.  Interest expense under notes due to the director
  totaled approximately $16,000, $71,000 and $147,000 for the years ended
  December 31, 1996, 1995 and 1994, respectively.

  The common stock and common stock purchase warrants issued as consideration
  for the note agreements with the director have been accounted for as debt
  issue costs and are amortized on a straight-line basis over the terms of the
  agreements.

  Bank Credit Facilities

  At December 31, 1996, the Company's foreign subsidiary had bank credit
  facilities which provided for maximum borrowings of approximately $570,000
  and $272,000 at December 31, 1996 and 1995, respectively.  These bank credit
  facilities are collateralized by the subsidiary's accounts receivable and
  inventory and bear interest at 8.75%.  Outstanding borrowings under these
  agreements were $127,605 and $155,676 at December 31, 1996 and 1995,
  respectively.

  Revolving Credit and Security Agreement

  The Company has a revolving credit and security agreement (the agreement)
  with a finance company which provides for the sale of the Company's eligible
  accounts receivable.  Advances equal to eighty percent (80%) of eligible
  accounts receivable are made under the agreement, with the remaining twenty
  percent (20%) advanced upon customer payment.  The receivables are sold with
  recourse and the finance company can charge back certain uncollected
  receivables in accordance with the agreement.  The agreement provides for
  maximum advances  of $4,000,000 with interest on outstanding advances payable
  monthly at the prime rate plus 2%.  The agreement also provides for a monthly
  maintenance fee of .25% of eligible receivables sold.  Interest and
  maintenance fees are subject to an aggregate monthly minimum of $7,500.  The
  agreement expires in June 1997 and cannot be terminated without penalty
  unless the Company receives a written commitment from a bank to provide
  financing.  Outstanding advances under this agreement were $1,534,647 and
  $1,031,302 at December 31, 1996 and 1995, respectively, and are classified as
  a reduction of accounts receivable in the accompanying consolidated balance
  sheets.


                                       38
<PAGE>   40


                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995



NOTE F - CONVERTIBLE DEBENTURES

  In September 1996, the Company issued $5,000,000 of 5% convertible
  debentures, due in September 1999.  The debentures are convertible into
  common stock at the lesser of the per share market price at the time of
  funding or 80% of the per share price of the common stock at the time of
  conversion.  The Company can force conversion of the debentures anytime after
  September 30, 1997, provided that the per share price of the common stock has
  increased by at least 50% from the date of funding.  Market price of the
  common stock is defined as the five day average closing bid price.

  In December 1996, convertible debentures amounting to $750,000 plus accrued
  interest of $8,111 were converted into 423,673 common shares.


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

  Stock Option Plans

  The Company's board of directors has approved a stock option plan which
  covers up to 2,700,000 shares of common stock.  The plan provide 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 options transaction for each of the three
  years in the year ended December 31, 1996 are summarized below:

<TABLE>
<CAPTION>
                                              1996                             1995                      1994         
                                     --------------------------       --------------------------   --------------------
                                                       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   1,936,967         $1.48         1,285,012          $1.01   1,875,464       $1.55
                                                                                                                       
      Granted                            550,954          2.27         1,002,646           2.01     734,000         .64
                                                                                                                        
      Exercised                         (305,631)          .98          (298,533)          1.25           -           - 
      Forfeited                         (258,865)         2.58           (52,158)          1.25  (1,324,452)       1.56
                                        --------          ----         ---------           ----  ----------        ----
                                                                                                                       
      Outstanding, end of year         1,923,425         $1.63         1,936,967          $1.48   1,285,012       $1.01
                                      ==========          ====         =========           ====   =========        ====
                                                                                                
                                                                                                
</TABLE>





                                       39
<PAGE>   41


                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995



NOTE G - STOCK OPTIONS, WARRANTS AND EMPLOYEE STOCK PURCHASE PLAN -
            Continued

  The following table summarizes information about stock options outstanding at
December 31, 1996:

<TABLE>
<CAPTION>
                                         Options Outstanding                       Options Exercisable       
                           --------------------------------------------    --------------------------------
                                                Weighted
                                                Average        Weighted                           Weighted
             Range of           Number           Remaining     Average           Number           Average
             Excise          Outstanding at    Contractual     Exercise      Exercisable at       Exercise
              Price        December 31, 1996
            -----------    -----------------
                                               Life (Years)     Price      December 31, 1996        Price  
                                               ------------ ------------   -----------------     ----------
           <S>                     <C>            <C>         <C>                 <C>             <C>
           $0.01-0.94                615,421      8.1         $  .50              309,667         $ 0.63
           $1.00-1.88                735,670      8.0           1.44              359,337           1.42
            $
            2.00-2.81                300,188      8.8           2.38              128,188           2.45
           $3.63-4.31                272,146      9.1           3.89               99,667           3.74
                                   ---------      ---           ----             --------           ----
                                   1,923,425      8.3         $ 1.75              896,859         $ 1.55
                                   =========      ===          =====              =======          =====
</TABLE>

  The Company uses the intrinsic value method in accounting for its stock
  option plans.  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>
                                                                                  1996              1995   
                                                                              ------------        ----------
    <S>                           <C>                                          <C>             <C>
    Net loss                      As reported                                  $ (6,706,894)   $  (5,340,557)
                                  Pro forma                                      (7,509,903)      (5,615,345)

    Net loss per
      common share                As reported                                  $       (.18)   $        (.17)
                                  Pro forma                                            (.21)            (.18)
</TABLE>

  For purposes of the pro forma amounts above, the fair value of each option
  grant was estimated on the date of grant using the Black-Scholes
  options-pricing model with the following weighted-average assumptions used
  for grants in 1996 and 1995, respectively; expected volatility of 110% and
  100%, risk-free interest rates of 5.3%-6.6% and 5-8%-7.8%; and expected lives
  of 3-7 years for both years.


                                       40
<PAGE>   42



                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995

NOTE G - STOCK OPTIONS, WARRANTS AND EMPLOYEE STOCK PURCHASE PLAN -
            Continued

  Warrants

  In connection with the purchase of the outstanding notes payable and
  establishment of a line of credit during 1994, 250,000 common stock purchase
  warrants were granted to a director at an exercise price of $0.40 per share.
  These warrants expire in July 2004.

  Employee Stock Purchase Plan

  The Company has an employee stock purchase plan that provides for the sale of
  up to 300,000 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 last
  pay date of each plan period.  44,477 and 52,975 shares of common stock were
  purchased by employees under this Plan for the years ended December 31, 1996
  and 1995, respectively.

NOTE H - INCOME TAXES

  The Company's temporary differences result in a net deferred income tax asset
  which is reduced to zero by a related valuation allowance, summarized as
  follows:
<TABLE>
<CAPTION>
                                                                                        December 31,       
                                                                                ---------------------------
                                                                                  1996              1995   
                                                                                -----------      ----------
    <S>                                                                          <C>           <C>
    Deferred tax assets
      Operating loss carryforwards                                               $6,232,000     $ 4,946,000
      Nondeductible accruals and allowances                                         359,000         465,000
      Capitalized inventory costs                                                   151,000         174,000
      Tax credit carryforwards                                                       89,000          89,000
      Other                                                                         219,000          52,000
                                                                                 ----------     -----------
         Gross deferred tax assets                                                7,050,000       5,726,000
                                                                                 
    Deferred tax asset valuation allowance                                       (6,883,000)     (5,251,000)
                                                                                 ----------     ----------- 
         Net deferred tax asset                                                     167,000         475,000
                                                                                 ----------     -----------
                                                                                 
    Deferred tax liabilities                                                     
      Cash to accrual adjustments                                                   125,000         444,000
      Other                                                                          42,000          31,000
                                                                                 ----------     -----------
         Deferred tax liabilities                                                   167,000         475,000
                                                                                 ----------     -----------
                                                                                 
         Net deferred tax                                                        $        -     $         -
                                                                                 ==========     ===========
</TABLE>





                                       41
<PAGE>   43


                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE H - INCOME TAXES - Continued

  Income tax expense for 1995 and 1994 represents income tax expense of INS and
  approximated income taxes as computed at the statutory rates for the separate
  pretax earnings of INS.

  At December 31, 1996, the Company had operating loss carryforwards for U.S.
  income tax purposes of approximately $16,187,000 available to reduce future
  taxable income and approximately $89,000 of investment and research and
  experimental credits available to reduce future income taxes payable, which
  expire as follows:
<TABLE>
<CAPTION>
                                           Net
                                         operating                Tax
                      Year                loss                   Credits
                      ----            -------------              -------
                      <S>              <C>                       <C>
                      2000             $     22,000              $18,000
                      2001                  434,000               43,000
                      2002                1,016,000               28,000
                      2003                  805,000                 -
                      2004                  652,000                 -
                      2005                  937,000                 -
                      2006                  255,000                 -
                      2007                  766,000                 -
                      2008                2,864,000                 -
                      2009                2,173,000                 -
                      2010                1,816,000                 -
                      2011                4,447,000                 -   
                                         ----------               ------

                                        $16,187,000              $89,000
                                         ==========               ======
</TABLE>

  The Company's European subsidiary has net operating loss carryforwards of
  approximately $2,801,000 that can be used to offset future taxable income.
  These carryforwards can be carried forward indefinitely.  The resulting
  deferred income tax asset has been reduced to zero by a related valuation
  allowance.

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





                                       42
<PAGE>   44




                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995


NOTE I - LINE OF BUSINESS AND MAJOR CUSTOMERS

  The Company and its subsidiaries are engaged in one business segment:
  providing network multimedia products and services.  The Company sells its
  products and services to customers located primarily in the United States and
  Europe (sales in Europe were approximately $2,264,000, $2,727,000 and
  $3,560,000 for the years ended December 31, 1996, 1995 and 1994,
  respectively).  Revenue from healthcare providers and related entities
  comprised approximately 25%, 42% and 32% of consolidated revenues for the
  years ended December 31, 1996, 1995 and 1995, respectively.  Revenue from
  telephone operating companies and related communications entities comprised
  approximately 23%, 18% and 29% of consolidated revenues for the years ended
  December 31, 1996, 1995 and 1994, respectively.  At December 31, 1996,
  accounts receivable from telephone operating companies and related
  communication entities comprised 46% of consolidated receivables and accounts
  receivable from health care providers comprised 17% of consolidated
  receivables.

  Sales to one customer accounted for approximately 14%, 12% and 13% of
  consolidated sales for the years ended December 31, 1996, 1995 and 1994,
  respectively.  Additionally, approximately 43% of consolidated accounts
  receivable at December 31, 1996 were from two customers, accounting for 31%
  and 12% of consolidated accounts receivable.

  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.

  The Company's operations are subject to rapid technological developments.
  Management periodically evaluates the realizability of its technology related
  assets, including inventories, software development costs and costs in excess
  of net assets of acquired businesses.  Management believes that no material
  impairment of these assets exists at December 31, 1996.  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.





                                       43
<PAGE>   45



                     VSI Enterprises, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1996 and 1995



NOTE J - COMMITMENTS AND CONTINGENCIES

 Operating Leases

  The Company and its subsidiaries lease office space and equipment under
  non-cancelable operating leases expiring at various dates through February
  2001.  Rent expense for the years ended December 31, 1996, December 31, 1995
  and December 31, 1994 was approximately $660,000, $735,000 and $626,000,
  respectively.  Approximate minimum annual future rental payments under the
  leases are as follows:

<TABLE>
<CAPTION>
            Year ending December 31,
                     <S>                                            <C>
                     1997                                           $      561,000
                     1998                                                  186,000
                     1999                                                   77,000
                     2000                                                   56,000
                     2001                                                   80,000
                                                                     -------------
                                                                    $      960,000
                                                                     =============
</TABLE>


  Litigation

 In January 1997, the Company, together with an officer, had been named
 as defendants in a lawsuit filed by certain stockholders of the Company.  The
 lawsuit, which purports to represent a class of stockholders, alleges that the
 defendants made certain misrepresentations and omissions in connection with   
 certain disclosures about the Company.  The Company denies these allegations
 and intends to defend itself vigorously; however, management and legal counsel
 are currently unable to determine the possible outcome of this matter. 
 Accordingly, no liability for possible losses has been accrued.

 The Company is also 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.

                                       44
<PAGE>   46

                                    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 Company's proxy statement, dated March 24, 1997, for
the 1997 annual meeting of shareholders is incorporated hereby by reference.

ITEM 11.  EXECUTIVE COMPENSATION.

         The information relating to executive compensation contained in the
Company's proxy statement, dated March 24, 1997, for the 1997 annual meeting of
shareholders is 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 Company's proxy statement, dated March
24, 1997, for the 1997 annual meeting of shareholders is incorporated herein by
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information relating to related party transactions contained in
the Company's proxy statement, dated March 24, 1997, for the 1997 annual
meeting of shareholders is incorporated herein 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, 1996 and December 31, 
         1995

         Consolidated Statements of Operations for Years Ended December 31,
         1996, 1995 and 1994

         Consolidated Statement of Stockholders' Equity for Years Ended
         December 31, 1996, 1995 and 1994

         Consolidated Statements of Cash Flows for Years Ended December 31,
         1996, 1995 and 1994

         Notes to Consolidated Financial Statements





                                      -45-
<PAGE>   47


         2.  Financial Statement Schedules.

         The following financial statement schedule of VSI Enterprises, Inc.
for the years ended December 31, 1996, 1995 and 1994 is included pursuant to
Item 8:

<TABLE>
         <S>                <C>                                                                                       <C>
                            Report of Independent Certified Public
                              Accountants on Schedules  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1

         Schedule II        Valuation and Qualifying Accounts   . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
</TABLE>


Schedules not listed above have been omitted because they are not applicable or
are not required for the information required to be set forth therein is
included in the Financial Statements or notes thereto.

         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 Company's Registration Statement on Form S-18 (File No.
33-27040-D) (referred to as "S-18"), (ii) 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"), (iii) 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"), (iv) 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"); (v) the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1992 (referred to as "12/31/92 10-Q"); (vi) the Company's Annual
Report on Form 10-K for the year ended March 31, 1993 (referred to as "1993
10-K"); (vii) the Company's Registration Statement Form S-1 (File No.
33-85754) (referred to as "S-1"); (viii) the Company's Annual Report on Form
10-K for the year ended December 31, 1994 (referred to as "1994 10-K"); and
(ix) the Company's Annual Report on Form 10-K for the year ended December 31,
1995 (referred to as "1995 10-K").

<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  (12/31/92
                          10-Q)

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





                                      -46-
<PAGE>   48


<TABLE>
     <S>                  <C>
       *3.7               Certificate of Amendment to Certificate of Incorporation filed on September 8, 1995 (1995 10-
                          K)

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

     *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)

       *10.4              Revolving Credit and Security Agreement dated June 7, 1995 by and between Videoconferencing
                          Systems, Inc. ("VSI") and Fidelity Funding of California, Inc. (1995 10-K)

       *10.5              Agreement, dated June 5, 1995, among Registrant, VSI and Larry Carr regarding renewal of
                          promissory note and termination of line of credit (1995
                          10-K)

       *10.6              Promissory Note, dated June 6, 1995, from VSI to Larry Carr in the principal amount of
                          $299,656 (1995 10-K)

      *10.15              1994 Employee Stock Purchase Plan (1994 10-K)

       21.1               Subsidiaries of the Registrant

       23.1               Consent of Grant Thornton LLP

       27.1               Financial Data Schedule (SEC use only)
</TABLE>


     (b) Reports on Form 8-K.

         During the quarter ended December 31, 1996, the Company filed (i) a
Current Report on Form 8-K dated October 2, 1996, (ii) Amendment No. 1 on Form
8-K/A dated November 21, 1996 to its Current Report on Form 8-K dated October
2, 1996, and (iii) Amendment No. 2 on Form 8-K/A dated December 13, 1996 to its
Current Report on Form 8-K dated October 2, 1996.





                                      -47-
<PAGE>   49

                                   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 K. Snelling          
                                            ----------------------------------
Date:  March 25, 1997                       Richard K. Snelling, Chairman of 
                                            the Board and 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/ Richard K. Snelling                        Chairman of the Board               March 25, 1997
------------------------------------------------        and Chief Executive Officer                          
              Richard K. Snelling                                                  



                /s/ B.R. Brewer                     President, Chief Operating Officer,        March 25, 1997
------------------------------------------------   Chief Financial Officer and Secretary                     
                 B. R. Brewer                            (Principal Financial and       
                                                            Accounting Officer)         
                                                                                        

             /s/ Carleton A. Brown                               Director                      March 25, 1997
------------------------------------------------                                                             
               Carleton A. Brown


               /s/ Larry M. Carr                                 Director                      March 25, 1997
------------------------------------------------                                                             
                 Larry M. Carr


              /s/ Leo M. Cortjens                                Director                      March 25, 1997
------------------------------------------------                                                             
                Leo M. Cortjens


               /s/ Mark E. Munro                                 Director                      March 25, 1997
------------------------------------------------                                                             
                 Mark E. Munro


            /s/ Edward S. Redstone                               Director                      March 25, 1997
------------------------------------------------                                                             
              Edward S. Redstone


                                                                 Director                                    
------------------------------------------------                                                             
             Andre van den Bogaert
                                  
</TABLE>
<PAGE>   50





               Report of Independent Certified Public Accountants
                                  on Schedule



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 February 21,
1997, 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 of VSI Enterprises, Inc. and subsidiaries for the year ended
December 31, 1996.  In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.

We have previously audited and reported on Schedule II of VSI Enterprises, Inc.
and subsidiaries for the years ended December 31, 1995 and 1994, prior to its
restatement for the 1996 pooling of interests with Integrated Network Services,
Inc. (INS).  Separate financial statements of INS included in the restated
consolidated balance sheet as of December 31, 1995, and the restated
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1995 and 1994 were audited and reported on
separately by other auditors.

We have also audited the combination of Schedule II for the years ended
December 31, 1995 and 1994, after restatement for the 1996 pooling of
interests;  in our opinion, such schedule has been properly combined on the
basis described in Note B of the notes to the consolidated financial
statements.

                                               /s/ Grant Thornton LLP

Atlanta, Georgia
February 21, 1997




                                     S-1
<PAGE>   51

                                      VSI

                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)          Period  
            -----------                           -----------       ----------         ------------       -----------
<S>                                                <C>             <C>                   <C>               <C>
Year ended December 31, 1996                                                                         
  Reserve for obsolete inventory                   $  244,000      $  250,000            $      -          $494,200
  Reserve for doubtful accounts receivable            658,402         (28,558)            358,720           271,124
                                                                                                     
Year ended December 31, 1995                                                                         
  Reserve for obsolete inventory                      166,200         78,000                    -           244,200
  Reserve for doubtful accounts receivable            349,832         431,512             122,942           658,402
                                                                                                     
Year ended December 31, 1994                                                                         
  Reserve for obsolete inventory                      555,200         75,000              464,000           166,200
  Reserve for doubtful accounts receivable            283,768         90,392               24,328           349,832
</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".




                                     S-2
<PAGE>   52

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
      EXHIBIT                                                                           SEQUENTIAL
      NUMBER                            DESCRIPTION OF EXHIBIT                           PAGE NO.
      ------                            ----------------------                           --------
       <S>                           <C>                                                 <C>
       21.1                          Subsidiaries of the Registrant

       23.1                          Consent of Grant Thornton LLP

       27.1                          Financial Data Schedule (SEC use only)
                                                                           
</TABLE>