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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                  FORM 10-K/A
                                AMENDMENT NO. 3

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

        Annual Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934
                  For the Fiscal Year Ended December 31, 1998

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

                          Commission File No. 1-10927

                             VSI ENTERPRISES, INC.

                             A Delaware Corporation
                  (IRS Employer Identification No. 84-1104448)
                            5801 Goshen Springs Road
                            Norcross, Georgia 30071
                                 (770) 242-7566

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

                                      None
                                      ----

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

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

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

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

The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant (10,703,808 shares) on April 15, 1999 was
approximately $5,351,904, based on the closing price of the registrant's common
stock as quoted on the Nasdaq Small Cap Market on April 15, 1999. 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 April
15, 1999: 12,300,144 shares of $.001 par value common stock.
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                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None.


The following items are amended:

Item 1.   Business.

Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.



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ITEM 1.   BUSINESS.

GENERAL

VSI Enterprises, Inc. (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.

The Company operates under five wholly-owned subsidiaries that include;
Videoconferencing Systems, Inc., which designs, manufactures, markets and
services an interactive group of videoconferencing and control systems; VSI
Network Solutions, Inc., d/b/a Eastern Telecom, Inc. ("ETI") which is a company
engaged in the business of marketing and selling telecommunications services
and products; Videoconferencing Systems, n.v. ("VSI Europe") which is a
distributor of the Company's videoconference systems in Europe; VSI Solutions
Inc. ("VSI Solutions") which is a software company whose products include a
reservation system for the management of videoconferencing systems; VSI Network
Services, Inc., d/b/a Integrated Network Services, Inc. ("INS") which was
engaged in the design, installation and support of local and wide area
networks.

The Company expects to close VSI Solutions by July 1, 1999, upon the completion
of a contract with a customer. Integrated Network Services, Inc., which was 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 discontinued
operations in December, 1998.

On January 15, 1999, the Company implemented a 1-for-4 reverse split of the
shares of VSI Common Stock. All shares and per share amounts included in this
report reflect the effects of the reverse split.

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.

RECENT DEVELOPMENTS

Debt Restructuring. On August 31, 1999, we restructured our debt with Thomson
Kernaghan & Co., Ltd., which totaled $1,089,750 at August 31, 1999. We made a
cash payment of $150,000 at closing, and the remaining balance was exchanged
for a 7% secured convertible debenture, with a one year term. The debenture is
secured by a lien on our ownership interest in Eastern Telecom, Inc. which is
junior to our converting term note holders and new investors, as discussed
below. Eastern Telecom is a marketer and reseller of telecommunications
services and products. Additionally, under the terms of the agreement, Thomson
Kernaghan released its existing security interest in our patents. Thomson
Kernaghan has the option to commence converting the debenture into shares of
our common stock at the initial rate of 7.5% per month beginning January 1,
2000. This rate will increase to 15% per month commencing April 1, 2000. The
conversion price is the lesser of $1.00 per share or the five-day average
closing bid price of



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our common stock prior to the date of any such conversion, with a floor of
$0.50 per share. Furthermore, Thomson Kernaghan has the option of converting
the debenture into shares of Eastern Telecom common stock at any time and at
the rate of one share of Eastern Telecom common stock for each $6.50 of
principal so converted. Any remaining balance of the debenture will be payable
on the maturity date.

As part of closing the Thomson Kernaghan transaction, $1,213,000 of our
18-month term notes due March 31, 2000 were converted into 195,099 shares of
Eastern Telecom common stock which were owned by us, representing a 19.5%
minority interest in Eastern Telecom. In addition, $1,040,000 of new capital
was raised by selling a 16.0% minority interest in Eastern Telecom. The
consideration received for the sale of shares of common stock of Eastern
Telecom was based on an internal valuation of Eastern Telecom. We still hold
the remaining 64.5% majority ownership interest in Eastern Telecom.

Participants in the term note conversion and new equity participants also
received 1,098,492 and 396,497 warrants to acquire shares of our common stock
at an exercise price of $0.50 and $1.00 per share, respectively. Under the
terms of the Thomson Kernaghan agreement, we have undertaken to sell our
remaining interest in Eastern Telecom at not less than fair market value,
provided the terms of any such transaction are otherwise acceptable to us.
Additionally, Eastern Telecom's minority shareholders have a put option, which
gives them the right to put their Eastern Telecom shares back to us after one
year, and we have a call option to reacquire shares of Eastern Telecom at any
time, both at a price of $6.50 per share of Eastern Telecom common stock.

Management Changes. On May 1, 1999, we entered into consulting agreements with
a Dallas, Texas based venture capital, merchant banking and consulting firm,
Taconic Partners, L.L.C., and with Karen Franklin to assist with our ongoing
and anticipated operational and financial restructuring. On June 7, 1999, Ms.
Franklin replaced interim Chief Financial Officer, Sam Horgan. On June 8, 1999,
we announced that President and Chief Executive Officer Judi North would be
resigning her position, effective June 11, 1999, for personal reasons. Mrs.
North was replaced, on an interim basis, by Richard E. Harrison, President of
Taconic Partners. Concurrent with the announcement of Ms. North's resignation,
we promoted Rick Egan to President of our Videoconferencing Systems subsidiary.
Ms. North remains on our board of directors.

Richard E. Harrison, age 41, is the President and a Manager of Taconic
Partners, L.L.C., a Dallas, Texas based venture capital, merchant banking and
consulting firm. Since October 1996, Mr. Harrison has served as Chairman,
President and CEO of OHA Financial, Inc., an affiliated investment of Taconic
engaged in the specialty finance industry. Before founding Taconic Partners,
Inc. in 1990, the predecessor to Taconic Partners, L.L.C., Mr. Harrison was a
senior consultant with Towers Perrin, where he specialized in post-merger
integration of operations and organizations for larger international companies.
Prior to joining Towers Perrin, Mr. Harrison worked for Thomson McKinnon in
corporate finance. Before that, Mr. Harrison was on the marketing staff of
Reliance Electric Company. Mr. Harrison holds a bachelor of business
administration degree in Finance from Baylor University and a masters of
business administration degree from the University of Texas at Austin where he
graduated with honors.

Karen T. Franklin, age 42, served as Controller of OHA Financial, Inc. from
September 1997 through May 1999. Previously, she had served as Director of
Financial Accounting for Jayhawk Acceptance Corporation, a publicly held
specialty finance company, and in managerial positions with



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PricewaterhouseCoopers, Nations Credit Corporation and US Trails, Inc. She
holds a master of science degree in accounting from the University of North
Texas. She is a Certified Public Accountant.

Nasdaq Listing. Effective as of the close of business on September 22, 1999,
our common stock was delisted from the Nasdaq SmallCap Market and began trading
on the OTC Bulletin Board. The delisting occurred as a result of the minimum
bid price on our common stock being less than $1.00 per share and our net
tangible assets being under $2.0 million. We are appealing Nasdaq's decision to
delist our shares and have been advised by Nasdaq that its review council will
likely issue its decision in April 2000.

Sale of VSI Europe. On September 30, 1999, we sold our European subsidiary, VSI
Europe, to certain members of VSI Europe's executive management team. As a
condition of such sale, we were released from all liabilities, including
certain guarantees under VSI Europe's bank credit agreements. Concurrent with
the sale, VSI Enterprises and VSI Europe have agreed to enter into a
non-exclusive reseller agreement wherein VSI Europe will retain the right to
market our videoconferencing product line in Europe.

VIDEOCONFERENCING SYSTEMS

The Company's core business is the design, manufacture, marketing and servicing
of interactive group videoconferencing and control systems (the "VSI Systems").
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.

Its 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, with or
without the necessity of custom design. The Company's lead products are
marketed under the trade name Omega(TM). Customers are offered a variety of
option packages to fit specific applications. Customers are also offered
upgrade packages that make the Company's new products compatible with older
models. To date, the Company has sold over 1,700 videoconferencing systems to
approximately 325 customers, including Bank of America, Bell Atlantic, Boeing,
Duracell, MCI, General DataComm and Johnson & Johnson; various foreign, U.S.
and state government departments and agencies; educational institutions; and
health care facilities.

VSI Systems enable participants in multiple locations to hold interactive group
meetings remotely, thus avoiding costly and time-consuming travel. Participants
at any connected location can be seen and heard by all other participants. If
the VSI System is equipped with the appropriate options, the participants can
also utilize slides, graphs, plain paper drawings, computer-generated graphics,
computer data, laser discs and 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 live, face-to-face meetings and promote a natural
interaction among the participants.



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

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

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

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

Corporate and government organizations often use meetings to provide
information, review operations, make plans, resolve problems, introduce new
ideas or products, conduct training sessions and communicate with customers and
vendors. Such conventional group meetings usually require at least some of the
participants to travel to the meeting site. When meetings are required on a
frequent, repetitive or emergency basis, travel costs and productivity losses
can be substantial. 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.

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 school, colleges 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.



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Products

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 Company's lead products are marketed under the trade name Omega. The key
features and benefits of the Omega(TM) platform include:

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

The Omega(TM) product line offers a complete range of group videoconferencing
systems, through three product families: Achiever, Performer and Ovation.

The Achiever product family is designed for low to moderate usage of
videoconferencing. The systems utilize the best board level codec on the
market, a patented mouse driven graphical user interface and click and zoom
camera control. These products can be upgraded to include remote diagnostics
capabilities, sign on security and additional peripherals.

The Performer product family is designed for moderate to high usage of
videoconferencing. The system encompasses the highest quality codec, advanced
audio and video processors, SCAN technology that supports onscreen control of
peripheral devices and supplies information to a database in the system
controller, remote diagnostics and an open architecture.

The Ovation product family is designed for videoconferencing users with
specific needs. These systems are specially designed for use in distance
learning, video arraignment, large conference rooms and auditoriums.

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

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



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some 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, they are interoperable with systems of other standards-compliant
manufacturers.

The heart of the Omega(TM) is the System Controller, a proprietary software
suite that must be installed on a properly configured personal computer. The
software suite includes the Omega(TM) real time operating system, Omega(TM)
videoconferencing application package, device drivers, and a third party SQL
database engine (as licensed to VSI for resale). This software is delivered in
object code format. 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.
Currently, the patents secure payment of a $900,000 promissory note at an
interest rate of 14% per annum, with $300,000 due February 16, 1999 and
$600,000 due May 16, 1999. In the event of default, the debt holder could
foreclose on its security interest in the patents. (See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Factors Affecting Future Performance.")

The Company also has confidentiality agreements with certain of its employees
and has implemented other security measures.

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 LAN-based gateway offering and software upgrades of
existing products. Additional system and network management products are under
development.

Customer Service

The Company generally provides a warranty for parts and labor on its systems
for 90 days from the date



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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 office. 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 with a guaranteed
on-site response within 48 hours. Warranty and contract service is provided
from the Company's U.S. and European locations.

Markets

The Company has defined its target markets as the "Fortune 1,000" companies in
North America and Europe. 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, governments and healthcare providers. 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 each of the fiscal years ended December 31, 1998, 1997 and 1996,
international sales (sales outside of the United States and Canada) represented
approximately 27%, 14% and 20%, respectively, of the Company's total sales. Net
product sales attributable to VSI Europe increased from approximately $2.8
million during the year ended December 31, 1997 to $2.9 million for the year
ended December 31, 1998. VSI Europe has historically contributed substantially
all of the Company's international sales, although sales in China of $2.3
million were recorded in 1998 by VSI. See "-Videoconferencing Systems, n.v.
("VSI Europe")." No sales opportunities in China are being pursued in 1999. The
Company believes it presently maintains an approximate 1% to 2% share of the
total worldwide videoconferencing equipment market as measured by 1998 total
sales volume for the industry.

Customers

The Company's customers include Fortune 1,000 companies, mid-sized
corporations, agencies of state, local and federal governments, and health care
facilities. They include Bank of America, Boeing, MCI, Duracell, BellSouth,
Bell Atlantic and Johnson & Johnson.

NETWORK SERVICES ("ETI")

The Company, through its ETI subsidiary, serves as a sales agent for a number
of major telecommunications clients, which include the regional Bell operating
companies ("RBOCs"), Cable and Wireless and 3Com Corporation. ETI is paid a
commission by its clients for products and services sold to



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other entities. Among ETI's core product offerings are high speed data transfer
systems, internet connections, T-1 connections, network services such as
Centrex, frame relay and basic rate interface, primary rate interface and ISDN
connections. ETI's business is conducted primarily in the northeastern United
States

Market

The large telecommunications companies have pared fixed costs and overhead by
outsourcing many functions including marketing to the lower tier business
customer which is the niche that ETI has successfully captured. ETI usually
targets customers who generate less than $250,000 per year in
telecommunications/network service billings. The desire and willingness of Bell
Atlantic to enter into a three year contract with the Company is an indication
of a stable outsourcing attitude of large providers.

Competition

Competition has been limited by the large telecommunications companies' agent
selection criteria, and as a result, new entrants have been limited in numbers.
While the agency agreement is non-exclusive, it is in the providers best
interest to limit competition.

Product Line

ETI's products fall under the classifications of :

         -        Data Services
         -        Voice Products
         -        Account Management Services
         -        Long Distances Services

Data Services include internet connections, dedicated data transmission lines,
and other information technology related services.

Voice Products include interexhange services, on-premises voice mail products,
toll free number telephone lines, and a broad range of other services.

Account Management Services provides the customer with technical and customer
service assistance , as well as, manage customer accounts for its vendors.

Long Distance Services is a new area of the market that ETI has begun to sell.
This service along with cellular and other telecommunication products and
services offer significant potential additional revenues.

During fiscal 1998 and 1997, approximately 37% of the Company's revenue
primarily, commissions earned by ETI -- were from Bell Atlantic.

VIDEOCONFERENCING SYSTEMS, N.V. ("VSI EUROPE")

VSI Europe is a distributor of the Company's videoconference systems in Europe
and conducts most of



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its international business through two offices located in London and Antwerp,
Belgium. For each of the fiscal years ended December 31, 1998, 1997 and 1996,
international sales (sales outside of the United States and Canada) represented
approximately 27%, 14% and 20%, respectively, of the Company's total sales. Net
product sales attributable to VSI Europe increased from approximately $2.8
million during the year ended December 31, 1997 to $2.9 million for the year
ended December 31, 1998. VSI Europe has historically contributed substantially
all of the Company's international sales, although sales in China of $2.3
million were recorded in 1998 by Videoconferencing Systems, Inc.

VSI SOLUTIONS INC.

VSI Solutions is a software company whose products include a reservation system
for the management of videoconferencing systems. Its principal product is
"Video Administrator" which is a custom software package that facilitates
network management, offered through VSI Solutions. Video Administrator will
cease to be provided upon the completion in June 1999 of a project with one
customer, and the operations of VSI Solutions will be discontinued at that
time.

COMPETITION

The Company competes in the videoconferencing industry by providing
application-specific and custom solutions (products and services) for its
customers' videoconferencing needs. Because the Company's videoconferencing
systems are compression technology-independent, they can be sold to customers
with standard codecs, high speed codecs, board-level codecs or specialty
codecs, as well as with direct links to ATM and fiber optic networks.

The videoconferencing industry covers a broad spectrum of videoconferencing
services available to businesses and others, all of which are, in a general
sense, competitive with the Company's systems. The VSI Systems, however, are
designed and marketed primarily for the group and custom videoconferencing
segment of the industry. Within this segment of the industry, the Company
presently competes primarily with two companies 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, some of which may 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, 1998,
1997 and 1996, the Company's aggregate expenditures for research and
development of new products or new components for existing VSI Systems were
$800,000, $1.1 million and $1.2 million, respectively. During fiscal 1998, the
Company's research and development expenses decreased by approximately 24% due
to a reduction in workforce.

EMPLOYEES

As of March 15, 1999, the Company employed 124 persons full time, including
five executive officers.



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Of the full-time employees who were not executive officers, 45 were engaged in
sales and marketing, 6 in production, 38 in service, seven in research and
development, and 23 in general administration. The workforce has been reduced
by approximately 15% since December 31, 1998, due to the closing of INS and
consolidation of VSI's operations. Employee relations are considered good, and
the Company has no collective bargaining contracts covering any of its
employees.



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


As a result of the Company's recurring losses from operations and the Company's
ratio of current assets/current liabilities, the Company's independent auditors
for the year ended December 31, 1998 have included a paragraph in their audit
report accompanying the Company's consolidated financial statements regarding
the Company's ability to continue as a going concern.

In response to those concerns, the Company has undertaken a restructuring of
its business operations and balance sheet that, when fully implemented, are
intended to achieve profitable operations and provide positive operating cash
flows, as well as improve prospects for additional equity capital investments.
This restructuring includes aggressive management of accounts receivable and
inventory, sale of non- strategic assets and raising of funds through either
private placement or restructuring of its current debt. During the first
quarter of 1999, the Company reviewed its operating expenses and substantially
reduced fixed management and overhead expenses. In addition, the Company
restructured certain of its outstanding indebtedness. (See "Item 1. Business
Recent Developments.")

As of December 31, 1998, the Company had an accumulated deficit of $46,877,847,
of which $16,935,972 was realized in 1998. The Company believes that its
ongoing effort to restructure and refocus the strategic direction of the
organization, and to eliminate assets that are either non-performing, impaired
or unrelated to the core business (resulting in a non-recurring charge of
approximately $10.3 million in 1998), will enable it to compete in the domestic
videoconferencing and control system market.

FINANCIAL CONDITION

During the year ended December 31, 1998, the Company's total assets decreased
approximately 52% to $10,960,965 from $22,880,459 at December 31, 1997. A large
part of the decrease resulted from a $7,767,444 impairment charge of most of
the goodwill from two non-core assets. Other factors were:

         -        92% decrease in other long-term assets, primarily due to the
                  sale and impairment of investments in two other companies
         -        57% decrease in inventories, primarily due to an
                  approximately $1.68 million write-down of obsolete or
                  slow-moving videoconferencing inventory
         -        86% decrease in rental and demonstration inventory, due to
                  write-downs of obsolete demonstration inventory and the
                  closing of several sales offices
         -        89% decrease in software development costs, net, due to
                  impairment of capitalized costs

         Cash and cash equivalents as of December 31, 1998 increased $282,732,
or approximately 32%, to $1,134,231 from $859,684 on December 31, 1997.

         Total stockholders' equity decreased $14,588,279, or approximately
94%, from December 31, 1997, primarily because of the $16,935,972 net loss for
the year.



                                       13
<PAGE>   14

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

As part of an ongoing effort to restructure and refocus the strategic direction
of the Company, and to eliminate assets that are either non-performing,
impaired or unrelated to the core business, the Company took a non-cash and
non-recurring charge of approximately $10.3 million in 1998. The charge
included: the write-down of obsolete or slow-moving videoconferencing and
demonstration inventory ($1.88 million); the loss from the sale of investments
in two companies ($450,000); a write-down of capitalized software development
costs ($180,000); and the write-off of most of the goodwill from the
acquisitions of VSI n.v. in 1992 and ETI in 1996 ($7.76 million). As a result,
many of the comparisons between 1998 and 1997 financial results in several
categories have been significantly impacted by the non-recurring charges and/or
the related changes in organizational structure and strategic direction.

Also, results for 1998 and 1997 reflect the December 1998 closure of INS.
Results for years presented have been restated to reflect the discontinuance of
operations of INS.

REVENUES

Revenues for the year ended December 31, 1998 were $19.4 million, an
approximately 1% decrease over revenues for the year ended December 31, 1997.
An approximately 12% increase in videoconferencing systems revenues was more
than offset by an approximately 21% decrease in commissions from telephone
network reselling. The increase in videoconferencing systems revenues was due
to a large order from a customer in China of $2.3 million. The decrease in
commissions from telephone network reselling in 1998 was due primarily to a
large number of chargebacks for disconnections and cancellations.

GROSS MARGIN

Gross margin as a percentage of revenues for the year ended December 31, 1998
was approximately 37%, down from 51% for the year ended December 31, 1997. The
decrease was due to higher than usual sales of lower margin videoconferencing
products during the second and third quarters of 1998, primarily from a $2.3
million order to a customer in China, and to lower revenues during the first
quarter of 1998 at ETI. ETI revenues are basically all generated through
commissions on the sale of services from third parties and do not have any cost
of sales, therefore their margins are 100%. If their revenues decrease as a
percentage of total sales then the overall margin of the Company decreases.

SELLING, GENERAL & ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended December 31,
1998 were $13,023,732, a decrease of $479,808, or approximately 4%, over the
year ended December 31, 1997, due to improvements in parts procurement and
ongoing cost reduction programs; and an approximately 10% reduction in workforce
during 1998.



                                       14
<PAGE>   15

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, 1998, the Company's research and development expenses were
$786,103, an approximately 24% decrease over the year ended December 31, 1997.
The decrease was due to a reduction in workforce.

IMPAIRMENT LOSS

At December 31, 1998, an impairment loss of $7,767,444 was charged to
operations. The majority of that loss - $6,995,211 - was charged to operations
as an impairment of the original goodwill recorded with the Company's
acquisition of ETI. The Company compared the carrying value of ETI at December
31, 1998 to the undiscounted anticipated cash flows for the next ten years to
determine if there had been an impairment. As the anticipated undiscounted cash
flows were lower than the carrying value of ETI, the Company then used the
present value of estimated expected future cash flows using a 15% discount rate
(discounted cash flows) to determine the impairment charge. This evaluation was
triggered by ETI's net operating loss during 1998, a reduction in commissions
paid to ETI by Bell Atlantic during 1998 and an informal valuation of ETI
performed during the fourth quarter of 1998.

An additional $577,077 impairment loss was recorded to eliminate all remaining
goodwill related to VSI Europe, and an additional $195,156 impairment loss was
recorded to write down VSI Europe's net assets to zero. Management recorded the
impairment loss in light of VSI Europe's continuing operating losses. See Note
A-7 and A-10 to the consolidated financial statements.

LOSS ON SALE OF INVESTMENTS

The loss on the sale of investments was the result of the Company's
reevaluation of its investment in Global TeleMedix, Inc., which was sold in
October 1998 at a loss of $302,000 and the loss of $150,000 in the investment
in Educational Video Conferencing, Inc., which was sold on December 31, 1998.

OTHER EXPENSES

Other expenses, primarily finance charges, were $1,682,303 for the year ended
December 31, 1998, an increase of $1,606,134 over the year ended December 31,
1997. The increase was primarily due to amortization of debt discount costs
during the vesting period (the second and third quarters of 1998) of the
conversion feature of the Company's convertible debentures; the amortization of
debt issuance costs associated with the Company's convertible debentures; and
interest expense from the convertible debentures.

DISCONTINUED OPERATIONS

The Company discontinued operations of its wholly-owned subsidiary, VSI Network
Services, Inc. on December 31, 1998. The net loss attributed to the
discontinued operations was $418,973 which included the loss from operations
for the year ended December 31, 1998 of $763,705 and a gain of $344,732
recorded from the extinguishment of debt.



                                       15
<PAGE>   16

NET LOSS

Net loss for the year ended December 31, 1998 was $16,935,972, a $11,118,606, or
approximately 191%, increase over the net loss of $5,817,366 for the year ended
December 31, 1997. Net loss from continuing operations was $16,516,999, a
$11,645,395, or approximately 239%, increase over the net loss of $4,871,604 for
the year ended December 31, 1997. The increase in net loss was due primarily to
non-cash and non-recurring charges of approximately $10.3 million in 1998.

Excluding the non-recurring charges of approximately $10.3 million, the net loss
was approximately $6.6 million, an approximately $800,000 increase over the net
loss for the year ended December 31, 1997. The non-recurring charges included:
the write-down of obsolete or slow-moving videoconferencing and demonstration
inventory ($1.88 million); the loss from the sale of investments in two
companies ($450,000); a write-down of capitalized software development costs
($180,000); and the write-off of most of the goodwill from the acquisitions of
VSI Europe in 1992 and ETI in 1996 ($7.76 million).

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

REVENUES

Revenues for the year ended December 31, 1997 were $19.6 million, an
approximately 54% increase over revenues for the year ended December 31, 1996.
The increase was primarily due to the recognition of a full year of revenue
from wholly-owned subsidiary ETI in 1997, compared to three months of revenue
from ETI in 1996. ETI was acquired in October 1996.

GROSS MARGIN

Gross margin as a percentage of revenues for the year ended December 31, 1997
was 51%, up from 28% for the year ended December 31, 1996, due to the addition
of high margin sales and account management commissions from ETI, a sales
agency for a number of major telecommunications companies.

SELLING, GENERAL & ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the year ended December 31,
1997 were $13,503,540, an increase of $5,248,453, or 64%, over the year ended
December 31, 1996, due to an increase in the Company's sales, marketing and
distribution initiatives in the United States (primarily due to the October
1996 acquisition of ETI and its sales force) and the Far East.

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, 1997, the Company's research and development expenses were
$1,031,814, a 13% decrease over the year ended December 31, 1996. Expenses in
1996 had been somewhat higher than historical levels, due to an expansion in
the research and development workforce to accommodate projects related to
forthcoming generations of the Omega product line and other



                                       16
<PAGE>   17

software projects. Many of those projects were completed or were winding down
by first quarter 1997, and the workforce -- primarily at subsidiary VSI
Solutions, Inc. -- was reduced.

OTHER EXPENSES/INCOME TAXES

Non-operating expenses and income taxes for the year ended December 31, 1997
were $269,410, a 94% increase over non-operating expenses and income taxes for
the year ended December 31, 1996. The increase was primarily due to the payment
of state taxes in Rhode Island by ETI, which was profitable in 1997.

NET LOSS

Net loss for the year ended December 31, 1997 was $5,817,366, a 13% improvement
over the net loss for the year ended December 31, 1996. Excluding a charge to
reflect obsolescence of certain inventory of approximately $2.1 million, the
net loss for the year was approximately $3.7 million, a 44% improvement over
1996. The decrease in the loss was primarily due to a 54% increase in revenues
and a substantial improvement in gross margins.

LIQUIDITY AND SOURCES OF CAPITAL

General

As of December 31, 1998, the Company had cash and cash equivalents of
$1,134,231. The Company's liquidity sources include existing cash and credit
facilities. In order to meet its cash flow requirements, short-term debt and
approximately $600,000 in accrued but unpaid sales tax obligations, the Company
will require additional funding in 1999. This additional funding could be in
the form of the sale of assets, debt, equity, or a combination. A further
reduction in operating expenses has also been effected in order to maximize the
Company's allocation of cash resources. 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.

On February 23, 1998, the Company issued $3,000,000 of 5% Convertible
Debentures due February 2000 ("the Debentures") to Thomson Kernaghan & Co. Ltd.
("Thomson Kernaghan"), the proceeds of which were utilized for working capital
purposes. The debentures were convertible into shares of common stock of the
Company at the option of the holder at the lesser of (i) $8.00 per share or
(ii) 85% of the average closing bid price of the Company's common stock. The
debenture holder was also granted warrants to purchase 9,375 shares of common
stock of the Company, at an exercise price of $2.40 per share. An agent
involved in the placement of the debentures received warrants to purchase 9,375
shares of common stock of the Company, at an exercise price of $10.00 per
share.

During the year, $710,000 of debentures, plus accrued interest of $13,531, were
converted by the debenture holder into 445,956 shares of common stock of the
Company. The Company also paid $128,858 in accrued interest and fees.

Also, in November 1998, $1,440,000 of debentures were redeemed by the Company
at face value as follows: (i)$1,040,000 of debentures were bought back at face
value on October 1, 1998 (at which time the Company paid $128,858 in accrued
interest and fees); and (ii) $400,000 of debentures were bought



                                       17
<PAGE>   18

back at face value on November 16, 1998 (at which time the Company paid a fee
of $50,000). The remaining debentures were converted on November 16, 1998 into
a $900,000 term note to Thomson Kernaghan, at an interest rate of 14% per
annum, due on or before May 16, 1999. At that time, Thomson Kernaghan was
issued warrants to purchase 25,000 shares of common stock of the Company, at an
exercise price of $2.40 per share.

Of the 445,956 shares issued upon conversion of the debentures, 50,000 shares
were held in escrow at December 31, 1998, with 25,000 of these shares issued in
January 1999 and 25,000 issued in February 1999. To secure payment of the note,
VSI granted the debt holder a security interest in VSI's seven patents issued
by the U.S. Patent & Trademark Office. In the event of default, the debt holder
could foreclose on its security interest in the patents.

VSI has not paid a $300,000 installment of principal under the term note, which
installment was due February 16, 1999. The failure to make this payment
subjects VSI to a $30,000 per month penalty fee until the full balance is
repaid. If VSI does not repay the note on or before May 16, 1999, VSI will be
obligated to pay the debt holder an additional penalty of $30,000 on the 16th
of each month until the debt is paid. As of March 30, 1999, the outstanding
balance under this note, including accrued interest and penalties, was
$1,006,257.

Effective August 31, 1999, the Company restructured its term note with Thomson
Kernaghan. See "Item 1. Business - Recent Developments."

The cash redemption of a portion of the convertible debentures was funded in
part from the proceeds of a private placement of term notes by the Company in
October and November of 1998. These term notes were restructured on August 31,
1999 in connection with the Thomson Kernaghan debt restructuring.
See "Item 1. Business - Recent Developments."

In December 1998, the Company received $250,000 from the sale of the Company's
investment in Educational Video Conferencing, Inc., a New York-based provider
of distance education services. In October 1998, the Company received $243,000
from the sale of the Company's investment in Global TeleMedix, Inc., a
Massachusetts-based provider of telemedicine software.

In October, 1998, the Board of Directors of the Company authorized a stock
repurchase program pursuant to which management is authorized to repurchase up
to 250,000 shares of common stock of the Company. As of March 15, 1999, the
Company had not repurchased any shares of its common stock. Any future
purchases will be financed from the Company's cash reserves.

Credit Facilities

VSI

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
$4,000,000 at an interest rate of prime plus 2% per annum. 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 certain fixed assets of VSI. As of December
31, 1998, approximately $83,000 was owed to Fidelity Funding.



                                       18
<PAGE>   19

ETI

On October 8, 1998, ETI entered into a financing agreement with RFC Capital,
Inc., whereby RFC Capital, Inc. purchases eligible accounts receivable for 90%
of the accounts receivable amount, up to $1,500,000, at an interest rate of
prime plus 2.75% per annum. This amount may be increased, subject to additional
payment of commitment fees by ETI, to $5,000,000. If any account receivable is
not paid within 90 days, ETI is required to buy back the account receivable for
the full purchase price. The credit facility is secured by eligible accounts
receivable. As of December 31, 1998, approximately $1,403,000 was owed to RFC
Capital, Inc.

INS

In December 1996, VSI Network Services, Inc. (d/b/a Integrated Network
Services, or INS), a wholly owned subsidiary of the Company, 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% per annum. Funds available under the credit
facility are based on 80% of eligible accounts receivable invoices, with
certain restrictions. The credit facility is secured by accounts receivable,
inventory and fixed assets of INS. As of December 31, 1998, approximately
$248,000 was owed to Presidential Financial Corporation.

With INS ceasing operations on December 31, 1998, VSI is obligated to repay the
balance owed Presidential Financial Corporation. On March 31, 1999, that amount
was approximately $138,000. The Company expects to repay the full amount during
1999 upon the collection of outstanding INS accounts receivable.

VSI n.v.

In February 1998, Videoconferencing Systems, n.v., a wholly owned subsidiary of
the Company, entered into a revolving credit and security agreement with
Kredietbank, n.v. This credit facility provides Videoconferencing Systems, n.v.
with up to $550,000 at an interest rate of 5% per annum. The credit facility is
secured by 137,500 shares of common stock of the Company, held in escrow by
Kredietbank, n.v. At December 31, 1998, approximately $253,000 was owed to
Kredietbank, n.v.

As of December 31, 1998, Videoconferencing Systems, n.v. had a secured bank
facility with Generale Bank of approximately $166,000, of which approximately
$157,000 was outstanding at that time.

OPERATING LOSS CARRYFORWARDS

As of December 31, 1998, the Company had operating loss carryforwards for U.S.
income tax purposes of approximately $29,389,000 available to reduce future
taxable income through 2013. The Company also has investment and research and
experimental credits of approximately $89,000 available to reduce future income
taxes payable through 2013. 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.



                                       19
<PAGE>   20

Videoconferencing Systems, n.v. has net operating loss carryforwards of
approximately $3,350,000 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.

YEAR 2000

The Company has assessed the impact of the Year 2000 issue on its computer
systems and is in the process of remediating the affected hardware and
software.

The Company utilizes various computer workstations and software packages as
tools in running its accounting and operations areas. Most are PC-based and are
Year 2000 compliant, with the exception of some older workstations that will be
phased out by 2000. Also, the primary accounting system is not currently Year
2000 compliant, and management plans during 1999 to implement any necessary
vendor upgrades and modifications to ensure continued functionality with
respect to any accounting software problems associated with Year 2000. The
Company presently has two well known and widely used software packages that run
its accounting and management systems. These two different softwares will be
converted to one Companywide software package that has been upgraded by the
vendor and implementation is expected to start in the summer of 1999, with
completion slated for late fall 1999.

With respect to the production of its own proprietary software and hardware,
the Company has taken the necessary steps to ensure that its proprietary
technology is Year 2000 compliant. The Company's videoconferencing products use
PC controllers of recent vintage that are computed in and displayed in
four-digit format. In addition, the Company's Omegaa software uses "C"
libraries that compute the date based on a count of the number of seconds from
January 1970. Those software libraries are in no danger of being out of
compliance before the year 2038.

Also, the Company has surveyed the vendors who supply key computer-based
components for its videoconferencing systems and services, and found that all
are Year 2000 compliant. The Company will continue to monitor and assess the
Year 2000 situation on an ongoing basis, especially in its dealings with new
vendors or suppliers, and will take appropriate corrective action as needed.

Contingency planning is a normal part of VSI's sales cycle, given lead time for
parts and installation windows. VSI has included Year 2000 concerns into normal
contingency planning without forming a separate department or task force to
address these concerns. The Company has not developed a separate Year 2000
contingency plan, since to date no adverse effect from the Year 2000 issue has
been identified. Should it be determined that any major vendors, service
providers or partners may be negatively impacted by the Year 2000 issue, the
Company will develop contingency plans for affected areas or make use of
alternate suppliers.

Expenditures for the Year 2000 project have to date been immaterial and are
being expensed as incurred. These expenditures have not had, and are not
expected to have, a material impact on the consolidated financial position,
results of operation or cash flows of the Company.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
such as statements relating to financial results and



                                       20
<PAGE>   21

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. (See "-Factors Affecting Future
Performance" in the section that follows).

FACTORS AFFECTING FUTURE PERFORMANCE

The following summarizes certain of the risks inherent in the Company's
business:

WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS WHEN
NEEDED.

We will require additional capital or other financing to finance our
operations, new market development and continued growth. We may seek additional
equity financing through the sale of securities on a public or a private
placement basis on such terms as are reasonably attainable. We may not be able
to obtain such financing when needed, or that if obtained, it may not be
sufficient or on terms and conditions acceptable to us. Sales and potential
sales of substantial amounts of our common stock included in the registration
in the public market could adversely affect the prevailing market prices for
the common stock and impair our ability to raise additional capital through the
sale of equity securities.

WE HAVE SUFFERED RECURRING LOSSES FROM OPERATIONS, AND OUR CURRENT LIABILITIES
EXCEED CURRENT ASSETS, WHICH MAY PREVENT US FROM CONTINUING AS A GOING CONCERN.

As a result of our recurring losses from operations in recent years and our
ratio of current assets to current liabilities, our auditors have expressed
substantial doubt about our ability to continue as a going concern. Although we
have undertaken a restructuring of the business operations that is intended to
achieve profitable operations and provide positive operating cash flows as well
as provide for additional equity capital investments, our restructuring may not
be successful.

WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY IN THE FUTURE.

After 13 years of operations, we have not reported any profits for a full year
of operations and, as of September 30, 1999, we had an accumulated deficit of
$49.4 million. We may not be able to achieve or sustain profitability in the
future. Whether or not we are able to operate profitably, we will require
additional capital to finance our operations.

OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE FAIL TO SECURE SUFFICIENT
CAPITAL AND FAIL TO CREATE A STRONG MARKETING SUPPORT TEAM THAT CAN PENETRATE
NEW MARKETS.

Our core technology, developed for videoconferencing applications, can also be
used as the foundation for products and services in other markets, particularly
for command and control applications for general business and industrial users.
Entering that market successfully will require sufficient capital for further
software product development, and the creation of sales channels and a
marketing support team. The inability to secure sufficient capital or the
failure to create a strong sales channel/marketing support organization could
result in a failed effort to penetrate these new markets, and adversely affect
operating results and cash flow.



                                       21
<PAGE>   22

DUE TO A FLOATING CONVERSION RATE FOR THE OUTSTANDING CONVERTIBLE DEBENTURE, WE
DO NOT KNOW THE EXACT NUMBER OF SHARES THAT WILL BE ISSUED UPON CONVERSION.

Upon full conversion of the outstanding convertible debenture held by Thomson
Kernaghan, we would issue a maximum of 1,879,500 shares of common stock to
Thomson Kernaghan. Based on the recent trading price of our common stock, if
the debenture were to be converted at the present time, Thomson Kernaghan could
be entitled to receive the maximum number of shares. These common shares would
represent approximately 13.3% of our total outstanding common shares. Due to
the floating conversion rate and depending on the timing of any conversions by
Thomson Kernaghan, we do not know the exact number of shares that we will issue
upon conversion.

THOMSON KERNAGHAN COULD CONVERT THE DEBENTURE AT A LOW STOCK PRICE, RESULTING
IN MORE SHARES FOR THOMSON KERNAGHAN AND CAUSING A SUBSTANTIAL DILUTION TO THE
OTHER COMMON SHAREHOLDERS SINCE THOMSON KERNAGHAN MAY SELL THE FULL AMOUNT
ISSUABLE UPON CONVERSION.

The outstanding debenture held by Thomson Kernaghan converts at a floating
rate, based upon the market price of our common stock at the time of
conversion, subject to a floor of $0.50 per share. The lower the stock price at
the time Thomson Kernaghan converts the debenture, the more common shares
Thomson Kernaghan will receive. Furthermore, the conversion of the convertible
debentures may result in substantial dilution to the interests of other holders
of common stock since Thomson Kernaghan may ultimately convert and sell the
full amount issuable on conversion.

THOMSON KERNAGHAN COULD CONVERT THE CONVERTIBLE DEBENTURES INTO GREATER AMOUNTS
OF COMMON STOCK, THE SALES OF WHICH WOULD FURTHER DEPRESS OUR STOCK PRICE.

To the extent that Thomson Kernaghan converts and then sells its common stock,
the common stock price may decrease due to the additional shares in the market.
This could allow Thomson Kernaghan to convert its convertible preferred stock
into even greater amounts of common stock. And, the subsequent sale of the
common stock could further depress the stock price.

THE PRICE OF OUR COMMON STOCK COULD BE FURTHER DEPRESSED BY SHORT SALES BY
THOMSON KERNAGHAN OR OTHERS.

The significant downward pressure on the price of the common stock as Thomson
Kernaghan converts and sells material amounts of common stock could encourage
short sales by Thomson Kernaghan or others. This could place further downward
pressure on the price of the common stock.

FUTURE ACQUISITIONS MAY NOT BE SUCCESSFULLY INTEGRATED WITH OUR EXISTING
OPERATIONS, AND OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.

An important element of our growth strategy is to expand when appropriate
through acquisitions. Our future success is dependent upon our ability to
finance and effectively integrate acquired businesses with our operations. Our
inability to do so could harm our operating results. Future acquisitions may
not be successfully integrated with our existing operations, and our
acquisition strategy as a whole may not be successful. In addition, our
financial performance is now and will continue to be subject to various risks
associated with the acquisition of businesses, including the financial effects
associated with the integration of such businesses.



                                       22
<PAGE>   23

IF WE FAIL TO DEVELOP COMPETITIVE PRODUCTS IN RESPONSE TO TECHNOLOGICAL
CHANGES, OUR BUSINESS COULD BE NEGATIVELY AFFECTED.

The market for our products is characterized by rapidly changing technology,
evolving industry standards and frequent product introductions. Product
introductions are generally characterized by increased functionality and better
picture quality at reduced prices. If we are unable, for technological or other
reasons, to develop competitive products in a timely manner in response to
changes in the industry, our business and operating results could be materially
and adversely affected. Our ability to successfully develop and introduce on a
timely basis new and enhanced products that embody new technology, and achieve
levels of functionality and prices that are acceptable to the market will be a
significant factor in our ability to grow and to remain competitive. For
instance, the ability to transact business via the Internet is becoming
increasingly important. Accordingly, in order to remain competitive, we are
currently developing a system which will allow our customers remote access of
command and control systems via the Internet. There is no guarantee that we can
timely or effectively implement this strategy.

OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY A DISRUPTION IN SUPPLY OR A
SIGNIFICANT PRICE INCREASE OF VIDEOCONFERENCING COMPONENTS OR FAILURE OF A
THIRD PARTY SUPPLIER TO REMAIN COMPETITIVE IN PRICE.

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

OUR OPERATIONS COULD BE ADVERSELY AFFECTED BY THE LOSS OF A MAJOR CUSTOMER.

We sell videoconferencing systems and related control services and network
services to a number of major customers. During the year ended December 31,
1998, approximately 37% of our revenues were from Bell Atlantic. The loss of
Bell Atlantic or other customers could have an adverse effect on our
operations.

THE LOSS OF KEY MANAGEMENT OR TECHNICAL PERSONNEL COULD ADVERSELY AFFECT OUR
OPERATIONS.

Our development, management of our growth and other activities depend on the
efforts of key management and technical employees. Competition for such persons
is intense. Since we do not have long-term employment agreements with our key
management personnel or technical employees, we could lose one or more of our
key management or technical personnel which could adversely affect our
operations. Our future success is also dependent upon our ability to
effectively attract, retain, train, motivate and manage our employees, and
failure to do so could have a material adverse effect on our business and
operating results.



                                       23
<PAGE>   24

WE EXPECT COMPETITORS MAY ENTER THE MARKET WHICH HAVE FAR GREATER TECHNICAL AND
FINANCIAL RESOURCES THAN WE HAVE.

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

FLUCTUATIONS IN OUR QUARTERLY PERFORMANCE COULD ADVERSELY AFFECT OUR TOTAL
REVENUES AND NET INCOME LEVELS.

Our product sales have historically been derived primarily from the sale of
videoconferencing systems and related equipment, the market for which is still
developing. In addition, our revenues occur predominantly in the third month of
each fiscal quarter. Accordingly, our quarterly results of operations are
difficult to predict, and delays in the closing of sales near the end of the
quarter could cause quarterly revenues and, to a greater degree, operating and
net income to fall substantially short of anticipated levels. Our total
revenues and net income levels could also be adversely affected by:

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

WE MAY NOT BE ABLE TO SUSTAIN CONTINUED TRADING MARKET IN OUR COMMON STOCK.

Our common stock is traded on the OTC Bulletin Board. While we believe there
are several securities broker/dealers making a market in our common stock, a
public market for our common stock may not continue to be made or persons
purchasing our securities may not be able to avail themselves of a public
trading market for the common shares in the future.

WE MAY NOT BE ABLE TO REGAIN OUR NASDAQ LISTING.

Effective as of the close of business on September 22, 1999, our common stock
was delisted from the Nasdaq SmallCap Market and began trading on the OTC
Bulletin Board. The delisting occurred as a result of the minimum bid price on
our common stock being less than $1.00 per share and our net tangible assets
being under $2.0 million. We are appealing Nasdaq's decision to delist our
shares and have been advised by Nasdaq that its review council will likely
issue its decision in April 2000. If our appeal is unsuccessful, our common
stock will continue to trade on the OTC Bulletin Board until such time as we
qualify for inclusion on the Nasdaq Stock Market. Because the requirements for
a new listing on the Nasdaq Stock Market are substantially more onerous than
the requirements for continued listing, we may not be in a position in the
future to reapply for listing on Nasdaq.



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IF WE ISSUE PREFERRED STOCK, THE VALUE OF OUR COMMON STOCK MAY DECREASE.

The issuance of any preferred stock could affect the rights of the holders of
common stock, and therefore, reduce the value of the common stock and make it
less likely that holders of common stock would receive a premium for the sale
of their shares of common stock. In particular, specific rights granted to
future holders of preferred stock could be issued to restrict our ability to
merge with or sell our assets to a third party. No preferred stock is currently
outstanding, and we have no present plans to issue any preferred stock.

THE SEC'S RULES REGARDING "PENNY STOCKS" MAY RESTRICT YOUR ABILITY TO RESELL
OUR SHARES.

Our common stock is subject to a Securities and Exchange Commission rule that
imposes additional sales practice requirements on broker/dealers who sell such
securities to persons other than established customers and accredited investors
(generally, institutions with assets in excess of $5,000,000 or individuals
with net worths in excess of $1,000,000 or annual incomes exceeding $200,000 or
$300,000 jointly with their spouses). For transactions covered by the rule, the
broker/dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Consequently, the rule may affect the ability of broker/dealers to sell
our common stock and therefore may affect the ability of purchasers of our
stock to resell those shares.



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

The Company conducts most of its business in the United States and therefore,
the Company believes its exposure to foreign currency exchange rate risk at
December 31, 1998 was not material. The value of the Company's financial
instruments is generally not significantly impacted by changes in the interest
rates and the Company has no investments in derivatives. Fluctuations in
interest rates are not expected to have a material impact on interest expense
incurred under the Company's credit facilities due to the relative short term
nature of its debt.



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                                   SIGNATURES


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

                                        VSI ENTERPRISES, INC.



                                        By: /s/ Richard E. Harrison
                                            -----------------------------------
Date: November 30, 1999                     Richard E. Harrison,
                                            Chief Executive Officer



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