VSI ENTERPRISES INC, PRER14A, 2000-04-19

VSI ENTERPRISES INC
PRER14A, 2000-04-19
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

VSI Enterprises, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

Not Applicable
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[ ] Fee paid previously with preliminary materials:

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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE> 2

VSI ENTERPRISES, INC.
5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071

APRIL 20, 2000

Dear Shareholders:

It is my pleasure to invite you to VSI's 2000 annual meeting of
shareholders. We will hold the annual meeting on Thursday, May 18, 2000, at 9:00
a.m. at our executive offices located at 5801 Goshen Springs Road, Norcross,
Georgia. In addition to formal items of business, we will review major
developments during 1999 and continuing into 2000, and answer any questions that
you may have.

We are sending you the official notice of the 2000 annual meeting, our
Proxy Statement, proxy card and 1999 Annual Report. Please carefully read the
entire Proxy Statement and accompanying Annual Report, and vote your shares
either on the enclosed proxy card or by telephone, as detailed in the
instructions on the card.

Please pay special attention to Agenda Item 2. We have undertaken a
restructuring of our business operations and balance sheet which, when fully
implemented, is intended to achieve profitable operations and generate positive
cash flow. These steps are important for increasing the value of your shares. As
you will see from a review of our Annual Report, we have made significant
progress, although future challenges remain.

As part of our restructuring, we have entered into an agreement to sell VSI
Network Solutions, Inc., doing business as Eastern Telecom, to PentaStar
Communications, Inc. Eastern Telecom is a reseller of telecommunications
services primarily for BellAtlantic, Lucent Technologies and Cable & Wireless.
Its business is unrelated to VSI's present strategy and core competency:
building cutting edge software-based command and control systems. Additionally,
without additional investment to find its own acquisitions, Eastern Telecom
could increasingly find itself non-competitive, which could negatively affect
its operating results. Eastern Telecom lost approximately $76,000 in 1999.
Lastly, we believe we have negotiated a favorable transaction price that
includes the potential for additional consideration based on Eastern Telecom's
2000 financial results. For these reasons, we have decided to divest Eastern
Telecom and utilize the proceeds to fund our software development and marketing
efforts.

We are asking you to approve the divestiture of Eastern Telecom at the
Annual Meeting. The Proxy Statement sent to you with this letter describes in
detail the sale of Eastern Telecom's assets to PentaStar. PLEASE NOTE THAT ANY
BALLOT NOT RETURNED WILL BE COUNTED AS A NO FOR THE PURPOSE OF DETERMINING
WHETHER OR NOT THIS SALE IS APPROVED. THEREFORE, I URGE YOU TO VOTE IN FAVOR OF
THE SALE UTILIZING ONE OF THE THREE METHODS SET FORTH IN THE PROXY STATEMENT.

Very Truly Yours,

/s/ Larry M. Carr

Larry M. Carr
Chairman of the Board
VSI Enterprises, Inc.
<PAGE> 3

VSI ENTERPRISES, INC.
5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071
---------------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

<TABLE>
<C> <S>
DATE : THURSDAY, MAY 18, 2000
TIME : 9:00 A.M.
LOCATION : 5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071
</TABLE>

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

To the Shareholders of
VSI Enterprises, Inc.

At our annual meeting, we will ask you to:

(1) Elect four (4) directors to constitute the Board of Directors;

(2) To approve the sale of substantially all the assets of our
subsidiary, VSI Network Solutions, Inc., doing business as Eastern
Telecom, to PentaStar Communications, Inc.;

(3) To ratify the selection of Grant Thornton, LLP as independent
auditors for 2000; and

(4) To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.

If you were a stockholder of record at the close of business on March 27,
2000, you may vote at the annual meeting.

A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed. Please sign, date and return the proxy promptly. You may also vote by
telephone according to the directions on the proxy card. If you attend the
meeting, you may, if you wish, withdraw your proxy and vote in person.

By Order of the Board of Directors,

/s/ Larry M. Carr

Larry M. Carr
Chairman of the Board

Norcross, Georgia

April 20, 2000

PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY PROMPTLY SO THAT YOUR VOTE MAY BE
RECORDED AT THE MEETING IF YOU DO NOT ATTEND PERSONALLY.
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Voting Procedures........................................... 1
Summary Term Sheet.......................................... 2
Outstanding Shares and Voting Rights........................ 4
Security Ownership of Certain Beneficial Owners and
Management................................................ 5
AGENDA ITEM ONE -- ELECTION OF DIRECTORS.................... 7
Meetings of the Board of Directors and Committees of the
Board..................................................... 8
Executive Officers.......................................... 9
Executive Compensation...................................... 10
Directors' Fees........................................... 10
Compensation Committee Interlocks and Insider
Participation.......................................... 11
Stock Option Plan......................................... 11
Certain Transactions........................................ 12
Stockholder Return Performance Graph........................ 14
Report of Compensation Committee on Executive
Compensation.............................................. 15
AGENDA ITEM TWO -- APPROVAL OF SALE OF SUBSTANTIALLY ALL OF
THE ASSETS OF VSI NETWORK SOLUTIONS, INC., OUR WHOLLY
OWNED SUBSIDIARY, TO PENTASTAR COMMUNICATIONS, INC........ 17
General..................................................... 17
Background.................................................. 17
Business Conducted........................................ 17
Terms of the Transaction.................................. 17
Unanimous Board Recommendation............................ 18
Mailing of Proxy Statement................................ 18
What Vote is Required for Approval of the Asset Sale?..... 18
When Will the Asset Sale Be Completed?.................... 19
Conditions to Completing the Asset Sale................... 19
Interests of Directors and Officers in the Asset Sale that
Differ From Your Interests............................. 19
Termination............................................... 19
Regulatory Approvals...................................... 19
Dissenters' Rights........................................ 19
Accounting Treatment...................................... 19
Federal Income Tax Consequences........................... 20
Reports, Opinions and Appraisals.......................... 20
Past Contracts, Transactions or Negotiations.............. 20
Pro Forma Financial Information........................... 21
Condensed Consolidated Operations......................... 22
Condensed Consolidated Balance Sheet...................... 23
Liabilities and Stockholders Equity....................... 23
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements................................... 24
Description of PentaStar's Business......................... 24
Overview.................................................... 24
Recent Developments......................................... 26
PentaStar's Strategy........................................ 27
</TABLE>

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<PAGE> 5

<TABLE>
<CAPTION>
Provide Comprehensive Communications Solutions. 27
<S> <C>
Grow Through Acquisitions................................. 27
Increase Revenues of Acquired Companies................... 27
Utilize PentaStar's Size to Increase Efficiencies in the
Operating Regions...................................... 28
Implement a Best Practices Program........................ 28
Create Strong Incentives for Management to Increase
Earnings............................................... 28
Industry.................................................... 29
The Communications Services Agent Industry................ 29
The Internet Service Provider Industry.................... 31
PentaStar Services.......................................... 31
Local Access.............................................. 31
Long Distance............................................. 32
Wireless.................................................. 32
Internet.................................................. 32
Project Management........................................ 32
Analysis of New Technologies and Developments............. 32
PentaStar's Proposed Internet Services.................... 33
Other Services............................................ 33
Sales and Marketing......................................... 33
Competition................................................. 34
Agent Business............................................ 34
Proposed ISP Business..................................... 35
Government Regulation....................................... 35
Agent Business............................................ 35
Proposed ISP Business..................................... 36
Employees................................................. 37
Description of Property................................... 38
Legal Proceedings......................................... 38
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 38
Overview.................................................... 38
Overview of Operations.................................... 40
Significant Accounting Policies and Procedures............ 41
Results of Operations....................................... 41
Liquidity and Capital Resources............................. 44
Year 2000 Risks............................................. 45
Inflation................................................... 45
Recent Accounting Pronouncements............................ 45
Financial Statements........................................ 46
AGENDA ITEM THREE -- SELECTION OF AUDITORS.................. 47
Engagement of Grant Thornton, LLP......................... 47
Engagement of Arthur Anderson, LLP........................ 48
Annual Report on Form 10-K.................................. 49
Where You Can Find Additional Information About VSI......... 49
Shareholder Proposals....................................... 49
Other Matters............................................... 50
PentaStar Consolidated Financial Statements........... F-1 to F-42
Appendix A -- Purchase Agreement...................... A-1 to A-43
</TABLE>

ii
<PAGE> 6

VSI ENTERPRISES, INC.
5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071
---------------------

ANNUAL MEETING OF SHAREHOLDERS
MAY 18, 2000
---------------------

PROXY STATEMENT

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

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of VSI Enterprises, Inc. (the "Company" or
"VSI") for the Annual Meeting of Shareholders to be held on Thursday, May 18,
2000, and any adjournments or postponements thereof, at the time and place and
for the purposes set forth in the accompanying notice of the meeting. This Proxy
Statement and the accompanying proxy are first being mailed to shareholders on
or about April 20, 2000. Our principal executive offices are located at 5801
Goshen Springs Road, Norcross, Georgia 30071.

VOTING PROCEDURES

WHO CAN VOTE?

Shareholders as of the close of business on March 27, 2000, are entitled to
vote.

HOW DO I VOTE?

You may vote by mail by using the proxy card or by attending the meeting
and voting in person. To vote by mail, simply mark, sign and date the enclosed
proxy card and return it in the postage-paid envelope which has been provided.
You may also vote by telephone by following the instructions on the proxy card.
All properly executed proxies in the form enclosed received in time for the
meeting will be voted according to their voting rights in accordance with the
instructions contained thereon, and, if no choice is specified, proxies will be
voted FOR the election of the nominees named below to constitute the entire
Board of Directors, FOR the sale of substantially all of the assets of our
subsidiary, VSI Network Solutions, Inc., doing business as Eastern Telecom
("Eastern Telecom"), to PentaStar Communications, Inc. and FOR the ratification
of the selection of Grant Thornton, LLP as our independent auditor for 2000.

HOW CAN I CHANGE MY VOTE?

Any person giving a proxy pursuant to this Proxy Statement may revoke it at
any time before it is exercised at the meeting by filing with our Secretary, at
our address stated above, a written notice of such revocation or a duly executed
proxy bearing a later date. In addition, if a person executing a proxy is
present at the meeting, he or she may, but need not, revoke his or her proxy, by
notice of such revocation to the Secretary of the meeting, and vote his or her
shares in person. Proxies, if in the form enclosed, duly signed and received in
time for voting, and not revoked before they are voted, will be voted at the
meeting in accordance with the instructions specified therein.

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SUMMARY TERM SHEET

This summary term sheet does not contain all of the information that is
important to you. You should carefully read the entire proxy statement to fully
understand the sale of assets to PentaStar Communications, Inc. The purchase
agreement is attached as Appendix A to this proxy statement. We encourage you to
read the purchase agreement, as it is the legal document that governs the sale
of assets.

PROPOSED ACQUISITION

- STOCKHOLDER VOTE. You are being asked to vote to approve an asset sale
transaction whereby our majority owned subsidiary, Eastern Telecom, will
sell substantially all of its assets to OC Mergerco 4, Inc., a wholly
owned subsidiary of PentaStar Communications, Inc.

- THE ACQUIROR. PentaStar Communications, Inc. is a publicly held
Delaware corporation whose objective is to be a leading multi-regional
provider of custom-designed communications solutions to small and
medium-size businesses. PentaStar Communications, Inc. is acquiring the
assets of Eastern Telecom. through PentaStar's newly-formed, wholly
owned acquisition subsidiary, OC Mergerco 4, Inc.

- CONSIDERATION TO VSI NETWORK SOLUTIONS, INC. The consideration payable
by PentaStar Communications, Inc. to Eastern Telecom for the assets will
consist of:

-- cash in an amount of $2,100,000;

-- 57,357 shares of PentaStar, which had an aggregate fair market value
as of the date of the purchase agreement of $950,000 and have an
aggregate fair market value as of April 14, 2000 of $1,061,105;

-- the assumption of the assumed liabilities (as defined in the purchase
agreement); and

-- the Earn-Out Amount payable pursuant to Section 2.3(b) of the purchase
agreement.

- At the Closing, PentaStar will:

-- pay to us by wire transfer to an account designated by us, $1,600,000
of the cash portion of the purchase price;

-- deposit the remaining $500,000 of the cash portion of the purchase
price and the stock certificates representing the closing shares into
an escrow account with the escrow agent; and

-- assume the assumed liabilities.

-- The accounts receivable escrow fund, the closing shares and the other
property held in the escrow account shall be held and disbursed
according to the purchase agreement and the escrow agreement.

REASON FOR THE SALE

We are selling the assets of Eastern Telecom because Eastern Telecom's
business is unrelated to our present strategy and core competency: building
software-based command and control systems. The funds raised from the sale of
the assets of Eastern Telecom will provide working capital to further the
development and marketing of our new products in the audio/visual command and
control market. We are also selling Eastern Telecom because VSI's Board of
Directors has concluded that the price offered by PentaStar for Eastern Telecom
is attractive and fair to VSI and its shareholders from a financial point of
view.

FAIRNESS OF THE SALE

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the assets of Eastern Telecom is fair to VSI and to VSI's shareholders. The
Board of Directors considered internally prepared analyses of the value of
Eastern Telecom using customary methods of valuation, including

- estimating the present value of VSI's interest in Eastern Telecom using
discounted cash flow methodology; and

- analyzing the pro forma effect on revenues, earnings per share, earnings
before interest, taxes, depreciation and amortization and other measures
of financial performance.

No one method, however, was determinative. Our Board of Directors did not retain
a financial advisor to opine as to the fairness of the transaction.

UNANIMOUS BOARD RECOMMENDATION

The Board of Directors has unanimously approved the sale of assets and
recommends that VSI stockholders vote to approve the sale of assets.

MAILING OF PROXY STATEMENT

This proxy statement is first being sent to you on April 20, 2000.

WHAT VOTE IS REQUIRED FOR APPROVAL OF THE ASSET SALE?

The asset sale requires the approval of the holders of a majority of the
outstanding shares of VSI's common stock. The failure to vote or a broker
non-vote has the same effect as a vote against the asset sale.

WHEN WILL THE ASSET SALE BE COMPLETED?

We are working to complete the asset sale as soon as possible. We
anticipate completing the asset sale by May 19, 2000, subject to receipt of
stockholder approval and satisfaction of other requirements, including the
conditions described immediately below.

CONDITIONS TO COMPLETING THE ASSET SALE

The completion of the asset sale depends on a number of conditions listed
in the purchase agreement being met. Additionally, the completion of the asset
sale requires the approval of the asset sale and purchase agreement by the
shareholders of VSI.

INTERESTS OF DIRECTORS AND OFFICERS IN THE ASSET SALE THAT DIFFER FROM YOUR
INTERESTS

Some of VSI's directors and officers have interests in the asset sale that
are different from, or are in addition to, their interests as stockholders in
VSI. The members of VSI's Board of Directors knew about these additional
interests, and considered them, when they approved the purchase agreement. These
interests include provisions in the purchase agreement regarding directors' and
officers' indemnification and insurance.

TERMINATION

- TERMINATING THE PURCHASE AGREEMENT. VSI and PentaStar can agree to
terminate the purchase agreement at any time prior to the closing of the
asset sale.

In addition, PentaStar can decide to terminate the purchase agreement
without VSI's consent if:

-- VSI breaches any representation, warranty, or covenant contained in
the purchase agreement in any material way, and PentaStar has notified
VSI of the breach and the breach has not been cured within 10 days
after the notice; or

-- the closing of the asset sale has not occurred on or before May 31,
2000 because of the failure of any condition precedent to PentaStar's
obligation to consummate the closing of the asset sale.

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<PAGE> 9

CONTACT INFORMATION

If you have any questions regarding the sale of assets or any other matters
discussed in this proxy statement, please contact:

VSI Enterprises, Inc.
5801 Goshen Springs Road
Norcross, Georgia 30071
Phone: (770) 242-7566
Attn: Karen Franklin

Interim Chief Financial Officer

PentaStar Communications, Inc.
1522 Blake Street
Denver, Colorado 80202
Phone: (303) 825-4400
Attn: Nancy Shipp
Director of Investor Relations

SOLICITATION OF PROXIES

Who pays for this proxy solicitation?

We do. We are responsible for the expense of this solicitation, including
the cost of preparing and mailing this Proxy Statement. In addition to sending
you these materials, some of our directors, officers and regular employees may
contact you by telephone, facsimile transmission, mail or in person, at no
additional compensation. We will also use the services of Corporate Investors
Communications, Inc., a proxy solicitation firm, in connection with the
solicitation of proxies. Although we do not know the exact cost of these
services at this time, we anticipate that the cost will not exceed $7,500.

OUTSTANDING SHARES AND VOTING RIGHTS

Our common stock is our only class of securities with general voting
rights. Each share of issued and outstanding common stock (excluding shares held
in treasury) is entitled to one vote on each matter properly coming before the
meeting. Only stockholders of record as of the close of business on the Record
Date will be entitled to vote at the meeting, and cumulation of votes is not
permitted. As of the Record Date, of March 27, 2000, we had a total of
14,899,280 shares of common stock, par value $.001 per share (the "Common
Stock") issued and outstanding, with each share of Common Stock entitled to one
vote. Our common stock is listed for trading on the OTC Bulletin Board.

All share and per share amounts included in this Proxy Statement have been
adjusted to reflect the effects of a 1-for-4 reverse split of our common stock,
effected on January 15, 1999.

WHAT ARE THE REQUIREMENTS FOR A QUORUM?

Holders of a majority of the outstanding shares entitled to vote, if
present in person or represented by proxy, will constitute a quorum at the
meeting. Under applicable Delaware law, abstentions and "broker-non-votes" (as
described below) are counted for purposes of determining the existence of a
quorum for the transaction of business.

WHAT ARE "BROKER NON-VOTES"?

Nominees, such as banks and brokers (hereinafter referred to as "Brokers")
who hold shares in street name, have the authority to vote on certain routine
matters on which they have not received instructions from beneficial owners.
Brokers holding shares of common stock in street name who do not receive
instructions are entitled to vote on the election of directors. However, Brokers
may not vote shares held for customers on approval of certain other matters
without specific instructions from such customers. Under applicable
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Delaware law, "broker non-votes" on any such proposal (where a Broker submits a
proxy but does not have authority to vote a customer's shares on such proposal)
will not be included in the vote totals on that proposal.

WHAT VOTE IS REQUIRED TO ELECT DIRECTORS?

The four directors to be elected at the meeting will be elected by a
plurality of the votes of the shares present in person or represented by proxy
at the meeting and casting votes for the position on the board which that
nominee represents. With regard to the election of directors, votes may be cast
for or withheld from each nominee. Accordingly, under applicable Delaware law,
abstentions and "broker non-votes" will have no effect on the outcome of the
election of directors.

WHAT VOTE IS REQUIRED TO PASS THE OTHER MATTERS?

The affirmative vote of a majority of the outstanding shares is required to
approve the sale of substantially all the assets of our subsidiary, Eastern
Telecom. In all other matters other than the election of directors, only the
affirmative vote of the majority of those shares which are present in person or
represented by proxy at the meeting and entitled to vote thereon which are cast
are required to approve a proposal for purposes of Delaware law. For such
purpose, under applicable Delaware law, abstentions and broker non-votes will be
counted as shares present for purposes of determining the presence of a quorum
but will not be counted as votes cast for purposes of determining whether the
sale of our subsidiary received sufficient votes for approval. Since approval of
the sale of substantially all the assets of Eastern Telecom requires the
affirmative vote of holders of a majority of shares outstanding, a shareholder
who fails to return a proxy or who abstains from voting on the proposals in his
proxy will have functionally voted against the sale of our subsidiary.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of March 27, 2000 by (i) each person known by
us to be the beneficial owner of more than five percent (5%) of the outstanding
Common Stock; (ii) each of our directors; (iii) the Named Executive Officers (as
defined herein); and (iv) all of our directors and executive officers as a
group.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED(1) OF CLASS
- ------------------------ ------------ --------
<S> <C> <C>
Larry M. Carr............................................... 1,573,639(2) 10.03%
Julia B. North.............................................. 115,996(3) *
Richard E. Harrison......................................... 986,667(4) 6.28%
Harlan D. Platt, Ph.D....................................... 36,739(5) *
Edward S. Redstone.......................................... 1,509,254(6) 9.73%
Karen T. Franklin........................................... 77,000(7) *
Richard W. Egan............................................. 33,080(8) *
Brian S. Rowley............................................. 2,500(9) *
Kenneth A. Oberkofler....................................... 15,266(10) *
Richard C. Mays............................................. 512,019(11) 3.43%
All Directors and Executive Officers as a Group (11
persons).................................................. 4,203,042(12) 24.95%
</TABLE>

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

* Less than 1% of outstanding shares.

(1) "Beneficial Ownership" includes shares for which an individual, directly or
indirectly, has or shares voting or investment power or both and also
includes options which are exercisable within sixty days of the date of
this Proxy Statement. All of the listed persons have sole voting and
investment power over the shares listed opposite their names unless
otherwise indicated in the notes below. Beneficial ownership as reported in
the above table has been determined in accordance with Rule 13d3 of the
Securities Exchange Act of 1934. The percentages are based upon 14,899,280
shares outstanding, except

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<PAGE> 11

for certain parties who hold options to purchase shares which are
exercisable within the next sixty days. The percentages for those parties
who hold presently exercisable options are based upon the sum of shares
beneficially owned by them plus the number of options held by them which
are exercisable within the next sixty days, as indicated in the following
notes.

(2) Includes 20,000 shares of common stock subject to stock options that are
exercisable within the next sixty days and 262,537 shares of common stock
subject to presently exercisable common stock Purchase Warrants. Also
includes 166,667 shares and 500,000 shares subject to warrants held in the
name of OHA Financial, the board of which Mr. Carr serves as a director;
Mr. Carr disclaims beneficial ownership of these shares. Mr. Carr's mailing
address is 5801 Goshen Springs Road, Norcross, Georgia 30071.

(3) Includes 103,750 shares of common stock subject to stock options that are
exercisable within the next sixty days and 5,001 shares of common stock
issuable upon the exercise of warrants.

(4) Includes 300,000 shares of common stock subject to stock warrants that are
exercisable within the next sixty days. Also includes 166,667 shares and
500,000 shares subject to warrants held in the name of OHA Financial, for
which Mr. Harrison serves as a director; Mr. Harrison disclaims beneficial
ownership of these shares. Mr. Harrison's mailing address is 5801 Goshen
Springs Road, Norcross, Georgia 30071.

(5) Includes 28,750 shares of common stock subject to stock options that are
exercisable within the next sixty days, 5,001 shares of common stock
subject to warrants and 2,988 shares of common stock jointly owned by Dr.
Platt's spouse.

(6) Includes 11,250 shares of common stock subject to stock options that are
exercisable within the next sixty days, 600,019 shares of common stock
issuable upon the exercise of warrants and 625 shares owned by Mr.
Redstone's spouse. Mr. Redstone's mailing address is 222 Merrimack Street,
Suite 210, Lowell, Massachusetts 01852.

(7) Includes 50,000 shares of common stock issuable upon the exercise of
warrants that are exercisable within the next sixty days and 25,000 shares
of common stock issuable upon the exercise of options.

(8) Includes 18,334 shares of common stock issuable upon the exercise of
options that are exercisable within the next sixty days and 3,751 shares
subject to warrants.

(9) Includes 2,500 shares of common stock issuable upon the exercise of
warrants and options that are exercisable within sixty days.

(10) Includes 3,894 shares of common stock issuable upon the exercise of
warrants and options that are exercisable within sixty days.

(11) Includes 11,019 shares of common stock subject to stock options that are
exercisable within the next sixty days, and 500,000 shares held by ACIS,
Inc., of which Mr. Mays is the controlling stockholder.

(12) Includes shares held by executive officers who are not Named Executive
Officers; shares beneficially owned by more than one officer or director
are not counted twice. Includes shares of common stock subject to options
and warrants that are exercisable within the next sixty days.

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AGENDA ITEM ONE

ELECTION OF DIRECTORS

Our Board of Directors consists of four directors. Our By-laws provide that
the Board of Directors shall consist of not less than three nor more than seven
members, the precise number to be determined from time to time by our Board of
Directors. The Board has set the number of directors at four. The Board of
Directors recommends the election of the four nominees listed below.

Each of the nominees has consented to being named in this Proxy Statement
and to serve as one of our directors if elected. In the event that any nominee
withdraws or for any reason is not able to serve as a director, the proxy will
be voted for such other person as may be designated by the Board of Directors,
but in no event will the proxy be voted for more than four nominees. The
affirmative vote of a plurality of all votes cast at the meeting by the holders
of the Common Stock is required for the election of the four nominees standing
for election. Our management has no reason to believe that any nominee will not
serve if elected.

Each of the following persons has been nominated by management for election
to the Board of Directors to succeed themselves for a term of one year and until
their successors are elected and qualified:

LARRY M. CARR. Mr. Carr, age 56, has served as a director for us since
June 1994. Mr. Carr founded Nursefinders, Inc., a temporary services company in
the healthcare industry, in 1974. Although Mr. Carr's interest in this company
was acquired by Adia Services, Inc., Mr. Carr still owns and operates numerous
Nursefinders franchises and assists in the administration and management of
several other franchises through an entity known as Management Services, Inc.
Mr. Carr is Chairman of the Board of Northwest National Bank, located in
Arlington, Texas, and is a director of several privately held companies,
including OHA Financial, Inc., Trinity Airweights, LLC and Computerized
Healthcare, Inc.

JULIA B. NORTH. Ms. North, age 52, has served as a director for us since
October 1997. Ms. North served as President and Chief Executive Officer of VSI
Enterprises, Inc. from October 1997 until her resignation on June 11, 1999. Ms.
North served in various capacities with BellSouth Corporation from 1972 to
October 1997, including most recently as President of its Consumer Services
Division. Ms. North is a director of WinnDixie Stores, Inc., a food retailer,
ChoicePoint, Inc., a provider of risk management services, and Wisconsin Energy
Corp., a holding company with subsidiaries in utility and non-utility
businesses.

HARLAN D. PLATT, PH.D. Dr. Platt, age 49, has been a Professor of Finance
in the College of Business Administration at Northeastern University in Boston
since 1981. His research interests are in the areas of corporate renewal and
turnaround management. Dr. Platt is the author of three books, with the most
recent Principles of Corporate Renewal published in April 1998 by the University
of Michigan Press. Dr. Platt serves on the Board of Directors of Prospect Street
High Income Portfolio, Inc., and is the president of 911RISK Inc., which
develops predictive models of corporate distress. He is also the faculty dean of
the Turnaround Management Association.

EDWARD S. REDSTONE. Mr. Redstone, age 71, has served as a director for us
since July 1996. Mr. Redstone has been a private investor since 1994. From 1984
to 1994, he served as Chairman of the Board of Martha's Vineyard National Bank.

There are no family relationships between any of our directors or executive
officers and any other of our directors or executive officers.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and persons who own more than 10% of our
outstanding Common Stock to file with the Securities and Exchange Commission
reports of changes in ownership of our Common Stock held by such persons.
Officers, directors and greater than 10% shareholders are also required to
provide us with copies of all forms they file under this regulation. To the best
of our knowledge, based solely on a review of the copies of such reports
furnished to us and representations that no other reports were required, during
the year ended December 31, 1999, all

7
<PAGE> 13

Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% shareholders were fulfilled.

Although it is not our obligation to make filings pursuant to Section 16 of
the Securities Exchange Act of 1934, we have adopted a policy requiring all
Section 16 reporting persons to report monthly to our Chief Financial Officer as
to whether any transactions in our securities occurred during the previous
month.

MEETINGS OF THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD

During the year ended December 31, 1999, the Board of Directors held eleven
(11) meetings and acted by unanimous written consent on seven (7) other
occasions during 1999. Each director attended at least 75% or more of the
aggregate number of meetings held by the Board of Directors and the committees
on which he or she served. Our Board of Directors has four standing committees:
the Executive Committee, the Audit Committee, the Compensation Committee and the
Stock Option Committee. The Board of Directors does not have a standing
nominating committee, such function being reserved to the full Board of
Directors.

The Executive Committee presently consists of Larry M. Carr and Edward S.
Redstone. The Executive Committee exercises the authority of the Board of
Directors in accordance with our By-laws between meetings of the Board. The
Executive Committee did not hold meetings during the year ended December 31,
1999.

The Audit Committee presently consists of Harlan D. Platt, Ph.D.
(Chairman), Larry M. Carr and Edward S. Redstone. The Audit Committee has been
assigned the following principal functions:

- recommending the independent auditors

- reviewing and approving the annual report of the independent auditors

- approving the annual financial statements

- reviewing and approving summary reports of the auditors' findings and
recommendations.

The Audit Committee held two (2) meetings during the year ended December 31,
1999.

The Compensation Committee presently consists of Larry M. Carr (Chairman),
Edward S. Redstone and Julia B. North. The Compensation Committee has been
assigned the functions of approving and monitoring the remuneration arrangements
for senior management and establishing the targets that determine awards payable
under our incentive compensation plan. The Compensation Committee did not hold
meetings during the year ended December 31, 1999.

The Stock Option Committee presently consists of Edward S. Redstone
(Chairman) and Larry M. Carr. The Stock Option Committee has been assigned the
functions of administering our Stock Option Plans and Employee Stock Purchase
Plan and granting options thereunder. The Stock Option Committee held three (3)
meetings during the year ended December 31, 1999.

8
<PAGE> 14

EXECUTIVE OFFICERS

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>

RICHARD E. HARRISON....................... 42 Interim Chief Executive Officer

RICHARD W. EGAN........................... 34 President -- Videoconferencing Systems
Subsidiary

RICHARD C. MAYS........................... 43 Vice President and Chief Technical Officer

KAREN T. FRANKLIN......................... 42 Interim Chief Financial Officer and Secretary

BRIAN S. ROWLEY........................... 32 President -- Eastern Telecom Subsidiary

KENNETH A. OBERKOFLER..................... 37 Vice President -- VSI Direct

AUSTIN STEPHENS........................... 45 Vice President -- VSI Control Systems
</TABLE>

Executive officers are chosen by and serve at the discretion of our Board
of Directors. Executive officers will devote their full time to our business and
affairs.

RICHARD E. HARRISON. Mr. Harrison joined us in June 1999 as Interim Chief
Executive Officer. Mr. Harrison has served as President of Taconic Partners,
LLC, a Dallas, Texas based venture capital and consulting firm since 1994. From
1995 through September 1999, Mr. Harrison served as President, Chief Executive
and Chairman of the Board of OHA Financial, Inc., a Texas corporation previously
engaged in financing automobiles.

KAREN T. FRANKLIN. Ms. Franklin joined us in June 1999 as Interim Chief
Financial Officer. Ms. Franklin has served as Controller of OHA Financial, Inc.,
a Dallas, Texas based finance company from September 1997 to June 1999. From
1995 to March 1997 she served as Director of Financial Accounting for Jayhawk
Acceptance Corp. Previously, she has served in various managerial positions with
PricewaterhouseCoopers and USTrails, Inc. Ms. Franklin is a Certified Public
Accountant.

RICHARD W. EGAN. Mr. Egan joined us in June 1995 and, since June 11, 1999
has served as President of the Videoconferencing Systems subsidiary. From
February 1, 1998 through June 11, 1999 he served as Executive Vice
President -- Global Sales. From July 1996 until February 1998 he served as
National Account Manager, and from June 1995 until July 1996 as Regional Sales
Director. He was previously employed as Eastern Region Sales Manager for DBA
Software and as Account Manager for Training America/Goal Systems.

RICHARD C. MAYS. Mr. Mays joined us in April 1993 and, since February 1,
1998, has served as Vice President and Chief Technical Officer. From April 1993
until September 1994, he served as Lead Software Engineer, and from September
1994 until April 1996 as Software Development Manager.

BRIAN S. ROWLEY. Mr. Rowley joined Eastern Telecom in 1992 and has served
as Eastern Telecom's President and Chief Operating Officer since August 1998.
His past responsibilities have included Operations Manager, Director of
Operations, Vice President of Operations and Vice President of Operations and
Finance.

KENNETH A. OBERKOFLER. Mr. Oberkofler joined VSI in 1993 and has served as
National Account Manager from November 1993 until July 1998. He served as
Director of Sales from July 1998 to December 1999 and since January 2000 has
served as Vice President -- VSI Direct.

AUSTIN STEPHENS. Mr. Stevens joined us in 1995 and has served in various
capacities, including Vice President -- Operations. He became Vice
President -- Control Systems in January 2000.

9
<PAGE> 15

EXECUTIVE COMPENSATION

The following table provides certain summary information for the fiscal
years ended December 31, 1999, 1998 and 1999 concerning compensation paid or
accrued by us to or on behalf of our Chief Executive Officer and our other
executive officers whose total annual salary and bonus exceeded $100,000 during
the year ended December 31, 1999 (the "Named Executive Officers").

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ------------
NUMBER OF
OTHER OPTIONS OR
NAME AND ANNUAL WARRANTS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDED
------------------ ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard E. Harrison............... 1999(1) $163,200 -- $20,000 300,000
Interim President and Chief
Executive Officer

Julia B. North.................... 1999(2) $ 74,764 -- $ 1,538 --
President and Chief 1998 $161,539 12,500
Executive Officer 1997 $ 32,000 12,500

Richard W. Egan................... 1999 $127,701(4) $ 1,058
President of 1998(3) $132,535(4) $ 769 -- 25,000
Videoconferencing Systems

Karen T. Franklin................. 1999(5) $ 99,662 $17,394 -- 50,000
Interim Chief Financial Officer
and Secretary

Brian S. Rowley................... 1999 $120,653 $28,432 -- 25,000
President of Eastern Telecom

Kenneth A. Oberkofler............. 1999 $235,229 -- -- --
Vice President -- VSI Direct
</TABLE>

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

(1) Mr. Harrison became Interim Chief Executive Officer on June 11, 1999. The
$20,000 set out under Other Annual Compensation is for consulting services
rendered prior to May 1, 1999.

(2) Ms. North joined VSI in October 1997 and she resigned as President and Chief
Executive Officer on June 11, 1999. She remains a director of VSI.

(3) Mr. Egan was named President of Videoconferencing Systems on June 11, 1999.

(4) Includes sales commissions of $53,995 in 1998 and $31,432 in 1999.

(5) Ms. Franklin became Interim CFO and joined VSI on June 11, 1999.

(6) Mr. Rowley was named President -- Eastern Telecom in August 1998.

(7) Mr. Oberkofler was named Vice President -- VSI Direct in January 2000.

DIRECTORS' FEES

Our present policy does not provide for any cash compensation to directors
who also serve as our employees for their services as directors. Each of our
non-employee directors receives an automatic grant of options to purchase 3,750
shares of Common Stock on each January 5. Each of our non-employee directors
also receives $500 for each Board meeting attended, plus reimbursement of travel
and other expenses incurred in connection with the performance of their duties.

In addition, all new non-employee directors receive a onetime grant of an
option to purchase 5,000 shares of our Common Stock at an exercise price equal
to the fair market value of such stock on the date of grant. Such options
expire, unless previously exercised or terminated, ten years from the date of
grant.

10
<PAGE> 16

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors is currently comprised
of Larry M. Carr, Edward S. Redstone and Julia B. North. With the exception of
Ms. North, who served as our President & Chief Executive Officer, until her
resignation on June 11, 1999, none of the members of the Compensation Committee
served as an officer or employee or any of our subsidiaries during fiscal 1999.
Except as set forth below, there were no material transactions between us and
any of the members of our Compensation Committee during fiscal 1999.

STOCK OPTION PLAN

In 1991, by action of our Board of Directors, we adopted the 1991 Stock
Option Plan (the "1991 Plan") for our officers, directors and employees and
those of our wholly-owned subsidiaries. The 1991 Plan was approved by our
shareholders on October 10, 1991. In July 1992, the 1991 Plan was amended to,
among other things, provide for the automatic grant of options to our
non-employee directors, to increase the number of shares of Common Stock
available for grant thereunder and to expand the class of persons eligible to
receive options under the 1991 Plan to include employees of our majority-owned
subsidiaries. In November 1993, the 1991 Plan was further amended to expand the
class of persons eligible to receive options under the 1991 Plan and to increase
the number of shares of Common Stock available for grant thereunder. The 1991
Plan, as amended by our shareholders on May 19, 1998, provides for the grant of
options to purchase up to an aggregate of 915,514 shares of our Common Stock.
Under the terms of the 1991 Plan, the Stock Option Committee of the Board of
Directors may grant options to purchase shares of Common Stock to our officers,
directors and employees and those of our subsidiaries.

The following table provides certain information concerning individual
grants of warrants (in the case of Mr. Harrison and Ms. Franklin) and stock
options under our 1991 Stock Option Plan made during the year ended December 31,
1999 to the Named Executive Officers:

OPTIONS GRANTED IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS AND ANNUAL RATES OF STOCK
WARRANTS PRICE APPRECIATION FOR
OPTIONS AND GRANTED TO EXERCISE OPTION OR
WARRANTS EMPLOYEES OR BASE WARRANT TERM(1)
GRANTED IN FISCAL PRICE EXPIRATION ----------------------
NAME (#) YEAR ($ PER SHARE) DATE 5% 10%
- ---- ----------- ----------- ------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Harrison...... 300,000(2) 60.11% .525 05/01/04 $99,501 $251,014
Richard W. Egan.......... 25,000(3) 5.01% .34 08/25/04 $ 5,346 $ 13,547
Karen T. Franklin........ 25,000(4) 10.01% $.525 05/01/04 $ 8,254 $ 20,918
25,000(4) .43 08/01/04 $ 6,760 $ 20,348
Brian S. Rowley.......... 25,000(5) 5.01% .34 08/25/04 $ 5,346 $ 5,346
</TABLE>

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

(1) The dollar amounts under these columns represent the potential realizable
value of each grant of option assuming that the market price of our Common
Stock appreciates in value from the date of grant at the 5% and 10% annual
rates prescribed by the SEC and therefore are not intended to forecast
possible future appreciation, if any, of the price of our Common Stock.

(2) Warrants vest as follows: 200,000 are fully vested and 100,000 on May 1,
2000.

(3) Options vest as follows: 25,000 on December 31, 2000.

(4) Warrants vest as follows: 25,000 on June 11, 1999 and 25,000 on January 2,
2000.

(5) Options vest as follows: 8,333, 8,333 and 8,333 shares on each of August 25,
2000, 2001 and 2002.

11
<PAGE> 17

The following table provides certain information concerning the value of
unexercised warrants and unexercised options held by the Named Executive
Officers under our Stock Option Plans as of December 31, 1999. No options or
warrants were exercised by any of the Named Executive Officers during 1999.

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE MONEY OPTIONS
OPTIONS OR WARRANTS AND WARRANTS AT
AT FISCAL YEAR END FISCAL YEAR END(A)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard E. Harrison........................ 200,000 100,000 -0- -0-
Julia B. North............................. 103,750 25,000 -0- -0-
Richard W. Egan............................ 0 25,000 -0- 1,250
Karen T. Franklin.......................... 25,000 25,000 -0- -0-
Brian Rowley............................... 0 25,000 -0- 1,250
</TABLE>

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

(a) Dollar values were calculated by determining the difference between the fair
market value of the underlying securities at year-end ($0.39 per share) and
the exercise price of the options.

CERTAIN TRANSACTIONS

Reference is made to "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" for additional information.

On August 31, 1999, VSI restructured its debt with Thomson Kernaghan & Co.,
Ltd. ("Kernaghan"), which totaled $1,089,750 at August 31, 1999. VSI 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"). The
Debenture was repaid in March 2000.

As part of closing the Kernaghan transaction, $1,213,000 of the Company's
18-month term notes due March 31, 2000 were converted into 195,099 shares of
Eastern Telecom common stock which were owned by VSI, 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. On March 14, 2000, VSI
exchanged 531,077 shares of its common stock for 16% of the common stock of
Eastern Telecom held by certain minority shareholders. VSI now holds a 80.5%
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 VSI common stock at
an exercise price of $0.50 and $1.00 per share, respectively. Under the terms of
the Kernaghan agreement, VSI has undertaken to sell its remaining interest in
Eastern Telecom at not less than fair market value, provided the terms of any
such transaction are otherwise acceptable to VSI. Additionally, Eastern
Telecom's remaining minority shareholders have a put option, which gives them
the right to put their Eastern Telecom shares back to VSI after one year or upon
the sale of Eastern Telecom or substantially all of its assets and VSI has a
call option to reacquire shares of Eastern Telecom at any time, both at a price
of $6.50 per share of Eastern Telecom Common Stock. As previously discussed in
this Proxy Statement, we have asked you to approve the sale of Eastern Telecom.

12
<PAGE> 18

In connection with the August 31, 1999 transactions described above, an
aggregate of 255,480 shares of Eastern Telecom common stock were sold to
affiliates of VSI, as follows:

<TABLE>
<CAPTION>
EASTERN TELECOM SHARES EASTERN TELECOM
ISSUED IN EXCHANGE SHARES ISSUED FOR
NAME TITLE FOR TERM NOTES NEW EQUITY
- ---- -------- ---------------------- -----------------
<S> <C> <C> <C>
Richard E. Harrison........................... CEO -- 76,923(1)
Richard Egan.................................. Officer 1,613 --
Edward S. Redstone............................ Director 32,265 76,923
Larry M. Carr................................. Director 64,530 --
Julia B. North................................ Director 1,613 --
Harlan D. Platt............................... Director 1,613 --
</TABLE>

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

(1) Represents shares of Eastern Telecom common stock owned by OHA Financial,
Inc., of which Mr. Harrison serves as a Director.

13
<PAGE> 19

STOCKHOLDER RETURN PERFORMANCE GRAPH

Set forth below is a line graph comparing the yearly percentage change in
the cumulative total stockholder return on the our Common Stock against the
cumulative total return of the Nasdaq Stock Market Index and the Nasdaq
Electronics Components Stock Index for the period commencing on December 31,
1994 and ending December 31, 1999 (the "Measuring Period"). The graph assumes
that the value of the investment in our Common Stock and each index was $100 on
December 31, 1994. The yearly change in cumulative total return is measured by
dividing (i) the sum of (a) the cumulative amount of dividends for each fiscal
year, assuming dividend reinvestment, and (b) the change in share price between
the beginning and end of the Measuring Period, by (ii) the share price at the
beginning of the Measuring Period. We have not paid any cash dividends.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
VSI ENTERPRISES, INC., NASDAQ STOCK MARKET INDEX AND
NASDAQ ELECTRONICS COMPONENTS STOCK INDEX

<TABLE>
<CAPTION>
NASDAQ ELECTRONICS
VSI ENTERPRISES INC. NASDAQ US COMPONENTS
-------------------- --------- ------------------
<S> <C> <C> <C>
1994 100.00 100.00 100.00
1995 304.96 141.33 165.62
1996 170.00 173.89 286.42
1997 100.00 213.07 300.25
1998 20.00 300.25 464.11
1999 8.00 542.43 910.46
</TABLE>

ASSUMES $100 INVESTED ON DECEMBER 31, 1994 IN VSI ENTERPRISES, INC.
COMMON STOCK, NASDAQ STOCK MARKET INDEX AND
NASDAQ ELECTRONICS COMPONENTS STOCK INDEX

14
<PAGE> 20

REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

During the year ended December 31, 1999, the Compensation Committee of the
Board of Directors was comprised of three non-employee members of the Board. The
Compensation Committee is responsible for:

- setting our compensation philosophy and policies

- setting the terms and the administration of compensation plans for our
officers

- review and approval of pay recommendations for our executive officers

- initiation of all compensation actions for our Chief Executive Officer

Our compensation policies have been designed to align the financial
interests of our management with those of our stockholders, and reflect our
nature by taking into account our operating environment and the expectations for
growth and enhanced profitability. Compensation for each of our executive
officers consists of a base salary, discretionary performance bonus and stock
options. We do not currently provide executive officers with other long-term
incentive compensation aside than the ability to contribute their earnings to
our 401(k) Plan.

The Compensation Committee's philosophy is that the predominant portion of
an executive's compensation should be based directly upon the value of long-term
incentive compensation in the form of stock options. The Compensation Committee
believes that providing executives with the opportunities to acquire significant
stakes in our growth and prosperity (through grants of stock options), while
maintaining other elements of our compensation program at conservative levels,
will enable us to attract and retain executives with the outstanding management
abilities and entrepreneurial spirit which are essential to our ongoing success.
Furthermore, the Compensation Committee believes that this approach to
compensation motivates executives to perform to their full potential.

At least annually, the Compensation Committee reviews salary
recommendations for our executives (other than the Chief Executive Officer) and
then approves such recommendations, with any modifications it deems appropriate.
The annual salary recommendations are made under the ultimate direction of the
Chief Executive Officer, based on peer group and national industry surveys of
total compensation packages, as well as evaluations of the individual
executive's past and expected future performance. Similarly, the Compensation
Committee fixes the base salary of the Chief Executive Officer based on a review
of competitive compensation data, the Chief Executive Officer's overall
compensation package, and the Compensation Committee's assessment of his or her
past performance and its expectation as to his future performance in leading us
forward. Generally, such salaries have been below levels paid to executives with
comparable qualifications, experience and responsibilities at other similarly
situated companies.

The Compensation Committee also determines, based upon the recommendation
of the Chief Executive Officer, the annual bonus, if any, to be paid to
executive officers (other than the Chief Executive Officer). The amount of each
individual bonus is determined based upon an evaluation of such factors as
individual performance, increases in our revenue, net income, net income per
share and market penetration, as well as improvements in operating efficiencies.
The assessment of performance achievement is considered in relation to the
maximum normal bonus opportunity, which is paid for achieving outstanding levels
of performance. The Compensation Committee applies similar criteria in setting
the amount of annual bonus, if any, earned by the Chief Executive Officer.

Stock options represent a substantial portion of compensation for our
executive officers, including our Chief Executive Officer. Stock options are
granted at the prevailing market price on the date of grant, and will only have
value if our stock price increases. Generally, option grants vest in equal
amounts over a period of three years (although certain special types of grants
may vest either immediately or over a shorter period) and executives must be
employed by us at the time of vesting in order to exercise the options. Grants
of stock options generally are based upon the level of the executive's position
with us and an evaluation of the executive's past and expected future
performance. The Compensation Committee believes that dependence on stock
options for a significant portion of executives' compensation more closely
aligns such executives'

15
<PAGE> 21

personal interests with those of our stockholders, since the ultimate value of
such compensation is linked directly to stock price.

In the year ended December 31, 1999, we granted: our Interim Chief
Executive Officer Richard E. Harrison warrants to purchase shares of our Common
Stock; our Interim Chief Financial Officer Karen T. Franklin warrants to
purchase shares of our Common Stock; our President-Videoconferencing Systems,
Richard W. Egan options to purchase shares of our Common Stock; our Vice
President-Eastern Telecom Brian S. Rowley options to purchase shares of our
Common Stock; and our Chief Technical Officer Richard C. Mays options to
purchase shares of our Common Stock. We also granted options to certain other
persons who are not executive officers.

The Compensation Committee continually evaluates our compensation policies
and procedures with respect to executives. Although the Compensation Committee
believes that current compensation policies have been successful in aligning the
financial interests of executive officers with those of our stockholders and
with our performance as a company, it continues to examine what modifications,
if any, should be implemented to further link executive compensation with our
performance as a company and the executive's individual performance.

Larry M. Carr, Chairman
Edward S. Redstone
Julia B. North

Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the foregoing Report of
Compensation Committee on Executive Compensation and the Stockholder Return
Performance Graph shall not be incorporated by reference into any such filings.

16
<PAGE> 22

AGENDA ITEM TWO

APPROVAL OF SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF

VSI NETWORK SOLUTIONS, INC., OUR WHOLLY OWNED SUBSIDIARY,

TO PENTASTAR COMMUNICATIONS, INC.

GENERAL

On February 18, 2000, our majority owned subsidiary, VSI Network Solutions,
Inc., doing business as Eastern Telecom, Inc. entered into a purchase agreement
with PentaStar Communications, Inc. and its newly-formed, wholly owned
acquisition subsidiary, OC Mergerco 4, Inc., to sell substantially all of its
assets to PentaStar Communications, Inc. The transaction will close upon
approval by the shareholders of VSI Enterprises, Inc. and satisfaction of the
terms of the purchase agreement.

BACKGROUND

BUSINESS CONDUCTED

VSI ENTERPRISES, INC.

VSI Enterprises, Inc. is engaged in the design, manufacture, marketing and
servicing of software based command and control systems, including
videoconferencing control systems, which operate on PC platforms. Together with
its wholly owned subsidiary, VSI provides command and control solutions which
allow end users to operate, as a single system, a broad range of electronic
equipment such as projectors, VCRs, computers, sound systems, lighting and
temperature controls and other audio/video devices in a variety of settings. In
addition, we resell voice and data services and equipment on behalf of large
telecommunications companies through our majority-owned subsidiary, Eastern
Telecom (sale pending). Our videoconferencing products are designed to allow
multiple participants at geographically disbursed sites to see and hear each
other on live television and share graphical pictorial information using
standard commercially available telecommunications transmission facilities. VSI
integrates standard video, audio and transmission components with its own
proprietary video, audio and computer control components software. VSI has two
business segments: control and video conferencing systems and network services.

PENTASTAR COMMUNICATIONS, INC.

PentaStar designs, procures and facilitates the installation and use of
communication services solutions that best meet customer's specific requirements
and budgets. PentaStar was originally formed to become a communication services
agent. PentaStar has become a multi-regional company that designs, sells and
facilitates the installation and usage of communication services for small and
medium-size business customers.

TERMS OF THE TRANSACTION

- STOCKHOLDER VOTE. You are being asked to vote to approve an asset sale
transaction whereby our majority owned subsidiary, VSI Network
Solutions, Inc., will sell substantially all of its assets to OC
Mergerco 4, Inc., a wholly owned subsidiary of PentaStar Communications,
Inc.

- THE ACQUIROR. PentaStar Communications, Inc., is a publicly held
Delaware corporation whose objective is to be a leading multi-regional
provider of custom-designed communications solutions to small and
medium-size businesses. PentaStar Communications, Inc. is acquiring the
assets of VSI Network Solutions, Inc. through PentaStar's newly-formed,
wholly owned acquisition subsidiary, OC Mergerco 4, Inc.

- CONSIDERATION TO VSI NETWORK SOLUTIONS, INC. The consideration payable
by PentaStar Communications, Inc. to VSI Network Solutions, Inc. for the
assets will consist of:

-- cash in an amount of $2,100,000;

17
<PAGE> 23

-- 57,657 shares of PentaStar, which had an aggregate fair market value
as of the date of the purchase agreement of $950,000 and have an
aggregate fair market value as of April 14, 2000 of $1,061,105;

-- the assumption of the assumed liabilities (as defined in the purchase
agreement); and

-- the Earn-Out Amount payable pursuant to Section 2.3(b) of the purchase
agreement.

At the Closing, PentaStar will:

-- pay to us by wire transfer to an account designated by us, $1,600,000
of the cash portion of the purchase price;

-- deposit the remaining $500,000 of the cash portion of the purchase
price and the stock certificates representing the closing shares into
an escrow account with the escrow agent; and

-- assume the assumed liabilities.

The accounts receivable escrow fund, the closing shares and the other
property held in the escrow account shall be held and disbursed according
to the purchase agreement and the escrow agreement.

REASON FOR THE SALE

FAIRNESS OF THE SALE

Our Board of Directors has carefully considered the sale of the assets of
Eastern Telecom and the price for the assets. The Board believes that it has
found the best reasonably available price for Eastern Telecom, after considering
a number of possible transactions. The Board concluded that the price VSI will
receive for the assets of Eastern Telecom is fair to VSI and to VSI's
shareholders. The Board of Directors considered internally prepared analyses of
the value of Eastern Telecom using customary methods of valuation, including

- estimating the present value of VSI's interest in Eastern Telecom using
discounted cash flow methodology; and

- analyzing the pro forma effect on revenues, earnings per share, earnings
before interest, taxes, depreciation and amortization and other measures
of financial performance.

No one method, however, was determinative. Our Board of Directors did not retain
a financial advisor to opine as to the fairness of the transaction.

UNANIMOUS BOARD RECOMMENDATION

The Board of Directors has unanimously approved the sale of assets and
recommends that VSI stockholders vote to approve the sale of assets.

MAILING OF PROXY STATEMENT

This proxy statement is first being sent to you on April 20, 2000.

WHAT VOTE IS REQUIRED FOR APPROVAL OF THE ASSET SALE?

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<PAGE> 24

WHEN WILL THE ASSET SALE BE COMPLETED?

CONDITIONS TO COMPLETING THE ASSET SALE

INTERESTS OF DIRECTORS AND OFFICERS IN THE ASSET SALE THAT DIFFER FROM YOUR
INTERESTS

TERMINATION

- TERMINATING THE PURCHASE AGREEMENT. VSI and PentaStar can agree to
terminate the purchase agreement at any time prior to the closing of the
asset sale.

In addition, PentaStar can decide to terminate the purchase agreement
without VSI's consent if:

-- the closing of the asset sale has not occurred on or before May 31,
2000 because of the failure of any condition precedent to PentaStar's
obligation to consummate the closing of the asset sale.

REGULATORY APPROVALS

There are no federal or state regulatory requirements to be complied with
for approval to be obtained in connection with this transaction.

DISSENTERS' RIGHTS

Shareholders of VSI do not have dissenters' rights with respect to this
transaction.

ACCOUNTING TREATMENT

Terms of the agreement include initial cash consideration in the amount of
$2,100,000, PentaStar common stock valued at $950,000 and PentaStar's assumption
of certain liabilities. The sale of Eastern Telecom assets to PentaStar will be
accounted for under the purchase method of accounting. VSI expects to realize an
initial gain of approximately $1.0 million on the sale. Any potential gain under
the earn-out provision will be recognized when additional consideration is
received.

FEDERAL INCOME TAX CONSEQUENCES

For Federal and State Income Tax purposes, the divestiture of the network
services division will be treated as an asset disposition. VSI does not expect
to recognize a gain for Federal Income Tax purposes, due to the write-off of
goodwill in 1998, which was disallowed for tax purposes. The write-off will be
allowed for tax purposes in 2000 due to the disposition of the assets.

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<PAGE> 25

REPORTS, OPINIONS AND APPRAISALS

No reports, opinions or appraisals that materially relate to this
transaction were received from outside parties or referred to in the proxy
statement.

PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS

No past contacts, transactions or negotiations have occurred between VSI
Enterprises, Inc., or any of our subsidiaries, and PentaStar Communications,
Inc. and any of its subsidiaries.

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<PAGE> 26

PRO FORMA FINANCIAL INFORMATION

INTRODUCTION

The following unaudited pro forma condensed consolidated financial
statements give effect to the disposition of VSI's equity interest in Eastern
Telecom and to the exchange of certain shares of Eastern Telecom common stock
for shares of VSI common stock.

The unaudited pro forma condensed consolidated balance sheet presents the
financial position of VSI at December 31, 1999 giving effect to the disposition
as if it had occurred on such date. The unaudited pro forma condensed statement
of operations for the year ended December 31, 1999 gives effect to the
disposition as if it had occurred at the beginning of the period.

The unaudited pro forma financial information is presented for information
purposes only and it is not necessarily indicative of the financial position and
results of operations that would have been achieved had the disposition been
completed as of the dates indicated and is not necessarily indicative of VSI's
future financial position or results of operations.

The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical consolidated financial statements of
VSI, including the related notes thereto.

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<PAGE> 27

VSI ENTERPRISES, INC AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 1999

<TABLE>
<CAPTION>
12/31/99 ETI ETI 12/31/99
------------ SHARE SALE ------------
HISTORICAL CONVERSION ADJUSTMENT PRO FORMA
------------ ---------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 798,826 $ 2,100,000 $2,115,545
(36,860)
(746,421)
Accounts Receivable, net............... 986,754 986,754
Inventories, net....................... 760,082 760,082
Demonstration inventory................ 16,258 16,258
Net current assets of discontinued
operations.......................... 476,153 (560,502) (84,349)
----------- ----------- ----------
Total current assets................ 3,038,073 3,794,290
Property and equipment:
Continuing operations.................. 166,572 166,572
Discontinued operations................ 577,676 (577,676) --
Other assets:
Software development costs, net........ 205,295 205,295
Other long term assets................. 14,614 14,614
Investments............................ -- 950,000 950,000
Other assets of discontinued
operations. net..................... 908,303 (908,303) --
----------- ----------- ----------- ----------
Total assets........................ $ 4,910,533 -- $ 220,238 $5,130,771
=========== =========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable....... $ 105,907 $ 105,907
Accounts payable....................... 941,301 941,301
Accrued expenses....................... 1,001,837 1,001,837
Deferred revenues...................... 1,000,512 1,000,512
Convertible debentures................. 939,750 939,750
Total current liabilities........... 3,989,307 3,989,307
Redeemable minority interest........... 2,118,293 (1,561,731) (746,421) 0
189,859
Stockholders' equity..................... (1,197,067) 1,561,731 776,800 1,141,464
----------- ----------
Total liabilities and
stockholders' equity......... $ 4,910,533 -- $ 220,238 $5,130,771
=========== =========== =========== ==========
</TABLE>

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<PAGE> 28

VSI ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
12/31/99 12/31/99
----------- ETI ------------
HISTORICAL SALE ADJUSTMENT PRO FORMA
----------- --------------- ------------
<S> <C> <C> <C>
Revenues:
Videoconferencing systems..................... $ 7,132,248 $ 7,132,248
----------- -----------
7,132,248 7,132,248
----------- -----------
Costs and Expenses:
Cost of videoconferencing systems............. 3,716,388 3,716,388
Selling, general and administrative........... 4,467,821 4,467,821
Research and development...................... 416,225 416,225
----------- -----------
8,600,434 8,600,434
----------- -----------
Loss from operations.................. (1,468,186) (1,468,186)
Loss on sale of subsidiary...................... (167,539) (167,539)
Other expenses, primarily financing charges..... (884,244) (884,244)
-----------
Net loss from continuing operations
before income taxes (2,519,969) (2,519,969)
Income taxes....................................
----------- -----------
Net loss from continuing operations... (2,519,969) (2,519,969)
Loss from discontinued operations, net of taxes
(nil)......................................... (319,625) 76,152 (243,473)
Gain on disposal of subsidiary.................. 0 1,050,000 1,050,000
----------- -----------
Net loss.............................. $(2,839,594) $1,126,152 $(1,713,442)
=========== ========== ===========
Net loss per common share:
Income (loss) from continuing operations...... $ (0.20) $ (0.20)
Income (loss) from discontinued operations.... (0.03) 0.06
----------- -----------
$ (0.23) $ (0.14)
=========== ===========
Weighted average shares outstanding............. 12,300,144 12,300,144
=========== ===========
</TABLE>

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<PAGE> 29

VSI ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

Note 1. The pro forma balance sheet has been prepared to reflect the
disposition of VSI's interest in Eastern Telecom and the exchange of certain
shares of Eastern Telecom common stock into shares of VSI common stock, as if
they had happened on December 31, 1999. Pro forma adjustments are made to
reflect:

a. The conversion of 240,266 shares of Eastern Telecom common stock into
520,577 shares of VSI common stock in an equity transaction valued at
$1,561,731, which occurred on March 10, 2000.

b. Proceeds from the sale of Eastern Telecom, pursuant to a definitive
agreement entered into on February 18, 2000, with PentaStar Communications, of
$2,100,000 in cash and $950,000 in PentaStar stock.

c. A payment of $746,421 to remaining minority interest shareholders of
Eastern Telecom.

d. A reduction in assets and liabilities of discontinued operations and
remaining minority interest balances associated with Eastern Telecom.

Note 2. The pro forma statement of operations has been prepared to reflect the
following pro forma adjustments necessary to reflect the disposition of VSI's
interest in Eastern Telecom outlined in Note 1, as if it had occurred at the
beginning of the period presented. Pro forma adjustments are made to reflect:

a. A reduction in loss from discontinued operations of $76,152 to reflect
the disposition.

b. A gain on sale of $1,050,000 to reflect the disposition.

DESCRIPTION OF PENTASTAR'S BUSINESS

OVERVIEW

PentaStar Communications, Inc., a Delaware corporation, was founded on
March 15, 1999, to become a multi-regional communications services agent for
small to medium-size business customers. Prior to October 26, 1999, PentaStar
had not conducted any operations, and all of PentaStar's activities were related
to the organization of PentaStar, the acquisitions described below and
PentaStar's initial public offering of common stock (the Offering). On October
26, 1999, PentaStar, through wholly-owned subsidiaries, acquired DMA Ventures,
Inc., dba Access Communications (Access) and ICM Communications Integration,
Inc. (ICM) (together, the Acquired Companies) and completed the Offering.
References in this Proxy Statement to "PentaStar," refer to PentaStar, ICM and
Access on a combined basis, unless the context otherwise indicates.

On October 26, 1999, PentaStar commenced business operations as a
communications services agent. PentaStar designs, procures and facilitates the
installation and use of communications and Internet services for small to
medium-size businesses that generally cannot afford in-house communications
management resources. PentaStar's goal is to provide its customers with a
comprehensive communications solution, utilizing the infrastructure of existing
communications service providers. By analyzing and selecting from a variety of
available communications service providers and technologies, other than for
local access where PentaStar primarily offers regional bell operating company
(RBOC) service, PentaStar provides its customers with a custom-designed,
cost-effective solution for local access, long distance, wireless and Internet
services for voice and data communications services. As the communications
industry becomes increasingly complex, PentaStar believes its services will
become more valuable to its customers.

PentaStar has and will continue to enter into agent relationships with long
distance, wireless and Internet service providers that will expand the available
services offered by agents acquired by PentaStar.

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<PAGE> 30

PentaStar services customers in a broad range of industries, including
retail, wholesale, manufacturing, service, distribution and professional
services. Some of the major benefits PentaStar provides its customers are:

- assistance in sorting through the abundance of confusing technology
options;

- management of the ordering and installation of communications services;

- more effective and timely responses to problems encountered with
communications service providers than can generally be obtained by an
individual customer;

- ongoing evaluation of new solutions that could better suit the future
communications needs of PentaStar's customers;

- development and maintenance of customer-specific databases that allow
PentaStar to better apply its knowledge and experience to each
customer's communications needs; and

- payment of most of PentaStar's fees by the communications service
provider.

PentaStar believes that it offers compelling reasons for communications
service providers to view PentaStar as a strategic partner. Those reasons are as
follows:

- PentaStar is an effective sales force for its service providers, with a
competitive, cost effective and variable cost solution for them;

- PentaStar provides the ability to retain customers and increase revenues
from customers;

- PentaStar provides a professional staff to handle the installation of
services and ongoing interface between the customer and the service
provider;

- PentaStar can sell into markets that may not be economical for the
service providers to support directly; and

- PentaStar can act as a sales agent for communications services that some
service providers, the RBOCs in particular, are prohibited by law from
offering. This provides its customers with a complete communications
solution.

ICM was formed in 1990 as a division of International Communications
Management, Inc., a corporation that provided training for communications
service providers. ICM was formed to provide communications consulting and sell
communications services to small to medium-size businesses. In January 1995, the
ICM division was spun-off into a separate corporation owned by International
Communications Management, Inc. In July 1997, ICM was spun-off as a separate
corporation to the shareholders of International Communications Management, Inc.
ICM has been a U S WEST Communications, Inc. (U S WEST) agent since 1991.
Approximately 99% of ICM's 1999 and 1998 revenues were from commissions paid by
U S WEST. The balance was comprised of revenues from the sale of long distance
and Internet services procured from a former affiliate of ICM. ICM has sold U S
WEST's local access service since 1991 and has marketed U S WEST's wireless
services since December 1998 and U S WEST's Internet services since January
1998. ICM has offered Qwest long distance services since October 1998 and AT&T
long distance services since April 1999. In June 1998, ICM began offering Epoch
Internet services.

Access was formed in 1995 by Jeffrey A. Veres. Originally, Access acted as
an agent for U S WEST and sold local area network and wide area network hardware
for computer systems in the Denver, Colorado metropolitan area. In April 1999,
Access discontinued its hardware business to focus on selling U S WEST's
communications services. Access has been a U S WEST agent since 1995. All of
Access' 1999 and 1998 agent revenues were from commissions paid by U S WEST.
Access has recently begun offering Qwest long distance services and is
developing other service provider relationships. Access has sold U S WEST's
local access services since 1995 and has marketed U S WEST's wireless services
since December 1998 and U S WEST's Internet services since January 1998. Access
has been an agent for Qwest long distance services since January 1999.

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<PAGE> 31

PentaStar also intends to acquire additional communications services agents
in other major metropolitan areas. PentaStar has formed PentaStar Internet,
Inc., a wholly-owned subsidiary, to acquire Internet service providers ("ISPs")
in small, high-growth areas. PentaStar's goal is to use the staff and customer
relationships of ISPs PentaStar may acquire to implement comprehensive local
access, long distance, wireless and Internet solutions for customers in these
small markets. Currently, PentaStar is focusing its resources on acquiring
communications services agents rather than ISPs.

RECENT DEVELOPMENTS

On February 18, 2000, PentaStar, through a wholly-owned subsidiary,
completed the acquisition of the assets of USTeleCenters, Inc. and Vermont
Network Services Corporation (collectively referred to as "UST"). UST, founded
in 1986 and headquartered in Boston, Massachusetts, is a full-service
communications agent focusing on small business customers located throughout
Bell Atlantic's 13 state Northeast and Mid-Atlantic region. UST has agency
agreements with service providers including Bell Atlantic, Bell South,
Southwestern Bell and Sprint. Approximately 75% and 71% of UST's revenues were
from commissions paid from Bell Atlantic, in 1999 and 1998, respectively. The
purchase price consideration consisted of $182,000 in cash paid at closing, the
issuance of 5,980 shares of PentaStar's common stock and the assumption of
approximately $2,500,000 of liabilities. PentaStar also assumed the on-going
obligations under various agreements relating to the acquired assets.

On February 18, 2000, PentaStar signed a definitive agreement to acquire
the assets of Eastern Telecom, Inc. ("ETI"). ETI, founded in 1992, is a
full-service communications agent based in Warwick, Rhode Island primarily
servicing customers in Boston, New York, Albany, Providence and Warwick. ETI is
an authorized agent for Bell Atlantic and Bell South. The acquisition of the
assets of ETI is contingent upon receipt of the approval of the shareholders of
VSI Enterprises, Inc., which is the parent company of ETI. Terms of the
definitive agreement provide for a purchase price for the assets to consist of
approximately $2,100,000 in cash, the issuance of PentaStar's common stock with
a fair market value of $950,000 and the assumption of certain liabilities at
closing. In addition, there is a potential earnout payment based upon the
combined earnings of ETI and UST for the year ending December 31, 2000.

On February 22, 2000, PentaStar, through a wholly-owned subsidiary,
completed the acquisition of the assets of NCI Communications, Inc. ("NCI"). NCI
is primarily a long distance communications services agent located in Seattle,
Washington. NCI has carrier agreements with Qwest, AT&T and GST Telecom. NCI is
owned by certain of the previous shareholders of ICM, who, upon the Company's
acquisition of ICM, became shareholders of PentaStar. The purchase price paid
for the assets consisted of cash of $10,000 and the cancellation of a $601,000
note receivable from NCI to PentaStar.

On March 17, 2000, PentaStar completed the acquisition of the assets of
ParTel Communications, Inc. (ParTel). ParTel, founded in 1982, is a full-service
communications agent based in Phoenix, Arizona primarily servicing customers in
the Phoenix and Tucson metropolitan markets. ParTel is an agent of U S WEST and
sells primarily high-end, data-oriented products. Historically, all of ParTel's
revenues have been generated from commissions paid from U S WEST. The purchase
price consideration consisted of $519,000 in cash paid at closing and the
issuance of 30,310 shares of PentaStar's common stock. At the time the
acquisition of ParTel was consummated, PentaStar loaned $500,000 (interest at
the prime rate plus 1%) to a corporation controlled by the former shareholders
of ParTel. The loan will be due not later than December 31, 2001, and is
personally guaranteed by the former shareholders. In addition, there is a
potential earnout payment based upon the adjusted earnings of ParTel for the
year ending December 31, 2000.

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<PAGE> 32

PENTASTAR'S STRATEGY

PentaStar's objective is to be a leading multi-regional provider of
custom-designed communications solutions to small and medium-size businesses.
PentaStar's strategy to achieve this objective is to:

PROVIDE COMPREHENSIVE COMMUNICATIONS SOLUTIONS

PentaStar offers comprehensive communications solutions by providing
customers with the benefit of its independent analysis of multiple technologies
and pricing plans, except in local access where PentaStar works primarily with
RBOCs with whom it has or may establish agency relationships. In addition to
selling basic communications services, PentaStar's focus is to provide solutions
for more complex, high-end data-oriented products or advanced communications
services such as Frame Relay or ATM services. PentaStar believes that, by
purchasing a package of local access, long distance, wireless and Internet
services from one communications service provider, the customer may not have the
opportunity to choose the solutions that best meet its communications needs. By
engaging PentaStar's services, the customer is able to select different
providers for each type of service to best meet its needs.

PentaStar will continue to establish technology experts to analyze existing
and developing communications services technologies. PentaStar will continue to
evaluate changing pricing programs of various service providers and to seek
technology and pricing solutions that best address the needs of its customers.
This assists PentaStar's field sales personnel in customizing the services that
it recommends for each customer.

GROW THROUGH ACQUISITIONS

PentaStar intends to build a multi-regional presence in the communications
market by acquiring RBOC agents in major metropolitan areas and, as appropriate
opportunities become available, ISPs in small, high growth areas. PentaStar
strives to acquire companies that are well managed, have a strong customer base,
are profitable and would benefit from the additional resources that PentaStar
intends to provide. PentaStar's goal is to structure these acquisitions so that
the owners who manage the on-going business of each acquired agent receive a
significant amount of their portion of the purchase price in PentaStar's common
stock.

PentaStar believes the agents and ISPs targeted for acquisition will be
attracted to, and benefit from, the opportunity to join PentaStar because
PentaStar plans to offer them:

- shared systems, administration and infrastructure support;

- lower costs resulting from planned economies of scale;

- improved commission structures resulting from aggregating sales;

- availability of multiple long distance, wireless and Internet options;

- access to on-going analysis of available communications and Internet
technologies and pricing plans;

- access to other acquired companies' "best practices" models;

- greater access to capital for future growth;

- add-on sales to local operations of regional customers; and

- consolidated order entry and processing.

INCREASE REVENUES OF ACQUIRED COMPANIES

PentaStar intends to increase revenues of agents and ISPs acquired as
follows:

Introduce New Agent Services. The agents PentaStar has acquired and the
agents it intends to acquire primarily sell local access services for RBOCs.
PentaStar currently sells and will continue to sell Internet services, long
distance and wireless for voice and data communications through other agent
relationships. This will enable its customers to use PentaStar as the one
resource for all their communications needs.

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<PAGE> 33

Increase Revenues Through Commission Strategies. As a result of creating a
larger organization, PentaStar's commission rates have been enhanced by meeting
volume minimums in some existing commission contracts. PentaStar has and expects
to continue to negotiate more favorable commission arrangements than are
available to individual agents. PentaStar believes the impact of this strategy
will increase as it grows.

Enhance Selling and Advertising Efforts. PentaStar continues to expect to
attract new customers by increasing its direct selling and advertising efforts.
PentaStar continues to accomplish this in part by allowing the managers of
acquired agents and ISPs to have more time to focus on selling as a result of
relieving them of the administrative functions that will be consolidated into
PentaStar's headquarters or regional centers. PentaStar believes advertising has
not been used in any significant way by agents or small ISPs. PentaStar has
provided management assistance and financial resources to implement a
significant advertising program. PentaStar has also developed marketing
materials and presentations to be used by management and the sales personnel of
its agents and ISPs.

Sell Communications Services Through ISP Sales Channel. PentaStar believes
the limited population of small markets makes it more difficult for
communications service providers to justify a local sales presence. If PentaStar
acquires ISPs, PentaStar believes it could increase its revenues by utilizing
the sales force of these ISPs to sell providers' local access, long distance and
wireless services for voice and data communications to business subscribers of
the ISPs. These ISPs would offer a unique sales channel for PentaStar to serve
small markets, in addition to providing it with the value of their Internet
business.

UTILIZE PENTASTAR'S SIZE TO INCREASE EFFICIENCIES IN THE OPERATING REGIONS

PentaStar has and will continue to consolidate functions that are not
critical to control at the local level into its corporate headquarters. These
functions include human resources, information systems, legal services and tax
matters. Additionally, PentaStar has and will continue to consolidate some
aspects of accounting, order processing and after-sales management into regional
centers to be established at designated local sites. The purchasing of
insurance, supplies, equipment and certain external services are being managed
from PentaStar's corporate headquarters. Also, PentaStar expects to aggregate
the service provider traffic of any ISP PentaStar acquires onto a unified
Internet connection, which PentaStar believes should result in lower access
costs to it.

IMPLEMENT A BEST PRACTICES PROGRAM

The agents PentaStar has acquired are operating with a high degree of
autonomy in their regions, which PentaStar expects to be the case with its other
agent and ISP acquisitions. However, PentaStar is implementing and will continue
to implement a best practices program under which each acquired company will be
able to adopt successful business practices developed by its other agents and
ISPs. This allows each acquired company to develop a best practices model that
works for it. PentaStar's corporate management team is actively facilitating
this process.

CREATE STRONG INCENTIVES FOR MANAGEMENT TO INCREASE EARNINGS

PentaStar has established two strong incentives for its agent managers, who
are generally the former owners of the acquired agents, to increase their
region's earnings. The first incentive is the opportunity to earn a greater
percentage of the total shares of PentaStar's common stock issued to acquire the
agents based on each agent's future performance. The second incentive is a bonus
plan pursuant to which each agent manager may receive a cash bonus of up to 5%
of his area's operating earnings before amortization expense. PentaStar expects
that managers of other agents it acquires and managers of acquired ISPs will
also participate in bonus programs based upon their ISPs operating earnings
before amortization expense and will also participate in PentaStar's stock
option plan.

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<PAGE> 34

INDUSTRY

THE COMMUNICATIONS SERVICES AGENT INDUSTRY

General. Communications services agents are organizations that are
authorized to sell and facilitate the use of communications services of one or
more communications service providers. A full-service agent:

- establishes relationships with customers;

- assists the customer in analyzing its communications needs;

- arranges for the communications service providers to provide the
customer with the communications services that best suit the customer's
needs; and

- facilitates the installation of communications services by the various
communications service providers.

Agents have been successful in obtaining new sales as a result of existing
relationships with customers and potential customers. PentaStar believes agents
have a sales cost that is competitive with that of the direct sales forces of
service providers. By utilizing agents to sell their services, service providers
can outsource a difficult and costly function.

Communications services agents are generally paid a commission by each
communications service provider based on a percentage of the customer's cost of
services sold by the agent. This commission typically ranges from 7% to 20% of
the contract value for an individual agent. It is paid upon either the execution
of the contract and installation of the services or pro-rata over the contract's
life, depending upon the service provider.

The communications services agent industry is highly fragmented and
characterized by hundreds of local companies with no large national competitors.
According to the 1999 MultiMedia Telecommunications Association Market Review
and Forecast, the core communications market segments, other than the Internet,
in which PentaStar competes had sales of $200.6 billion in 1998, which are
expected to grow to $283.8 billion by the end of 2002, a 9.0% compound annual
growth rate. Sales in these market segments are made directly by service
providers and by agents. PentaStar is not aware of any data that breaks down
these sales between service providers and agents. According to the
Telecommunications and Information Highways-Internet Market Report by Paul Budde
Communication, the U.S.-based Internet services market was $6.6 billion in 1998
and is expected to grow to $24.7 billion in 2002, a compound annual growth rate
of 39.1%. The total market for all services that PentaStar sells was $207.2
billion in 1998 and is projected to grow to $308.5 billion in 2002, a compound
annual growth rate of 10.5%.

Communications service providers include:

- RBOCs;

- Competitive local exchange carriers, or CLECs;

- long distance service providers;

- wireless service providers; and

- ISPs.

Most communications service providers use agents to augment their direct
sales force. Generally, communications service providers select agents that they
believe have the knowledge and expertise to effectively sell communications
services and facilitate the installation process.

Local Access Market. According to the 1999 MultiMedia Telecommunications
Association Market Review and Forecast, local access services revenues,
including voice and data were $56.4 billion in 1998 and are expected to reach
$70.4 billion by 2002, a 5.7% compound annual growth rate. As a result of its
acquisition of Access and ICM, PentaStar derived approximately $6.6 million, or
98.5%, of its combined revenues in 1998 and approximately $5.4 million, or
98.7%, of its combined revenues in 1999 from this market. PentaStar

29
<PAGE> 35

believes the RBOCs have continued to dominate the local access market. The
Modified Final Judgment that required the break-up of AT&T and the concurrent
FCC decisions that permitted the RBOCs to use affiliated and nonaffiliated
entities to act as sales agents on a commission basis for the local
telecommunications services offered by the RBOCs led to the development of
agency programs. The Telecommunications Act of 1996, which changed the Modified
Final Judgment's line-of-business restrictions, permits the RBOCs to enter the
in-region long distance market upon the satisfaction of a statutory checklist of
market-opening criteria and other requirements. The Telecommunications Act of
1996 also allows long distance carriers to provide local services in the RBOCs'
territories. Large long distance carriers were permitted to offer combined
packages of long distance and resold RBOC local services in the states where the
RBOC has not received in-region long distance authorization beginning February
8, 1999. These long distance carriers are not permitted to market long distance
and RBOC resold local services through a "single transaction," meaning those
carriers may not use the same sales agent to market both products to the same
customer in the same communication. Also, the long distance carriers may not
offer long distance and RBOC resold local exchange services as a bundled package
under an integrated pricing schedule. The Telecommunications Act of 1996 also
required the RBOCs to allow other communications service providers to
interconnect with the RBOC's facilities and equipment. This has made the local
access market more competitive.

PentaStar believes that the RBOCs continue to have a distinct competitive
advantage in the local access market because they:

- control the line to customer locations;

- have an established customer base; and

- have greater financial and other resources to deploy new technologies.

As the local access market continues to offer greater service choices and
face increased competition, PentaStar believes that agents which are:

- cost effective;

- offer an efficient method of attracting and retaining customers; and

- have the ability to provide comprehensive communications services

will be in demand by both RBOCs and customers.

Long Distance Market. According to the 1999 MultiMedia Telecommunications
Association Market Review and Forecast, long distance revenues were $106 billion
in 1998 and are expected to reach $142.6 billion by 2002, a 7.7% compound annual
growth rate. As a result of its acquisition of Access and ICM, PentaStar derived
approximately $36,000, or 0.5% of its combined revenues in 1998 and
approximately $11,000, or 0.2% of its combined revenues in 1999 from this
market. The long distance market is highly price competitive and is dominated by
large national companies such as AT&T, MCI/WorldCom, Qwest and Sprint. These
large national carriers compete aggressively for market share and most have
established agency programs that enhance their overall sales efforts. The RBOCs
will also be allowed to offer long distance service upon satisfaction of the
statutorily mandated criteria, which determine when the local market has become
sufficiently competitive.

Wireless Market. According to the 1999 MultiMedia Telecommunications
Association Market Review and Forecast, the wireless communications services
market was $38.2 billion in 1998 and is expected to reach $70.8 billion by 2002,
a 16.7% compound annual growth rate. As a result of its acquisition of Access
and ICM, PentaStar derived approximately $4,000, or 0.1% of its combined
revenues in 1998 and approximately $24,000, or 0.4% of its combined revenues in
1999 from this market. Although much of the early growth in wireless
communications has occurred in the consumer sector, in particular cellular
telephones, PentaStar believes an increasing share of wireless communications
services will be used by business customers in the future.

The development of personal communication service ("PCS") and its ability
to facilitate voice, Internet, e-mail and other wireless services has ushered in
the increasing use of wireless technologies for the business market. According
to the 1999 MultiMedia Telecommunications Association Market Review and
Forecast, the
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<PAGE> 36

PCS services market was $3.7 billion in 1998 and is expected to reach $16.6
billion in 2002, a 45.4% compound annual growth rate. The integration of
computer applications and wireless technologies is anticipated to also fuel
future market growth.

PentaStar expects that small to medium-size businesses will increasingly
use wireless communications for voice and data applications.

Internet Services Market. The Internet has grown rapidly since its
introduction to the public in the early 1990s, allowing millions of people
worldwide to communicate and conduct business electronically. The April 1999
Internet Demographics Survey, conducted by CommerceNet and Neilsen Media
Research, estimated the number of Internet users in the United States and Canada
at 92 million. According to the Telecommunications and Information
Highways-Internet Market Report by Paul Budde Communication, the U.S.-based ISP
market was $6.6 billion in 1998 and is expected to grow to $24.7 billion in
2002, a compound annual growth rate of 39.1%. As a result of its acquisition of
Access and ICM, PentaStar derived approximately $62,000, or 0.9% of its combined
revenues in 1998 and approximately $40,000, or 0.7% of its combined revenues in
1999 from this market. The growth in the number of Internet users is being
fueled by a number of factors, including the increased use of personal
computers, the speed and reduction in cost of computer hardware, and the
increasing importance of the Internet as a means of communication and commerce.

THE INTERNET SERVICE PROVIDER INDUSTRY

Businesses are becoming more "virtual," which allows individuals to be less
concerned with proximity to the office and more concerned with communications
and Internet access to the office. The Internet has allowed many businesses and
individuals to conduct their business away from the traditional commercial
centers to regions and cities that have not previously been viable locations for
business. This trend is spurring growth in both Internet users and ISPs, as well
as in the use of the Internet for communications.

ISPs are organizations that offer a range of Internet and World Wide
Web-based services to customers. The Internet services market in the areas
PentaStar is targeting currently consists primarily of basic Internet access.
The rapid development and growth of the Internet has resulted in a highly
fragmented market. According to the 1999 Boardwatch Directory of Internet
Service Providers, there are over 5,000 ISPs in the United States. Most of these
ISPs are small and are local businesses. PentaStar believes that currently less
than 15% of the ISPs have regional or national market coverage. This industry is
currently undergoing substantial consolidation.

PENTASTAR SERVICES

LOCAL ACCESS

PentaStar currently acts as a sales agent for U S WEST's comprehensive
local access services, including basic dial tone and advanced communications
services in the Colorado and Northwest regions. As a result of its acquisitions
subsequent to December 31, 1999, PentaStar is also offering these same services
for U S WEST in the Phoenix and Tucson, Arizona market and as a sales agent for
Bell Atlantic, Southwestern Bell and Bell South in the Northeast and
Mid-Atlantic regions. Basic dial tone services are telephone connections, voice
messaging and call management. More advanced communications services PentaStar
acts as a sales agent for include:

- data transmission oriented services;

- dedicated high-capacity transmission services;

- high speed real time communications access, including digital subscriber
line, or DSL;

- packet-based transmission for wide area networks, including frame relay
service; and

- an advanced digital network for data, video, voice and Internet traffic,
including ISDN.

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<PAGE> 37

LONG DISTANCE

PentaStar currently offers Qwest and AT&T long distance services.
PentaStar's predecessors have offered Qwest long distance services in the
Northwest and Colorado regions since October 1998 and January 1999, respectively
and AT&T long distance services in the Northwest region since April 1999. These
Northwest region services have been offered utilizing the agent relationships of
NCI, an affiliate of ICM, which was acquired by PentaStar subsequent to December
31, 1999. PentaStar's relationships with these long distance providers allow it
to offer its customers the pricing, quality and add-on features that they
require for their specific long distance communications. As a result of
PentaStar's acquisitions subsequent to December 31, 1999, PentaStar is also
offering long distance services provided by Sprint in the Northeast and
Mid-Atlantic regions.

WIRELESS

PentaStar currently offers US WEST's wireless services in the Colorado and
Northwest regions. PentaStar concentrates on providing its customers with
services and capabilities that will allow them to better utilize wireless
technology and make this technology an integral part of their voice and data
communications strategy. PentaStar's predecessors have offered U S WEST's
wireless services since December 1998. These wireless services include cellular,
paging and integrated voice and data communications services. PentaStar provides
and will continue to provide its customers with competitive pricing, coverage
and access to add-on features.

INTERNET

PentaStar currently offers US WEST's Internet services in the Colorado and
Northwest regions and, since February 2000, became a Certified Internet Agent
for Epoch Internet, a Tier-1 and nationwide ISP. PentaStar finds that customers
are often confused by the process of selecting an ISP, connecting to the ISP and
integrating the service into their internal systems. Many ISPs do not provide
installation and start-up assistance or assistance in internal cabling and
networking for their customers. As a result, the customers must coordinate with
local access providers, networking/cabling consultants and the ISP to obtain
service. To address this problem, PentaStar offers a turnkey solution to its
customers through its agent relationships, connection expertise and
relationships with networking/cabling companies. PentaStar's predecessors have
offered U S WEST's Internet services since January 1998. As a result of its
acquisitions subsequent to December 31, 1999, PentaStar is also offering
Internet services provided by Bell Atlantic and North Atlantic Internet in the
Northeast and Mid-Atlantic regions.

PROJECT MANAGEMENT

The combination of wireless technologies, computer networking integration,
telephone system integration and Internet technologies creates significant
challenges for small to medium-size businesses attempting to implement an
overall communications solution. PentaStar believes that some of its customers
may benefit from PentaStar's project management capabilities. PentaStar will
continue to offer comprehensive communications services, assistance in the
selection of hardware and cabling providers, supervision of the installation and
integration of all the communications services components and, to a limited
extent, the installation of hardware. However, PentaStar does not plan to offer
computer network implementation. As PentaStar's size and geographic coverage
expand, they believe they will be able to offer project management to customers
who have larger, more complex projects requiring significant planning, resource
management and coordination.

ANALYSIS OF NEW TECHNOLOGIES AND DEVELOPMENTS

PentaStar believes that over the course of the next few years the
communications industry will see the introduction and expanded use of a wide
range of new technologies and services. These new technologies will include the
use of:

- Internet and wireless technologies for voice and data communications;

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<PAGE> 38

- wireless receptor technologies, such as dish relay, satellite and radio
towers and cable networks for communications; and

- intra-company networks.

There are also several private companies developing satellite networks that
will be used for providing new services and capabilities. Many of these new
technologies will be valuable additions to the overall communications strategies
of PentaStar's customers. However, this abundance of new options may add to the
confusion PentaStar's customers face in making their communications choices.
PentaStar will offer its customers, at no charge, ongoing analysis of these new
technologies and services and assist them in their determination of which
technologies may be applicable to their needs.

PENTASTAR'S PROPOSED INTERNET SERVICES

The core product expected to be offered by ISPs PentaStar may acquire will
be dial-up and dedicated access to the Internet. Although individuals typically
use slower, less expensive Internet access methods, business customers often
benefit from dedicated, high-speed Internet access. PentaStar expects to have
the ability to procure the communications services necessary to provide
PentaStar's customers with the highest speed access available in a particular
market. PentaStar also plans to offer e-mail applications, file transfer
protocol, World Wide Web hosting, Web design, project management of Web-based
services and assistance with electronic commerce. PentaStar's goal is to
increase the use of these more advanced services by customers of ISPs they may
acquire.

OTHER SERVICES

It is not currently common in the agent industry to provide customers with
post-sales support beyond installation. Additionally, small to medium-size
businesses typically do not have communications departments to deal with
post-sales issues. Since post-sales services have not been customarily offered
by agents, PentaStar does not know whether it can sell these services at a price
that is acceptable to the customer and economical to them. To fill this need
PentaStar may offer to its customers:

- on-going contract maintenance, including service and billing problem
dispute resolution with the communications service provider;

- 7-day a week emergency assistance for service interruption or
degradation;

- on-going audits and needs analysis to ensure that all services are
functioning appropriately;

- regular audits and analysis of the services in place and the need for
new services; and

- audits of billings and consolidation of billings.

PentaStar believes that providing these additional services may add
significant incremental revenues and further strengthen PentaStar's customer
relationships.

SALES AND MARKETING

PentaStar's direct sales efforts are conducted at the local level by its
direct sales force. Members of PentaStar's direct sales team meet face-to-face
with prospective customers, discuss their communications needs and use
PentaStar's local project management staff to design a comprehensive package of
communications services. PentaStar continues to focus on improving its project
management staff and capabilities and developing programs to recruit and train
motivated sales people with good technical and customer skills. PentaStar's goal
is to establish a long-term relationship as the customer's total solution
provider.

PentaStar's agents also establish additional customer referral
relationships by working directly with:

- interconnect companies;

- value-added resellers;

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- computer network integrators;

- telephone system integrators; and

- ISPs and equipment vendors.

PentaStar customarily pays a referral fee to these companies or reciprocates in
the sharing of market opportunities.

In addition, PentaStar intends to maintain a comprehensive database for
significant customers that will document their communications service plans and
providers, historical usage and anticipated future needs. PentaStar believes
that this database will become a valuable tool for providing enhanced services
to its customers.

COMPETITION

AGENT BUSINESS

The market for communications services is extremely competitive and rapidly
changing. PentaStar expects competition to increase as communications service
providers expand their traditional service offerings. Many of PentaStar's
largest competitors are national communications service providers that have
significantly greater financial, marketing and other resources. These
competitors may adopt more aggressive pricing policies and offer more attractive
terms to customers than PentaStar can. PentaStar may face increasing price
pressure from PentaStar's larger competitors. In addition, some of PentaStar's
current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to compete more
effectively. PentaStar may not survive in this intensely competitive and rapidly
evolving market. Within this market, PentaStar encounters multiple competitors
that include:

- the direct sales forces of communications service providers, such as US
WEST, AT&T, Qwest, MCI/WorldCom and numerous CLECs;

- other communications services agents;

- customer infrastructure out-sourcers, such as Convergent Technologies,
which buy a customer's computers, servers and telephone equipment and
lease them back to the customer along with providing the customer
CLEC-type services; and

- communications consultants, such as groups within Electronic Data
Systems and Andersen Consulting.

PentaStar believes the primary competitive factors in its market include:

- the ability to provide a solution that satisfies all the customer's
communications needs;

- pricing;

- customer service during and after installation;

- quality and reliability of communications services;

- access to multiple communications service provider options; and

- development of customer loyalty.

Although PentaStar faces a broad range of competition from a variety of
communications service providers, PentaStar seeks to compete effectively by
acting as a sales agent primarily for RBOC services in the local access market,
along with long distance, wireless and Internet services from providers in those
markets, with a strong focus on customer service.

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PROPOSED ISP BUSINESS

Currently, PentaStar is focusing its resources and acquisition efforts on
communication services agents rather than ISPs. However, PentaStar intends to
evaluate and pursue potential ISP acquisition candidates of which PentaStar
becomes aware and which meet a strategic need. PentaStar's target market for
Internet access is extremely competitive. PentaStar expects competition to
increase as Internet use grows and ISPs expand their traditional services and
new start-ups emerge in the marketplace. Barriers to entry are minimal and
competitors can enter the market at a relatively low cost. Many of PentaStar's
competitors have greater financial, marketing and other resources than
PentaStar. PentaStar cannot guarantee that it will be able to compete
effectively in this market. PentaStar's competitors include:

- other local and regional ISPs;

- national ISPs, such as MindSpring and Verio;

- on-line information providers, such as America Online and Prodigy;

- large national communications providers, such as AT&T, Qwest,
MCI/WorldCom and the RBOCs; and

- traditional cable television providers, such as Time-Warner and AT&T.

In PentaStar's target ISP market, PentaStar believes that the following are
the principal competitive factors:

- maintaining high-speed access options and adequate capacity;

- affordable pricing;

- the ability to assist customers in implementing services and resolving
problems; and

- offering a variety of services in addition to basic access.

GOVERNMENT REGULATION

AGENT BUSINESS

PentaStar is not directly subject to any government regulations other than
normal business regulations. However, the communications service providers for
whom PentaStar acts as a sales agent are subject to varying degrees of federal,
state and local regulation. Generally, the FCC exercises jurisdiction over all
communications service providers to the extent they provide services involving
the supplying of interstate or international communications. The
Telecommunications Act of 1996 expanded the FCC's jurisdiction to include
certain interconnection and related issues that traditionally have been
considered subject primarily to state regulation. The state regulatory
commissions also retain jurisdiction over significant aspects of the provision
of intrastate communications services. The Telecommunications Act of 1996 was
intended ultimately to permit service providers in the long distance and local
communications services markets, as well as cable television providers, to
compete freely in all communications markets. For example, the
Telecommunications Act of 1996 eventually will permit the RBOCs to compete fully
in the provision of in-region long distance services upon the satisfaction of
the statutorily mandated criteria. The 1996 Act also allows long distance
carriers to provide local services in the RBOCs' territories. Long distance
carriers are also permitted to offer combined packages of long distance and
resold RBOC local services. However, large long distance carriers are not
permitted to market long distance and resold RBOC local services through a
"single transaction" meaning that these carriers may not use the same sales
agent to market both products to the same customer in the same communication.
Also, the telecommunications carrier may not offer long distance and RBOC resold
local exchange services as a bundled package under an integrated pricing
schedule. The Telecommunications Act of 1996 also generally requires RBOCs to
provide competitors with interconnection and nondiscriminatory access to their
local exchange network on more favorable terms than have been available in the
past. As required by the Telecommunications Act of 1996, the FCC adopted in
August 1996 new rules implementing the interconnection and resale provisions of
the Telecommunications Act of 1996,

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<PAGE> 41

which are intended to minimize regulatory, economic and operational impediments
to full competition for local services.

In general, PentaStar is unable to determine what effect the
Telecommunications Act of 1996 and other laws and regulations will have on the
communications industry in general and on it in particular. Numerous FCC, state
and local regulatory decisions are expected regarding issues that may materially
affect it because they will have an impact on:

- the services and the pricing that can be offered by RBOCs; and

- who can compete with RBOCs in various markets and the prices they will
be able to offer.

Also, the communications service providers whose services PentaStar will
market are affected by the laws and changes in the laws affecting the provision
of telecommunications. These laws and changes may have an indirect effect on
PentaStar. For instance, on February 26, 1998, the FCC established rules that
restricted telecommunications carriers' use of customer proprietary network
information, or CPNI. The rules prohibit carriers from using information gleaned
from providing one type of service (local, long distance or wireless) to market
another type of service without first obtaining that customer's consent. This
means that a carrier could not give PentaStar a local service customer's
marketing information in order for PentaStar to market that carrier's long
distance, wireless or Internet services without first obtaining that customer's
consent to use his or her CPNI. However, the U.S. Court of Appeals for the Tenth
Circuit recently overturned most of the FCC's CPNI rules. On October 4, 1999,
the FCC filed a petition for rehearing of this case. This petition was denied on
November 30, 1999.

The communications service providers for which PentaStar acts as a sales
agent must also comply with the FCC's verification requirements enacted to
prevent slamming, the unauthorized change of a customer's presubscribed carrier
selection. The slamming rules govern the manner in which telecommunications
carriers effectuate and verify selection by consumers of preferred providers of
local exchange and interexchange services. When PentaStar successfully sells a
customer a service that replaces that customer's local access or long distance
service, the provider of the new service must comply with the verification
procedures in order to switch PentaStar's customer's service.

PROPOSED ISP BUSINESS

PentaStar anticipates providing Internet access, in part, through
transmissions over public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for communications. As an
ISP, PentaStar will not be directly regulated by the FCC or any other agency,
other than regulations applicable to businesses generally. PentaStar could,
however, become subject in the future to regulation by the FCC or other
regulatory agencies as a provider of basic telecommunications services.

These regulations could affect the charges that PentaStar pays to connect
to the local telephone network or for other purposes. PentaStar, like other
ISPs, will not be required to pay carrier access charges. Access charges are
assessed by local telephone companies to long-distance companies for the use of
the local telephone network to originate and terminate long-distance calls,
generally on a per minute basis. Access charges have been a matter of continuing
dispute between local telephone companies and long-distance carriers. In May
1997, the FCC reaffirmed its decision that ISPs should not be required to pay
carrier access charges.

To the extent that an end user's call to an ISP is local rather than long
distance, the local telephone company that serves the ISP may be entitled to
reciprocal compensation from the end user's local telephone company. Reciprocal
compensation is a reimbursement from one local telephone company to a second one
for handling calls that originate with the first local telephone company and
terminate with the second one. To the extent that a call from an end user to an
ISP is considered intrastate, the local telephone company serving an ISP would
be entitled to reciprocal compensation. This payment of reciprocal compensation
reduces the local telephone company's costs and ultimately reduces the ISP's
costs. The FCC recently determined that most, but not all, traffic to an ISP is
interstate in nature rather than local. This determination could potentially
eliminate the payment of reciprocal compensation to the local telephone company.
The FCC has yet to rule on
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<PAGE> 42

the specific issue of reciprocal compensation and ISP traffic; however, the FCC
has stated that state commissions may determine whether, in some circumstances,
reciprocal compensation should be paid.

The FCC's current position is that Internet access providers should not be
required to contribute to a new universal service fund established to replace
current local rate subsidies and to meet other public policy objectives, such as
enhanced communications systems for schools, libraries and health care
providers. As a result, unlike telecommunications carriers and other
telecommunications providers, ISPs do not have to contribute a percentage of
their revenues to the federal universal service fund and are not expected to be
required to contribute to similar funds being established at the state level.
Both the access charge and universal service treatment of ISPs, however, are the
subjects of further FCC proceedings and could change. Telephone companies are
actively seeking reconsideration or reversal of the FCC decisions, and their
arguments are gaining more support as Internet-based telephony begins to compete
with conventional telecommunications companies.

PentaStar is not in a position to predict how these matters will be
resolved, but PentaStar could be adversely affected if, in the future, it and
other ISPs are required to pay access charges, contribute to universal service
support or if PentaStar's local telephone companies no longer receive reciprocal
compensation for its traffic.

The law relating to the liability of ISPs and on-line services companies
for information carried on or disseminated through their networks is unsettled.
As the law in this area develops, the potential imposition of liability upon
PentaStar for information carried on and disseminated through its network could
require PentaStar to implement measures to reduce its exposure to this
liability, which may require the expenditure of substantial resources or the
discontinuation of some of PentaStar's products or service offerings. Any costs
that are incurred as a result of contesting any asserted claims or the
consequent imposition of liability could materially adversely affect our
profitability.

Due to the increasing popularity and use of the Internet, a number of laws
and regulations have been adopted in recent months and may be adopted in the
future, by federal and state governments, as well as by foreign governments with
respect to the Internet. These laws cover or may cover issues such as content,
user privacy, pricing and copyright infringement. PentaStar cannot predict the
impact, if any, that recent and any future regulatory changes or developments
may have on the business, financial condition and results of operations of any
ISPs it acquires. Changes in the regulatory environment relating to the Internet
access industry, including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
access providers or others, could have a material adverse effect on the ISP
business.

EMPLOYEES

As of March 24, 2000, PentaStar had 245 employees, all of whom were
full-time employees. Of PentaStar's full-time employees, 6 are corporate
headquarter employees, 141 are in sales and marketing, 56 are in operations and
engineering support, and 42 are in administration.

PentaStar believes that its relations with its employees are satisfactory.
PentaStar is not party to any collective bargaining agreements, and PentaStar
has never experienced a work stoppage. As PentaStar continues to grow and
acquire new companies, PentaStar expects to hire additional personnel.

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DESCRIPTION OF PROPERTY

As of December 31, 1999 PentaStar maintains their corporate headquarters at
1522 Blake Street, Denver, Colorado. PentaStar leases 1,875 square feet under a
lease which expires August 31, 2002. Additionally, ICM and Access lease the
following facilities:

<TABLE>
<CAPTION>
LOCATION SQ. FT. TERM
- -------- ------- ------------------------------
<S> <C> <C>
Denver, Colorado...................................... 9,050 4,250 sq. ft. expires 7/31/00
4,800 sq. ft. expires 12/31/01
Colorado Springs, Colorado............................ 300 Expires 3/31/00
Bellevue, Washington.................................. 9,902 5,213 sq. ft. expires 11/30/02
4,689 sq. ft. expires 11/30/02
Portland, Oregon...................................... 3,238 Expires 6/28/01
</TABLE>

PentaStar believes additional space is available for expansion.

LEGAL PROCEEDINGS

There are no material legal proceedings pending or, to PentaStar's
knowledge, threatened against it.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERVIEW

The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes as of December 31, 1999 and for the period from
inception (March 15, 1999) through December 31, 1999, and the predecessor
financial statements of Access and ICM as of October 25, 1999 and December 31,
1998 and for the period from January 1, 1999 to October 25, 1999 and the year
ended December 31, 1998, included in as part of this Proxy Statement beginning
on page F-1.

PentaStar was incorporated on March 15, 1999 under Delaware law.
PentaStar's activity through October 25, 1999 consisted of:

- organizing PentaStar;

- developing PentaStar's business plan, management and corporate
structure;

- pursuing the acquisitions of the Acquired Companies; and

- conducting activities in connection with the Offering.

Upon the closing of the acquisitions of the Acquired Companies and the
Offering, PentaStar commenced its business operations as a communications
services agent for communications services including local access, long
distance, wireless and Internet services for voice and data communications.
PentaStar designs, procures and facilitates the installation and use of
communications services to best meet its customers' needs. PentaStar plans to
continue to acquire other communications services agents.

On October 26, 1999, PentaStar successfully completed its initial public
offering. The Offering resulted in the sale of 1,297,845 shares of its common
stock, for proceeds of $10,714,000 net of cash offering costs of $2,265,000.
Immediately prior to the Offering, PentaStar completed the acquisitions of the
Acquired Companies. Purchase consideration for Access consisted of $189,000 in
cash, 205,000 shares of PentaStar's common stock and assumption of liabilities.
Purchase consideration for ICM consisted of $1,619,000 in cash, 165,000 shares
of PentaStar's common stock and assumption of liabilities. In connection with
the acquisition of ICM, $500,000 of cash was placed in escrow for application
against indemnification obligations. These acquisitions were accounted for under
the purchase method of accounting. The principal shareholder of ICM and the
principal shareholder of Access each entered into escrow and contingent stock
agreements with PentaStar on closing of the acquisitions. These agreements
adjust the final consideration paid to those shareholders in return for their
interests in ICM and Access.

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Under these agreements, shares of PentaStar common stock were placed into
escrow. Based upon the earnings performance of an acquired company relative to
that of all other acquired companies for the 12-month period prior to the
earlier of a sale of substantially all of the assets or stock of PentaStar or
five years, the shareholder associated with that company or seller of that
company will receive back from escrow all, some or none of the shares such
shareholder or seller placed in escrow. In addition, based upon the relative
earnings performance of the acquired company, such shareholder or seller may
receive additional shares of common stock from PentaStar. PentaStar, at its
discretion, may distribute cash to such shareholder or seller in lieu of some or
all of the additional shares in an amount equal to the fair market value of the
additional shares not distributed. The agreements are designed, however, so that
there will be no net change to the total number of shares of PentaStar common
stock outstanding after the combined adjustments are made for all of the
Acquired Companies. PentaStar expects that the owners who manage other agent
companies that PentaStar acquires will be required to receive a significant
amount of the purchase price in PentaStar common stock and place into escrow
from 25% to 50% of their PentaStar common stock pursuant to similar
arrangements.

ICM was a U S WEST agent, which means ICM has been accepted by U S WEST to
sell, order and assist in the implementation of U S WEST communications
services. PentaStar expects to retain the agent relationship with U S WEST
indefinitely. PentaStar believes that the loss of its agent relationship with U
S WEST would have a material adverse effect. Of ICM's revenues in 1999 and 1998,
99% were from U S WEST. Subsequent to the acquisition, ICM's former president,
Dennis W. Schillinger, has remained with PentaStar as manager of PentaStar's
Northwest region. ICM, located in Bellevue, Washington, was founded in 1990.

Access was also a U S WEST agent. PentaStar expects to retain its agent
relationship with U S WEST indefinitely. PentaStar believes that the loss of its
agent relationship with U S WEST would have a material adverse effect. All of
Access' revenues in fiscal 1999 and 1998 were from U S WEST. Subsequent to the
acquisition, Access' former president, Jeffrey A. Veres, has remained with
PentaStar as manager of PentaStar's Colorado region. Access, located in Denver,
Colorado, was founded in 1995.

On February 18, 2000, PentaStar, through a wholly-owned subsidiary,
completed the acquisition of the assets of USTeleCenters, Inc. and Vermont
Network Services Corporation (collectively referred to as "UST"). UST, founded
in 1986 and headquartered in Boston, Massachusetts, is a full-service
communications agent focusing on small business customers located throughout
Bell Atlantic's 13 state Northeast and Mid-Atlantic region. UST has agency
agreements with service providers including Bell Atlantic, Bell South,
Southwestern Bell and Sprint. Approximately 75% and 71% of UST's revenues were
from commissions paid from Bell Atlantic in 1999 and 1998, respectively. The
purchase price consideration consisted of $182,000 in cash paid at closing, the
issuance of 5,980 shares of PentaStar's common stock and the assumption of
approximately $2,500,000 of liabilities. PentaStar also assumed the on-going
obligations under various agreements relating to the acquired assets.

On February 18, 2000, PentaStar signed a definitive agreement to acquire
the assets of Eastern Telecom. Eastern Telecom, founded in 1992, is a
full-service communications agent based in Warwick, Rhode Island primarily
servicing customers in Boston, New York, Albany, Providence and Warwick. Eastern
Telecom is an authorized agent for Bell Atlantic and Bell South. The acquisition
of the assets of Eastern Telecom is contingent upon receipt of the approval of
the shareholders of VSI Enterprises, Inc., which is the parent company of
Eastern Telecom. Terms of the definitive agreement provide for a purchase price
for the assets to consist of approximately $2,100,000 in cash, the issuance of
PentaStar's common stock with a fair market value of $950,000 and the assumption
of certain liabilities at closing. In addition, there is a potential earnout
payment based upon the combined earnings of Eastern Telecom and UST for the year
ending December 31, 2000.

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<PAGE> 45

became shareholders of PentaStar. The purchase price paid for the assets
consisted of cash of $10,000 and the cancellation of a $601,000 note receivable
from NCI to PentaStar.

On March 17, 2000, PentaStar completed the acquisition of the assets of
ParTel Communications, Inc ("ParTel"). ParTel, founded in 1982, is a
full-service communications agent based in Phoenix, Arizona primarily servicing
customers in the Phoenix and Tucson metropolitan markets. ParTel is an agent of
U S WEST and sells primarily high-end, data-oriented products. Historically all
of ParTel's revenues have been generated from commissions paid from U S WEST.
The purchase price consideration consisted of $519,000 in cash paid at closing
and the issuance of 30,310 shares of PentaStar's common stock. At the time the
acquisition of ParTel was consummated, PentaStar loaned $500,000 (interest at
the prime rate plus 1%) to a corporation controlled by the former shareholders
of ParTel. The loan will be due not later than December 31, 2001, and is
personally guaranteed by the former shareholders. In addition, there is a
potential earnout payment based upon the adjusted earnings of ParTel for the
year ending December 31, 2000.

OVERVIEW OF OPERATIONS

The following discussion applies to ICM and Access for the periods prior to
their acquisition by PentaStar and is also applicable to PentaStar for the
period of its ownership of ICM and Access as a result of its acquisition of both
ICM and Access.

Substantially all of the revenues of ICM and Access are generated from the
commissions they receive from selling communications services as agents for
communications service providers. ICM and Access are paid a commission by each
service provider based on a percentage of each customer's cost of services. ICM
and Access sell advanced communications and basic dial tone services for the
local access market to facilitate data, voice and video communications.
PentaStar expects that, over time, the percentage of advanced communications
services revenues will increase as a percentage of revenues because of increased
demand for, and availability of, these services. Basic dial tone services in
general are telephone connections, voice messaging and call management. Advanced
communications services are all other voice and data communications services,
including:

- data transmission oriented services;

- dedicated high-capacity transmission services;

- high speed real time communications access, including digital subscriber
line, or DSL;

- packet-based transmission for wide area networks, including frame relay
service; and

- an advanced digital network for data, video, voice and Internet traffic,
including ISDN.

In the ordinary course of business, ICM and Access experience delays in
payments on commissions earned from U S WEST, commonly known as disputed items.
Disputed items represent accounts receivable in dispute for installed services
and arise primarily from differences in documentation between PentaStar and U S
WEST relating to:

- the commission percentages earned;

- the type of services sold; and

- the service installation dates.

In 1999 and 1998, the gross amounts of disputed items represented 9% and
12.5%, respectively, of PentaStar's and its predecessor's combined revenues in
those years. U S WEST does not pay any portion of the commission when an amount
is in dispute. PentaStar believes, based upon an extensive review of the
disputed items, that the actual amounts in dispute are substantially less than
the gross amount of the commissions being withheld as a result of the disputes.
As of October 25, 1999, ICM and Access established allowances to reduce the
disputed accounts receivable to an amount each of them believes represents the
estimated net realizable value of their disputed items. The allowances were
established through a review by ICM and Access of all of the commissions due on
installed services, and PentaStar believes the allowances are

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<PAGE> 46

adequate and has established allowances at December 31, 1999 representing the
net realizable value of disputed items. As a result of PentaStar's continuing
relationship with U S WEST, changes have been implemented in the process of
receiving payment for installed services, which have resulted in 1999 disputed
receivables being cleared in a more timely manner.

Salaries and commissions expenses consist principally of salary and
incentive compensation that Access and ICM as operating companies pay their
sales and marketing, operations and engineering support and administrative
staff.

Other general and administrative expenses include communications expenses,
office rent and utilities, travel, professional fees and depreciation for Access
and ICM as operating companies. For the period from inception (March 15, 1999)
through December 31, 1999 this also includes the expenses related to the
operations and staffing of PentaStar's corporate office.

ICM and Access have experienced some seasonal variations in their
businesses. Orders for communications services tend to slow in the last quarter
of the calendar year due to customers' budgetary constraints. Generally, orders
increase in the first quarter of the following year. Because of the time lag
between order and installation, revenues in the first four months of each
calendar year are typically below the average of revenues for the remaining
portion of the year.

SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES

When PentaStar obtains an order for U S WEST communications services,
PentaStar receives an up-front payment of a portion of the commission PentaStar
is entitled to receive for the whole order. That up-front portion for ICM and
Access was 35% in 1998 but was increased to 55% for orders received after June
1, 1999. Those initial payments are accounted for as deferred revenue. After the
services are fully installed, which is approximately three months after order,
PentaStar becomes entitled to receive the remaining portion of the commission.
It is not until the final installation is completed by U S WEST that PentaStar
recognizes the revenue for the total commission, including the initial payment
and the final payment. PentaStar generally receives final payment within 90 days
of final installation.

In connection with the acquisitions, PentaStar recorded goodwill of
$4,501,000, which represents the excess of the purchase price paid over the net
tangible book value. The goodwill amount is being amortized over its estimated
useful life of 20 years. The annual goodwill amortization expense is $225,000.
The assignment of an amortization period of 20 years was influenced by the
attributes and market position of each of ICM and Access. Future events or
changes in circumstances may result in a reduction in the 20-year amortization
period, which would result in increased annual goodwill expense. PentaStar has
and anticipates acquiring additional communications services agents in the
future and expects to record goodwill in those acquisitions. Future acquisitions
may warrant amortization periods of less than 20 years.

RESULTS OF OPERATIONS

PENTASTAR COMMUNICATIONS, INC.

FOR THE PERIOD FROM INCEPTION (MARCH 15, 1999) THROUGH DECEMBER 31, 1999

Revenues. Revenues consist principally of commissions from sales of
communications services as an agent for communications service providers.
PentaStar recorded revenue of $622,000 resulting from sales of advanced
communications services and $72,000 from sales of basic dial tone services.
These sales were the result of PentaStar's acquisitions of the Acquired
Companies whose operations have been reported in the consolidated financial
statements of PentaStar since October 26, 1999. Substantially all of the revenue
during the period was generated through the sales of U S WEST services.
PentaStar's revenue recognition policy is to recognize revenues on the date the
respective service is installed versus the date that the order for service is
accepted by the service provider. In general, it is PentaStar's experience that
this period between the order and installation of services is approximately
three months. As a result, the revenues recognized during the period were
related to orders that were made prior to PentaStar's acquisition of the
Acquired Companies. Prior to PentaStar's acquisition of the Acquired Companies,
the Acquired Companies management's and employee's
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<PAGE> 47

attention was diverted from the core operations of the business as a result of
the acquisition agreements and Offering with PentaStar. Accordingly, the
revenues for the period are lower than those experienced historically by the
Acquired Companies. PentaStar expects future revenues to more closely
approximate the historical levels of the Acquired Companies as a result of the
integration into PentaStar's ownership and operations.

Operating expenses. Salaries and commissions expense of $796,000 consists
principally of costs of operations, sales, management and administrative
personnel at the operating companies. Other general and administrative expenses
of $558,000 consist principally of the overhead expenses of the operating
companies such as rent, telephone and supplies and the expenses applicable to
the corporate office of PentaStar such as personnel costs, travel, insurance and
professional fees. Additionally, the corporate expenses included approximately
$171,000 of consulting services expense, of which $126,000 of noncash expense
was associated with the issuance of common stock options at the Offering and
$45,000 was associated with the payment of cash. PentaStar was formed on March
15, 1999 and, accordingly, began incurring expenses but did not have any
operations until the acquisition of the Acquired Companies on October 26, 1999.
Depreciation and amortization expense of $74,000 consists of depreciation
expense on property and equipment and the amortization of goodwill associated
with the acquisition of the Acquired Companies.

Loss from operations. The loss from operations of $734,000 was primarily
attributable to the above discussed effects of decreased revenue together with
the additional costs and expenses associated with the corporate office.

Other (income) expense, net. Other income, net, of $57,000 represents the
interest income earned on the invested cash proceeds from the Offering after the
acquisitions of the Acquired Companies. As PentaStar utilizes additional cash
resources for operating needs and future acquisitions, PentaStar expects
interest income to decrease.

Income taxes. A benefit of $244,000 was recorded for the period
representing an effective tax rate of 36.1%. The difference between the federal
statutory rate of 34% and the effective rate is due to state income taxes offset
by nondeductible goodwill amortization.

Net loss. For the reasons discussed above, a net loss of $433,000 was
recognized during the period.

ACQUIRED COMPANIES -- ICM Communications Integration, Inc.

"Management's Discussion And Analysis of Financial Condition And Results Of
Operations" consists primarily of comparisons of the historical financial
statements. The information may not be reflective of the continuing results of
operations and financial condition of ICM as a wholly-owned subsidiary of
PentaStar, because of certain non-recurring expenses related to the acquisition
and the elimination of redundant costs.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE PERIOD FROM JANUARY 1, 1999 TO
OCTOBER 25, 1999

Revenues. Total revenues of $4,275,000 and $3,245,000 were recorded for
the year ended December 31, 1998 and for the period from January 1, 1999 to
October 25, 1999, respectively. The decrease was attributable to the shorter
reporting period and diversion of ICM's management's and employee's attention
prior to October 25, 1999, as a result of the acquisition by PentaStar and the
Offering. Advanced communications services revenues decreased from $3,681,000
for the year ended December 31, 1998 to $2,718,000 for the period January 1,
1999 to October 25, 1999 for the reasons discussed above. Basic dial tone
services revenues decreased from $594,000 for the year ended December 31, 1998
to $527,000 for the period January 1, 1999 to October 25, 1999. This decrease
was smaller than that of the advanced communications services revenue decrease
as a result of the creation of a specific group dedicated to selling basic dial
tone services that was established in the first half of 1999.

Costs and expenses. Salaries and commissions of $2,746,000 and $2,322,000
were recorded for the year ended December 31, 1998 and for the period from
January 1, 1999 to October 25, 1999, respectively. This decrease was
attributable to the shorter reporting period and lower revenues. The salaries
and commissions as a percentage of revenue were higher for the period from
January 1, 1999 to October 25, 1999 as a result of the fixed cost component of
these costs attributable to management, operations, sales, and administrative
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<PAGE> 48

personnel not affected by the revenue decrease. Other general and administrative
expenses of $952,000 and $1,285,000 were recorded for the year ended December
31, 1998 and for the period from January 1, 1999 to October 25, 1999,
respectively. This increase was primarily due to professional fees and other
non-recurring costs associated with the acquisition by PentaStar and the
Offering.

Income (loss) from operations. Income from operations of $577,000 was
recorded for the year ended December 31, 1998 and a loss from operations of
$362,000 was recorded for the period from January 1, 1999 to October 25, 1999.
This change was the result of the above discussed changes in revenues and costs
and expenses.

Other (income) expense, net. Other (income) expense, net, of ($8,000) and
$9,000 was recorded for the year ended December 31, 1998 and for the period from
January 1, 1999 to October 25, 1999, respectively. This difference was the
result of ICM utilizing its line of credit in the 1999 period to fund its cash
needs versus interest income earned on excess cash balances in the 1998 period.

Income taxes. A provision for income taxes of $200,000 was recorded for
the year ended December 31, 1998 and a benefit for income taxes of $137,000 was
provided for the period from January 1, 1999 to October 25, 1999. The effective
tax rate was 34.2% in the 1998 period and increased to 36.9% in the 1999 period.

Net income (loss). For the reasons discussed above, net income of $385,000
was recorded in the year ended December 31, 1998, and a net loss of $234,000 was
recorded for the period from January 1, 1999 to October 25, 1999.

ACQUIRED COMPANIES -- DMA Ventures, Inc. dba Access Communications

"Management's Discussion And Analysis of Financial Condition And Results Of
Operations" consists primarily of comparisons of the historical financial
statements. The information may not be reflective of the continuing results of
operations and financial condition of Access as a wholly-owned subsidiary of
PentaStar, because of certain non-recurring expenses related to the acquisition
and the elimination of redundant costs.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE PERIOD FROM JANUARY 1, 1999 TO
OCTOBER 25, 1999

Revenues. Total revenues of $2,382,000 and $1,568,000 were recorded for
the year ended December 31, 1998 and for the period from January 1, 1999 to
October 25, 1999, respectively. The decrease was attributable to the shorter
reporting period and diversion of Access' managements' and employees' attention
prior to October 25, 1999, as a result of the acquisition by PentaStar and the
Offering. Advanced communications services revenues decreased from $2,038,000
for the year ended December 31, 1998 to $1,457,000 for the period from January
1, 1999 to October 25, 1999 for the reasons discussed above. Basic dial tone
services revenues decreased from $344,000 for the year ended December 31, 1998
to $111,000 for the period from January 1, 1999 to October 25, 1999 due to a
decreased focus on basic communications services and the reasons discussed
above.

Costs and expenses. Salaries and commissions of $1,201,000 and $1,138,000
were recorded for the year ended December 31, 1998 and for the period from
January 1, 1999 to October 25, 1999, respectively. This decrease was
attributable to the shorter reporting period and lower revenues. The salaries
and commissions as a percentage of revenue was higher for the period from
January 1, 1999 to October 25, 1999 as a result of the fixed cost component of
these costs attributable to management, operations, sales and administrative
personnel not affected by the revenue decrease. Other general and administrative
expenses of $577,000 and $479,000 were recorded for the year ended December 31,
1998 and for the period from January 1, 1999 to October 25, 1999, respectively.
This decrease was attributable to the shorter reporting period. The amount as a
percentage of revenue was higher for the period from January 1, 1999 to October
25, 1999 as a result of professional fees and other non-recurring costs
associated with the acquisition by PentaStar and the Offering.

Income (loss) from operations. Income from operations of $604,000 was
recorded for the year ended December 31, 1998, and a loss from operations of
$49,000 was recorded for the period from January 1, 1999 to

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<PAGE> 49

October 25, 1999. This change was the result of the above discussed changes in
revenues and costs and expenses.

Other (income) expense, net. Other (income) expense, net, of $49,000 and
$64,000 was recorded for the year ended December 31, 1998 and for the period
from January 1, 1999 to October 25, 1999, respectively. These amounts are
comprised primarily of interest expense on Access's borrowings. The difference
was the result of Access utilizing its line of credit in the 1999 period to fund
its cash needs.

Income taxes. A provision for income taxes of $212,000 was provided for
the year ended December 31, 1998, and a benefit for income taxes of $41,000 was
provided for the period from January 1, 1999 to October 25, 1999. The effective
tax rate was 38.2% in the 1998 period and decreased to 36.3% in the 1999 period.

Loss from discontinued operations. Losses from discontinued operations
were $370,000 and $74,000 for the year ended December 31, 1998 and for the
period from January 1, 1999 to October 25, 1999, respectively. The loss from
discontinued operations is net of income tax benefits of $219,000 for the year
ended December 31, 1998 and $42,000 for the period from January 1, 1999 to
October 25, 1999.

Net loss. For the reasons discussed above, net losses of $27,000 and
$146,000 were recorded for the year ended December 31, 1998 and for the period
from January 1, 1999 to October 25, 1999, respectively.

LIQUIDITY AND CAPITAL RESOURCES

PENTASTAR COMMUNICATIONS, INC.

PentaStar's operations provided net cash of $68,000 for the period from
inception (March 15, 1999) through December 31, 1999, which was primarily
attributable to the collections of receivables. PentaStar used net cash in
investing activities of $2,731,000 during the same period primarily due to the
acquisition of the Acquired Companies as discussed below. PentaStar's financing
activities during the same period provided net cash of $10,800,000 as a result
of the Offering and related party borrowings as discussed below.

During 1999, PentaStar issued promissory notes in the amount of $86,000 to
BACE Investments, LLC for funds loaned by BACE Investments, LLC to PentaStar to
pay expenses associated with the organization of PentaStar, the acquisitions of
the Acquired Companies and the Offering. Immediately prior to the Offering,
PentaStar issued 86 shares of Series A preferred stock to BACE Investments, LLC
as payment in full of the principal amount of the notes. BACE Investments, LLC
is the largest shareholder of PentaStar.

On October 26, 1999, PentaStar successfully completed its initial public
offering. The Offering resulted in the sale of 1,297,845 shares of its common
stock, resulting in proceeds of $10,714,000, net of cash offering costs of
$2,265,000. Of that amount, $2,590,000 was paid by PentaStar to acquire the
Acquired Companies and pay certain assumed liabilities of the Acquired
Companies. These remaining proceeds have been or will be used to:

- make other complementary acquisitions or investments; and

- fund working capital, systems investment and other general corporate
purposes.

PentaStar intends to fund future acquisitions through the proceeds of the
Offering, the issuance of common stock, internally generated cash flow and
future borrowings.

As of December 31, 1999, PentaStar had no outstanding debt. PentaStar
believes it will be able to obtain a working capital line of credit or other
debt financing; however, PentaStar may not be able to obtain this financing, or
if available, the terms of the financing may not be favorable to PentaStar or
the shareholders without substantial dilution of ownership rights.

PentaStar believes that the net proceeds from the Offering, cash flow from
operations and debt financing will be sufficient to satisfy PentaStar's
anticipated cash requirements for the next 12 months. PentaStar will likely
require additional equity or debt financing beyond that period, and possibly
sooner, dependent upon the scope of the acquisition activity. PentaStar has not
yet identified any sources of long-term financing.

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ACQUIRED COMPANIES -- ICM Communications Integration, Inc.

ICM's operations provided net cash of $9,000 for the period from January 1,
1999 to October 25, 1999, which is a decrease from the $291,000 provided for the
year ended December 31, 1998. ICM used net cash to purchase property and
equipment as well as to fund advances to related parties of ICM of $290,000 and
$321,000 for the period from January 1, 1999 to October 25, 1999 and for the
year ended December 31, 1998, respectively. Net cash of $145,000 was provided
from financing activities for the period from January 1, 1999 to October 25,
1999 as compared to the use of net cash of $13,000 for the year ended December
31, 1998. This difference was primarily attributable to the difference in the
outstanding balance under the line of credit. PentaStar repaid all interest
bearing indebtedness when it acquired ICM. The cash portion of the purchase
price otherwise payable to the shareholders of ICM at the closing was reduced by
the amount of interest bearing indebtedness so repaid.

ACQUIRED COMPANIES -- DMA Ventures, Inc. dba Access Communications

Access's operations used net cash of $266,000 for the period from January
1, 1999 to October 25, 1999, which is an increase from the $224,000 used for the
year ended December 31, 1998. Access used net cash to purchase and sell property
and equipment of $9,000 and $13,000 for the period from January 1, 1999 to
October 25, 1999 and for the year ended December 31, 1998, respectively. Net
cash of $193,000 was provided from financing activities for the period from
January 1, 1999 to October 25, 1999 as compared to the use of net cash of
$271,000 for the year ended December 31, 1998. This difference was primarily
attributable to the outstanding balance under the line of credit at October 25,
1999 and a capital contribution by the shareholder during the period January 1,
1999 to October 25, 1999. PentaStar repaid all interest bearing indebtedness
when it acquired Access. The cash portion of the purchase price otherwise
payable to the shareholder of Access at the closing was reduced by the amount of
interest bearing indebtedness so repaid.

YEAR 2000 RISKS

Many software applications and computer hardware and related equipment and
systems that use embedded technology, such as microprocessors, rely on two
digits rather than four to represent years in performing computations and
decision-making functions. These programs, hardware items and systems may fail
beginning on January 1, 2000, or earlier, because they misinterpret "00" as the
year 1900 rather than 2000. This problem is generally referred to as the "Year
2000" issue.

As of March 24, 2000, there were no material Year 2000 issues noted with
any of PentaStar's computer systems, or to PentaStar's knowledge, to any third
party that PentaStar does business with. No costs are expected to be incurred or
accrued relating to the Year 2000 issue.

INFLATION

As a result of the relatively low levels of inflation during the last three
years, inflation did not have a significant impact on the results of operations
in those periods of any of the businesses PentaStar has acquired.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). PentaStar is required to adopt SFAS
No. 133 no later than the first fiscal quarter of 2001. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, PentaStar has not entered into any derivative financial instruments or
hedging activities. PentaStar has not determined the impact of adopting SFAS No.
133.

In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition." SAB No. 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in financial statements. SAB No. 101 must be applied to financial

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<PAGE> 51

statements no later than the second fiscal quarter of 2000. PentaStar does not
believe adoption of SAB No. 101 will have a material impact on its consolidated
financial position or results of operations.

FINANCIAL STATEMENTS

See Financial Statements beginning on page F-1.

The approval of the holders of a majority of the issued and outstanding
shares of Common Stock of VSI is required for this transaction to be completed.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS APPROVE THE
SALE OF SUBSTANTIALLY ALL OF VSI NETWORK SOLUTIONS, INC.'S ASSETS TO PENTASTAR
COMMUNICATIONS, INC.

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AGENDA ITEM THREE

SELECTION OF AUDITORS

We have appointed the accounting firm of Grant Thornton LLP as our
independent auditors to review and audit our financial statements for the year
ending December 31, 2000. A resolution to ratify the appointment will be
presented at the annual meeting. A majority of the votes cast must vote in favor
to ratify the appointment. If the shareholders do not ratify the appointment, we
may reconsider our selection of Grant Thornton LLP.

A representative of Grant Thornton LLP is expected to be present at the
meeting, will have an opportunity to make a statement if he or she so desires to
do so, and is expected to be available to respond to appropriate questions which
stockholders might have.

Even if such selection of Grant Thornton LLP is ratified, the board of
directors, in its discretion, may direct the appointment of a new independent
accounting firm at any time during the year, if the board feels that such change
would be in the best interests of the company and its stockholders.

Grant Thornton LLP has served as the company's independent auditors since
January 5, 1999.

ENGAGEMENT OF GRANT THORNTON LLP

On January 5, 1999, we dismissed our independent auditors, Arthur Andersen
LLP, and on the same date we authorized the engagement of the firm of Grant
Thornton LLP as our independent auditors for the fiscal year ending December 31,
1998. Each of these actions was approved by our Board of Directors.

We engaged Arthur Andersen LLP as our independent auditor on October 16,
1997 and they only reported on our consolidated financial statements for the
fiscal year ended December 31, 1997. The report of Arthur Andersen LLP on our
consolidated financial statements for the fiscal year ended December 31, 1997
did not contain any adverse opinions or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles.

In connection with the audit of the fiscal year ended December 31, 1997 and
for the unaudited interim period through January 5, 1999, there were no
disagreements with Arthur Andersen LLP on any matter of accounting principle or
practice, financial statement disclosure, or audit procedure or scope which
disagreement, if not resolved to the satisfaction of Arthur Andersen LLP, would
have caused it to make reference to the subject matter of the disagreement in
its report. Further, during the fiscal year ended December 31, 1997 and the
unaudited interim period through January 5, 1999, neither us nor any of our
representatives sought the advice of Grant Thornton LLP regarding the
application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on our financial
statements, which advice was an important factor considered by us in reaching a
decision as to the accounting, auditing or financial reporting issue.

In connection with the audit of the fiscal year ended December 31,1997 and
the unaudited interim period through January 5, 1999, Arthur Andersen LLP did
not advise us that (i) the internal controls necessary for us to develop
reliable financial statements did not exist; (ii) information had come to its
attention that led it to no longer be able to rely on management's
representations, or that made it unwilling to be associated with the financial
statements prepared by management; (iii) there existed a need to expand
significantly the scope of its audit, or that information had come to Arthur
Andersen LLP's attention during the fiscal periods, that if further investigated
may (a) materially impact the fairness or reliability of either: a previously
issued audit report or the underlying financial statements, or the financial
statements issued or to be issued covering the fiscal period subsequent to the
date of the most recent financial statements covered by an audit report
(including information that may prevent it from rendering an unqualified audit
report on those financial statements), or (b) cause Arthur Andersen LLP to be
unwilling to rely on management's representations or be associated with our
financial statements, and due to Arthur Andersen LLP's dismissal did not so
expand the scope of its audit or conduct such further investigation; or (iv)
information had come to Arthur Andersen LLP's attention that it concluded
materially impacts the fairness or reliability of either (a) a previously issued

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audit report or the underlying financial statements, or (b) the financial
statements issued or to be issued covering the fiscal period subsequent to the
date of the most recent financial statements covered by an audit report
(including information that, unless resolved to Arthur Andersen LLP's
satisfaction, would prevent it from rendering an unqualified audit report on
those financial statements), and due to Arthur Andersen LLP's dismissal, the
issue has not been resolved to Arthur Andersen LLP's satisfaction prior to its
dismissal.

ENGAGEMENT OF ARTHUR ANDERSEN LLP

On September 18, 1997, we dismissed our independent auditors, Grant
Thornton LLP, and on the same date authorized the engagement of the firm of
Arthur Andersen LLP as our independent auditors for the fiscal year ending
December 31, 1997. We formally engaged Arthur Andersen LLP on October 6, 1997.
Our Board of Directors approved each of these actions.

Except as described herein, Grant Thornton LLP's report on our consolidated
financial statements for the fiscal years ended December 31, 1996 and 1995 did
not contain any adverse opinion or a disclaimer of opinion, nor was qualified or
modified as to uncertainty, audit scope or accounting principles. Grant Thornton
LLP previously reported on our consolidated financial statements as of and for
the year ended December 31, 1995, prior to the restatement for the 1996 merger
with Integrated Network Services, Inc. ("INS"), which was accounted for as a
pooling of interests. Separate financial statements of INS included in the VSI
Enterprises, Inc. and subsidiaries consolidated financial statements as of and
for the year ended December 31, 1995 were audited and reported on separately by
other auditors. Grant Thornton LLP audited the combination of our consolidated
financial statements as of and for the year ended December 31, 1995, after
restatement for the 1996 merger with INS. Other than the reference to the
separate financial statements of INS included in VSI Enterprises, Inc. and
subsidiaries consolidated financial statements as of and for the year ended
December 31, 1995, the report of Grant Thornton LLP on our consolidated
financial statements as of and for the year ended December 31, 1995 did not
contain any adverse opinion of disclaimer of opinion, nor was it modified as to
uncertainty, audit scope or accounting principles.

In connection with the audit of the fiscal years ended December 31, 1996
and 1995 and for the unaudited interim period through September 18, 1997, there
were no disagreements with Grant Thornton LLP on any matter of accounting
principle or practice, financial statement disclosure, or audit procedure or
scope which disagreement, if not resolved to the satisfaction of Grant Thornton
LLP, would have caused it to make reference to the subject matter of the
disagreement in its report. Further, during the fiscal years ended December 31,
1996 and 1995 and the unaudited interim period through September 18, 1997,
neither us nor any of our representatives sought the advice of Arthur Andersen
LLP regarding the application of accounting principles to a specific completed
or contemplated transaction or the type of audit opinion that might be rendered
on our financial statements, which advice was an important factor considered by
us in reaching a decision as to the accounting, auditing or financial reporting
issue.

In connection with the audit of the fiscal years ended December 31, 1996
and 1995 and the unaudited interim period through September 18, 1997, Grant
Thornton LLP did not advise us that (i) the internal controls necessary for us
to develop reliable financial statements did not exist; (ii) that information
had come to its attention that led it to no longer be able to rely on our
management's representations, or that made it unwilling to be associated with
the financial statements prepared by our management; (iii) that there existed a
need to expand significantly the scope of its audit, or that information had
come to Grant Thornton LLP's attention during the fiscal periods, that if
further investigated may (a) materially impact the fairness or reliability of
either: a previously issued audit report or the underlying financial statements,
or the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that may prevent it from rendering an
unqualified audit report on those financial statements), or (b) cause Grant
Thornton LLP to be unwilling to rely on management's representations or be
associated with our financial statements, and due to Grant Thornton LLP's
dismissal did not so expand the scope of its audit or conduct such further
investigation; or (iv) that information had come to Grant Thornton LLP's
attention that it concluded materially impacts the fairness or reliability of
either (a) a previously issued audit report or the underlying financial
statements, or (b) the financial statements issued or to be issued covering the
fiscal period subsequent to the date of the most
48
<PAGE> 54

recent financial statements covered by an audit report (including information
that, unless resolved to Grant Thornton LLP's satisfaction, would prevent it
from rendering an unqualified audit report on those financial statements), and
due to Grant Thornton LLP's dismissal, the issue has not been resolved to Grant
Thornton LLP's satisfaction prior to its dismissal.

ANNUAL REPORT ON FORM 10-K

Our Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
as filed with the Securities and Exchange Commission, is available to
shareholders who make written request therefor to our Investor Relations
Department, 5801 Goshen Springs Road, Norcross, Georgia 30071. Copies of
exhibits and basic documents filed with that report or referenced therein will
be furnished to shareholders of record upon request.

WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT VSI

VSI is subject to informational requirements of the Securities Exchange Act
of 1934. In accordance with the 1934 Act, VSI files reports and other
information with the Securities and Exchange Commission. Such reports and other
information can be inspected and copied at the Public Reference Room maintained
by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Northeast Regional Office located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and the Midwest Regional Office located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call
the Securities and Exchange Commission at (800) SEC-0330 for further information
on the Public Reference Room. VSI's Securities and Exchange Commission's filings
are also available to the public at the Securities and Exchange Commission's
Internet site at http://www.sec.gov.

We are incorporating into this Proxy Statement the following documents that
we have previously filed with the Commission:

VSI's Annual Report of Form 10-K for the year ended December 31, 1999.

All documents filed by VSI under Section 13(a), 13(c), 14 or 15(d) of
the 1934 Act subsequent to the date of this Proxy Statement shall be deemed
to be incorporated by reference into this prospectus. Any information
incorporated by reference shall be modified or superseded by any
information contained in this prospectus or in any other document filed
later with the Commission that modifies or supersedes such information. Any
information that is modified or superseded shall become a part of this
Proxy Statement as the information has been so modified or superseded.

We will provide without charge to each shareholder of VSI, upon
written or oral request of such person, a copy of any and all of the
information that has been incorporated by reference in this Proxy
Statement. Please direct such requests to Investor Relations Department,
VSI, Inc., 5801 Goshen Springs Road, Norcross, Georgia 30071, telephone
number (770) 242-7566.

The following portions of our Annual Report to Shareholders for the year
ended December 31, 1999, which accompanies this Proxy Statement, are also
incorporated by reference herein: (i) our consolidated financial statements as
of December 31, 1999, 1998 and 1997 and for the years ended December 31, 1999,
1998, and 1997; and (ii) Management's Discussion and Analysis of Financial
Condition and Results of Operations.

SHAREHOLDER PROPOSALS

Proposals of shareholders intended to be presented at our 2001 annual
meeting must be received at our principal executive offices by Tuesday, January
2, 2001 in order to be eligible for inclusion in our proxy statement and form of
proxy for that meeting.

49
<PAGE> 55

OTHER MATTERS

The Board of Directors knows of no other matters to be brought before the
annual meeting. However, if other matters should come before the annual meeting
it is the intention of the persons named in the enclosed form of Proxy to vote
the Proxy in accordance with their judgment of what is in our best interest and
in the best interest of our shareholders.

By Order of the Board of Directors,

/s/ Larry M. Carr

Larry M. Carr
Chairman of the Board

Norcross, Georgia

April 20, 2000

50
<PAGE> 56

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PENTASTAR COMMUNICATIONS, INC.
Report of Independent Public Accountants.................. F- 2
Consolidated Balance Sheet................................ F- 3
Consolidated Statement of Operations...................... F- 4
Consolidated Statement of Shareholders' Equity............ F- 5
Consolidated Statement of Cash Flows...................... F- 6
Notes to Consolidated Financial Statements................ F- 7
ICM COMMUNICATIONS INTEGRATION, INC.
Report of Independent Public Accountants.................. F-18
Balance Sheets............................................ F-19
Statements of Operations.................................. F-20
Statements of Shareholders' Equity........................ F-21
Statements of Cash Flows.................................. F-22
Notes to Financial Statements............................. F-23
DMA VENTURES, INC., DBA ACCESS COMMUNICATIONS
Report of Independent Public Accountants.................. F-29
Balance Sheets............................................ F-30
Statements of Operations.................................. F-31
Statements of Shareholder's Equity........................ F-32
Statements of Cash Flows.................................. F-33
Notes to Financial Statements............................. F-34
</TABLE>

PentaStar F-1
<PAGE> 57

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
PentaStar Communications, Inc.:

We have audited the accompanying consolidated balance sheet of PentaStar
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1999, and the related consolidated statement of operations, shareholders'
equity and cash flows for the period from inception (March 15, 1999) through
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PentaStar Communications,
Inc. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the period from inception (March 15, 1999)
through December 31, 1999 in conformity with accounting principles generally
accepted in the United States.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 24, 2000.

PentaStar F-2
<PAGE> 58

PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,137
Accounts receivable....................................... 1,092
Prepaid expenses and other................................ 203
Related party note receivable............................. 601
-------
Total current assets................................... 10,033
Property and equipment, net............................... 555
Deferred income taxes..................................... 323
Other assets.............................................. 45
Goodwill, net............................................. 4,459
-------
Total assets........................................... $15,415
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 170
Other accrued liabilities................................. 65
Related party acquisition payables........................ 326
Accrued compensation...................................... 541
Deferred revenue.......................................... 393
Deferred income taxes..................................... 97
-------
Total current liabilities.............................. 1,592
-------
Commitments and contingencies (Note 5)
Shareholders' equity:
Series A preferred stock, $1,000 stated value; 1,000,000
shares authorized;
86 shares issued and outstanding....................... 86
Common stock, $.0001 par value; 20,000,000 shares
authorized;
4,797,842 shares issued and outstanding................ 1
Additional paid-in capital................................ 14,169
Retained deficit.......................................... (433)
-------
Total shareholders' equity............................. 13,823
-------
Total liabilities and shareholders' equity............. $15,415
=======
</TABLE>

The accompanying notes to consolidated financial statements
are an integral part of this consolidated balance sheet.
PentaStar F-3
<PAGE> 59

PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (MARCH 15, 1999) THROUGH DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<S> <C>
Revenue:
Advanced communications services.......................... $ 622
Basic dial tone services.................................. 72
----------
694
----------
Operating expenses:
Salaries and commissions.................................. 796
Other general and administrative expenses (exclusive of
noncash consulting expense shown below)................ 432
Noncash consulting expense................................ 126
Depreciation and amortization............................. 74
----------
1,428
----------
Loss from operations................................... (734)
----------
Other (income) expense:
Interest income........................................... (58)
Other expense............................................. 1
----------
Other (income) expense, net............................ (57)
----------
Loss before benefit for income taxes........................ (677)
Benefit for income taxes.................................... 244
----------
Net loss.................................................... $ (433)
==========
Basic and diluted net loss per common share................. $ (0.12)
Weighted-average common shares outstanding.................. 3,507,116
==========
</TABLE>

The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
PentaStar F-4
<PAGE> 60

PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MARCH 15, 1999) THROUGH DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- ------------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ --------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, March 15, 1999......... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock for
initial capitalization of
Company........................ -- -- 3,129,997 -- -- -- --
Issuance of common stock for
cash, net of offering costs of
$2,754......................... -- -- 1,297,845 1 10,224 -- 10,225
Issuance of warrants to
underwriter.................... -- -- -- -- 489 -- 489
Issuance of options to
consultant..................... -- -- -- -- 126 -- 126
Issuance of common stock for
acquisitions................... -- -- 370,000 -- 3,330 -- 3,330
Issuance of Series A preferred
stock for retirement of notes
payable........................ 86 86 -- -- -- -- 86
Net loss......................... -- -- -- -- -- (433) (433)
--- ---- --------- ---- ------- ----- -------
Balances, December 31, 1999...... 86 $ 86 4,797,842 $ 1 $14,169 $(433) $13,823
=== ==== ========= ==== ======= ===== =======
</TABLE>

The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
PentaStar F-5
<PAGE> 61

PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 15, 1999) THROUGH DECEMBER 31, 1999
(IN THOUSANDS)

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (433)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 74
Issuance of options to consultant...................... 126
Deferred income tax benefit............................ (244)
Changes in operating assets and liabilities --
Accounts receivable, net.................................. 533
Prepaid expenses and other................................ (83)
Accounts payable and accrued liabilities.................. 38
Deferred revenue.......................................... 57
-------
Net cash provided by operating activities.............. 68
-------
Cash flows from investing activities:
Purchase of property and equipment........................ (91)
Advances to related parties............................... (9)
Acquisition of Acquired Companies......................... (2,586)
Other..................................................... (45)
-------
Net cash used in investing activities.................. (2,731)
-------
Cash flows from financing activities:
Issuance of common stock for cash, net of offering
costs.................................................. 10,714
Proceeds from related party borrowings.................... 86
-------
Net cash provided by financing activities.............. 10,800
-------
Net increase in cash and cash equivalents................... 8,137
Cash and cash equivalents, beginning of period.............. --
-------
Cash and cash equivalents, end of period.................... $ 8,137
=======
</TABLE>

The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
PentaStar F-6
<PAGE> 62

PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)

1. BUSINESS AND ORGANIZATION

PentaStar Communications, Inc., a Delaware corporation ("PentaStar" or the
"Company"), was founded on March 15, 1999, to become a multi-regional company
that designs, sells and facilitates the installation and usage of communications
services for small and medium-size business customers. Prior to October 26,
1999, PentaStar had not conducted any operations, and all of its activities were
related to its formation and the acquisitions and the offering discussed below.
On October 26, 1999 PentaStar, through its wholly-owned subsidiaries, acquired
the outstanding capital stock and other equity interests of DMA Ventures, Inc.,
dba Access Communications ("Access") and ICM Communications Integration, Inc.
("ICM") (together, the "Acquired Companies") (see Note 3) and completed an
initial public offering of its common stock (the "Offering") (see Note 4). The
Company continues to acquire companies to expand its operations (see Note 9).

Upon closing of the acquisitions of the Acquired Companies and the
Offering, PentaStar commenced its business operations as a sales agent for
communications services including local access, long distance, wireless and
internet services for voice and data communications. PentaStar designs, procures
and facilitates the installation and use of communications services to best meet
its customers' specific needs.

Approximately 99% of PentaStar's revenues were generated from the sales of
services for U S WEST Communications, Inc. ("U S WEST"), a regional Bell
operating company. The loss of the relationship with U S WEST or a material
diminishment in the volume of business with U S WEST would adversely affect the
Company. Management believes the Company could become a sales agent for another
provider with comparable terms if it were to lose its relationship with U S
WEST. Subsequent to December 31, 1999 the Company has completed the acquisitions
of other agents (see Note 9) whose revenues are principally generated from
communications service providers other than U S WEST.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All significant intercompany accounts and
transactions were eliminated in consolidation.

Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less that are readily convertible into cash
and are not subject to significant risk from fluctuations in interest rates to
be cash equivalents.

Revenue Recognition

The Company generates revenue from its sale of communications services.
Revenues are recognized on the date the respective service is installed. Amounts
collected in advance of the service installation date are recorded as deferred
revenue until the installation occurs. Historically, the Company has experienced
delays in the receipt of payment for certain installed services referred to as
disputed items. The delay in payment for these disputed items has been due to
deficiencies in documentation between the Company and U S WEST and discrepancies
in the amounts believed receivable from U S WEST. As a result of the Company's
continuing relationship with U S WEST, changes have been implemented in the
process of receiving payment for installed services, which have resulted in
receivables being cleared in a more timely manner.

PentaStar F-7
<PAGE> 63
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition". SAB No. 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in financial statements. SAB No. 101 must be applied to financial
statements no later than the second fiscal quarter of 2000. The Company does not
believe adoption of SAB No. 101 will have a material impact on its consolidated
financial position or results of operations.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses. The carrying value
of these financial instruments in the accompanying consolidated balance sheet
approximates their fair value because of their short-term nature.

Concentration of Credit Risk

The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash and accounts receivable. The Company maintains
their cash in institutions that the Company considers of high credit quality.
The balances, at times, may exceed federally insured limits. Credit risk with
respect to accounts receivable is limited due to the credit worthiness of the
Company's primary customer, U S WEST. Management does not anticipate significant
credit losses from such financial instruments.

Property and Equipment

Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are capitalized and amortized using the straight-line
method over the shorter of the useful lives or the remaining lease term.

Expenditures for repairs and maintenance are expensed as incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized.

Property and equipment consists of the following at December 31, 1999:

<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE IN YEARS
-----------------
<S> <C> <C>
Computer and telephone equipment............................ 3-6 $295
Office furniture and equipment.............................. 5-10 162
Leasehold improvements...................................... 3-10 116
Vehicles.................................................... 5 14
----
587
Less: accumulated depreciation.............................. (32)
----
Property and equipment, net................................. $555
====
</TABLE>

PentaStar F-8
<PAGE> 64
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Depreciation expense was $32 for the period from inception (March 15, 1999)
through December 31, 1999.

Goodwill

The excess of acquisition cost over fair value of net tangible assets of
businesses acquired has been recorded as goodwill and is being amortized on a
straight-line basis over its estimated life of 20 years. The Company accounts
for goodwill at the lower of amortized cost or net realizable value. As part of
an ongoing review of the valuation and amortization of goodwill, management
addresses the carrying value of the Company's goodwill assets to determine if
changes in facts and circumstances suggest that they may be impaired. If this
review indicates that the goodwill asset will not be recoverable, as determined
by a discounted cash flow analysis over the remaining amortization period, the
carrying value of the Company's goodwill would be reduced to its estimated fair
market value. No event has been identified that would indicate an impairment of
the value of goodwill recorded in the accompanying consolidated balance sheet.
Amortization expense was $42 for the period from inception (March 15, 1999)
through December 31, 1999.

Advertising and Promotion

Advertising and promotional related costs are expensed when incurred or the
first time the advertising appears. The Company did not incur any advertising
costs for the period from inception (March 15, 1999) through December 31, 1999.

Stock-Based Compensation

The Company accounts for its stock-based employee compensation agreements
using the intrinsic value method under which no compensation is generally
recognized for options granted to employees with an exercise price equal to or
greater than the fair market value of the underlying stock. Equity instruments
granted to non-employees are recorded at fair value on the date of grant.

The Company follows the disclosure only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123").

Income Taxes

Deferred tax assets and liabilities are provided for differences between
the financial statement and tax basis of assets and liabilities using current
enacted tax rates. The provision for income taxes includes the amount due for
the current period and the change in deferred taxes between periods. A valuation
allowance is provided for a portion or all of the deferred tax asset when it is
more likely than not that the Company will not be able to realize the benefits
of the deferred tax assets in future years.

Earnings Per Share

The Company applies SFAS No. 128, "Earnings Per Share". SFAS No. 128
provides for the calculation of "Basic" and "Diluted" earnings or net income per
share. Basic net income per share includes no dilution and is computed by
dividing earnings available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted net income per share
reflects the potential dilution of stock options and warrants using the treasury
stock method. As of December 31, 1999, options to purchase 407,950 shares of
common stock and warrants to purchase 125,000 shares of common stock were
outstanding. The options and warrants are excluded from the calculation of
diluted loss per share as they are antidilutive.

PentaStar F-9
<PAGE> 65
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Comprehensive Loss

The Company applies SFAS No. 130 "Reporting Comprehensive Income." For the
period from inception (March 15, 1999) through December 31, 1999, comprehensive
loss is the same as the Company's net loss.

Segment Information

The Company applies SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." The management approach to segment
reporting required by SFAS No. 131 designates the internal organization that is
used by senior management for making operational decisions and assessing
performance as the source of the Company's reportable segments. The Company
currently operates in one segment: Communications services sales.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Company is
required to adopt SFAS No. 133 no later than the first fiscal quarter of 2001.
SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. To date, the Company has not entered into any derivative
financial instruments or hedging activities. The Company has not determined the
impact of adopting SFAS No. 133.

3. BUSINESS COMBINATIONS

As discussed in Note 1, on October 26, 1999, PentaStar acquired Access and
ICM. Purchase consideration for Access consisted of $189 in cash, 205,000 shares
of the Company's common stock and assumption of liabilities. Purchase
consideration for ICM consisted of $1,619 in cash, 165,000 shares of the
Company's common stock and assumption of liabilities. In connection with the
acquisition of ICM, $500 of cash was placed in escrow for application against
indemnification obligations.

Included in the accompanying consolidated balance sheet at December 31,
1999, is approximately $326 to be distributed to the prior shareholders of the
Acquired Companies for post closing working capital adjustments.

The sole shareholder of Access and the principal shareholder of ICM each
entered into escrow and contingent stock agreements with PentaStar on closing of
the acquisitions. These agreements adjust the final consideration paid to those
shareholders in return for their interest in Access and ICM. Under these
agreements, shares of PentaStar common stock were placed into escrow. Based upon
the earnings performance of an acquired company relative to that of all other
acquired companies for the 12-month period prior to the earlier of a sale of
substantially all of the assets or stock of PentaStar or five years, the
shareholder associated with that company will receive back from escrow all, some
or none of the shares placed in escrow. In addition, based again upon the
relative earnings performance of the acquired company, that shareholder may
receive additional shares of common stock from PentaStar. The agreements are
designed, however, so that there will be no net change to the total number of
shares of PentaStar common stock outstanding after the combined adjustments are
made for all of the acquired companies.

The acquisitions of the Acquired Companies were recorded using the purchase
method of accounting by which the purchase consideration was allocated to the
identifiable assets and liabilities of the Acquired Companies and the excess of
the purchase consideration over the fair value of the net assets acquired was

PentaStar F-10
<PAGE> 66
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

recorded as goodwill. The operating results of the Acquired Companies have been
included in the accompanying consolidated financial statements since the date of
acquisition.

The allocation of the purchase price of the Acquired Companies was as
follows:

<TABLE>
<CAPTION>
ACCESS ICM TOTAL
------ ------ ------
<S> <C> <C> <C>
Purchase Consideration:
Cash....................................................... $ 189 $1,619 $1,808
PentaStar common stock..................................... 1,845 1,485 3,330
Acquisition costs.......................................... 52 22 74
------ ------ ------
$2,086 $3,126 $5,212
====== ====== ======
</TABLE>

Of the total purchase price of $5,212, $496 was allocated to property and
equipment, $215 to net working capital and $4,501 to goodwill. The purchase
price allocation is preliminary and may change upon final determination of the
fair market value of the assets acquired, principally the receivables disputed
with U S WEST.

The following unaudited pro forma condensed consolidated financial
information presents the consolidated results of operations of the Company as if
the acquisition of the Acquired Companies occurred at the beginning of the
respective periods. The unaudited pro forma financial data does not purport to
represent what PentaStar's combined results of operations would actually have
been if such transactions in fact had occurred on those dates and are not
necessarily representative of PentaStar's combined results of operations for any
future period. Since the Acquired Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. Costs and expenses associated with the corporate office
and management of PentaStar are included in the 1999 net loss.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
1999 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $5,507 $6,657
Net income (loss) from continuing operations................ (622) 567
Net income (loss) from continuing operations per
share -- basic and diluted................................ $(0.13) $ 0.12
</TABLE>

4. SHAREHOLDERS' EQUITY

Preferred Stock

The Board of Directors has the authority, without further action by the
shareholders, to issue up to 1,000,000 shares of preferred stock, in one or more
series and to determine dividends and other rights and preferences for the
preferred stock.

The Company issued Series A preferred stock to BACE Investments, LLC on
October 25, 1999 as payment in full of the principal amount of notes payable
issued by BACE Investments, LLC to the Company for financing of the Company's
operations prior to the Offering.

The Series A preferred stock has a stated value of $1,000 per share and
bears dividends on the stated value at a rate of 5% per annum, payable annually.
In the event of dissolution, liquidation or winding up of the Company, the
Series A preferred stock has a preference to the holders of the common stock in
an amount equal to the stated value, plus the unpaid dividends, whether or not
declared, thereon. The Series A preferred stock has no voting rights, redemption
or conversion features and rates junior to any other preferred stock.

PentaStar F-11
<PAGE> 67
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Common Stock

In connection with the organization and initial capitalization of
PentaStar, the Company issued 3,129,997 shares of common stock at $.0001 par
value which gives retroactive effect to a 3,417.96 for 1 stock split during
1999.

On October 26, 1999, the Company successfully completed the Offering. The
Offering resulted in the sale of 1,297,845 shares of the common stock (includes
underwriters over-allotment purchase of an additional 47,845 shares), resulting
in proceeds of $10,714, net of cash offering costs of $2,265. These proceeds
were used to finance the cash consideration and payment of certain assumed
liabilities of the acquisitions of the Acquired Companies and will be used to
make other complementary acquisitions or investments and for working capital,
systems investment and other general corporate purposes.

Upon completion of the Offering, the Company sold to the representative of
the underwriters for a nominal cost, warrants to purchase 125,000 shares of
common stock. These warrants will become exercisable one year after the
effective date of the Offering at a per share exercise price of 120% of the
initial public offering price and will expire five years from the effective date
of the Offering. The common stock issuable on exercise of the warrants is
subject to certain adjustments to protect the holder from dilution. Upon
completion of the Offering, the Company issued options to purchase 20,000 shares
to a consultant for executive placement services. The options were immediately
vested and are exercisable at the initial public offering price. The options
expire in 10 years. The fair value of the warrants and options issued was $489
and $126 respectively, as determined by the Black-Scholes pricing model. The
assumptions used in the model were as follows:

<TABLE>
<S> <C>
Risk-free interest rate................................. 5.6%
Expected years until exercise........................... 5 and 10
Expected stock volatility............................... 42%
Dividend yield.......................................... 0.0%
</TABLE>

The Company issued 370,000 shares of its common stock to shareholders of
the Acquired Companies as partial consideration in the acquisition of the
Acquired Companies (see Note 3).

The Company adopted its stock option plan on August 13, 1999. The Company
has reserved 1,000,000 shares of its common stock for issuance pursuant to the
exercise of options granted under the Company's stock option plan (see Note 6).

5. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases various office facilities from certain shareholders and
other office facilities from unrelated parties under long-term leases. The
Company subleases a portion of one of its leases to an unrelated party.
Generally, the Company is required to pay executory costs such as property
taxes, maintenance and insurance.

PentaStar F-12
<PAGE> 68
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

As of December 31, 1999, future minimum lease payments required under
operating leases are as follows:

<TABLE>
<CAPTION>
NET
MINIMUM TOTAL OBLIGATION
GROSS SUBLEASE NET TO RELATED
OBLIGATION COMMITMENTS OBLIGATION PARTIES
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Years Ending December 31 --
2000.................................... $307 $ 51 $256 $ 72
2001.................................... 262 51 211 72
2002.................................... 181 38 143 24
2003.................................... -- -- -- --
2004.................................... -- -- -- --
Thereafter.............................. -- -- -- --
---- ---- ---- ----
$750 $140 $610 $168
==== ==== ==== ====
</TABLE>

Total facilities rent expense, net of sublease payments, was $52 for the
period from inception (March 15, 1999) through December 31, 1999, of which, $18
represents rent expense for the related party leases.

Employment Agreements

The Company has entered into employment agreements with a key executive of
Access and a key executive of ICM. These employment agreements generally
prohibit such individuals from disclosing confidential information and trade
secrets and restrict such individuals from competing with the Company for a
period of one to two years following termination of employment. The initial term
of these employment agreements is the earlier of a change in control of the
Company as defined in those agreements or five years.

Litigation

The Company is involved in litigation arising in the ordinary course of
business. It is the opinion of management that the outcome of such litigation
will not have a material effect on the Company's results of operations or
financial position.

6. STOCK OPTIONS

On August 13, 1999, the Board of Directors adopted the PentaStar
Communications, Inc. Stock Option Plan (the "Stock Option Plan") for the purpose
of attracting and retaining certain key employees of the Company. The Stock
Option Plan will terminate on the tenth anniversary of the date of its adoption,
unless earlier terminated by the Board of Directors pursuant to the terms of the
Stock Option Plan. The Stock Option Plan is administered by the Incentive Plan
Committee which is comprised of members of the Board of Directors. The Stock
Option Plan provides that an aggregate of 1,000,000 of the Company's authorized
shares be reserved for future grants under the Stock Option Plan. The exercise
price of incentive stock options granted pursuant to the Stock Option Plan
cannot be less than 100% of the fair market value of the common stock on the
date of the grant and the term of these options cannot exceed ten years.

PentaStar F-13
<PAGE> 69
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

The Stock Option Plan activity for the period from inception (March 15,
1999) through December 31, 1999 is as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Options outstanding, beginning of period.................... -- $ --
Granted..................................................... 407,950 10.22
Exercised................................................... -- --
------- ------
Options outstanding, end of period.......................... 407,950 $10.22
======= ======
</TABLE>

Exercise prices for employee awards outstanding as of December 31, 1999 are
as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------- OPTIONS EXERCISABLE
REMAINING LIFE RANGE OF --------------------
NUMBER (IN YEARS) EXERCISE PRICE NUMBER PRICE
------- -------------- -------------- -------- --------
<S> <C> <C> <C> <C>
382,950 9.82 $10.00 93,750 $10.00
25,000 9.92 $13.63 -- --
------- ------ ------
407,950 9.83 $10.00-$13.63 93,750 $10.00
======= ====== ======
</TABLE>

Pro forma disclosure information regarding net income per share is required
by SFAS No. 123 and has been determined as if the Company had accounted for its
stock-based compensation using the fair value method prescribed by that
statement. Since the options granted during 1999 had exercise prices which were
greater than or equal to the fair value of the common stock on the date of
grant, no compensation expense was recognized in the statement of operations for
the period from March 15, 1999 through December 31, 1999. The following table
reflects the pro forma net loss had the Company elected to adopt the fair value
method prescribed by SFAS No. 123:

<TABLE>
<S> <C>
Net loss:
As reported............................................. $ (433)
Pro forma............................................... $ (812)
Earnings per share:
As reported basic and diluted........................... $(0.12)
Pro forma basic and diluted............................. $(0.23)
</TABLE>

These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.

The weighted-average fair value of options granted during 1999 was $3.46
per share. The estimated fair value of each option granted is calculated using
the Black-Scholes option-pricing model. The weighted-average assumptions used in
the model were as follows:

<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.6%
Expected years until exercise............................... 4
Expected stock volatility................................... 42%
Dividend yield.............................................. 0.0%
</TABLE>

PentaStar F-14
<PAGE> 70
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

7. RELATED-PARTY TRANSACTIONS

The Company leases its corporate office facilities from BACE Real Estate,
LLC pursuant to a 36-month term agreement for $3 per month. BACE Real Estate,
LLC is an affiliate of BACE Investments, LLC, which is the largest shareholder
of the Company.

The Company is a party to a consulting agreement with BIBD, LLC, a venture
between BACE Industries, LLC (an affiliate of BACE Investments, LLC) and Black
Diamond Capital, LLC (a significant shareholder of the Company). Under the
agreement, BIBD assists in identifying potential acquisition candidates and
other financial consulting. The agreement commenced on September 1, 1999 and
provides for payment of a monthly fee that varies depending on the Company's
annualized revenues and reimbursement of defined expenses. The Company made
payments to BIBD, LLC of $67 during the period from inception (March 15, 1999)
through December 31, 1999.

The Company leases certain operating company office facilities from the
previous sole shareholder of Access for $3 per month. This lease expires on
December 31, 2001.

In connection with the acquisition of ICM, the Company acquired a note
receivable from Network Communications, Inc. ("NCI"). NCI is owned by certain of
the previous shareholders of ICM, who, upon the Company's acquisition of ICM,
became shareholders of the Company. At December 31, 1999, NCI owed the Company
$601 under the terms of the note receivable for cash advances, commissions
payable to ICM and shared expenses. Subsequent to December 31, 1999, the Company
acquired the assets of NCI pursuant to an Asset Purchase Agreement for cash and
forgiveness of the outstanding balance of the note receivable (see Note 9).

8. INCOME TAXES

The benefit for income taxes consists of the following for the period from
inception (March 15, 1999) through December 31, 1999:

<TABLE>
<S> <C>
Deferred benefit:
Federal................................................... $211
State..................................................... 33
----
Total.................................................. $244
====
</TABLE>

A reconciliation of the statutory income tax rate to the benefit for income
taxes is as follows:

<TABLE>
<S> <C>
Federal income tax at statutory rate........................ 34.0%
State income taxes, net of federal tax effect............... 3.3
Goodwill amortization and other............................. (1.2)
----
Total benefit............................................. 36.1%
====
</TABLE>

PentaStar F-15
<PAGE> 71
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Deferred income taxes result from differences in the tax basis of assets
and liabilities and their carrying amounts for financial reporting purposes. The
current net deferred tax liability results from the Company's conversion from
the cash basis method to the accrual basis method for income tax reporting. The
noncurrent deferred tax assets and (liabilities), result principally from the
following:

<TABLE>
<S> <C>
Cash to accrual conversion.................................. $(71)
Property basis.............................................. (35)
Net operating losses........................................ 382
Other....................................................... 47
----
Net deferred tax asset.................................... $323
====
</TABLE>

In connection with the acquisition of Access, the Company acquired
operating loss carryforwards for federal income tax purposes of approximately
$585, expiring in various years from 2013 to 2018. During 1999, the Company
generated approximately $438 of additional operating loss carryforward which
will expire in 2019.

9. SUBSEQUENT EVENTS

On February 18, 2000, the Company, through a wholly-owned subsidiary,
completed the acquisition of the assets of USTeleCenters, Inc. and Vermont
Network Services Corporation (collectively referred to as "UST"). UST, founded
in 1986 and headquartered in Boston, Massachusetts, is a full-service
communications agent focusing on small business customers located throughout
Bell Atlantic's 13 state Northeast and Mid-Atlantic region. UST has agency
agreements with service providers including Bell Atlantic, Bell South,
Southwestern Bell and Sprint. Approximately 75% and 71% of UST's revenues were
from commissions paid from Bell Atlantic in 1999 and 1998, respectively. The
purchase price consideration consisted of $182 in cash paid at closing, the
issuance of 5,980 shares of the Company's common stock and the assumption of
approximately $2,500 of liabilities. The Company also assumed the on-going
obligations under various agreements relating to the acquired assets.

On February 18, 2000, the Company signed a definitive agreement to acquire
the assets of Eastern Telecom, Inc. ("ETI"). ETI, founded in 1992, is a
full-service communications agent based in Warwick, Rhode Island primarily
servicing customers in Boston, New York, Albany, Providence and Warwick. ETI is
an authorized agent for Bell Atlantic and Bell South. The acquisition of the
assets of ETI is contingent upon receipt of the approval of the shareholders of
VSI Enterprises, Inc., which is the parent company of ETI. Terms of the
definitive agreement provide for a purchase price for the assets to consist of
approximately $2,100 in cash, the issuance of the Company's common stock with a
fair market value of $950 and the assumption of certain liabilities at closing.
In addition, there is a potential earnout payment based upon the combined
earnings of ETI and UST for the year ending December 31, 2000.

On February 22, 2000, the Company, through a wholly-owned subsidiary,
completed the acquisition of NCI. NCI is primarily a long distance
communications services agent located in Seattle, Washington. NCI has carrier
agreements with Qwest, AT&T and GST Telecom. NCI is owned by certain of the
previous shareholders of ICM, who, upon the Company's acquisition of ICM, became
shareholders of the Company. The purchase price paid for the assets consisted of
cash of $10 and the cancellation of a $601,000 note receivable from NCI to the
Company.

On March 17, 2000, the Company completed the acquisition of the assets of
ParTel Communications, Inc. ("ParTel"). ParTel, founded in 1982, is a
full-service communications agent based in Phoenix, Arizona, primarily servicing
customers in the Phoenix and Tucson metropolitan markets. ParTel is an agent of
U S

PentaStar F-16
<PAGE> 72
PENTASTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

WEST and sells primarily high-end, data oriented products. Historically, all of
ParTel's revenues have been generated from commissions paid by U S WEST. The
purchase price consideration consisted of $519 in cash paid at closing and the
issuance of 30,310 shares of the Company's common stock. At the time the
acquisition of ParTel was consummated, the Company loaned $500 (interest at the
prime rate plus 1%) to a corporation controlled by the former shareholders of
ParTel. The loan will be due not later than December 31, 2001, and is personally
guaranteed by the former shareholders. In addition, there is a potential earnout
payment based upon the adjusted earnings of ParTel for the year ending December
31, 2000.

PentaStar F-17
<PAGE> 73

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
ICM Communications Integration, Inc.:

We have audited the accompanying balance sheets of ICM Communications
Integration, Inc. (a Washington corporation) as of October 25, 1999 and December
31, 1998, and the related statements of operations, shareholders' equity and
cash flows for the period from January 1, 1999 to October 25, 1999, and for the
year ended December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ICM Communications
Integration, Inc. as of October 25, 1999 and December 31, 1998, and the results
of its operations and its cash flows for the period from January 1, 1999 to
October 25, 1999, and for the year ended December 31, 1998 in conformity with
accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Denver, Colorado,
January 19, 2000.

PentaStar F-18
<PAGE> 74

ICM COMMUNICATIONS INTEGRATION, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
OCTOBER 25, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2 $ 138
Accounts receivable, net.................................. 1,306 1,229
Related party receivable.................................. -- 27
Prepaid expenses and other................................ 100 79
------ ------
Total current assets................................... 1,408 1,473
Related party note receivable............................. 568 281
Property and equipment, net............................... 150 178
------ ------
Total assets........................................... $2,126 $1,932
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 324 $ 101
Compensation related accruals............................. 561 465
Deferred revenue.......................................... 260 159
Shareholder note payable.................................. 29 31
Line of credit............................................ 151 4
Income taxes payable...................................... 37 37
Deferred income taxes..................................... 146 302
------ ------
Total current liabilities.............................. 1,508 1,099
------ ------
Deferred income taxes....................................... 19 --
Commitments and contingencies...............................
Shareholders' equity:
Common stock, no par value; 1,000,000 shares authorized;
514,000 shares issued and outstanding.................. -- --
Retained earnings......................................... 599 833
------ ------
Total shareholders' equity............................. 599 833
------ ------
Total liabilities and shareholders' equity............. $2,126 $1,932
====== ======
</TABLE>

The accompanying notes to financial statements
are an integral part of these balance sheets.
PentaStar F-19
<PAGE> 75

ICM COMMUNICATIONS INTEGRATION, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
OCTOBER 25, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Advanced communications services.......................... $2,718 $3,681
Basic dial tone services.................................. 527 594
------ ------
3,245 4,275
------ ------
Costs and expenses:
Salaries and commissions.................................. 2,322 2,746
Other general and administrative expenses................. 1,285 952
------ ------
3,607 3,698
------ ------
Income (loss) from operations.......................... (362) 577
------ ------
Other (income) expense:
Interest income........................................... (1) (9)
Interest expense.......................................... 10 1
------ ------
Other (income) expense, net............................ 9 (8)
------ ------
Income (loss) before provision for income taxes............. (371) 585
Provision (benefit) for income taxes........................ (137) 200
------ ------
Net income (loss)........................................... $ (234) $ 385
====== ======
</TABLE>

The accompanying notes to financial statements
are an integral part of these statements.
PentaStar F-20
<PAGE> 76

ICM COMMUNICATIONS INTEGRATION, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1997......................... 520 $10 $476 $ 486
Retirement of repurchased shares.................. (6) (10) (28) (38)
Net income........................................ -- -- 385 385
--- --- ---- -----
Balances, December 31, 1998......................... 514 -- 833 833
Net loss.......................................... -- -- (234) (234)
--- --- ---- -----
Balances, October 25, 1999.......................... 514 $-- $599 $ 599
=== === ==== =====
</TABLE>

The accompanying notes to financial statements
are an integral part of these statements.
PentaStar F-21
<PAGE> 77

ICM COMMUNICATIONS INTEGRATION, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
OCTOBER 25, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(234) $ 385
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Deferred income tax benefit............................ (137) (47)
Depreciation........................................... 38 37
Gain on disposition of assets.......................... (7) --
Provision for uncollectible accounts................... 116 141
Changes in operating assets and liabilities -
Accounts receivable, net............................. (166) (621)
Prepaid expenses and other........................... (21) (28)
Accounts payable and accrued expenses................ 319 154
Income taxes payable................................. -- 160
Deferred revenue..................................... 101 110
----- -----
Net cash provided by operating activities......... 9 291
----- -----
Cash flows from investing activities:
Purchase of property and equipment........................ (11) (96)
Advances to related parties............................... (287) (225)
Proceeds from disposition of assets....................... 8 --
----- -----
Net cash used in investing activities............. (290) (321)
----- -----
Cash flows from financing activities:
Net change in line of credit.............................. 147 4
Treasury stock repurchase................................. (2) (7)
Payments on capital lease obligations..................... -- (10)
----- -----
Net cash provided by (used in) financing
activities...................................... 145 (13)
----- -----
Net decrease in cash and cash equivalents................... (136) (43)
Cash and cash equivalents, beginning of period.............. 138 181
----- -----
Cash and cash equivalents, end of period.................... $ 2 $ 138
===== =====
Supplemental schedule of noncash investing and financing
activities:
Acquisition of treasury stock for note payable............ $ -- $ 38
===== =====
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 10 $ 1
===== =====
Cash paid for taxes....................................... $ -- $ 88
===== =====
</TABLE>

The accompanying notes to financial statements
are an integral part of these statements.
PentaStar F-22
<PAGE> 78

ICM COMMUNICATIONS INTEGRATION, INC.

NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)

1. BUSINESS AND ORGANIZATION

The financial statements reflect the historical cost of assets and
liabilities and results of operations of ICM Communications Integration, Inc., a
Washington corporation (the "Company"), incorporated on January 3, 1995. On
October 26, 1999, PentaStar Communications, Inc. ("PentaStar"), through a wholly
owned subsidiary, closed an Agreement and Plan of Merger, pursuant to which the
Company was merged into PentaStar.

Dependence Upon US WEST

The Company acts as a sales agent for and generated substantially all of
its revenues from US WEST Communications, Inc. ("US WEST"), a regional Bell
operating company. The loss of the relationship with US WEST or a material
diminishment in the volume of business with US WEST would adversely affect the
Company. Management believes the Company could become a sales agent for another
provider with comparable terms if it were to lose its relationship with US WEST.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Property and Equipment

Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Expenditures for repairs and maintenance are expensed as incurred. Expenditures
for major renewals and betterments, which extend the useful lives of existing
equipment, are capitalized and depreciated. Upon retirement or disposition of
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statements of operations. Property and equipment consists of the following:

<TABLE>
<CAPTION>
ESTIMATED USEFUL OCTOBER 25, DECEMBER 31,
LIFE IN YEARS 1999 1998
---------------- ----------- ------------
<S> <C> <C> <C>
Computer and telephone equipment.................... 3-5 $177 $191
Office furniture and fixtures....................... 7 63 40
---- ----
240 231
Less: accumulated depreciation...................... (90) (53)
---- ----
Property and equipment, net....................... $150 $178
==== ====
</TABLE>

Depreciation expense was approximately $38 and $37 for the period from
January 1, 1999 to October 25, 1999, and for the year ended December 31, 1998,
respectively.

Revenue Recognition

Revenue and the related commissions expense are recognized in the month
when services are installed by US WEST. Deferred revenue in the accompanying
balance sheets represents cash collected from US WEST on uninstalled services.

Beginning in 1998, the Company received advanced communication service
commissions from a related entity for telecommunication agency services not
related to US WEST. The revenue approximated $83 and

PentaStar F-23
<PAGE> 79
ICM COMMUNICATIONS INTEGRATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

$32 for the period from January 1, 1999 to October 25, 1999, and for the year
ended December 31, 1998, respectively.

The Company has not received payment for certain installed services of $865
and $1,018 at October 25, 1999 and December 31, 1998, respectively. The delay in
payment for these disputed items has been due to deficiencies in documentation
between the Company and US WEST and discrepancies in the amounts believed
receivable from US WEST. An allowance of $238 and $240 at October 25, 1999 and
December 31, 1998, respectively, has been established for these disputed
receivables.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
which could change in the near future include the allowance provided for
disputed receivables.

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
investments, accounts receivable, accounts payable and borrowings. The carrying
value of these financial instruments on the accompanying balance sheets
approximates their fair value because of their short-term nature.

Concentration of Credit Risk

The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash and accounts receivable. The Company maintains
their cash in institutions, which the Company considers of high credit quality.
The balances, at times, may exceed federally insured limits. Credit risk with
respect to accounts receivable is limited due to the credit worthiness of the
Company's major customer, U S WEST. Management does not anticipate significant
credit losses from such financial instruments.

Asset Impairment

The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets, which are held and used in operations would
be impaired if the undiscounted future cash flows related to the asset did not
exceed the net book value. If an asset is determined to be impaired, it is
written down to its fair value.

Advertising and Promotion

Advertising and promotional related expenses are charged to operations when
incurred or the first time the advertising occurs. Advertising expense totaled
$18 and $30 for the period from January 1, 1999 to October 25, 1999 and for the
year ended December 31, 1998, respectively.

Income Taxes

PentaStar F-24
<PAGE> 80
ICM COMMUNICATIONS INTEGRATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

A valuation allowance is provided for a portion or all of the deferred tax
asset when it is more likely than not that the Company will not be able to
realize the benefits of the deferred tax assets in future years.

Reclassifications

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

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
The Company is required to adopt SFAS No. 133 no later than the first fiscal
quarter of 2001. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities. The Company has not
determined the impact of adopting SFAS No. 133.

3. BORROWINGS

Line of Credit

In June 1997, the Company established a line of credit with SeaFirst Bank,
which permits the Company to borrow up to $50 at a rate equal to the prime rate
plus 3% (11.25% and 10.75% at October 25, 1999, and December 31, 1998,
respectively). The line of credit expires on November 5, 1999. A related party,
who is a shareholder and director, guarantees borrowings under the agreement.
The credit line was increased to $150 in April of 1999 and three additional
shareholders and directors became guarantors. The Company had outstanding
balances under this line of credit of $151 and $4 at October 25, 1999, and
December 31, 1998, respectively. Subsequent to October 25, 1999, in connection
with the acquisition of the Company by PentaStar, the line of credit was paid in
full.

4. OPERATING LEASES

The Company leases three office facilities in Bellevue, Washington and
Portland, Oregon. The Company sublet a portion of one of the Bellevue,
Washington leases to a related party through August 1999 and began subletting to
an unrelated party in September 1999. The Company is required to pay executory
costs such as property taxes, maintenance and insurance under its operating
leases.

As of October 25, 1999, future minimum lease payments required under
operating leases, net of sublease payments, are as follows:

<TABLE>
<CAPTION>
MINIMUM
GROSS SUBLEASE NET
OBLIGATION COMMITMENTS OBLIGATION
---------- ----------- ----------
<S> <C> <C> <C>
Period from October 26, 1999 to December 31, 1999... $ 34 $ 8 $ 26
Years ended December 31 --
2000.............................................. 208 51 157
2001.............................................. 190 51 139
2002.............................................. 157 38 119
---- ---- ----
$589 $148 $441
==== ==== ====
</TABLE>

Rent expense, net of sublease payments, charged to operations totaled
approximately $129 and $106 for the period from January 1, 1999 to October 25,
1999 and for the year ended December 31, 1998, respectively.

PentaStar F-25
<PAGE> 81
ICM COMMUNICATIONS INTEGRATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Sublease charges to the related party were $33 and $16 for the period from
January 1, 1999 to October 25, 1999 and for the year ended December 31, 1998,
respectively.

5. INCOME TAXES

The (benefit) provision for income taxes consists of the following:

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
OCTOBER 25, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Current (benefit) provision:
Federal................................................... $ -- $213
State..................................................... -- 34
----- ----
Total current.......................................... -- 247
----- ----
Deferred (benefit) provision:
Federal................................................... (119) (41)
State..................................................... (18) (6)
----- ----
Total deferred......................................... (137) (47)
----- ----
(Benefit) provision for income taxes...................... $(137) $200
===== ====
</TABLE>

A reconciliation of the statutory income tax rate to the provision for
income taxes is as follows:

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
OCTOBER 25, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Federal income tax at statutory rate........................ 34.0% 34.0%
State income taxes, net of federal tax effect............... 3.3 3.3
Other....................................................... (0.4) (3.1)
---- ----
Total provision............................................. 36.9% 34.2%
==== ====
</TABLE>

The tax effects of temporary differences, representing deferred tax assets
and liabilities, result principally from the following:

<TABLE>
<CAPTION>
OCTOBER 25, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accounts receivable, prepaids and other................... $(644) $(595)
Deferred revenue.......................................... 97 59
Payables and accruals..................................... 343 144
Allowance for disputed receivables........................ 58 90
----- -----
Net current deferred tax liability..................... $(146) $(302)
===== =====
Deferred tax liability:
Property basis............................................ $ (19) $ --
</TABLE>

PentaStar F-26
<PAGE> 82
ICM COMMUNICATIONS INTEGRATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

6. RETIREMENT SAVING PLAN

The Company adopted an IRA plan in October 1997. Under the plan, qualified
employees may elect to defer up to $6 of their calendar year compensation. The
plan provides for contributions by the Company to match the first 3% of the
qualified compensation. The Company may match less than 3%, but not below 1%, in
no more than two out of the past five years. Alternatively, the Company may
contribute 2% of compensation to all eligible employees, whether or not they
participate in the plan. The Company's contributions were $24 for both the
period from January 1, 1999 to October 25, 1999, and the year ended December 31,
1998.

7. RELATED-PARTY TRANSACTIONS

Noncurrent Receivable

The Company has a note receivable from a related entity. The related entity
and the Company have some common shareholders. The receivable consists of cash
advances, commissions receivable from sales made on behalf of the related entity
and shared expenses. Management believes that the amount is fully collectible
and repayments will begin in the year 2000. The balance was approximately $568
and $281 at October 25, 1999 and December 31, 1998, respectively.

Amounts charged to the related entity for the shared expenses, commissions
earned from the sales made on behalf of the related entity and cash advances to
the related entity were as follows:

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
OCTOBER 25, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Commission earned........................................... $83 $32
Salaries and bonuses........................................ 67 53
Other expenses.............................................. 41 63
Cash advances............................................... 96 102
</TABLE>

Current Receivables

The Company had a note receivable from one of its shareholders. Interest
accrued at 12% per annum and the monthly principal and interest payments were
$1. The note was paid in July 1999.

The Company had a $25 non-interest bearing receivable from a related entity
outstanding at December 31, 1998. The advance was repaid in July 1999.

Shareholder Notes Payable

In November of 1998, the Company repurchased six shares of no-par stock
from a shareholder for $38. Consideration for the repurchase was a note payable
with monthly payments of $3, maturing in October of 1999. Interest accrued at a
rate of 6% per annum.

Sublease Income

From October 1998 through August 1999, the Company sublet space to a
related entity. The terms of the sublease mirrored the terms of the master
lease. The related entity was responsible for all lease payments and related
property expenses.

PentaStar F-27
<PAGE> 83
ICM COMMUNICATIONS INTEGRATION, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Guarantees

In June 1997, a shareholder and director guaranteed the Company's line of
credit from SeaFirst Bank. Subsequent to December 31, 1998, the loan was
amended, to include among other things, additional shareholders and directors as
guarantors.

8. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is involved in litigation arising in the ordinary course of
business. It is the opinion of management that the outcome of this litigation
will not have a material effect on the financial position of the Company.

9. SUBSEQUENT EVENT

On October 26, 1999, the Company was merged into PentaStar. The purchase
consideration consisted of approximately $1,619 in cash, 165,000 shares of
PentaStar common stock and assumption of liabilities. Additional shares of
PentaStar common stock may be issued to one of the shareholders based upon the
relative earnings performance of the Company to that of other acquired companies
of PentaStar.

In determining the cash portion of the consideration, the purchase
agreement distinguishes, by definition, the liabilities of the Company at
October 25, 1999, between retained and non-retained liabilities. Non-retained
liabilities represent pre-acquisition liabilities deducted from the cash
consideration otherwise payable to the shareholders and consist of the following
at October 25, 1999:

<TABLE>
<S> <C>
Accounts payable and accrued expenses....................... $294
Income taxes payable........................................ 37
Shareholder note payable.................................... 29
Line of credit.............................................. 151
Related-party note payable.................................. 25
----
$536
====
</TABLE>

PentaStar F-28
<PAGE> 84

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
DMA Ventures, Inc., dba Access Communications:

We have audited the accompanying balance sheets of DMA Ventures, Inc. dba
Access Communications (a Colorado corporation) as of October 25, 1999 and
December 31, 1998, and the related statements of operations, shareholder's
equity and cash flows for the period from January 1, 1999 to October 25, 1999
and for the year ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DMA Ventures, Inc. as of
October 25, 1999 and December 31, 1998, and the results of its operations and
its cash flows for the period from January 1, 1999 to October 25, 1999 and for
the year ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

Denver, Colorado,
February 2, 2000.

PentaStar F-29
<PAGE> 85

DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
OCTOBER 25, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1 $ 83
Accounts receivable, net.................................. 319 179
Prepaid expenses and other................................ 20 46
Deferred income taxes..................................... 163 149
Net current assets of discontinued operations............. -- 60
---- ----
Total current assets................................... 503 517
---- ----
Property and equipment, net............................... 346 399
---- ----
Total assets........................................... $849 $916
==== ====
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Related party borrowings.................................. $ 4 $ 5
Current maturities of long-term borrowings................ 76 72
Current maturities of capital leases...................... 45 63
Line of credit............................................ 202 --
Accounts payable.......................................... 40 71
Accrued expenses.......................................... 182 161
Income taxes payable...................................... -- 82
Deferred revenue.......................................... 76 114
---- ----
Total current liabilities.............................. 625 568
---- ----
Long-term borrowings........................................ 87 185
Capital lease obligations................................... 9 18
Deferred income taxes....................................... 16 --
Commitments and contingencies Shareholder's equity:
Common stock, no par value; 25,000,000 shares authorized;
10,000,000 shares issued and outstanding............... 114 1
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued and outstanding........... -- --
Retained (deficit) earnings............................... (2) 144
---- ----
Total shareholder's equity............................. 112 145
---- ----
Total liabilities and shareholder's equity............. $849 $916
==== ====
</TABLE>

The accompanying notes to financial statements
are an integral part of these balance sheets.
PentaStar F-30
<PAGE> 86

DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS

STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
OCTOBER 25, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Advanced communications services.......................... $1,457 $2,038
Basic dial tone services.................................. 111 344
------ ------
1,568 2,382
------ ------
Costs and expenses:
Salaries and commissions.................................. 1,138 1,201
Other general and administrative expenses................. 479 577
------ ------
1,617 1,778
------ ------
Income (loss) from operations.......................... (49) 604
------ ------
Other (income) expense:
Interest income........................................... -- (3)
Interest expense.......................................... 37 52
Other expense............................................. 27 --
------ ------
Other (income) expense, net............................ 64 49
------ ------
Income (loss) from continuing operations before provision
for income taxes.......................................... (113) 555
Provision (benefit) for income taxes........................ (41) 212
------ ------
Net income (loss) from continuing operations................ (72) 343
Loss from discontinued operations (less applicable income
tax benefit of $42 and $219, respectively)................ (74) (370)
------ ------
Net loss............................................... $ (146) $ (27)
====== ======
</TABLE>

The accompanying notes to financial statements
are an integral part of these statements.
PentaStar F-31
<PAGE> 87

DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS

STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK RETAINED TOTAL
------------------- ------------------- EARNINGS SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT (DEFICIT) EQUITY
---------- ------ ---------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1997....................... 10,000,000 $ 1 -- $ -- $ 239 $ 240
Distributions to
shareholder............. -- -- -- -- (68) (68)
Net loss................... -- -- -- -- (27) (27)
---------- ---- ---------- ---- ----- -----
Balances, December 31,
1998....................... 10,000,000 1 -- -- 144 145
Contribution from
shareholder............. -- 113 -- -- -- 113
Net loss................... -- -- -- -- (146) (146)
---------- ---- ---------- ---- ----- -----
Balances, October 25,
1999....................... 10,000,000 $114 -- $ -- $ (2) $ 112
========== ==== ========== ==== ===== =====
</TABLE>

The accompanying notes to financial statements
are an integral part of these statements.
PentaStar F-32
<PAGE> 88

DMA VENTURES, INC.
DBA ACCESS COMMUNICATIONS

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
OCTOBER 25, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(146) $ (27)
Adjustments to reconcile net loss to net cash used in
operating activities --
Deferred income tax provision.......................... 2 203
Depreciation........................................... 62 79
Provision for uncollectible accounts................... 27 10
Changes in operating assets and liabilities --
Accounts receivable, net............................. (167) (65)
Prepaid expenses and other........................... 26 (17)
Payables and accrued expenses........................ (92) (340)
Deferred revenue..................................... (38) 19
Discontinued operations.............................. 60 (86)
----- -----
Net cash used in operating activities............. (266) (224)
----- -----
Cash flows from investing activities:
Purchase of property and equipment........................ (35) (13)
Proceeds from sale of property and equipment.............. 26 --
----- -----
Net cash used in investing activities............. (9) (13)
----- -----
Cash flows from financing activities:
Increase in line of credit................................ 202 --
Principal payments on related-party borrowings............ (1) (67)
Principal payments on long-term borrowings................ (94) (49)
Payments on capital lease................................. (27) (87)
Distributions to shareholder.............................. -- (68)
Capital contribution...................................... 113 --
----- -----
Net cash provided by (used in) financing
activities..................................... 193 (271)
----- -----
Net decrease in cash and cash equivalents................... (82) (508)
Cash and cash equivalents, beginning of period.............. 83 591
----- -----
Cash and cash equivalents, end of period.................... $ 1 $ 83
===== =====
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 37 $ 67
===== =====
Cash paid for taxes....................................... $ -- $ 12
===== =====
</TABLE>

The accompanying notes to financial statements
are an integral part of these statements.
PentaStar F-33
<PAGE> 89

DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)

1. BUSINESS AND ORGANIZATION

The financial statements reflect the historical cost of assets and
liabilities and results of operations of DMA Ventures, Inc. dba Access
Communications, a Colorado corporation (the "Company") incorporated on August
10, 1993. Prior to May 1, 1999, the Company was a network integrator, focused on
converging technologies for voice, data and video communication ("Hardware
Business") and a sales agent for U S WEST Communications, Inc. ("U S WEST"), a
regional Bell operating company. During 1999, the Company decided to discontinue
the operations of the Hardware Business. On October 26, 1999, PentaStar
Communications, Inc. ("PentaStar"), through a wholly-owned subsidiary, closed an
Agreement and Plan of Merger, pursuant to which the Company was merged into
PentaStar.

Fiscal Year

The Company's fiscal year ends on July 31. The accompanying financial
statements have been conformed to a December 31 year end in connection with the
acquisition of the Company by PentaStar.

Dependence Upon U S WEST

The Company acts as a sales agent for and generated all of its continuing
revenues from U S WEST. The loss of the relationship with U S WEST or a material
diminishment in the volume of business with U S WEST would adversely affect the
Company. Management believes the Company could become a sales agent for another
provider with comparable terms if it were to lose its relationship with U S
WEST.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Property and Equipment

PentaStar F-34
<PAGE> 90
DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Property and equipment consists of the following:

<TABLE>
<CAPTION>
ESTIMATED USEFUL OCTOBER 25, DECEMBER 31,
LIFE IN YEARS 1999 1998
---------------- ----------- ------------
<S> <C> <C> <C>
Computer and telephone equipment.............. 3-6 $282 $250
Office furniture and equipment................ 5-10 111 112
Leasehold improvements........................ 3-10 139 140
Vehicles...................................... 5 39 74
---- ----
571 576
Less: accumulated depreciation................ (225) (177)
---- ----
Property and equipment, net................... $346 $399
==== ====
</TABLE>

Depreciation expense was $62 and $79 for the period from January 1, 1999 to
October 25, 1999, and for the year ended December 31, 1998, respectively.

Revenue Recognition

Revenue and the related commissions expense are recognized in the month
when services are installed by U S WEST. Deferred revenue in the accompanying
balance sheets represents cash collected from U S WEST on uninstalled services.

The Company has not received payment for certain installed services of $247
and $150, as of October 25, 1999, and December 31, 1998, respectively, due to a
dispute with U S WEST. The delay in payment for these disputed items has been
due to deficiencies in documentation between the Company and U S WEST and
discrepancies in the amounts believed receivable from U S WEST. An allowance of
$115 and $180 at October 25, 1999, and December 31, 1998, respectively, has been
established for the Company's receivables.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
which could change in the near future include the allowance for disputed
receivables.

Fair Value of Financial Instruments

The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and borrowings. The carrying value of
these financial instruments in the accompanying balance sheets approximates
their fair value because of their short-term nature.

Concentration of Credit Risk

The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash and accounts receivable. The Company maintains
their cash in institutions which the Company considers of high credit quality.
The balances, at times, may exceed federally insured limits. Credit risk with
respect to accounts receivable is limited due to the credit worthiness of the
Company's primary customer, U S WEST. Management does not anticipate significant
credit losses from such financial instruments.

PentaStar F-35
<PAGE> 91
DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Asset Impairment

The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Long-lived assets which are held and used in operations would be
impaired if the undiscounted future cash flows related to the asset did not
exceed the net book value. If an asset is determined to be impaired, it is
written down to its fair value.

Advertising and Promotion

Advertising and promotional related expenses are charged to operations when
incurred or the first time the advertising appears. Advertising expense for the
period from January 1, 1999 to October 25, 1999, and for the year ended December
31, 1998 was not significant.

Income Taxes

Stock-Based Compensation

Reclassifications

Certain prior year amounts have been reclassified to conform to current
year classifications.

Recent Accounting Pronouncements

3. BORROWINGS

Line of Credit

The Company had a line of credit with Colorado Business Bank, N.A. which
permitted the Company to borrow up to $350 at a rate equal to the prime rate
plus 1% (9.25% and 8.75% at October 25, 1999 and December 31, 1998,
respectively). The line of credit was renewed on a yearly basis. Borrowings
under the agreement were collateralized by all accounts, inventory, equipment
and general intangibles of the Company, as well as shareholder owned marketable
securities and the shareholder's life insurance policy. The Company's borrowings
were limited to 75% of the total accounts receivable balance less than ninety
days (approximately $154 borrowing limitation at October 25, 1999). At October
25, 1999, there was an outstanding balance of

PentaStar F-36
<PAGE> 92
DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

$202 under this line. Subsequent to October 25, 1999, in connection with the
acquisition of the Company by PentaStar, the line of credit was paid in full.

Notes Payable

At October 25, 1999, and December 31, 1998 notes payable consisted of the
following:

<TABLE>
<CAPTION>
OCTOBER 25, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Note payable to Colorado Business Bank, N.A., Denver,
Colorado; interest at 9.5% per annum; collateralized by
all accounts, inventory, equipment, general intangibles,
and shareholder owned marketable securities; cross
collateralized with the line of credit; co-borrower with
the Company's shareholder and an officer; payable in
monthly installments of $6.3; due April 2002.............. $163 $220
Note payable to Lexus Financial Services Corporation;
interest at 8.5% per annum; collateralized by a vehicle;
payable in monthly principal and interest installments of
$.884; due April 2002. Paid October 1999.................. -- 31
Note payable to Colorado Business Bank, N.A., Littleton,
Colorado; interest at 10.5% per annum; collateralized by a
vehicle; payable in monthly principal and interest
installments of $.798; paid August 1999................... -- 6
Note payable to shareholder; interest at the annual federal
rate (5.5% and 5.1% at October 25, 1999 and December 31,
1998, respectively), unsecured............................ 4 5
---- ----
167 262
Less: current maturities.................................... (80) (77)
---- ----
Long-term borrowings, net of current maturities............. $ 87 $185
==== ====
</TABLE>

Subsequent to October 25, 1999, in connection with the acquisition of the
Company by PentaStar, outstanding balances under notes payable were paid in
full.

Capital Leases

The Company leased certain office furniture and equipment under agreements
which were classified as capital leases. Cost of such assets at October 25,
1999, and December 31, 1998 totaled $258 and $237, respectively and accumulated
amortization totaled $98 and $76, respectively. Subsequent to October 25, 1999,
in connection with the acquisition of the Company by PentaStar, all capital
lease obligations were paid in full.

4. OPERATING LEASES:

The Company leases office and warehouse facilities from its shareholder and
other office space and equipment from unrelated parties under long-term leases
expiring in various years through the year 2001. Generally, the Company is
required to pay executory costs such as property taxes, maintenance and
insurance.

PentaStar F-37
<PAGE> 93
DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

As of October 25, 1999, future minimum lease payments required under
operating leases were as follows:

<TABLE>
<CAPTION>
RELATED
OTHERS PARTIES
------ -------
<S> <C> <C>
For the period from October 26, 1999 to December 31, 1999... $ 8 $ 6
Years ending December 31,
2000...................................................... 27 36
2001...................................................... -- 36
2002...................................................... -- --
2003...................................................... -- --
Thereafter................................................ -- --
--- ---
$35 $78
=== ===
</TABLE>

Total rent expense charged to income for leases totaled $73 and $79 for the
period from January 1, 1999 to October 25, 1999, and for the year ended December
31, 1998, respectively, of which, $30 and $36 represents rent expense for
related-party leases, respectively.

5. INCOME TAXES:

The (benefit) provision for income taxes consists of the following:

<TABLE>
<CAPTION>
OCTOBER 25, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Current (benefit):
Federal................................................... $(74) $(182)
State..................................................... (11) (28)
---- -----
Total current.......................................... (85) (210)
Deferred provision:
Federal................................................... 2 176
State..................................................... -- 27
---- -----
Total deferred......................................... 2 203
---- -----
Benefit for income taxes.................................. $(83) $ (7)
==== =====
</TABLE>

A reconciliation of the statutory income tax rate to the benefit for income
taxes from continuing operations is as follows:

<TABLE>
<CAPTION>
OCTOBER 25, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Federal income tax at statutory rate........................ 34.0% 34.0%
State income taxes, net of federal tax effect............... 3.3 3.3
Other....................................................... (1.0) .9
---- ----
Total provision............................................. 36.3% 38.2%
==== ====
</TABLE>

PentaStar F-38
<PAGE> 94
DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Deferred income taxes result from differences in the tax basis of assets
and liabilities and their carrying amounts for financial reporting purposes. The
tax effects of these temporary differences, representing deferred tax assets and
liabilities, result principally from the following:

<TABLE>
<CAPTION>
OCTOBER 25, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accounts receivable and allowance......................... $(114) $(52)
Accrued expenses.......................................... 59 127
Net operating loss carry forward.......................... 218 56
Other..................................................... -- 18
----- ----
Net current deferred tax asset......................... $ 163 $149
===== ====
Deferred tax liability:
Property basis............................................ $ (16) $ --
</TABLE>

The Company has generated net operating losses of approximately $585 for
federal income tax purposes, expiring in various years from 2013 to 2018.

6. STOCK OPTION PLAN

In February 1998, the Company adopted a stock option plan, which provides
for the granting of options to employees, directors and consultants. A maximum
of 700,000 shares of common stock may be issued under the plan. The option
price, number of shares and grant date are determined at the discretion of the
Company's Board of Directors. The exercise price of the options granted has been
established at no less than the fair value at the date of grant. Options granted
under the plan expire ten years after the grant date and vest 1/12th on the last
day of each fiscal quarter.

A summary of option transactions for the year ended December 31, 1998 and
for the period from January 1, 1999 to October 25, 1999 and options outstanding
at October 25, 1999 and December 31, 1998 are shown below:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options Granted in 1998..................................... 551,500 $0.33
Exercised................................................... -- --
-------- -----
Outstanding at December 31, 1998............................ 551,500 0.33
Options Granted in 1999..................................... 22,500 0.33
Forfeited................................................... (310,000) 0.33
Exercised................................................... -- --
-------- -----
Outstanding at October 25, 1999............................. 264,000 $0.33
======== =====
Exercisable at December 31, 1998............................ 140,250 $0.33
======== =====
Exercisable at October 25, 1999............................. 121,792 $0.33
======== =====
</TABLE>

PentaStar F-39
<PAGE> 95
DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- --------------------------
WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE LIFE EXERCISE EXERCISE
PRICE NUMBER (IN YEARS) PRICE NUMBER PRICE PRICE
--------------------- -------- ---------- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
$0.33 241,500 8.42 $0.33 119,501 $0.33 $0.33
$0.33 22,500 9.57 $0.33 2,291 $0.33 $0.33
------- ---- ----- ------- ----- -----
264,000 8.52 $0.33 121,792 $0.33 $0.33
======= ==== ===== ======= ===== =====
</TABLE>

The fair value of the options granted was $0.06 and $0.05 per share for
options granted during 1999 and 1998, respectively. Had the Company's stock
based compensation cost been determined using their fair value at the grant
date, the Company's net income would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
OCTOBER 25, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Net Income:
As reported............................................... $(146) $(27)
Pro forma................................................. (150) (32)
</TABLE>

The above fair value was determined using the minimum value method (no
volatility assumed), a risk free interest rate of 5.6% and 4.55% for 1999 and
1998, respectively, an expected life of four years and no dividend payout.

7. RETIREMENT SAVING PLAN

The Company maintains a qualified retirement savings plan under Section
401(k) of the Internal Revenue Code. Under the plan, employees may elect to
defer up to 15% of their compensation, subject to Internal Revenue Service
limits. The plan allows for discretionary contributions to be made by the
Company. No Company contributions were made for the period from January 1, 1999
to October 25, 1999, or for the year ended December 31, 1998. The plan is
administered by a third party.

8. COMMITMENTS AND CONTINGENCIES

Guarantees

In December 1995, the Company, acting as a co-borrower with its shareholder
and an officer, obtained a loan from Key Bank ("Key Bank"). The funds were used
to purchase, among other items, real estate owned by the shareholder and
officer. The loan was secured by the real estate, through a Deed of Trust dated
December 28, 1995. In May 1996, the U.S. Small Business Administration ("SBA")
guaranteed the Key Bank loan, which resulted in the Deed of Trust being
transferred to the SBA. In August 1998, the Key Bank debt balance was paid in
full, with proceeds obtained by the shareholder and officer from the Colorado
Business Bank. The Company is a guarantor on the Colorado Business Bank note.
The real estate securing the note has been leased by the Company since April
1996.

The Colorado Business Bank note bears interest at 9% and is due in monthly
principal and interest installments of $1. The note is secured by a first deed
of trust and an assignment of rents between the Company and its shareholder. In
November 1999, the shareholder paid off the outstanding balance of $116 and,
accordingly, the Company no longer guarantees the note.

PentaStar F-40
<PAGE> 96
DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

Litigation

The Company is involved in litigation arising in the ordinary course of
business. It is the opinion of management that the outcome of any such
litigation will not have a material effect on the financial statements of the
Company.

9. DISCONTINUED OPERATIONS

During February 1999, management approved a formal plan to dispose of the
Company's Hardware Business. Operations related to this business ceased on April
30, 1999, with the completion of all installations. The Company reduced its
labor force, eliminated all inventories, and wrote-down the value of the
property and equipment. As a result of this decision, the Company has reflected
the operations of the Hardware Business as discontinued operations in the
accompanying financial statements.

Net current assets of discontinued operations as of December 31, 1998 are
as follows:

<TABLE>
<S> <C>
Current Assets:
Accounts receivable, net.................................. $284
Inventory................................................. 178
----
Total current assets................................... 462
----
Current Liabilities:
Accounts payable and accrued expenses..................... $274
Deferred revenue.......................................... 128
----
Total current liabilities.............................. $402
----
Net assets of discontinued operations.................. $ 60
====
</TABLE>

The results of discontinued operations were as follows:

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
OCTOBER 25, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues.................................................... $ 817 $3,223
Costs and expenses.......................................... 933 3,812
----- ------
Loss from discontinued operations......................... $(116) $ (589)
===== ======
</TABLE>

10. SUBSEQUENT EVENT

On October 26, 1999, the Company was merged into PentaStar. The purchase
consideration consisted of approximately $189 in cash, 205,000 shares of
PentaStar common stock and assumption of liabilities. Additional shares of
PentaStar common stock may be issued to one of the shareholders based upon the
relative earnings performance of the Company to that of other acquired companies
of PentaStar.

PentaStar F-41
<PAGE> 97
DMA VENTURES, INC. DBA ACCESS COMMUNICATIONS

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)

liabilities represent preacquisition liabilities deducted from the cash
consideration otherwise payable to the sole shareholder and consist of the
following at October 25, 1999:

<TABLE>
<S> <C>
Related party borrowings.................................... $ 4
Long term borrowings........................................ 163
Capital leases.............................................. 54
Line of credit.............................................. 202
Accounts payable............................................ 19
Accrued expenses............................................ 56
----
$498
====
</TABLE>

PentaStar F-42
<PAGE> 98
APPENDIX A

PURCHASE AGREEMENT

AMONG

PENTASTAR COMMUNICATIONS, INC.,

OC MERGERCO 4, INC.,

VSI NETWORK SOLUTIONS, INC.

AND

THE SHAREHOLDER

VSI NETWORK SOLUTIONS, INC.

AS OF FEBRUARY 18, 2000

<PAGE> 99

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Definitions........................................................................................................... 1

2. Purchase and Sale.................................................................................................... 1
2.1. Basic Transaction........................................................................................... 1
2.2. Assumption of Certain Liabilities........................................................................... 1
2.3. Purchase Price; Payment..................................................................................... 2
2.4. Sales Taxes, Etc............................................................................................ 4
2.5. The Closing................................................................................................. 4
2.6. Deliveries at the Closing................................................................................... 4

3. Representations and Warranties....................................................................................... 4
3.1. Representations and Warranties of the Company and the Shareholder........................................... 4
3.2. Representations and Warranties of PentaStar................................................................. 16
3.3. Survival of Representations................................................................................. 17
3.4. Representations as to Knowledge............................................................................. 17

4. Pre-Closing Covenants................................................................................................ 18
4.1. General..................................................................................................... 18
4.2. Operation and Preservation of Business...................................................................... 18
4.3. Full Access................................................................................................. 18
4.4. Notice of Developments...................................................................................... 18
4.5. Exclusivity................................................................................................. 18
4.6. Announcements; Securities Law Restrictions.................................................................. 18
4.7. Bulk Sales Laws............................................................................................. 19
4.8 Shareholders' Meeting....................................................................................... 19
4.9 Specified Consents.......................................................................................... 19
4.10 Termination Expenses........................................................................................ 20

5. Post-Closing Covenants............................................................................................... 20
5.1. Further Assurances.......................................................................................... 20
5.2. Transition.................................................................................................. 20
5.3. Cooperation................................................................................................. 20
5.4. Confidentiality............................................................................................. 20
5.5. Financial Statements........................................................................................ 21
5.6. Satisfaction of Liabilities................................................................................. 21
5.7. Repurchase of Unpaid Receivables............................................................................ 21
5.8. Transfer Restrictions....................................................................................... 22

6. Conditions to Closing................................................................................................ 23
6.1. Conditions to Obligation of PentaStar....................................................................... 23
</TABLE>

<PAGE> 100

<TABLE>
<S> <C>
6.2. Conditions to Obligation of the Company and the Shareholder................................................. 25

7. Remedies for Breaches of This Agreement.............................................................................. 25
7.1. Indemnification Provisions for Benefit of PentaStar......................................................... 25
7.2. Indemnification Provisions for Benefit of the Company and the Shareholder................................... 27
7.3. Matters Involving Third Parties............................................................................. 28
7.4. Right of Offset............................................................................................. 29
7.5. Other Remedies.............................................................................................. 29

8. Termination.......................................................................................................... 29
8.1. Termination of Agreement.................................................................................... 29
8.2. Effect of Termination....................................................................................... 29
8.3. Confidentiality............................................................................................. 29

9. Miscellaneous........................................................................................................ 30
9.1. No Third-Party Beneficiaries................................................................................ 30
9.2. Entire Agreement............................................................................................ 30
9.3. Succession and Assignment................................................................................... 30
9.4. Counterparts................................................................................................ 30
9.5. Headings.................................................................................................... 30
9.6. Notices..................................................................................................... 30
9.7. Governing Law............................................................................................... 31
9.8. Amendments and Waivers...................................................................................... 31
9.9. Severability................................................................................................ 31
9.10. Expenses.................................................................................................... 31
9.11. Arbitration................................................................................................. 31
9.13. Incorporation of Exhibits................................................................................... 32
9.14. Shareholder's Agent......................................................................................... 32
</TABLE>

<PAGE> 101

Exhibits:

Exhibit 1.1(a) Exhibit 3.1(h)(i)
Exhibit 1.1(b) Exhibit 3.1(h)(ii)
[Exhibit 1.1(c) is intentionally omitted.] Exhibit 3.1(i)(i)
Exhibit 1.1(d)(i) Exhibit 3.1(i)(ii)
Exhibit 1.1.(d)(ii) Exhibit 3.1(k)
Exhibit 1.1(e) Exhibit 3.1(l)(i)
Exhibit 1.1(f) Exhibit 3.1(l)(ii)
Exhibit 1.1(g) Exhibit 3.1(m)
Exhibit 1.1(h) Exhibit 3.1(n)(ii)
Exhibit 1.1(i) Exhibit 3.1(o)(i)
Exhibit 1.1(j) Exhibit 3.1(o)(ii)
Exhibit 2.3(b)(i) Exhibit 3.1(o)(iii)
Exhibit 2.3(b)(iii) Exhibit 3.1(r)
Exhibit 3.1(b)(ii) Exhibit 3.1(s)
Exhibit 3.1(c) Exhibit 3.1(t)
Exhibit 3.1(d)(i)(A) Exhibit 3.1(u)(ii)
Exhibit 3.1(d)(i)(B) Exhibit 3.2(a)(ii)
Exhibit 3.1(d)(ii)(A) Exhibit 3.2(b)(i)
Exhibit 3.1(d)(ii)(B) Exhibit 4.9(a)
Exhibit 3.1(e)(i) Exhibit 4.9(b)
Exhibit 3.1(e)(ii)(F) Exhibit 6.1(h)
Exhibit 3.1(e)(iii) Exhibit 6.2(c)

<PAGE> 102

PURCHASE AGREEMENT

This Purchase Agreement is entered into as of February 18, 2000 among
PentaStar Communications, Inc., a Delaware corporation ("PentaStar"), OC
Mergerco 4, Inc., a Delaware corporation (the "Acquiror"), VSI Network
Solutions, Inc., a Delaware corporation (the "Company"), and the Person
identified as the Shareholder on the signature page hereto (the "Shareholder").

Recitals

A. The Shareholder presently owns approximately 67%, and upon the
Closing will own all, of the issued and outstanding capital stock of the
Company.

B. The Acquiror is a newly-formed, wholly-owned subsidiary of
PentaStar. The Acquiror desires to acquire from the Company, and the Company
desires to sell to the Acquiror, substantially all of the Company's assets as
provided in this Agreement.

C. PentaStar, the Acquiror, the Company and the Shareholder
desire to make certain representations, warranties and agreements in connection
with such transaction and also desire to set forth various conditions precedent
thereto.

Agreement

NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties and covenants set forth herein and other good and
valuable consideration, the receipt and sufficiency of which are acknowledged,
the parties agree as follows:

1. Definitions. The terms defined in Exhibit 1.1(a) shall have the
meanings designated therein.

2. Purchase and Sale.

2.1. Basic Transaction.

(a) Subject to the terms and conditions set forth in this
Agreement, the Acquiror agrees to purchase from the Company, and the Company
agrees to sell to the Acquiror, all the Acquired Assets free and clear of any
Tax or Encumbrance (other than the Permitted Encumbrances in the event that,
subject to Section 4.10, the Acquiror has not paid off the debt to RFC Capital
Corporation as of the Closing), for the consideration specified in Section 2.3.
The Acquiror will have no obligation under this Agreement to purchase less than
all of the Acquired Assets.

(b) The following documents have been executed and
delivered by the parties thereto concurrently with the execution of this
Agreement: (i) the Assignment and Assumption Agreement; (ii) the Bill of Sale;
(iii) the Employment Agreement; (iv) the Escrow Agreement; (v) the
Noncompetition Agreement; (vi) the Rowley Payment Agreement; (vii) the Voting
Agreement; and (viii) the documents specified in Sections 6.1(f)(ii) (other than
with respect to the Required Vote) and 6.1(o).

<PAGE> 103
2.2. Assumption of Certain Liabilities. Subject to the terms and
conditions set forth in this Agreement, the Acquiror agrees to assume and become
responsible at the Closing for all of the Assumed Liabilities. The Acquiror will
not assume or have any responsibility with respect to any other Liability not
expressly included within the definition of Assumed Liabilities.

2.3. Purchase Price; Payment.

(a) The consideration payable by the Acquiror to the
Company for the Acquired Assets will consist of (i) cash in an amount of
$2,100,000; (ii) such number of PentaStar Shares (rounded to the nearest whole
share) as have an aggregate Fair Market Value as of the date of this Agreement
of $950,000 (such number of shares being referred to as the "Closing Shares");
(iii) the assumption of the Assumed Liabilities; and (iv) the Earn-Out Amount
payable pursuant to Section 2.3(b) (collectively the "Purchase Price"). At the
Closing, the Acquiror will (i) pay to the Company by wire transfer to an account
designated by the Company $1,600,000 of the cash portion of the Purchase Price,
(ii) deposit the remaining $500,000 of the cash portion of the Purchase Price
(such $500,000 is referred to as the "Accounts Receivable Escrow Fund") and the
stock certificates representing the Closing Shares into the Escrow Account with
the Escrow Agent (which Closing Shares shall be issued by PentaStar in the name
of the Company and contributed by PentaStar to the Acquiror immediately prior to
the Closing) and (iii) assume the Assumed Liabilities. The Accounts Receivable
Escrow Fund, the Closing Shares and the other property held in the Escrow
Account shall be held and disbursed according to this Agreement and the Escrow
Agreement.

(b) In addition to the cash portion of the Purchase Price
and the Closing Shares payable and issuable at the Closing pursuant to Section
2.3(a), the Company shall be entitled to receive the Earn-Out Amount determined
and payable as provided in this Section 2.3(b).

(i) PentaStar agrees that, during the Earn-Out
Period, the Acquiror will conduct the operations represented by the Acquired
Assets in the ETI Region as a separate subsidiary of PentaStar with no other
operations. PentaStar agrees that, during the Earn-Out Period, it will not
allocate any corporate expense or otherwise cause the ETI Region to incur any
corporate or other expense not specifically related to the business of the ETI
Region.

(ii) As soon as reasonably practicable after the
end of the Earn-Out Period, and in any event by March 31, 2001, PentaStar will
cause the independent auditors who audit its financial statements for the year
2000 to prepare an audited income statement of the Acquiror for the Earn-Out
Period and a written calculation of the Earn-Out Amount (collectively, the
"Earn-Out Financial Statements"). PentaStar will promptly provide a copy of the
Earn-Out Financial Statements to the Company. Within 20 days after receipt of
the Earn-Out Financial Statements, each of PentaStar and the Company will, in a
written notice to the other, either accept the Earn-Out Financial Statements or
object to them by describing in reasonably specific detail any proposed
adjustments to the Earn-Out Financial Statements and the estimated amounts of
and reasons for such proposed adjustments. The failure by PentaStar or the
Company to object to the Earn-Out Financial Statements within such 20-day period
will be deemed to be an acceptance by such Person of the Earn-Out Financial
Statements. If any adjustments to the Earn-Out Financial Statements are proposed
by PentaStar or the Company within such 20-day period, the dispute shall be
resolved as provided in Section 2.3(b)(v). The reasonable fees and expenses of
the independent auditors for the preparation of the Earn-Out Financial
Statements, other than those associated with the normal year-end audit of
PentaStar or the Acquiror, shall be paid 50% by PentaStar and 50% by the
Company.

A-2
<PAGE> 104

(iii) Within 10 Business Days after the later of
the acceptance of the Earn-Out Financial Statements by PentaStar and the Company
or the resolution of any disputes under Section 2.3(b)(v), as the case may be,
the Acquiror shall pay the Earn-Out Amount, if any, to the Company. The Earn-Out
Amount shall be paid, in PentaStar's sole discretion, in cash or PentaStar
Common Stock, or any combination thereof. If any portion of the Earn-Out Amount
is paid in PentaStar Common Stock, the number of shares of PentaStar Common
Stock to be issued (which shall be rounded to the nearest whole share) will be
determined by dividing (A) the Earn-Out Amount that is being paid in PentaStar
Common Stock by (B) a per share value of PentaStar Common Stock that is equal to
90% of the Fair Market Value as of the date such Earn-Out Amount is paid, and
such shares shall be issued by PentaStar in the name of the Company or Brian S.
Rowley, as the case may be, in the amounts determined as set forth below, and
contributed by PentaStar to the Acquiror immediately prior to the delivery of
such shares by the Acquiror. If any shares of PentaStar Common Stock are issued
in the name of the Company pursuant to this Section 2.3(b)(iii), the Acquiror
shall deposit the stock certificates representing such shares into the Escrow
Account with the Escrow Agent. If the Earn-Out Amount becomes payable by the
Acquiror, the Company shall pay to Mr. Rowley (however delivery may be delayed
if such shares are in escrow) the amount determined pursuant to Exhibit
2.3(b)(iii) (and if the Earn-Out Amount is comprised of a combination of cash
and PentaStar Common Stock, then Mr. Rowley shall receive cash and PentaStar
Common Stock from the Company in the same proportions as the cash and PentaStar
Common Stock comprising the Earn-Out Amount (the shares of PentaStar Common
Stock, if any, issued in the name of Mr. Rowley are referred to as the "Rowley
Shares")). The cash portion of the Earn-Out Amount shall be paid by wire
transfer to an account designated by the Company.

(iv) In the event that PentaStar sells the
operations conducted by the Acquiror prior to the end of the Earn-Out Period,
PentaStar shall require the purchaser to continue to account for such operations
separately and agree to assume the obligation of the Acquiror to pay the
Earn-Out Amount as provided in this Section 2.3(b), including the obligation to
comply with the provisions of Section 2.3(b)(i).

(v) If any adjustments to the Earn-Out Financial
Statements are proposed by PentaStar or the Company pursuant to Section
2.3(b)(ii), PentaStar and the Company will negotiate in good faith to resolve
any dispute, provided that if the dispute is not resolved within 10 days
following the receipt of the proposed adjustments then PentaStar and the Company
will retain the Boston, Massachusetts office of (or office most geographically
proximate to Boston, Massachusetts) BDO Seidman LLC to resolve such dispute,
which resolution will be final and binding. The fees and expenses of BDO Seidman
LLC will be paid 50% by PentaStar and 50% by the Company, and BDO Seidman LLC
will be retained under a retention letter executed by the parties that specifies
that the determination by said firm of any such disputes will be resolved in
accordance with this Agreement (including the definitions of "Earn-Out Amount,"
"Earn-Out Period," "Earn-Out Period EBITA" and "EBITA" set forth in this
Agreement), by choosing the position of Arthur Andersen L.L.P. or the objecting
party under Section 2.3(b)(ii), without change, within 30 days of the expiration
of the 20-day period described in Section 2.3(b)(ii).

(c) The allocation of the total consideration for the
Acquired Assets for Tax reporting purposes shall be as follows: (i) to cash and
cash equivalents, the amount thereof; (ii) to Closing Accounts Receivable, the
amount determined by the Acquiror from the Company's, records, adjusted by the
Acquiror to conform to GAAP; (iii) to inventory, the amount determined by the
Acquiror from the Company's records, adjusted by the Acquiror to conform to
GAAP; (iv) to leasehold improvements, the greater of fair

A-3
<PAGE> 105

market value (determined by the Acquiror from its historical experience, or in
the Acquiror's sole discretion, by independent appraisal) or the current book
value thereof as reflected in the Company's records, adjusted by the Acquiror to
conform to GAAP; and (v) the entire remaining balance of the consideration shall
be allocated to the goodwill of the Company's business or, at the Acquiror's
sole discretion, to the other intangible assets which are included in the
Acquired Assets. The parties acknowledge that such allocations for Tax reporting
purposes were determined pursuant to arm's length bargaining regarding the fair
market values of the Acquired Assets in accordance with the provisions of Code
Section 1060. The parties agree to be bound by these allocations for all
federal, state and local Tax reporting purposes, including for purposes of
determining any income, gain, loss, depreciation or other deductions in respect
of such assets. The parties further agree to prepare and file all Tax Returns
(including Form 8594 under the Code) in a manner consistent with such
allocations.

2.4. Sales Taxes, Etc. The Company will pay all sales, use,
transfer, licensing and other Taxes, fees and charges payable in respect of or
as a result of the sale and transfer of the Acquired Assets to the Acquiror
pursuant to this Agreement.

2.5. The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Sherman &
Howard L.L.C. at 10:00 a.m. Denver, Colorado time on the date on which the
Required Vote is obtained. The date upon which the Closing occurs is the
"Closing Date." All transactions contemplated by this Agreement will be
effective at 12:01 a.m. Eastern Standard Time on such date between January 1,
2000 and May 1, 2000 as the Acquiror shall determine (such effective time being
the "Effective Date").

2.6. Deliveries at the Closing. At the Closing, (a) the Company
will deliver to PentaStar the various certificates, instruments and documents,
and take the actions, referred to in Section 6.1 and (b) PentaStar will deliver
to the Company the various certificates, instruments and documents, and take the
actions, referred to in Section 6.2.

3. Representations and Warranties.

3.1. Representations and Warranties of the Company and the
Shareholder. The Company and the Shareholder jointly and severally represent and
warrant to PentaStar and the Acquiror that the statements contained in this
Section 3.1 are correct and complete as of the date of this Agreement and will
be correct and complete as of the Effective Date and as of the date of the
Closing (as though made then and as though the Effective Date and the date of
the Closing were then substituted for the date of this Agreement throughout this
Section 3.1). For purposes of this Section 3.1, (a) with respect to the
representations given as of the date of this Agreement, the VSN/UST Acquisition
shall be deemed not to have occurred as of the date of this Agreement and (b)
the Company and the Shareholder are not making any representations or warranties
with respect to UST, VNS or the UST/VNS Assets or business as of any date after
the date of this Agreement, as the UST/VNS Assets will be owned by the Acquiror
after the date of this Agreement.

(a) Organization, Good Standing, Etc. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and is qualified and authorized to do business as a
foreign corporation and is in good standing in Rhode Island, Massachusetts, New
York and New Jersey, which are the only jurisdictions in which the nature of the
business conducted by it or the properties owned, leased or operated by it make
such qualification necessary. The Company has all requisite

A-4
<PAGE> 106

corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted.

(b) Ownership and Capitalization.

(i) The authorized capital stock of the Company
consists of 1,000,000 shares of common stock, $.01 par value. The Shareholder
owns, beneficially and of record, free and clear of any Encumbrance or Tax,
1,000,000 shares of the common stock, $.01 par value, of the Company (the
"Company Shares"), and the Company Shares constitute all of the issued and
outstanding capital stock of the Company.

(ii) Except as set forth on Exhibit 3.1(b)(ii),
the Company has no Subsidiaries and no capital stock, securities convertible
into capital stock, or any other equity interest in any other corporation,
partnership, limited partnership, limited liability company, association, joint
venture or other Person. Each of the entities listed on Exhibit 3.1(b)(ii) is
wholly-owned, directly or indirectly, by the Company, is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation, as set forth on Exhibit 3.1(b)(ii), and is qualified to do
business as a foreign corporation and is in good standing in the states set
forth on Exhibit 3.1(b)(ii), which are the only jurisdictions in which the
nature of the business conducted by it or the properties owned, leased or
operated by it make such qualification necessary. No Person has any right to
acquire any interest in any Subsidiary and there are no authorized or
outstanding stock appreciation, phantom stock, profit participation or similar
rights with respect to any Subsidiary. Each such Subsidiary has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted.

(c) Authority; No Violation. This Agreement and the Other
Seller Agreements and the consummation of the transactions contemplated hereby
and thereby have been duly and unanimously approved by the board of directors
and shareholders of the Company, and this Agreement and the Other Seller
Agreements to which the Company is a party have been duly executed and delivered
by the Company. The Company has full corporate power and authority to execute,
deliver and perform this Agreement and the Other Seller Agreements to which the
Company is a party, each Person (other than PentaStar or the Acquiror) who is a
party to any Other Seller Agreement has full and absolute right, power,
authority and legal capacity to execute, deliver and perform this Agreement and
all Other Seller Agreements to which such Person is a party, and this Agreement
constitutes, and the Other Seller Agreements will when executed and delivered
constitute, the legal, valid and binding obligations of, and shall be
enforceable in accordance with their respective terms against, the Company and
each such Person who is a party thereto. The execution, delivery and performance
of this Agreement and the Other Seller Agreements and the consummation of the
transactions contemplated hereby and thereby will not (i) violate any Legal
Requirement to which the Company or any Person (other than PentaStar or the
Acquiror) who is a party to any Other Seller Agreement is subject or any
provision of the articles of incorporation or bylaws of the Company or of any
such Person, or (ii) violate, with or without the giving of notice or the lapse
of time or both, or conflict with or result in the breach or termination of any
provision of, or constitute a default under, or give any Person the right to
accelerate any obligation under, or result in the creation of any Encumbrance
upon any properties, assets or business of the Company or of any such Person
pursuant to, any indenture, mortgage, deed of trust, lien, lease, license,
Permit, agreement, instrument or other arrangement to which the Company or any
such Person is a party or by which the Company or any such Person or any of
their respective assets and properties is bound or subject. Except for the
Required Vote, the consents listed on Exhibit 4.9(a) and the Specified

A-5
<PAGE> 107

Consents, neither the Company, nor any Person (excluding PentaStar or the
Acquiror) need give any notice to, make any filing with or obtain any
authorization, consent or approval of any Governmental Authority or other Person
in order for the parties to consummate the transactions contemplated by this
Agreement and the Other Seller Agreements. Except for the Required Vote, no
approval of the shareholders of VSI Enterprises, Inc. is required for the
execution, delivery or performance by the Company or VSI Enterprises, Inc. of
this Agreement or any Other Seller Agreement.

(d) Financial Statements

(i) The unaudited balance sheets of each of the
Company, UST and VNS as of December 31, 1998, the related statements of income
for each of the Company, UST and VNS for the fiscal year then ended, the
unaudited balance sheets of each of the Company, UST and VNS as of December 31,
1999 (the latter being referred to as the "Latest Balance Sheets"), and the
related statements of income for each of the Company, UST and VNS for the
twelve-month periods then ended (which December 31, 1999 financial statements
are final and not subject to adjustment) have been prepared in accordance with
GAAP on a consistent basis, are in accordance with the books and records of the
Company, UST and VNS (which books and records are complete and correct in all
material respects), and fairly present the respective financial position and
results of operations of each of the Company, UST and VNS in all material
respects as of such dates and for each of the periods indicated. As of the date
of each such balance sheet, each of the Company, UST and VNS had no Liability
other than those set forth on each such balance sheet. Copies of the financial
statements described in the first sentence in this Section 3.1(d) are attached
as Exhibit 3.1(d)(i)(A). Attached as Exhibit 3.1 (d)(i)(B) is a list of all
employees of the Company, UST or VNS (broken down with respect to each of the
three companies) whose employment with the Company, UST or VNS (A) has
terminated since December 31, 1999 or (B) will be terminated in connection with
the Closing. To the best knowledge of the Company and the Shareholder, the
Financial Projections for the Year Ending 2000 have been prepared by the Company
in good faith and in a manner consistent with the Company's normal budgeting
process, with no intent to misrepresent the future financial performance of the
business represented by the Acquired Assets, and reflects the Company's best
estimate of the financial performance of such business in the year ending
December 31, 2000.

(ii) Attached as Exhibit 3.1(d)(ii)(A) are the
combining balance sheets, and corresponding combining income statements, of each
of the Company, UST and VNS as of December 31, 1999, restated to reflect the
accounting methodology set forth on Exhibit 3.1(d)(ii)(B) in all material
respects. The balance sheets and income statements attached as Exhibit
3.1(d)(ii)(A) accurately and completely restate the Latest Balance Sheets, and
corresponding income statements, of each of the Company, UST and VNS to reflect
the accounting methodology set forth on Exhibit 3.1(d)(ii)(B).

(e) Absence of Certain Agreements, Changes or Events.

(i) The Company is not, except as set forth on
Exhibit 3.1(e)(i), a party to or otherwise bound by any material contract or
agreement (A) pursuant to which the Company is obligated to furnish any
services, product or equipment and (B) that has been prepaid with respect to any
period after December 31, 1999.

(ii) Since December 31, 1999, neither the
Company, UST nor VNS has (A) incurred any debt, indebtedness or other Liability,
except current Liabilities incurred in the ordinary course of business
consistent with past practice; (B) delayed or postponed the payment of accounts
payable or other

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Liabilities or accelerated the collection of any receivable beyond stated,
normal terms; (C) sold or otherwise transferred any of its assets or properties,
except for the sale of the UST/VNS Assets pursuant to the UST/VNS Acquisition
Agreement; (D) canceled, compromised, settled, released, waived, written-off or
expensed any account or note receivable, right, debt or claim involving more
than $10,000 in the aggregate or accelerated the collection of any account or
note receivable; (E) changed in any significant manner the way in which it
conducts its business; (F) made or granted any individual or general wage or
salary increase, or any additional benefits of any kind or nature, or entered
into any employment agreements with salaried employees, officers or directors
(except for the employment agreements identified on Exhibit 3.1(e)(ii)(F)
entered into with UST or VNS employees as part of the operational integration of
UST, VNS and the Company after and only after obtaining PentaStar's consent
thereto); (G) except as otherwise expressly permitted by this Section
3.1(e)(ii), (1) entered into any contracts or agreements, or made any
commitments, involving more than $10,000 individually or in the aggregate,
except for contracts or agreements for capital expenditures not involving more
than $25,000 individually or in the aggregate, or (2) accelerated, terminated,
delayed, modified or canceled any agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses) involving more
than $10,000 individually or in the aggregate; (H) suffered any material adverse
fact or change, including, without limitation, to or in its business, assets or
financial condition or customer or service provider relationships; (I) made any
payment or transfer to or for the benefit of any shareholder, officer or
director or any relative or affiliate thereof or permitted any Person,
including, without limitation, any shareholder, officer, director or employee or
any relative or affiliate thereof, to withdraw assets from the Company, UST or
VNS; or (J) agreed to incur, take, enter into, make or permit any of the matters
described in clauses (A) through (I).

(iii) Exhibit 3.1(e)(iii) lists, for each of the
Company, UST and VNS, all orders booked, by month, during the seven-month period
from July 1, 1999 through January 31, 2000, and the current status of each such
order, as reported through databases of each company which do not reconcile to
any of such companies' general ledgers.

(f) Tax Matters.

(i) Each of the Company, UST and VNS has filed,
or has had filed on its behalf, all Tax Returns that it was required to file.
All such Tax Returns were correct and complete in all respects. All Taxes owed
by the Company, UST or VNS (whether or not shown on any Tax Return) have been
paid. Neither the Company, UST nor VNS is currently the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Company, UST or VNS does not
file Tax Returns that it is or may be subject to taxation by that jurisdiction.
There are no Encumbrances (other than Encumbrances for Taxes not yet due and
payable, which shall be paid by the Company) on any of the assets of the
Company, UST or VNS that arose in connection with any failure (or alleged
failure) to pay any Tax.

(ii) Each of the Company, UST and VNS has
withheld, or has had withheld on its behalf, and paid, or has had paid on its
behalf, all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
shareholder or other third party.

(iii) To the best knowledge of the Company and the
Shareholder, there is no basis for any authority to assess any additional Taxes
with respect to the Company, UST or VNS for any period

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for which Tax Returns have been filed. There is no pending or threatened dispute
or claim concerning any Tax Liability of the Company, UST or VNS. None of the
Company, UST or VNS have any Liability for any unpaid Taxes.

(iv) Neither the Company, UST nor VNS has waived,
or had waived on its behalf, any statute of limitations in respect of Taxes or
agreed to any extension of time with respect to a Tax assessment or deficiency.

(v) Neither the Company, UST nor VNS has made
any payments, is not obligated to make any payments and is not a party to any
agreement that under certain circumstances could obligate it to make any
payments that will not be deductible under Code Section 280G. None of the
Company, UST or VNS is a party to any Tax allocation or sharing agreement. None
of the Company, UST or VNS has Liability for the Taxes of any Person under
Treasury Regulation Section 1.1502-6 (or any similar provision of state, local,
or foreign law), as a transferee or successor, by contract or otherwise.

(g) Assets and Properties.

(i) Each of the Company, UST and VNS has good
and marketable title to, or a valid leasehold interest or interest as a licensee
in, the properties and assets used or held for use by it, located on its
Premises, or shown on its Latest Balance Sheet or acquired after the date
thereof. As of the Closing, all of the Acquired Assets will be owned by the
Company, free and clear of all Encumbrances (other than the Permitted
Encumbrances in the event that, subject to Section 4.10, the Acquiror has not
paid off the debt to RFC Capital Corporation as of the Closing). Neither the
Company, UST nor VNS has entered into any contract or made any commitment to
sell all or any part of its assets, except to the extent that the Permitted
Encumbrances could be deemed a contract or commitment to sell assets. The
Company Acquired Assets constitute all of the real, personal and mixed assets
and property, both tangible and intangible, including Intellectual Property,
which are being used or held for use by the Company in the conduct of the
business and operations of the Company, consistent with historical and current
practices. The UST/VNS Assets constitute all of the real, personal and mixed
assets and property, both tangible and intangible, including Intellectual
Property, which are being used or held for use by UST or VNS in the conduct of
their respective business and operations, consistent with historical and current
practices. Each of the Company, UST and VNS owns or leases all equipment and
other tangible assets necessary for the conduct of its business as presently
conducted and as presently proposed to be conducted. Each such tangible asset
material to the Company's, UST's or VNS's operations is in good operating
condition and repair. There are no leases of real property between the Company,
UST or VNS and any shareholder, officer or director or any relative or affiliate
thereof. None of the current or former shareholders, nor any relative or
affiliate thereof, of the Company, UST or VNS, owns any asset, tangible or
intangible, which is used in the business of the Company, UST or VNS, as the
case may be, other than assets which will be included in the Acquired Assets.

(ii) The Premises constitute all of the real
property, buildings and improvements used by the Company, UST or VNS, as the
case may be, in its business. To the best knowledge of the Shareholder, the
Premises have been occupied, operated and maintained in accordance with
applicable Legal Requirements. None of the Company, UST or VNS has received
notice of violation of any Legal Requirement or Permit relating to its
operations or its owned or leased properties.

(iii) No party to any lease with respect to any
Premises has repudiated any

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provision thereof, and there are no disputes, oral agreements or forbearance
programs in effect as to any such lease.

(h) Lists of Contracts and Other Matters. Attached as
Exhibit 3.1(h)(i) is a correct and complete list setting forth the following
items, to the extent such items relate to the Acquired Assets, the Assumed
Liabilities or the business represented by the Acquired Assets:

(i) the following contracts and other agreements
in effect as of January 1, 2000 or the Closing to which the Company, UST or VNS
is, or following the closing under the UST/VNS Acquisition Agreement to which
the Acquiror will be, a party:

(A) any agreement (or group of related
agreements) for the lease of personal property to or from any Person providing
for lease payments in excess of $5,000 per year;

(B) any agreement involving a deposit
in an amount greater than $5,000;

(C) any agreement (or group of related
agreements) for the purchase or sale of supplies, products or other personal
property, or for the furnishing or receipt of services, the performance of which
will extend over a period of more than one year, result in a material loss to
the Company, UST or VNS or their respective businesses or involve consideration
in excess of $10,000;

(D) any agreement concerning a
partnership or joint venture;

(E) any agreement (or group of related
agreements) under which the Company, UST or VNS has created, incurred, assumed
or guaranteed any indebtedness for borrowed money, or any capitalized lease
obligation, in excess of $10,000 or under which any of them has granted any
Encumbrances on any of its respective assets, tangible or intangible;

(F) any agreement concerning
confidentiality or noncompetition;

(G) any agreement with any of its
current or former shareholders or any relative or affiliate thereof;

(H) any profit sharing, stock option,
stock purchase, phantom stock, stock appreciation, profit participation,
deferred compensation, severance or other plan or arrangement;

(I) any collective bargaining agreement;

(J) any agreement for the employment of
any individual on a full-time, part-time, consulting or other basis or any
agreement providing severance benefits;

(K) any agreement under which the
Company, UST or VNS has advanced or loaned any amount to any of its directors,
officers and employees outside the ordinary course of business;

(L) any agreement obligating the
Company, UST or VNS to meet another party's unspecified requirements for goods
or services or obligating any of them to purchase an unspecified

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amount of goods or services based on another party's ability to supply them;

(M) any agreement under which the
consequences of a default or termination could have a material adverse effect on
the business, financial condition, operations, results of operations or future
prospects of the Company, UST or VNS; or

(N) any other agreement (or group of
related agreements) the performance of which involves consideration in excess of
$10,000.

(ii) All material claims, deposits, causes of
action, choses in action, rights of recovery, rights of set off and rights of
recoupment of the Company, UST or VNS.

(iii) All material franchises, approvals, Permits,
licenses, Orders, registrations, certificates, variances and similar rights of
the Company, UST or VNS (all of which are in full force and effect).

(iv) Each item of Intellectual Property owned by
the Company, UST or VNS or which is used by the Company, UST or VNS in its
business and, in each case where the Company, UST or VNS is not the owner, the
owner of the Intellectual Property.

(v) The name of each bank or other financial
institution or entity in which the Company, UST or VNS has an account or safe
deposit box (with the identifying account number or symbol) and the names of all
persons authorized to draw thereon or to have access thereto.

The Shareholder has delivered to PentaStar a correct and complete copy
of each written agreement and a written summary setting forth the terms and
conditions of each oral agreement referred to in Section 3.1(h)(i). With respect
to each such agreement, (A) the agreement is legal, valid, binding, enforceable
and in full force and effect; (B) the agreement will continue to be legal,
valid, binding, enforceable and in full force and effect on identical terms
immediately following the consummation of the transactions contemplated hereby
(except for those franchises, approvals, Permits, Licenses, Orders,
registrations, certificates or variances of the Company, UST or VNS set forth on
Exhibit 3.1(h)(ii) which have been granted, issued or given by Governmental
Authorities and which are not, by their terms, transferable to the Acquiror);
(C) neither the Company, UST or VNS nor, to the best knowledge of the
Shareholder, any other party is in breach or default, and, to the best knowledge
of the Shareholder, no event has occurred which, with notice or lapse of time,
would constitute a breach or default, or permit termination, modification or
acceleration, under the agreement; and (D) no party has repudiated any provision
of the agreement.

(i) Litigation; Compliance with Applicable Laws and
Rights.

(i) There is no outstanding Order against, nor,
except as set forth on Exhibit 3.1(i)(i), is there any litigation, proceeding,
arbitration or investigation by any Governmental Authority or other Person
pending or, to the best knowledge of the Company and the Shareholder, threatened
against, the Company, UST or VNS or their respective assets or business or
relating to the transactions contemplated by this Agreement, nor is there any
basis for any such action.

(ii) To the best knowledge of the Company and the
Shareholder, except as set

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forth on Exhibit 3.1(i)(ii), neither the Company, UST or VNS nor the Company's,
UST's or VNS's assets are in violation of any applicable Legal Requirement or
Right. None of the Company, UST or VNS has received notice from any Governmental
Authority or other Person of any violation or alleged violation of any Legal
Requirement or Right, and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand or notice has been filed or commenced or is
pending or, to the best knowledge of the Company and the Shareholder, threatened
against the Company, UST or VNS alleging any such violation.

(j) Notes and Accounts Receivable. The notes and accounts
receivable of the Company, UST and VNS reflected on its Latest Balance Sheet,
and all notes and accounts receivable arising on or prior to the Closing, arose
from bona fide transactions by the Company, UST and VNS in the ordinary course
of business, are valid receivables with trade customers and have been recorded
using the Company's historic revenue recognition policies.

(k) Product Quality, Warranty and Liability. All services
and products sold, leased, provided or delivered by the Company, UST or VNS to
customers on or prior to January 1, 2000 or the Closing conform to applicable
contractual commitments, express and implied warranties, product and service
specifications and quality standards, and there is no basis for any Liability
for replacement or repair thereof except as provided for in services contracts
entered into by the Company, UST or VNS with customers or other damages in
connection therewith. No service or product sold, leased, provided or delivered
by the Company, UST or VNS to customers on or prior to January 1, 2000 or the
Closing is subject to any guaranty, warranty or other indemnity beyond the
applicable standard terms and conditions of sale or lease. None of the Company,
UST or VNS has any Liability and there is no basis for any Liability arising out
of any injury to a Person or property as a result of the ownership, possession,
provision or use of any service or product sold, leased, provided or delivered
by the Company, UST or VNS on or prior to the Closing Date or the Closing. All
product or service liability claims that have been asserted against the Company,
UST or VNS since January 1, 1996, whether covered by insurance or not and
whether litigation has resulted or not, other than those listed and summarized
on Exhibit 3.1(i)(i), are listed and summarized on Exhibit 3.1(k).

(l) Insurance. Each of the Company, UST and VNS has
policies of insurance (i) covering risk of loss on the Acquired Assets and the
Company Acquired Assets (in the case of the Company) and the UST/VNS Assets (in
the case of UST and VNS), (ii) covering products and services liability and
liability for fire, property damage, personal injury and workers' compensation
coverage and (iii) for business interruption, all, to the best knowledge of the
Company and the Shareholder, with responsible and financially sound insurance
carriers in adequate amounts and in compliance with governmental requirements
and in accordance with good industry practice. All such insurance policies are
valid, in full force and effect and enforceable in accordance with their
respective terms and no party has repudiated any provision thereof. All such
policies will remain in full force and effect until the Closing. Neither the
Company nor any other party to any such policy is in breach or default
(including with respect to the payment of premiums or the giving of notices) in
the performance of any of their respective obligations thereunder, and no event
exists which, with the giving of notice or the lapse of time or both, would
constitute a breach, default or event of default, or permit termination,
modification or acceleration under any such policy. There are no claims,
actions, proceedings or suits arising out of or based upon any of such policies
nor, to the best knowledge of the Company and the Shareholder, does any basis
for any such claim, action, suit or proceeding exist. All premiums have been
paid on such policies as of the date of this Agreement and will be paid on such
policies through the Closing. Each of the Company, UST and VNS has been covered
during the three years prior to the date of this Agreement by the insurance
policies set forth on Exhibit 3.1(l)(i). All claims made during

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such five-year period with respect to any insurance coverage of the Company, UST
or VNS, other than those described on Exhibit 3.1(k), are set forth on Exhibit
3.1(l)(ii).

(m) Pension and Employee Benefit Matters. Neither the
Acquiror nor PentaStar will suffer any Liability or Adverse Consequence from the
Company's, UST's or VNS's administration or termination of any of its Employee
Benefit Plans or from any failure of any pre-Closing or post-Closing
distribution of benefits to employees of the Company, UST or VNS to be made by
the Company, UST or VNS in compliance with all applicable Legal Requirements.
Neither the Acquiror nor PentaStar will have any obligation to employ any
employee of the Company, UST or VNS or to continue any Employee Benefit Plan,
and will have no Liability under any plan or arrangement maintained by the
Company, UST or VNS for the benefit of any employee. The Company, UST or VNS, as
the case may be, will remain liable for all costs of employee compensation,
including benefits and Taxes relating to employment and employees attributable
to periods up to January 1, 2000, whether reported by the Closing or thereafter,
and all group health plan continuation coverage to which any employee, former
employee or dependent is entitled because of a qualifying event (as defined in
Section 4980B(f)(3) of the Code) occurring through the Closing or as a result of
termination of employment with the Company, UST or VNS because of the
transactions contemplated by this Agreement and any benefit or excise tax
liability or penalty or other costs arising from any failure by the Company, UST
or VNS to provide group health plan continuation coverage. Except as set forth
on Exhibit 3.1(m), neither the Company, UST or VNS nor any Affiliated Group
which includes the Company, UST or VNS (if any) maintains, administers or
contributes to, has maintained, administered or contributed to, or has any
Liability to contribute to, any Employee Benefit Plan. Exhibit 3.1(m) lists each
Employee Benefit Plan that is, or at any time during the past three years was,
maintained, administered, contributed to or required to be contributed to by the
Company, UST or VNS or any Affiliated Group (if any) which includes or has
included the Company, UST or VNS, and the date of termination of each such
Employee Benefit Plan (if any) which has been terminated. None of the Company,
UST or VNS has any Liability (and there is no basis for the assertion of any
Liability) as a result of the Company's, UST's or VNS's or any such Affiliated
Group's maintenance, administration or termination of, or contribution to, any
Employee Benefit Plan. Neither the Company nor any member of any Affiliated
Group (if any) which includes or has included the Company, UST or VNS has ever
been required to contribute to any Multiemployer Plan (as defined in ERISA
Section 3(37)) nor has incurred any Liability under Title IV of ERISA.

(n) Employees and Labor.

(i) None of the Company, UST or VNS has received
any notice, nor, to the best knowledge of the Company and the Shareholder, is
there any reason to believe that any Key Employee of the Company, UST or VNS or
any group of employees of the Company, UST or VNS has made plans to terminate
his, her or its employment with the Company, UST or VNS, as the case may be. To
the best knowledge of the Company and the Shareholder, no Key Employee is
subject to any agreement, obligation, Order or other legal hindrance that
impedes or might impede such Key Employee from devoting his or her full business
time to the affairs of the Company, UST or VNS, as the case may be, prior to the
Closing and, if such person becomes an employee of the Acquiror or PentaStar, to
the affairs of the Acquiror or PentaStar after the Closing. None of the Company,
UST or VNS will be required to give any notice under the Worker Adjustment and
Retraining Notification Act, as amended, or any similar Legal Requirement as a
result of this Agreement, the Other Seller Agreements or the transactions
contemplated hereby or thereby. None of the Company, UST or VNS has any labor
relations problems or disputes, nor has any of the Company, UST

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or VNS experienced any strikes, grievances, claims of unfair labor practices or
other collective bargaining disputes. None of the Company, UST or VNS is a party
to or bound by any collective bargaining agreement, there is no union or
collective bargaining unit at the Company's, UST's or VNS's facilities, and no
union organization effort has been threatened, initiated or is in progress with
respect to any employees of the Company, UST or VNS.

(ii) Exhibit 3.1(n)(ii) lists (A) the name of
each salesperson (whether such salesperson was an employee or independent
contractor) of the Company, UST or VNS, other than UST Telemarketers, who has
left the employment of the Company, UST or VNS in the twelve-month period ending
January 31, 2000, (B) the date such salesperson left the employment of the
Company, UST or VNS and (C) the dollar amount of orders booked by the Company,
UST or VNS during the twelve-month period prior to the date such salesperson
left the employment of the Company, UST or VNS which were attributable to such
salesperson or for which such salesperson was responsible, as reported through
databases of each company which do not reconcile to any of such companies'
general ledgers.

(o) Customer and Service Provider Relationships. The
customers listed on Exhibit 3.1(o)(i) (the "Large Customers"), individually or
with their respective affiliates, accounted for the respective revenues of the
Company, UST and VNS during the fiscal year ended December 31, 1998 or the
fiscal year ended December 31, 1999, the revenues of the Company, UST or VNS set
forth opposite such Large Customer's name on Exhibit 3.1(o)(i), as reported
through databases of each company which did not reconcile to any of such
companies' general ledgers. Exhibit 3.1(o)(ii) lists each Person who was a
service provider to the customers of the Company, UST or VNS as of December 31,
1999 or as of the date of this Agreement (the "Principal Providers"). Each of
the Company, UST and VNS has good commercial working relationships with its
Large Customers (except as set forth on Exhibit 3.1(o)(iii)) and Principal
Providers and since December 31, 1999 no Large Customer (except as set forth on
Exhibit 3.1(o)(iii)) or Principal Provider has canceled or otherwise terminated
its relationship with the Company, UST or VNS, as the case may be, materially
decreased its services supplied to the Company, UST or VNS, as the case may be,
or threatened to take any such action. The Company and the Shareholder have no
basis to anticipate any problems with the Company's, UST's or VNS's customer or
service provider relationships. To the best knowledge of the Company and the
Shareholder (and the Company and the Shareholder have no obligation in making
this representation to make inquiry of any Large Customer or Principal Provider
as to such Large Customer's or Principal Provider's plans), no Large Customer
(except as set forth on Exhibit 3.1(o)(iii)) or Principal Provider has any plans
to terminate its relationship with the Company, UST or VNS and the execution and
delivery of this Agreement and of the UST/VNS Acquisition Agreement and the
consummation of the transactions contemplated hereby and thereby will not
adversely affect the relationship of the Company, UST or VNS with any Large
Customer or Principal Provider prior to the Closing (or in the case of the
UST/VNS Acquisition Agreement, the closing thereunder)or of the Acquiror or
PentaStar with any Large Customer or Principal Provider after the Closing (or in
the case of the UST/VNS Acquisition Agreement, the closing thereunder).

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(p) Environmental Matters. Each of the Company, UST or
VNS is conducting and at all times has conducted its business and operations,
and has occupied, used and operated its Premises and all other real property and
facilities presently or previously owned, occupied, used or operated by it, in
compliance with all Environmental Obligations and so as not to give rise to
Liability under any Environmental Obligations or to any impact on the Company's,
UST's or VNS's business or activities. None of the Company, UST or VNS has any
Liability under any Environmental Obligation, nor is there any basis for any
such Liability.

(q) Intellectual Property. The Company owns or has, or
will upon the closing under the UST/VNS Acquisition Agreement own or have, the
legal right to use each item of Intellectual Property required to be identified
on Exhibit 3.1(h)(i), except for the software deficiency set forth on Exhibit
3.1(i)(ii). The continued operation of the business of the Company, UST or VNS
as currently conducted will not interfere with, infringe upon, misappropriate or
conflict with any Intellectual Property rights of another Person. To the best
knowledge of the Company and the Shareholder, no other Person has interfered
with, infringed upon, misappropriated or otherwise come into conflict with any
Intellectual Property rights of the Company, UST or VNS or any Intellectual
Property included in the Acquired Assets. Neither the Company, UST or VNS nor
any owner of any Intellectual Property included in the Acquired Assets has
granted any license, sublicense or permission with respect to any Intellectual
Property owned or used in the Company's, UST's or VNS's business. No claims are
pending or, to the knowledge of the Company and the Shareholder, threatened,
that the Company, UST or VNS is infringing or otherwise adversely affecting the
rights of any Person with regard to any Intellectual Property. To the best
knowledge of the Company and the Shareholder, all of the Intellectual Property
that is owned by the Company, UST or VNS is owned free and clear of all
Encumbrances and was not misappropriated from any Person, and all portions of
the Intellectual Property that are licensed by the Company, UST or VNS are
licensed pursuant to valid and existing license agreements. The consummation of
the transactions contemplated by this Agreement will not result in the loss or
material diminution of any Intellectual Property or rights in Intellectual
Property.

(r) Year 2000 Warranty. To the best knowledge of the
Company and the Shareholder, the computer software owned by the Company, UST or
VNS and all other Intellectual Property used or held for use by the Company, UST
or VNS in its business accurately processes date/time data (including
calculating, comparing, and sequencing) from, into, and between the twentieth
and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations and the date September 9, 1999 when either (i) used as a standalone
application, or (ii) integrated into or otherwise used in conjunction with the
third party hardware, software, firmware and data over which the Shareholder,
the Company, UST or VNS have no control ("Third Party Products") with which such
Company, UST or VNS software or other Intellectual Property was designated or
intended to operate at the time such Company, UST or VNS software was (A)
developed or (B) first provided to the Company's, UST's or VNS's customers, or
tested by the Company, UST or VNS for such customers, whichever is later.
Notwithstanding the foregoing, the Company, UST or VNS shall not be considered
to be in breach of the representation and warranty in the immediately preceding
sentence if the failure of such Company, UST or VNS software to comply with such
representation and warranty is attributable solely to (x) a failure by any Third
Party Product to accurately process date/time data (including but not limited
to, calculating, comparing, and sequencing) from, into, and between the
twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations and the date September 9, 1999; or (y) any modification of the
Company, UST or VNS software by any party other than the Company, UST or VNS
(unless such modification was made at the direction of the Company,

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UST or VNS). The personal computers used by UST in its telecenter business do
not meet the representation set forth in clause (i) of the first sentence of
this Section 3.1(r); provided, however, that such computers have been networked
together to allow the Company to operate the telecenter business in a manner
consistent with past practice without loss of material data.

(s) Brokers' Fees. Except as set forth on Exhibit 3.1(s),
neither the Company nor the Shareholder has, and will not have as a result of
the consummation of this Agreement, any Liability to pay any fees or commissions
to any broker, finder or agent with respect to the transactions contemplated by
this Agreement.

(t) Guaranties. The Company is not a guarantor or
otherwise liable for any Liability (including indebtedness for borrowed money)
of any other Person. Except as set forth on Exhibit 3.1(t), no Person is a
guarantor or otherwise liable for any Liability (including indebtedness for
borrowed money) of the Company.

(u) Investment Representations. (i) The Company is
acquiring the shares of PentaStar Common Stock to be issued pursuant to this
Agreement (the "PentaStar Shares") for the Company's own account and not on
behalf of any other Person, except that the Rowley Shares, if issued, will be
issued in the name of Brian S. Rowley pursuant to Section 2.3(b)(iii); the
Company is aware and acknowledges that the PentaStar Shares have not been
registered under the Securities Act, or applicable state securities laws, and
may not be offered, sold, assigned, exchanged, transferred, pledged or otherwise
disposed of unless so registered under the Securities Act and applicable state
securities laws or an exemption from the registration requirements thereof is
available; (ii) the Company has been furnished all information that the Company
deems necessary to enable it to evaluate the merits and risks of an investment
in PentaStar, including, without limitation, the information described on
Exhibit 3.1(u)(ii); the Company has had a reasonable opportunity to ask
questions of and receive answers from PentaStar concerning PentaStar, the
PentaStar Shares and any and all matters relating to the transactions described
herein or in the information described on Exhibit 3.1(u)(ii), and all such
questions, if any, have been answered to the full satisfaction of the Company;
(iii) no Person other than the Company and Brian S. Rowley pursuant to Section
2.3(b)(iii) has (A) any rights in and to the PentaStar Shares, which rights were
obtained through or from the Company; or (B) any rights to acquire the PentaStar
Shares, which rights were obtained through or from the Company; (iv) the Company
has such knowledge and expertise in financial and business matters (including
knowledge and expertise in the business and proposed business of PentaStar) that
the Company is capable of evaluating the merits and risks involved in an
investment in the PentaStar Shares; and the Company is financially able to bear
the economic risk of the investment in the PentaStar Shares, including a total
loss of such investment; (v) the Company has adequate means of providing for its
current needs and has no need for liquidity in its investment in the PentaStar
Shares; the Company has no reason to anticipate any material change in its
financial condition for the foreseeable future; (vi) the Company is aware that
the acquisition of the PentaStar Shares is an investment involving a risk of
loss and that there is no guarantee that the Company will realize any gain from
this investment, and that the Company could lose the total amount of its
investment; (vii) the Company understands that no United States federal or state
agency has made any finding of determination regarding the fairness of the
offering of the PentaStar Shares for investment, or any recommendation or
endorsement of the offering of the PentaStar Shares; (viii) the Company is
acquiring the PentaStar Shares for investment, with no present intention of
dividing or allowing others to participate in such investment or of reselling,
or otherwise participating, directly or indirectly, in a distribution of
PentaStar Shares, except for the issuance of the Rowley Shares in the name of
Brian S. Rowley pursuant to Section 2.3(b)(iii), and

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shall not make any sale, transfer or pledge thereof without registration under
the Securities Act and any applicable securities laws of any state, unless an
exemption from registration is available, as established to the reasonable
satisfaction of PentaStar, by opinion of counsel or otherwise; (ix) except as
set forth herein, no representations or warranties have been made to the Company
by PentaStar or any agent, employee or affiliate of PentaStar, and in entering
into this transaction the Company is not relying upon any information, other
than from the results of independent investigation by the Company; and (x) the
Company understands that the PentaStar Shares are being offered to the Company
in reliance on specific exemptions from the registration requirements of United
States federal and state securities laws and that PentaStar is relying upon the
truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Company set forth herein in order to
determine the applicability of such exemptions and the suitability of the
Company to acquire the PentaStar Shares; and (xi) the Company is an "accredited
investor" as defined in Rule 501(a) of Regulation D promulgated under the
Securities Act.

All the certificates representing PentaStar Shares shall bear the
following legend, in addition to the legend required by Section 5.8:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") NOR UNDER ANY STATE SECURITIES LAWS AND CAN
NOT BE TRANSFERRED, SOLD, ASSIGNED OR HYPOTHECATED UNTIL EITHER (I) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED EFFECTIVE UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS OR (II) THE ISSUER RECEIVES AN OPINION OF
COUNSEL TO THE ISSUER OR OTHER COUNSEL TO THE HOLDER OF SUCH SHARES, WHICH
OPINION IS SATISFACTORY TO THE ISSUER AND ITS COUNSEL, THAT SUCH SECURITIES MAY
BE TRANSFERRED, SOLD, ASSIGNED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE
ACT OR APPLICABLE STATE SECURITIES LAWS.

(v) UST/VNS Acquisition Agreement. The representations
and warranties of UST, VNS and/or View Tech set forth in the UST/VNS Acquisition
Agreement are true and correct.

(w) Disclosure. None of the documents or information
provided to PentaStar by the Company, the Shareholder or any agent or employee
thereof in the course of PentaStar's due diligence investigation and the
negotiation of this Agreement and Section 3.1 of this Agreement and the
disclosure Exhibits referred to therein, including the financial statements
referred to above in Section 3.1, contains any untrue statement of any material
fact or omit to state a material fact necessary in order to make the statements
contained herein or therein not misleading. Except as set forth in this
Agreement and the Exhibits, including the financial statements, there is no
other fact specific to the Company, UST or VNS which materially adversely
affects the business, condition, affairs or operations of the Company, UST or
VNS or any of their respective properties or assets.

Nothing in the disclosure Exhibits referred to in Section 3.1
shall be deemed adequate to disclose an exception to a representation or
warranty made herein unless the applicable disclosure Exhibit identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate to
disclose an exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document or other
item itself).

3.2. Representations and Warranties of PentaStar. PentaStar
represents and warrants to the

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Company and the Shareholder that the statements contained in this Section 3.2
are correct and complete as of the date of this Agreement and will be correct
and complete as of the date of the Closing (as though made then and as though
the date of the Closing were substituted for the date of this Agreement
throughout this Section 3.2).

(a) Organization, Good Standing, Power, Etc. PentaStar
and the Acquiror are each corporations duly organized, validly existing and in
good standing under the laws of the State of Delaware and are qualified to do
business as foreign corporations and are in good standing in all jurisdictions
in which the nature of the respective businesses conducted by each of them or
the respective properties owned, leased or operated by each of them make such
qualification necessary. This Agreement and the Other PentaStar Agreements and
the transactions contemplated hereby and thereby have been duly approved by all
requisite corporate action. Each of PentaStar and the Acquiror have full
corporate power and authority to execute, deliver and perform this Agreement and
the Other PentaStar Agreements to which it is a party, and this Agreement
constitutes, and the Other PentaStar Agreements will when executed and delivered
constitute, the legal, valid and binding obligations of PentaStar or the
Acquiror, as the case may be, and shall be enforceable in accordance with their
respective terms against PentaStar or the Acquiror, as the case may be.

(b) Capitalization.

(i) The authorized, issued and outstanding
shares of the capital stock of PentaStar are as set forth on Exhibit 3.2(b)(i).

(ii) At the time of issuance thereof and
delivery, the PentaStar Shares to be delivered pursuant to this Agreement will
be duly authorized and validly issued shares of PentaStar's Common Stock, and
will be fully paid and nonassessable. Such PentaStar Shares shall at the time of
such issuance and delivery be free and clear of any Encumbrances of any kind or
character, other than those arising under applicable federal and state
securities laws, under this Agreement or under any Other Seller Agreement.

(iii) All of the issued and outstanding capital
stock of the Acquiror is owned by PentaStar.

(c) No Violation of Agreements, Etc. The execution,
delivery and performance of this Agreement and the Other PentaStar Agreements,
and the consummation of the transactions contemplated hereby and thereby will
not (i) violate any Legal Requirement to which PentaStar or the Acquiror is
subject or any provision of the certificate of incorporation or bylaws of
PentaStar or the Acquiror or (ii) violate, with or without the giving of notice
or the lapse of time or both, or conflict with or result in the breach or
termination of any provision of, or constitute a default under, or give any
Person the right to accelerate any obligation under, or result in the creation
of any Encumbrance upon any properties, assets or business of PentaStar or of
the Acquiror pursuant to, any indenture, mortgage, deed of trust, lien, lease,
license, agreement, instrument or other arrangement to which PentaStar or the
Acquiror is a party or by which PentaStar or the Acquiror or any of their
respective assets and properties is bound or subject. Except for notices and
consents that will be given or obtained by PentaStar prior to the Closing,
neither PentaStar nor the Acquiror need to give any notice to, make any filing
with or obtain any authorization, consent or approval of any Governmental
Authority or other Person in order for the parties to consummate the
transactions contemplated by this Agreement.

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3.3. Survival of Representations. The representations and
warranties contained in Sections 3.1 and 3.2 and the Liabilities of the parties
with respect thereto shall survive any investigation thereof by the parties and
shall survive the Closing for two years, except that the Liabilities of the
Company and the Shareholder with respect to the representations and warranties
set forth in Sections 3.1(f), 3.1(m), 3.1(p) and 3.1(q) shall survive until the
expiration of the applicable statute of limitations and except that the
Liabilities of the Company and the Shareholder with respect to the
representations and warranties set forth in Sections 3.1(a), 3.1(b), 3.1(c) and
3.1(u) and the Liabilities of PentaStar with respect to the representations and
warranties set forth in Sections 3.2(a) and 3.2(b) shall survive without
termination.

3.4. Representations as to Knowledge. The representations and
warranties contained in Article 3 hereof will in each and every case where an
exercise of discretion or a statement to the "best knowledge," "best of
knowledge" or "knowledge" is required on behalf of any party to this Agreement
be deemed to require that such exercise of discretion or statement be in good
faith after reasonable investigation (including, in the case of the Company and
the Shareholder, inquiry of the applicable employees of the Company), with due
diligence, to the best efforts of such party and be exercised always in a
reasonable manner and within reasonable times.

4. Pre-Closing Covenants. The parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.

4.1. General. Each of the parties will use its reasonable best
efforts to take all actions necessary, proper or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including the satisfaction, but not the waiver, of the closing conditions set
forth in Section 6) and the other agreements contemplated hereby. Without
limiting the foregoing, the Shareholder will, and will cause the Company to,
give any notices, make any filings and obtain any consents, authorizations or
approvals needed to consummate the transactions contemplated by this Agreement.

4.2. Operation and Preservation of Business. The Company will not,
and the Shareholder will not cause or permit the Company to, engage in any
practice, take any action or enter into any transaction outside the ordinary
course of its business; provided, however, that in no event will any action be
taken or fail to be taken by the Company or the Shareholder or any transaction
be entered into by the Company or the Shareholder which would result in a breach
of any representation, warranty or covenant of the Company or the Shareholder
contained herein or in the Agreement dated December 22, 1999 between PentaStar
and the Company. The Company will, and the Shareholder will cause the Company
to, keep its business and properties, including its current operations, physical
facilities, working conditions and relationships with customers, service
providers, lessors, licensors and employees, intact.

4.3. Full Access. The Company will, and the Shareholder will cause
the Company to, permit PentaStar and its agents to have full access at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of the Company, to all premises, properties, personnel,
books, records (including Tax records), contracts and documents of or pertaining
to the Company, UST or VNS.

4.4. Notice of Developments. The Company and the Shareholder will
give prompt written notice to PentaStar of any material development which occurs
after the date of this Agreement and before the Closing and affects the
business, assets, Liabilities, financial condition, operations, results of
operations,

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future prospects, representations, warranties, covenants or disclosure Exhibits
of the Company, UST or VNS. No such written notice, however, will be deemed to
amend or supplement any disclosure Exhibit or to prevent or cure any
misrepresentation, breach of warranty or breach of covenant.

4.5. Exclusivity. Neither the Company nor the Shareholder will, and
the Shareholder will not cause or permit the Company to, (a) solicit, initiate
or encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities, or any portion
of the assets of, the Company (including any acquisition structured as a merger,
consolidation or share exchange) or (b) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing. The Shareholder will not vote shares
of the Company's stock in favor of any such transaction. The Company and the
Shareholder will notify PentaStar immediately if any Person makes any proposal,
offer, inquiry or contact with respect to any of the foregoing.

4.6. Announcements; Securities Law Restrictions. Prior to the
Closing, neither the Shareholder nor the Company shall disclose to any Person,
nor issue any press release or make any public announcement concerning, the
existence, terms or subject matter of this Agreement without the prior written
approval of PentaStar, except (and only to the extent) previously publicly
announced by PentaStar and the Shareholder shall coordinate its initial release
with respect to this Agreement with PentaStar. Further, neither the Shareholder
nor the Company shall violate the United States securities laws which restrict
the Shareholder and the Company, as Persons with material non-public information
concerning PentaStar obtained directly or indirectly from PentaStar, from
purchasing or selling securities of PentaStar or from communicating such
information to any other Person under any circumstances in which it is
reasonably foreseeable that such Person is likely to purchase or sell such
securities.

4.7. Bulk Sales Laws. In reliance upon its indemnification rights
set forth in Section 7, the Acquiror waives compliance by the Company with the
bulk transfer law and any other similar law of any applicable jurisdiction in
respect to the transactions contemplated by this Agreement.

4.8 Shareholders' Meeting.

(a) The Shareholder, acting through its board of
directors, shall, in accordance with applicable Legal Requirements and the
Shareholder's articles or certificate of incorporation and bylaws, duly call,
give notice of, convene and hold a meeting (including any adjournment or
postponement thereof, the "Meeting") of its shareholders as soon as practicable
following the date of this Agreement, but in any event no later than 20 days
after the mailing of the Proxy Statement for the purpose of considering and
taking action upon the approval of the sale of the Acquired Assets to the
Acquiror pursuant to this Agreement (the "Transaction"). The Shareholder shall
cause the Meeting to be held, and such vote shall be taken not, later than May
31, 2000. The board of directors shall recommend such approval by the
shareholders and shall take all reasonable, lawful action to solicit such
approval by the shareholders of the Shareholder.

(b) The Shareholder shall (i) as promptly as practicable
following the date of this Agreement, prepare and file with the SEC and use its
best efforts to have cleared by the SEC and thereafter mail to its shareholders
as promptly as practicable, a proxy statement and a form of proxy in connection
with the vote at the Meeting of its shareholders with respect to the Transaction
(such proxy statement, together with any amendments thereof or supplements
thereto, in each case in the form or forms mailed to the

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shareholders, is the "Proxy Statement") and (ii) otherwise comply with all Legal
Requirements applicable to the Meeting. PentaStar shall be permitted to review
drafts of such Proxy Statement. The Shareholder will include in the Proxy
Statement the recommendation of its board of directors that shareholders of the
Shareholder vote in favor of the approval of the Transaction. The Shareholder
shall notify PentaStar promptly of the receipt of any comments of the SEC or its
staff and of any request by the SEC or its staff or any other governmental
officials for amendments or supplements to the Proxy Statement or for additional
information, and will supply PentaStar with copies of all correspondence between
the Shareholder and any of its representatives, on the one hand, and the SEC or
its staff or any other governmental officials, on the other hand, with respect
to the Proxy Statement. The Proxy Statement shall comply with all applicable
Legal Requirements.

(c) The Shareholder shall cause each of its affiliates to
vote at the Meeting all shares of the capital stock of the Shareholder that each
owns in favor of the Transaction.

4.9 Specified Consents. As of the date of this Agreement, the
Company have delivered to the Acquiror the third-party consents set forth on
Exhibit 4.9(a) which are satisfactory to the Acquiror. As of the date of this
Agreement, all other third-party consents delivered to the Acquiror are not
satisfactory to the Acquiror. Prior to the date the Required Vote is obtained,
the Company and the Shareholder shall obtain and deliver to the Acquiror the
material third-party consents set forth on Exhibit 4.9(b), any additional
material third-party consents required under agreements entered into by the
Company after the date hereof (the "Specified Consents"). The documents
described in Section 6.1(l) shall be for the benefit of the Acquiror on forms
previously provided to the Company by the Acquiror, and the other Specified
Consents shall be in the name of the Acquiror as assignee, be effective upon the
Closing and comply in wording with the concept set forth in clause (a) of the
definition of Assumed Liabilities on a form to be provided by the Acquiror.

4.10 Termination Expenses. The Company shall pay any "early
termination fee" required to terminate the Receivables Sales Agreement dated as
of October 8, 1998 between the Company and RFC Capital Corporation, and all
other fees, expenses, costs and amounts necessary to deliver the Acquired Assets
at the Closing as set forth in Section 2.1 and this Agreement.

5. Post-Closing Covenants. The parties agree as follows with respect to
the period following the Closing.

5.1. Further Assurances. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
party reasonably may request, all at the sole cost and expense of the requesting
party (unless the requesting party is entitled to indemnification therefor under
Section 7).

5.2. Transition. Neither the Company nor the Shareholder will take
any action at any time that is designed or intended to have the effect of
discouraging any customer, supplier, lessor, licensor or other business
associate of the Company, UST or VNS from establishing or continuing a business
relationship with the Acquiror or PentaStar after the Closing.

5.3. Cooperation. In the event and for so long as any party
actively is contesting or defending

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against any action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand in connection with (a) any transaction contemplated by this
Agreement or (b) any fact, situation, circumstance, status, condition, activity,
practice, plan, occurrence, event, incident, action, failure to act or
transaction on or prior to the Closing involving any of the Acquired Assets or
the Company's business, each of the other parties will cooperate with such party
and its counsel in the contest or defense, make available their personnel, and
provide such testimony and access to their books and records as shall be
reasonably necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending party (unless the contesting or
defending party is entitled to indemnification therefor under Section 7).

5.4. Confidentiality. The Company and the Shareholder will treat
and hold as confidential all Confidential Information concerning PentaStar, the
Company's business, the business represented by the UST Assets and the VNS
Assets or the Acquired Assets, refrain from using any such Confidential
Information and deliver promptly to PentaStar or destroy, at the request and
option of PentaStar, all of such Confidential Information in its or their
possession.

5.5. Financial Statements. Upon request of PentaStar, the Company
and the Shareholder will, and will use commercially reasonable efforts to cause
UST and VNS to, cooperate with PentaStar and render such assistance to PentaStar
and its accountants as may be required to produce such historical and on-going
financial statements and audits as PentaStar may request, including, without
limitation, signing (or in the case of UST and VNS using commercially reasonable
efforts to cause to be signed) management representation letters reasonably
requested by PentaStar's auditors, all at the sole cost and expense of
PentaStar, but without additional consideration to the Company, UST, VNS or the
Shareholder. The Company and the Shareholder acknowledge that PentaStar may be
required by applicable law to include audited financial statements with respect
to the business of the Company, UST and VNS in reports filed with governmental
agencies and that the inability to audit the financial statements as of the
Effective Date promptly after the Closing could have a material adverse effect
on PentaStar.

5.6. Satisfaction of Liabilities. The Company and the Shareholder
will pay and perform, as and when due, all Liabilities (other than the Assumed
Liabilities) relating to the Company, the business of the Company and the
Acquired Assets, including without limitation, all Taxes attributable to the
transactions contemplated by this Agreement and all accrued vacation and other
accrued employee benefits. Further, the Company and the Shareholder, at their
expense, promptly will take or cause to be taken any action necessary to remedy
any failure of the Premises or the acquired business to comply at the Closing
with any Legal Requirement, upon receipt of notice from PentaStar at any time.
The Acquiror will pay and perform, as and when due (except to the extent the
validity thereof or the liability therefor is being contested by the Acquiror),
the Assumed Liabilities.

5.7. Repurchase of Unpaid Receivables. The Company and the
Shareholder jointly and severally guarantee that Closing Accounts Receivable in
at least the aggregate net amount set forth on Exhibit 1.1(e) (the "Aggregate
Net Amount") will be paid to the Acquiror not later than 180 days from the
Closing Date. Upon demand (the "Payment Demand") by PentaStar at any time after
180 days from the Closing Date, the Company and the Shareholder shall jointly
and severally pay to the Acquiror the amount of any shortfall (a "Shortfall
Payment") between the Aggregate Net Amount and the aggregate payments received
by the Acquiror from account obligors in respect of the Closing Accounts
Receivable. Payments received by the Acquiror from such account obligors will be
applied to the Closing Accounts Receivable specified by the account obligors in
connection with such payment. If the Acquiror receives a Shortfall Payment from
the

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Company or the Shareholder and the Acquiror thereafter receives payment from an
account obligor in respect of a Closing Account Receivable (a
"Post-Indemnification Payment") in respect of which such Shortfall Payment was
made, the Acquiror will promptly deliver the amount of such Post-Indemnification
Payment to the Company; provided, however, that the aggregate amount of all
Post-Indemnification Payments made by the Acquiror to the Company will not
exceed the amount of the Shortfall Payment. Upon delivery of the Shortfall
Payment to the Acquiror, the Closing Accounts Receivable identified by PentaStar
in the Payment Demand (and PentaStar shall so identify the oldest Closing
Accounts Receivable first) shall, without further action of any party, become
the property of the Company and the Shareholder, who may pursue collection
thereof; provided, however, that the Shareholder and the Company shall notify
the account obligor that such collection efforts are not being undertaken on
behalf of the Acquiror. From the Closing until 180 days after the Closing Date,
PentaStar (through the Acquiror) will apply the Company's standard accounts
receivable collection procedures to the Closing Accounts Receivable; provided,
however, neither the Acquiror nor PentaStar will not be required to institute
suit, utilize third-party collection agencies or other agents or take other
extraordinary collection actions with respect to the Closing Accounts
Receivable; and, provided further, that any failure of any collection activities
of the Acquiror, PentaStar or any such collection agency or other agent will not
relieve the Company or the Shareholder from their guarantee of the Closing
Accounts Receivable as described in this Section 5.7. The Acquiror will make
available to the Company and the Shareholder, during normal business hours as
reasonably requested by the Company, such of the Acquiror's books and records as
are necessary to allow the Company and the Shareholder, at their expense, to
confirm the amount of the Shortfall Payment demanded by PentaStar and the
existence of any Post-Indemnification Payment received by the Acquiror from an
account obligor in respect of such account obligor's Closing Account Receivable.

5.8. Transfer Restrictions. Unless otherwise agreed by PentaStar,
except for the transfer of the Rowley Shares to Brian S. Rowley pursuant to
Section 2.3(b)(iii), the Company will not sell, assign, exchange, transfer,
pledge or otherwise dispose of at any time prior to the date which is 18 months
after the Closing any of the PentaStar Shares received by the Company as part of
the Purchase Price, whether such shares are Closing Shares or are issued
pursuant to Section 2.3(b)(iii). Thereafter, up to 33.33% of the Total VSIN
Shares may be resold at any time, and an additional 33.33% of the Total VSIN
Shares may be resold beginning 24 months after the Closing. Any remaining Total
VSIN Shares may not be sold until the earlier to occur of (x) sale of all or
substantially all of the assets or outstanding shares of PentaStar or (y) 30
months after the Closing. Certificates for the PentaStar Shares issued to the
Company pursuant to the Agreement will bear a legend substantially in the form
set forth below as long as applicable:

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THAT CERTAIN PURCHASE
AGREEMENT DATED AS OF FEBRUARY __, 2000 (THE "AGREEMENT"), BY AND AMONG THE
ISSUER, OC MERGERCO 4, INC., VSI NETWORK SOLUTIONS, INC. AND SHAREHOLDER OF VSI
NETWORK SOLUTIONS, INC. PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD SET FORTH
IN THE AGREEMENT, SUCH SHARES MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF WITHOUT THE WRITTEN CONSENT OF THE ISSUER, AND
THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, PLEDGE OR OTHER DISPOSITION WHICH VIOLATES THE
AGREEMENT. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE
ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER RELATING TO
THIS RESTRICTIVE LEGEND PLACED WITH THE TRANSFER AGENT) WHEN THE APPLICABLE
HOLDING PERIOD HAS

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EXPIRED.

PentaStar shall issue separate certificates to the Company representing
the shares of PentaStar Shares subject to each of the three periods of
restriction contemplated by this Section 5.8.

The restrictions set forth along in this Section 5.8 shall be in
addition to any restrictions on transfer imposed by the Securities Act and
applicable state securities laws. The Company also agrees to comply with such
restrictions.

5.9 Certain Provider Matters. Notwithstanding any other provision
of this Agreement, if during the period ending on June 30, 2000, any Person who
is a service provider to the Acquiror at any time during the period ending June
30, 2000 (who was also a service provider to the Company, UST or VNS prior to
the Closing) changes or terminates its relationship with the Acquiror, and such
change or termination results in Adverse Consequences to the Acquiror or
PentaStar, then the Company and the Shareholder agree to jointly and severally
indemnify the Acquiror and PentaStar from such Adverse Consequences. The
Shareholder's Agent shall be entitled to participate in PentaStar's strategy
sessions and PentaStar's negotiating sessions with such service provider in an
effort to minimize or eliminate the Adverse Consequence, subject to PentaStar's
ultimate control with respect to such strategy sessions and negotiating
sessions.

5.10 Claims Against UST/VNS/View Tech. If PentaStar or the Acquiror
asserts a claim for indemnification against the Company or the Shareholder with
respect to a matter concerning UST, VNS or the UST/VNS Assets, then the Company
and the Shareholder (through the Shareholder's Representative) shall be
entitled, subject to PentaStar's control, to participate in any efforts
PentaStar or the Acquiror may undertake to pursue indemnification from UST, VNS
or View Tech; provided, however, that nothing in this Section 5.10 shall be
deemed to supersede or modify in any way the obligations of the Company and the
Shareholder under Section 7 or to condition their obligations under Section 7 on
PentaStar or the Acquiror pursuing indemnification from UST, VNS or View Tech.

6. Conditions to Closing.

6.1. Conditions to Obligation of PentaStar. The obligation of
PentaStar to consummate the transactions contemplated by this Agreement is
subject to satisfaction of the following conditions:

(a) the Company's and the Shareholder's representations
and warranties shall be correct and complete at and as of the Effective Date and
the Closing and any written notices delivered to PentaStar pursuant to Section
4.4 and the subject matter thereof shall be satisfactory to PentaStar;

(b) the Company and the Shareholder shall have performed
and complied with all of their covenants hereunder through the Closing;

(c) the Required Vote shall have been obtained and the
Company and the Shareholder shall have delivered the Specified Consents;

(d) no action, suit or proceeding shall be pending or
threatened before any Governmental Authority or any other Person wherein an
unfavorable Order would (i) prevent consummation of any of the transactions
contemplated by this Agreement, (ii) cause any of the transactions contemplated
by this

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Agreement to be rescinded following consummation or (iii) affect adversely the
right of the Acquiror to own the Acquired Assets and conduct the acquired
business, and no such Order shall be in effect;

(e) there shall have been no adverse change in the
Company, the Acquired Assets (excluding the UST/VNS Assets) or the Company's
business between the date of execution of this Agreement and the Closing;

(f) the Company and the Shareholder shall have delivered
to PentaStar (i) a certificate to the effect that each of the conditions
specified above in Sections 6.1(a) through (e) is satisfied in all respects,
(ii) a certificate as to the adoption of resolutions by the board of directors
and shareholders of the Company, and the board of directors and, to the extent
required by applicable Legal Requirement and the Shareholder's articles or
certificate of incorporation and bylaws, the shareholders of VSI Enterprises,
Inc., authorizing the execution, delivery and performance of this Agreement and
the Other Seller Agreements and the consummation of the transactions
contemplated hereby and thereby and (iii) a good standing certificate, dated
within 10 days of the Closing, from the Secretary of State of the State of the
Company's and VSI Enterprises, Inc.'s jurisdictions of incorporation and each
other state in which the Company is qualified or authorized to do business as a
foreign corporation.

(g) the Company and the Shareholder shall have caused the
Other Seller Agreements to have been executed and delivered by the parties
thereto other than PentaStar and the Acquiror;

(h) PentaStar shall have received from counsel to the
Company and the Shareholder an opinion in form and substance as set forth in
Exhibit 6.1(h) addressed to PentaStar and the Acquiror dated as of the Closing;

(i) [INTENTIONALLY OMITTED.];

(j) [INTENTIONALLY OMITTED.];

(k) [INTENTIONALLY OMITTED.];

(l) [INTENTIONALLY OMITTED.]

(m) PentaStar shall have received from the Company UCC,
lien, judgment and litigation searches with respect to the Company and the
Company Acquired Assets and evidence of the termination of all Encumbrances,
other than Permitted Encumbrances, against the Company Acquired Assets;

(n) the Company shall have delivered to PentaStar
possession and control of the Company Acquired Assets;

(o) the Company and the Shareholder shall have executed
and delivered to PentaStar appropriate documentation to transfer to the
Acquiror, to the extent not transferred to the Acquiror in connection with the
UST/VNS Acquisition, record ownership of the trade names "Eastern Telecom,"
"USTeleCenters," "USTele.com," "USTeleNet" and "Vermont Network Services"
(PentaStar acknowledges that the trade names "Eastern Telecom" and "Vermont
Network Services" is not registered with any Governmental Authority) and all
other registered Intellectual Property and applications therefor, in form
appropriate for filing with the U.S. Patent and Trademark Office or other
applicable Governmental

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Authority; and

(p) the Company and the Shareholder shall have delivered
to PentaStar such other instruments, certificates and documents as are
reasonably requested by PentaStar in order to consummate the transactions
contemplated by this Agreement, all in form and substance reasonably
satisfactory to PentaStar.

Once the Required Vote has been obtained, if the Company fails to deliver any
item, or take any action, specified in Sections 6.1(a) through (c), 6.1(f)
through (h) or 6.1(l) through (p), then PentaStar and the Acquiror may cause the
Closing to occur by delivering to the Company the items, and taking the actions,
specified in Sections 6.2(a) through (d), and upon such delivery and the taking
of such actions the Closing shall be deemed to have been completed. Such Closing
shall not relieve the Company or the Shareholder from any Liability to PentaStar
and the Acquiror for the Company's or the Shareholder's breach of any
representation, warranty or covenant or for the failure to make any such
delivery or take any such action.

6.2. Conditions to Obligation of the Company and the Shareholder.
The obligation of the Company and the Shareholder to consummate the transactions
contemplated by this Agreement is subject to satisfaction of the following
conditions:

(a) the Required Vote shall have been obtained;

(b) PentaStar shall have delivered to the Company a
certificate to the effect that PentaStar's representations and warranties are
correct and complete at and as of the Effective Date and the Closing and that
PentaStar has performed and complied with all of its covenants hereunder through
the Closing Date; each of the conditions specified above in Sections 6.2(a) and
(b) is satisfied in all respects;

(c) the Company shall have received from counsel to
PentaStar an opinion in form and substance as set forth in Exhibit 6.2(c),
addressed to the Company and dated as of the Closing; and

(d) PentaStar shall have paid the Purchase Price pursuant
to Section 2.3 that is to be paid at the Closing.

The Shareholder's Agent may waive any condition specified in this Section 6.2 at
or prior to the Closing.

7. Remedies for Breaches of This Agreement.

7.1. Indemnification Provisions for Benefit of PentaStar.

(a) If the Company or the Shareholder breaches (or if any
Person other than PentaStar or the Acquiror alleges facts that, if true, would
mean the Company or the Shareholder has breached) any of the representations or
warranties of the Company or the Shareholder contained herein and PentaStar
gives notice thereof to the Shareholder's Agent within the Survival Period, or
if the Company or the Shareholder breaches (or if any Person other than
PentaStar or the Acquiror alleges facts that, if true, would mean the Company or
the Shareholder has breached) any covenants of the Company or the Shareholder
contained herein or any representations, warranties or covenants of the Company
or the Shareholder contained in any Other Seller Agreement and PentaStar gives
notice thereof to the Shareholder's Agent, or if UST, VNS or View Tech breaches
any of their covenants (including, without limitation, covenants regarding

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indemnification) set forth in the UST/VNS Acquisition Agreement and PentaStar
gives notice thereof to the Shareholder's Agent, then the Company and the
Shareholder agree to jointly and severally indemnify and hold harmless PentaStar
and the Acquiror from and against any Adverse Consequences PentaStar or the
Acquiror may suffer resulting from, arising out of, relating to or caused by any
of the foregoing regardless of whether the Adverse Consequences are suffered
during or after the Survival Period. In determining whether there has been a
breach of any representation or warranty contained in Section 3.1 and in
determining for purposes of the preceding sentence the amount of Adverse
Consequences suffered by PentaStar or the Acquiror, such representations and
warranties shall not be qualified (other than by the reference to "knowledge"
set forth in the last sentence of Section 3.1(o)) by "material," "materiality,"
"in all material respects," "best knowledge," "best of knowledge" or "knowledge"
or words of similar import, or by any phrase using any such terms or words. The
Company and the Shareholder also agree to jointly and severally indemnify and
hold harmless PentaStar and the Acquiror from and against any Adverse
Consequences PentaStar or the Acquiror may suffer which result from, arise out
of, relate to or are caused by (i) any Liability of the Company, UST, VNS or the
Shareholder not included in the Assumed Liabilities, or (ii) any condition,
circumstance or activity existing prior to the Closing which relates to any
Legal Requirement or any act or omission of the Company, UST, VNS, or any
current or former shareholder of the Company or any predecessor with respect to,
or any event or circumstance related to, the Company's, UST's, VNS's, any
current or former shareholder's or any predecessor's ownership, use or operation
of any of the Acquired Assets, the Premises or any other assets or properties or
the conduct of its or their business, regardless, in the case of (i) or (ii), of
(A) whether or not such Liability, act, omission, event, circumstance or matter
was known or disclosed to PentaStar, was disclosed on any Exhibit hereto or is a
matter with respect to which the Company or the Shareholder did or did not have
knowledge, (B) when such Liability, act, omission, event, circumstance or matter
occurred, existed, occurs or exists and (C) whether a claim with respect thereto
was asserted before or is asserted after the Closing and (iii) any Liability
resulting from any failure of the parties to comply with any applicable bulk
sales or transfer Legal Requirement in connection with the transactions
contemplated by this Agreement. The Company and the Shareholder acknowledge and
agree that the fact that they have made disclosures pursuant to Section 3.1 or
otherwise of matters, or did not have knowledge of matters, which result in
Adverse Consequences to PentaStar or the Acquiror shall not relieve the Company
and the Shareholder of their obligation pursuant to this Section 7 to indemnify
and hold PentaStar and the Acquiror harmless from all Adverse Consequences.
Matters disclosed on an Exhibit referenced in Section 3.1 are deemed to be part
of the corresponding representation for purposes of determining the breach or
non-breach of such representation, but such disclosure shall not relieve the
Company and the Shareholder from their obligation to indemnify PentaStar and the
Acquiror pursuant to the preceding provisions of Section 7.1(a) from the matter
disclosed except to the extent such matter constitutes an Assumed Liability. If
any dispute arises concerning whether any indemnification is owing which cannot
be resolved by negotiation among the parties within 30 days of notice of claim
for indemnification from the party claiming indemnification to the party against
whom such claim is asserted, the dispute will be resolved by arbitration
pursuant to this Agreement.

(b) (i) Amounts needed to satisfy the obligations of the
Company and the Shareholder under Section 5.7 during the Escrow Period shall be
paid to the Acquiror first out of the Accounts Receivable Escrow Fund, then by
the Company and the Shareholder. The Company and the Shareholder shall have
joint and several Liability for any additional amounts needed to cover such
obligations, which amounts shall be paid directly to the Acquiror. At the end of
the Escrow Period, amounts of the Accounts Receivable Escrow Fund which may be
needed to cover pending indemnification claims with respect to Section 5.7 made
by PentaStar (such amounts to be determined by PentaStar in accordance with
Section 5.7)

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shall be retained in the Accounts Receivable Escrow Fund until such claims are
resolved, and any excess of the Accounts Receivable Escrow Fund shall be paid to
the Company.

(ii) Except as provided in Section 7.1(b)(i),
amounts needed to cover any indemnification claims resolved in favor of
PentaStar or the Acquiror against the Company or the Shareholder during the
Escrow Period shall be paid to PentaStar first out of the cash portion of the
Purchase Price from the Company and the Shareholder and then out of the Escrow
Deposit, along with interest from the date the party seeking indemnification
gives notice thereof to the indemnifying party at the rate equal to two
percentage points above the prime rate quoted by PentaStar's principal lender
from time to time if such interest rate amount is not already included in the
indemnification claim pursuant to the definition of Adverse Consequences. The
Company and the Shareholder shall have joint and several Liability for any
amounts of cash needed to cover such claims, which amounts shall be paid
directly to PentaStar. At the end of the Escrow Period, amounts of the Escrow
Deposit which may be needed to cover pending indemnification claims made by
PentaStar (such amounts to be determined by PentaStar based upon the reasonable
exercise of its business judgment) shall be retained in the Escrow Account until
such claims are resolved, and any excess of the Escrow Deposit shall be paid to
the Company. For purposes of indemnification claims, each of the Total VSIN
Shares shall be valued at the per share price at which it was issued pursuant to
Section 2.3(a) or 2.3(b)(iii), as applicable, and the Closing Shares shall be
deemed to be the first shares subject to such claims for purposes of such
calculation. Subject to Section 7.1(b)(i), the Escrow Deposit shall also be
available to satisfy the obligations of the Company and the Shareholder under
Section 5.7.

(iii) Nothing in this Section 7.1(b) shall be
construed to limit PentaStar's or the Acquiror's right to indemnification to
amounts on deposit in the Accounts Receivable Escrow Fund or the Escrow Account.
PentaStar and the Shareholder's Agent shall jointly give instructions to the
Escrow Agent to carry out the intent of this Section 7.1(b). Any disputes
concerning the escrowed property shall be settled by arbitration as provided in
this Agreement. PentaStar, on the one hand, and the Company and the Shareholder
jointly and severally, on the other hand, shall each be responsible for one-half
of the fees, charges and expenses payable to the Escrow Agent pursuant to
paragraph a. of Article 2 of the Escrow Agreement and, except as otherwise
determined pursuant to Section 9.11 of this Agreement, one-half of any amounts
payable pursuant to paragraph b. of such Article 2.

(c) PentaStar and the Acquiror shall not assert a claim
for indemnification against the Company or the Shareholder until the aggregate
amount of all Adverse Consequences previously suffered by PentaStar or the
Acquiror in respect of all matters indemnifiable under Section 7.1(a) exceeds
$25,000, at which point PentaStar and the Acquiror shall be entitled to be
indemnified in full, including for all matters comprising the initial $25,000 of
Adverse Consequences not previously asserted. The aggregate indemnification
obligation of the Company and the Shareholder pursuant to Section 7.1(a) shall
be limited to the Purchase Price.

7.2. Indemnification Provisions for Benefit of the Company and the
Shareholder.

(a) If PentaStar breaches (or if any Person other than
the Company or the Shareholder alleges facts that, if true, would mean PentaStar
has breached) any of its representations or warranties contained herein and the
Shareholder's Agent gives notice of a claim for indemnification against
PentaStar within the Survival Period, or if PentaStar breaches (or if any Person
other than the Company or the

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Shareholder alleges facts that, if true, would mean PentaStar has breached) any
of its covenants contained herein or any of its representations, warranties or
covenants contained in any Other PentaStar Agreement and the Shareholder's Agent
gives notice thereof to PentaStar, then PentaStar agrees to indemnify and hold
harmless the Company and the Shareholder from and against any Adverse
Consequences the Company and the Shareholder may suffer which result from, arise
out of, relate to, or are caused by the breach or alleged breach, regardless of
whether the Adverse Consequences are suffered during or after the Survival
Period. In determining whether there has been a breach of any representation or
warranty contained in Section 3.2 and in determining the amount of Adverse
Consequences suffered by the Company and the Shareholder for purposes of this
Section 7.2, such representations and warranties shall not be qualified by
"material," "materiality," "in all material respects," "best knowledge," "best
of knowledge" or "knowledge" or words of similar import, or by any phrase using
any such terms or words. Matters disclosed on an Exhibit referenced in Section
3.2 are deemed to be part of the corresponding representation for purposes of
determining the breach or non-breach of such representation. If any dispute
arises concerning whether any indemnification is owing which cannot be resolved
by negotiation among the parties within 30 days of notice of claim for
indemnification from the party claiming indemnification to the party against
whom such claim is asserted, the dispute will be resolved by arbitration
pursuant to this Agreement.

(b) The Company and the Shareholder shall not assert a
claim for indemnification against PentaStar until the aggregate amount of all
Adverse Consequences previously suffered by the Company and the Shareholder in
respect of all matters indemnifiable under Section 7.2(a) exceeds $25,000
(exclusive of amounts which are part of the Purchase Price), at which point the
Company and the Shareholder shall be entitled to be indemnified in full,
including for all matters comprising the initial $25,000 of Adverse Consequences
not previously asserted. The aggregate indemnification obligation of PentaStar
pursuant to Section 7.1(a) shall be limited to the Purchase Price.

7.3. Matters Involving Third Parties.

(a) If any Person not a party to this Agreement
(including, without limitation, any Governmental Authority) notifies any party
(the "Indemnified Party") with respect to any matter (a "Third Party Claim")
which may give rise to a claim for indemnification against any other party (the
"Indemnifying Party"), then the Indemnified Party will notify each Indemnifying
Party thereof in writing within 15 days after receiving such notice. No delay on
the part of the Indemnified Party in notifying any Indemnifying Party will
relieve the Indemnifying Party from any obligation hereunder unless (and then
solely to the extent) the Indemnifying Party thereby is prejudiced.

(b) Any Indemnifying Party will have the right, at its
sole cost and expense, to defend the Indemnified Party against the Third Party
Claim with counsel of its choice satisfactory to the Indemnified Party so long
as (i) the Indemnifying Party notifies the Indemnified Party in writing within
10 days after the Indemnified Party has given notice of the Third Party Claim
that the Indemnifying Party will indemnify the Indemnified Party from and
against the entirety of any Adverse Consequences the Indemnified Party may
suffer resulting from, arising out of, relating to or caused by the Third Party
Claim, (ii) the Indemnifying Party provides the Indemnified Party with evidence
reasonably acceptable to the Indemnified Party that the Indemnifying Party will
have the financial resources to defend against the Third Party Claim and fulfill
its indemnification obligations hereunder (subject to the limitations set forth
in Section 7.1(c) and 7.2(b)), (iii) the Third Party Claim involves only money
damages and does not seek an injunction or other equitable relief, (iv)
settlement of, or an adverse judgment with respect to, the Third Party Claim is
not, in the good

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faith judgment of the Indemnified Party, likely to establish a precedential
custom or practice materially adverse to the continuing business interests of
the Indemnified Party, and (v) the Indemnifying Party conducts the defense of
the Third Party Claim actively and diligently. If the Indemnifying Party does
not assume control of the defense or settlement of any Third Party Claim in the
manner described above, it will be bound by the results obtained by the
Indemnified Party with respect to the Third Party Claim.

(c) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 7.3(b) above, (i)
the Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (ii) the
Indemnified Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be withheld unreasonably), and (iii)
the Indemnifying Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnified Party (not to be withheld unreasonably).

(d) In the event any of the conditions in Section 7.3(b)
above is or becomes unsatisfied, however, (i) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any settlement
with respect to, the Third Party Claim in any manner it reasonably may deem
appropriate (and the Indemnified Party need not consult with, or obtain any
consent from, any Indemnifying Party in connection therewith), (ii) the
Indemnifying Parties will reimburse the Indemnified Party promptly and
periodically for the costs of defending against the Third Party Claim (including
reasonable attorneys' fees and expenses), and (iii) the Indemnifying Parties
will remain responsible for any Adverse Consequences the Indemnified Party may
suffer resulting from, arising out of, relating to or caused by the Third Party
Claim to the fullest extent provided in this Section 7.

7.4. Right of Offset. PentaStar and the Acquiror will have the
right to offset any Adverse Consequences either of them may suffer against any
amounts payable (including amounts payable in the form of PentaStar Common
Stock) pursuant to this Agreement or any Other Seller Agreement to the Company,
the Shareholder or any relative or affiliate of the Company or the Shareholder
at or after the Closing.

7.5. Other Remedies. The foregoing indemnification provisions are
in addition to, and not in derogation of, any statutory, equitable or common law
remedy any party may have.

8. Termination.

8.1. Termination of Agreement. The parties may terminate this
Agreement as provided below:

(a) PentaStar and the Shareholder's Agent may terminate
this Agreement by mutual written consent at any time prior to the Closing; or

(b) PentaStar may terminate this Agreement by giving
written notice to the Shareholder's Agent at any time prior to the Closing (i)
in the event the Company or the Shareholder has breached any representation
(given as of the date of this Agreement), warranty or covenant contained in this
Agreement in any material way, PentaStar has notified the Shareholder's Agent of
the breach, and the breach has not been cured within 10 days after the notice of
breach or (ii) if the Closing has not occurred on or before May

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31, 2000 because of the failure of any condition precedent to PentaStar's
obligations to consummate the Closing (unless the failure results primarily from
PentaStar breaching any representation, warranty or covenant contained in this
Agreement in any material way).

8.2. Effect of Termination. The termination of this Agreement by a
party pursuant to Section 8.1 will in no way limit any obligation or liability
of any other party based on or arising from a breach or default by such other
party with respect to any of its representations, warranties, covenants or
agreements contained in this Agreement, and the terminating party will be
entitled to seek all relief to which it is entitled under applicable law.

8.3. Confidentiality. If this Agreement is terminated, each party
will treat and hold as confidential all Confidential Information concerning the
other parties which it acquired from such other parties in connection with this
Agreement and the transactions contemplated hereby.

9. Miscellaneous.

9.1. No Third-Party Beneficiaries. This Agreement will not confer
any rights or remedies upon any Person other than the parties and their
respective successors and permitted assigns.

9.2. Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the parties and
supersedes any prior understandings, agreements or representations by or among
the parties, written or oral, to the extent they relate in any way to the
subject matter hereof.

9.3. Succession and Assignment. This Agreement will be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. Neither the Company nor the Shareholder may assign this
Agreement or any of its, his or her rights, interests or obligations hereunder
without the prior written approval of PentaStar. PentaStar and the Acquiror may
assign their respective rights and obligations hereunder as permitted by law,
including, without limitation, to any debt or equity financing source.

9.4. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall be deemed to be one and the same instrument. The execution of a
counterpart of the signature page to this Agreement will be deemed the execution
of a counterpart of this Agreement. This Agreement may be delivered by facsimile
and facsimile signatures will be treated as original signatures for all
purposes.

9.5. Headings. The section headings contained in this Agreement are
inserted for convenience only and will not affect in any way the meaning or
interpretation of this Agreement.

9.6. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if it is sent by
registered or certified mail, return receipt requested, postage prepaid, or by
courier, telecopy or facsimile, and addressed to the intended recipient as set
forth below:

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If to the Company or the
Shareholder: Copy to:

Addressed to the Jackson Walker L.L.P.
Shareholder's Agent at: 901 Main Street, Suite 6000
5430 LBJ Freeway, Suite 1135 Dallas, Texas 75202
Dallas, Texas 75240 Attn: Bradley L. Whitlock
Telecopy: (214) 369-9509 Telecopy: (214) 953-5822

If to PentaStar: Copy to:

PentaStar Communications, Inc. Sherman & Howard L.L.C.
1522 Blake Street 633 Seventeenth Street, Suite 3000
Denver, Colorado 80202 Denver, Colorado 80202
Attn: Chief Executive Officer Attn: B. Scott Pullara
Telecopy: (303) 825-4402 Telecopy: (303) 298-0940

Notices will be deemed given three days after mailing if sent by certified mail,
when delivered if sent by courier, and upon receipt of confirmation by person or
machine if sent by telecopy or facsimile transmission. Any party may change the
address to which notices, requests, demands, claims and other communications
hereunder are to be delivered by giving the other parties notice in the manner
herein set forth.

9.7. Governing Law. This Agreement will be governed by and
construed in accordance with the domestic laws of the State of Colorado without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Colorado or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Colorado.

9.8. Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same is in writing and signed by PentaStar
and the Shareholder's Agent. No waiver by any party of any default,
misrepresentation or breach of warranty or covenant hereunder, whether
intentional or not, will be deemed to extend to any prior or subsequent default,
misrepresentation or breach of warranty or covenant hereunder or affect in any
way any rights arising by virtue of any prior or subsequent such occurrence, and
no waiver will be effective unless set forth in writing and signed by the party
against whom such waiver is asserted.

9.9. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.

9.10. Expenses. Except as otherwise provided in Section 8.2, (a)
PentaStar shall bear its own costs and expenses (including, without limitation,
legal fees and expenses) incurred either before or after the date of this
Agreement in connection with this Agreement or the transactions contemplated
hereby and (b) the Shareholder will bear all costs and expenses (including,
without limitation, all legal, accounting and tax related fees and expenses, all
fees, commissions, expenses and other amounts payable to any broker, finder or
agent) incurred by the Company or by the Shareholder either before or after the
date of this Agreement in connection with this Agreement or the transactions
contemplated hereby.

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9.11. Arbitration. Any disputes arising under or in connection with
this Agreement, including, without limitation, those involving claims for
specific performance or other equitable relief, will be submitted to binding
arbitration in Denver, Colorado before the Judicial Arbiter Group, but under the
Commercial Arbitration Rules of the American Arbitration Association under the
authority of federal and state arbitration statutes, and shall not be the
subject of litigation in any forum. If the Judicial Arbiter Group is unavailable
to conduct the arbitration or is unsatisfactory to a party in its good faith
judgment, then it shall be before another arbitral body in Denver, Colorado
selected by PentaStar and the Shareholder's Agent or, if they cannot agree on
another arbitral body, the American Arbitration Association. EACH PARTY, BY
SIGNING THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY
RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS,
INCLUDING THE RIGHT TO JURY TRIAL. The arbitrator shall have full authority to
order specific performance and other equitable relief and award damages and
other relief available under this Agreement or applicable law, but shall have no
authority to add to, detract from, change or amend the terms of this Agreement
or existing law. All arbitration proceedings, including settlements and awards,
shall be confidential, except as may otherwise be required by applicable Legal
Requirement. The decision of the arbitrators will be final and binding, and
judgment on the award by the arbitrators may be entered in any court of
competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE
SPECIFICALLY ENFORCEABLE. The prevailing party or parties in any such
arbitration or in any action to enforce this Agreement will be entitled to
recover, in addition to any other relief awarded by the arbitrator, all
reasonable costs and expenses, including fees and expenses of the arbitrators
and attorneys, incurred in connection therewith. If each party prevails on
specific issues in the arbitration, the arbitrator may allocate the costs
incurred by all parties on a basis the arbitrator deems appropriate.

9.12. Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement will be construed as
if drafted jointly by the parties and no presumption or burden of proof will
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. The word "including" will mean including
without limitation. The parties intend that each representation, warranty and
covenant contained herein will have independent significance. If any party
breaches any representation, warranty or covenant contained herein in any
respect, the fact that there exists another representation, warranty or covenant
relating to the same subject matter (regardless of the relative levels of
specificity) which the party has not breached will not detract from or mitigate
the fact that the party is in breach of the first representation, warranty or
covenant.

9.13. Incorporation of Exhibits. The Exhibits identified in this
Agreement are incorporated herein by reference and made a part hereof.

9.14. Shareholder's Agent. The Company and the Shareholder hereby
authorize and appoint the Shareholder's Agent as its exclusive agent and
attorney-in-fact to act on behalf of each of them with respect to all matters
which are the subject of this Agreement or any Other Seller Agreement,
including, without limitation, (a) receiving or giving all notices,
instructions, other communications, consents or agreements that may be
necessary, required or given hereunder and (b) asserting, settling,
compromising, or defending, or determining not to assert, settle, compromise or
defend, (i) any claims which the Company or the Shareholder may assert, or have
the right to assert, against PentaStar or the Acquiror, or (ii) any claims which
PentaStar or the Acquiror may assert, or have the right to assert, against the
Company or the

A-32
<PAGE> 134

Shareholder. The Shareholder's Agent hereby accepts such authorization and
appointment. Upon the receipt of written evidence satisfactory to PentaStar to
the effect that the Shareholder's Agent has been substituted as agent of the
Company and the Shareholder by reason of his death, disability or resignation,
PentaStar shall be entitled to rely on such substituted agent to the same extent
as they were theretofore entitled to rely upon the Shareholder's Agent with
respect to the matters covered by this Section 9.14. Neither the Company nor the
Shareholder shall act with respect to any of the matters which are the subject
of this Agreement or any Other Seller Agreement except through the Shareholder's
Agent. The Company and the Shareholder acknowledge and agree that PentaStar and
the Acquiror may deal exclusively with the Shareholder's Agent in respect of
such matters, that the enforceability of this Section 9.14 is material to
PentaStar and the Acquiror, and that PentaStar and the Acquiror have relied upon
the enforceability of this Section 9.14 in entering into this Agreement.

A-33
<PAGE> 135

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

PENTASTAR:

PENTASTAR COMMUNICATIONS, INC.

By: /s/ Robert S. Lazzeri
---------------------------
Name: Robert S. Lazzeri
Title: Chief Executive Officer

ACQUIROR:

OC MERGERCO 4, INC.

By: /s/ Robert S. Lazzeri
---------------------------
Name: Robert S. Lazzeri
Title: Chief Executive Officer

A-34
<PAGE> 136

COMPANY:

VSI NETWORK SOLUTIONS, INC.

By: /s/ Richard E. Harrison
-----------------------------
Name: Richard E. Harrison
Title: Chief Executive Officer

SHAREHOLDER:

VSI ENTERPRISES, INC.

By: /s/ Richard E. Harrison
-----------------------------
Name: Richard E. Harrison
Title: Chief Executive Officer

[SIGNATURE PAGE TO PURCHASE AGREEMENT]

A-35
<PAGE> 137

Exhibit 1.1(a) - 7

Exhibit 1.1(a)

DEFINED TERMS

Accounts Receivable Escrow Fund has the meaning given it in
Section 2.3(a).

Acquiror has the meaning given it in the preamble to this
Agreement.

Acquired Assets means all right, title and interest of the Company
in and to all of the tangible and intangible assets of the Company, including,
without limitation, the Company Acquired Assets; provided, however, that for all
purposes of this Agreement the UST/VNS Assets shall be deemed to be Acquired
Assets.

Adverse Consequences means all actions, suits, proceedings,
investigations, complaints, claims, demands, Orders, Liabilities, liens, losses,
damages, penalties, fines, settlements, costs, remediation costs, expenses and
fees (including court costs and reasonable fees and expenses of counsel and
other experts), plus interest at a rate equal to two percentage points above the
prime rate quoted by PentaStar's principal lender from time to time accrued from
the date the party seeking indemnification for an Adverse Consequence gives
notice thereof to the indemnifying party.

Affiliated Group means any affiliated group within the meaning of
Code Section 1504 or any similar group defined under a similar provision of
state, local or foreign law.

Assignment Agreement (UST/VNS Acquisition Agreement) means the
Assignment Agreement among the Company, the Acquiror, PentaStar, UST, VNS and
View Tech in the form of Exhibit 1.1(b).

Assignment and Assumption Agreement means the Assignment and
Assumption Agreement between the Company and the Acquiror in the form of Exhibit
1.1(c) pursuant to which the Acquiror will assume the Assumed Liabilities.

Assumed Liabilities means (a) the obligations of the Company
arising after the Closing Date under those contracts which are identified by
PentaStar on Exhibit 1.1(d)(i) with respect to the period after the Closing Date
provided, however, that such assumed obligations shall not include any Liability
of the type described in clause (ii) of the third sentence of Section 7.1(a)
which results from, arises out of or relates to the period on or before January
1, 2000, (b) the Liabilities expressly set forth on Exhibit 1.1(d)(ii) in the
amounts expressly set forth on Exhibit 1.1(d)(ii), and (c) additions to the
Liabilities set forth on Exhibit 1.1(d)(ii) which have been incurred by the
Company in the ordinary course of business, consistent with past practice,
between January 1, 2000 and the Closing and not in breach of any representation,
warranty or covenant contained in this Agreement; provided, however, that
Assumed Liabilities will not include any Liabilities for Taxes, bonuses or
profit sharing, any Liabilities past their due dates or any Liabilities for
commissions associated with receivables that have been collected prior to
January 1, 2000, except for such Liabilities, in such amounts, as are expressly
set forth on Exhibit 1.1(d)(ii) pursuant to (b) above; and, provided further,
that Assumed Liabilities will not include any interest bearing debt, other than
the debt to RFC Capital Corporation in the amount expressly set forth on Exhibit
1.1(d)(ii) pursuant to (b) above.

Exhibit 1.1(a)-1

A-36
<PAGE> 138

Assumed Liabilities will not include any other Liability.

Business Day means any day on which commercial banks are open for
business in Denver, Colorado.

Closing Accounts Receivable means the accounts (including late
fees and interest charges thereon) and notes receivable of the Company in the
aggregate net amount set forth on Exhibit 1.1(e).

Closing and Closing Date have the meanings given in Section 2.5.

Code means the Internal Revenue Code of 1986, as amended.

Company has the meaning given it in Recital A, except that for
purposes of Section 3.1 the term the "Company" shall mean the Company and all of
its Subsidiaries.

Company Acquired Assets means all right, title and interest of the
Company in and to all of the tangible and intangible assets of the Company,
including, without limitation, cash and cash equivalents, and rights to receive
cash from RFC Capital Corporation, but excluding the Company's charter
documents, bylaws, minute books, stock books and other corporate records having
exclusively to do with the corporate organization and capitalization of the
Company. To the extent any current or former shareholder of the Company, or
relative or affiliate thereof, owns any tangible or intangible assets used in
the business of the Company, the Company shall arrange to have such assets
transferred to the Company, at no cost, immediately prior to the Closing and
such assets shall be included in the Company Acquired Assets.

Company Shares has the meaning given it in Section 3.1(b)(i).

Confidential Information means any information concerning the
subject Person or the subject Person's business, products, financial condition,
prospects and affairs that is not already generally available to the public.

Earn-Out Amount means the remainder of (i) four times Earn-Out
Period EBITA minus (ii) $4,381,000; provided, however, that in no event will the
Earn-Out Amount exceed $7,807,000.

Earn-Out Period means the calendar year 2000.

Earn-Out Period EBITA means the EBITA of the Acquiror from the ETI
Region for the Earn-Out Period including, for this purpose, the EBITA of the
Company, UST and VNS from the ETI Region from January 1, 2000 until the
acquisition of their respective assets and business by the Acquiror.

EBITA means earnings before interest, taxes and amortization,
determined in accordance with GAAP, but in a manner consistent with the
accounting measurements used by Arthur Andersen L.L.P. to perform the audit of
the income statement of PentaStar for the calendar year ending December 31, 2000
(the "PentaStar Method"); provided, however, that revenues and expenses
recognized by the Company, UST or VNS for the calendar year ended December 31,
1999 that are or would be recognized during the Earn-Out

Exhibit 1.1(a)-2

A-37
<PAGE> 139

Period utilizing the PentaStar Method will be included in Earn-Out Period EBITA;
and provided further, that payments made or expenses incurred or accrued by UST,
VNS or the Acquiror to or in respect of Franklin A. Reece during the period from
January 1 through December 31, 2000 shall be included as expenses in determining
Earn-Out Period EBITA.

Effective Date has the meaning given it in Section 2.5.

Employee Benefit Plan means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multiemployer Plan, as defined in ERISA Section 3(37)) or (d)
Employee Welfare Benefit Plan.

Employee Pension Benefit Plan has the meaning set forth in ERISA
Section 3(2).

Employee Welfare Benefit Plan has the meaning set forth in ERISA
Section 3(1).

Employment Agreement means the Employment and Noncompetition
Agreement between the Acquiror and Brian S. Rowley in the form of Exhibit
1.1(f).

Encumbrance means any mortgage, pledge, conditional sale
agreement, charge, claim, interest of another Person, lien, security interest,
title defect or other encumbrance.

Environmental Obligations means all present and future Legal
Requirements and Permits concerning land use, public health, safety, welfare or
the environment, including, without limitation, the Resource Conservation and
Recovery Act (42 U.S.C. ' 6901 et seq.), as amended, and the Comprehensive
Environmental Response, Compensation, and Liability Act (42 U.S.C. ' 9601 et
seq.), as amended.

ERISA means the Employee Retirement Income Security Act of 1974,
as amended, and any regulations, rules or orders promulgated thereunder.

Escrow Account means the account established pursuant to the
Escrow Agreement.

Escrow Agreement means the Escrow Agreement among PentaStar, the
Acquiror, the Company, the Shareholder's Agent and Escrow Agent in the form of
Exhibit 1.1(g).

Escrow Agent means Norwest Bank Colorado, N.A.

Escrow Deposit means the Closing Shares (other than the View Tech
Shares) and any shares of PentaStar Common Stock issued in the name of the
Company pursuant to Section 2.3(b)(iii), and if any stock, cash or other assets
of PentaStar or any other Person are issued or delivered in respect of the
property in the Escrow Deposit, such stock, cash or other assets shall be
immediately delivered to the Escrow Agent and be part of the Escrow Deposit.

Exhibit 1.1(a)-3

A-38
<PAGE> 140

Escrow Period means (a) with respect to the Accounts Receivable
Escrow Fund, the period commencing on the Closing and ending on the date which
is the earlier of (i) the date on which the Acquiror has received payment of
Closing Accounts Receivable in the Aggregate Net Amount (as defined in Section
5.7) or (ii) 180 days after the Closing Date, and (b) with respect to the Escrow
Deposit, the period commencing on the date of the Closing and ending on the date
which is 18 months after the date of the Closing.

ETI Region means the State of Vermont, the Borough of Manhattan,
New York and the metropolitan areas of each of Albany, New York, Boston,
Massachusetts and Providence, Rhode Island.

Fair Market Value of the PentaStar Common Stock means, as of any
date, the average of the closing prices of the PentaStar Common Stock for the 5
trading days ending two trading days prior to such date, as quoted by Nasdaq. If
closing prices are not quoted for the PentaStar Common Stock, the closing price
for each such day shall be deemed to be the average of the last bid and last
asked prices for the PentaStar Common Stock for that day, as quoted by Nasdaq.
If the PentaStar Common Stock is not quoted on Nasdaq, the closing price for
each such day shall be deemed to be the average of the high and low sales prices
for the PentaStar Common Stock on that day (or if no sales prices are reported,
the average of the high and low asked prices) as reported by the principal
regional stock exchange, or if not so reported, as reported by Nasdaq or a
quotation system of general circulation to brokers and dealers. If the Fair
Market Value of the PentaStar Common Stock cannot be determined pursuant to the
preceding sentence, Fair Market Value shall be determined by the board of
directors of PentaStar by any reasonable method chosen by it.

GAAP means generally accepted accounting principles as in effect
from time to time in the United States.

Governmental Authority means the United States of America, any
state, commonwealth, territory or possession of the United States of America,
any political subdivision thereof (including counties, municipalities, home-rule
cities and the like), and any agency, authority or instrumentality of any of the
foregoing, including, without limitation, any court, tribunal, department,
bureau, commission or board.

Hazardous Materials means any material, chemical, compound,
mixture, hazardous substance, hazardous waste, pollutant or contaminant defined,
listed, classified or regulated under any Environmental Obligation.

Intellectual Property means all trade, corporate, business and
product names, trademarks, trademark rights, service marks, copyrights, patents,
patent rights, trade secrets, business, customer and technical information, and
computer software, all registrations, licenses and applications pertaining
thereto, and all related documentation and goodwill.

Key Employee means (a) each employee of the Company other than
clerical employees and (b), if any salesperson is an independent contractor
rather than an employee, each such salesperson. Key Employees include, without
limitation, executives and salespersons.

Latest Balance Sheet has the meaning given it in Section 3.1(d).

Exhibit 1.1(a)-4

A-35
<PAGE> 141

Legal Requirement means any constitution, statute, ordinance,
code, or other law (including common law), rule, regulation, Order, notice,
standard, procedure or other requirement enacted, adopted, applied or issued by
any Governmental Authority, including, without limitation, judicial decisions
applying or interpreting any such Legal Requirement.

Liability means any liability or obligation (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or to
become due).

Meeting has the meaning given it in Section 4.8.

Noncompetition Agreement means the Noncompetition Agreement in
the form of Exhibit 1.1(h) among PentaStar, the Acquiror, the Company, the
Shareholder and Richard E. Harrison.

Orders means all judgments, injunctions, orders, rulings, decrees,
directives, notices of violation or other requirements of any Governmental
Authority or arbitrator having jurisdiction in the matter, including a
bankruptcy court or trustee.

Other PentaStar Agreements means the Assignment Agreement (UST/VNS
Acquisition Agreement), the Assignment and Assumption Agreement, the Employment
Agreement, the Escrow Agreement, the Noncompetition Agreement, the Rowley
Payment Agreement, the Voting Agreement and the other documents and instruments
to be executed and delivered by PentaStar or the Acquiror pursuant to this
Agreement.

Other Seller Agreements means the Assignment Agreement (UST/VNS
Acquisition Agreement), the Assignment and Assumption Agreement, the Employment
Agreement, the Escrow Agreement, the Noncompetition Agreement, the Reece
Agreements, the Rowley Payment Agreement, the View Tech Lock-Up Agreement, the
Voting Agreement and other documents and instruments to be executed and
delivered by the Company, the Shareholder or any relative or affiliate of the
Company or of the Shareholder pursuant to this Agreement.

PentaStar Common Stock means the common stock, par value $.0001
per share, of PentaStar.

PentaStar Shares has the meaning set forth in Section 3.1(u).

Permits means all permits, licenses, consents, franchises,
authorizations, approvals, privileges, waivers, exemptions, variances,
exclusionary or inclusionary Orders and other concessions, whether governmental
or private, including, without limitation, those relating to environmental,
public health, welfare or safety matters.

Permitted Encumbrances means the liens and security interests of
RFC Capital Corporation in the Company assets existing under the Receivables
Sale Agreement dated October 8, 1998 between the

Exhibit 1.1(a)-5

A-40
<PAGE> 142

Company and RFC Capital Corporation and evidenced by the UCC-a financing
statements set forth on Exhibit 1.1(i).

Person means an individual, partnership, corporation, association,
joint stock company, trust, joint venture, limited liability company,
unincorporated organization or Governmental Authority.

Premises means the real property, buildings and improvements
thereon constituting the business premises of (a) the Company located at 300
Metro Center Boulevard Warwick, RI 02886; 19 West 44th Street, Suite 415 New
York, NY 10036; 270 Bridge Street, Suite 304, Dedham, MA 02026; 460 Totten Pond
Road, Waltham, MA; 230 Washington Extension, Albany, NY 12203; and 8 Fairfield
Boulevard, Wallingford, CT, (b) UST located at 250 West 50th Street, Manhattan,
NY; 745 Atlantic Avenue, Boston, MA; 745 Atlantic Avenue, 4th Floor, Boston, MA;
711 Atlantic Avenue, Boston, MA; 60 K Street South Boston, MA; 803 Summer
Street, South Boston, MA; 233 Stevens Street, Hyannis, MA; and One Richmond
Square, Providence, RI, and (c) VNS located at 13 Kilburn Street, Burlington,
VT; One Scaled Avenue, Rutland, VT; Hotel Coolidge, White River, VT; 142 Boynton
Avenue, Plattsburgh, NY; and 425 Union Street, West Springfield, MA.

Proxy Statement has the meaning given it in Section 4.8.

Purchase Price has the meaning given it in Section 2.3(a).

Reece Agreements means the following, each dated as of
approximately the date hereof: (a) Noncompetition Agreement among PentaStar, the
Acquiror and Franklin A. Reece; and (b) Consulting Agreement between the Company
and Franklin A. Reece.

Required Vote meaning the affirmative vote of such of the
shareholders of the Shareholder as is required by applicable Legal Requirement
and the Shareholder's articles or certificate of incorporation and bylaws to
approve the Transaction.

Right means any right, property interest, concession, patent,
trademark, trade name, copyright, know-how or other proprietary right of another
Person.

Rowley Payment Agreement means the Rowley Payment Agreement among
the Acquiror, PentaStar, Brian S. Rowley, the Company and the Shareholder in the
form of Exhibit 1.1(j).

Rowley Shares has the meaning given it in Section 2.3(b)(iii).

SEC means the Securities and Exchange Commission.

Securities Act means the Securities Act of 1933, as amended.

Shareholder has the meaning given it in the preamble to this
Agreement.

Shareholder's Agent means Richard Harrison (or the substituted
agent described in Section 9.14)

Exhibit 1.1(a)-6

A-41
<PAGE> 143

acting as agent for the Company and the Shareholder pursuant to Section 9.14.

Shares means all of the issued and outstanding capital stock of
the Company.

Specified Consents has the meaning given it in Section 4.9.

Subsidiary means, with respect to a Person, any Person controlled
(meaning possession of the direct or indirect power to direct or cause the
direction of the management and policies, whether through the ownership of
voting securities, by contract or otherwise) by such first Person directly or
through one or more intermediaries.

Survival Period means, with respect to a representation or
warranty, the applicable period after the Closing Date during which such
representation or warranty survives pursuant to Section 3.4.

Tax means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, documentary,
personal property, sales, use, transfer, registration, value added, alternative
or add-on minimum, estimated or other tax of any kind whatsoever, including any
interest, penalty or addition thereto, whether disputed or not.

Tax Return means any return, declaration, report, claim for refund
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.

Total VSIN Shares means the Closing Shares and the shares (other
than the Rowley Shares) of PentaStar Common Stock, if any, issued to the Company
pursuant to Section 2.3(b)(iii).

Transaction has the meaning given it in Section 4.8.

UST means USTeleCenters, Inc., a Delaware corporation.

UST/VSN Assets means the "Assets" as defined in the UST/VNS
Acquisition Agreement, including, without limitation, cash and cash equivalents
of UST and VNS.

UST/VNS Acquisition means the acquisition of assets of UST and VNS
by the Acquiror contemplated by the UST/VNS Acquisition Agreement.

UST/VNS Acquisition Agreement means the Asset Purchase Agreement
dated as of December 31, 1999 among the Acquiror, UST, VNS and View Tech
pursuant to which the Acquiror will acquire the UST/VNS Assets, and the bill of
sale, the assignment and assumption agreement and the other agreements,
instruments and closing documents to be delivered by UST, VNS or View Tech in
connection with the

Exhibit 1.1(a)-7

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<PAGE> 144

closing thereunder.

VNS means Vermont Network Services Corporation, a Delaware
corporation.

View Tech means View Tech, Inc., a Delaware corporation and the
owner, directly or indirectly, of all of the outstanding capital stock of each
of UST and VNS.

View Tech Lock-Up Agreement means the View Tech Lock-Up Agreement
dated February 18, 2000 between PentaStar and View Tech.

Voting Agreement means the Voting Agreement dated the date of
this Agreement among PentaStar, Edward S. Redstone and Larry M. Carr.

Exhibit 1.1(a)-8

A-43
<PAGE> 145

VSI ENTERPRISES, INC.
5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE 2000 ANNUAL
MEETING OF SHAREHOLDERS.

The undersigned hereby appoints Larry M. Carr and Richard E. Harrison or
either of them, with power of substitution to each, the proxies of the
undersigned to vote the Common Stock of the undersigned at the Annual Meeting of
Shareholders of VSI ENTERPRISES, INC. to be held on Thursday, May 18, 2000, at
9:00 a.m., at the Company's offices, 5801 Goshen Springs Road, Norcross, Georgia
30071, and any adjournments or postponements thereof:

1. To elect four (4) directors for a term of one year and until their
successors are elected and have qualified.

<TABLE>
<S> <C> <C> <C>
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for all nominees
(except as marked to the contrary below) listed below
</TABLE>

LARRY M. CARR, JULIA B. NORTH, HARLAN D. PLATT, Ph.D., and EDWARD S. REDSTONE

INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE THE
NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.

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

2. To approve the sale of substantially all the assets of our Subsidiary, VSI
Network Solutions, Inc., doing business as Eastern Telecom, to PentaStar
Communications, Inc.;

[ ] FOR [ ] AGAINST [ ] ABSTAIN

3. To ratify the selection of Grant Thornton, LLP as independent auditors for
2000; and

[ ] FOR [ ] AGAINST [ ] ABSTAIN

4. To vote in accordance with their best judgment with respect to any other
matters that may properly come before the meeting or any adjournments or
postponements thereof.

THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ABOVE PROPOSALS AND UNLESS
INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY
WILL BE SO VOTED.

Please date and sign this Proxy exactly as name(s) appears on the mailing
label.

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

Print Name(s):
-----------------------

NOTE: When signing as an
attorney, trustee, executor,
administrator or guardian,
please give your title as
such. If a corporation or
partnership, give full name by
authorized officer. In the
case of joint tenants, each
joint owner must sign.

Dated:
------------------------------