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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

Commission File No. 0-26912

Vodavi Technology, Inc.




(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 86-0789350                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|4717 East Hilton Avenue, Ste. 400, Phoenix, Arizona            |  | 85034                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          

(480) 443-6000

(Registrants telephone number, including area code)


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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes NoX .

The number of shares outstanding of registrants Common Stock, $.001 par value
per share, as of October 28, 2003 was 3,520,589.





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TABLE OF CONTENTS



|                               |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                               | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 2.Changes In Securities and Use of Proceeds                                             
|                               | Item 3.Defaults Upon Senior Securities                                                       
|                               | Item 4.Submission of Matters to a Vote of Security Holders                                   
|                               | Item 5.Other Information                                                                     
|                               | Item 6.Exhibits and Reports on Form 8-K                                                      
|SIGNATURES                    
|EX-31.1                       
|EX-31.2                       
|EX-32.1                       
|EX-32.2                       



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VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003

TABLE OF CONTENTS

|         |  |                                                                                       |  |                                                                                                 |    |      |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|         |  |                                                                                       |  |                                                                                                 |    | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                 |    |     
|Item 1.  |  | Financial Statements                                                                  |  |                                                                                                 |    |     
|         |  |                                                                                       |  | Consolidated Balance Sheets  September 30, 2003
and December 31, 2002                          |    |      | 3  | 
|         |  |                                                                                       |  | Consolidated
Statements of Operations  Three and Nine Months Ended September 30, 2003 and 2002 |    |      | 4  | 
|         |  |                                                                                       |  | Consolidated Statements of Cash Flows  Nine Months
Ended September 30, 2003 and 2002           |    |      | 5  | 
|         |  |                                                                                       |  | Notes to Consolidated Financial Statements                                                      |    |      | 6  | 
|Item 2.  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |                                                                                                 | 10 |     
|Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |                                                                                                 | 17 |     
|Item 4.  |  | Controls and Procedures                                                               |  |                                                                                                 | 17 |     
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                                 | 18 |     
|         |  |                                                                                       |  | SIGNATURES                                                                                      |    |      | 19 | 

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PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETSIn thousands, except share amounts

|                              |                                                                                                             |                           |        |                    |        |                   |        |        |        | 
|----------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | ------------------ | ------ | ----------------- | ------ | ------ | ------ | 
|                              |                                                                                                             |                           |        | September 30, 2003 |        | December 31, 2002
|                              |                                                                                                             |                           |        |                    |        |                  
|CURRENT ASSETS:               |                                                                                                             |                           |        |                    |        |                   |        |       
|                              | Cash                                                                                                        |                           | $      | 1,462              |        |                   | $      | 1,141  |       
|                              | Accounts receivable, net of reserves for doubtful accounts
and sales returns of $344 and $422, respectively |                           |        | 7,078              |        |                   |        | 6,671  |       
|                              | Inventory                                                                                                   |                           |        | 4,546              |        |                   |        | 5,550  |       
|                              | Income tax receivable                                                                                       |                           |        |                   |        |                   |        | 300    |       
|                              | Deferred income taxes                                                                                       |                           |        | 436                |        |                   |        | 436    |       
|                              | Prepaid and other current assets                                                                            |                           |        | 505                |        |                   |        | 731    |       
|                              |                                                                                                             |                           |        |                    |        |                   |        |       
|                              |                                                                                                             | Total current assets      |        |                    | 14,027 |                   |        |        | 14,829 | 
|PROPERTY AND EQUIPMENT, net   |                                                                                                             |                           | 1,552  |                    |        |                   | 1,631  |       
|GOODWILL                      |                                                                                                             |                           | 725    |                    |        |                   | 725    |       
|DEFERRED INCOME TAXES         |                                                                                                             |                           | 160    |                    |        |                   | 160    |       
|OTHER LONG-TERM ASSETS        |                                                                                                             |                           | 75     |                    |        |                   | 43     |       
|                              |                                                                                                             |                           |        |                    |        |                   |        |       
|                              |                                                                                                             | $                         | 16,539 |                    |        | $                 | 17,388 |       
|                              |                                                                                                             |                           |        |                    |        |                   |        |        |       
|CURRENT LIABILITIES:          |                                                                                                             |                           |        |                    |        |                   |        |       
|                              | Accounts payable                                                                                            |                           | $      | 621                |        |                   | $      | 1,250  |       
|                              | Accrued liabilities                                                                                         |                           |        | 1,863              |        |                   |        | 1,551  |       
|                              | Accounts payable to stockholder                                                                             |                           |        | 3,631              |        |                   |        | 3,965  |       
|                              | Current portion of long-term debt                                                                           |                           |        | 200                |        |                   |        |       |       
|                              |                                                                                                             |                           |        |                    |        |                   |        |       
|                              |                                                                                                             | Total current liabilities |        |                    | 6,315  |                   |        |        | 6,766  | 
|                              |                                                                                                             |                           |        |                    |        |                   |        |       
|Long-term debt                |                                                                                                             |                           | 750    |                    |        |                   |       |       
|                              |                                                                                                             |                           |        |                    |        |                   |        |       
|COMMITMENTS AND CONTINGENCIES
|STOCKHOLDERS EQUITY:         |                                                                                                             |                           |        |                    |        |                   |        |       
|                              | Preferred stock, $.001 par value; 1,000,000 shares
authorized, no shares issued                             |                           |        |                   |        |                   |        |       |       
|                              | Common stock, $.001 par value; 10,000,000 shares
authorized; 3,839,289 and 4,668,488 shares issued          |                           |        | 4                  |        |                   |        | 5      |       
|                              | Additional paid-in capital                                                                                  |                           |        | 11,441             |        |                   |        | 13,503 |       
|                              | Accumulated deficit                                                                                         |                           |        | (1,212             | )      |                   |        | (2,127 | )     
|                              | Treasury stock, 318,700 shares at cost                                                                      |                           |        | (759               | )      |                   |        | (759   | )     
|                              |                                                                                                             |                           |        |                    |        |                   |        |       
|                              |                                                                                                             |                           | 9,474  |                    |        |                   | 10,622 |       
|                              |                                                                                                             |                           |        |                    |        |                   |        |       
|                              |                                                                                                             | $                         | 16,539 |                    |        | $                 | 17,388 |       
|                              |                                                                                                             |                           |        |                    |        |                   |        |        |       

The accompanying notes are an integral part of these consolidated balance sheets.

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VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSIn thousands except per share amounts

|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |       |  
|------------------------------------------------------------- | -------------------------------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | -
|                                                              |                                              |   | Three Months Ended |       | Nine Months Ended
|                                                              |                                              |   | September 30,      |       | September 30,    
|                                                              |                                              |   |                    |       |                  
|                                                              |                                              |   | 2003               |       | 2002              |   | 2003   |       | 2002
|                                                              |                                              |   |                    |       |                   |   |        |       |     
|REVENUE, net                                                  |                                              | $ | 11,397             |       |                   | $ | 10,541 |       |      | $ | 30,678 |       |  | $ | 28,790 |      
|COST OF GOODS SOLD                                            |                                              |   | 7,456              |       |                   |   | 6,600  |       |      |   | 20,110 |       |  |   | 18,234 |      
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|GROSS MARGIN                                                  |                                              |   | 3,941              |       |                   |   | 3,941  |       |      |   | 10,568 |       |  |   | 10,556 |      
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|OPERATING EXPENSES:                                           |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                              | Engineering and product development          |   |                    | 499   |                   |   |        | 637   |      |   |        | 1,569 |  |   |        | 1,696 |  
|                                                              | Selling, general and administrative          |   |                    | 2,655 |                   |   |        | 2,916 |      |   |        | 7,393 |  |   |        | 7,635 |  
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                              |                                              |   | 3,154              |       |                   |   | 3,553  |       |      |   | 8,962  |       |  |   | 9,331  |      
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|OPERATING INCOME                                              |                                              |   | 787                |       |                   |   | 388    |       |      |   | 1,606  |       |  |   | 1,225  |      
|INTEREST EXPENSE                                              |                                              |   | 40                 |       |                   |   | 22     |       |      |   | 93     |       |  |   | 82     |      
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|INCOME BEFORE INCOME TAXES AND CHANGE IN
ACCOUNTING PRINCIPLE |                                              |   | 747                |       |                   |   | 366    |       |      |   | 1,513  |       |  |   | 1,143  |      
|INCOME TAX PROVISION                                          |                                              |   | 295                |       |                   |   | 145    |       |      |   | 598    |       |  |   | 453    |      
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE                  |                                              |   | 452                |       |                   |   | 221    |       |      |   | 915    |       |  |   | 690    |      
|CHANGE IN ACCOUNTING PRINCIPLE,
net of tax                    |                                              |   |                   |       |                   |   |       |       |      |   |       |       |  |   | (1,263 | )    
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|NET INCOME (LOSS)                                             |                                              | $ | 452                |       |                   | $ | 221    |       |      | $ | 915    |       |  | $ | (573   | )    
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|EARNINGS PER COMMON SHARE:                                    |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Basic                                                         |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                              | Income before change in accounting principle |   | $                  | 0.13  |                   |   | $      | 0.05  |      |   | $      | 0.23  |  |   | $      | 0.16  |  
|                                                              | Change in accounting principle               |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        | (0.29 | )
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                              | Net income (loss)                            |   | $                  | 0.13  |                   |   | $      | 0.05  |      |   | $      | 0.23  |  |   | $      | (0.13 | )
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Diluted                                                       |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                              | Income before change in accounting principle |   | $                  | 0.12  |                   |   | $      | 0.05  |      |   | $      | 0.22  |  |   | $      | 0.16  |  
|                                                              | Change in accounting principle               |   |                    |      |                   |   |        |      |      |   |        |      |  |   |        | (0.29 | )
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                              | Net income (loss)                            |   | $                  | 0.12  |                   |   | $      | 0.05  |      |   | $      | 0.22  |  |   | $      | (0.13 | )
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|WEIGHTED AVERAGE SHARES OUTSTANDING:                          |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                              | Basic                                        |   |                    | 3,521 |                   |   |        | 4,350 |      |   |        | 4,021 |  |   |        | 4,324 |  
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                              | Diluted                                      |   |                    | 3,766 |                   |   |        | 4,469 |      |   |        | 4,192 |  |   |        | 4,418 |  
|                                                              |                                              |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      

The accompanying notes are an integral part of these consolidated financial statements.

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VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSIn thousands

|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |        |        |        |       | 
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------- | ------------------------------------------- | ----------------------------------------------- | ------ | ----------------- | ----- | ------ | ------ | ------ | ----- | 
|                                                                                               |                                                        |                                             |                                             |                                                 |        | Nine Months Ended
|                                                                                               |                                                        |                                             |                                             |                                                 |        | September 30,    
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                  
|                                                                                               |                                                        |                                             |                                             |                                                 |        | 2003              |       | 2002  
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                          |                                                        |                                             |                                             |                                                 |        |                   |       |       
|Net income (loss)                                                                              |                                                        | $                                           | 915                                         |                                                 |        | $                 | (573  | )     
|Adjustments to reconcile net income (loss) to net cash
flows provided by operating activities: |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               | Depreciation and amortization                          |                                             |                                             | 347                                             |        |                   |       | 513    |       
|                                                                                               | Change in accounting principle                         |                                             |                                             |                                                |        |                   |       | 1,263  |       
|Changes in working capital:                                                                    |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               | Accounts receivable, net                               |                                             |                                             | (407                                            | )      |                   |       | (624   | )     
|                                                                                               | Inventory                                              |                                             |                                             | 1,004                                           |        |                   |       | 1,221  |       
|                                                                                               | Income tax receivable                                  |                                             |                                             | 300                                             |        |                   |       | 839    |       
|                                                                                               | Prepaid and other current assets                       |                                             |                                             | 226                                             |        |                   |       | (265   | )     
|                                                                                               | Other long-term assets and deferred taxes              |                                             |                                             | (38                                             | )      |                   |       |       |       
|                                                                                               | Accounts payable and payable to stockholder            |                                             |                                             | (963                                            | )      |                   |       | 2,527  |       
|                                                                                               | Accrued liabilities                                    |                                             |                                             | 312                                             |        |                   |       | (182   | )     
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               |                                                        |                                             |                                             | Net cash flows provided by operating activities |        |                   | 1,696 |        |        |        | 4,719 | 
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                          |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               | Cash paid to acquire property and equipment            |                                             |                                             | (262                                            | )      |                   |       | (418   | )     
|                                                                                               | Cash paid to acquire DataSpeak Systems, Inc.           |                                             |                                             |                                                |        |                   |       | (624   | )     
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               |                                                        |                                             | Net cash flows used in investing activities |                                                 |        | (262              | )     |        |        | (1,042 | )    
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                          |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               | Net advances (payments) on revolving credit facility   |                                             |                                             |                                                |        |                   |       | (2,593 | )     
|                                                                                               | Borrowings on term loan                                |                                             |                                             | 1,000                                           |        |                   |       |       |       
|                                                                                               | Repayments on term loan                                |                                             |                                             | (50                                             | )      |                   |       |       |       
|                                                                                               | Stock repurchase                                       |                                             |                                             | (2,063                                          | )      |                   |       |       |       
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               |                                                        | Net cash flows used in financing activities |                                             |                                                 | (1,113 | )                 |       |        | (2,593 | )     
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|CHANGE IN CASH                                                                                 |                                                        |                                             | 321                                         |                                                 |        |                   | 1,084 |       
|CASH, beginning of period                                                                      |                                                        |                                             | 1,141                                       |                                                 |        |                   | 340   |       
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|CASH, end of period                                                                            |                                                        | $                                           | 1,462                                       |                                                 |        | $                 | 1,424 |       
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                            |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               | Cash paid for interest                                 |                                             | $                                           | 93                                              |        |                   | $     | 82     |       
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       
|SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:                        |                                                        |                                             |                                             |                                                 |        |                   |       |       
|                                                                                               | Common stock issued to acquire DataSpeak Systems, Inc. |                                             | $                                           |                                                |        |                   | $     | 135    |       
|                                                                                               |                                                        |                                             |                                             |                                                 |        |                   |       |       

The accompanying notes are an integral part of these consolidated financial statements.

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VODAVI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003

(a)  INTERIM FINANCIAL REPORTING

The accompanying unaudited Consolidated Financial Statements have been prepared
by Vodavi Technology, Inc. and subsidiaries (Vodavi or the Company)
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) and, in the opinion of management, include all adjustments (consisting
of normal recurring accruals and adjustments) necessary for a fair presentation
of results of operations, financial position, and cash flows as of and for the
periods presented.

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and revenue and expenses
during the period reported. Actual results could differ from those estimates.
Estimates are used in accounting for, among other things, customer incentive
programs, allowances for bad debts and sales returns, inventory obsolescence,
product warranty, depreciation, taxes and other contingencies. Estimates and
assumptions are reviewed periodically and the effects of revisions are
reflected in the Consolidated Financial Statements in the period they are
determined to be necessary.

The results for the nine months ended September 30, 2003 are not necessarily
indicative of financial results for the full year. These financial statements
should be read in conjunction with the audited Consolidated Financial
Statements and notes thereto included in Vodavis Annual Report on Form 10-K
for the year ended December 31, 2002.

[SPACE INTENTIONALLY LEFT BLANK]

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(b)  CALCULATION OF EARNINGS PER SHARE

In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per Share, the Company displays basic and diluted earnings per
share (EPS). Basic EPS is determined by dividing net income (loss) by the
weighted average number of common shares outstanding. The basic weighted
average number of common shares outstanding excludes all dilutive securities.
Diluted EPS is determined by dividing net income by the weighted average number
of common shares and dilutive securities outstanding.

A reconciliation of the numerator and denominator (weighted average number of
shares outstanding) of the basic and diluted EPS computation is as follows:

|                                             |                                      |   |                    |       |                   |   |      |       |      |   |     |       |  |   |        |       | 
|-------------------------------------------- | ------------------------------------ | - | ------------------ | ----- | ----------------- | - | ---- | ----- | ---- | - | --- | ----- |  | - | ------ | ----- | 
|                                             |                                      |   | Three Months Ended |       | Nine Months Ended
|                                             |                                      |   | September 30,      |       | September 30,    
|                                             |                                      |   |                    |       |                  
|                                             |                                      |   | 2003               |       | 2002              |   | 2003 |       | 2002
|                                             |                                      |   |                    |       |                   |   |      |       |     
|                                             |                                      |   | (In thousands)    
|Income before change in accounting principle |                                      | $ | 452                |       |                   | $ | 221  |       |      | $ | 915 |       |  | $ | 690    |      
|Change in accounting principle               |                                      |   |                   |       |                   |   |     |       |      |   |    |       |  |   | (1,263 | )    
|                                             |                                      |   |                    |       |                   |   |      |       |      |   |     |       |  |   |        |      
|Net income (loss)                            |                                      | $ | 452                |       |                   | $ | 221  |       |      | $ | 915 |       |  | $ | (573   | )    
|                                             |                                      |   |                    |       |                   |   |      |       |      |   |     |       |  |   |        |      
|Weighted average common shares:              |                                      |   |                    |       |                   |   |      |       |      |   |     |       |  |   |        |      
|                                             | Basic                                |   |                    | 3,521 |                   |   |      | 4,350 |      |   |     | 4,021 |  |   |        | 4,324 | 
|                                             | Effect of dilutive stock options (1) |   |                    | 245   |                   |   |      | 119   |      |   |     | 171   |  |   |        | 94    | 
|                                             |                                      |   |                    |       |                   |   |      |       |      |   |     |       |  |   |        |      
|                                             | Diluted                              |   |                    | 3,766 |                   |   |      | 4,469 |      |   |     | 4,192 |  |   |        | 4,418 | 
|                                             |                                      |   |                    |       |                   |   |      |       |      |   |     |       |  |   |        |      
|Anti-dilutive stock options (1)              |                                      |   | 241                |       |                   |   | 621  |       |      |   | 592 |       |  |   | 611    |      



---

|(1) |  | Dilutive securities are calculated using the treasury stock method and
the average market price during the period. If an options strike price
is less than the average market price during the reporting period, the
option is dilutive. If an options strike price is greater than the
average market price during the reporting period, the option is
anti-dilutive and is not included in the weighted average common shares
calculation. All options are anti-dilutive in reporting periods that
result in a loss, excluding extraordinary items, regardless of the average
market price.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(c) STOCK OPTION PLANS

Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and provide
pro forma earnings per share disclosures for employee stock option grants as if
the fair-value-based method as defined in SFAS No. 123 had been applied. The
Company applies the intrinsic value method under APB No. 25 and provides the
pro forma disclosure provisions of SFAS No. 123.

No stock-based employee compensation cost is reflected in net income as all
options granted under the Plan had an exercise price equal to or greater than
the market price of the underlying common stock on the date of grant. If the
Company had accounted for its stock-based compensation plan using a fair value
based method of accounting as prescribed in SFAS No. 123, the Companys net
income and earnings per share would have been reported as follows:
7Table of Contents

|                           |                               |  |                                          |      |                   |  |      |      |      |  |   |      |  |  |   |       |  
|-------------------------- | ----------------------------- |  | ---------------------------------------- | ---- | ----------------- |  | ---- | ---- | ---- |  | - | ---- |  |  | - | ----- | -
|                           |                               |  | Three Months Ended                       |      | Nine Months Ended
|                           |                               |  | September 30,                            |      | September 30,    
|                           |                               |  |                                          |      |                  
|                           |                               |  | 2003                                     |      | 2002              |  | 2003 |      | 2002
|                           |                               |  |                                          |      |                   |  |      |      |     
|                           |                               |  | (In Thousands, Except Per Share Amounts)
|Net income (loss):         |                               |  |                                          |      |                   |  |      |      |      |  |   |      |  |  |   |      
|                           | As reported                   |  | $                                        | 452  |                   |  | $    | 221  |      |  | $ | 915  |  |  | $ | (573  | )
|                           | Options expense, net of taxes |  |                                          | 23   |                   |  |      | 37   |      |  |   | 83   |  |  |   | 92    |  
|                           |                               |  |                                          |      |                   |  |      |      |      |  |   |      |  |  |   |      
|                           | Pro forma net income (loss)   |  | $                                        | 429  |                   |  | $    | 184  |      |  | $ | 832  |  |  | $ | (665  | )
|                           |                               |  |                                          |      |                   |  |      |      |      |  |   |      |  |  |   |      
|Earnings (loss) per share: |                               |  |                                          |      |                   |  |      |      |      |  |   |      |  |  |   |      
|                           | As reported  Basic           |  | $                                        | 0.13 |                   |  | $    | 0.05 |      |  | $ | 0.23 |  |  | $ | (0.13 | )
|                           | As reported  Diluted         |  |                                          | 0.12 |                   |  |      | 0.05 |      |  |   | 0.22 |  |  |   | (0.13 | )
|                           | Pro forma  Basic             |  |                                          | 0.12 |                   |  |      | 0.04 |      |  |   | 0.21 |  |  |   | (0.15 | )
|                           | Pro forma  Diluted           |  | $                                        | 0.11 |                   |  | $    | 0.04 |      |  | $ | 0.20 |  |  | $ | (0.15 | )

(d)  SEGMENT REPORTING

The Company operates in one reportable segment, the distribution of business
telecommunications equipment. Accordingly, the Company has only presented
financial information for its one reportable segment.

(e)  CREDIT AGREEMENT

In April 2003, the Company entered into a credit agreement with Comerica
Bank-California (Comerica), which established a $5.0 million revolving line
of credit facility and a $1.0 million term loan (the Credit Facility).
Advances under the Credit Facility are based upon eligible accounts receivable
and inventory of the Companys wholly owned subsidiary Vodavi Communications
Systems, Inc. and are secured by substantially all of the Companys assets.
The Credit Facility contains covenants that are customary for similar credit
facilities and also prohibits our operating subsidiaries from paying dividends
to our company without the consent of Comerica.

The $5.0 million revolving line of credit bears interest at Comericas prime
rate (4.0% as of September 30, 2003) and requires monthly payments of interest
only with all unpaid principal and accrued interest due at its expiration in
April 2005. If the Company is unable to reduce the principal balance on the
line of credit to zero for at least thirty consecutive days during any fiscal
year, then any remaining balance will be converted into a term loan, or term
balance, as defined in the agreement. In addition to interest on the term
balance, the Company will be required to make monthly payments of principal in
an amount sufficient to fully amortize the term balance over a thirty-six month
period.

The $1.0 million term loan was available to the Company only for the purpose of
acquiring its common stock. Borrowings on the term loan bear interest at
Comericas prime rate plus 0.5%, or 4.5% as of September 30, 2003. In addition
to interest on the term loan, the Company is required to make monthly payments
of principal in an amount sufficient to fully amortize the term loan over a
sixty-month period with all unpaid principal and accrued interest due in
thirty-six months, or by June 2006.

(f)  SELF TENDER OFFER  STOCK REPURCHASE

In May 2003, the Company commenced a self-tender offer to purchase up to
1,000,000 shares of its common stock for $2.40 per share. On June 13, 2003,
the Company repurchased 829,199 shares of its common stock at $2.40 per share
pursuant to the tender offer. The purchase price of approximately $2.1
million, which includes offering costs of approximately $73,000, is recorded as
a reduction to common stock and additional paid in capital in the accompanying
consolidated balance sheet as of September 30, 2003.

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(g)  CHANGE IN ACCOUNTING PRINCIPLE AND RECENT ACCOUNTING PRONOUNCEMENTS

In 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,
Accounting For Business Combinations, and SFAS No. 142, Goodwill And Other
Intangible Assets. These statements modified accounting for business
combinations after June 30, 2001 and affected the Companys treatment of
goodwill and other intangible assets effective January 1, 2002. The statements
require that goodwill existing at the date of adoption be reviewed for possible
impairment and that impairment tests be performed at least annually, with
impaired assets written-down to fair value. Additionally, existing goodwill
and intangible assets must be assessed and classified consistent with the
statements criteria. Intangible assets with estimated useful lives will
continue to be amortized over those periods. Amortization of goodwill and
intangible assets with indefinite lives has ceased.

The Company determined that upon adoption of these statements on January 1,
2002, the $1.6 million carrying amount of the goodwill as of that date was
impaired. The goodwill impairment was recognized in 2002 as a change in
accounting principle, net of $375,000 of income taxes.

In October 2001, the FASB issued SFAS No. 144 Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement also extends the reporting requirements to report separately, as
discontinued operations, components of an entity that have either been disposed
of or are classified as held-for-sale. We adopted the provisions of SFAS No.
144 effective January 1, 2002. The adoption of this statement did not have any
impact on our financial condition or results from operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 replaced EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring), and applies to exit or disposal
activities initiated after December 31, 2002. The requirements of SFAS No. 146
will not be required unless and until the Company has a future exit or disposal
activity.

In November 2002, the FASB issued FASB Interpretation Number 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantee of the Indebtedness of Others. This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions in this interpretation apply to guarantees issued or modified after
December 31, 2002. We have adopted the disclosure provisions of this
interpretation.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensations  A Transition and Disclosure  an Amendment to SFAS No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entitys accounting policy decisions with respect to stock-based employee
compensation. Finally, this statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. We have adopted the disclosure requirements of SFAS No.
148 as of December 31, 2002.

In January 2003, The FASB issued FASB Interpretation Number 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation provides guidance on the identification of entities for which
control is achieved through means other than through voting rights and how to
determine when and which business enterprise should consolidate the Variable
Interest Entity. This new model for consolidation applies to an entity in
which either the equity investor (if any) does not have a controlling financial
interest or the equity investment at risk is insufficient to finance that
entitys activities without receiving additional subordinated financial support
from other parties. The adoption of this Interpretation did not have any
impact on our financial condition or results from operations.

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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement did not
have a material impact on our financial condition or results from operations.

(h)  COMMITMENTS AND CONTINGENCIES

The Company is subject to certain asserted and unasserted claims encountered in
the normal course of business. The Company believes that the resolution of
these matters will not have a material adverse effect on its financial position
or results of operations. The Company cannot provide assurance, however, that
damages that result in a material adverse effect on its financial position or
results of operations will not be imposed by these matters.




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We design, develop, market, and support a broad range of business
telecommunications solutions, including telephony products, voice processing
products, and computer-telephony products for a wide variety of business
applications. Our telecommunications solutions incorporate sophisticated
features, such as automatic call distribution and Internet protocol, or IP,
gateways. Our voice processing products include interactive voice response
systems, automated attendant, and voice and fax mail. Our computer-telephony
products enable users to integrate the functionality of their telephone systems
with their computer systems. We market our products primarily in the United
States as well as in foreign countries through a distribution model consisting
primarily of wholesale distributors and direct dealers.

Critical Accounting Policies and Estimates

Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates
and judgments, including those related to customer incentives, bad debts, sales
returns, excess and obsolete inventory, and contingencies and litigation. We
base our estimates and judgments on historical experience and on various other
factors that are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:

Customer Incentives

We record reductions to revenue for customer incentive programs, including
special pricing agreements, price protection for our distributors, promotions,
and other volume-related rebate programs. Such reductions to revenue are
estimates, which are based on a number of factors, including our assumptions
related to customer redemption rates, sales volumes, and inventory levels at
our distributors. If actual results differ from our original assumptions,
revisions are made to our estimates that could result in additional reductions
to our reported revenue in the period the revisions are made. Additionally, if
market conditions were to decline, we may take actions to

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increase the level of
customer incentive offerings that could result in an incremental reduction of
revenue in the period in which we offer the incentive.

Bad Debts

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Additionally, we have a significant concentration of accounts
receivable with our largest distributor, Graybar Electric Company, Inc. As of
September 30, 2003, Graybar accounted for 38% of our total accounts receivable.
If Graybars financial condition were to deteriorate, resulting in their
inability to make payments to us, it could have a material adverse impact on
our financial condition and results of operations.

Sales Returns

We maintain allowances for estimated sales returns. While we have
distribution agreements with our largest distributors that limit the amount of
sales returns on active products, we generally allow unlimited returns of
products that we discontinue. Accordingly, the timing and amount of revisions
to our estimates for sales returns is largely influenced by our decisions to
discontinue product lines and our ability to predict the inventory levels of
such products at our largest distributors. Revisions to these estimates have
the effect of increasing or decreasing the reported amount of revenue in the
period in which the revisions are made. We generally do not accept product
returns from our direct dealers unless the product is damaged.

Excess and Obsolete Inventory

We record our inventory at the lower of cost or market value. Our
assessment of market value is determined by, among other things, historical and
forecasted sales activity, the condition of specific inventory items, and
competitive pricing considerations. When the assessed market value is less
than the historical cost, provision is made in the financial statements to
write-down the carrying amount of the respective inventory items to market
value. If actual results are less favorable than our original assumptions for
determining market value, additional inventory write-downs may be required.

The above listing is not intended to be a comprehensive list of our
accounting policies. See our audited consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2002, which contains accounting policies and other disclosures
required by generally accepted accounting principles in the United States of
America.

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Results of Operations

The following table sets forth, for the periods indicated the percentage
of total revenue represented by certain revenue and expense items. The table
and the discussion below should be read in conjunction with the
consolidated financial statements and notes thereto that appear elsewhere
in this report.

|                                             |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |   
|-------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | --
|                                             |  | Three Months Ended |       | Nine Months Ended
|                                             |  | September 30,      |       | September 30,    
|                                             |  |                    |       |                  
|                                             |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                             |  |                    |       |                   |  |      |       |     
|Revenue                                      |  |                    | 100.0 | %                 |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | % 
|Cost of goods sold                           |  |                    | 65.4  |                   |  |      | 62.6  |      |  |  | 65.6  |   |  |  | 63.3  |   
|                                             |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |   
|Gross margin                                 |  |                    | 34.6  |                   |  |      | 37.4  |      |  |  | 34.4  |   |  |  | 36.7  |   
|Operating expenses:                          |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |   
|Engineering and product development          |  |                    | 4.4   |                   |  |      | 6.0   |      |  |  | 5.1   |   |  |  | 5.9   |   
|Selling, general, and administrative         |  |                    | 23.3  |                   |  |      | 27.7  |      |  |  | 24.1  |   |  |  | 26.5  |   
|                                             |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |   
|                                             |  |                    | 27.7  |                   |  |      | 33.7  |      |  |  | 29.2  |   |  |  | 32.4  |   
|Operating income                             |  |                    | 6.9   |                   |  |      | 3.7   |      |  |  | 5.2   |   |  |  | 4.3   |   
|Interest expense, net                        |  |                    | 0.4   |                   |  |      | 0.2   |      |  |  | 0.3   |   |  |  | 0.3   |   
|                                             |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |   
|Pretax income                                |  |                    | 6.5   |                   |  |      | 3.5   |      |  |  | 4.9   |   |  |  | 4.0   |   
|Income tax expense                           |  |                    | 2.6   |                   |  |      | 1.4   |      |  |  | 1.9   |   |  |  | 1.6   |   
|                                             |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |   
|Income before change in accounting principle |  |                    | 3.9   |                   |  |      | 2.1   |      |  |  | 3.0   |   |  |  | 2.4   |   
|Change in accounting principle               |  |                    |      |                   |  |      |      |      |  |  |      |   |  |  | (4.4  | ) 
|                                             |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |   
|Net income (loss)                            |  |                    | 3.9   | %                 |  |      | 2.1   | %    |  |  | 3.0   | % |  |  | (2.0  | )%
|                                             |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |       |   

Quarter Ended September 30, 2003 Compared With Quarter Ended September 30,
2002

Revenue

Revenue for the three-month period ended September 30, 2003 totaled $11.4
million, an increase of 8.1%, from revenue of $10.5 million for the same period
of 2002. Sales to our supply house customers accounted for approximately $7.0
million of our total revenue during the third quarter of 2003 compared with
$6.2 million in the 2002 third quarter. The increase in sales to our supply
house customers in 2003 is principally related to sales of our new STS
telephone system that we introduced in January 2003. The STS product line is a
full-featured telephone system designed and priced to capture a larger portion
of the small business telephone system market. While the STS telephone system
has been accepted well into the marketplace, sales of this product have had the
effect of reducing the level of sales of similar products that we sell through
supply houses.

Sales through our infinitedirect dealer program totaled $4.1 million for
the most recent quarter compared with $4.0 million for the same period a year
ago. During 2003, we continued our program to focus on selling to fewer, but
larger and better-established, dealers who are more effective at selling our
larger systems.

Gross Margin

Our gross margin was approximately $3.9 million for each of the quarterly
periods ended September 30, 2003 and 2002, respectively. Our gross margin as a
percentage of total revenue decreased to 34.6% during 2003 from 37.4% during
2002. The decrease in our gross margin percentage during 2003 is a direct
result of the product mix of sales to our supply house customers with a heavier
emphasis of sales of our new STS telephone system, which generates a lower
overall gross margin percentage than most of our other products.

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Engineering and Product Development

Engineering and product development expenditures decreased to $499,000
during the third quarter of 2003 from $637,000 in the same period of 2002. The
current quarters expenditures reflect headcount reductions and less outsourced
development costs from a year ago. While engineering and product development
expenditures have decreased from a year ago, we continue to invest in the
development of our next generation IP Key Telephone System, the convergence of
and enhancements to our existing Key Telephone Systems, and enhancements to our
voice processing products.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased to $2.7 million in
the third quarter of 2003 from approximately $2.9 in the third quarter of 2002.
During the third quarter of 2002, we incurred a $300,000 charge for the
settlement of litigation.

Interest Expense

Interest expense increased to $40,000 during the third quarter of 2003
from $22,000 for the same period a year ago.

Income Taxes

We provided for federal and state income taxes using an effective rate of
39.5% for each of the third quarters of 2003 and 2002.

Nine Months Ended September 30, 2003 Compared With Nine Months Ended
September 30, 2002

Revenue

Revenue for the nine-month period ended September 30, 2003 totaled $30.7
million, an increase of 6.6%, from revenue of $28.8 million for the same period
of 2002. Sales to our supply house customers accounted for approximately $18.4
million of our total revenue during the nine-month period of 2003 compared with
$16.6 million in the same period of 2002. The increase in sales to our supply
house customers in 2003 is principally related to sales of our new STS
telephone system that we introduced in January 2003. The STS product line is a
full-featured telephone system designed and priced to capture a larger portion
of the small business telephone system market. While the STS telephone system
has been accepted well into the marketplace, sales of this product have had the
effect of reducing the level of sales of similar products that we sell through
supply houses.

Sales through our infinitedirect dealer program totaled $12.1 million for
the first nine months of 2003 compared with $11.1 million the same period of
2002. During 2003, we continued our program to focus on selling to fewer, but
larger and better-established, dealers who are more effective at selling our
larger systems.

Gross Margin

Our gross margin was approximately $10.6 million for each of the
nine-month periods ended September 30, 2003 and 2002, respectively. Our gross
margin as a percentage of total revenue decreased to 34.4% during 2003 from
36.7% during 2002. The decrease in our gross margin percentage during 2003 is
a direct result of the product mix of sales to our supply house customers with
a heavier emphasis of sales of our new STS telephone system, which generates a
lower overall gross margin percentage than most our other products. In
addition, our gross margin percentage has declined during the first nine months
of 2003 as a result of our efforts to rationalize our product lines and reduce
inventory levels.

Engineering and Product Development

Engineering and product development expenditures decreased slightly to
$1.6 million during the first nine months of 2003 from $1.7 million for the
same period a year ago. We continue to invest in the development of our next
generation IP Key Telephone System, the convergence of and enhancements to our
existing Key Telephone Systems, and enhancements to our voice processing
products.

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Selling, General, and Administrative Expenses

Selling, general, and administrative expenses also decreased to $7.4
million for the nine months ended September 30, 2003 compared to $7.6 from the
same period of 2002. The decrease is primarily attributable to $300,000 of
expense in the 2002 period for the settlement of litigation.

Interest Expense

Interest expense increased slightly to $93,000 for the first nine months
of 2003 from $82,000 for the same period a year ago.

Income Taxes

We provided for federal and state income taxes using an effective rate of
39.5% during the 2003 period compared with 39.6% for the 2002 period.

Liquidity and Capital Resources

Our net working capital position was approximately $7.7 million at
September 30, 2003 compared with $8.1 million at December 31, 2002. We had a
cash balance of $1.5 million at September 30, 2003 compared with a cash balance
of $1.1 million at December 31, 2002. Factors that decreased our cash position
during the first nine months of 2003 included an increase in accounts
receivable of $407,000, a reduction of accounts payable of $963,000, and
repayments on our term loan of $50,000. We also used approximately $262,000
during the first nine months of 2003 for the purchase of property and equipment
and $2.1 million for the repurchase of stock. Sources of cash included positive
income from operations, reductions in inventory of $1.0 million and other
current assets of $226,000, the receipt of a $300,000 income tax refund and
borrowings on our term loan of $1.0 million.

Our accounts receivable days sales outstanding, calculated on a quarterly
basis, were approximately 56 days as of September 30, 2003 compared to 70 days
as of December 31, 2002. The timing of payments received from our largest
distributors and the linearity of our revenue streams during the quarter
significantly influence our days sales outstanding and our liquidity. Our two
largest distributors comprised 54% of our total accounts receivable as of
September 30, 2003 and 43% as of December 31, 2002. An increase in
concentration from our two largest distributors generally has the effect of
increasing our days sales outstanding while a more linear revenue stream during
the quarter has the effect of reducing our receivable days sales outstanding.

Our inventory turnover, measured in terms of days sales outstanding on a
quarterly basis, was 55 days as of September 30, 2003 compared to 87 days as of
December 31, 2002. The decrease in inventory days outstanding is a direct
result of a higher volume of sales in the third quarter 2003 compared with the
fourth quarter of 2002 and our efforts to rationalize our product lines.

Trade payables and accrued liabilities, including payables to third-party
and related-party manufacturers, were approximately $6.1 million as of
September 30, 2003 compared with $6.8 million as of December 31, 2002. The
level of our trade payables and accrued liabilities between periods is largely
influenced by the timing of payments we make to our largest suppliers for
inventory items and payments to cover payroll and customer rebates. We
generally pay trade payables within 45 days from the invoice date, except for
payments to our largest supplier, which are 60 days from the invoice date.

We had a $15.0 million credit facility with General Electric Capital
Corporation that expired in April 2003. The line of credit bore interest at
2.5% over the 30-day commercial paper rate. Advances under the line of credit
were based upon eligible accounts receivable and inventory of our wholly owned
subsidiary Vodavi Communications Systems, Inc., and were secured by
substantially all of our assets. The revolving line of credit contained
covenants that are customary for similar credit facilities and also prohibited
our operating subsidiaries from paying dividends to our Company without the
consent of GE Capital.

In April 2003, we entered into a credit agreement with Comerica
Bank-California of a size that is more reflective of the current capital
requirements of our business. The credit agreement established a $5.0 million
revolving line of credit and a $1.0 million term loan. Advances under the
credit facility are based upon eligible

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accounts receivable and inventory of
our wholly owned subsidiary Vodavi Communications Systems, Inc. and are secured
by substantially all of our assets. The credit facility contains covenants that
are customary for similar credit facilities and also prohibits our operating subsidiaries from
paying dividends to our Company without the consent of Comerica.

The $5.0 million revolving line of credit bears interest at Comericas
prime rate, or 4.0% at September 30, 2003, and requires monthly payments of
interest only with all unpaid principal and accrued interest due at its
expiration in April 2005. If we are unable to reduce the principal balance on
the line of credit to zero for at least thirty consecutive days during any
fiscal year, then any remaining balance will be converted into a term loan, or
term balance, as defined in the agreement. In addition to interest on the term
balance, we will be required to make monthly payments of principal in an amount
sufficient to fully amortize the term balance over a thirty-six month period.

The $1.0 million term loan was available to us only for the purpose of
acquiring our common stock. Borrowings on the term loan bear interest at
Comericas prime rate plus 0.5%, or 4.5% at September 30, 2003. In addition to
interest on the term loan, we are required to make monthly payments of
principal in an amount sufficient to fully amortize the term loan over a
sixty-month period with all unpaid principal and accrued interest due in
thirty-six months, or by June 2006.

In May 2003, we commenced a self-tender offer to purchase up to 1,000,000
shares of our common stock for $2.40 per share. On June 13, 2003, we
repurchased 829,199 shares of our common stock at $2.40 per share pursuant to
the tender offer. The purchase price of approximately $2.1 million, which
includes offering costs of approximately $73,000, is recorded as a reduction to
common stock and additional paid in capital in the accompanying consolidated
balance sheet as of June 30, 2003. The repurchase was funded through advances
on our revolving line of credit and term loan.

We have no special purpose entities or off balance sheet financing
arrangements, commitments, or guarantees other than certain long-term operating
lease agreements for our office and warehouse facilities and short-term
purchase commitments to our third-party suppliers. The following table sets
forth all known commitments as of September 30, 2003 and the year in which
those commitments become due or are expected to be settled (in thousands):

|           |  |           |       |              |  |             |     |             |  |       |       |                  |  |   |       |  |  |   |        | 
|---------- |  | --------- | ----- | ------------ |  | ----------- | --- | ----------- |  | ----- | ----- | ---------------- |  | - | ----- |  |  | - | ------ | 
|           |  |           |       |              |  | Credit      |     |             |  |       |       | Accounts Payable |  |   |       | 
|           |  | Operating |       | Facility and |  | Purchase    |     | & Accrued   |  |       |       |                 
|Year       |  | Leases    |       | Term Loan    |  | Commitments |     | Liabilities |  | Total
|           |  |           |       |              |  |             |     |             |  |      
|2003       |  | $         | 274   |              |  | $           | 50  |             |  | $     | 6,212 |                  |  | $ | 6,115 |  |  | $ | 12,651 | 
|2004       |  |           | 1,095 |              |  |             | 200 |             |  |       |      |                  |  |   |      |  |  |   | 1,295  | 
|2005       |  |           | 881   |              |  |             | 200 |             |  |       |      |                  |  |   |      |  |  |   | 1,081  | 
|2006       |  |           | 818   |              |  |             | 500 |             |  |       |      |                  |  |   |      |  |  |   | 1,318  | 
|2007       |  |           | 785   |              |  |             |    |             |  |       |      |                  |  |   |      |  |  |   | 785    | 
|Thereafter |  |           | 3,142 |              |  |             |    |             |  |       |      |                  |  |   |      |  |  |   | 3,142  | 
|           |  |           |       |              |  |             |     |             |  |       |       |                  |  |   |       |  |  |   |        | 
|Total      |  | $         | 6,995 |              |  | $           | 950 |             |  | $     | 6,212 |                  |  | $ | 6,115 |  |  | $ | 20,272 | 
|           |  |           |       |              |  |             |     |             |  |       |       |                  |  |   |       |  |  |   |        | 

From time to time we are subject to certain asserted and unasserted claims
encountered in the normal course of business. We believe that the resolution
of these matters will not have a material adverse effect on our financial
position or results of operations. We cannot provide assurance, however, that
damages that result in a material adverse effect on our financial position or
results of operations will not be imposed in these matters.

We believe that our working capital and credit facilities are sufficient
to fund our capital needs during the next 12 months. Although we currently
have no acquisition targets, we intend to continue to explore acquisition
opportunities as they arise and may be required to seek additional financing in
the future to meet such opportunities.

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International Manufacturing Sources

We currently obtain a substantial majority of our products under various
manufacturing arrangements with third-party manufacturers in South Korea and
Thailand, including LGE who owns approximately 25% of our outstanding common
stock. We face risks associated with international manufacturing sources. For
a more detailed discussion of these risks, please see Item 1, Special Considerations
included in our annual report on form 10-K for the year ended December 31,
2002.

Impact of Recently Issued Standards

In 2001, the FASB issued SFAS No. 141, Accounting For Business Combinations,
and SFAS No. 142, Goodwill And Other Intangible Assets. These statements
modified accounting for business combinations after June 30, 2001 and affected
the Companys treatment of goodwill and other intangible assets effective
January 1, 2002. The statements require that goodwill existing at the date of
adoption be reviewed for possible impairment and that impairment tests be
performed at least annually, with impaired assets written-down to fair value.
Additionally, existing goodwill and intangible assets must be assessed and
classified consistent with the statements criteria. Intangible assets with
estimated useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indefinite lives will
cease.

The Company determined that upon adoption of these statements on January 1,
2002, the $1.6 million carrying amount of the goodwill as of that date was
impaired. The goodwill impairment was recognized in 2002 as a change in
accounting principle, net of $375,000 of income taxes.

In October 2001, the FASB issued SFAS No. 144 Accounting for Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement also extends the reporting requirements to report separately, as
discontinued operations, components of an entity that have either been disposed
of or are classified as held-for-sale. We adopted the provisions of SFAS No.
144 effective January 1, 2002. The adoption of this statement did not have any
impact on our financial condition or results from operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 replaced EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring), and applies to exit or disposal
activities initiated after December 31, 2002. The requirements of SFAS No. 146
will not be required unless and until the Company has a future exit or disposal
activity.

In November 2002, the FASB issued FASB Interpretation Number 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantee of the Indebtedness of Others. This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions in this interpretation apply to guarantees issued or modified after
December 31, 2002. We have adopted the disclosure provisions of this
interpretation.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensations  A Transition and Disclosure  an Amendment to SFAS No. 123.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entitys accounting policy decisions with respect to stock-based employee
compensation. Finally, this statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. We have adopted the disclosure requirements of SFAS No.
148 as of December 31, 2002.

In January 2003, The FASB issued FASB Interpretation Number 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation provides guidance on the identification of entities for which
control is achieved through means other than through voting rights and how to
determine when and which

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business enterprise should consolidate the Variable
Interest Entity. This new model for consolidation applies to an entity in
which either the equity investor (if any) does not have a controlling financial
interest or the equity investment at risk is insufficient to finance that
entitys activities without receiving additional subordinated financial support
from other parties. The adoption of this Interpretation did not have any
impact on our financial condition or results from operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement did not
have a material impact on our financial condition or results from operations.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This report contains forward-looking statements, including statements regarding
our business strategies, our business, and the industry in which we operate.
These forward-looking statements are based primarily on our expectations and
are subject to a number of risks and uncertainties, some of which are beyond
our control. Actual results could differ materially from the forward-looking
statements as a result of numerous factors, including those set forth in our
Form 10-K for the year ended December 31, 2002, as filed with the Securities
and Exchange Commission.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not participate in any activities involving derivative financial
instruments or other financial and commodity instruments. We do not hold
investment securities that would require disclosure of market risk. Our market
risk exposure is limited to interest rate risk associated with our credit
facility. We incur interest at a variable rate of prime on advances made under
our revolving line of credit and prime plus 0.5% on our term loan. At
September 30, 2003 we had a term loan balance of $950,000 and had no
outstanding borrowings on the line of credit.




ITEM 4. CONTROLS AND PROCEDURES

We have evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of September 30, 2003. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have each concluded that our
disclosure controls and procedures are effective to ensure that we record,
process, summarize, and report information required to be disclosed by us in
our quarterly reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commissions rules and forms.
During the quarterly period covered by this report, there have not been any
changes in our internal controls over financial reporting that have materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

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##### Table of Contents






PART II  OTHER INFORMATION






| | Item 1. | Legal Proceedings
| | ------- | -----------------
|
| |         | Not applicable.  






| | Item 2. | Changes In Securities and Use of Proceeds
| | ------- | -----------------------------------------
|
| |         | Not applicable.                          






| | Item 3. | Defaults Upon Senior Securities
| | ------- | -------------------------------
|
| |         | Not applicable.                






| | Item 4. | Submission of Matters to a Vote of Security Holders
| | ------- | ---------------------------------------------------
|
| |         | Not applicable.                                    






| | Item 5. | Other Information
| | ------- | -----------------
|
| |         | Not applicable.  






| | Item 6. | Exhibits and Reports on Form 8-K
| | ------- | --------------------------------
|

| | Exhibits: |                                                                                                                                                                          
| | --------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |           | Exhibit 31.1  Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended.
|
| |           | Exhibit 31.2  Certification of Chief Financial Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended.
|
| |           | Exhibit 32.1  Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.        
|
| |           | Exhibit 32.2  Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.        
|
| |           | Reports on Form 8-K:                                                                                                                                                     
|
| |           | On July 2, 2003, the Registrant filed a Form 8-K reporting a change
in the Registrants certifying accountant.                                                           

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|       |  |                  |  |                                                                                                                   
|------ |  | ---------------- |  | ------------------------------------------------------------------------------------------------------------------
|       |  |                  |  | VODAVI TECHNOLOGY, INC.                                                                                           
|Dated: |  | October 28, 2003 |  | /s/ Gregory K. Roeper                                                                                             
|       |  |                  |  |                                                                                                                   
|       |  |                  |  | Gregory K. Roeper
President and Chief Executive Officer
(Principal Executive Officer)                             
|Dated: |  | October 28, 2003 |  | /s/ David A. Husband                                                                                              
|       |  |                  |  |                                                                                                                   
|       |  |                  |  | David A. Husband
Chief Financial Officer and Vice President  Finance
(Principal Financial and Accounting Officer)

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EXHIBIT INDEX





| | Exhibit
Number |  | Description                                                                                                                                               
| | -------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 31.1           |  | Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended.
|
| | 31.2           |  | Certification of Chief Financial Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the
Securities Exchange Act of 1934, as amended.
|
| | 32.1           |  | Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.        
|
| | 32.2           |  | Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.