SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31, 2002       Commission File Number 0-26912


                             VODAVI TECHNOLOGY, INC.
             (Exact name of registrant as specified in its charter)

               Delaware                                          86-0789350
    (State or other jurisdiction of                           (I.R.S. Employer
     incorporation or organization)                          Identification No.)

   4717 East Hilton Avenue, Suite 400
          Phoenix, Arizona                                       85034-6402
(Address of principal executive offices)                          (Zip Code)

                                 (480) 443-6000
               Registrant's telephone number, including area code


           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 par value

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

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

The  aggregate  market  value  of  common  stock  held by  nonaffiliates  of the
registrant  (3,258,485 shares) based on the closing price of the common stock as
reported  on the Nasdaq  SmallCap  Market on June 28,  2002,  which was the last
business day of the registrant's most recently  completed second fiscal quarter,
was $6,907,988. For purposes of this computation,  all officers,  directors, and
10%  beneficial  owners of the  registrant  are  deemed to be  affiliates.  Such
determination  should not be deemed an admission that such officers,  directors,
or 10% beneficial owners are, in fact, affiliates of the registrant.

As  of  March  24,  2003,  there  were  outstanding   4,349,788  shares  of  the
registrant's  common stock,  $.001 par value,  which excludes  318,700  treasury
shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

     None.
<PAGE>
                             VODAVI TECHNOLOGY, INC.

                           ANNUAL REPORT ON FORM 10-K

                       FISCAL YEAR ENDED DECEMBER 31, 2002

                                TABLE OF CONTENTS
                                                                            PAGE
                                                                            ----
PART I

  ITEM 1.      BUSINESS.....................................................   1
  ITEM 2.      PROPERTIES...................................................  18
  ITEM 3.      LEGAL PROCEEDINGS............................................  18
  ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........  18

PART II

  ITEM 5.      MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
                 RELATED STOCKHOLDER MATTERS................................  19
  ITEM 6.      SELECTED FINANCIAL DATA......................................  20
  ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS..........................  21
  ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
               RISK.........................................................  28
  ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................  28
  ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE..........................  28

PART III

  ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........  29
  ITEM 11.     EXECUTIVE COMPENSATION.......................................  31
  ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
               AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS...............  36
  ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............  38
  ITEM 14.     CONTROLS AND PROCEDURES......................................  38

PART IV

  ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                 FORM 8-K...................................................  39

SIGNATURES     .............................................................  41

CERTIFICATIONS .............................................................  42

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................. F-1

                 STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     THE  STATEMENTS  CONTAINED  IN THIS REPORT ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE  FORWARDING-LOOKING  STATEMENTS  WITHIN THE MEANING OF APPLICABLE
SECURITIES LAWS.  FORWARD-LOOKING  STATEMENTS INCLUDE  STATEMENTS  REGARDING OUR
"EXPECTATIONS,"   "ANTICIPATION,"   "INTENTIONS,"   "BELIEFS,"  OR  "STRATEGIES"
REGARDING  THE  FUTURE.   FORWARD-LOOKING  STATEMENTS  ALSO  INCLUDE  STATEMENTS
REGARDING REVENUE, MARGINS,  EXPENSES, AND EARNINGS ANALYSIS FOR FISCAL 2003 AND
THEREAFTER;  TECHNOLOGICAL DEVELOPMENTS; FUTURE PRODUCTS OR PRODUCT DEVELOPMENT;
OUR  PRODUCT  AND  DISTRIBUTION   CHANNEL  DEVELOPMENT   STRATEGIES;   POTENTIAL
ACQUISITIONS  OR  STRATEGIC  ALLIANCES;  THE  SUCCESS OF  PARTICULAR  PRODUCT OR
MARKETING  PROGRAMS;  AND LIQUIDITY AND ANTICIPATED CASH NEEDS AND AVAILABILITY.
ALL FORWARD-LOOKING  STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION
AVAILABLE  TO US AS OF  THE  FILING  DATE  OF  THIS  REPORT,  AND WE  ASSUME  NO
OBLIGATION TO UPDATE ANY SUCH  FORWARD-LOOKING  STATEMENTS.  OUR ACTUAL  RESULTS
COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING  STATEMENTS.  AMONG THE FACTORS
THAT COULD CAUSE RESULTS TO DIFFER  MATERIALLY ARE THE FACTORS DISCUSSED IN ITEM
1, "SPECIAL CONSIDERATIONS."

                                      -i-
<PAGE>
                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

     We  design,  develop,  market,  and  support  a  broad  range  of  business
telecommunications  solutions,  including traditional and IP telephony products,
voice processing products, as well as computer telephony products that address a
wide  variety  of  business  applications.   Our  telecommunications   solutions
incorporate sophisticated features such as automatic call distribution, scalable
networking,  Internet Protocol, or IP, as well as wireless solutions.  Our voice
processing products include Internet messaging,  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.

     Our   goal   is   to   develop,    deliver,    and   support   high-quality
telecommunications products and services that meet the demands of the markets we
serve. Key elements of our strategy to achieve that goal include the following:

     *    expand  our  core  business  of  supplying  telephone  systems,  voice
          processing systems, and computer-telephony integration (CTI) products;

     *    emphasize  sales of  larger  and more  advanced  systems  through  our
          dealers;

     *    focus on the integration of existing and newly  developed  products to
          provide  complete,  industry  standard-based  business  communications
          products to our customers;

     *    focus on IP  telephony  product  developments  allowing  Voice over IP
          (VoIP) connectivity for our legacy products and our next generation IP
          LAN telephony system;

     *    expand our strategic  relationship  with LG Electronics  Inc., or LGE,
          which is a member of the multi-billion dollar,  Korean-based LG Group;
          and

     *    enhance  our  existing  products  and  expand  our  product  lines  by
          expanding  our  technological   expertise  and  distribution  channels
          through

          --   business acquisitions,  license arrangements, and other strategic
               relationships, and

          --   internal research and development efforts.

     Our corporate  offices are located at 4717 East Hilton  Avenue,  Suite 400,
Phoenix,  Arizona,  and our telephone  number is (480) 443-6000.  Our website is
located at www.vodavi.com. Through our website, we make available free of charge
our annual report on Form 10-K, our proxy  statement,  our quarterly  reports on
Form 10-Q,  our current  reports on Form 8-K,  amendments to reports filed under
the Securities Exchange Act, and earnings press releases.  All references to our
business  operations in this report include the operations of Vodavi Technology,
Inc. and our subsidiaries.

INDUSTRY OVERVIEW

     Virtually  every  business  relies  upon its  communications  system  as an
essential tool to speed and enhance the  effectiveness of  communications  among
employees,  customers,  and vendors;  to contact  decision makers  regardless of
their location;  to increase employee  productivity;  to provide better customer
service;  and to reduce  operating  costs.  Many  factors  have  influenced  the
telecommunications industry, including the following:

     *    successive  technological  developments that have resulted in enhanced
          features and services;

     *    advances in telephone and computer hardware and software;

     *    emphasis   on  the   use  of   communications   systems   to   provide
          cost-effective customer service;

     *    development of the Internet as an alternative to traditional telephone
          networks; and

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<PAGE>
     *    regulatory changes.

These factors have resulted in continual  development of full-featured  business
communications  systems designed for use by small- and  medium-sized  businesses
that can be offered at affordable prices.

     Accelerated   technological   advances   in  recent   years  have   enabled
telecommunications  system providers to develop sophisticated systems that offer
a wide  variety of  applications  in  addition  to  traditional  call  switching
functions.  Businesses  of all sizes now  demand  affordable  telecommunications
systems that provide the capacity for

     *    voice processing systems, which automate call answering, provide voice
          mail and  automated  call  distribution  functions,  and  provide  the
          capacity to manage facsimile messages; and

     *    computer-telephony  integration, which greatly enhances efficiency and
          productivity by integrating businesses' voice and data networks.

Automatic  call  distribution,  IP  telephony,  wireless  offerings,  and  other
innovations represent  significant  opportunities for sales of new product lines
and applications to increase further employee  mobility and efficiency.  We also
believe that international  sales of voice processing  products will increase in
the  future as demand for  features  such as voice  mail and  unified  messaging
increases.

OUR PRODUCTS

     We currently design, develop, market, and support a broad range of

     *    telephony  products,  which include digital and IP-based key telephone
          systems and commercial grade telephones;

     *    voice processing products,  including automated  attendant,  automatic
          call  distribution,  voice mail and fax mail,  and  unified  messaging
          systems; and

     *    computer-telephony   products,   including  Windows-based  application
          products  (such as PC telephones and attendant  consoles),  local area
          network (known as LAN) to PBX connection  packages,  IP gateways,  and
          Internet messaging systems.

TELEPHONY PRODUCTS

     KEY TELEPHONE SYSTEMS

     Sales of key telephone systems represented approximately 74% of our revenue
during  2002,  74% of our  revenue  during  2001,  and 71%  during  2000.  A key
telephone system consists primarily of a sophisticated switching unit located at
the user's place of business, along with the individual telephone sets and other
devices, such as facsimile machines or modems, located at individual "stations."
We  supply  various  models  of key  telephone  sets,  several  of which are CTI
compatible,  with  progressive  features for use in conjunction with each of our
key telephone systems.

     We currently  market  various  lines of key  telephone  systems,  under our
STARPLUS,  Triad, and INFINITE brand names,  for businesses  requiring as few as
three  incoming  lines and eight  stations  up to 144 lines and 250  stations (a
384-port system). We sell the STARPLUS line to large wholesale  distributors for
resale to  telephone  sales and  installation  companies  known as  "dealers" or
"interconnects." We also sell our Triad line to large wholesale distributors for
resale  only to  authorized  dealers.  We sell our  INFINITE  line  directly  to
authorized dealers.

     We market  both  digital and  IP-based  key  telephone  systems and related
products.  Our digital telephone systems employ a digital  architecture in order
to provide digital voice  transmission  and system  control,  while our IP-based
telephone systems utilize an IP data network for voice transmission. Most of our
telephone  systems feature flexible  software combined with modular hardware and
card slot design, which allow cost-effective  system customization and expansion
to meet the needs of individual  users. Our digital  telephone systems are fully
compatible with  industry-standard  commercial  grade  telephones and contain an
extensive  array of standard  features that add  sophistication  generally found
only in larger telephone systems.  We design our key telephone systems to permit

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<PAGE>
expansion  or   customization   for  specific   business   applications  by  the
installation of a variety of voice processing or computer-telephony  integration
products.

     Our digital systems enable customers to upgrade their telephone  systems as
their  businesses  grow  and as  technology  advances  by  adding  or  replacing
components in stages without replacing their entire systems.  As a result, it is
generally more economical for the end users to expand their STARPLUS,  Triad, or
INFINITE  systems than to switch to a competitor's  system.  We believe that the
economy and flexibility we provide our customers through this migration strategy
provides us with a competitive advantage.

     COMMERCIAL GRADE TELEPHONES

     We market several models of commercial grade telephones  through  wholesale
distributors  for use with  analog or  digital  key  systems,  PBX  systems,  or
telephone company central office, or Centrex, switching systems. Businesses, the
hospitality industry, and school districts represent the principal purchasers of
our commercial  grade  telephones.  All of our commercial  grade telephones meet
industry standards for commercial telephone units and may be used with telephone
systems sold by us or by competing manufacturers.

     Our commercial grade telephones offer a myriad of features,  functions, and
designs  ranging  from  simple,   traditionally  styled  desk  and  wall-mounted
telephones  to  programmable  telephones  with  contemporary  styling.  Our more
advanced commercial grade telephones contain a central processing unit, built-in
memory, built-in data jacks, built-in speakerphones, built-in Caller ID, and the
capability to use custom calling features provided by local telephone companies.
Sales of  commercial  grade  telephones  represented  approximately  7.5% of our
revenue during 2002, 7% of our revenue during 2001, and 8% during 2000.

VOICE PROCESSING PRODUCTS

     Voice processing  includes  functions  designed to improve customer service
and reduce  labor  costs  while  providing  faster,  more  efficient  routing of
incoming  calls as well as  speeding up and  simplifying  message  delivery  and
storage. We design our voice processing products to integrate with the telephone
systems  we sell  as well as  those  sold by  competing  manufacturers.  We also
cultivate the  expansion of our existing  base of telephone  systems by offering
digitally integrated voice processing systems for our Triad and INFINITE product
lines to  differentiate  them from our  competitors'  products  and to provide a
value-added  basis  for  increased  sales  and  profit  margins.  Sales of voice
processing  products  accounted for  approximately  18.5% of our revenue  during
2002, 19% during 2001, and 21% during 2000.

     VOICE MAIL SYSTEMS

     Voice  mail  enables  callers  to  leave  detailed   messages  and  permits
recipients to retrieve  messages when they return to their offices or by dialing
into the system from remote telephones.  Each voice mailbox can be customized to
the individual user's needs. Voice messages can be stored,  replayed,  saved, or
erased as desired by the user.  The menu routing  functions  included in some of
our voice mail systems  enable  business  users to program the systems to create
custom,   multi-level   menus  that  permit  callers  to  automatically   access
organizational  departments or product, service, or event information by dialing
menu choices.

     In addition to our larger  voice  processing  systems,  we market a line of
self-contained,  competitively  priced  voice  processing  systems  designed for
small- to medium-sized  organizations.  These systems, which work in conjunction
with key  telephone  systems sold by us as well as other  manufacturers,  can be
expanded  from two ports up to eight  ports,  feature a full range of  automated
attendant and voice mail functions, and include a serial port for administration
via the user's personal computer.

     ADVANCED MESSAGING PLATFORM

     Our  Microsoft(R)   Windows  NT-based  messaging  systems,   which  provide
virtually unlimited port capacities, combine voice mail functions with facsimile
messaging  capabilities  (known  as fax  mail) as well as the  ability  to share
messages with other voice messaging systems over the Internet. Fax mail provides
the ability to receive,  store,  retrieve, and forward facsimile messages in the
same  manner  that  voice  mail  handles  voice  messages.  Our fax mail  system

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<PAGE>
digitizes and stores facsimile messages and notifies the user that messages have
been received.  The user can retrieve and print the  facsimiles  from his or her
office or remote  locations  (such as a hotel  room) and can also  instruct  the
system  to  forward  facsimiles  to other  recipients.  "Fax-on-demand"  enables
callers to access information stored by a business,  such as sales and marketing
brochures, technical specifications, and pricing data, and request the system to
transmit the desired information to the caller's facsimile machine.

     Our Windows  NT-based system also uses Internet e-mail  protocols to enable
voice messages to be transported  over the Internet or other  electronic  fields
for  efficient,   low-cost  information  exchange  between  remote  systems.  In
addition,  our Windows NT-based Internet fax delivery systems connect the user's
telephone  and  computer  to enable the user to transmit  facsimile  messages or
documents to  conventional  facsimile  machines via the Internet.  These systems
provide  ease of use and avoid  problems  associated  with  e-mail  attachments,
mismatched data encryption techniques, or private or switched network costs. Our
Internet fax delivery systems provide spoken prompts that guide the user through
the transmission process and also transmit delivery  confirmations to the user's
mailbox.  As a result,  a business  with  multiple  offices can extend its voice
messaging  system so as to permit  employees in  different  locations to create,
receive,  answer, or forward voice and facsimile  messages via the Internet more
quickly,  efficiently, and economically than traditional long-distance telephone
calls.

     Our Windows NT-based system also uses Microsoft(R)  Exchange  technology to
provide unified  messaging.  Unified  messaging  enables users to access e-mail,
voice mail,  facsimiles,  and paging  messages in a single session at a personal
computer.  The  system  displays a listing  of all of the  user's  messages  and
enables the user to access and control all of his or her  messages  with a click
of the computer mouse.

     AUTOMATIC CALL DISTRIBUTION

     We market our automatic call distribution, or ACD, software systems and ACD
reporting packages for use with our digital key telephone systems. The automatic
call  distribution  functions  enable  businesses that receive customer calls to
manage incoming calls  efficiently by directly routing them to the proper person
or group.  Our ACD systems reduce the number of abandoned  calls by reducing the
number of calls placed on hold and by  minimizing  the length of time that calls
are kept on hold. When all group member  telephones are busy, ACD plays a custom
"hold"  message  for the caller  and  connects  the call to the first  available
person or sales agent.  ACD saves employee time by eliminating  the necessity of
continually  answering and  transferring  calls to the same groups.  ACD enables
agents with display  telephones  to see the number of calls  waiting in queue as
well as the length of the longest  waiting call in order to speed call  handling
at times of heavy calling activity. Our ACD reporting package provides real-time
statistics  and  comprehensive  reports  on calling  activity  for review by the
user's management.

COMPUTER-TELEPHONY INTEGRATION PRODUCTS

     We design,  develop,  and market CTI products that use an open architecture
to integrate  computer and telephone  systems into a  user-friendly  information
processing and storage system.  We believe that developing more  value-added CTI
applications  for our  telephone  systems will enhance the appeal of our product
lines  and  enable  us  to  sell  more  key  telephone  systems,   full-featured
telephones,  and other  software  packages and add-on  peripheral  products.  We
market CTI products that enable a user

     *    to use the Internet to access voice,  facsimile,  and e-mail  messages
          via personal computers;

     *    to incorporate  telephone  functions  with computer  software to speed
          call handling and permit the user to personalize telephone functions;

     *    to identify  incoming  callers and  immediately  access computer files
          relating to the caller;  connect  Windows-based local area networks to
          the user's telephone system; and

     *    to  access  and  analyze  call  accounting   information  quickly  and
          inexpensively.

NEW PRODUCT DEVELOPMENT

     We engage in an ongoing  program to develop  enhancements  to our  existing
product lines and to develop new products that address the increasing demands of
business organizations for low-cost productivity enhancing  communication tools.
We believe that  continuous  development  of new  products and features  will be
necessary to enable us to continue to offer telephony systems,  voice processing

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<PAGE>
products,  computer-telephony  products,  and  related  business  communications
products  that  will be in  greatest  demand  and  that  will  provide  the best
opportunities  for our growth and  profitability  on an ongoing  basis.  We have
developed and  introduced  several new or enhanced  products and product  lines,
including the following:

     *    the XTS digital key system platform expandable from 12 to 384 ports;

     *    a full  featured  networking  package  to  connect  up to 16  customer
          locations;

     *    the STS digital key system;

     *    our new Pathfinder 9.0 voice processing  system that provides enhanced
          client and server applications;

     *    a digital version of Pathfinder 9.0 allowing direct digital connection
          to our Infinite  and Triad key system  products,  which will  transmit
          Caller  ID  information  to the  voice  processing  systems  providing
          potential for enhanced features;

     *    our IP telephony system,  Telenium IP, providing LAN telephony from 64
          stations expanding to 300 stations.  We are also developing for LGE an
          IP equivalent of our Pathfinder  that will provide IP  connectivity to
          our Telenium IP system; and

     *    a new line of digital key sets with expanded "soft key" capability.

     We are  currently  focusing  our new  product  development  efforts  on new
products and enhancements  that will deliver greater  features,  sophistication,
and  value  to  our  current  product  offerings.   In  addition,   through  new
developments,  we are targeting markets that we do not currently serve. Examples
of our current developments include the following:

     *    an expanded  version of the XTS  switching  platform from 384 ports to
          600 ports, allowing us to market larger customer applications;

     *    the continued IP enabling of our XTS switch with the  introduction  of
          our  networking  package  that  operates  using an IP  infrastructure,
          allowing up to 32 XTS systems to operate as one seamless  system using
          the customer's LAN/WAN infrastructure;

     *    a new "In  Skin" PC  platform  that will  provide  a voice  processing
          application on the Starplus STS system;

     *    a new "In Skin" PC platform  that will provide  software  applications
          such as  voice  processing,  ACD,  and CTI,  eliminating  the need for
          external computer platforms on the XTS System;

     *    a wireless IP product that will offer complete in-building mobility to
          the XTS and Telenium telephone systems;

     *    new hardware and  software  enhancements  to the Telenium IP telephone
          system  that  will  add  remote  worker,   IP  security,   high  speed
          interfaces,  SIP protocol support, and transparent networking features
          to the product; and

     *    a Feature  Server  platform that will host software  applications  and
          interface  with the  Telenium  and XTS  systems  via an IP  interface,
          thereby reducing the requirement for specific voice cards.

     We are expanding our strategic  alliances  with LGE and other third parties
related to the development of new products,  product lines, or product features,
including  our new  Telenium  IP system.  We will  continue  to seek  additional
strategic alliances for new product development in the future.

SALES, MARKETING, AND DISTRIBUTION

     We currently market our products in all 50 states and, to a limited extent,
internationally  through a distribution  network  consisting  primarily of large
wholesale  distributors and telephone sales and installation  companies known as
"direct dealers." In March 2002,  through our acquisition of Dataspeak  Systems,
Inc., we began  distributing our products and services  directly to end-users in
the Phoenix  metropolitan  area.  We also had an in-house  sales force that made
direct  sales  of  Interactive   Voice  Response   products  to  end-users.   We
discontinued our Interactive  Voice Response  business in March 2001. We have in

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<PAGE>
the past and may in the future  market our products on a private  label basis to
original equipment  manufacturers,  or OEMs. The following table sets forth, for
the periods  indicated,  the  percentage  of total  revenue  represented  by the
respective distribution channels.

                                                  YEAR ENDED DECEMBER 31,
                                                --------------------------
     DISTRIBUTION CHANNEL                       2002       2001       2000
     --------------------                       ----       ----       ----
     Wholesale Distributors                       56%        55%        65%
     Direct Dealers                               41%        41%        30%
     Direct Sales Office                           3%        --         --
     IVR Customers                                --          4%         5%
                                                ----       ----       ----
                                                 100%       100%       100%
                                                ====       ====       ====

     The following diagram illustrates the current distribution channels for our
product lines.

     WHOLESALE DISTRIBUTORS

                                     [LOGO]
                                     VODAVI

     TRIAD               STARPLUS                      INFINITE(1)
       |                    |                              |
       |                    |                    ---------------------
  DISTRIBUTOR           DISTRIBUTOR              |                   |
       |                    |                    |                   |
       |                    |                    |                   |
       |                    |                    |                   |
   AUTHORIZED             DEALER            AUTHORIZED               |
    DEALER                  |                 DEALER                 |
       |                    |                    |                   |
       |                    |                    |                   |
   END USER             END USER             END USER            END USER

(1)  Infinite  product  is  distributed  direct  to end  users  in  the  Phoenix
     metropolitan area through our direct sales office.

     We design and market our  STARPLUS  and Triad  brands of products  for sale
through wholesale distributors. These distributors resell our products primarily
to small  local  interconnect  companies,  dealers,  and  independent  telephone
companies.  The interconnects and independent telephone companies in turn resell
our products to end users, install the systems at the end users' businesses, and
provide  service and technical  support  following the sale. We provide  ongoing
support  and  training  to enable  distributors  and their  dealers  to sell our
products  more  effectively  and to provide the  interconnects  and  independent
telephone  companies with technical  assistance they may request with respect to
installation, maintenance, and customer support.

     We believe  that  sales  through  distributors  offer  several  advantages,
including the following:

     *    established  distribution  systems  and  access  to a large  number of
          dealer and national customer accounts;

     *    maintenance of customer credit facilities and an established inventory
          of our products;

     *    availability  of products in over 600 locations  throughout the United
          States;

     *    security of receivables;

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<PAGE>
     *    reduced needs for direct training;

     *    effective promotion of our products at trade shows;

     *    geographically  dispersed  sales forces that can reach  customers more
          effectively than we would otherwise be able to do; and

     *    lower support and carrying  costs  compared with the costs  associated
          with direct sales to a large number of direct dealers.

     Distributors  that currently  resell our products  include Graybar Electric
Co., Inc., Alltel Supply, Inc.,  Sprint/North  Supply,  Famous Telephone Supply,
ADI, Target, and Power & Telephone Supply Company.  Graybar accounted for 27% of
our  revenue  during  2002,  27% in 2001,  and 32% in 2000.  Our second  largest
distributor  in each of the  respective  years  accounted for 12% of our revenue
during 2002, 9% in 2001, and 12% during 2000.

     STARPLUS DISTRIBUTORS AND DEALERS

     We design  and market  our  STARPLUS  brand of  products  for sale  through
wholesale distributors.  The distributors resell our products primarily to small
local interconnect companies and independent telephone companies,  which in turn
resell  our  products  to end  users,  install  the  systems  at the end  users'
businesses,  and provide  service and technical  support  following the sale. We
provide  ongoing  support  and  training  to  enable  distributors  to sell more
effectively  our  products  and to provide  the  interconnects  and  independent
telephone companies with technical assistance in installation,  maintenance, and
customer  support.  Our STARPLUS  line of products  consists of  electronic  key
telephones and STARPLUS, STS, DHS, DHSE, and DHSL lines.

     TRIAD DISTRIBUTORS AND DEALERS

     We design and market our Triad line of digital  telephone  systems for sale
through  distributors to a limited number of authorized Triad dealers. The Triad
product line  includes a full array of digital  telephone  systems  ranging from
three lines and eight stations up to 384 ports, as well as voice messaging, ACD,
CTI, and other  products.  The  authorized  Triad dealers must commit to minimum
purchases of Triad products and must be trained and certified through our formal
product and sales training  program.  Our goal is to encourage the Triad dealers
to promote the Triad line to their  customers as the  preferred  line of digital
telephone  systems.  We provide the  authorized  Triad  dealers with  marketing,
sales, and product support  services.  We had  approximately  150 authorized and
active Triad dealers as of December 31, 2002.

     INFINITE DIRECT DEALERS

     We developed  our INFINITE line of telephone  systems and related  products
for sales to a limited number of authorized direct dealers. These direct dealers
are medium and large interconnect companies that resell our products directly to
end-users. We believe that the principal advantages of this distribution channel
include greater  control over the  application and  installation of our products
and the ability to obtain  market  feedback  on product  pricing,  quality,  and
technology.  Sales to direct dealers, however,  generally involve greater credit
risks,  the  necessity  to provide  increased  direct  marketing  and  technical
support,  and  additional  costs  associated  with  developing  and training the
independent  sales staff of the various direct dealers to enable them to solicit
purchases of our products.

     As of December 31, 2002, we had  approximately 150 direct dealers that sell
our INFINITE  products.  We maintain a program to focus on selling to fewer, but
larger   and   better-established,   dealers.   We  secure   arrangements   with
large-volume, well-qualified dealers and have discontinued sales to dealers that
have not provided a sufficient  level of sales or support for our INFINITE line.
We strive to secure  dealers that maintain  large customer bases and possess the
resources  needed to provide  quality sales  presentations  and support to their
customers.

     IN-HOUSE SALES STAFF

     We have an in-house  sales  support  staff of eight  employees  who provide
dealers and distributors with order fulfillment, marketing, sales, and technical
support.  We  believe  that our  commitment  to  support  dealers  that sell our
products  on a pre-sale  and  post-sale  basis  provides  us with a  competitive
advantage.

                                       7
<PAGE>
     VODAVI DIRECT

     We have a direct sales office of nine  employees who sell our INFINITE line
of  products  and  provide  pre- and post- sales  support  services  directly to
end-users in the Phoenix  metropolitan  area. We acquired this operation  during
March 2002 through our acquisition of Dataspeak Systems, Inc.

     INTERNATIONAL SALES

     To date, sales of our products in foreign  countries have not represented a
significant portion of our revenue. We believe, however, that sales of our voice
processing  and other  products in  international  markets  may  increase in the
future as demand  for  features  such as voice  mail,  advanced  messaging,  and
automatic call distribution  increases,  as touchtone  technologies and cellular
telephone  service  become more  available  and other  installed  communications
infrastructures  are improved,  and as regulatory  differences between countries
are  eliminated.  All of our sales in foreign  countries are denominated in U.S.
dollars.

RESEARCH AND DEVELOPMENT; STRATEGIC ALLIANCES WITH LGE AND OTHER COMPANIES

     We believe that the continued  development  of software that  distinguishes
the  functions  and  features  of our  products  from  those of our  competitors
represents a critical factor in determining our ongoing success. Our engineering
staff  consists of highly trained and  experienced  software  professionals  who
focus  on  providing  and  supporting   high-quality,   user-friendly   business
communications  systems  and  related  products.  The  availability  of in-house
software  and systems  development  expertise at our  facilities  in Arizona and
Georgia provides us with product control, permits faster turnaround and reaction
time to changing market conditions, and provides a solid base of maintenance and
support services to end users. We use product and market development groups that
interact  with  customers in order to anticipate  and respond to customer  needs
through  development of new product programs and enhancement of existing product
lines.

     We  conduct  joint  development  activities  with  LGE for the  design  and
development  of  hardware  incorporated  into some of our  existing  or  planned
telephone systems and commercial grade telephone product lines.  Under our joint
development  projects with LGE, we provide market analysis,  product management,
functional and  performance  standards,  software  development,  quality control
program development,  sales and distribution,  and customer service and support,
while LGE provides  hardware  research,  design and development,  development of
components   such  as  integrated   circuits  and   semiconductor   chips,   and
manufacturing and production engineering. Generally, LGE contributes the ongoing
research  and  development  costs for the  product  hardware  in  return  for an
arrangement  under which LGE  produces the finished  goods  developed  under the
alliance. As a result of this arrangement, we have been able to obtain access to
LGE's research and  development  expertise and resources  while  controlling our
capital  expenditures for much of our product development  efforts. In addition,
our  arrangement  with LGE enables us to minimize  the risks  inherent in making
significant investments in research and development infrastructure or personnel.
To the extent that we develop new  hardware in  conjunction  with LGE or another
development  partner, the development partner typically retains ownership rights
to the new hardware and we retain the right to sell products  incorporating that
hardware  throughout  North America and the  Caribbean.  See Item 1, "Business -
Manufacturing"  and  Item  1,  "Special  Considerations  - We  rely  on LGE as a
strategic  partner." We have  successfully  engaged in such projects with LGE in
the past and believe  that we will  continue  to have  access to LGE's  advanced
hardware research and development capabilities as we develop new product lines.

     We enhance our software  development  expertise through  acquisitions of or
licensing   arrangements   and  other  strategic   alliances  with   independent
third-party  developers.  We have active strategic  alliance  relationships with
other  companies that possess  expertise in automatic call  distribution,  small
digital key telephone systems,  computer telephony,  and Internet telephony.  We
believe that our strategic  alliances with other companies  enable us to develop
products and bring them to market more quickly and at a lower cost than we would
be able to achieve by developing  the products  internally.  We intend to pursue
additional  opportunities to enter into strategic alliances with other companies
that  possess  established  expertise  in  specific  technologies  in  order  to
co-develop  proprietary  products,  or to  acquire  such  companies  in order to
develop new products internally.

                                       8
<PAGE>
MANUFACTURING

     We obtain our key telephone systems,  some of our voice processing systems,
and  our   full-featured   commercial  grade   telephones  under   manufacturing
arrangements  with various  third-party  manufacturers,  including  LGE. We also
purchase certain voice  processing  products from third parties on an OEM basis.
Our  agreements  with  the  third-party   manufacturers  generally  require  the
manufacturers to produce our products according to our technical specifications,
to perform quality control functions or otherwise meet our quality standards for
manufacturing,  and to test or inspect the products prior to shipment. Under the
manufacturing agreements,  the manufacturers provide us with warranties that the
products are free of defects in material and  workmanship.  The agreements  also
require the manufacturers to repair or replace, at their expense,  products that
fail to conform to the warranties within specified periods.

     We obtained a majority of our key telephone systems and voice mail products
from LGE, which owns the rights to produce this equipment.  We purchase products
manufactured  by LGE in Korea on a purchase  order  basis.  We  purchased  $15.9
million, $13.0 million, and $16.4 million of product from LGE in 2002, 2001, and
2000, which represented 74%, 67%, and 61% of our total purchases,  respectively.
LGE currently owns  approximately 20% of our outstanding  common stock. See Item
1, "Special Considerations - We rely on LGE as a strategic partner" and "Special
Considerations  - Certain  conflicts  of interest may arise as a result of LGE's
ownership interest in our company."

     We obtained all of our commercial  grade  telephones and replacement  parts
for such telephones from LG Srithai,  Ltd., or LGST, a joint venture between LGE
and Srithai Group, a Thailand-based entity. Under an agreement with our company,
LGST granted us the right to distribute  and sell  throughout  the United States
and Canada the products that LGST manufactures for us in Thailand. Our agreement
with LGST  prohibits us from  purchasing  the products  covered by the agreement
from any other  manufacturer  during the term of the  agreement.  The  agreement
renews  automatically for successive one-year terms unless either party provides
notice to the other of its intent to cancel the  agreement at least three months
prior to the end of the then-current term. We make all purchases pursuant to the
agreement on a purchase order basis.  We purchased  $2.6 million,  $2.4 million,
and $4.2 million of product from LGST in 2002, 2001, and 2000, which represented
12%, 12%, and 15.7% of our total purchases,  respectively.  See Item 1, "Special
Considerations  -  We  rely  on  LGE  as  a  strategic   partner"  and  "Special
Considerations  - Certain  conflicts  of interest may arise as a result of LGE's
ownership interest in our company."

     We also obtained some of our digital key telephone  systems from Tecom Co.,
Ltd., a Republic of China company.  Under an agreement  with our company,  Tecom
granted us the right to sell and  distribute  throughout  all of North and South
America the products that Tecom  manufactures  for us. The term of the agreement
with Tecom will  remain in effect  until  either  party gives the other party at
least 120 days advance notice of termination.  We make all purchases pursuant to
the agreement on a purchase order basis.

     We currently maintain a $5.0 million insurance policy to cover lost revenue
in the  event of  significant  interruptions  in  purchases  from  our  overseas
manufacturers.  See Item 1, "Special Considerations - We depend on third parties
for  manufacturing"  and  Item  1,  "Special  Considerations  -  We  face  risks
associated with international manufacturing sources."

QUALITY CONTROL

     We recognize that product quality and  reliability are critical  factors in
distinguishing  our  products  from  those of our  competitors.  We  design  our
products to include  components  meeting specified quality standards in order to
assure reliable  performance.  We also require our third-party  manufacturers to
comply with specified quality standards regarding materials and assembly methods
used in manufacturing our products.  In addition, we maintain a rigorous quality
assurance  program  designed  to assure  that the  manufacture  of our  products
conforms  to  specified  standards  and to detect  substandard  products  before
shipment.  We have an inspection  program in which we examine varying numbers of
our  products as they arrive at our  warehouse  in Arizona,  depending  upon the
manufacturer and the type of product.

                                       9
<PAGE>
SUPPORT SERVICES

     We provide limited warranties  against defective  materials and workmanship
on each of the products that we sell. We provide a complete  support service for
all of our products by  maintaining  a 24-hour  toll-free  telephone  number and
e-mail support that the dealers' or interconnects'  service  representatives can
contact for trouble  shooting  and  diagnostic  assistance.  We also  maintain a
technical support page on our Web site that includes frequently asked questions,
technical  tips,  and  product-related  notifications.  We maintain an operating
set-up of each of our telephone  systems,  key telephone  units,  and peripheral
systems  at our  headquarters  facility,  supported  by a staff  of  technicians
trained to handle service  assistance calls. When a dealer or interconnect calls
with a question  relating to performance  malfunctions or an operational  system
question,   our  personnel   attempt  to  replicate  any  problem  the  user  is
encountering,  diagnose the cause, and provide a solution via telephone.  If our
technicians cannot determine the cause of the malfunction over the telephone, we
dispatch a service  representative  to the user's  place of business in order to
locate the source of the problem and take corrective measures.

     We currently  outsource the repair and  refurbishment  of our products.  We
believe that this arrangement enables us to continue to provide fast turn-around
time and consistent  quality of repairs  without the overhead and other expenses
associated with operating a repair facility.

COMPETITION

     Markets for communications products are extremely competitive. We currently
compete principally on the basis of the technical  innovation and performance of
our products,  including their ease of installation and use, reliability,  cost,
and the  technical  support  both  before  and  after  sales to end  users.  Our
competitors  for the sale of telephone  systems and  telephones  include  Avaya,
Inc., Comdial  Corporation,  Inter-Tel,  Inc.,  Iwatsu, NEC Corporation,  Nortel
Networks  Corporation,  Panasonic  Technologies,  Inc., and Toshiba  Information
Systems.

     Competitors  in the market for voice  processing  systems  include  Applied
Voice  Technology  and  Key  Voice  as well  as PBX  and  key  system  telephone
manufacturers that offer integrated voice processing systems of their own design
and under  various OEM  agreements.  Competitors  in the market for IP telephony
systems include 3Com Corporation, AltiGen Communications,  Inc., Artisoft, Inc.,
and Cisco Systems,  Inc., in addition to other PBX and key system  manufacturers
that offer IP enabled systems.

     In the  computer  telephony  market,  we  compete  with  many  of the  same
companies  indicated above.  Some of our product lines compete with products and
services  provided by the regional Bell  operating  companies,  or RBOCs,  which
offer key telephone systems and commercial grade telephones  produced by several
of the competitors named above as well as Centrex systems that provide automatic
call  distribution  facilities  and features  through  equipment  located in the
telephone company's central switching offices. Many competitors listed above are
larger than our company and  therefore may have greater  financial  resources at
their disposal.

PATENTS, TRADEMARKS, AND LICENSES

     We own various U.S.  patents.  We intend to continue to seek patents on our
inventions used in our products. The process of seeking patent protection can be
expensive and can consume significant management resources.  We believe that our
patents strengthen our negotiating position with respect to future disputes that
may arise  regarding  our  technology.  However,  we believe that our  continued
success  depends  primarily  on such  factors  as the  technological  skills and
innovative  abilities of our  personnel  rather than on our  patents.  We cannot
assure you that  patents will issue from our pending or future  applications  or
that any patents that are issued will  provide  meaningful  protection  or other
commercial advantage.

     We own a number of registered and unregistered  trademarks that we consider
to be an important factor in marketing our products.  Our ability to compete may
be enhanced by our ability to protect our proprietary information, including the
issuance of patents,  copyrights,  and  trademarks.  We also have taken steps to
protect our  proprietary  information  through a "trade  secrets"  program  that
includes copy protection of our software programs and obtaining  confidentiality
agreements with our employees. We cannot assure you, however, that these efforts
will be  effective  in  preventing  misappropriation,  reverse  engineering,  or
independent development of our proprietary information by our competitors. While
none of our  intellectual  property  rights  have been  invalidated  or declared

                                       10
<PAGE>
unenforceable,  we  cannot  assure  you that our  rights  will be  upheld in the
future.  Accordingly,  we believe that,  due to the rapid pace of  technological
change in the telecommunications  industry, the technical and creative skills of
our engineers and other personnel will be extremely important in determining our
future technological success.

     We  license  from third  parties  the rights to the  software  included  in
certain of our products,  including certain CTI and ACD products. These licenses
generally give us a  non-exclusive  right to use and sell the licensed  software
included in our products during the term of the applicable agreement. We pay the
licensors fees based on the number of units that we purchase from them.

     The  telecommunications  industry is characterized  by rapid  technological
development and frequent  introduction of new products and features. In order to
remain competitive,  we and other telecommunications  manufacturers  continually
find it necessary  to develop  products  and  features  that  provide  functions
similar to those of other industry participants, often with incomplete knowledge
of whether patent or copyright  protection may have been applied for or obtained
by other  parties.  As a result,  we receive  notices from time to time alleging
possible  infringement  of patents  and other  intellectual  property  rights of
others.  To date,  we have been able to  successfully  defend these claims or to
negotiate  settlements  to these claims on terms we believe to be favorable.  In
the future, however, the defense of such claims, fees paid in settlement of such
claims,  or costs  associated  with  licensing  rights  to use the  intellectual
property  of others or to  develop  alternative  technology  may have a material
adverse impact on our operations.

GOVERNMENT REGULATION

     The U.S.  government from time to time has imposed  anti-dumping  duties on
some telephone products manufactured in some of the countries where our products
are manufactured.  Most recently,  duties on certain of our products were phased
out between 1997 and 2000. We cannot assure you that similar  duties will not be
imposed  in  the  future  on  telephone   products,   including   our  products,
manufactured  in  these or  other  foreign  countries.  The  imposition  of such
additional  duties on our  products  could  have a material  adverse  effect our
operating results.

EMPLOYEES

     As of March 24, 2003, we employed a total of 109 persons,  all of which are
full-time  employees  at our  facilities  in  Phoenix,  Arizona,  and  Norcross,
Georgia.  Our  current  number of  full-time  employees  includes  29 persons in
engineering  and product  development;  49 in sales,  marketing,  and  technical
support; 15 in warehouse and distribution  functions;  and 16 in administration,
including executive  personnel.  We consider our relationship with our employees
to be good, and none of our employees currently are represented by a union.

                             SPECIAL CONSIDERATIONS

     YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING  FACTORS,  IN ADDITION TO THOSE
DISCUSSED  ELSEWHERE IN THIS REPORT, IN EVALUATING OUR COMPANY AND OUR BUSINESS.
SOME OF THE  STATEMENTS  AND  INFORMATION  CONTAINED IN THIS REPORT THAT ARE NOT
HISTORICAL FACTS ARE FORWARD-LOOKING  STATEMENTS, AS SUCH TERM IS DEFINED IN THE
SECURITIES LAWS.  THESE INCLUDE  STATEMENTS  CONCERNING  FUTURE,  PROPOSED,  AND
ANTICIPATED  ACTIVITIES  OF OUR  COMPANY;  CERTAIN  TRENDS  WITH  RESPECT TO OUR
REVENUE, OPERATING RESULTS, CAPITAL RESOURCES, AND LIQUIDITY; AND CERTAIN TRENDS
WITH RESPECT TO THE MARKETS WHERE WE COMPETE OR THE TELECOMMUNICATIONS  INDUSTRY
IN GENERAL.  FORWARD-LOOKING STATEMENTS, BY THEIR VERY NATURE, INCLUDE RISKS AND
UNCERTAINTIES, MANY OF WHICH ARE BEYOND OUR CONTROL. ACCORDINGLY, ACTUAL RESULTS
MAY  DIFFER,  PERHAPS  MATERIALLY,  FROM THOSE  EXPRESSED  IN OR IMPLIED BY SUCH
FORWARD-LOOKING  STATEMENTS.  FACTORS THAT COULD CAUSE ACTUAL  RESULTS TO DIFFER
MATERIALLY INCLUDE THOSE DISCUSSED UNDER THIS ITEM 1, "SPECIAL CONSIDERATIONS."

OUR  RELIANCE ON OUR  INDEPENDENT  DISTRIBUTION  NETWORK  AFFECTS OUR  INVENTORY
LEVELS, THE TIMING AND PREDICTABILITY OF OUR REVENUE,  AND OUR OVERALL OPERATING
RESULTS.

     We currently market our products through a distribution  network consisting
primarily of large wholesale  distributors  and telephone sales and installation
companies known as "direct dealers." Distributors generally maintain inventories
in amounts that they consider  sufficient to fill anticipated  orders. A decline
in the  volume of sales made by  distributors  could  result in their  inventory
levels  exceeding  their  anticipated  sales,  which  could delay  purchases  of
additional   products  from  us  until  the   distributors'   inventories  reach
re-ordering   levels.   Direct  dealers  generally  stock  inventories  only  in

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<PAGE>
quantities they deem sufficient to fill anticipated short-term orders, including
orders related to support and maintenance.  As a result, distributors and direct
dealers may cancel  orders and delay or change  volume levels on short notice to
us. Because the sale of key telephone systems,  voice processing  products,  and
related  products  typically  involves a long sales cycle, we may not be able to
accurately  forecast  our own  inventory  levels.  Our  reliance on  third-party
distributors  and dealers to sell our  products  could  further  exaggerate  any
inventory  shortages or excesses that we might  experience,  particularly if our
distributors  or dealers are not able to give us adequate  notice of anticipated
changes in demand for our products.

     Additionally, we offer our distributors price protection on their inventory
of our products. If we reduce the list price of our products, we will compensate
our distributors  for the respective  products that remain in their inventory on
the date the price adjustment  becomes  effective.  If we do not have sufficient
cash resources to compensate  distributors on terms  satisfactory to them or us,
our price  protection  obligations  may  prevent  us from  reacting  quickly  to
competitive market conditions.

     We depend  upon  independent  distributors  and direct  dealers to sell our
products to end users, to perform installation  services, and to perform service
and support  functions  after the sale.  Other  telephone  system  manufacturers
compete intensely for the attention of the same distributors and direct dealers,
most of which carry products that compete directly with our products. We may not
be able to maintain  favorable  relationships  with the  distributors and direct
dealers that  currently  carry our product  lines in order to encourage  them to
promote and sell our products instead of those of our competitors.  In addition,
we may not be able to develop such  relationships  with additional  distributors
and dealers in the future.

     Graybar  accounted for 27% of our sales during 2002,  27% during 2001,  and
32% during 2000. Accounts receivable from Graybar comprised approximately 23% of
total accounts  receivable at December 31, 2002. Our second largest  customer in
each of the  respective  years  accounted  for 12% of our sales during 2002,  9%
during 2001, and 12% during 2000.  Accounts  receivable  from our second largest
customer  comprised  approximately 20% of total accounts  receivable at December
31, 2002.

WE FACE RISKS ASSOCIATED WITH INTERNATIONAL MANUFACTURING SOURCES.

     We currently  obtain a substantial  majority of our products  under various
manufacturing  arrangements  with  third-party  manufacturers  in  South  Korea,
Thailand,  and Taiwan.  We believe that production of our product lines overseas
enables us to obtain  these items on a cost basis that  enhances  our ability to
market them  profitably.  Our reliance on third-party  manufacturers  to provide
personnel  and  facilities in these  countries  and the potential  imposition of
quota limitations on imported goods from certain Far East countries expose us to
certain economic and political risks, including the following:

     *    political  instability  in  Asia,  and in  particular  on  the  Korean
          Peninsula;

     *    the business and financial condition of our third-party manufacturers;

     *    the  possibility  of  expropriation,   supply   disruption,   currency
          controls, and exchange fluctuations;

     *    changes in tax laws, tariffs, and freight rates; and

     *    strikes,  work slow downs, or lockouts at any ports where our products
          arrive in the United States.

     The countries in which most of our products are manufactured also have been
subject to economic  problems in the past.  Although the  economic  situation in
Asia in recent years has not  resulted in any adverse  changes in our ability to
obtain  products or the prices that we pay for our products,  an extended period
of financial  pressure on overseas markets or currency  devaluations that result
in a  financial  setback  to our  overseas  manufacturers  could have an adverse
impact on our operations.

     Protectionist  trade  legislation  in either the  United  States or foreign
countries, such as a change in the current tariff structures,  export compliance
laws, or other trade policies,  could  adversely  affect our ability to purchase
our products  from  foreign  suppliers or the price at which we can obtain those
products.

                                       12
<PAGE>
WE DEPEND ON NEW PRODUCTS AND TECHNOLOGIES.

     We  operate  in  an  industry  that  is   characterized   by  fast-changing
technology. As a result, we will be required to expend substantial funds for and
commit significant  resources to the conduct of continuing product  development,
including  research and development  activities and the engagement of additional
engineering and other technical personnel. Any failure on our part to anticipate
or respond adequately to technological developments,  customer requirements,  or
new design  and  production  techniques,  or any  significant  delays in product
development  or  introduction,  could  have a  material  adverse  effect  on our
operations.

     Our future  operating  results will depend to a  significant  extent on our
ability  to  identify,  develop,  and market  enhancements  or  improvements  to
existing  product  lines as well as to introduce  new product lines that compare
favorably on the basis of time to market, cost, and performance with the product
lines  offered by our  competitors.  The success of new product lines depends on
various  factors,  including  proper market  segment  selection,  utilization of
advances in technology,  innovative development of new product concepts,  timely
completion  and  delivery of new product  lines,  efficient  and  cost-effective
features,  and market  acceptance of our products.  Because of the complexity of
the  design  and  manufacturing  processes  required  by  our  products,  we may
experience  delays from time to time in completing the design and manufacture of
improvements to existing product lines or the introduction of new product lines.
In addition,  customers or markets may not accept new product lines. Our failure
to design and  implement  enhancements  to existing  product lines or failure to
introduce  new  products on a timely and  cost-effective  basis would  adversely
affect our future operating results.

     Complex software  programs,  such as those we develop or those developed by
other software sources and incorporated into our products,  occasionally contain
errors that are discovered only after the product has been installed and used by
many  different  customers  in a variety of  business  operations.  Although  we
conduct extensive testing of the software programs included in our products,  we
may not successfully  detect and eliminate all such errors in our products prior
to shipment.  Significant  programming  errors in product software could require
substantial design  modifications that may create delays in product introduction
and  shipment and that could result in an adverse  impact on our  reputation  as
well as on our operating results.

THE TELECOMMUNICATIONS INDUSTRY IS CYCLICAL.

     The  telecommunications  industry  has  experienced  economic  downturns at
various times,  characterized by diminished product demand,  accelerated erosion
of average selling prices, and production overcapacity. We have sought to reduce
our exposure to industry downturns by targeting our product lines towards small-
and medium-sized  businesses,  which we believe will sustain continued growth in
the near and long term,  resulting in a steadily  increasing demand for enhanced
and upgraded telephone systems and voice processing  products.  However,  we may
experience substantial period-to-period fluctuations in future operating results
because  of general  industry  conditions  or events  occurring  in the  general
economy. In addition,  the size and timing of sales of our new voice processing,
IP systems, and computer-telephony  products may vary from quarter to quarter to
a greater  extent in  future  periods.  The  expanding  importance  of these new
products could result in significant variations in our overall operating results
on a quarterly basis.

WE  MUST  FINANCE  THE  MAINTENANCE  AND  EXPANSION  OF  OUR  BUSINESS  AND  THE
DEVELOPMENT OF NEW PRODUCTS.

     To remain competitive,  we must continue to make significant investments in
research and development, equipment, and facilities. As a result of the increase
in fixed costs and operating expenses related to these expenditures, our failure
to increase net sales  sufficiently  to offset the increased costs may adversely
affect our operating  results.  From time to time, we may seek additional equity
or debt financing to provide for the expenditures required to maintain or expand
our  business.  We cannot  predict  the timing  and  amount of any such  capital
requirements.  Such financing may not be available or, if available,  may not be
available on terms  satisfactory  to us. If such  financing is not  available on
satisfactory  terms,  we may be unable to  maintain  or expand our  business  or
develop  new  products  at the rate  desired  and our  operating  results may be
adversely  affected.  Debt  financing  increases  expenses  and  must be  repaid
regardless of our operating results. Equity financing could result in additional
dilution to existing  stockholders.  See Item 7,  "Management's  Discussion  and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources."

                                       13
<PAGE>
WE DEPEND ON THIRD PARTIES FOR MANUFACTURING.

     We depend upon third parties to  manufacture  our  products.  We do not own
most of the equipment,  tools, and molds used in the manufacturing  process, and
we have only limited  control  over the  manufacturing  processes.  As a result,
certain  difficulties  could have a  material  adverse  effect on our  business,
including any  difficulties  encountered by the third-party  manufacturers  that
result in

     *    product defects;

     *    production delays;

     *    cost overruns; or

     *    the inability to fulfill orders on a timely basis.

Our operations  would be adversely  affected if we were to lose our relationship
with any of our suppliers,  if any of our suppliers' operations were interrupted
or terminated, or if overseas or air transportation services were disrupted even
for a  relatively  short  period of time.  We do not  maintain an  inventory  of
sufficient  size to provide  protection  for any  significant  period against an
interruption  of  supply,  particularly  if we were  required  to locate and use
alternative sources of supply.

WE RELY ON LGE AS A STRATEGIC PARTNER.

     We rely on LGE to supply most of our key  telephone  systems and voice mail
products,  all  of  our  commercial  grade  telephones,  as  well  as  on  LGE's
engineering,  hardware and circuit development,  and manufacturing capabilities.
We purchased  approximately  $18.5  million,  $15.4 million and $20.6 million of
product from LGE and LGST,  constituting  approximately 86%, 79%, and 77% of our
total  purchases in 2002,  2001,  and 2000,  respectively.  We currently  obtain
products  from  LGE and  LGST on a  purchase  order  basis  and  cannot  provide
assurance that we will be able to secure  long-term  manufacturing  arrangements
for the  products  we  currently  obtain  from LGE and  LGST.  LGE has no formal
commitments to support our business or operations.

MARKETS FOR OUR PRODUCTS ARE  INTENSELY  COMPETITIVE,  AND WE CANNOT  ASSURE YOU
THAT WE WILL BE ABLE TO COMPETE SUCCESSFULLY IN THE FUTURE.

     We engage in an intensely  competitive business that has been characterized
by price  erosion,  rapid  technological  change,  and foreign  competition.  We
compete with major domestic and international companies. Many of our competitors
have greater market recognition and substantially greater financial,  technical,
marketing, distribution, and other resources than we possess. Emerging companies
also may increase their  participation in the telephone  systems and peripherals
markets. Our ability to compete successfully depends on a number of factors both
within and outside our control, including the following:

     *    the quality, performance, reliability, features, ease of use, pricing,
          and diversity of our product lines;

     *    the performance of our distributors and dealers;

     *    the quality of our customer services;

     *    our ability to address the needs of our customers;

     *    our success in designing and  manufacturing  new  products,  including
          those implementing new technologies;

     *    the  availability  of  adequate  sources  of raw  materials,  finished
          components, and other supplies at acceptable prices;

     *    our suppliers' efficiency of production;

     *    the rate at which end users upgrade or expand their existing telephone
          systems, applications, and services;

     *    new product introductions by our competitors;

                                       14
<PAGE>
     *    the number,  nature, and success of our competitors in a given market;
          and

     *    general market and economic conditions.

We currently  compete  principally on the basis of the technical  innovation and
performance of our products,  including  their ease of use and  reliability,  as
well as price, timely delivery, and after-sale service and technical support. We
may not continue to be able to compete successfully in the future.

WE FACE RISKS ASSOCIATED WITH PATENTS, LICENSES, AND INTELLECTUAL PROPERTY.

     Our success  depends in part upon our  ability to protect  our  proprietary
technology.  We rely on a combination of copyright,  trademark, and trade secret
laws, nondisclosure and other contractual agreements,  and technical measures to
protect our proprietary technology.  We have acquired certain patents and patent
licenses,  and we intend to  continue  to seek  patents  on our  inventions  and
manufacturing   processes.  We  face  risks  associated  with  our  intellectual
property, including the following:

     *    the steps we have  taken to  protect  our  proprietary  rights  may be
          inadequate to protect misappropriation of such rights;

     *    third  parties  may  independently   develop  equivalent  or  superior
          technology;

     *    the process of seeking  patent  protection  can be long and expensive,
          and patents may not issue from future applications;

     *    existing  patents  or any new  patents  that are  issued may not be of
          sufficient  scope or strength to provide us  meaningful  protection or
          any commercial advantage;

     *    we may be subject to or may initiate  interference  proceedings in the
          U.S.  Patent  and  Trademark  Office,  which  can  demand  significant
          financial and management resources; and

     *    we may commence  litigation to enforce  patents or other  intellectual
          property rights,  or to defend us against claimed  infringement of the
          rights of others,  which could  result in  substantial  cost to us and
          diversion of our management's attention.

     As is typical in the  telecommunications  industry,  we have  received from
time  to  time,  and  in  the  future  may  receive,   allegations  of  possible
infringement of patents or other intellectual  property rights of others.  Based
on  industry  practice,  we  believe  that in most  cases  we could  obtain  any
necessary  licenses or other rights on  commercially  reasonable  terms.  In the
event that a third party alleges that we are infringing  its rights,  we may not
be able to obtain  licenses  on  commercially  reasonable  terms  from the third
party,  if at all, or the third party may  commence  litigation  against us. The
failure  to obtain  necessary  licenses  or other  rights or the  occurrence  of
litigation  arising out of such claims could materially and adversely affect us,
our result of operations, or prospects.

OUR  THIRD-PARTY  MANUFACTURERS  MAY  EXPERIENCE  SHORTAGES OF RAW MATERIALS AND
SUPPLIES.

     The principal raw materials and  components  used in producing our products
consist of

     *    semiconductor components;

     *    unfinished printed circuit boards;

     *    molded plastic parts; and

     *    metals.

The  third-party  manufacturers  of our  products  acquire  these raw  materials
primarily from Asian  sources,  which  indirectly  subjects us to certain risks,
including supply  interruptions and currency price  fluctuations.  Purchasers of
these materials,  including our third-party  manufacturers  and us, from time to
time  experience  difficulties in obtaining  these  materials.  The suppliers of
these  materials  currently are  adequately  meeting our  requirements.  We also
believe that there are alternate suppliers for most of these materials.

                                       15
<PAGE>
WE DEPEND ON MANAGEMENT AND OTHER KEY PERSONNEL.

     Our  development  and  operations  to date  have  been,  and  our  proposed
operations  will be,  substantially  dependent upon the efforts and abilities of
our senior  management and technical  personnel.  We have employment  agreements
with  William J.  Hinz,  our  Chairman  of the Board,  Gregory  K.  Roeper,  our
President and Chief Executive  Officer,  David A. Husband,  our Vice-President -
Finance and Chief Financial Officer, and Steven R. Francis, our Vice President -
Sales and  Marketing.  We  maintain  agreements  with each of our  officers  and
employees that prohibit them from disclosing  confidential  information obtained
while  employed  with us. The loss of existing  key  personnel or the failure to
recruit and retain  necessary  additional  personnel would adversely  affect our
business  prospects.  We cannot provide assurance that we will be able to retain
our current  personnel  or that we will be able to attract and retain  necessary
additional personnel. Our internal growth and the expansion of our product lines
will  require  additional  expertise  in such  areas  as  software  development,
operational  management,  and sales and  marketing.  Such  growth and  expansion
activities  will  increase  further the demand on our  resources and require the
addition  of new  personnel  and the  development  of  additional  expertise  by
existing  personnel.  Our  failure to  attract  and  retain  personnel  with the
requisite  expertise or to develop  internally  such expertise  could  adversely
affect the prospects for our success.

CERTAIN CONFLICTS OF INTEREST MAY ARISE AS A RESULT OF LGE'S OWNERSHIP  INTEREST
IN OUR COMPANY.

     LGE currently owns  approximately  20% of our outstanding  common stock. We
obtain most of our digital telephone systems,  IP-based products, and voice mail
products  from  LGE  and  obtain  all of our  commercial  grade  telephones  and
replacement  parts for such  telephones from LGST, an affiliate of LGE. See Item
1, "Business - Manufacturing"  and "Special  Considerations -We rely on LGE as a
strategic  partner."  As a result of LGE's direct  ownership  interest in us, an
inherent  conflict of interest exists in  establishing  the volume and terms and
conditions  of our  purchases  from LGE and  LGST.  In order  to  mitigate  such
conflicts,  all  decisions  with respect to such  purchases  will be made by our
officers and reviewed by our directors who have no relationship with LGE.

OUR STOCK PRICE MAY BE VOLATILE.

     The trading price of our common stock in the public securities market could
be subject to a variety of factors, including the following:

     *    wide fluctuations in response to quarterly variations in our operating
          results or the operating results of our competitors;

     *    actual or anticipated  announcements of  technological  innovations or
          new product developments by us or our competitors;

     *    significant  actual  or  anticipated   expenditures  for  property  or
          equipment,  research and development,  sales and marketing activities,
          or other planned or unanticipated events;

     *    changes in analysts' estimates of our financial performance;

     *    developments or disputes concerning proprietary rights;

     *    regulatory developments;

     *    general industry conditions; and

     *    worldwide economic and financial conditions.

The trading  volume of our common stock in the past has been limited,  which may
increase  the  volatility  of the  market  price for our stock  and  reduce  the
liquidity  of an  investment  in  shares of our  common  stock.  During  certain
periods,   the  stock  markets  have   experienced   extreme  price  and  volume
fluctuations.  In particular,  prices for many technology stocks often fluctuate
widely,  frequently for reasons  unrelated to the operating  performance of such
companies.  These broad  market  fluctuations  and other  factors may  adversely
affect the market price of our common stock.

                                       16
<PAGE>
THE ABSENCE OF AN ACTIVE TRADING  MARKET,  WHICH MAY OCCUR IF WE ARE REQUIRED TO
DELIST OUR SHARES  FROM NASDAQ  SMALLCAP  MARKET,  WOULD  LIKELY MAKE OUR COMMON
STOCK AN ILLIQUID INVESTMENT.

     The NASDAQ Stock  Market has certain  rules that must be met in order for a
listed  company to maintain its listing on NASDAQ.  During fiscal 2001, we moved
the listing of our common  stock from the NASDAQ  National  Market to the NASDAQ
SmallCap Market. We may be required to delist from the NASDAQ SmallCap Market if
we fail to comply with those rules.  Should that occur, market makers may choose
to create a market for our common stock on the over-the-counter  bulletin board.
If that  does  not  occur,  our  stock  could be  traded  in the  "pink  sheets"
maintained by the National Quotation Bureau. As a result, investors would likely
find it  significantly  more  difficult  to  dispose  of, or to obtain  accurate
quotations as to the value of, our shares.

RIGHTS TO ACQUIRE OUR COMMON STOCK COULD RESULT IN DILUTION TO OTHER  HOLDERS OF
OUR COMMON STOCK.

     As of March 1, 2003, we had outstanding options to acquire 1,005,500 shares
of our common stock at a weighted  average exercise price of $2.66 per share. An
additional 442,000 shares remain available for grant under our 1994 Stock Option
Plan.  During the terms of these  options,  the  holders  thereof  will have the
opportunity  to profit from an increase in the market price of the common stock.
Additionally, all outstanding options become fully vested and exercisable upon a
change of control of our company.  The  existence of these options may adversely
affect the terms on which we can obtain additional financing, and the holders of
these options can be expected to exercise such options at a time when we, in all
likelihood, would be able to obtain additional capital by offering shares of our
common stock on terms more  favorable to us than those  provided by the exercise
of these options.

SALES OF ADDITIONAL  SHARES OF OUR COMMON STOCK COULD HAVE A NEGATIVE  EFFECT ON
THE MARKET PRICE OF OUR COMMON STOCK.

     Sales of substantial amounts of our common stock in the public market could
adversely affect  prevailing market prices and could impair our ability to raise
capital through the sale of our equity securities.  A majority of the restricted
shares of common stock currently outstanding are eligible for sale in the public
market,  subject  to  compliance  with the  requirements  of Rule 144  under the
securities laws.  Shares issued upon the exercise of stock options granted under
our stock option plan  generally will be eligible for sale in the public market.
We also have the authority to issue additional shares of common stock and shares
of one or more series of  preferred  stock.  The  issuance of such shares  could
dilute the voting power of the currently  outstanding shares of our common stock
and could dilute earnings per share.

IT MAY BE  DIFFICULT  FOR A THIRD PARTY TO ACQUIRE  US, EVEN IF THE  ACQUISITION
WOULD BE IN THE BEST INTEREST OF STOCKHOLDERS.

     We are  subject  to  provisions  under  Delaware  corporate  law that would
require  us  to  obtain  certain  approvals  from  our  board  of  directors  or
stockholders  in order to engage in a business  combination  with an  interested
stockholder   under   certain   circumstances.   Our  Amended   Certificate   of
Incorporation  and Bylaws also contain a number of other provisions  relating to
corporate governance and to the rights of stockholders. These provisions

     *    authorize  our board of  directors  to fill  vacancies on our board of
          directors;

     *    authorize  our board of directors to issue  preferred  stock in series
          with such voting rights and other powers as our board of directors may
          determine; and

     *    require the  affirmative  vote of two-thirds of the directors  then in
          office to approve:

          --   a public offering of our capital stock;
          --   the merger  with or the  acquisition  of another  business or the
               acquisition  of a  significant  amount of the  assets of  another
               business;
          --   the sale of a significant amount of our assets;
          --   our entering into contracts with our stockholders or directors;
          --   our  assumption or acquisition of debt in excess of $1.0 million;
               and

                                       17
<PAGE>
          --   any amendment of our Amended  Certificate  of  Incorporation  and
               Bylaws  of our  wholly  owned  subsidiary  Vodavi  Communications
               Systems, Inc.

These  provisions in our Amended  Certificate  of  Incorporation  and Bylaws and
Delaware  corporate law may have the effect of making more difficult or delaying
attempts by others to obtain  control of us, even when these  attempts may be in
the best interests of stockholders.

WE DO NOT PAY CASH DIVIDENDS.

     We have  never  paid any cash  dividends  on our  common  stock  and do not
anticipate that we will pay dividends in the  foreseeable  future.  Instead,  we
intend  to  retain  any  earnings  to  provide  funds  for use in our  business.
Furthermore,  the terms of the  revolving  line of credit  facility  between our
wholly owned subsidiary Vodavi Communications Systems, Inc. and General Electric
Capital Corporation  prohibit our subsidiary from paying dividends to us without
the  consent of GE  Capital.  This  restriction  could  limit our ability to pay
dividends in the future.

ITEM 2. PROPERTIES

     We sublease,  for a ten year term expiring in December 2011,  approximately
55,000 square feet of space in Phoenix,  Arizona,  where we maintain engineering
and design laboratories,  a sound engineering  laboratory,  software development
facilities,  testing  laboratories,  product  development  facilities,  customer
service  support  facilities,  an  employee  training  facility,  warehouse  and
distribution  areas,  sales  and  marketing  offices,   and  administrative  and
executive offices.

     We also  lease  approximately  3,000  square  feet of  space  in  Norcross,
Georgia,  for a term expiring in August 2006. We maintain  software  development
facilities, engineering and design laboratories, product development facilities,
product assembly and testing facilities.

     We lease, for a term ending in December 2004,  approximately  19,500 square
feet of space in Scottsdale, Arizona. This space is sub-leased to a third party.
We also lease, for a term ending in May 2005, approximately 5,000 square feet of
office and warehouse  space in Tempe,  Arizona that is used in our Vodavi Direct
operation.

     We believe our  facilities  are  adequate  for our  reasonably  anticipated
needs.

ITEM 3. LEGAL PROCEEDINGS

     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.

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

     Not applicable.

                                       18
<PAGE>
                                     PART II

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

     Our common stock was quoted in the NASDAQ  National Market under the symbol
"VTEK" from  October 6, 1995 to July 18,  2001,  and is now listed on the NASDAQ
SmallCap Market. The following table sets forth the high and low sales prices of
our common stock on the NASDAQ  National  Market and the NASDAQ  SmallCap Market
for the periods indicated.

                                                              HIGH          LOW
                                                              ----          ---
2000:
  First quarter ......................................        $7.31        $2.75
  Second quarter .....................................         4.50         1.00
  Third quarter ......................................         3.78         2.00
  Fourth quarter .....................................         2.44         1.00

2001:
  First quarter ......................................        $2.50        $1.03
  Second quarter .....................................         1.19         0.63
  Third quarter ......................................         1.40         0.76
  Fourth quarter .....................................         1.45         0.76

2002:
  First quarter ......................................        $1.65        $1.24
  Second quarter .....................................         2.85         1.43
  Third quarter ......................................         3.33         1.71
  Fourth quarter .....................................         2.15         1.31

2003:
  First quarter (through March 24, 2003) .............        $1.95        $1.37

     On March 24,  2003,  the closing  sales price of our common stock was $1.78
per share.  As of March 24, 2003,  there were 38 holders of record of our common
stock.

DIVIDEND POLICY

     We have not declared or paid any cash  dividends on our common stock and do
not intend to declare or pay any cash dividends in the  foreseeable  future.  In
addition,  our credit facility with GE Capital restricts our ability to pay cash
dividends.

                                       19
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data presented below as of and for each
of the years in the two-year period ended December 31, 2002 are derived from our
consolidated financial statements,  which have been audited by Deloitte & Touche
LLP, independent auditors.  The selected  consolidated  financial data presented
below as of and for each of the years in the  three-year  period ended  December
31, 2000 are derived from our consolidated financial statements, which have been
audited by Arthur Andersen LLP,  independent  public  accountants.  The selected
consolidated  financial information provided below should be read in conjunction
with Item 7,  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations" and the Consolidated  Financial Statements of our company
and related notes thereto. No dividends were paid during the periods presented.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                        -----------------------------------------------------------------
                                                     (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:             2002           2001           2000          1999          1998
                                        --------       --------       --------      --------      --------
<S>                                     <C>            <C>            <C>           <C>           <C>
Revenue .............................   $ 37,328       $ 34,153(1)    $ 47,705      $ 49,811      $ 48,322
Gross margin ........................     13,449         11,170(2)      17,503        17,886        15,802
Operating expenses ..................     12,164         13,183(3)      16,041        15,252        14,358
Operating income (loss) .............      1,285         (2,013)         1,462         2,634         1,444
Interest expense ....................         97            406            705           676           791
                                        --------       --------       --------      --------      --------
Income (loss) before income
  taxes and change in accounting
  principle .........................      1,188         (2,419)           757         1,958           653
Provision for (benefit from)
  income taxes ......................        471           (863)           309           718          (330)
                                        --------       --------       --------      --------      --------
Income (loss) before income
  taxes and change in
  accounting principle ..............        717         (1,556)           448         1,240           983

Change in accounting principle ......     (1,263)            --             --            --            --
                                        --------       --------       --------      --------      --------
Net income (loss) ...................   $   (546)      $ (1,556)      $    448      $  1,240      $    983
                                        ========       ========       ========      ========      ========
Net income (loss) per share,
  diluted ...........................   $  (0.13)      $  (0.37)      $   0.10      $   0.29      $   0.23
                                        ========       ========       ========      ========      ========
Weighted average shares
  outstanding, diluted ..............      4,428          4,235          4,305         4,344         4,342
                                        ========       ========       ========      ========      ========

                                                                  AS OF DECEMBER 31,
                                        ------------------------------------------------------------------
                                                                   (IN THOUSANDS)
BALANCE SHEET DATA:                       2002           2001           2000          1999          1998
                                        --------       --------       --------      --------      --------
Assets:
  Current assets ....................   $ 14,829       $ 14,861       $ 20,959      $ 20,570      $ 17,810
  Property and equipment, net .......      1,631          1,581          2,033         2,356         2,663
  Goodwill, net .....................        725          1,638          1,772         1,906         2,244
  Other, net ........................        203            193            417           726           426
                                        --------       --------       --------      --------      --------
                                        $ 17,388       $ 18,273       $ 25,181      $ 25,558      $ 23,143
                                        ========       ========       ========      ========      ========
Liabilities:
  Current liabilities ...............   $  6,748       $  7,045       $ 12,176      $ 13,208      $ 12,044
  Other long-term obligations .......         18            200            421           530           500
                                        --------       --------       --------      --------      --------
Total liabilities ...................      6,766          7,245         12,597        13,738        12,544
Stockholders' equity ................     10,622         11,028         12,584        11,820        10,599
                                        --------       --------       --------      --------      --------
                                        $ 17,388       $ 18,273       $ 25,181      $ 25,558      $ 23,143
                                        ========       ========       ========      ========      ========
</TABLE>

----------
(1)  Includes special charges of $432 related to price protection obligations.
(2)  Cost of goods sold  includes  special  charges of $568 related to inventory
     impairments.
(3)  Includes special charges of $761 related to severance, receivable reserves,
     and exit costs.

                                       20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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  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 December 31, 2002,
Graybar  accounted  for  23% 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

                                       21
<PAGE>
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,  which  begin on page F-1 of this  Annual  Report on Form  10-K,  which
contain accounting policies and other disclosures required by generally accepted
accounting principles in the United States.

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.

                                                  2002        2001        2000
                                                 ------      ------      ------
Revenue .....................................     100.0%      100.0%      100.0%
Cost of goods sold ..........................      64.0        67.3        63.3
                                                 ------      ------      ------
   Gross margin .............................      36.0        32.7        36.7

Operating expenses:
Engineering and product development .........       6.3         5.9         3.6
Selling, general, and administrative ........      26.3        32.7        30.0
                                                 ------      ------      ------
                                                   32.6        38.6        33.6

Operating income (loss) .....................       3.4        (5.9)        3.1
Interest expense, net .......................        .2         1.2         1.5
                                                 ------      ------      ------
Income (loss) before taxes and
   accounting change ........................       3.2        (7.1)        1.6
Income tax expense (benefit) ................       1.3        (2.5)        0.7
                                                 ------      ------      ------
Income (loss) before accounting change ......       1.9        (4.6)        0.9%
Change in accounting principle ..............      (3.4)         --          --
                                                 ------      ------      ------
Net income (loss) ...........................      (1.5)%      (4.6)%       0.9%
                                                 ======      ======      ======

2001 SPECIAL CHARGES

     During the first quarter of 2001, we implemented a restructuring plan aimed
at reducing our operating  expenses to coincide with our revised sales  outlook.
Pursuant to the restructuring  plan, we reduced our workforce,  discontinued our
Interactive  Voice Response  product group,  and implemented  broad-based  price
reductions on certain  product lines.  These actions  created  severance-related
obligations of $168,000,  estimated  shut-down costs of $265,000,  and estimated
distributor price protection obligations of $432,000.

     Additionally,  in light of deteriorating  economic and industry  conditions
and planned  introductions  of new  products,  in the first  quarter of 2001, we
re-evaluated  the carrying  amount of certain  receivables  and inventory  items
resulting in additional accounts receivable reserve requirements of $328,000 and
inventory impairments of $568,000.

     The pre-tax  financial  impact of these  initiatives  during  2001  totaled
approximately  $1.8 million  consisting of both cash and non-cash  charges.  The
following table sets forth the components of these special  charges  included in
the  accompanying  consolidated  statement  of  operations  for the  year  ended
December 31, 2001:

                                       22
<PAGE>
                                   AMOUNT                INCLUSION IN
                                   ($000)          STATEMENT OF OPERATIONS
                                   ------          -----------------------
Non-cash Charges:
  Inventory impairments           $   568     Cost of goods sold
  Allowance for bad debts             328     Selling, general & administrative
                                                expenses
  Distributor price protection        151     Revenue
  Property and equipment               15     Selling, general & administrative
                                                expenses
                                  -------
                                    1,062

Cash Charges:
  Distributor price protection        281     Revenue
  Severance-related costs             168     Selling, general & administrative
                                                expenses
  Other shut-down costs               250     Selling, general & administrative
                                                expenses
                                  -------
                                      699
                                  -------
                                  $ 1,761
                                  =======

The following  table sets forth the activity of accrued cash charges for each of
the years in the two-year period ended December 31, 2001: (IN THOUSANDS)

<TABLE>
<CAPTION>
                                  INITIAL        2001        BALANCE        2002        BALANCE
                                  BALANCE      PAYMENTS   DEC. 31, 2001   PAYMENTS   DEC. 31, 2002
                                  -------      --------   -------------   --------   -------------
<S>                                <C>          <C>          <C>           <C>          <C>
Distributor price protection       $ 281        $(195)       $  86         $ (86)       $  --
Severance-related costs              168         (114)          54           (54)          --
Other shut-down costs                250         (106)         144          (144)          --
                                   -----        -----        -----         -----        -----
                                   $ 699        $ 415        $ 284         $(284)       $  --
                                   =====        =====        =====         =====        =====
</TABLE>

FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
2001

REVENUE

     Revenue during 2002 increased $3.2 million,  or 9.3%, to $37.3 million from
revenue of $34.2 million in 2001. Sales to our supply house customers  increased
$1.9 million,  or 10.0 %, to $20.8  million,  or 56% of our total revenue during
2002 compared with $18.9 million, or 55% of our total revenue in 2001. Our sales
in this channel of distribution can fluctuate significantly between periods as a
result of  fluctuations  in the amount of inventory  supply  houses carry of our
product. We estimated that during 2002, our supply house customers reduced their
inventory  of  our  products  by  approximately  $1.5  million  compared  with a
reduction of $5.8 million in 2001.

     Sales through our INFINITE  direct dealer program  increased  approximately
$700,000,  or 5.0%, to $15.4  million,  or 41% of our total revenue during 2002,
compared  with $14.7  million,  or 43% of our total  revenue  during  2001.  The
increase in INFINITE  product sales can be  attributed to selling to fewer,  but
larger and better  established  dealers  who are more  effective  at selling our
larger systems.

     Sales  through our direct  sales  office,  which we acquired in March 2002,
totaled  approximately  $1.0 million,  after intercompany  eliminations,  during
2002.

     Our revenue during 2002 was negatively impacted by our decision to exit our
Interactive  Voice  Response  business  in 2001.  Revenue  attributable  to this
business  totaled  $135,000 during 2002 compared with revenue of $1.3 million in
2001.

GROSS MARGIN

     Our gross margin was $13.5  million in 2002  compared with $11.2 million in
2001.  Our gross  margin as a  percentage  of total  revenue  increased to 36.0%
during 2002 compared with 32.7% in 2001. The increase in gross margin percentage

                                       23
<PAGE>
during 2002 is a direct result of (a) inventory impairments and price protection
obligations of $1.0 million in 2001 (b) better leverage over the fixed component
of cost of goods sold, which includes labor and other warehouse and distribution
costs;  and (c) higher  margins  associated  with our direct sales  office.  The
increase in gross margin  percentage  between periods was slightly offset by our
decision  to sell  certain  discontinued  product  lines in 2002 in a bulk  sale
transaction for $300,000 at no margin.

ENGINEERING AND PRODUCT DEVELOPMENT

     Engineering and product  development  expenditures  increased 16.8% to $2.3
million in 2002  compared  with $2.0 million in 2001.  During 2002,  we incurred
additional salaries and personnel costs associated with an increase in headcount
and field trial activities.  During 2002 we also engaged third-party consultants
to a  greater  extent  than 2001 to  assist  in the  development  of some of our
products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling,  general and administrative  expenses declined  approximately $1.4
million,  or 12.1%, to $9.8 million in 2002 compared with $11.2 million in 2001.
Excluding special charges of approximately  $760,000 recorded in 2001,  selling,
general and administrative expense declined by approximately  $594,000, or 5.7%,
in 2002.  The  reduction is the net effect of a number of factors  including (a)
the  discontinuance  of our Interactive Voice Response  Business,  (b) decreased
sales, marketing and promotional expenses, (c) a reduction in bad debt expenses;
and (d) a reduction in depreciation and amortization,  including the elimination
of goodwill  amortization  of $134,000  associated with our adoption of SFAS No.
142. These reductions were partially offset by additional  operating expenses of
our direct sales office of  approximately  $632,000 during 2002 compared to zero
in 2001,  and the cost  associated  with the settlement of litigation in 2002 of
$300,000.

INTEREST EXPENSE

     Interest  expense  decreased to  approximately  $97,000 in 2002 compared to
$406,000 in 2001.  The  decrease in interest  expense is a direct  result of our
debt reduction efforts during 2002 and lower borrowing costs.

INCOME TAXES

     We provided for federal and state  income taxes using an effective  rate of
39.6% during 2002 compared with and effective  rate of 35.7% in 2001. The change
in effective  rates between  periods  reflects the impact of permanent  book/tax
differences in loss years versus years with positive pre-tax earnings.

FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
2000

REVENUE

     Revenue  during 2001 totaled $34.2  million  compared with revenue of $47.7
million in 2000, a reduction  of $13.5  million,  or 28.4%.  Sales to our supply
house customers  accounted for approximately  $18.9 million, or 55% of our total
revenue during 2001 compared with $31.2 million,  or 65% of our total revenue in
2000,  representing a year-over-year  decrease of $12.3 million. The decrease in
sales to our  supply  house  customers  is  attributable  to (a) a $5.8  million
reduction in supply house inventory  levels resulting in fewer orders to us; (b)
soft  market  conditions  in the  small-  to  mid-sized  markets  affecting  our
industry;  (c) our  decision  to reduce  prices on certain  of our  single  line
telephones  and  voice  mail   products;   and  (d)  reduced  sales  of  certain
discontinued products.

     Revenue in 2001 was also  negatively  impacted by our  decision to exit the
retail  Interactive  Voice Response  business  during the first quarter of 2001.
Revenue  attributable to this business totaled $1.3 million during 2001 compared
with $2.4 million during 2000, a reduction of 45.8%.

     Sales through our infinite direct dealer program totaled $14.7 million,  or
43% or our total revenue during 2001 compared with $15.0 million,  or 31% of our
total  revenue  during 2000.  During 2001,  we continued our program to focus on
selling to fewer,  but  larger  and  better-established,  dealers.  While  sales
through our infinite  channel were  positively  impacted by the  introduction of

                                       24
<PAGE>
larger dealers,  they were  negatively  impacted by the poor economic and market
conditions  for small- to mid-sized  businesses  in the United States and by our
decision to reduce prices on certain voice mail products.

GROSS MARGIN

     Our gross margin was $11.2 million  during 2001 compared with $17.5 million
during 2000. Our gross margin as a percentage of total revenue declined to 32.7%
during 2001 compared  with 36.7% during 2000.  The reduction in our gross margin
percentage during 2001 is a direct result of (a) inventory impairments and price
protection  obligations  of $1.0 million  recorded  during the first  quarter of
2001; (b) fewer sales to cover the fixed component of costs of goods sold, which
includes  labor  and  other  warehouse  and  distribution  costs;  and (c) price
reductions on certain single line telephones and voice mail products, which were
slightly offset by price concessions provided to us by our suppliers.

ENGINEERING AND PRODUCT DEVELOPMENT

     Engineering and product  development  expenditures  increased 14.7% to $2.0
million  during 2001 from $1.7 million  during 2000.  The increase was primarily
due to salaries and related personnel costs associated with additional headcount
and field trial expenses.  During 2001, we introduced  seven new products to the
market and continued development efforts on our next generation IP Key Telephone
System as well as enhancements  to our existing Key Telephone  Systems and voice
processing products.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

     Selling,  general,  and  administrative  expenses were $11.2 million during
2001 compared with $14.3 million in 2000, a reduction of $3.1 million, or 21.7%.
Excluding  special  charges  of  approximately  $760,000  recorded  in the first
quarter of 2001, selling,  general, and administrative expenses declined by $3.9
million,  or 27.1%,  from 2000.  This  decrease is the net effect of a number of
factors,  including  (a)  headcount  reductions;  (b)  decreased  marketing  and
promotional expenses; and (c) strict cost controls over discretionary spending.

INTEREST EXPENSE

     Interest  expense  decreased to $406,000  during 2001 from $705,000  during
2000.  During  2001,  our  interest  expense was  positively  impacted by a $3.7
million  reduction  in our loan  balance  from the  beginning  of the year and a
reduction of our effective interest rate from 9.15% at the beginning of the year
to 4.52% at December 31, 2001.

INCOME TAXES

     We provided for federal and state  income taxes using an effective  rate of
35.7%  during 2001  compared  with an effective  rate of 40.8% during 2000.  The
change in  effective  rates  between  periods  reflects  the impact of permanent
book/tax differences in loss years versus years with positive pre-tax earnings.

LIQUIDITY AND CAPITAL RESOURCES

     Our net working  capital  position  was $8.1  million at December  31, 2002
compared  with $7.8 million at December 31, 2001.  We had a cash balance of $1.1
million at December 31, 2002  compared to a cash balance of $340,000 at December
31, 2001. Factors that increased our cash position during 2002 included positive
cash flows from  operations,  the receipt of an $839,000 income tax refund,  and
$3.0 million by extending  our payment  terms with our largest  supplier from 30
days to 60 days. Factors that reduced our cash balance during 2002 included cash
payments of $624,000 to acquire DataSpeak  Systems,  Inc., cash payments of $2.6
million on our revolving credit facility, purchases of property and equipment of
$485,000, and other changes in working capital, including reductions in accounts
payable and accrued liabilities of $625,000.

     Our days sales  outstanding,  calculated  on quarterly  sales,  improved to
approximately  70 days  as of  December  31,  2002  compared  with 71 days as of
December  31,  2001.  Our  days  sales  outstanding,   and  our  liquidity,   is

                                       25
<PAGE>
significantly  influenced  by the timing of payments  received  from our largest
distributors.  Our two largest distributors  comprised 43% of our total accounts
receivable as of December 31, 2002 and 48% of our total  accounts  receivable as
of December 31, 2001.

     Our inventory  turnover,  measured in terms of days sales  outstanding on a
quarterly  basis,  increased to 87 days as of December 31, 2002 compared with 84
days as of December 31, 2001.  Our inventory  days sales  outstanding  increased
slightly as a result of lower than  anticipated  sales in the fourth  quarter of
2002.

     Trade payables and accrued  liabilities,  including payables to third-party
and related-party manufacturers,  were approximately $6.8 million as of December
31, 2002  compared  with $4.5 million as of December  31, 2001.  The increase in
trade  payables and accrued  liabilities  between  periods is a direct result of
extending our payment  terms with our largest  supplier from 30 days to 60 days.
We anticipate that our payment terms with our largest supplier will remain at 60
days for the foreseeable future.

     We maintain a $15.0 million credit facility with General  Electric  Capital
Corporation that expires during April 2003. The line of credit bears interest at
2.5% over the 30-day  commercial  paper rate,  or 3.8% as of December  31, 2002.
Advances  under the line of credit are based upon eligible  accounts  receivable
and  inventory of our wholly owned  subsidiary  Vodavi  Communications  Systems,
Inc., and are secured by substantially all of our assets. We had total borrowing
capacity of approximately  $7.0 million and no outstanding  borrowings under the
credit  facility at December 31, 2002.  The  revolving  line of credit  contains
covenants that are customary for similar credit facilities and also prohibit our
operating  subsidiaries from paying dividends to our company without the consent
of GE Capital.  As of December 31, 2002, we were in  compliance  with all of the
covenants.

     We are  currently  in the  process  of  negotiating  a  replacement  credit
facility, which we expect to complete before the current facility expires. While
we have  not yet  signed a  definitive  credit  agreement,  we have  received  a
commitment  from a financial  institution  for a $5.0 million  revolving  credit
facility with a term of two years.  Advances under the credit facility will bear
interest at the bank's prime rate.  There can be no  assurances  that we will be
successful in obtaining a replacement facility or completing the proposed credit
agreement on the terms outlined above.

     During March 2002 we acquired  substantially  all of the assets and assumed
certain liabilities of DataSpeak Systems,  Inc., an Arizona-based  dealer of our
products.  Under the terms of the purchase  agreement,  we paid cash of $624,000
and issued  100,000 shares of restricted  common stock.  The cash portion of the
acquisition was funded by our credit facility.

     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 facilities and certain vehicles and short-term purchase
commitments to our third-party suppliers.

     The  following  table sets forth all known  commitments  as of December 31,
2002 and the year in which those  commitments  become due or are  expected to be
settled (in thousands):

                                                           ACCOUNTS
                                                           PAYABLE &
                   OPERATING    CREDIT      PURCHASE        ACCRUED
    YEAR            LEASES     FACILITY    COMMITMENTS    LIABILITIES     TOTAL
    ----            ------     --------    -----------    -----------    -------
2003                $ 1,094     $    --      $ 5,203        $ 6,748      $13,045
2004                  1,095          --           --             --        1,095
2005                    881          --           --             --          881
2006                    818          --           --             --          818
2007                    785          --           --             --          785
Thereafter            3,142          --           --             --        3,142
                    -------     -------      -------        -------      -------
Total               $ 7,815     $    --      $ 5,203        $ 6,748      $19,766
                    =======     =======      =======        =======      =======

                                       26
<PAGE>
     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.

INTERNATIONAL MANUFACTURING SOURCES

     We  currently  obtain  most of our  products  under  various  manufacturing
arrangements  with  third-party  manufacturers  in Asia,  including LGE who owns
approximately  20% of  our  outstanding  common  stock.  See  Item  1,  "Special
Considerations  - We face  risks  associated  with  international  manufacturing
sources."

IMPACT OF RECENTLY ISSUED STANDARDS

     In 2001,  the FASB  issued  Statement  No.  141,  ACCOUNTING  FOR  BUSINESS
COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These
statements modified accounting for business combinations after June 30, 2001 and
affected our 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  indeterminate  lives will cease.  Goodwill
amortization expense was $0, $134,000, and $134,000 for the years ended December
31, 2002, 2001, and 2000, respectively.

     We have  determined  that upon  adoption of these  statements on January 1,
2002, the entire $1.6 million carrying amount of the goodwill was impaired. This
determination  was based principally on the total market value of our issued and
outstanding  common stock on January 1, 2002 of $5.5 million  compared  with our
book value on December 31, 2001 of $11.0  million.  The goodwill  impairment was
recognized  in the first  quarter of 2002 as a change in  accounting  principle.
Except as  disclosed  above,  the  adoption of these  statements  did not have a
material impact on our financial condition or results from operations.

     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 will apply to exit or disposal
activities  initiated after December 31, 2002. We have reviewed the requirements
of SFAS No. 146 and  believe  the  adoption  of this  statement  will not have a
material impact on our financial statements.

     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

                                       27
<PAGE>
modified after  December 31, 2002. We have adopted the disclosure  provisions of
this  interpretation  as of  December  31,  2002 as  presented  in Note 4 to our
consolidated financial statements.

     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 market 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 as presented in Note 6 to our consolidated financial
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of December 31, 2002, we did not participate in any derivative financial
transactions or other financial and commodity  transactions for which fair value
disclosure would be required under Statement of Financial  Accounting  Standards
No. 107. 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  instruments.  We incur interest on loans made under a revolving line
of credit at variable  interest rates of 2.50% over the 30 day commercial  paper
rate, a total of 3.80% at December 31, 2002.  The  principal of loans under this
line of credit is due in April 2003. At December 31, 2002, we had no outstanding
borrowings under the line of credit.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

     Reference is made to the financial statements,  the report thereon, and the
notes thereto commencing at page F-1 of this Report, which financial statements,
report, and notes are incorporated herein by reference.

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

     Not applicable.

                                       28
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information  regarding our directors
and executive officers:


         NAME                  AGE            POSITION

William J. Hinz (1).........    57     Chairman of the Board
Gregory K. Roeper...........    42     President, Chief Executive Officer, and
                                        Director
David A. Husband............    34     Vice President-Finance, Chief Financial
                                        Officer, Secretary, and Treasurer
Stephen L. Borcich..........    56     Vice President - Distribution Sales
Steven R. Francis...........    51     Vice President - Dealer Sales
Jack A. Henry (2)...........    59     Director
Jong Hwa Choi...............    42     Director
Stephen A McConnell (2).....    50     Director
Emmett E. Mitchell (1)(2)...    47     Director
Frederick M. Pakis (1)......    49     Director

----------
(1)  Member of the Compensation Committee
(2)  Member of the Audit Committee

     WILLIAM J. HINZ has served as Chairman  of the Board of our  company  since
October 1997 and as a director of our company  since April 1997.  Since  October
1999, Mr. Hinz has served as Group President for the Triumph  Components  Group,
which is a group of seven  divisional  companies  within Triumph Group,  Inc., a
publicly  held  company.  Mr.  Hinz  served as  President  of  Stolper-Fabralloy
Company,  a  precision  aerospace  engine  component   manufacturer  that  is  a
subsidiary of Triumph Group, Inc., from September 1997 until October 1999 and as
Executive  Vice  President of  Operations of  Stolper-Fabralloy  from March 1996
until  September  1997.  Mr. Hinz served as Vice  President of Global Repair and
Overhaul  Operations  for  AlliedSignal  Aerospace  Company from June 1994 until
March 1996.  During this period,  Mr. Hinz also was  responsible  for  aerospace
aftermarket merger and acquisition activity.

     GREGORY K. ROEPER has served as  President  of our company  since  December
1998 and as Chief Executive Officer and a director of our company since December
1999.  Mr.  Roeper  served as our Chief  Operating  Officer from June 1998 until
December 1999. Between November 1994 and June 1998, Mr. Roeper held a variety of
other executive  positions with our company,  including Chief Financial Officer;
Executive Vice President - Finance, Administration,  and Operations;  Secretary;
and  Treasurer.  From 1982 until  1994,  Mr.  Roeper was  employed  with  Arthur
Andersen LLP.

     DAVID  A.  HUSBAND  has  served  as our Vice  President  -  Finance,  Chief
Financial Officer,  Secretary,  and Treasurer since March 2001. Prior to joining
our company,  Mr. Husband served in various  capacities with Action  Performance
Companies,   Inc.,  a  publicly   held  company   engaged  in  the   motorsports
merchandising  business,  from May 1998 until  December  2000,  most recently as
Executive Vice President and Chief Operating  Officer.  Mr. Husband was employed
as an accountant with Arthur  Andersen LLP from July 1992 to May 1998,  where he
was primarily  engaged in auditing  publicly held  companies.  Mr.  Husband is a
Certified Public Accountant in the state of Arizona.

     STEPHEN L. BORCICH has served as our Vice  President -  Distribution  Sales
since June 2002. Prior to that, Mr. Borcich served as our Vice President - Sales
and Marketing since April 1999. Mr. Borcich served as Vice President - Sales for
Voice Technologies  Group, a manufacturer and distributor of digital integration
technology  from August 1998 until March  1999.  From  February  1997 until July
1998, Mr. Borcich served as Vice President - Sales and Marketing of Q.SyS, Inc.,
a manufacturer of computer  telephony  applications.  Mr. Borcich also served as
Vice  President  - Sales  of  Microlog  Corporation  from  December  1990  until
September 1995.

                                       29
<PAGE>
     STEVEN R.  FRANCIS has served as our Vice  President  - Dealer  Sales since
June 2002. From March 2002,  when we acquired  DataSpeak  Systems,  Inc. to June
2002,  Mr.  Francis  served as our Vice  President - Direct Sales.  Mr.  Francis
served as co-founder and president of DataSpeak Systems,  Inc., an Arizona-based
interconnect company from January 1998 until March 2002. Prior to that time, Mr.
Francis served as the Vice President of Sales and Marketing of Enhanced Systems,
Inc. from October 1996 until December 1997. Mr. Francis previously has served in
the  communications  industry in various  positions  including various sales and
management positions at GTE, Stromberg-Carlson, and Executone.

     JACK A. HENRY has served as a director of our company since  November 2001.
Mr. Henry began his career in 1966 with the international  professional services
firm of  Arthur  Andersen  LLP and held  positions  in the  Detroit,  San  Jose,
Seattle,  and Phoenix offices. In 2000, Mr. Henry retired as Managing Partner of
the Phoenix office and formed Sierra Blanca  Ventures,  LLC, a private  advisory
and  investment  firm. Mr. Henry  currently  serves on the board of directors of
Simula, Inc., Harris Trust Bank of Arizona, and SOS Staffing Services,  Inc. Mr.
Henry  has also  served in a  variety  of  community  positions  including  most
recently as chairman of the Arizona  Chamber of Commerce from 1999 to 2000,  and
chairman of Greater Phoenix Leadership from 2000 to 2001. Mr. Henry attended the
U.S. Naval Academy and holds a BBA and MBA from the University of Michigan.

     JONG HWA CHOI has served as a director of our company since  February 2003.
Mr. Choi has served in various  capacities for LG InfoComm  U.S.A., a major U.S.
mobile  handset  vendor and affiliate of LG  Electronics,  Inc.  since 1987, and
since  March 2000 has served as Vice  President  of  Administration.  During his
16-year tenure, Mr. Choi has managed international  business planning and set up
overseas   subsidiaries  for  various   divisions  of  LGE.  Mr.  Choi's  global
assignments include Italy, Russia, and the United States. Mr. Choi's experiences
in various industries include consumer electronics,  semiconductors,  and mobile
handsets.

     STEPHEN A MCCONNELL  has served as a director of our company  since January
1996. Mr. McConnell  currently  serves as the President of Solano  Ventures,  an
investment  fund devoted to small- to mid-sized  companies.  Mr.  McConnell also
currently  serves as Chairman of G-L  Industries,  LLC, a  manufacturer  of wood
glue-lam  beams  used in the  construction  industry.  Mr.  McConnell  served as
Chairman of the Board of Mallco Lumber & Building  Materials from September 1991
to June 1997.  Mr.  McConnell  currently  serves as a director of Capital  Title
Group, Inc., Mobile Mini, Inc., and Miracor Diagnostics,  Inc., all of which are
publicly held companies.

     EMMETT E. MITCHELL has served as a director of our company  since  February
1999. Mr.  Mitchell has been employed with MS Howell & Co., a NASD broker dealer
and  investment  banking firm, as the Executive  Vice  President  since December
2000.  Mr.  Mitchell has also served as the Chief  Financial  Officer of ICESoft
Technologies, Inc., a privately held software company since December 2001. Prior
to this, Mr. Mitchell was employed with Paradise Valley Securities,  Inc., since
October 1991, most recently as the Chairman and Chief Executive Officer.

     FREDERICK M. PAKIS has served as a director of our company  since  November
2001.  Mr. Pakis was a co-founder of JDA Software,  Inc. in 1985 where he served
as  Co-Chairman  of the Board,  President,  and Co-Chief  Executive  Officer for
various  periods of time  through  1999.  Since that time,  Mr. Pakis formed and
serves as Managing  Director of  Clarendon  Capital  Management,  LLC, a private
advisory and investment firm. Mr. Pakis previously served as a Retail Consulting
Manager  with Touche Ross & Co. from 1981 to 1985,  and as Director of Corporate
Planning for the Sherwin Williams  Company,  a home improvement  specialty store
company  from 1976 to 1981.  Mr.  Pakis  also  serves on the  boards of  several
not-for-profit  entities,  including  Phoenix  Children's  Hospital  and Phoenix
Country Day School.  Mr. Pakis attended the U.S. Military Academy at West Point,
received a Bachelor of Science  degree in Operations  Research from Case Western
Reserve  University  , and a Master of Business  Administration  degree from the
London School of Business, where he studies as a Sloan Fellow.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section  16(a) of the Exchange Act requires our  directors,  officers,  and
persons who own more than 10% of a registered class of our equity  securities to
file  reports of  ownership  and changes in  ownership  with the SEC.  Officers,
directors,  and greater than 10% stockholders are required by SEC regulations to
furnish us with copies of all Section  16(a) forms they file.  Based solely upon
our review of the copies of such forms we received  during the fiscal year ended
December  31,  2002,  and written  representations  that no other  reports  were
required,  we believe that each person who, at any time during such fiscal year,

                                       30
<PAGE>
was a  director,  officer,  or  beneficial  owner of more than 10% of our common
stock  complied  with all Section 16(a) filing  requirements  during such fiscal
year,  except  that  Mr.  Hinz  filed  a  late  Form  4  covering  two  purchase
transactions.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY OF CASH AND OTHER COMPENSATION

     The  following  table sets forth  certain  information  with respect to the
compensation  we paid to our Chief  Executive  Officer and four other  executive
officers who received  cash  compensation  in excess of $100,000  during  fiscal
2002.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                             LONG TERM
                                                                           COMPENSATION
                                                                           ------------
                                                                              AWARDS
                                                                           ------------
                                               ANNUAL COMPENSATION          SECURITIES
                                        --------------------------------    UNDERLYING        ALL OTHER
NAME AND PRINCIPAL POSITION(1)          YEAR     SALARY($)     BONUS ($)   OPTIONS(#)(2)    COMPENSATION($)
------------------------------          ----     ---------     ---------   -------------    ---------------
<S>                                     <C>      <C>           <C>           <C>              <C>
Gregory K. Roeper..................     2002     $ 165,000     $ 25,000           --          $ 4,329(3)
   President and Chief Executive        2001     $ 155,000     $ 15,000       35,000          $ 8,451(4)
   Officer                              2000     $ 148,500           --           --            6,579

David A. Husband...................     2002     $ 135,000     $ 25,000           --          $   750(5)
   Vice President - Finance, Chief      2001     $  94,000     $     --       75,000          $    --
   Financial Officer, Secretary
   and Treasurer

Stephen L. Borcich.................     2002     $ 125,000     $     --           --          $   750(5)
   Vice President - Distribution        2001     $ 125,000     $     --           --          $   750(5)
   Sales                                2000     $ 134,612(6)    10,000           --              750(5)

Kent R. Burgess....................     2002     $ 134,000     $     --           --          $    --
   Former Vice President - Product      2001     $ 125,000     $     --           --          $    --
   Development                          2000     $  91,350           --       10,000               --

Steven R. Francis..................     2002     $ 102,000     $     --       50,000          $   750(5)
   Vice President - Dealer Sales
</TABLE>

----------
(1)  We  consider  Messrs.  Roeper,  Husband,  Borcich,  and  Francis  to be our
     executive  officers.  David A. Husband became our Chief  Financial  Officer
     during March 2001;  Mr.  Francis  became our Vice  President - Direct Sales
     during  March  2002 and became our Vice  President  - Dealer  Sales in June
     2002. Mr. Burgess was our Vice President - Product  Development  from April
     2000 until his retirement in December 2002.
(2)  The  exercise  price of all stock  options  granted  were equal to the fair
     market value of our common stock on the date of grant.
(3)  Represents premium payment of $3,579 for a long-term  disability  insurance
     policy paid by our company and a 401(k) plan matching  contribution  in the
     amount of $750.
(4)  Represents premium payment of $2,234 for a long-term  disability  insurance
     policy and $5,467 for a term life  insurance  policy  paid by our  company.
     Also includes a 401(k) plan matching contribution in the amount of $750.
(5)  Represents a 401(k) plan matching contribution.
(6)  Includes sales commissions paid during fiscal 2000.

                                       31
<PAGE>
OPTION GRANTS

     The following  table sets forth certain  information  with respect to stock
options granted to the officers listed during the fiscal year ended December 31,
2002.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                           INDIVIDUAL GRANTS
                             --------------------------------------------------------------------------------
                                                                                        POTENTIAL REALIZABLE
                                                                                          VALUE AT ASSUMED
                                            PERCENTAGE                                      ANNUAL RATES
                             NUMBER OF       OF TOTAL                                      OF STOCK PRICE
                             SECURITIES      OPTIONS                                      APPRECIATION FOR
                             UNDERLYING     GRANTED TO                                     OPTION TERM(1)
                              OPTIONS      EMPLOYEES IN    EXERCISE     EXPIRATION    -----------------------
NAME                         GRANTED (#)    FISCAL YEAR     PRICE         DATE           5%             10%
----                         -----------    -----------    --------     ----------    -------        --------
<S>                          <C>            <C>            <C>          <C>           <C>            <C>
Gregory K. Roeper..........        --            --            --            --            --              --
David A. Husband...........        --            --            --            --            --              --
Stephen L. Borcich.........        --            --            --            --            --              --
Kent R. Burgess............        --            --            --            --            --              --
Steven R. Francis..........    50,000          60.6%        $1.35        3/4/12       $42,450        $107,578
</TABLE>

----------
(1)  Potential gains are net of the exercise price,  but before taxes associated
     with the  exercise.  Amounts  represent  hypothetical  gains  that could be
     achieved for the  respective  options if exercised at the end of the option
     term. The assumed 5% and 10% rates of stock price appreciation are provided
     in  accordance  with  SEC  rules  and  do not  represent  our  estimate  or
     projection of the future price of our common stock.  Actual gains,  if any,
     on stock option  exercises will depend upon the future market prices of our
     common stock.

OPTION HOLDINGS AND VALUES

     The  following  table  provides  information  on the  value of  unexercised
options held by the officers  listed as of December 31, 2002. None of the listed
officers exercised any options during 2002.

                      OPTION VALUES AS OF DECEMBER 31, 2002

<TABLE>
<CAPTION>
                                              UNDERLYING NUMBER
                                                OF SECURITIES             VALUE OF UNEXERCISED
                                             UNEXERCISED OPTIONS        IN-THE-MONEY OPTIONS AT
                                            AT FISCAL YEAR-END (#)       FISCAL YEAR-END ($)(1)
                                         ---------------------------   ---------------------------
NAME                                     EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                                     -----------   -------------   -----------   -------------
<S>                                        <C>             <C>           <C>            <C>
Gregory K. Roeper ......................   171,250         51,250        $ 7,000        $21,000
David A. Husband .......................    18,750         56,250        $13,650        $40,950
Stephen L. Borcich .....................    33,750         11,250        $    --        $    --
Kent R. Burgess ........................     5,000          5,000        $    --        $    --
Steven R. Francis ......................        --         50,000        $    --        $22,000
</TABLE>

----------
(1)  Calculated  based upon the closing price of our common stock as reported on
     the Nasdaq  SmallCap  Market on December  31, 2002 of $1.79 per share.  The
     exercise price of certain of the options held by our executive  officers on
     December 31, 2002 were greater than $1.79 per share.

EMPLOYMENT AGREEMENTS

     WILLIAM J. HINZ

     Effective  October 1, 1999,  we entered into an employment  agreement  with
William J. Hinz.  The agreement had an initial term through  September 30, 2001,
and   automatically   renewed   through   September  30,  2002.   The  agreement
automatically   renews  for  successive   one-year  terms  unless  either  party

                                       32
<PAGE>
terminates  by giving  the other  party at least 30 days'  written  notice.  The
agreement  provides  for Mr.  Hinz to serve as our  Chairman of the Board and to
receive a base salary of $75,000 per annum.

     The  employment  agreement  provides  for Mr.  Hinz to  receive  his  fixed
compensation  to  the  date  of  termination  of his  employment  by  reason  of
resignation,  death, or as a result of termination of employment "for cause," as
defined the  agreement.  If we terminate  the  employment of Mr. Hinz, or if his
employment is terminated by reason of disability, the agreement provides for the
payment  of  fixed  compensation  to Mr.  Hinz  for  the  remaining  term of the
agreement,  payable in a lump sum within ten days of the date of termination. In
addition,  Mr. Hinz's vested options as of the date of  termination  will remain
outstanding  through the 90-day period  following the  then-current  term of the
agreement. All unvested options as of the date of termination will be cancelled.

     In the event of a "change of  control"  of our  company,  as defined in the
agreement,  Mr. Hinz will receive a minimum bonus of $50,000.  In addition,  any
options that were granted to Mr. Hinz that remain unvested as of the date of the
change of control will become fully vested and exercisable on the effective date
of the change of  control.  If the  employment  of Mr. Hinz is  terminated  as a
result of a change of control,  we will be required to pay Mr. Hinz,  within ten
days of the date of termination, the greater of (a) his base salary and benefits
for the  remaining  term of the  employment  agreement,  or (b) his annual  base
salary.

     GREGORY K. ROEPER

     Effective October 1, 1999, we entered into an employment agreement with Mr.
Roeper.  We renewed and amended the agreement  effective  October 1, 2002, for a
term expiring on September  30, 2003.  The  agreement  automatically  renews for
successive  one-year  terms unless  either party  terminates by giving the other
party at least 30 days' written notice.  The employment  agreement  provides for
Mr. Roeper to serve as our President and Chief Executive Officer. The employment
agreement provides for Mr. Roeper to receive a base salary of $182,500 per annum
through September 30, 2003.

     The agreement  provides for Mr. Roeper to receive his fixed compensation to
the date of termination of his employment by reason of resignation, death, or as
a result of termination of employment  "for cause," as defined in the agreement.
If we terminate his employment,  or if his employment is terminated by reason of
disability,  the  agreement  provides  for the  payment  of his base  salary and
benefits for a period of one year,  payable in a lump sum within ten days of the
date of termination.  In addition, Mr. Roeper's vested options as of the date of
termination  will remain  outstanding  through the 120-day period  following the
then-current  term of the  agreement.  All  unvested  options  as of the date of
termination will be cancelled.

     In the event of a "change of  control"  of our  company,  as defined in the
agreement, Mr. Roeper will receive a minimum bonus of $100,000. In addition, any
options that were granted to Mr.  Roeper that remain  unvested as of the date of
the change of control will become fully vested and  exercisable on the effective
date of the change of control.  If Mr.  Roeper's  employment  is terminated as a
result of a change of control,  we will be required to pay him,  within ten days
of the date of termination,  his annual base salary and benefits for a period of
one year  following  the date of  termination  plus any earned bonus through the
date of termination.

     DAVID A. HUSBAND

     Effective January 1, 2003, we entered into an employment agreement with Mr.
Husband.  The  agreement  has  an  initial  term  of  one  year.  The  agreement
automatically   renews  for  successive   one-year  terms  unless  either  party
terminates  by giving  the other  party at least 30 days'  written  notice.  The
employment  agreement  provides for Mr. Husband to serve as our Vice President -
Finance and Chief Financial Officer.  The employment  agreement provides for Mr.
Husband to receive a base  salary of $135,000  per annum  through  December  31,
2003.

     The agreement provides for Mr. Husband to receive his fixed compensation to
the date of termination of his employment by reason of resignation, death, or as
a result of termination of employment "for cause," as defined the agreement.  If
we terminate Mr.  Husband's  employment,  or if his  employment is terminated by
reason of disability, we will pay Mr. Husband his base salary and benefits for a
period  ranging from six to nine  months,  depending on his length of service to
our  company.  In  addition,  Mr.  Husband's  vested  options  as of the date of

                                       33
<PAGE>
termination  will remain  outstanding  through the 120-day period  following the
then-current  term of the  agreement.  All  unvested  options  as of the date of
termination will be cancelled.

     In the event of a "change of  control"  of our  company,  as defined in the
employment  agreement,  Mr. Husband will receive a bonus ranging from $25,000 to
$62,500,  based on the value of the transaction.  In addition,  any options that
were granted to Mr. Husband that remain unvested as of the date of the change of
control will become fully vested and  exercisable  on the effective  date of the
change of control.  If Mr.  Husband's  employment is terminated as a result of a
change of control,  we will be required to pay him his base salary and  benefits
for a six-month  period  following the date of termination plus any earned bonus
through the date of termination.

     STEVEN R. FRANCIS

     Effective  March 1, 2002, in connection  with our  acquisition of DataSpeak
Systems,  Inc., we entered into an employment  agreement with Mr.  Francis.  The
agreement has an initial term through  February 2004.  The employment  agreement
provides  for Mr.  Francis to serve as  President of Vodavi  Direct,  Inc.,  our
wholly owned  subsidiary,  for a base salary of $125,000 per annum.  Pursuant to
the agreement,  we granted to Mr. Francis  ten-year  options to purchase  50,000
shares of our common  stock at an exercise  price per share equal to $1.35,  and
25% of the options  will vest and become  exercisable  on each of the first four
anniversaries of the date of grant. In the event of a "change of control" of our
company,  as defined in the  agreement,  any  options  that were  granted to Mr.
Francis that remain unvested as of the date of the change of control will become
fully vested and exercisable on the effective date of the change of control.  If
Mr.  Francis'  employment is  terminated as a result of a change of control,  we
will be  required  to pay Mr.  Francis  his base  salary  and  benefits  for the
remaining  term of the  agreement  plus any  earned  bonus  through  the date of
termination.

     The agreement provides for Mr. Francis to receive his fixed compensation to
the date of termination of his employment by reason of resignation, death, or as
a result of termination of employment "for cause," as defined the agreement.  If
we terminate the employment of Mr.  Francis,  or if his employment is terminated
by reason  of  disability,  the  agreement  provides  for the  payment  of fixed
compensation  to Mr.  Francis  for  the  remaining  term  of the  agreement.  In
addition,  any vested  options held by Mr. Francis as of the date of termination
will remain  outstanding  through the 90-day period  following the  then-current
term of the agreement.  All unvested  options as of the date of termination will
be cancelled.

     Each employment  agreement described above provides that the executive will
be eligible to receive  discretionary bonuses in amounts determined by our Board
of Directors. In addition, each employment agreement generally requires us to

     *    reimburse  each  executive  for all travel,  entertainment,  and other
          ordinary  and  necessary  expenses  incurred  in  connection  with our
          business   and  their  duties   under  their   respective   employment
          agreements; and

     *    provide such other fringe benefits that we make generally available to
          all of our employees on a non-discriminatory basis.

     Each  employment  agreement  also  contains  provisions  that  prohibit the
executive from

     *    competing  with us for a period of 12 months after the  termination of
          the executive's employment with our company,

     *    taking certain actions  intended to solicit other persons to terminate
          their  business  relationship  with  us or to  terminate  his  or  her
          employment relationship with us, and

     *    making  unauthorized use or disclosure of our trade names,  fictitious
          names, or confidential information.

     OTHER ARRANGEMENTS

     We maintain  agreements  with each of our other officers and employees that
prohibit such persons from disclosing  confidential  information  obtained while
employed by us. We offer our employees medical,  life, and disability  insurance

                                       34
<PAGE>
benefits.  Our executive officers and other key personnel  (including  directors
who also are  employees of our company)  are eligible to receive  stock  options
under our stock option plan.

DIRECTOR COMPENSATION AND OTHER INFORMATION

     Employees of our company do not receive compensation for serving as members
of our Board of  Directors.  Each  independent  director  receives  a  quarterly
retainer  fee  of  $3,750  payable  on  the  first  day of  each  quarter.  Each
independent  director  also  receives a $500 fee for each  meeting  attended  by
telephone or in person and  reimbursement  for reasonable  expenses  incurred in
attending  meetings of our Board of Directors,  except that Mr. Hinz receives no
cash compensation for meetings attended.  Mr. Hinz, the Chairman of our Board of
Directors,  is compensated as pursuant to an employment agreement.  See Item 11,
"Executive  Compenation - Employment  Agreements." During March 2003, we granted
Mr.  Hinz  options to  purchase  15,000  shares of our common  stock.  Committee
members  other than Mr.  Hinz  receive a $500 fee for  attendance  at  committee
meetings  that are held on days other  than days on which a Board of  Directors'
meeting  is held.  Non-employees  who serve as  directors  of our  company  also
receive an annual automatic stock option grant to purchase 5,000 shares of stock
under our Amended and Restated 1994 Stock Option Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Performance  evaluation and  compensation  decisions  relating to 2002 were
made by the Compensation Committee of our Board of Directors, which consisted of
Messrs.  Mitchell, Hinz, and Pakis. Except for our employment agreement with Mr.
Hinz,  none of such persons had any contractual or other  relationships  with us
during   fiscal   2002   except   as   directors.   See  Item   11,   "Executive
Compensation--Employment Agreements."

                                       35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

     The  following  table  sets  forth  certain  information  with  respect  to
beneficial  ownership  of our common  stock as of December  31, 2002 by (i) each
director;  (ii) the  executive  officers  set forth in the Summary  Compensation
Table under Item 11,  "Executive  Compensation;"  (iii) all of our directors and
executive  officers as a group; and (iv) each other person who is known by us to
beneficially own or to exercise voting or dispositive  control over more than 5%
of our common stock.

                                                        NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)                SHARES (2)   PERCENT (2)
----------------------------------------                ----------   -----------
DIRECTORS AND EXECUTIVE OFFICERS:
William J. Hinz.......................................    60,800(3)      1.4%
Gregory K. Roeper.....................................   210,600(4)      4.6%
David A. Husband......................................    62,350(5)      1.4%
Stephen L. Borcich....................................    33,750(6)       *
Kent R. Burgess.......................................     5,003(7)       *
Steven R. Francis.....................................   100,000(8)      2.3%
Jack A. Henry.........................................     5,900(9)       *
Kyeong-Woo Lee........................................     5,000(10)      *
Stephen A McConnell...................................    56,900(11)     1.3%
Emmett E. Mitchell....................................    30,000(12)      *
Frederick M. Pakis....................................     5,000(13)      *
All directors and officers as a group (11 persons)....   575,303        12.2%

NON-MANAGEMENT 5% STOCKHOLDERS:
LG Electronics, Inc...................................   862,500(14)    19.8%
Hummingbird Management, LLC...........................   477,300(16)    11.0%
Steven A. Sherman.....................................   277,330(15)     6.3%
Anthony Silverman.....................................   263,267(17)     6.1%

----------
*    Less than 1%

(1)  Each person  named in the table has sole voting and  investment  power with
     respect  to  all  common  stock  beneficially  owned  by  him,  subject  to
     applicable community property law, except as otherwise indicated. Except as
     otherwise indicated, each person may be reached at 4717 East Hilton Avenue,
     Suite 400, Phoenix, Arizona 85034.
(2)  The  percentages  shown are calculated  based upon 4,349,788  shares of our
     common  stock  outstanding  on December  31, 2002.  The  percentages  shown
     include  the shares of common  stock that each  named  stockholder  has the
     right to  acquire  within 60 days of  December  31,  2002.  In  calculating
     ownership percentage, all shares of common stock that the named stockholder
     has the right to acquire upon exercise of stock  options  within 60 days of
     December 31, 2002 are deemed to be outstanding for the purpose of computing
     the  percentage  of common  stock  owned by such  stockholder,  but are not
     deemed  to be  outstanding  for the  purpose  of  computing  the  ownership
     percentage of any other stockholder.  Percentages may be rounded. Includes,
     when applicable, shares owned of record by such person's minor children and
     spouse and by other related  individuals  and entities over whose shares of
     common  stock  such  person has sole or shared  voting  control or power of
     disposition.
(3)  Includes  13,300  shares of common stock and 47,500  shares of common stock
     issuable  upon  exercise of options,  but excludes  12,500 shares of common
     stock issuable upon exercise of unvested stock options.
(4)  Includes  35,600 shares of common stock and 175,000  shares of common stock
     issuable  upon  exercise of options,  but excludes  60,000 shares of common
     stock issuable upon exercise of unvested stock options.
(5)  Includes  43,600  shares of common stock and 18,750  shares of common stock
     issuable  upon  exercise of options,  but excludes  56,250 shares of common
     stock issuable upon exercise of unvested stock options.
(6)  Includes  33,750 shares of common stock  issuable upon exercise of options,
     but  excludes  11,250  shares of common  stock  issuable  upon  exercise of
     unvested stock options.

                                       36
<PAGE>
(7)  Includes 3 shares of common stock and 5,000 shares of common stock issuable
     upon  exercise  of  options,  but  excludes  5,000  shares of common  stock
     issuable upon exercise of unvested stock options.
(8)  Excludes  50,000 shares of common stock  issuable upon exercise of unvested
     stock options.
(9)  Includes  900  shares of common  stock  and  5,000  shares of common  stock
     issuable  upon  exercise of stock  options,  but  excludes  5,000 shares of
     common stock issuable upon exercise of unvested stock options.
(10) Includes  5,000  shares of common  stock  issuable  upon  exercise of stock
     options,  but excludes  5,000 shares of common stock issuable upon exercise
     of unvested stock options.
(11) Includes  26,900  shares of common stock and 30,000  shares  issuable  upon
     exercise of options,  but excludes  5,000  shares of common stock  issuable
     upon exercise of unvested stock options.
(12) Includes (a) 9,500 shares of common stock and 20,000  shares  issuable upon
     exercise  of  options  held by Mr.  Mitchell,  and (b) 500 shares of common
     stock held by Mr.  Mitchell as  custodian  for his  children,  but excludes
     5,000  shares of common  stock  issuable  upon  exercise of unvested  stock
     options held by Mr. Mitchell.
(13) Includes  5,000  shares of common  stock  issuable  upon  exercise of stock
     options,  but excludes  5,000 shares of common stock issuable upon exercise
     of unvested stock options.
(14) Represents shares of common stock beneficially owned by LG Electronics Inc.
     LGE has sole voting power and sole dispositive power over such shares.  LGE
     acquired  the shares of our common stock in  connection  with the merger of
     its minority owned  subsidiary,  LGIC,  with and into LGE during  September
     2000. The address of LGE is LG Twin Towers, 20 Yoido-dong,  Youngdungpo-gu,
     Seoul 150-721, Korea.
(15) Includes  95,000  shares of common stock and 75,000  shares  issuable  upon
     exercise of options held by Mr.  Sherman;  8,000 shares held by Mr. Sherman
     as custodian  for certain of his  children;  86,830  shares held by Sherman
     Capital Group,  L.L.C.,  of which Mr. Sherman is the managing  member;  and
     12,500  shares  held by  Sherman  Capital  Partners,  L.L.C.,  of which Mr.
     Sherman is a managing member. Mr. Sherman disclaims beneficial ownership of
     all shares  held by Sherman  Capital  Group,  L.L.C.  and  Sherman  Capital
     Partners,  L.L.C. except to the extent that his individual interest in such
     shares  arises from his interest in each such  entity.  The address for Mr.
     Sherman is 509 Vista Grande Drive, Colorado Springs, Colorado 80906.
(16) Represents 477,300 shares of common stock beneficially owned by Hummingbird
     Management,  LLC (f/k/a  Morningside  Value Investors,  LLC), as investment
     manager  to The  Hummingbird  Value  Fund,  L.P.  The  managing  member  of
     Hummingbird  Management  is Paul  Sonkin,  who also serves as the  managing
     member of HVF Capital,  the general partner of The  Hummingbird  Value Fund
     and The Hummingbird  Microcap Value Fund.  Hummingbird  Management has sole
     voting and dispositive  power over the shares,  and Hummingbird  Management
     disclaims  any  economic  interest or  beneficial  ownership of the shares.
     Information  is based solely on a Schedule 13D filed with the Commission on
     or about June 12,  2002,  as amended on  November  26,  2002 and January 3,
     2003. The address of Hummingbird  Management,  LLC is 153 East 53rd Street,
     New York, New York 10022.
(17) Represents  263,267  shares of common stock  beneficially  owned by Anthony
     Silverman,  who has  sole  voting  and  dispositive  power  of the  shares.
     Information  is based solely on a Schedule 13D filed with the Commission on
     or about August 7, 2002. The address for Mr. Silverman is 7305 E. Del Acero
     Drive, Scottsdale, Arizona 85254.

                                       37
<PAGE>
EQUITY COMPENSATION PLAN INFORMATION

     The following table sets forth information with respect to our common stock
that may be issued  upon the  exercise  of stock  options  under our 1994  Stock
Option Plan as of December 31, 2002.

<TABLE>
<CAPTION>
                                                                                       (c)
                                       (a)                                   Number of Securities (b)
                               Number of Securities                           Remaining Available for
                                to be Issued Upon       Weighted Average       Future Issuance Under
                                   Exercise of         Exercise Price of     Equity Compensation Plans
                               Outstanding Options,   Outstanding Options,     (Excluding Securities
       Plan Category           Warrants, and Rights   Warrants, and Rights   Reflected in Column (a))
       -------------           --------------------   --------------------   ------------------------
<S>                                  <C>                     <C>                     <C>
Equity Compensation Plans
   Approved by
   Stockholders...............         880,500               $ 2.89                   567,000

Equity Compensation Plans
   Not Approved by
   Stockholders...............              --                   --                        --
                                     ---------               ------                 ---------

   Total......................         880,500               $ 2.89                   567,000
                                     =========               ======                 =========
</TABLE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     LG Electronics Inc., our principal supplier,  owns approximately 20% of our
outstanding common stock. Kyeong Woo Lee, a director of our company from January
2002 until  February  2003 and Jong Hwa Choi,  a director of our  company  since
February 2003, are officers of LGE or its affiliates. We purchased approximately
$18.5 million of key telephone systems,  commercial grade telephones,  and voice
mail  products from LGE and an affiliate of LGE during 2002. We believe that the
purchases from LGE and its affiliate  approximate terms that would be offered by
non-related  parties.  We owed LGE and its affiliate  approximately $4.0 million
for product purchases as of December 31, 2002.

     We also conduct joint  development  activities  with LGE for the design and
development  of  hardware  incorporated  into some of our  existing  and planned
telephone  systems and commercial grade telephones.  Generally,  LGE contributes
the ongoing research and development costs for the product hardware and produces
the finished goods  developed under the alliance and we obtain the right to sell
such products throughout North America and the Caribbean.

     In July 2001, we entered into a development  agreement with LGE under which
we will  develop for LGE  certain  advanced  voice  messaging  technologies.  We
recorded  revenue of  $183,000 in 2002 and  $210,000 in 2001 for work  performed
under the development agreement using the percentage of completion method. As of
December 31, 2002, LGE had paid us $300,000 pursuant to the agreement.

ITEM 14. CONTROLS AND PROCEDURES

     Based on their evaluation, as of a date within 90 days prior to the date of
the filing of this report, of the  effectiveness of our disclosure  controls and
procedures,  our Chief Executive  Officer and Chief Financial  Officer have each
concluded  that  our  disclosure  controls  and  procedures  are  effective  and
sufficient to ensure that we record, process,  summarize, and report information
required  to  be  disclosed  by us in  our  periodic  reports  filed  under  the
Securities  Exchange Act within the time periods specified by the Securities and
Exchange Commission's rules and forms.

                                       38
<PAGE>
     Subsequent  to the  date of  their  evaluation,  there  have  not  been any
significant  changes in our  internal  controls or in other  factors  that could
significantly affect these controls, including any corrective action with regard
to significant deficiencies and material weaknesses.

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

     (1)  Financial Statements are listed in the Index to Consolidated Financial
          Statements on page F-1 of this report.

     (2)  Financial Statement  Schedules:  Schedule II, Valuation and Qualifying
          Accounts is set forth on page S-3 of this report.

(b)  REPORTS ON FORM 8-K.

     None.

(c)  EXHIBITS

EXHIBIT
NUMBER                                 EXHIBIT
------                                 -------
3.1       Amended Certificate of Incorporation of the Registrant (l)
3.2       Amended and Restated Bylaws of the Registrant (l)
4.1       Form of  Certificate  representing  shares of Common Stock,  par value
          $.001 per share (1)
10.13A    Vodavi Single Line Telephone  Agreement  Extension dated April 4, 1997
          between  Vodavi   Communications   Systems,   Inc.  and  L.G.  Srithai
          Electronics Co., Ltd. (2)
10.19     OEM Agreement  dated as of June 19, 1995,  between Tecom Co., Ltd. and
          Vodavi Communications Systems, Inc. (3)
10.23     Amended  and  Restated  Credit  Agreement  dated as of April 11,  1994
          between  Vodavi  Communications  Systems,  Inc.  and General  Electric
          Capital Corporation, as Amended and Restated as of June 11, 1997 (2)
10.24     First  Amendment to Stock Pledge and  Security  Agreement  dated as of
          June 11, 1997,  between Vodavi  Technology,  Inc. and General Electric
          Capital Corporation (2)
10.25     Security Agreement dated as of June 11, 1997 between Enhanced Systems,
          Inc. and General Electric Capital Corporation (2)
10.28     Trademark  Security  Agreement,  dated  as of June  11,  1997,  by and
          between  Vodavi  Communications  Systems,  Inc.  and General  Electric
          Capital Corporation (2)
10.29     Trademark Security Agreement dated as of June 11, 1997, by and between
          Enhanced Systems, Inc. and General Electric Capital Corporation (2)
10.35     Repair and Refurbishment Agreement dated June 24, 1999, between Vodavi
          Communication Systems, Inc. and Aztec International LLC (4)
10.36     License Agreement dated May 17, 1999,  between Santa Barbara Connected
          Systems Corporation and Vodavi Technology, Inc. (4)
10.37     Object Code Software License Agreement dated May 24, 1999,  between D2
          Technologies, Inc. and Vodavi Technology, Inc. (4)
10.38     Fourth  Amendment to Credit  Agreement  between Vodavi  Communications
          Systems, Inc. and General Electric Capital Corporation (5)
10.40     Employment  Agreement  dated October 1, 1999,  between William J. Hinz
          and Vodavi Technology, Inc. (6)
10.42     Second  Amendment  to Amended  and  Restated  Credit  Agreement  dated
          October 31, 1999,  between  Vodavi  Communications  Systems,  Inc. and
          General Electric Capital Corporation (6)
10.43     Third Amendment to Amended and Restated Credit Agreement dated October
          9, 2000,  between  Vodavi  Communications  Systems,  Inc.  and General
          Electric Capital Corporation (7)
10.44     Waiver and Amendment of Credit  Agreement dated May 11, 2001,  between
          Vodavi  Communications  Systems,  Inc.  and General  Electric  Capital
          Corporation (8)

                                       39
<PAGE>
10.47     Sublease Agreement dated August 8, 2001, between Vodavi Communications
          Systems, Inc. and SpeedFam-IPEC, Inc. (9)
10.48     Employment  Agreement,  effective October 1, 2001,  between Gregory K.
          Roeper and Vodavi Technology, Inc. (10)
10.49     Second  Amended and Restated 1994 Stock Option Plan  (amended  through
          May 13, 2002) (11)
10.50     Fourth  Amendment to Amended and Restated Credit Agreement dated March
          4, 2002,  between  Vodavi  Communications  Systems,  Inc.  and General
          Electric Capital Corporation
10.51     Employment  Agreement,  effective  January 1, 2003,  between  David A.
          Husband and Vodavi Technology, Inc.
10.52     Employment  Agreement,  effective October 1, 2003,  between Gregory K.
          Roeper and Vodavi Technology, Inc.
21        List of Subsidiaries
23.1      Consent of Deloitte and Touche LLP
23.2      Statement regarding consent of Arthur Andersen LLP
99.1      Certification  of the  Chief  Executive  Officer  of  the  Registrant,
          pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
          of the Sarbanes-Oxley Act of 2002.
99.2      Certification  of the  Chief  Financial  Officer  of  the  Registrant,
          pursuant to 18 U.S.C.  Section of 1350, as adopted pursuant to Section
          906 of the Sarbanes-Oxley Act of 2002.

----------
(1)  Incorporated  by  reference  to  Registration  Statement  on Form  S-1 (No.
     33-95926) and amendments thereto which became effective on October 6, 1995.
(2)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1997, as filed on August 11, 1997.
(3)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1995, as filed on April 1, 1996.
(4)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1999, as filed on August 16, 1999.
(5)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 1999, as filed on November 12, 1999.
(6)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1999, as filed on March 27, 2000.
(7)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 2000, as filed on November 14, 2000.
(8)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended March 31, 2001, as filed on May 15, 2001.
(9)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 2001, as filed on November 13, 2001.
(10) Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 2002, as filed on March 29, 2002.
(11) Incorporated  by  reference  to  Registration  Statement  on Form  S-8 (No.
     333-98819) as filed by the Registrant on August 27, 2002.

                                       40
<PAGE>
                                   SIGNATURES

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


                                       VODAVI TECHNOLOGY, INC.


Date: March 24, 2003                   By: /s/ Gregory K. Roeper
                                           -------------------------------------
                                           Gregory K. Roeper
                                           President and Chief Executive Officer

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

          SIGNATURE                       TITLE                       DATE
          ---------                       -----                       ----

/s/ William J. Hinz          Chairman of the Board                March 24, 2003
--------------------------
William J. Hinz


/s/ Gregory K. Roeper        President, Chief Executive           March 24, 2003
--------------------------   Officer, and Director
Gregory K. Roeper            (Principal Executive Officer)



/s/ David A. Husband         Vice President - Finance, Chief      March 24, 2003
--------------------------   Financial Officer, Secretary,
David A. Husband             and Treasurer (Principal Financial
                             and Accounting Officer)


/s/ Jack A. Henry            Director                             March 24, 2003
--------------------------
Jack A. Henry


/s/ Jong Hwa Choi            Director                             March 24, 2003
--------------------------
Jong Hwa Choi


/s/ Stephen A McConnell      Director                             March 24, 2003
--------------------------
Stephen A McConnell


/s/ Emmett E. Mitchell       Director                             March 24, 2003
--------------------------
Emmett E. Mitchell


/s/ Frederick M. Pakis       Director                             March 24, 2003
--------------------------
Frederick M. Pakis

                                       41
<PAGE>
                                  CERTIFICATION

     I, Gregory K. Roeper, certify that:

     1. I have reviewed  this annual  report on Form 10-K of Vodavi  Technology,
Inc.;

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial condition,  results of operations,  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The  registrant's  other  certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) Designed  such  disclosure  controls and  procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the  period  in which  this  annual  report  is being
     prepared;

          b) Evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c)  Presented  in  this  annual  report  our  conclusions   about  the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying  officers and I have disclosed,  based
on our most  recent  evaluation,  to the  registrant's  auditors  and the  audit
committee of the  registrant's  board of directors  (or persons  performing  the
equivalent functions):

          a) All significant deficiencies in the design or operation of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize,  and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) Any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant's  internal
     controls; and

     6. The registrant's other certifying  officers and I have indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 24, 2003

                                        /s/ Gregory K. Roeper
                                        ----------------------------------------
                                        Gregory K. Roeper
                                        Chief Executive Officer

                                       42
<PAGE>
                                  CERTIFICATION

     I, David A. Husband, certify that:

     1. I have reviewed  this annual  report on Form 10-K of Vodavi  Technology,
Inc.;

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial condition,  results of operations,  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The  registrant's  other  certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) Designed  such  disclosure  controls and  procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the  period  in which  this  annual  report  is being
     prepared;

          b) Evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c)  Presented  in  this  annual  report  our  conclusions   about  the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying  officers and I have disclosed,  based
on our most  recent  evaluation,  to the  registrant's  auditors  and the  audit
committee of the  registrant's  board of directors  (or persons  performing  the
equivalent functions):

          a) All significant deficiencies in the design or operation of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize,  and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) Any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant's  internal
     controls; and

     6. The registrant's other certifying  officers and I have indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 24, 2003

                                        /s/ David A. Husband
                                        ----------------------------------------
                                        David A. Husband
                                        Chief Financial Officer

                                       43
<PAGE>
                    VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

                                                                            PAGE
                                                                            ----

Independent Auditors' Report - Deloitte & Touche LLP.........................F-2

Report of Independent Public Accountants - Arthur Andersen LLP...............F-3

Consolidated Balance Sheets as of December 31, 2002 and 2001.................F-4

Consolidated Statements of Operations for the Years Ended
  December 31, 2002, 2001, and 2000..........................................F-5

Consolidated Statements of Changes in Stockholders' Equity for
  the Years Ended December 31, 2002, 2001, and 2000..........................F-6

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2002, 2001, and 2000..........................................F-7

Notes to Consolidated Financial Statements...................................F-8

Independent Auditors' Report on Schedules - Deloitte & Touche LLP............S-1

Report of Independent Public Accounts - Arthur Andersen LLP..................S-2

Schedule II -- Valuation and Qualifying Accounts.............................S-3

                                       F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Vodavi Technology, Inc.

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Vodavi
Technology,  Inc. and  subsidiaries  as of December  31, 2002 and 2001,  and the
related consolidated statements of operations,  changes in stockholders' equity,
and cash flows for the years then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on these  financial  statements  based  on our  audits.  The  Company's
consolidated  financial  statements  for the year ended  December  31, 2000 were
audited by other auditors who have ceased  operations.  Those auditors expressed
an  unqualified  opinion on those  consolidated  financial  statements  in their
report dated February 2, 2001.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the  financial  position of the  Company as of December  31, 2002 and
2001,  and the  results of their  operations  and their cash flows for the years
then ended in conformity with accounting  principles  generally  accepted in the
United States of America.

As discussed above, the consolidated financial statements of the Company for the
year ended  December  31, 2000 were  audited by other  auditors  who have ceased
operations. As described in Note 1, these financial statements have been revised
to include the  transitional  disclosures  required by  Statement  of  Financial
Accounting  Standards No. 142,  GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS 142),
which was  adopted by the  Company as of January 1, 2002.  Our audit  procedures
with  respect to the  disclosures  in Note 1 with  respect to 2000  included (1)
comparing the previously  reported net income to the previously issued financial
statements and the adjustments to reported net income representing  amortization
expense (including any related tax effects)  recognized in those periods related
to  goodwill,  intangible  assets that are no longer being  amortized,  deferred
credits related to an excess over cost,  equity method goodwill,  and changes in
amortization periods for intangible assets that will continue to be amortized as
a result of initially  applying SFAS 142  (including any related tax effects) to
the Company's underlying analysis obtained from management,  and (2) testing the
mathematical  accuracy of the  reconciliation of adjusted net income to reported
net income and the  related  earnings-per-share  amounts.  In our  opinion,  the
disclosures for 2000 in Note 1 are appropriate.  However, we were not engaged to
audit,  review, or apply any procedures to the 2000 financial  statements of the
Company other than with respect to such disclosures and, accordingly,  we do not
express  an  opinion  or any  other  form of  assurance  on the  2000  financial
statements taken as a whole.


DELOITTE & TOUCHE LLP
Phoenix, Arizona
  February 14, 2003

                                      F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

THIS REPORT OF INDEPENDENT  CERTIFIED  PUBLIC  ACCOUNTANTS IS A COPY OF A REPORT
PREVIOUSLY  ISSUED BY ARTHUR  ANDERSEN  LLP AND HAS NOT BEEN  REISSUED BY ARTHUR
ANDERSEN LLP.

To Vodavi Technology, Inc. and Subsidiaries:

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Vodavi
Technology,  Inc. (a Delaware  corporation)  and Subsidiaries as of December 31,
2000,  and  the  related  consolidated  statements  of  operations,  changes  in
stockholders'  equity  and cash  flows for each of the two  years in the  period
ended  December  31,  2000.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Vodavi  Technology,  Inc. and
Subsidiaries  as of December 31, 2000,  and the results of their  operations and
their  cash  flows for each of the two years in the period  ended  December  31,
2000, in conformity with accounting  principles generally accepted in the United
States.


ARTHUR ANDERSEN LLP
Phoenix, Arizona
  February 2, 2001

                                      F-3
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
IN THOUSANDS EXCEPT SHARE AMOUNTS

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                          ------------------------
                                   ASSETS                                    2002          2001
                                                                          ----------    ----------
<S>                                                                       <C>           <C>
Current Assets
  Cash                                                                    $    1,141    $      340
  Accounts receivable, net of reserves for doubtful accounts
    and sales returns of $422 in 2002 and $730 in 2001                         6,671         6,996
  Inventories                                                                  5,550         5,331
  Income tax receivable                                                          300           839
  Deferred income taxes                                                          436           781
  Prepaid expenses and other                                                     731           574
                                                                          ----------    ----------

                 Total current assets                                         14,829        14,861
Property and equipment, net                                                    1,631         1,581
Goodwill, net                                                                    725         1,638
Deferred Income Taxes                                                            160            --
Other Long-Term Assets, net                                                       43           193
                                                                          ----------    ----------
                                                                          $   17,388    $   18,273
                                                                          ==========    ==========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                                                        $    1,250    $    1,454
  Accrued liabilities                                                            969         1,437
  Accrued rebates                                                                564           577
  Accounts payable to stockholder                                              3,965           984
  Revolving credit facility borrowings                                            --         2,593
                                                                          ----------    ----------

                        Total current liabilities                              6,748         7,045
Deferred Income Taxes                                                             --           159
Other Long-Term Obligations                                                       18            41
Commitments and Contingencies (Note 5)
Stockholders' Equity:
  Preferred stock, $.001 par value, 1,000,000 shares authorized;
    no shares issued or outstanding                                               --            --
  Common stock, $.001 par value, 10,000,000 shares authorized;
    4,668,488 and 4,553,488 shares issued at December 31, 2002
    and 2001, respectively                                                         5             5
  Additional paid-in capital                                                  13,503        13,363
  Accumulated deficit                                                         (2,127)       (1,581)
  Treasury stock, at cost; 318,700 shares at December 31, 2002 and 2001         (759)         (759)
                                                                          ----------    ----------
                                                                              10,622        11,028
                                                                          ----------    ----------
                                                                          $   17,388    $   18,273
                                                                          ==========    ==========
</TABLE>

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

                                      F-4
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
IN THOUSANDS EXCEPT PER SHARE AMOUNTS

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                        --------------------------------------
                                                           2002          2001          2000
                                                        ----------    ----------    ----------
<S>                                                     <C>           <C>           <C>
Revenue, net                                            $   37,328    $   34,153    $   47,705
Cost of Goods Sold                                          23,879        22,983        30,202
                                                        ----------    ----------    ----------
                 Gross Margin                               13,449        11,170        17,503
Operating Expenses:
  Engineering and product development                        2,333         1,998         1,742
  Selling, general and administrative                        9,831        11,185        14,299
                                                        ----------    ----------    ----------
                                                            12,164        13,183        16,041
                                                        ----------    ----------    ----------

Operating Income (Loss)                                      1,285        (2,013)        1,462
Interest Expense                                                97           406           705
                                                        ----------    ----------    ----------
Income (Loss) Before Income Taxes and Change
in Accounting Principle                                      1,188        (2,419)          757
Provision for (Benefit from) Income Taxes                      471          (863)          309
                                                        ----------    ----------    ----------
Income (Loss) Before Change in Accounting Principle            717        (1,556)          448

Change in Accounting Principle, net of taxes                (1,263)           --            --
                                                        ----------    ----------    ----------
Net Income (Loss)                                       $     (546)   $   (1,556)   $      448
                                                        ==========    ==========    ==========
Basic earnings per share:
  Income (loss) before change in accounting principle   $     0.16    $    (0.37)   $     0.10
  Change in accounting principle                             (0.29)           --            --
                                                        ----------    ----------    ----------
  Net Income (Loss)                                     $    (0.13)   $    (0.37)   $     0.10
                                                        ==========    ==========    ==========

Diluted earnings per share:
  Income (loss) before change in accounting principle   $     0.16    $    (0.37)   $     0.10
  Change in accounting principle                             (0.29)           --            --
                                                        ----------    ----------    ----------
  Net Income (Loss)                                     $    (0.13)   $    (0.37)   $     0.10
                                                        ==========    ==========    ==========

Weighted Average Shares Outstanding:
  Basic Average Shares Outstanding                           4,331         4,235         4,273
                                                        ==========    ==========    ==========
  Diluted Average Shares Outstanding                         4,428         4,235         4,305
                                                        ==========    ==========    ==========
</TABLE>

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

                                      F-5
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity
IN THOUSANDS EXCEPT SHARE AMOUNTS

<TABLE>
<CAPTION>
                                              COMMON STOCK          ADDITIONAL                      TREASURY STOCK
                                        -------------------------    PAID-IN    ACCUMULATED    -----------------------
                                        SHARES ISSUED    AMOUNT      CAPITAL      DEFICIT        SHARES       VALUE        TOTAL
                                        -------------  ----------   ----------   ----------    ----------   ----------   ----------
<S>                                     <C>            <C>          <C>          <C>           <C>          <C>          <C>
Balance, December 31, 1999                4,342,238    $        4   $   12,334   $     (473)      (16,800)  $      (45)  $   11,820
  Net income                                     --            --           --          448            --           --          448
  Purchase of common stock                       --            --           --           --      (301,900)        (714)        (714)
  Options exercised                         211,250             1          836           --            --           --          837
  Tax benefit on stock option exercises          --            --          193           --            --           --          193
                                         ----------    ----------   ----------   ----------    ----------   ----------   ----------

Balance, December 31, 2000                4,553,488             5       13,363          (25)     (318,700)        (759)      12,584
  Net loss                                       --            --           --       (1,556)           --           --       (1,556)
                                         ----------    ----------   ----------   ----------    ----------   ----------   ----------

Balance, December 31, 2001                4,553,488             5       13,363       (1,581)     (318,700)        (759)      11,028
  Net loss                                       --            --           --         (546)           --           --         (546)
  Common stock issued                       115,000            --          150           --            --           --          150
  Tax effect of expired warrants                 --            --          (10)          --            --           --          (10)
                                         ----------    ----------   ----------   ----------    ----------   ----------   ----------

Balance, December 31, 2002                4,668,488    $        5   $   13,503   $   (2,127)     (318,700)  $     (759)  $   10,622
                                         ==========    ==========   ==========   ==========    ==========   ==========   ==========
</TABLE>

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

                                      F-6
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
IN THOUSANDS

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                    --------------------------------------
                                                       2002          2001          2000
                                                    ----------    ----------    ----------
<S>                                                 <C>           <C>           <C>
Cash flows from Operating Activities:
  Net income (loss)                                 $     (546)   $   (1,556)   $      448
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                        635           988           940
      Change in accounting principle                     1,263            --            --
      Tax benefit on stock option exercises                 --            --           193
      Provision for doubtful accounts and sales
        returns                                            256           839           628
      Deferred taxes                                       397            16           154
      Rent equalization                                    (23)          (94)          (51)
  Changes in working capital:
    Accounts receivable                                     69         3,962        (2,362)
    Inventories                                           (199)        1,376           196
    Income tax receivable                                  539          (839)           --
    Prepaid expenses and other                            (148)          296           167
    Other long-term assets                                   3            (6)         (191)
    Accounts payable                                      (204)           80            32
    Accounts payable to stockholder                      2,981        (1,398)          734
    Accrued liabilities and accrued rebates               (520)          (50)          615
                                                    ----------    ----------    ----------
               Net cash flows provided by
                 operating activities                    4,503         3,614         1,503
                                                    ----------    ----------    ----------

Cash flows from Investing Activities:
  Cash paid to acquire property and equipment             (485)         (172)         (291)
  Cash paid to acquire DataSpeak Systems, Inc.            (624)           --            --
  Cash received on notes receivable                         --            --           114
                                                    ----------    ----------    ----------
               Net cash flows used in investing
                 activities                             (1,109)         (172)         (177)
                                                    ----------    ----------    ----------

Cash Flows from Financing Activities:
  Payments on revolving credit facility, net            (2,593)       (3,666)       (2,413)
  Purchase of common stock                                  --            --          (714)
  Stock options exercised                                   --            --           837
                                                    ----------    ----------    ----------
                 Net cash flows used in financing
                   activities                           (2,593)       (3,666)       (2,290)
                                                    ----------    ----------    ----------

Change in Cash                                             801          (224)         (964)
Cash, beginning of period                                  340           564         1,528
                                                    ----------    ----------    ----------
Cash, end of period                                 $    1,141    $      340    $      564
                                                    ==========    ==========    ==========
</TABLE>

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

                                      F-7
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000

1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a.   NATURE OF BUSINESS

     Vodavi  Technology,  Inc., a Delaware  corporation,  and subsidiaries  (the
     Company),  designs,  develops,  markets,  and  supports  a broad  range  of
     business  telecommunications  solutions,  including  digital  and  IP-based
     telephone  systems,   voice  processing  systems,  and   computer-telephony
     products for a wide variety of business  applications.  The Company markets
     its products primarily in the United States through a distribution  network
     consisting of wholesale  distributors,  direct  dealers,  and its own sales
     personnel.

     The Company  currently  obtains  most of its  products  from  manufacturers
     located in South Korea,  Thailand,  Taiwan,  and the  People's  Republic of
     China.  While the Company  believes  that  production  of its product lines
     overseas enhances its profitability,  these arrangements expose the Company
     to certain  economic and political  risks. The Company does not own most of
     the equipment,  tools and molds used in the  manufacturing  process and has
     only limited control over the manufacturing of its products.  A majority of
     these purchases are made from a stockholder (see Note 8).

     b.   CUSTOMER CONCENTRATIONS

     Sales to the Company's largest distributor, Graybar Electric Company, Inc.,
     accounted for 27%,  27%, and 32% of total  revenues  during 2002,  2001 and
     2000, respectively.  During the same periods, sales to the Company's second
     largest  distributor  accounted for an additional 12%, 9%, and 12% of total
     revenues,   respectively.   Accounts   receivable   from  the  two  largest
     distributors  comprise  43%  and 48% of  total  accounts  receivable  as of
     December 31, 2002 and 2001, respectively.  No other customers accounted for
     more than 10% of the Company's revenues.

     c.   PRINCIPLES OF CONSOLIDATION

     The  consolidated  financial  statements  include  the  accounts  of Vodavi
     Technology,  Inc. and its wholly owned subsidiaries  Vodavi  Communications
     Systems, Inc. (VCS), Vodavi Direct, Inc., and Vodavi-CT,  Inc. (Vodavi-CT),
     formerly known as Enhanced  Systems,  Inc.  (together herein referred to as
     the Company).  In February 2002, Vodavi Direct, Inc. was formed as a wholly
     owned subsidiary of VCS (see Note 2). As a result of the  discontinuance of
     the business  operations of Vodavi-CT in 2001,  this entity was merged into
     its parent  company  in January  2003 and no longer  exists.  All  material
     intercompany transactions have been eliminated in consolidation.

     d.   USE OF ESTIMATES

     The  preparation  of financial  statements  in conformity  with  accounting
     principles  generally  accepted in the United States requires the Company's
     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 the  reported
     amounts of revenue and expenses during the reporting period. Actual results
     could differ from those estimates.

     Estimates  are  used  in  accounting  for,  among  other  things,  customer
     incentive  programs,  allowances  for doubtful  accounts and sales returns,
     price  protection,  reserves for excess  inventory  and  obsolescence,  and
     contingencies  and  litigation.  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.

                                      F-8
<PAGE>
     e.   INVENTORIES

     Inventories  consist of purchased  finished products from a stockholder and
     other  third-party  manufacturers  and  are  stated  at the  lower  of cost
     (first-in,  first-out method) or market. The Company's 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 reduce
     the carrying amount of the respective inventory items to market value.

     The Company  generally  takes title to  inventory  upon  shipment  from the
     manufacturer.

     f.   PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost, less  accumulated  depreciation.
     Depreciation is computed using the straight-line  method over the estimated
     useful lives of the respective assets. Leasehold improvements are amortized
     on the straight-line  method over the shorter of the estimated useful lives
     of the assets or the term of the lease.  When property or equipment is sold
     or otherwise disposed of, the cost and related accumulated depreciation are
     removed from the accounts  and any  resulting  gain or loss is reflected in
     operations for the period.

     Property  and  equipment  and  the  related  useful  lives  consist  of the
     following as of December 31, 2002 and 2001, respectively.

                                          USEFUL LIFE
             TYPE OF ASSET                 IN YEARS      2002        2001
             -------------                 --------    --------    --------
                                                       ($000)      ($000)
     Office and computer equipment              5      $  2,975    $  2,825
     Furniture and fixtures                    10           570         409
     Tooling and manufacturing equipment      5-8         1,670       1,662
                                                       --------    --------
                                                          5,215       4,896
     Less - accumulated depreciation                     (3,584)     (3,315)
                                                       --------    --------
                                                       $  1,631    $  1,581
                                                       ========    ========

     Depreciation expense was $485,000,  $627,000,  and $614,000,  for the years
     ended December 31, 2002, 2001, and 2000, respectively.

     g.   GOODWILL

     Goodwill  represents  the cost in excess of the  estimated  fair  values of
     assets  and  liabilities  acquired.  Goodwill  was being  amortized  on the
     straight-line method over 20 years.  Amortization expense was $0, $134,000,
     and  $134,000,  for the years ended  December  31,  2002,  2001,  and 2000,
     respectively.  Accumulated  amortization was $0, and $1,037,000 at December
     31, 2002 and 2001,  respectively.  On January 1, 2002, the Company  changed
     its method of accounting for goodwill. See note below.

     h.   OTHER LONG-TERM ASSETS

     Other long-term assets consists  principally of acquired  licensing rights,
     including a licensing agreement the Company entered into in 1999 to acquire
     the licensing and  manufacturing  rights to certain voice mail products for
     $500,000.  This  agreement was being  amortized  utilizing a useful life of
     three  years.  Amortization  expense  related to this  asset was  $125,000,
     $167,000 and $167,000 for the years ended December 31, 2002, 2001 and 2000,
     respectively.  As of December 31, 2002, all  licensing-related  assets were
     fully amortized.

                                      F-9
<PAGE>
     i.   IMPAIRMENT OF LONG-LIVED ASSETS

     Long-lived  assets,  excluding  goodwill and other intangible  assets,  are
     reviewed for impairment whenever events or circumstances  indicate that the
     carrying amount of the assets may not be recoverable.  If events or changes
     in circumstances indicate that the carrying amount of the assets may not be
     recoverable,  the Company  compares the carrying value of the assets to the
     sum of the expected future cash flows  (undiscounted  and without  interest
     charges) to be generated by the assets and their ultimate  disposition.  If
     the sum of the undiscounted cash flows is less then the carrying value, the
     impairment to be recognized is measured by the amount by which the carrying
     amount of the assets  exceeds  the fair value of the  assets.  Assets to be
     disposed  are valued at the lower of  carrying  value or fair  value,  less
     costs to sell.

     j.   RECENT ACCOUNTING PRONOUNCEMENTS

     In 2001,  the FASB  issued  Statement  No.  141,  ACCOUNTING  FOR  BUSINESS
     COMBINATIONS,  and Statement 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 indeterminate lives will cease.

     The Company  has  determined  that upon  adoption  of these  Statements  on
     January 1, 2002,  the entire $1.6 million  carrying  amount of the goodwill
     was impaired.  This determination was based principally on the total market
     value of the Company's  issued and  outstanding  common stock on January 1,
     2002 of $5.5 million  compared to the Company's  book value on December 31,
     2001 of $11.0 million.  The goodwill impairment was recognized in 2002 as a
     change in accounting principle, net of $375,000 of income taxes.

     The following table sets forth,  for the periods  presented,  pro forma net
     income  (loss) as if we had adopted SFAS Nos. 141 and 142 from the earliest
     period presented: ($000's except per share amounts)

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                        2002                 2001                  2000
                                  -----------------   ------------------    -----------------
                                  Amount      EPS     Amount       EPS      Amount      EPS
                                  -------   -------   -------    -------    -------   -------
<S>                               <C>       <C>       <C>        <C>        <C>       <C>
Income (loss) before change in
  accounting principle, as
  reported                        $   717   $  0.16   $(1,556)   $ (0.37)   $   448   $  0.10
Add back goodwill amortization,
  net of taxes                         --        --       100       0.02        100      0.02
                                  -------   -------   -------    -------    -------   -------
Adjusted net income (loss)        $   717   $  0.16   $(1,456)   $ (0.35)   $   548   $  0.12
                                  =======   =======   =======    =======    =======   =======
</TABLE>

     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 will apply to exit or disposal activities  initiated after December 31,
     2002.  We have  reviewed the  requirements  of SFAS No. 146 and believe the
     adoption of this statement will not have a material impact on our financial
     statements.

                                      F-10
<PAGE>
     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 as
     of December 31, 2002 as presented in Note 4.

     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  as
     presented in Note 6.

     k.   INCOME TAXES

     Income  taxes are  accounted  for under  the  asset and  liability  method.
     Deferred  tax  assets and  liabilities  are  recognized  for the future tax
     consequences  attributable to differences  between the financial  statement
     carrying  amounts of existing assets and  liabilities and their  respective
     tax basis,  and operating loss and tax credit  carryforwards.  Deferred tax
     assets and  liabilities  are measured  using enacted tax rates  expected to
     apply to taxable income in the years in which those  temporary  differences
     are expected to be recovered or settled.  The effect on deferred tax assets
     and  liabilities  of a change in tax rates is  recognized  in income in the
     period that includes the enactment date. A valuation  allowance is recorded
     against  deferred  tax  assets  if it is  unlikely  that some or all of the
     deferred tax assets will be realized.

     l.   REVENUE RECOGNITION

     The Company recognizes  revenue when persuasive  evidence of an arrangement
     exists,  delivery  has  occurred,  the fee is fixed  and  determinable  and
     collectibility is probable.  Generally,  all of these conditions are met at
     the time the Company ships  products to customers.  Additionally,  revenues
     from software sales were recognized when delivery had occurred, the license
     fee was fixed and determinable,  collectibility  was reasonably assured and
     evidence  of an  arrangement  existed.  Software  maintenance  and  support
     revenues were recognized  ratably over the term of the contract,  generally
     twelve months.  Revenues from  professional  services for  customization of
     software  are  generally   recognized  under  two  methods,   depending  on
     contractual terms. Under the time and materials method, revenue is based on
     a fee-per-hour  basis and is recognized as hours are  completed.  Under the
     fixed  contract  method,  a pre-set fee is agreed  upon for a project,  and
     revenue is recognized  proportionately to the percentage  completion of the
     project.  Revenues  are  recorded net of  discounts,  allowances  for sales
     returns and volume rebates.

     m.   ENGINEERING AND PRODUCT DEVELOPMENT

     All costs  associated  with internal  engineering  and product  development
     activities are expensed as incurred.

     n.   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

                                      F-11
<PAGE>
     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.

     The Company has computed,  for pro forma disclosure purposes,  the value of
     all options granted during 2002,  2001, and 2000,  using the  Black-Scholes
     option pricing model with the following weighted average assumptions:

                                                Years Ended December 31,
                                              ----------------------------
                                              2002        2001        2000
                                              ----        ----        ----
     Risk free interest rate                  3.05%       5.03%       6.14%
     Expected dividends                       None        None        None
     Expected lives in years                   5.0         5.0         4.9
     Expected volatility                      76.1%       79.0%       78.1%

     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:

                                                     Years Ended December 31,
                                                  -----------------------------
                                                    2002       2001       2000
                                                  -------    -------    -------
                                                          (IN THOUSANDS,
                                                     EXCEPT PER SHARE AMOUNTS)
     Net income (loss):
       As reported                                $  (546)   $(1,556)   $   448
       Fair Value of options granted,
         net of taxes                                (131)      (126)      (158)
                                                  -------    -------    -------
       Pro forma                                  $  (677)   $(1,682)   $   290
                                                  =======    =======    =======
     Earnings (loss) per share:
       As reported - basic and diluted            $ (0.13)   $ (0.37)   $  0.10
       Pro forma - basic and diluted              $ (0.16)   $ (0.40)   $  0.07

     o.   EARNINGS PER SHARE

     In accordance with SFAS No. 128, "Earnings Per Share", the Company displays
     basic and diluted  earnings per share  (EPS).  Basic EPS is  determined  by
     dividing  net  income 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:

                                      F-12
<PAGE>
<TABLE>
<CAPTION>
                                                        2002         2001         2000
                                                     ---------    ---------    ---------
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>          <C>          <C>
Income (loss) before change in accounting
  principal                                          $     717    $  (1,556)   $     448
Change in accounting principal                          (1,263)          --           --
                                                     ---------    ---------    ---------
Net income (loss                                     $    (546)   $  (1,556)   $     448
                                                     =========    =========    =========
Weighted average common shares for basic
  earnings per share                                     4,331        4,235        4,273
Effect of dilutive stock options(1)                         97           --           32
                                                     ---------    ---------    ---------
Weighted average common shares for diluted
  earnings per share                                     4,428        4,235        4,305
                                                     =========    =========    =========
Basic earnings per share:
Income before change in accounting principle         $    0.16    $   (0.37)   $    0.10
Change in accounting principle                           (0.29)          --           --
                                                     ---------    ---------    ---------
Net Income (loss)                                    $   (0.13)   $   (0.37)   $    0.10
                                                     =========    =========    =========
Diluted earnings per share:
Income before change in accounting principle         $    0.16    $   (0.37)   $    0.10
Change in accounting principle                           (0.29)          --           --
                                                     ---------    ---------    ---------
Net Income (loss)                                    $   (0.13)   $   (0.37)   $    0.10
                                                     =========    =========    =========
</TABLE>

(1)  Dilutive  securities are calculated using the treasury stock method and the
     average market price during the period.  Options on 625,000,  646,500,  and
     328,000  shares had an exercise price greater than the average market price
     during the years ended December 31, 2002, 2001, and 2000, respectively, and
     therefore did not enter into the earnings per share calculation.

     p.   FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying value of cash, accounts receivable,  accounts payable, payable
     to related parties, and accrued liabilities  approximate fair values due to
     the short-term  maturities of these  instruments.  As the revolving  credit
     facility bears a variable  interest rate at 2.5% over the 30 day commercial
     paper rate, the carrying value approximates fair value.

     q.   SEGMENTS

     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.

     r.   RECLASSIFICATIONS

     Certain  reclassifications  have been made to the financial  statements for
     the  year  ended  December  31,  2001  to  conform  to the  current  year's
     presentation.

2.   RECENT ACQUISITIONS

     On March 4, 2002, the Company,  through its wholly owned subsidiary  Vodavi
     Direct, Inc., acquired  substantially all of the assets and assumed certain
     liabilities  of DataSpeak  Systems,  Inc., an  Arizona-based  dealer of the
     Company's products.  Under the terms of the purchase agreement, the Company
     paid cash of $624,000 and issued 100,000 shares of restricted  common stock
     valued at $135,000 based on the closing price of the Company's common stock
     on the date of the acquisition. The purchase price was allocated as follows
     (in thousands):

                                      F-13
<PAGE>
                    Inventory                                 $ 20
                    Prepaid assets                               9
                    Property and equipment                      50
                    Deferred Taxes                               9
                    Goodwill                                   725
                    Accrued liabilities                        (54)
                                                              ----
                                                              $759
                                                              ====

3.   SPECIAL CHARGES

     During the first quarter of 2001, the Company  implemented a  restructuring
     plan aimed at reducing  its  operating  expenses to coincide  with its then
     current sales  outlook.  Pursuant to the  restructuring  plan,  the Company
     reduced  its  workforce  by  approximately  20  percent,  discontinued  its
     Interactive Voice Response product group, and implemented broad-based price
     reductions on certain voice mail products and single-line telephones. These
     actions  created  severance-related   obligations  of  $168,000,  estimated
     shut-down costs of $265,000,  and estimated  distributor  price  protection
     obligations of $432,000.

     Additionally,  in light of deteriorating  economic and industry  conditions
     and planned introductions of new products, in the first quarter of 2001 the
     Company  re-evaluated  the  carrying  amount  of  certain  receivables  and
     inventory  items  resulting  in  additional   accounts  receivable  reserve
     requirements of $328,000 and inventory impairments of $568,000.

     The pre-tax  financial  impact of these  initiatives  during  2001  totaled
     approximately  $1.8 million  consisting of both cash and non-cash  charges.
     The following  table sets forth the  components  of these  special  charges
     included in the accompanying  consolidated  statement of operations for the
     year ended December 31, 2001:

                                   Amount               Inclusion in
                                   ($000)           Statement of Operations
                                   ------           -----------------------
Non-cash Charges:
  Inventory impairments           $   568      Cost of goods sold
  Allowance for bad debts             328      Selling, general & administrative
                                                 expenses
  Distributor price protection        151      Revenue
  Property and equipment               15      Selling, general & administrative
                                                 expenses
                                  -------
                                    1,062
                                  -------
Cash Charges:
  Distributor price protection        281      Revenue
  Severance-related costs             168      Selling, general & administrative
                                                 expenses
  Other shut-down costs               250      Selling, general & administrative
                                                 expenses
                                  -------
                                      699
                                  -------
                                  $ 1,761
                                  =======

     The  following  table sets forth the  activity of accrued  cash charges for
     each of the years in the  two-year  period ended  December  31,  2002:  (IN
     THOUSANDS)

<TABLE>
<CAPTION>
                                                            Balance                Balance
                                     Initial       2001     Dec. 31,     2002      Dec. 31,
                                     Balance     Payments     2001     Payments     2002
                                     -------     --------    -----     --------     -----
<S>                                   <C>         <C>        <C>        <C>         <C>
     Distributor price protection     $ 281       $(195)     $  86      $ (86)      $  --
     Severance-related costs            168        (114)        54        (54)         --
     Other shut-down costs              250        (106)       144       (144)         --
                                      -----       -----      -----      -----       -----
                                      $ 699       $(415)     $ 284      $(284)         --
                                      =====       =====      =====      =====       =====
</TABLE>

                                      F-14
<PAGE>
     The following table sets forth for the periods  presented the total revenue
     and operating income (loss)  contributed by the Interactive  Voice Response
     product  group that was  discontinued  in the first  quarter  of 2001:  (IN
     THOUSANDS)

                                              Year Ended December 31,
                                          --------------------------------
                                           2002        2001         2000
                                          -------     -------      -------
     Revenue                              $   135     $ 1,331      $ 2,420
     Operating income (loss)                   73        (359)        (186)

4.   REVOLVING CREDIT FACILITY

     As of December 31, 2002, VCS had a $15.0 million  revolving credit facility
     with a financial  institution.  Available borrowings under the facility are
     based on eligible inventory and accounts receivable of VCS. Advances of the
     credit facility are secured by substantially  all of the Company's  assets.
     Vodavi  Technology,  Inc. and Vodavi Direct,  Inc. are guarantors under the
     credit  facility.  Interest is payable  monthly at a variable rate based on
     the 30-day  commercial  paper rate plus 2.50%  (3.80% and 4.52% at December
     31,  2002 and 2001,  respectively).  The credit  facility  expires in April
     2003.  At December 31, 2002,  there were no  outstanding  borrowings on the
     revolving credit facility and $7.0 million available for use.

     The  credit  agreement  contains  certain  financial   covenants  that  are
     customary for similar  credit  facilities  and also prohibits the Company's
     operating  subsidiaries  from paying  dividends to the Company  without the
     consent of the financial  institution.  At December 31, 2002 and 2001,  the
     Company was in compliance with these financial covenants.

5.   COMMITMENTS AND CONTINGENCIES

     a.   LEGAL MATTERS

     The Company was involved in a legal dispute with  Paradygm  Communications,
     Inc. and R.C. Patel related to a strategic alliance  agreement.  In October
     2002,  the  parties  settled the  dispute.  As a result,  the Company  paid
     Paradygm and Patel  $250,000 and  incurred an  additional  $50,000 of legal
     fees.   The  financial   impact  of  the  settlement  is  included  in  the
     consolidated financial statements for the year ended December 31, 2002.

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

     b.   OPERATING LEASES

     The Company has entered into long-term  operating lease  agreements for all
     of its  office and  warehouse  facilities  and  certain  vehicles.  Minimum
     payments under the Company's lease agreements are as follows:

                                      F-15
<PAGE>
     Years Ending
     December 31,                                               Operating Leases
     ------------                                               ----------------
                                                                 (IN THOUSANDS)
     2003                                                            $ 1,094
     2004                                                              1,095
     2005                                                                881
     2006                                                                818
     2007                                                                785
     Thereafter                                                        3,142
                                                                     -------
     Total minimum lease commitments                                   7,815
     Total minimum noncancellable sublease rentals                      (374)
                                                                     -------
                                                                     $ 7,441
                                                                     =======

     Certain of the Company's  lease  agreements  provide for initial periods of
     free or  discounted  rental  payments.  Rent  expense  is  recognized  on a
     straight-line  basis and was approximately  $1.2 million for the year ended
     December  31, 2002,  and $1.1 million for each of the years ended  December
     31, 2001, and 2000, respectively.  The difference between rent expensed and
     rent paid ("rent  equalization") was $23,000,  $94,000, and $51,000 for the
     years ended December 31, 2002, 2001, and 2000, respectively.

     c.   401(k) PROFIT SHARING PLAN

     The Company  sponsors a profit  sharing plan (the 401(k) Plan)  pursuant to
     Section 401(k) of the Internal Revenue Code of 1986. The 401(k) Plan covers
     substantially all full-time employees who meet the eligibility requirements
     and provides for a discretionary profit sharing contribution by the Company
     and an employee elective contribution with a discretionary Company matching
     provision. The Company expensed discretionary contributions pursuant to the
     401(k) Plan in the amounts of $64,000,  $63,000, and $76,000, for the years
     ended December 31, 2002, 2001, and 2000, respectively.

6.   STOCKHOLDERS' EQUITY

     a.   TREASURY STOCK

     In the fourth  quarter of 1999, the Company began  acquiring  shares of its
     common stock in connection with a stock  repurchase  program  authorized by
     the Company's Board of Directors in October 1999.  That program  authorized
     the  Company to  purchase  up to 400,000  common  shares  over a  six-month
     period,  which was  subsequently  extended  through June 2001,  on the open
     market or pursuant to negotiated  transactions  at price levels the Company
     deemed  attractive.  As of December  31,  2002,  the Company had  purchased
     318,700 shares at an aggregate cost of $759,000.

     b.   VODAVI TECHNOLOGY, INC. 1994 STOCK OPTION PLAN

     The Vodavi Technology,  Inc. 1994 Stock Option Plan (the Plan), as amended,
     provides  for  the  granting  of (a)  options  to  purchase  shares  of the
     Company's common stock, (b) stock  appreciation  rights,  (c) shares of the
     Company's  common stock,  or (d) other cash awards  related to the value of
     the Company's common stock. Under the Plan, options and other awards may be
     issued to key personnel of the Company. The options issued may be incentive
     stock  options or  nonqualified  stock  options.  The Plan also includes an
     automatic  program  under  which  nonqualified  options  are  automatically
     granted to the Company's nonemployee directors. If any options terminate or
     expire without having been  exercised in full,  the stock  underlying  such
     options  will again be  available  for grant under the Plan.  In July 2002,
     shareholders  approved  an  increase  in the  number of shares  that may be
     issued  under the plan from  1,100,000  to  1,600,000.  The Plan expires in
     2004.

     To the extent that granted options are incentive  stock options,  the terms
     and conditions of those options must be consistent  with the  qualification
     requirements set forth in Section 422 of the Internal Revenue Code of 1986.

                                      F-16
<PAGE>
     The maximum number of shares of common stock that can be granted to any one
     employee,  including  officers,  during the term of the Plan may not exceed
     50% of the shares of common stock covered by the Plan.

     The expiration date,  maximum number of shares  purchasable,  and the other
     provisions of the options are established at the time of grant. Options may
     be granted for terms of up to ten years and become  exercisable in whole or
     in one or more  installments  at such time as may be determined by the plan
     administrator,  but the  exercise  price may not be less than 100% (110% if
     the  option  is  granted  to a  stockholder  who at the time the  option is
     granted owns stock representing more than ten percent of the total combined
     voting  power of all  classes of the  Company's  stock) of the fair  market
     value of the common stock at the time of the grant.

     The following  table sets forth the activity under the Plan for each of the
     years presented:

<TABLE>
<CAPTION>
                                        December 31, 2002         December 31, 2001         December 31, 2000
                                     ----------------------    ----------------------    ------------------------
                                                   Weighted                  Weighted                   Weighted
                                                   Average                   Average                    Average
                                     Number of     Exercise    Number of     Exercise    Number of      Exercise
                                      Options       Price       Options       Price       Options         Price
                                      --------     --------     --------     --------     --------       --------
<S>                                    <C>         <C>           <C>         <C>            <C>          <C>
Options outstanding at
  beginning of period                  804,500     $   3.08      725,000     $   3.68      779,800       $   4.03
   Granted                             112,500         1.70      188,000         1.04      179,500           2.72
   Forfeited                           (36,500)        3.42     (108,500)        3.49      (81,800)          4.30
   Exercised                                --           --           --           --     (152,500)(1)       4.00
                                      --------     --------     --------     --------     --------       --------
Options outstanding at end
  of period                            880,500     $   2.89      804,500     $   3.08      725,000       $   3.68
                                      ========     ========     ========     ========     ========       ========
Options available for grant            567,000                   143,000                   222,500
                                      ========                  ========                  ========
Exercisable at end of
  period                               530,875     $   3.52      407,375     $   4.11      334,125       $   4.60
                                      ========     ========     ========     ========     ========       ========
Weighted average fair
  value of options granted                         $   1.08                  $    .69                    $   1.80
                                                   ========                  ========                    ========
</TABLE>

(1)  Excludes the exercise of 58,750 options that were not a part of the Plan.

<TABLE>
<CAPTION>
                                    Options Outstanding                             Options Exercisable
                  -------------------------------------------------------   -----------------------------------
                                      Weighted-Average
                        Number          Remaining                                Number
   Range of         Outstanding at    Contractual Life   Weighted-Average    Exercisable at    Weighted-Average
Exercise Prices   December 31, 2002     (in years)        Exercise Price    December 31, 2002   Exercise Price
---------------   -----------------     ----------        --------------    -----------------   --------------
<S>                 <C>                 <C>                <C>                <C>                <C>
 $0.99 - $2.78         619,000             7.7                $ 2.01             286,875            $ 2.29
 $2.79 - $4.58         102,500             4.5                $ 3.98             102,500            $ 3.98
 $4.59 - $7.00         159,000             2.3                $ 5.63             141,500            $ 5.68
                      --------                                ------            --------            ------
                       880,500                                $ 2.89             530,875            $ 3.52
                      ========                                ======            ========            ======
</TABLE>

7.   INCOME TAXES

     The Company files a consolidated  federal income tax return. The income tax
     provision (benefit) is comprised of the following:

                                      F-17
<PAGE>
                       2002       2001        2000
                      ------     ------      ------
                             (IN THOUSANDS)
     Current          $   74     $ (879)     $  463
     Deferred            397         16        (154)
                      ------     ------      ------
                      $  471     $ (863)     $  309
                      ======     ======      ======

     The Company  provides for deferred  income taxes  resulting  from temporary
     differences  between amounts  reported for financial  accounting and income
     tax purposes.  The components of deferred income taxes at December 31, 2002
     and 2001, were as follows:

                                                         2002            2001
                                                       ---------      ---------
                                                            (IN THOUSANDS)
     Current deferred tax assets:
       Receivable reserves                             $      73      $     226
       UNICAP adjustment                                      79             84
       Other accruals                                        200            372
       Research and development credits                       84             99
                                                       ---------      ---------
                                                       $     436      $     781
                                                       =========      =========
     Long-term deferred tax assets (liabilities):
       State net operating losses                      $      68      $      82
       Depreciation and amortization differences              92           (241)
                                                       ---------      ---------
                                                       $     160      $    (159)
                                                       =========      =========

     A reconciliation of the federal income tax rate to the Company's  effective
     income tax rate is as follows:

                                                      2002      2001      2000
                                                     ------    ------    ------
     Federal statutory tax rate                        34.0%    (34.0)%    34.0%

     State taxes, net                                   3.3      (3.3)      3.3

     Research and development tax credits              (2.8)     (3.1)    (13.9)
     Non-deductible expenses and other permanent
       differences                                      5.1       4.7      17.4
                                                     ------    ------    ------
                                                       39.6%    (35.7)%    40.8%
                                                     ======    ======    ======

     During 2001, the Company generated  approximately $2.4 million in state net
     operating loss  carryforwards.  These losses can only be carried forward to
     offset income in future years.

8.   RELATED PARTY TRANSACTIONS

     LG  Electronics  Inc.  (LGE),  the  Company's  principal  supplier,   owned
     approximately 20% of the Company's outstanding common stock at December 31,
     2002 and has a designated  member on the Company's board of directors.  The
     Company purchased  approximately  $18.5 million,  $15.4 million,  and $20.6
     million of key telephone  systems,  commercial grade telephones,  and voice
     mail products from LGE and an affiliate of LGE during 2002, 2001, and 2000,
     respectively.  The Company owed LGE and its affiliate a total of $3,965,000
     and  $984,000  for  product  purchases  at  December  31,  2002  and  2001,
     respectively.  During 2002,  the  Company's  payment terms with LGE and its
     affiliate  were  changed  from 30 days to 60 days after  shipment.  Current
     balances are non-interest bearing.

     The Company conducts joint  development  activities with LGE for the design
     and  development  of  hardware  incorporated  into  some  of the  Company's
     existing and planned  telephone  systems and commercial  grade  telephones.
     Generally,  LGE contributes the ongoing research and development  costs for
     the product  hardware and produces the finished goods  developed  under the
     alliance,  and  the  Company  obtains  the  right  to  sell  such  products
     throughout North America and the Caribbean.

                                      F-18
<PAGE>
     In July 2001,  the Company  entered into a development  agreement  with LGE
     under  which the  Company  will  develop  for LGE  certain  advanced  voice
     messaging  technologies.  The Company  recorded  revenue of $183,000 during
     2002 and  $210,000  during 2001 for work  performed  under the  development
     agreement  using the  percentage of completion  method.  As of December 31,
     2002, LGE had made cash payments to the Company of $300,000 pursuant to the
     agreement.

9.   SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest  and income  taxes for the years ended  December 31,
     2002, 2001, and 2000 was as follows:

                                                     2002     2001     2000
                                                     ----     ----     ----
                                                         (IN THOUSANDS)
     Interest                                        $ 97     $406     $705
     Income taxes                                    $401     $ --     $368


     Supplemental schedule of non-cash activities:                     2002
                                                                       ----
                                                                  (IN THOUSANDS)
     Common Stock issued to acquire DataSpeak Systems, Inc.            $135
     Common Stock issued in lieu of employee cash bonus                $ 15
     Tax effect of expired warrants                                    $(10)

     There were no non-cash  activities during the years ended December 31, 2001
     or 2000.

                                      F-19
<PAGE>
10.  SUMMARY OF QUARTERLY RESULTS (UNAUDITED): (IN THOUSANDS, EXCEPT PER SHARE
     AMOUNTS)

<TABLE>
<CAPTION>
                                              First       Second     Third     Fourth
                                             Quarter     Quarter    Quarter    Quarter      Year
                                             --------    --------   --------   --------   --------
<S>                                          <C>         <C>        <C>        <C>        <C>
2002
Revenue, net                                 $  8,790    $  9,459   $ 10,541   $  8,538   $ 37,328
Gross margin                                    3,151       3,463      3,941      2,894     13,449
Income (loss) before income taxes
  and change in accounting principle              279         499        366         44      1,188
Provision (benefit) for income taxes              112         197        145         17        471
Income before change in accounting
  principle                                       167         302        221         27        717
Change in accounting principle                 (1,263)         --         --         --     (1,263)
Net income (loss)                            $ (1,096)   $    302   $    221   $     27   $   (546)
Diluted earnings (loss) per share            $  (0.26)   $   0.07   $   0.05   $   0.01   $  (0.13)

2001
Revenue, net                                 $  6,060    $  9,603   $  9,664   $  8,826   $ 34,153
Gross margin                                    1,152       3,442      3,473      3,103     11,170
Income (loss) before income taxes and
  change in accounting principle               (3,291)        258        422        192     (2,419)
Provision (benefit) for income taxes           (1,207)         99        169         76       (863)
Income before change in accounting
  principle                                    (2,084)        159        253        116     (1,556)
Change in accounting principle                     --          --         --         --         --
Net income (loss)                            $ (2,084)   $    159   $    253   $    116   $ (1,556)
Diluted earnings (loss) per share            $  (0.49)   $   0.04   $   0.06   $   0.03   $  (0.37)
</TABLE>

                                      F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES

To the Board of Directors and Stockholders of
Vodavi Technology, Inc.
Phoenix, Arizona

We have audited the consolidated financial statements of Vodavi Technology, Inc.
and  subsidiaries  (the  "Company") as of December 31, 2002 and 2001 and for the
years then ended,  and have issued our report  thereon dated  February 14, 2003;
such  financial  statements  and report are  included  elsewhere  in this annual
report on Form 10-K of Vodavi Technology, Inc. and subsidiaries. Our audits also
included the  consolidated  financial  statement  schedules for 2002 and 2001 of
Vodavi  Technology,  Inc. and subsidiaries,  listed in the Index to Consolidated
Financial  Statements and Schedule.  The financial  statement  schedules are the
responsibility of the Company's management.  Our responsibility is to express an
opinion  based on our audits.  In our opinion,  such 2002 and 2001  consolidated
financial statement schedules, when considered in relation to the basic 2002 and
2001 consolidated  financial  statements taken as a whole, present fairly in all
material respects the information set forth therein.

DELOITTE & TOUCHE LLP
Phoenix, Arizona
   February 14, 2003

                                       S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


THIS REPORT OF INDEPENDENT  PUBLIC  ACCOUNTANTS IS A COPY OF A REPORT PREVIOUSLY
ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

To Vodavi Technology, Inc. and subsidiaries:

We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Vodavi Technology,  Inc.
and  Subsidiaries  (the Company) as of December 31, 2000 and for each of the two
years in the period ended  December 31,  2000,  included in this Form 10-K,  and
have issued our report  thereon dated February 2, 2001. Our audits were made for
the  purpose of forming an  opinion on those  statements  taken as a whole.  The
schedule included at page S-3 is the responsibility of the Company's  management
and is  presented  for purposes of complying  with the  Securities  and Exchange
Commission's  rules  and is not part of the  basic  financial  statements.  This
schedule,  for the two years ended  December 31, 2000, has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion,  fairly  states in all  material  respects  the  financial  data
required to be set forth therein in relation to the basic  financial  statements
taken as a whole.


ARTHUR ANDERSEN LLP
Phoenix, Arizona
   February 2, 2001

                                       S-2
<PAGE>
                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

                                  IN THOUSANDS

                                                    2002       2001       2000
                                                  -------    -------    -------
Reserves for doubtful accounts and sales returns:
  Balance at beginning of year                    $   730    $ 1,582    $ 1,239
  Provision charged to expense                        256        839        628
  Write-offs                                         (564)    (1,691)      (285)
                                                  -------    -------    -------
  Balance at end of year                          $   422    $   730    $ 1,582
                                                  =======    =======    =======

Restructuring reserve:
  Balance at beginning of year                    $   284    $    --    $    --
  Provision charged to expense                         --        699         --
  Payments                                           (284)      (415)        --
                                                  -------    -------    -------
  Balance at end of year                          $    --    $   284    $    --
                                                  =======    =======    =======

Reserves for excess and obsolete inventory:
  Balance at beginning of year                    $   621    $   741    $   433
  Provision charged to expense                        290      1,027        331
  Write-offs                                         (567)    (1,147)       (23)
                                                  -------    -------    -------
  Balance at end of year                          $   344    $   621    $   741
                                                  =======    =======    =======

                                       S-3
<PAGE>
                                  EXHIBIT INDEX

EXHIBIT
NUMBER                                 EXHIBIT
------                                 -------
3.1       Amended Certificate of Incorporation of the Registrant (l)
3.2       Amended and Restated Bylaws of the Registrant (l)
4.1       Form of  Certificate  representing  shares of Common Stock,  par value
          $.001 per share (1)
10.13A    Vodavi Single Line Telephone  Agreement  Extension dated April 4, 1997
          between  Vodavi   Communications   Systems,   Inc.  and  L.G.  Srithai
          Electronics Co., Ltd. (2)
10.19     OEM Agreement  dated as of June 19, 1995,  between Tecom Co., Ltd. and
          Vodavi Communications Systems, Inc. (3)
10.23     Amended  and  Restated  Credit  Agreement  dated as of April 11,  1994
          between  Vodavi  Communications  Systems,  Inc.  and General  Electric
          Capital Corporation, as Amended and Restated as of June 11, 1997 (2)
10.24     First  Amendment to Stock Pledge and  Security  Agreement  dated as of
          June 11, 1997,  between Vodavi  Technology,  Inc. and General Electric
          Capital Corporation (2)
10.25     Security Agreement dated as of June 11, 1997 between Enhanced Systems,
          Inc. and General Electric Capital Corporation (2)
10.28     Trademark  Security  Agreement,  dated  as of June  11,  1997,  by and
          between  Vodavi  Communications  Systems,  Inc.  and General  Electric
          Capital Corporation (2)
10.29     Trademark Security Agreement dated as of June 11, 1997, by and between
          Enhanced Systems, Inc. and General Electric Capital Corporation (2)
10.35     Repair and Refurbishment Agreement dated June 24, 1999, between Vodavi
          Communication Systems, Inc. and Aztec International LLC (4)
10.36     License Agreement dated May 17, 1999,  between Santa Barbara Connected
          Systems Corporation and Vodavi Technology, Inc. (4)
10.37     Object Code Software License Agreement dated May 24, 1999,  between D2
          Technologies, Inc. and Vodavi Technology, Inc. (4)
10.38     Fourth  Amendment to Credit  Agreement  between Vodavi  Communications
          Systems, Inc. and General Electric Capital Corporation (5)
10.40     Employment  Agreement  dated October 1, 1999,  between William J. Hinz
          and Vodavi Technology, Inc. (6)
10.42     Second  Amendment  to Amended  and  Restated  Credit  Agreement  dated
          October 31, 1999,  between  Vodavi  Communications  Systems,  Inc. and
          General Electric Capital Corporation (6)
10.43     Third Amendment to Amended and Restated Credit Agreement dated October
          9, 2000,  between  Vodavi  Communications  Systems,  Inc.  and General
          Electric Capital Corporation (7)
10.44     Waiver and Amendment of Credit  Agreement dated May 11, 2001,  between
          Vodavi  Communications  Systems,  Inc.  and General  Electric  Capital
          Corporation (8)
<PAGE>
10.47     Sublease Agreement dated August 8, 2001, between Vodavi Communications
          Systems, Inc. and SpeedFam-IPEC, Inc. (9)
10.48     Employment  Agreement,  effective October 1, 2001,  between Gregory K.
          Roeper and Vodavi Technology, Inc. (10)
10.49     Second  Amended and Restated 1994 Stock Option Plan  (amended  through
          May 13, 2002) (11)
10.50     Fourth  Amendment to Amended and Restated Credit Agreement dated March
          4, 2002,  between  Vodavi  Communications  Systems,  Inc.  and General
          Electric Capital Corporation
10.51     Employment  Agreement,  effective  January 1, 2003,  between  David A.
          Husband and Vodavi Technology, Inc.
10.52     Employment  Agreement,  effective October 1, 2003,  between Gregory K.
          Roeper and Vodavi Technology, Inc.
21        List of Subsidiaries
23.1      Consent of Deloitte and Touche LLP
23.2      Statement regarding consent of Arthur Andersen LLP
99.1      Certification  of the  Chief  Executive  Officer  of  the  Registrant,
          pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
          of the Sarbanes-Oxley Act of 2002.
99.2      Certification  of the  Chief  Financial  Officer  of  the  Registrant,
          pursuant to 18 U.S.C.  Section of 1350, as adopted pursuant to Section
          906 of the Sarbanes-Oxley Act of 2002.

----------
(1)  Incorporated  by  reference  to  Registration  Statement  on Form  S-1 (No.
     33-95926) and amendments thereto which became effective on October 6, 1995.
(2)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1997, as filed on August 11, 1997.
(3)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1995, as filed on April 1, 1996.
(4)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1999, as filed on August 16, 1999.
(5)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 1999, as filed on November 12, 1999.
(6)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1999, as filed on March 27, 2000.
(7)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 2000, as filed on November 14, 2000.
(8)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended March 31, 2001, as filed on May 15, 2001.
(9)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 2001, as filed on November 13, 2001.
(10) Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 2002, as filed on March 29, 2002.
(11) Incorporated  by  reference  to  Registration  Statement  on Form  S-8 (No.
     333-98819) as filed by the Registrant on August 27, 2002.