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, 2000       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                                 Identification No.)
              organization)


        8300 EAST RAINTREE DRIVE
           SCOTTSDALE, ARIZONA                                      85260
(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. [ ]

At March 15, 2001, there were  outstanding  4,234,788 shares of the registrant's
common stock,  $.001 par value,  which excludes  318,700  treasury  shares.  The
aggregate  market value of common stock held by  nonaffiliates of the registrant
(3,289,010 shares) based on the closing price of the common stock as reported on
the Nasdaq National  Market on March 15, 2001, was  $3,815,252.  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.

Documents  incorporated by reference:  Portions of the  registrant's  definitive
Proxy Statement for the 2001 Annual Meeting of Stockholders  are incorporated by
reference into Part III of this report.
<PAGE>
                             VODAVI TECHNOLOGY, INC.

                           ANNUAL REPORT ON FORM 10-K

                       FISCAL YEAR ENDED DECEMBER 31, 2000

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I

     ITEM 1.   BUSINESS....................................................    1
     ITEM 2.   PROPERTIES..................................................   19
     ITEM 3.   LEGAL PROCEEDINGS...........................................   19
     ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   20

PART II

     ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
               RELATED STOCKHOLDER MATTERS.................................   21
     ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA........................   22
     ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS.........................   23
     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
               RISK........................................................   26
     ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA..................   26
     ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE.........................   27

PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   27
     ITEM 11.  EXECUTIVE COMPENSATION......................................   27
     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
               OWNERS AND MANAGEMENT.......................................   27
     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   27

PART IV

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
               FORM 8-K....................................................   27

SIGNATURES     ............................................................   30


                 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 2001 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 telephony  products,  voice processing
products,  and  computer-telephony  products  for a  wide  variety  of  business
applications.   Our  telecommunications   solutions  incorporate   sophisticated
features,  such as automatic call  distribution  and Internet  protocol,  or IP,
gateways.  Our voice  processing  products  include  interactive  voice response
systems,  automated  attendant,  and voice and fax mail. Our  computer-telephony
products enable users to integrate the  functionality of their telephone systems
with their  computer  systems.  We market our  products  primarily in the United
States as well as in foreign countries  through a distribution  model consisting
primarily of wholesale distributors and direct dealers.

     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,  or  CTI,
          products;

     *    emphasize sales through our dealer programs;

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

     *    focus on IP  telephony  product  developments  allowing  Voice over IP
          (VoIP)  connectivity  for Legacy products and a 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
          with which we have enjoyed a long-term relationship; 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 8300 East Raintree Drive,  Scottsdale,
Arizona, and our telephone number is (480) 443-6000.  Our Web site, which is not
a part of this  report,  is located at  www.vodavi.com.  All  references  to our
business  operations in this report include the operations of Vodavi Technology,
Inc. and our subsidiaries.

                                  OUR BUSINESS

INDUSTRY OVERVIEW

     Virtually  every  business  today relies upon its  business  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  stimulated the growth of 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

     *    regulatory changes.

                                       1
<PAGE>
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;

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

Automatic  call  distribution,  IP telephony,  and other  innovations  represent
significant  opportunities  for sales of new product lines and  applications  to
further  increase  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 analog key telephone
          systems and commercial grade telephones;

     *    voice processing products, including IVR systems, 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 71% of our revenue
during 2000 and  approximately  70% during 1999. 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 and Triad lines through large wholesale
distributors  and the INFINITE  line through  telephone  sales and  installation
companies known as "direct dealers."

     We market  both  digital  and  analog 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 analog
telephone  systems employ a  microprocessor-based  architecture  and solid state
switching  for voice  transmission  and system  control.  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 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 expansion or
customization  for  specific  business  applications  by the  installation  of a
variety of voice processing or computer-telephony integration products.

                                       2
<PAGE>
     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,  and the capability to use
custom calling features provided by local telephone companies.

     In the third  quarter of 2000,  we  introduced  our model 2706  single-line
telephone which is a two-line,  Caller ID set. Our new line of commercial  grade
telephones offers more advanced features, including built-in Caller ID and other
functions.  Sales of commercial grade telephones represented approximately 8% of
our revenue during 2000 as compared with approximately 10% during 1999.

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 21% of our revenue during 2000
and approximately 20% during 1999.

     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 laptop PC.

     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
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

                                       3
<PAGE>
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.

     INTERACTIVE VOICE RESPONSE

     Our IVR system connects a business's  telephone system to its host computer
in  order to  permit  the use of any  telephone  to  access  and  store  certain
information in the business's  database.  This interactive  connectivity permits
callers to conduct  transactions,  such as placing orders,  checking  inventory,
tracking order shipments,  or querying account information,  from any telephone.
IVR uses voice prompts to communicate the steps required to enable the caller to
input  information  to  or  retrieve   information  from  the  database  and  to
communicate  information to the caller. The open architecture  design of our IVR
system provides unlimited scalability by permitting users to increase the number
of ports or voice  storage  capacity  simply by  plugging in more voice cards or
disk drives and by linking  multiple  devices into networks to create  virtually
unlimited  configurations.  Users may enhance  the system by adding  independent
off-the-shelf  software  modules that can be  seamlessly  integrated  to provide
additional  features,  such as call routing,  voice  messaging,  web-based  IVR,
speech recognition, and text-to-speech capabilities.

     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  computer;  incorporate  telephone
functions  with computer  software to speed call handling and permit the user to
personalize  telephone  functions;  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 quickly and  inexpensively  access
and analyze call accounting information.

                                       4
<PAGE>
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 communications 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
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.  Since 1994,
we have  developed and introduced  several new or enhanced  products and product
lines,  including new ACD reporting  packages,  additional  enhancements  to our
Windows  NT-based  voice  messaging  systems and our IVR systems,  a new line of
digital key telephone systems, a new line of commercial grade telephones, and an
IP gateway.

     We currently are focusing our new product development efforts on developing
and refining  enhancements that will deliver greater  features,  sophistication,
functionality,  and value to our current  product  offerings.  For  example,  we
currently are developing

     *    a VoIP card that will  enable our digital  switches to network  with a
          business  LAN and to serve as an imbedded  IP gateway  for  connecting
          with  voice over IP  networks  and will  allow  users of our  existing
          technologies to migrate towards the benefits of IP telephony;

     *    a new digital switch for our Triad and INFINITE  product lines,  which
          is scheduled for 12 to 384 ports;

     *    an IP switching system,  which will start at 64 stations and expand to
          300 stations;

     *    a new software release for Triad and INFINITE product lines to provide
          networking connectivity between systems; and

     *    a new software release for Pathfinder  voice  processing  system which
          provides   improved   applications  to  include   unified   messaging,
          networking, desk top call control, and text speech e-mail reading.

     We have strategic alliances with LGE and other third parties related to the
development of new products, product lines, or product features. For example, we
are working with LGE to develop a full IP-based telecommunications  solution. We
may enter into 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."  We also  maintain an in-house  direct sales force that makes
direct  sales of our IVR  products to  businesses  as well as an in-house  sales
support  staff  assisting  our  direct  dealers  and  distributors.  We  derived
approximately  65% of our total revenue in 2000 from sales to distributors,  30%
from sales to direct dealers, and 5% from direct sales to IVR customers. We have
in the past and may in the future  market our products on a private  label basis
to original equipment manufacturers,  or OEMs. The following diagram illustrates
the current distribution channels for our product lines.

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<PAGE>
                                   VODAVI LOGO

   TRIAD           STARPLUS          INFINITE          IVR         INTERNATIONAL
     |                 |                 |              |                |
     |                 |                 |              |                |
Distributor       Distributor            |              |          International
     |                 |                 |              |           Distributor
     |                 |                 |              |                |
     |                 |                 |              |                |
Authorized           Dealer          Authorized         |                |
  Dealer               |               Dealer           |              Dealer
     |                 |                 |              |                |
     |                 |                 |              |                |
 End User           End User          End User       End User         End User

     WHOLESALE DISTRIBUTORS

     We design and market our  STARPLUS  and Triad  brands of products  for sale
through wholesale  distributors.  The 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  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  offers  several  advantages,
including the following:

     *    established  distribution  systems  and  access  to a large  number of
          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;

     *    reduced needs for direct training by us;

     *    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 32% of
our sales  during 2000 and 41% in 1999.  Alltel  accounted  for 12% of our sales
during 2000 and 11% during 1999.

     Our sales and marketing  personnel  stimulate  demand for our products with
the interconnects and independent telephone companies that purchase our products
from Graybar,  Alltel,  and other distributors and install these products at the
end users' premises.  These  interconnects and independent  telephone  companies
provide the "pull  through"  demand for our products from Graybar,  Alltel,  and
other distributors.

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<PAGE>
     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 more effectively
sell 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 DHS, DHSE, and DHSL lines.

     TRIAD DISTRIBUTORS AND DEALERS

     During 1998, we introduced 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 order
fulfillment,   marketing,   sales,   and  product  support   services.   We  had
approximately 136 authorized and active Triad dealers as of December 31, 2000.

     INFINITE DIRECT DEALERS

     We developed  our INFINITE line of telephone  systems and related  products
for  sales to  direct  dealers.  These  direct  dealers  are  medium  and  large
interconnect companies or local dealers that resell our products directly to end
users.  We believe that the principal  advantages of this  distribution  channel
include  greater  visibility  of our  product  lines  and the  ability  to exert
additional control over factors such as pricing of our products. 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.

     We increased the number of direct  dealers that sell our INFINITE  products
from 100 at December 31, 1998 to approximately  166 at December 31, 2000. During
2000,  however,  we  continued  a program to upgrade and  strengthen  our dealer
network.  Under this  program,  we  focused on selling to fewer,  but larger and
better-established,   dealers.  During  2000,  we  signed  up  approximately  44
large-volume, well-qualified new dealers and discontinued sales to approximately
40 dealers that have not provided a sufficient level of sales or support for our
INFINITE  line.  The new dealers  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 nine  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 with our dealer customers.

     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 and interactive  voice response
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

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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 system 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.

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 with the warranties within specified periods.

     We obtained a majority of our digital telephone  systems,  commercial grade
telephones,  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.  During 2000, we purchased $16.5 million of product from LGE, which
represented 61% of our total purchases in 2000. LGE currently owns approximately
20.4% 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 analog  telephone  systems  and  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

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<PAGE>
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.  During
2000, we purchased $4.2 million of product from LGST, which represented 15.7% of
our total  purchases in 2000. 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 $3.8 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
ensure 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 ensure  that the  manufacture  of our  products
conforms with  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.

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.

     Prior to June 24,  1999,  we operated our own repair  center and  performed
repairs on certain of our products.  On June 24, 1999, we sold the repair center
and entered into a seven-year repair and refurbishment agreement with the buyer.
Under this agreement,  we appointed the buyer as the exclusive authorized repair
center for our  products.  We believe  that this  arrangement  will enable us to
continue to provide  fast  turn-around  time and  consistent  quality of repairs
without the overhead and other  expenses  associated  with  operating the repair
facility. This arrangement also provides a sales outlet for selected refurbished
products.

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,

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<PAGE>
Inc., Nortel Networks  Corporation,  Toshiba Information Systems,  Inc., Comdial
Corporation,  Panasonic  Technologies,  Inc., Iwatsu,  Inter-Tel,  Inc., and NEC
Corporation.

     Competitors in the market for voice  processing  systems  include Key Voice
and  Applied  Voice   Technology  as  well  as  PBX  and  key  system  telephone
manufacturers that offer integrated voice processing systems of their own design
and under various original equipment manufacturer agreements. Competition in the
interactive  voice  response  market  includes  InterVoice-Brite,   Inc.,  Edify
Corporation,  and  Syntellect,  Inc.  Competitors in the market for IP telephony
systems  include Cisco Systems,  Inc.,  Artisoft,  Inc., 3Com  Corporation,  and
AltiGen Communications, Inc.

     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 the Company and  therefore may have greater  financial  resources at
their disposal.

PATENTS, TRADEMARKS, AND LICENSES

     As of December  31,  2000,  we owned  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
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.

     During 1999, we entered into a non-exclusive licensing agreement with Santa
Barbara Connected Systems Corporation to acquire the licensing and manufacturing
rights to certain of our voice processing systems.  Since 1997, we had purchased
these  products  from  Connected  Systems  for  private-labeled   sales  to  our
distribution  partners and  customers.  By acquiring  the  licensing  rights and
having LGE  manufacture  these  products  for us, we obtained a more  dependable
source and better margins for several of our more popular products.

     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

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<PAGE>
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 February 28, 2001,  we employed a total of 123 persons,  all of which
are full-time employees at our facilities in Scottsdale,  Arizona, and Norcross,
Georgia.  This reflects a reduction from 143 full-time  employees as of December
31, 1999.  We made these  reductions to allow us to have more  flexibility  in a
fast changing business  environment.  Our current number of full-time  employees
includes  25  persons  in  engineering  and  product  development;  41 in sales,
marketing,  and technical support;  21 in warehouse and distribution  functions;
and  36 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 in collective bargaining with us.

     Various  third-party  manufacturers  provide the  personnel  engaged in the
manufacture and assembly of our products in South Korea,  Thailand,  Taiwan, and
the  People's  Republic of China  under the  agreements  between the  respective
manufacturers and us.

EXECUTIVE OFFICERS

     The following table sets forth information concerning each of our executive
officers as of March 23, 2001:

           NAME            AGE                    POSITION
           ----            ---                    --------
William J. Hinz........     55      Chairman of the Board
Gregory K. Roeper......     40      President, Chief Executive Officer, Chief
                                     Financial Officer, Secretary, and Director
Stephen L. Borcich.....     54      Vice President - Sales and Marketing
Kent R. Burgess........     54      Vice President - Product Development
Marc F. Niknam.........     42      Vice President - Engineering, Manufacturing,
                                    and Technical Support

     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 was 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.  Mr.  Hinz  served as  President  of European
Operations for AlliedSignal Aerospace Company from December 1991 until June 1994
and served in various other manufacturing management positions with AlliedSignal
Aerospace Company from 1968 to 1991.

     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 to 1994,  Mr. Roeper was employed by Arthur  Andersen
LLP,  most  recently  as a Senior  Manager.  Mr.  Roeper is a  Certified  Public
Accountant in the state of Arizona.

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<PAGE>
     STEPHEN L.  BORCICH has served as Vice  President - Sales and  Marketing of
our company 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  was  Vice
President - Sales of Microlog  Corporation  from December  1990 until  September
1995.

     KENT R. BURGESS has served as Vice  President - Product  Development  since
April  2000.  He has also  held  the  positions  of  Executive  Vice  President,
President of Vodavi-CT,  and Senior Vice President - Business Operations.  Prior
to joining our company, Mr. Burgess was President of the Network Services Group,
World Access, Inc., where he was responsible for the procurement,  distribution,
installation,  and repair of Nortel and Lucent network  switching  systems.  Mr.
Burgess was a member of the senior  management  team, which launched our company
in 1983.  Mr.  Burgess  holds a Bachelor  of  Science  degree in  Business  from
Marshall University in Huntington, West Virginia.

     MARC F. NIKNAM has served as Vice President -  Engineering,  Manufacturing,
and Technical  Support  since  November  2000.  Mr.  Niknam is  responsible  for
hardware  and  software  development,   manufacturing,  quality  assurance,  and
technical support.  Prior to being named Vice President,  he served as Executive
Director of Manufacturing,  Quality, Hardware Engineering, and Repair. From 1989
to 1993, Mr. Niknam served as Operation Manager in overseas factories.  Prior to
joining our company,  Mr. Niknam was employed by Three Phoenix Co., Eaton corp.,
Tracor Applied  Sciences  Inc.,  and  Honeywell.  Mr. Niknam holds a Bachelor of
Science  degree in Electrical and Computer  engineering  and a Master of Science
degree in Computer Science.

                             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.

WE RELY ON AN INDEPENDENT DISTRIBUTION NETWORK.

     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 for at least
a  two-month  period  of  time.  A  decline  in the  volume  of  sales  made  by
distributors,  however,  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 quantities  they deem  sufficient to fill
anticipated short-term orders. 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.

     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 32% of our sales  during 2000 and 41% during  1999.
Accounts  receivable from Graybar comprised  approximately 41% of total accounts
receivable  at December 31, 2000.  Alltel  accounted for 12% of our sales during
2000  and  11%  during  1999.   Accounts   receivable   from  Alltel   comprised
approximately 9% of total accounts receivable at December 31, 2000.

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<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  introduction,  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 goodwill 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,  although we have not experienced  significant  quarterly
sales  fluctuations  in the past,  the size and timing of sales of our new voice
processing 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  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 capital 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  capital  expenditures
required  to  maintain  or expand  our  design  and  production  facilities  and
equipment.  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 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

                                       13
<PAGE>
existing  stockholders.  See Item 7,  "Management's  Discussion  and Analysis of
Financial   Condition   and  Results  of  Operations  -  Liquidity  and  Capital
Resources."

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 FACE RISKS ASSOCIATED WITH INTERNATIONAL MANUFACTURING SOURCES.

     We  currently  obtain  some of our  products  under  various  manufacturing
arrangements with third-party  manufacturers in South Korea,  Thailand,  Taiwan,
and the People's  Republic of China.  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,  our  maintenance  of
equipment  and  inventories  abroad,  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:

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

     *    political and economic conditions abroad;

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

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

     The  countries  in which some of our products  are  manufactured  have been
subject  to  natural  disasters  and  civil  disturbances  in  the  past.  These
circumstances  could affect our ability to obtain some of our products  from our
overseas  manufacturers.  Except for a fire that  interrupted  production at one
plant  in  China  during  late  1993 and the  first  part of  1994,  we have not
experienced any significant  shipment  interruptions to date. The termination of
any of the  arrangements  with our  manufacturers  or our  inability  to  obtain
products  pursuant to such  arrangements,  even for a relatively short period of
time, could have a material adverse effect on our operations.

     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. In November 1999, the United States and China signed an agreement that
will lift trade  barriers  between the two countries  and that advances  China's
efforts to join the World  Trade  Organization.  Special  interest  groups  have
raised objections to these efforts,  and we cannot be certain whether or to what
extent trade  relations  with China will continue to improve.  Any  developments

                                       14
<PAGE>
that adversely affect trade relations between the United States and China in the
future  could  impact  our  ability  to  obtain  some of our  products  from our
manufacturers in China.

WE RELY ON LGE AS A STRATEGIC PARTNER.

     We rely on LGE to  supply  some of our key  telephone  systems,  commercial
grade  telephones,  and voice  mail  products  as well as on LGE's  engineering,
hardware and circuit development, and manufacturing capabilities.  We purchase a
significant portion of our key telephone systems and commercial grade telephones
from LGE and LGST, an affiliate of LGE.  During 2000, we purchased $20.7 million
of  product  from LGE and LGST,  constituting  approximately  76.7% of our total
purchases in 2000.  During 1999, we purchased  $18.4 million of product from LGE
and LGST,  constituting  approximately  65% of our total  purchases in 1999.  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 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 performance of our distributors and dealers;

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

     *    new product introductions by our competitors;

     *    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   telephone   systems,    voice   processing    products,
computer-telephony  products,  and commercial grade telephones,  including their
ease of use,  reliability,  cost, timely introduction,  delivery schedules,  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:

                                       15
<PAGE>
     *    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.

WE 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,

     *    metals, and

     *    packaging materials.

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.

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.  Although we have  employment
agreements  with  William J. Hinz,  our  Chairman  of the Board,  and Gregory K.
Roeper,  our President and Chief  Executive  Officer,  we do not have employment
agreements  with any of our other  executive  personnel.  However,  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.

                                       16
<PAGE>
CERTAIN CONFLICTS OF INTEREST MAY ARISE AS A RESULT OF LGE'S OWNERSHIP  INTEREST
IN OUR COMPANY.

     LGE currently owns approximately  20.4% of our outstanding common stock. We
obtain some of our digital telephone systems,  commercial grade telephones,  and
voice mail products from LGE and obtain some of our analog telephone systems and
most of our commercial grade telephone 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.

     We, LGE, and some of our other  stockholders are parties to a stockholders'
agreement.  At any time that we issue  shares of our  common  stock in an amount
representing  1% or more of our  outstanding  common  stock,  the  stockholders'
agreement gives LGE the right to purchase a sufficient  number of shares from us
as may be required to enable LGE to maintain the  percentage of ownership of our
common stock that existed immediately prior to such issuance.

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.

THE ABSENCE OF AN ACTIVE TRADING  MARKET,  WHICH MAY OCCUR IF WE ARE REQUIRED TO
DELIST OUR SHARES FROM  NASDAQ,  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 the National Market System.  We may be
required to delist from  Nasdaq if we fail to comply with those  rules.  If such
events  occur,  we could apply for listing on the Nasdaq  Small Cap Market if we
meet the requirements of that market. Alternatively, market makers may choose to
create a market for our common stock on the over-the-counter  bulletin board. If
that did 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.

                                       17
<PAGE>
RIGHTS TO ACQUIRE OUR COMMON STOCK COULD RESULT IN DILUTION TO OTHER  HOLDERS OF
OUR COMMON STOCK.

     As of March 15, 2001, we had outstanding  options to acquire 725,000 shares
of our common stock at a weighted  average exercise price of $3.68 per share. An
additional 375,000 shares remain available for grant under our 1994 Stock Option
Plan. In February  1999,  we issued  warrants to acquire an aggregate of 122,500
shares of common stock to the Company's  former investor  relations firm.  Those
warrants have exercise prices ranging from $4.00 to $6.50 per share. The Company
terminated  the agreement  with the firm in November 2000, and the warrants will
expire six months after that date in  accordance  with the terms of the original
marketing agreement. During the terms of these options and warrants, the holders
thereof will have the opportunity to profit from an increase in the market price
of the common  stock.  The existence of these options and warrants may adversely
affect the terms on which we can obtain additional financing, and the holders of
these  options and warrants can be expected to exercise such options or warrants
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 or warrants.

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.  Approximately  1,273,330
restricted  shares of common stock currently 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
          --   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.

                                       18
<PAGE>
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.

OUR  OPERATING  RESULTS  COULD  DIFFER   MATERIALLY  FROM  THE   FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS REPORT.

     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  elsewhere  under  this  Item 1,  "Special
Considerations."

ITEM 2. PROPERTIES

     We lease, for a term expiring in December 2001, approximately 60,000 square
feet of space in Scottsdale,  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  16,200  square  feet of space  in  Norcross,
Georgia,  for a term expiring in August 2002. We maintain  software  development
facilities, engineering and design laboratories, product development facilities,
product assembly and testing  facilities,  warehouse and distribution areas, and
sales, marketing, and administrative offices at this location.

     We lease, for a term ending in December 2004,  approximately  19,500 square
feet of space in  Scottsdale,  Arizona.  This space is in turn  sub-leased  to a
third party.

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

ITEM 3. LEGAL PROCEEDINGS

     On September 20, 1996, we and our  subsidiary,  Vodavi-CT,  filed a lawsuit
against Michael Mittel and Fereydoun  Taslimi,  former officers and directors of
Vodavi-CT.  The lawsuit  alleged,  among other things,  that Messrs.  Mittel and
Taslimi violated  federal and Arizona  securities laws and engaged in fraudulent
activities in connection  with our  acquisition  of Vodavi-CT in 1995;  breached
certain terms of their respective employment contracts with Vodavi-CT; converted
certain  corporate  assets of  Vodavi-CT;  breached  their  fiduciary  duties to
Vodavi-CT;  and  misappropriated  certain corporate  opportunities for their own
benefit.  On September  24,  1996,  Messrs.  Mittel and Taslimi  filed a lawsuit
against Vodavi-CT and our company.  The lawsuit alleged that Vodavi-CT  breached
Messrs.  Mittel's and Taslimi's respective  employment agreements by terminating
their employment.

     On September 27, 1999,  the court  entered an order  granting the motion of
our  company  and  Vodavi-CT  for  summary  judgment as to the claims of Messrs.
Mittel and  Taslimi for breach of their  respective  employment  agreements.  In
addition,  the court denied Messrs.  Mittel's and Taslimi's  motions for summary
judgment  as to  the  claims  of our  company  and  Vodavi-CT  with  respect  to
fraudulent misrepresentation and/or nondisclosure,  negligent misrepresentation,
conversion or misappropriation of corporate assets,  breach of contract,  breach
of implied  covenant of good faith and fair dealing,  breach of fiduciary  duty,
constructive fraud, and  misappropriation of corporate assets. The court granted
the motion of Messrs.  Mittel and Taslimi for summary  judgment as to the claims
of our company and Vodavi-CT with respect to unjust  enrichment and constructive
trust.

                                       19
<PAGE>
     In January 2000, we entered into a settlement agreement with Messrs. Mittel
and Taslimi.  Under the agreement,  the parties  executed mutual releases and we
repurchased  210,000 shares of our common stock from Messrs.  Mittel and Taslimi
for an aggregate of $499,800.

     On February 16,  2000,  Messrs.  Mittel and Taslimi  filed a lawsuit in the
United  States  District  Court for the  Northern  District of Georgia,  Atlanta
Division,  against our company and Gregory K. Roeper,  our  President  and Chief
Executive  Officer  (Case No.  1-00-CV-0410).  The  plaintiffs  alleged that our
company  and  Mr.  Roeper   violated   federal   securities   laws,  made  false
representations and omitted material facts, and breached fiduciary duties to the
plaintiffs in connection with the repurchase of their shares of our common stock
in the settlement  described  above.  The plaintiffs were seeking an unspecified
amount  of  compensatory  and  punitive  damages  as well as their  expenses  of
litigation.  In March  2000,  we and Mr.  Roeper  filed  responses  denying  the
plaintiffs'  allegations and asserting  various  affirmative  defenses.  We also
filed motions to dismiss the complaint.  In March 2001,  all of the  plaintiff's
claims  were  dismissed  by the  court  and we were  given  leave to  amend  our
complaint  and to assert  claims  against  Mittel and  Taslimi for breach of the
agreement and for fraud.

     On November 9, 1998, Paradygm  Communications,  Inc. and R.C. Patel filed a
lawsuit against our subsidiary,  Vodavi Communications  Systems, Inc., or VCS in
the United States District Court, Northern District of Georgia, Atlanta Division
(Civil Action File No.  1:98-CV-3637-WBH).  The  complaint  alleges that VCS (i)
breached its strategic alliance agreement with Paradygm, as well as its warranty
of product  fitness  under the  strategic  alliance  agreement;  (ii)  failed to
provide  reasonable  technical  and  sales  training  assistance  to  Paradygm's
employees  to  support  Paradygm  in its  efforts  to sell  products  under  the
agreement;  and  (iii)  engaged  in  conduct  that  constitutes  intentional  or
negligent  misrepresentation.  The complaint  requests  compensatory,  punitive,
incidental,  and  consequential  damages,  attorneys'  fees, plus any additional
relief. VCS answered the complaint denying the foregoing allegations,  asserting
that the complaint fails to state a claim and, for various  reasons,  the relief
sought by  Paradygm  and  Patel is  barred.  VCS also has  filed a  counterclaim
against Paradygm  alleging that Paradygm  breached the agreement  because of its
failure  to meet its  payment  obligations  to VCS.  The  counterclaim  requests
amounts  due  pursuant  to  the  strategic  alliance  agreement,  the  costs  of
litigation,  and reasonable attorneys' fees. Since filing the initial complaint,
Paradygm has been permitted to add Vodavi-CT, Inc., an affiliate of our company,
alleging that Vodavi-CT participated in the alleged fraudulent inducement of Mr.
Patel. On March 24, 1999, the plaintiffs  filed an amended  compliant to add our
subsidiary Vodavi-CT as an additional  defendant.  The amended complaint alleges
claims against Vodavi-CT similar to those alleged in the original complaint.  On
July 28, 1999,  Vodavi-CT  filed an answer and denied those  allegations  on the
same  basis as VCS'  original  answer.  The  parties  currently  are  conducting
discovery. We are vigorously defending this lawsuit.

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

     None

                                       20
<PAGE>
                                     PART II

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

     Our common  stock has been quoted in the Nasdaq  National  Market under the
symbol "VTEK" since October 6, 1995. The following table sets forth the high and
low sales  prices of our  common  stock on the  Nasdaq  National  Market for the
periods indicated.

                                                                 HIGH       LOW
                                                                 ----       ---
1998:
     First quarter...........................................   $4.50      $3.25
     Second quarter..........................................    3.97       2.75
     Third quarter...........................................    3.25       1.75
     Fourth quarter..........................................    3.50       1.81

1999:
     First quarter...........................................   $3.63      $2.06
     Second quarter..........................................    3.13       2.25
     Third quarter...........................................    3.00       2.16
     Fourth quarter..........................................    3.19       1.94

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 (through March 15, 2001)..................   $2.50      $1.06

     On March 15,  2001,  the closing  sales price of our common stock was $1.16
per share.  As of March 15, 2001,  there were 31 holders of record of our common
stock.

     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.

                                       21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data presented below as of and for each
of the years in the  five-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)
                                                       2000        1999        1998        1997        1996
                                                     -------     -------     -------     -------     -------
<S>                                                  <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenue .........................................    $47,705     $49,811     $48,322     $47,675     $46,154
                                                     -------     -------     -------     -------     -------
Gross margin ....................................     17,503      17,886      15,802      15,667      15,312
Operating expenses ..............................     16,041      15,252      14,358      13,828      13,749
Asset impairment and restructuring charges ......         --          --          --         819       4,805
                                                     -------     -------     -------     -------     -------
Operating income (loss) .........................      1,462       2,634       1,444       1,020      (3,242)
Interest expense ................................        705         676         791         663         840
                                                     -------     -------     -------     -------     -------
Income (loss) before income taxes ...............        757       1,958         653         357      (4,082)
Provision for (benefit from) income taxes .......        309         718        (330)        142         327
                                                     -------     -------     -------     -------     -------
Net income (loss) ...............................    $   448     $ 1,240     $   983     $   215     $(4,409)
                                                     =======     =======     =======     =======     =======
Net income (loss) per share, diluted.............    $  0.10     $  0.29     $  0.23     $  0.05     $ (1.02)
                                                     =======     =======     =======     =======     =======
Weighted average shares outstanding, diluted.....      4,305       4,344       4,342       4,342       4,342
                                                     =======     =======     =======     =======     =======

                                                                         AS OF DECEMBER 31,
                                                     -------------------------------------------------------
                                                                          (IN THOUSANDS)
                                                       2000        1999        1998        1997        1996
                                                     -------     -------     -------     -------     -------
BALANCE SHEET DATA:
Assets:
  Current assets ................................    $19,938     $19,645     $16,766     $19,507     $16,591
  Property and equipment, net....................      2,033       2,356       2,663       2,616       2,465
  Goodwill, net .................................      1,772       1,906       2,244       2,395       2,547
  Other, net ....................................      1,152       1,307       1,169       1,146         815
                                                     -------     -------     -------     -------     -------
                                                     $24,895     $25,214     $22,842     $25,664     $22,418
                                                     =======     =======     =======     =======     =======
Liabilities:
  Current liabilities ...........................    $12,176     $13,208     $12,044     $15,743     $12,627
  Other long-term obligations....................        135         186         199         306         391
                                                     -------     -------     -------     -------     -------
Total liabilities ...............................     12,311      13,394      12,243      16,049      13,018
Stockholders' equity ............................     12,584      11,820      10,599       9,615       9,400
                                                     -------     -------     -------     -------     -------
                                                     $24,895     $25,214     $22,842     $25,664     $22,418
                                                     =======     =======     =======     =======     =======
</TABLE>
                                       22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

ANNUAL RESULTS

     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.

                                                   2000       1999       1998
                                                  ------     ------     ------
                                                    %          %          %
                                                  ------     ------     ------
Revenue.......................................     100.0%     100.0%     100.0%
Cost of goods sold............................      63.3%      64.0%      67.3%
                                                  ------     ------     ------
   Gross margin...............................      36.7%      36.0%      32.7%
Operating expenses:
Engineering and product development...........       3.6%       3.2%       3.7%
Selling, general, and administrative..........      30.0%      27.5%      26.0%
                                                  ------     ------     ------
Operating income..............................       3.1%       5.3%       3.0%
Other expense, net............................      (1.5)%     (1.4)%     (1.7)%
                                                  ------     ------     ------
Pretax income.................................       1.6%       3.9%       1.3%
Income tax expense (benefit)..................       0.7%       1.4%      (0.7)%
                                                  ------     ------     ------
Net income....................................       0.9%       2.5%       2.0%
                                                  ======     ======     ======

REVENUE

     Revenue  in 2000  was  approximately  $47.7  million,  a  decrease  of $2.1
million,  or 4.2%, as compared to 1999 revenue of  approximately  $49.8 million.
Sales for the INFINITE  product line accounted for an increase of  approximately
$5.5 million,  a 58% increase in sales of those products over 1999. The increase
in INFINITE  revenue is primarily  due to the continued  addition,  beginning in
fourth  quarter of 1999,  of  large-volume,  well-qualified  new dealers.  Triad
revenue, our dealer focused channel through our wholesale  distribution channel,
increased 25% to $11.5 million for 2000 as compared to $9.2 million for 1999.

     Approximately   $1.3  million  of  the   increase  in  INFINITE   sales  is
attributable to voice mail sales. Sales of our voice mail products increased due
to the  introduction  of digital  voice mail in early 1999 and sales  incentives
that we offered throughout 2000. These sales incentives  encouraged the purchase
of voice mail with key telephone  systems,  or bundling.  Revenue for all of our
voice processing products through all of our distribution  channels increased by
$418,000, or 4.3%, in 2000 to approximately $10.2 million.

     The  decrease  in  total  revenue  during  2000  was  partially  due to the
migration from our older digital key telephone systems, which we discontinued in
January 2000, to our newer Triad and STARPLUS DHS systems,  and the migration of
our  commercial  grade  telephones  to the new 2700 series of  commercial  grade
telephones, which replaced our 2600 series beginning in June 1999. Other factors
included (a) a decision,  during the first  quarter of 2000, by one of our major
wholesale distribution customers to reduce its inventory levels; (b) soft market
conditions in the small- to mid-sized  markets  affecting our industry;  and (c)
the sale of repair  center in the second  quarter of 1999.  Repair  revenue  was
approximately $327,000 in 2000 as compared to $772,000 in 1999.

     Revenue  in 1999 was  approximately  $49.8  million,  an  increase  of $1.5
million,  or 3.1%, over 1998 revenue of approximately  $48.3 million.  Sales for
INFINITE product line accounted for an increase of approximately $1.9 million, a
25% increase in sales of those products over 1998. Approximately $1.5 million of
the increase in INFINITE sales is attributable to voice mail sales.  Revenue for
all of our voice processing  products  through all of our distribution  channels
increase by $2.8 million, or 40%, in 1999 to approximately $9.7 million.

     The  increase  in total  revenue  during 1999 was  partially  offset by the
migration from our older digital key telephone systems, which we discontinued in
January  2000,  to our newer Triad and DHS systems,  as well as the migration of

                                       23
<PAGE>
our  commercial   grade  telephone  to  the  2700  series  of  commercial  grade
telephones, which replaced our 2600 series beginning in June 1999. These product
migrations had a negative impact on our revenue. In addition, we sold our repair
center in the second quarter of 1999. Repair revenue was approximately  $772,000
in 1999 as compared with $1.5 million in 1998.

COST OF GOODS SOLD

     Gross margins  increased to 36.7% of revenue in 2000 as compared with 36.0%
in 1999.  The  improvement  in gross  margin is  primarily  due to the  enhanced
margins  associated  with our voice  processing  products and  decreased  import
duties.  The  voice  mail  margin  improvements  are  a  direct  result  of  the
acquisition of the voice mail  technology  rights in early 1999 and the movement
of the manufacturing overseas in late 1999. Additionally, sales of higher margin
voice processing products increased to 21.3% of total revenue in 2000 from 19.5%
of total revenue in 1999.

     Gross  margins  increased to 36.0% of revenue in 1999 as compared with 32.7
in 1998. The improvement in gross margin in 1999 was attributable to a number of
factors,  including  changes  in  product  mix as sales of  higher-margin  voice
processing  products  increased to 19.5% of total  revenue in 1999 from 14.4% of
total revenue in 1998. Other factors include the elimination of expenses related
to our repair center division,  which we sold during the second quarter of 1999,
negotiated  discounts from our vendors,  a decrease in import duties,  decreased
discounts  provided to wholesale  distributors,  and increased  participation in
rebate  programs  provided  by our  vendors.  During  1999,  margins  were  also
favorably impacted by our acquisition of the licensing and manufacturing  rights
to our "Talkpath" and "Dispatch" voice  processing  product lines from Connected
Systems in May 1999.

ENGINEERING AND PRODUCT DEVELOPMENT

     Engineering and product development expenditures increased to approximately
$1.7  million in 2000 as compared  with $1.6  million in 1999.  The increase was
primarily due to salaries and related personnel costs associated with additional
headcount and field trial expenses.

     Engineering and product development expenditures decreased to approximately
$1.6  million in 1999 from $1.8  million in 1998.  This  decrease was due to the
elimination of several engineering and product development  positions within our
company during fiscal 1998 as a result of the  termination of a PBX  development
project.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

     Selling,  general,  and administrative  expenses increased to approximately
$14.3 million in 2000 as compared  with $13.7 million in 1999.  This increase is
the net effect of a number of factors, including (a) continued investment in our
sales  force  beginning  in the  second  quarter  of 1999;  (b) an  increase  in
professional  fees;  (c)  an  increase  in the  reserve  for  doubtful  accounts
receivable;  (d) increased efforts in our marketing and sales programs;  and (e)
decreased expenses due to the sale of our repair center.

     Selling,  general,  and administrative  expenses increased to approximately
$13.7 million in 1999 as compared  with $12.5 million in 1998.  This increase is
primarily  a result of the  addition  of  several  new sales  personnel  and the
completion of our executive management team. The increase can also be attributed
to increased efforts in our marketing and sales programs.

INTEREST EXPENSE

     Interest  expense remained  relatively  stable in 2000 as compared to 1999.
Interest  expense  increased  by $29,000 to  $705,000 as compared to $676,000 in
1999.

     Interest expense  decreased to  approximately  $676,000 in 1999 as compared
with  $791,000 in 1998.  The $115,000  decrease can be  attributed  to decreased
average  borrowings  during  1999 as a result of  reduced  levels  of  inventory
throughout the year.

                                       24
<PAGE>
INCOME TAXES

     We have provided for income taxes using an effective rate of 40.8% in 2000,
as  compared  with an  effective  rate of  36.7% in 1999  and a tax  benefit  of
$330,000,  or 50.5% in 1998. We utilized research and development tax credits of
approximately  $74,000 in 2000,  $153,000 in 1999,  and $509,000 in 1998,  which
favorably impacted the effective tax rate in each of those years.

LIQUIDITY AND CAPITAL RESOURCES

     We had cash of  approximately  $564,000  at  December  31,  2000.  Our cash
accounts  are swept  regularly  and  applied  against our line of credit with GE
Capital.  Effective September 30, 1999, we negotiated an increase in our line of
credit from $12.0 million to $15.0 million.  The line of credit expires in April
2003 and bears interest at 2.5% over the 30-day  commercial  paper rate, a total
of 9.15% at December 31, 2000.  Advances under the line of credit are based upon
eligible accounts receivable and inventory of our wholly owned subsidiary,  VCS,
and are  secured  by  substantially  all of our  assets.  We had  borrowings  of
approximately  $6.3 million  against our available  operating  line of credit at
December 31, 2000,  which  represents a decrease of $2.4 million from borrowings
of $8.7  million at December  31,  1999.  At December  31,  2000,  our  eligible
additional  borrowing  availability  under the line of credit was  approximately
$4.2 million.

     The  revolving  line of credit  contains  covenants  that are customary for
similar credit  facilities and also  prohibits our operating  subsidiaries  from
paying  dividends to our company without the consent of GE Capital.  At December
31, 2000, we were in compliance with these covenants.

     Working  capital  increased to  approximately  $7.8 million at December 31,
2000 from  approximately  $6.5 million at December 31, 1999.  This  increase was
attributable to (a) an increase in accounts  receivable;  (b) a decrease in line
of credit; offset by (c) an increase in accounts payable; and (d) an increase in
accrued liabilities. Our current ratio was 1.6 for 2000 as compared with 1.5 for
1999.

     During May 1999, we entered into a non-exclusive  licensing  agreement with
Santa  Barbara  Connected  Systems  Corporation  to acquire  the  licensing  and
manufacturing  rights to our "Talkpath" and "Dispatch" voice processing  product
lines.  Since 1997, we had purchased  these products from Connected  Systems for
private-labeled  sales  to  distribution  partners  and  customers.   Under  the
agreement,  we paid  Connected  Systems  $500,000  during  1999.  No  additional
payments  are due under this  agreement.  The  purchase of this  technology  has
allowed us to contract directly with the end manufacturer, which has resulted in
significant cost savings on these products.

     On June 24,  1999,  we sold our repair  center  division's  net  inventory,
property, and other assets with a net book value of approximately  $531,000. The
buyer  paid to us  consideration  of  $100,000  in cash,  a note  receivable  of
$200,000  that  the  buyer  paid on July  31,  1999,  and a note  receivable  of
approximately  $195,000 with monthly  payments of  approximately  $16,000 for 12
months  commencing  August 1, 1999.  All  payments on the note were  received by
December 31, 2000.  We also incurred  liabilities  of  approximately  $50,000 in
connection with this  transaction,  which we paid in the fourth quarter of 1999.
As  part  of  this  transaction,   we  entered  into  a  seven-year  repair  and
refurbishment  agreement with the buyer. Under this agreement,  we appointed the
buyer as the exclusive authorized repair center for our products.

     In October 1999,  our board of directors  approved the  repurchase of up to
400,000 shares of our outstanding  common stock over a six-month  period,  which
was  subsequently  extended  through June 2001.  Financing for the repurchase is
provided  through  our line of credit and  proceeds  from option  exercises,  as
amended on October 31, 1999.  During October 2000, we  negotiated,  with General
Electric Capital  Corporation,  an extension to the stock  repurchase  period to
June 30, 2001. As of December 31, 2000, we had  repurchased  318,700 shares at a
total cost of $759,000. This amount includes the repurchase of 210,000 shares of
common stock in  connection  with the  settlement of a lawsuit in early 2000. We
have not made any further  repurchases as of the filing date of this report.  We
are accounting for the repurchase program under the cost method.

     We are a defendant in various lawsuits. See Item 3, "Legal Proceedings." We
have not made any provisions in our financial statements for these lawsuits. The
imposition  of damages  in any of these  matters  could have a material  adverse
effect on our results of operations and financial position.

                                       25
<PAGE>
     From time to time we also 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
finance our  internal  growth in the near term.  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  some of our  products  under  various  manufacturing
arrangements  with  third-party  manufacturers  in Asia.  As of the date of this
report, we do not believe that the current economic situations in Asia will have
any adverse impact on our operations.

IMPACT OF RECENTLY ISSUED STANDARDS

     On December 3, 1999,  the  Securities  and Exchange  Commission  staff (the
Staff)  issued  Staff  Accounting  Bulletin  (SAB)  101,  REVENUE   RECOGNITION.
Subsequent   to  its   issuance   the  Staff   elected  to  defer  the  required
implementation  date.  The Company has adopted SAB 101 during the fourth quarter
of 2000,  effective  January 1,  2000.  The  adoption  of SAB 101 did not have a
material impact on the Company's financial position or results of operations.

     In June 1998, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 133 (as amended by SFAS No. 137), ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND
HEDGING  ACTIVITIES,  which requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial  position and measure
those  instruments  at fair value.  The issuance of SFAS No 137,  ACCOUNTING FOR
DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133,  delayed the required  effective date of SFAS No. 133
to all fiscal years  beginning  after June 15, 2000. The Company was required to
adopt SFAS No.  133, as amended,  on January 1, 2001.  The  adoption of SFAS No.
133, as amended,  did not have an impact on the Company's  results of operations
or financial position.

     In July 2000, the Emerging  Issues Task Force (EITF) reached a consensus on
EITF Issue 00-10,  related to the accounting for shipping and handling  revenues
and  costs and their  classification  in the  income  statement.  The  consensus
requires an entity to record all shipping  and  handling  billed to customers as
revenue.  It also states that the  classification of shipping and handling costs
is an accounting policy decision subject to appropriate disclosure.  The Company
has adopted EITF 00-10 concurrent with SAB 101 as discussed above. Additionally,
a reclassification of 1999 and 1998 amounts within the income statement has been
made to conform with the requirements of EITF 00-10.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     At December 31, 2000, we did not  participate in any  derivative  financial
instruments or other  financial and commodity  instruments  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 2.5% over the 30 day  commercial  prime
rate, a total of 9.15% at December 31, 2000.  The  principal of loans under this
line of credit is due in April 2003.  At December 31, 2000,  we had  outstanding
borrowings on the line of credit of approximately $6.3 million.

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.

                                       26
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  required  by  this  Item  relating  to our  directors  is
incorporated  herein by reference to the definitive  Proxy Statement to be filed
pursuant to Regulation 14A of the  Securities  Exchange Act of 1934, as amended,
for our 2001 Annual Meeting of  Stockholders.  The information  required by this
Item  relating to our  executive  officers  is  included in Item 1,  "Business -
Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

     The information  required by this Item is incorporated  herein by reference
to the definitive  Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2001 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information  required by this Item is incorporated  herein by reference
to the definitive  Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2001 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information  required by this Item is incorporated  herein by reference
to the definitive  Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2001 Annual Meeting of Stockholders.

                                    PART IV

ITEM 14. 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-2 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)
4.3       Common Stock  Purchase  Warrant  dated  February  22, 1999,  issued to
          Continental Capital & Equity Corporation (4)
10.2      Security   Agreement  dated  as  of  April  11,  1994  between  Vodavi
          Communications    Systems,   Inc.   and   General   Electric   Capital
          Corporation(l)

                                       27
<PAGE>
10.3      Stock Pledge and Security Agreement dated as of April 11, 1994 between
          the Registrant and General Electric Capital Corporation(l)
10.7      Patent  Collateral  Assignment  Agreement  dated as of April 11,  1994
          between V Technology  Acquisition  Corp. and General  Electric Capital
          Corporation(l)
10.8      Trademark  Security  Agreement  dated as of April 11,  1994  between V
          Technology    Acquisition   Corp.   and   General   Electric   Capital
          Corporation(l)
10.9      Vodavi Technology,  Inc. Second Amended and Restated 1994 Stock Option
          Plan(4)
10.10     Stockholders'  Agreement among the Registrant,  V Technology  Holdings
          Corp.,  GoldStar  Telecommunication  Co., Ltd., The Sherman Group, The
          Opportunity Fund, Steven A. Sherman, and Glenn R. Fitchet, dated March
          28, 1994, and Amendment Agreement dated April 5, 1995(1)
10.12     Vodavi Key  System  Agreement  dated  April 4, 1994  between  GoldStar
          Telecommunication  Co.,  Ltd.,  and Vodavi  Communication  Systems,  a
          division of Executone Information Systems, Inc.(l)
10.13     Vodavi  Single Line  Telephone  Agreement  dated April 4,1994  between
          Srithai GoldStar Co., Ltd., and Vodavi Communication  Systems, Inc., a
          division of Executone Information Systems, Inc.(l)
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)
10.15     Assignment  and  Assumption  Agreement  dated April 11,  1994  between
          Executone  Information  Systems,  Inc.  and V  Technology  Acquisition
          Corp.(l)
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)
10.33     Consulting  Agreement  dated as of  December  5, 1997  between  Vodavi
          Technology, Inc. and Steven A. Sherman(4)
10.34     Bill of Sale and  Assignment  dated  June  24,  1999,  between  Vodavi
          Communications Systems, Inc. and Aztec International LLC.(5)
10.35     Repair and Refurbishment Agreement dated June 24, 1999, between Vodavi
          Communication Systems, Inc. and Aztec International LLC(5)
10.36     License Agreement dated May 17, 1999,  between Santa Barbara Connected
          Systems Corporation and Vodavi Technology, Inc.(5)
10.37     Object Code Software License Agreement dated May 24, 1999,  between D2
          Technologies, Inc. and Vodavi Technology, Inc.(5)
10.38     Fourth  Amendment to Credit  Agreement  between Vodavi  Communications
          Systems, Inc. and General Electric Capital Corporation(6)
10.40     Employment  Agreement  dated October 1, 1999,  between William J. Hinz
          and Vodavi Technology, Inc.(7)
10.41     Employment  Agreement dated October 1, 1999, between Gregory K. Roeper
          and Vodavi Technology, Inc.(7)
10.42     Second  Amendment  to Amended  and  Restated  Credit  Agreement  dated
          October 31, 1999,  between  Vodavi  Communications  Systems,  Inc. and
          General Electric Capital Corporation(7)
10.43     Third Amendment to Amended and Restated Credit Agreement dated October
          9, 2000,  between  Vodavi  Communications  Systems,  Inc.  and General
          Electric Capital Corporation(8)
21        List of Subsidiaries
23.1      Consent of Arthur Andersen LLP

----------
(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.

                                       28
<PAGE>
(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  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1997, as filed on March 31, 1998 and
     as amended on Form 10-K/A filed on April 30, 1998.
(5)  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.
(6)  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.
(7)  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.
(8)  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.

                                       29
<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 23, 2001                    By: /s/ Gregory K. Roeper
                                            ------------------------------------
                                            Gregory K. Roeper
                                            President, Chief Executive Officer,
                                            Chief Financial Officer, and
                                            Secretary


     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 23, 2001
-------------------------
William J. Hinz



/s/ Gregory K. Roeper       President, Chief Executive Officer,   March 23, 2001
-------------------------   Chief Financial Officer, Secretary,
Gregory K. Roeper           and Director (Principal Executive
                            Officer)


/s/ Tai Hyun                Director                              March 23, 2001
-------------------------
Tai Hyun



/s/ Gilbert H. Engels       Director                              March 23, 2001
-------------------------
Gilbert H. Engels



/s/ Stephen A McConnell     Director                              March 23, 2001
-------------------------
Stephen A McConnell



/s/ Emmett E. Mitchell      Director                              March 23, 2001
-------------------------
Emmett E. Mitchell

                                       30
<PAGE>
                    VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

                                                                            Page
                                                                            ----

Report of Independent Public Accountants..................................   F-2

Consolidated Balance Sheets as of December 31, 2000 and 1999..............   F-3

Consolidated Statements of Operations for the Years Ended
  December 31, 2000, 1999, and 1998.......................................   F-4

Consolidated Statements of Changes in Stockholders' Equity for
  the Years Ended December 31, 2000, 1999 and 1998........................   F-5

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2000, 1999 and 1998........................................   F-6

Notes to Consolidated Financial Statements................................   F-7

Report of Independent Public Accountants..................................   S-1

Schedule II -- Valuation and Qualifying Accounts..........................   S-2

                                       F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Vodavi Technology, Inc. and Subsidiaries:

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Vodavi
Technology,  Inc. (a Delaware  corporation)  and Subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations, changes in
stockholders'  equity and cash  flows for each of the three  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  1999,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting  principles  generally accepted
in the United States.


                                      /s/ Arthur Andersen LLP

Phoenix, Arizona
  February 2, 2001 (except with respect
  to the matter discussed in Note 9, as
  to which the date is March 13, 2001)

                                       F-2
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
IN THOUSANDS EXCEPT SHARE AMOUNTS

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                         -----------------------
                                                                           2000           1999
                                                                         --------       --------
<S>                                                                      <C>            <C>
                                     Assets

Current Assets:
  Cash                                                                   $    564       $  1,528
  Accounts receivable, net of reserves for doubtful accounts
    and sales returns of $1,582 in 2000 and $1,239 in 1999                 11,797         10,177
  Inventories                                                               6,707          6,903
  Prepaid expenses and other                                                  870          1,037
                                                                         --------       --------

        Total current assets                                               19,938         19,645

Property and Equipment, net                                                 2,033          2,356

Goodwill, net                                                               1,772          1,906

Other Long-Term Assets, net                                                 1,152          1,307
                                                                         --------       --------
                                                                         $ 24,895       $ 25,214
                                                                         ========       ========

                      Liabilities and Stockholders' Equity

Current Liabilities:
  Accounts payable                                                       $  1,374       $  1,342
  Accrued liabilities                                                       1,302          1,074
  Accrued rebates                                                             859            472
  Payable to related parties                                                2,382          1,648
  Revolving credit facility borrowings                                      6,259          8,672
                                                                         --------       --------

        Total current liabilities                                          12,176         13,208
                                                                         --------       --------

Other Long-Term Obligations                                                   135            186
                                                                         --------       --------

Commitments and Contingencies

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;
   4,553,488 and 4,342,238 shares issued at December 31, 2000
   and 1999, respectively                                                       5              4
  Additional paid-in capital                                               13,363         12,334
  Accumulated deficit                                                         (25)          (473)
  Treasury stock, at cost; 318,700 and 16,800 shares
    at December 31, 2000 and 1999, respectively                              (759)           (45)
                                                                         --------       --------
                                                                           12,584         11,820
                                                                         --------       --------
                                                                         $ 24,895       $ 25,214
                                                                         ========       ========
</TABLE>

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

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

Consolidated Statements of Operations
IN THOUSANDS EXCEPT PER SHARE AMOUNTS

<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                                        --------------------------------------
                                                          2000           1999           1998
                                                        --------       --------       --------
<S>                                                     <C>            <C>            <C>
Revenue, net                                            $ 47,705       $ 49,811       $ 48,322

Cost of Goods Sold (including products acquired
 from related parties (LGE) of $20,600, $18,800,
 and $18,000, respectively)                               30,202         31,925         32,520
                                                        --------       --------       --------

        Gross margin                                      17,503         17,886         15,802

Operating Expenses:
  Engineering and product development                      1,742          1,568          1,816
  Selling, general and administrative                     14,299         13,684         12,542
                                                        --------       --------       --------

Operating Income                                           1,462          2,634          1,444

Interest Expense                                             705            676            791
                                                        --------       --------       --------

Income Before Income Taxes                                   757          1,958            653

Provision for (Benefit from) Income Taxes                    309            718           (330)
                                                        --------       --------       --------

Net Income                                              $    448       $  1,240       $    983
                                                        ========       ========       ========

Basic Earnings per Share                                $    .10       $    .29       $    .23
                                                        ========       ========       ========

Diluted Earnings per Share                              $    .10       $    .29       $    .23
                                                        ========       ========       ========

Weighted Average Shares Outstanding - Basic                4,273          4,340          4,342
                                                        ========       ========       ========

Weighted Average Shares Outstanding - Diluted              4,305          4,344          4,342
                                                        ========       ========       ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-4
<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, 1997                4,342,238       $  4     $12,308       $(2,696)          --    $  --     $ 9,616
 Net income                                      --         --          --           983           --       --         983
                                          ---------       ----     -------       -------     --------    -----     -------

Balance, December 31, 1998                4,342,238          4      12,308        (1,713)          --       --      10,599
 Net income                                      --         --          --         1,240           --       --       1,240
 Purchase of common stock                        --         --          --            --      (16,800)     (45)        (45)
 Warrants issued                                 --         --          26            --           --       --          26
                                          ---------       ----     -------       -------     --------    -----     -------

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
                                          =========       ====     =======       =======     ========    =====     =======
</TABLE>

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

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

Consolidated Statements of Cash Flows
IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                           ---------------------------------------
                                                                              2000           1999           1998
                                                                           ---------      ---------      ---------
<S>                                                                        <C>            <C>            <C>
Cash Flows from Operating Activities:
  Net income                                                               $     448      $   1,240      $     983
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization                                                940            830            765
    Tax benefit on stock option exercises                                        193             --             --
    Provision for doubtful accounts                                              628            589            451
    Deferred taxes                                                               154           (162)           163
    Rent equalization                                                            (51)           (13)            17
    Loss on sale of repair center division                                        --             86             --
  Changes in working capital:
    Accounts receivable, net                                                  (2,362)        (1,898)           475
    Inventories                                                                  196           (627)         1,769
    Prepaid expenses and other                                                   167           (338)           209
    Other long-term assets                                                      (191)           462           (219)
    Accounts payable and payables to related parties                             766            635         (1,965)
    Accrued liabilities and accrued rebates                                      615           (307)          (562)
                                                                           ---------      ---------      ---------
          Net cash flows provided by operating activities                      1,503            497          2,086
                                                                           ---------      ---------      ---------
Cash Flows from Investing Activities:
  Cash paid for license agreement                                                 --           (500)            --
  Cash paid to acquire property and equipment                                   (291)          (387)          (629)
  Net proceeds from disposition of repair center
    division                                                                      --             50             --
  Cash received on notes receivable                                              114            281             --
                                                                           ---------      ---------      ---------
          Net cash flows used in investing activities                           (177)          (556)          (629)
                                                                           ---------      ---------      ---------
Cash Flows from Financing Activities:
  Net borrowings (payments) on revolving credit facility                      (2,413)           961           (917)
  Payments on capital leases                                                      --           (125)          (378)
  Purchase of common stock                                                      (714)           (45)            --
  Stock options exercised                                                        837             --             --
                                                                           ---------      ---------      ---------
          Net cash flows provided by (used in) financing activities           (2,290)           791         (1,295)
                                                                           ---------      ---------      ---------

Change in Cash                                                                  (964)           732            162

Cash, beginning of period                                                      1,528            796            634
                                                                           ---------      ---------      ---------

Cash, end of period                                                        $     564      $   1,528      $     796
                                                                           =========      =========      =========
</TABLE>

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

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

Notes to Consolidated Financial Statements
December 31, 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 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 as well as in foreign  countries  through a
     distribution network consisting of wholesale distributors,  direct dealers,
     and  its own  sales  personnel.  The  Company's  sales  efforts  have  been
     concentrated  on major  wholesale  distributors  as well as a direct dealer
     network.  During  2000,  1999,  and 1998,  sales to the  Company's  largest
     distributor   accounted   for  32%,   41%,  and  39%  of  total   revenues,
     respectively.  During 2000,  1999, and 1998,  sales to the Company's second
     largest  customer  accounted for an  additional  12%, 11%, and 12% of total
     revenues,   respectively.   Accounts  receivable  from  these  two  largest
     distributors  comprise  50%  and 45% of  total  accounts  receivable  as of
     December 31, 2000 and 1999, respectively.

     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.  Certain of these  purchases are
     made from related parties (see Note 6).

     b.   PRINCIPLES OF CONSOLIDATION

     The  consolidated  financial  statements  include  the  accounts  of Vodavi
     Technology,  Inc. and its wholly owned subsidiaries  Vodavi  Communications
     Systems,  Inc. (VCS), and Vodavi-CT,  Inc.  (Vodavi-CT),  formerly known as
     Enhanced Systems,  Inc.  (together herein referred to as the Company).  All
     material intercompany transactions have been eliminated in consolidation.

     c.   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.

     d.   INVENTORIES

     Inventories  consist primarily of purchased products from manufacturers and
     are stated at the lower of cost (first-in, first-out method) or market. For
     these  items,  the Company  takes title to products  when they are finished
     goods. The tooling and manufacturing equipment included within property and
     equipment   below  is  owned  by  the  Company  and  used  by  third  party
     manufacturers.

     e.   IMPAIRMENT OF LONG-LIVED ASSETS

     Statement of Financial  Accounting Standards (SFAS) No. 121, ACCOUNTING FOR
     IMPAIRMENT OF LONG-LIVED  ASSETS AND FOR  LONG-LIVED  ASSETS TO BE DISPOSED
     OF,  requires that  long-lived  assets be reviewed for impairment  whenever
     events or circumstances indicate that the carrying amount of the assets may
     not  be  recoverable.  If  the  sum  of  the  expected  future  cash  flows
     (undiscounted  and without  interest  charges) from an asset to be held and
     used in  operations  is less  than  the  carrying  value of the  asset,  an

                                       F-7
<PAGE>
     impairment loss must be recognized in the amount of the difference  between
     the  carrying  value and the fair  value.  Assets to be disposed of must be
     valued at the lower of carrying value or fair value less costs to sell.

     f.   PROPERTY AND EQUIPMENT

     Property and equipment are recorded at cost. Depreciation is computed using
     the  straight-line  method.  Property and equipment and the related  useful
     lives  consist  of  the  following  as  of  December  31,  2000  and  1999,
     respectively.

                                         Useful Life
                Type of Asset              in Years       2000        1999
                -------------              --------    ---------    ---------

     Office and computer equipment            5        $   2,741    $   2,423
     Furniture and fixtures                   10             346          345
     Tooling and manufacturing equipment     5-8           1,693        1,636
     Property and equipment in progress       --              --           85
                                                       ---------    ---------
                                                           4,780        4,489
     Less - accumulated depreciation                      (2,747)      (2,133)
                                                       ---------    ---------
                                                       $   2,033    $   2,356
                                                       =========    =========

     Depreciation expense was $614,000,  $604,000,  and $582,000,  for the years
     ended December 31, 2000, 1999, and 1998, respectively.

     g.   GOODWILL

     Goodwill  represents  the cost in excess of the  estimated  fair  values of
     tangible  assets and liabilities  acquired.  Goodwill is being amortized on
     the straight-line method over 20 years.  Amortization expense was $134,000,
     $141,000,  and $151,000,  for the years ended December 31, 2000,  1999, and
     1998,  respectively.  Accumulated amortization was $903,000 and $769,000 at
     December 31, 2000 and 1999, respectively.

     h.   OTHER LONG TERM ASSETS

     Included in other  long-term  assets is a licensing  agreement  the Company
     entered into in 1999 to acquire the licensing and  manufacturing  rights to
     certain  product  lines for  $500,000.  This  agreement is being  amortized
     utilizing a useful life of three  years.  Amortization  expense  related to
     this asset was $167,000  and $42,000 for the years ended  December 31, 2000
     and 1999 respectively.

     The remaining  balance in other  long-term  assets is comprised of deferred
     tax assets and various  other assets which are being  amortized  over their
     remaining useful lives.

     i.   INCOME TAXES

     The Company  utilizes  the asset and  liability  method of  accounting  for
     income  taxes as set forth in SFAS No. 109,  ACCOUNTING  FOR INCOME  TAXES.
     Under the asset and liability method,  deferred taxes are provided based on
     the estimated future tax consequences  attributable to differences  between
     the financial reporting basis and the tax basis of the Company's assets and
     liabilities.

     j.   REVENUE RECOGNITION

     The Company recognizes  revenue when persuasive  evidence of an arrangement
     exists,  delivery  has  occurred,  the fee is  fixed  or  determinable  and
     collectibility is probable.  Generally,  all of these conditions are met at
     the time the Company  ships  products to customers.  Additionally,  revenue
     from custom  software is  recognized  upon  substantial  completion  of the
     Company's  obligation.  Revenue  from  extended  maintenance  contracts  is
     recognized  over the lives of the respective  contracts,  generally  twelve
     months.

                                       F-8
<PAGE>
     k.   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:

                                             2000        1999        1998
                                            -------     -------     -------
                                         (in thousands, except per share data)

     Net Income                             $   448     $ 1,240     $   983
                                            =======     =======     =======

     Weighted average common shares for
       basic earnings per share               4,273       4,340       4,342

     Effect of dilutive stock options(1)         32           4          --
                                            -------     -------     -------

     Weighted average common shares for
       diluted earnings per share             4,305       4,344       4,342
                                            =======     =======     =======

     Basic earnings per share               $  0.10     $  0.29     $  0.23
                                            =======     =======     =======

     Diluted earnings per share             $  0.10     $  0.29     $  0.23
                                            =======     =======     =======

     (1)  Dilutive securities are calculated using the treasury stock method and
          the  average  market  price  during the  period.  Options on  328,000,
          537,300 and  592,400  shares had an exercise  price  greater  than the
          average  market price during the years ended  December 31, 2000,  1999
          and 1998, respectively,  and therefore did not enter into the earnings
          per share calculation.

     l.   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.

     m.   SEGMENTS

     Effective  January 1, 1998, the Company  adopted SFAS No. 131,  DISCLOSURES
     ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,  which established
     revised   standards  for  the   reporting  of  financial  and   descriptive
     information about operating segments in financial statements.

     The Company has determined that it operates in one reportable segment,  the
     distribution of telecommunications equipment. The Company has three product
     categories - telephony, voice processing, and computer-telephony;  however,
     each of  these  does  not  meet the  segment  criteria  for  SFAS No.  131.
     Accordingly,  the Company has not presented separate financial  information
     for  each  product  category  as  the  Company's   consolidated   financial
     statements present its one reportable segment.

     n.   RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

     On December 3, 1999,  the  Securities  and Exchange  Commission  staff (the
     Staff) issued Staff  Accounting  Bulletin (SAB) 101,  REVENUE  RECOGNITION.
     Subsequent  to its  issuance  the  Staff  elected  to  defer  the  required
     implementation  date.  The  Company  has  adopted SAB 101 during the fourth

                                       F-9
<PAGE>
     quarter of 2000, effective January 1, 2000. The adoption of SAB 101 did not
     have a material  impact on the Company's  financial  position or results of
     operations.

     In June 1998, the Financial  Accounting  Standards Board (FASB) issued SFAS
     No. 133 (as amended by SFAS No. 137), ACCOUNTING FOR DERIVATIVE INSTRUMENTS
     AND  HEDGING  ACTIVITIES,  which  requires  that an  entity  recognize  all
     derivatives  as either assets or  liabilities in the statement of financial
     position and measure those  instruments at fair value. The issuance of SFAS
     No 137,  ACCOUNTING FOR  DERIVATIVE  INSTRUMENTS  AND HEDGING  ACTIVITIES -
     DEFERRAL OF THE  EFFECTIVE  DATE OF FASB  STATEMENT  NO.  133,  delayed the
     required effective date of SFAS No. 133 to all fiscal years beginning after
     June 15, 2000.  The Company was required to adopt SFAS No. 133, as amended,
     on January 1, 2001. The adoption of SFAS No. 133, as amended,  did not have
     an impact on the Company's results of operations or financial position.

     In July 2000, the Emerging  Issues Task Force (EITF) reached a consensus on
     EITF Issue  00-10,  related to the  accounting  for  shipping  and handling
     revenues and costs and their  classification in the income  statement.  The
     consensus  requires an entity to record all shipping and handling billed to
     customers as revenue.  It also states that the  classification  of shipping
     and handling costs is an accounting  policy decision subject to appropriate
     disclosure.  The Company has adopted EITF 00-10  concurrent with SAB 101 as
     discussed above. Additionally,  a reclassification of 1999 and 1998 amounts
     within the income  statement has been made to conform with the requirements
     of EITF 00-10. The Company has elected to account for shipping and handling
     costs as a component of costs of goods sold.

2.   REVOLVING CREDIT FACILITY

     As of December 31, 2000, the Company had a $15.0 million  revolving  credit
     facility  with a  financial  institution.  Available  borrowings  under the
     facility  are based on  inventory  and  accounts  receivable.  Interest  is
     payable  monthly at a variable  rate  based on  commercial  paper plus 2.5%
     (9.15% and 8.05% at December 31, 2000 and 1999,  respectively).  The credit
     facility expires in April 2003 and is secured by  substantially  all of the
     Company's assets. At December 31, 2000, $6.3 million was outstanding on the
     revolving  credit  facility with an additional  $4.2 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, 2000, the Company was
     in compliance with these financial covenants.

3.   COMMITMENTS AND CONTINGENCIES

     a.   LEGAL MATTERS

     On September 20, 1996, the Company and its subsidiary,  Vodavi-CT,  filed a
     lawsuit against Michael Mittel and Fereydoun  Taslimi,  former officers and
     directors of  Vodavi-CT.  The lawsuit  alleged,  among other  things,  that
     Messrs. Mittel and Taslimi violated federal and Arizona securities laws and
     engaged  in  fraudulent   activities  in  connection   with  the  Company's
     acquisition  of  Vodavi-CT  in  1995;   breached  certain  terms  of  their
     respective employment contracts with Vodavi-CT; converted certain corporate
     assets of Vodavi-CT;  breached  their  fiduciary  duties to Vodavi-CT;  and
     misappropriated  certain corporate  opportunities for their own benefit. On
     September  24, 1996,  Messrs.  Mittel and Taslimi  filed a lawsuit  against
     Vodavi-CT  and the Company.  The lawsuit  alleged that  Vodavi-CT  breached
     Messrs.   Mittel's  and  Taslimi's  respective   employment  agreements  by
     terminating their employment.

     On September 27, 1999,  the court  entered an order  granting the motion of
     the Company and Vodavi-CT for summary  judgment as to the claims of Messrs.
     Mittel and Taslimi for breach of their respective employment agreements. In
     addition,  the court  denied  Messrs.  Mittel's and  Taslimi's  motions for
     summary judgment as to the claims of the Company and Vodavi-CT with respect
     to   fraudulent    misrepresentation   and/or   nondisclosure,    negligent
     misrepresentation,  conversion  or  misappropriation  of corporate  assets,
     breach of  contract,  breach of  implied  covenant  of good  faith and fair
     dealing, breach of fiduciary duty, constructive fraud, and misappropriation

                                      F-10
<PAGE>
     of corporate  assets.  The court  granted the motion of Messrs.  Mittel and
     Taslimi for summary  judgment as to the claims of the Company and Vodavi-CT
     with respect to unjust enrichment and constructive trust.

     In January  2000,  the Company  entered  into a settlement  agreement  with
     Messrs.  Mittel and  Taslimi.  Under the  agreement,  the parties  executed
     mutual  releases and the Company  repurchased  210,000 shares of its common
     stock from Messrs. Mittel and Taslimi for an aggregate of $499,800.

     On February 16,  2000,  Messrs.  Mittel and Taslimi  filed a lawsuit in the
     United States District Court for the Northern District of Georgia,  Atlanta
     Division,  against the Company and Gregory K.  Roeper,  its  President  and
     Chief Executive  Officer (Case No.  1-00-CV-0410).  The plaintiffs  alleged
     that the Company and Mr. Roeper  violated  federal  securities  laws,  made
     false  representations  and omitted material facts, and breached  fiduciary
     duties to the plaintiffs in connection  with the repurchase of their shares
     of the  Company's  common  stock in the  settlement  described  above.  The
     plaintiffs were seeking an unspecified  amount of compensatory and punitive
     damages as well as their expenses of litigation. In March 2000, the Company
     and Mr. Roeper filed  responses  denying the  plaintiffs'  allegations  and
     asserting various  affirmative  defenses.  We also filed motions to dismiss
     the  complaint.  On March 13,  2001,  all of the  plaintiff's  claims  were
     dismissed by the court and we were given leave to amend our  complaint  and
     to assert claims against Mittel and Taslimi for breach of the agreement and
     for fraud (see Note 9).

     On November 9, 1998,  Paradygm  Communications,  Inc.  (Paradygm)  and R.C.
     Patel (Patel) filed a lawsuit against the Company's wholly owned subsidiary
     VCS in the Superior Court of Gwinnett County,  Georgia (Case No. 98A87446).
     The  complaint  alleges  that  VCS  (i)  breached  its  strategic  alliance
     agreement with Paradygm,  as well as its warranty of product  fitness under
     the  strategic  alliance  agreement;  (ii)  failed  to  provide  reasonable
     technical and sales training assistance to Paradygm's  employees to support
     Paradygm in its efforts to sell  products  under the  agreement;  and (iii)
     engaged   in   conduct   that   constitutes    intentional   or   negligent
     misrepresentation.   The   complaint   requests   compensatory,   punitive,
     incidental, and consequential damages, attorneys' fees, plus any additional
     relief.  VCS  answered the  compliant  denying the  foregoing  allegations,
     asserting  that  the  compliant  fails to state a claim  and,  for  various
     reasons,  the relief  sought by Paradygm and Patel is barred.  VCS also has
     filed a counterclaim  against Paradygm  alleging that Paradygm breached the
     agreement  because of its failure to meet its payment  obligations  to VCS.
     The counterclaim  requests  amounts due pursuant to the strategic  alliance
     agreement,  the costs of litigation,  and reasonable attorneys' fees. Since
     filing the initial complaint,  Paradygm has been permitted to add Vodavi-CT
     alleging that Vodavi-CT  participated in the alleged fraudulent  inducement
     of Mr. Patel.

     On December 21, 1998,  the case was removed from the Superior  Court to the
     United States District Court for the Northern District of Georgia - Atlanta
     Division.  On July 28,  1999,  Vodavi-CT  filed an answer and denied  those
     allegations  on the same basis as VCS'  original  answer.  The  parties are
     currently  conducting  discovery.  The Company is vigorously defending this
     lawsuit. As the Company cannot reasonably estimate the likelihood or amount
     of any  potential  ultimate  exposure  with  respect  to  this  matter,  no
     provision has been made in its consolidated financial statements.

     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.

                                      F-11
<PAGE>
     b.   OPERATING LEASES

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

     Years Ending
     December 31,                                             Operating Leases
     ------------                                             ----------------
                                                               (in thousands)

        2001                                                       $  1,206
        2002                                                            317
        2003                                                            179
        2004                                                            179
                                                                   --------
        Total Minimum lease commitments                               1,881
        Total minimum noncancellable sublease rentals                  (738)
                                                                   --------
                                                                   $  1,143
                                                                   ========

     Certain of the Company's  lease  agreements  provide for initial periods of
     free or discounted  rental payments,  therefore the rent expense,  prior to
     sub-lease  rentals,   is  recognized  on  a  straight-line  basis  and  was
     $1,112,000,  $1,112,000,  and  $1,107,000  for the years ended December 31,
     2000, 1999, and 1998,  respectively.  The difference  between rent expensed
     and paid is included in other long-term obligations.

     c.   ROYALTIES

     VCS acquires  certain  proprietary  components from a third party under the
     terms of a license  agreement which expires in 2014. Under the terms of the
     agreement,  VCS will pay a 5.3% royalty over the  manufactured  cost of all
     products utilizing the proprietary  components.  Total royalties related to
     this  agreement  were $41,000,  $161,000,  and $264,000 for the years ended
     December  31,  2000,  1999,  and  1998,   respectively.   The  Company  has
     discontinued  manufacturing  the line of  products  that use this  licensed
     technology.

     d.   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 $76,000,  $68,000, and $70,000, for the years
     ended December 31, 2000, 1999 and 1998, respectively.

4.   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
     deems attractive.  As of December 31, 2000, 318,700 shares (including those
     discussed in Note 3) had been repurchased at an aggregate cost of $759,000.

     b.   WARRANTS

     In  February  1999,  pursuant  to a  marketing  agreement  with its  former
     investor  relations firm, the Company issued warrants for 122,500 shares of
     the Company's  common stock at prices between  $4.00-$6.50  per share.  The
     Company valued these warrants at $26,000 utilizing the Black-Scholes option

                                      F-12
<PAGE>
     pricing  model,  and  amortized  this amount to expense  over the  12-month
     period of the initial  agreement.  The Company  terminated  their agreement
     with the firm in  November  2000 and the  warrants  will  expire six months
     after  that date in  accordance  with the terms of the  original  marketing
     agreement.

     c.   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 June 2000,
     shareholders  approved  an  increase  in the  number of shares  that may be
     issued under the plan from 850,000 to 1,100,000. 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.

     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 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 summarizes activity under the Plan for the years ended:

<TABLE>
<CAPTION>
                                 December 31, 2000         December 31, 1999         December 31, 1998
                               ---------------------     ---------------------     ---------------------
                                            Weighted                  Weighted                  Weighted
                                             Average                   Average                   Average
                                Number      Exercise      Number      Exercise      Number      Exercise
                              of Options      Price       Options       Price     of Options      Price
                               ---------     -------     ---------     -------     ---------     -------
<S>                            <C>           <C>         <C>           <C>         <C>           <C>
     Options outstanding at
       beginning of period       779,800     $  4.03       592,400     $  4.88       816,900     $  4.80
         Granted                 179,500        2.72       267,500        2.62       157,500        3.90
         Forfeited               (81,800)       4.30       (80,100)       4.95      (382,000)       4.42
         Exercised              (152,500)       4.00            --          --            --          --
                               ---------     -------     ---------     -------     ---------     -------
     Options outstanding at
       end of period             725,000     $  3.68       779,800     $  4.03       592,400     $  4.88
                               =========     =======     =========     =======     =========     =======
     Options available for
       grant                     375,000                    70,200                   257,600
                               =========                 =========                 =========
     Exercisable at end of
       period                    334,125     $  4.60       384,100     $  4.83       327,325     $  4.99
                               =========     =======     =========     =======     =========     =======
     Weighted average fair
       value of options
       granted                               $  1.80                   $  1.69                   $  2.43
                                             =======                   =======                   =======
</TABLE>

                                      F-13
<PAGE>
<TABLE>
<CAPTION>
                                          Options Outstanding                  Options Exercisable
                                ----------------------------------------    -------------------------
                                                 Weighted
                                                  Average
                                   Number        Remaining    Weighted         Number       Weighted
                                Outstanding at  Contractual    Average     Exercisable at    Average
                                 December 31,     Life (in     Exercise     December 31,    Exercise
     Range of Exercise Prices       2000           years)       Price           2000          Price
     ------------------------    -----------     ----------    --------      -----------    --------
<S>                                <C>              <C>          <C>          <C>             <C>
           $1.16 - $2.88           397,000          8.80         $2.57         70,000         $2.57
           $3.00 - $4.75           153,000          6.55         $4.12         99,125         $3.99
           $5.03 - $7.00           175,000          6.16         $5.79        165,000         $5.83
</TABLE>

     The Company has elected to account for its stock-based  compensation  plans
     under APB Opinion (APB) No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
     Accordingly,  no  compensation  cost  is  recognized  in  the  accompanying
     financial statements for stock-based employee awards.  Entities electing to
     account for options under APB No. 25 must make pro forma disclosures of net
     income  and  earnings  per  share,  as if the fair  value  based  method of
     accounting   defined  in  SFAS  No.   123,   ACCOUNTING   FOR   STOCK-BASED
     COMPENSATION,  had been applied.  The Company has  computed,  for pro forma
     disclosure purposes, the value of all options granted during 2000, 1999 and
     1998,  using the  Black-Scholes  option  pricing  model with the  following
     weighted average assumptions:

                                             Years Ended December 31,
                                        ----------------------------------
                                          2000         1999         1998
                                        --------     --------     --------
     Risk free interest rate              6.14%        5.23%        5.50%
     Expected dividends                   none         none         none
     Expected lives in years               4.9          4.8            5
     Expected volatility                 78.09%       71.62%       70.09%

     If the Company had accounted for its stock-based  compensation plan using a
     fair  value  based  method of  accounting,  the  Company's  net  income and
     earnings per share would have been reported as follows:

                                             Years Ended December 31,
                                        ----------------------------------
                                          2000         1999         1998
                                        --------     --------     --------
                                      (in thousands, except per share amounts)

     Net income:
       Pro forma                        $    479     $  1,035     $    806
                                        --------     --------     --------
     Earnings per share:
       Pro forma - basic                     .11          .24          .19
       Pro forma - diluted                   .11          .24          .19

     Pursuant to a  separation  agreement,  on February  20,  1998,  the Company
     issued options for 58,750 shares of the Company's common stock at $4.00 per
     share. The options were exercised in full in the first quarter of 2000.

5.   INCOME TAXES

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

                                          2000         1999         1998
                                        --------     --------     --------
                                                  (in thousands)

     Current                            $    463     $    808     $   (167)
     Deferred                               (154)         (90)        (163)
                                        --------     --------     --------
                                        $    309     $    718     $   (330)
                                        ========     ========     ========

                                      F-14
<PAGE>
     The Company  provides for deferred  income taxes  resulting  from temporary
     differences  between amounts  reported for financial  accounting and income
     tax  purposes.  The  components  of the net  deferred  income  tax asset at
     December 31, 2000 and 1999, were as follows:

                                                        2000        1999
                                                      --------     -------
                                                          (in thousands)
     Deferred tax assets:
       Receivable reserves                            $    268     $   205
       UNICAP adjustment                                    84          88
       Other accruals                                      472         413
       Research and development credit                     197         219
                                                      --------     -------
                                                         1,021         925
     Deferred tax liabilities:
       Depreciation and amortization differences          (286)       (344)
                                                      --------     -------

     Net deferred tax asset                           $    735     $   581
                                                      ========     =======

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

                                              2000       1999       1998
                                             ------     ------     ------
     Federal statutory tax rate                34.0%      34.0%      34.0%
     State taxes, net                           3.3        3.0        4.6
     Research and development tax credits     (13.9)     (10.0)     (93.4)
     Non-deductible expenses and other
       permanent differences                   17.4        9.7        4.3
                                             ------     ------     ------
                                               40.8%      36.7%     (50.5)%
                                             ======     ======     ======

     The  Company  has  estimated  that it  generated  $74,000 in  research  and
     development tax credits during 2000. A portion of the federal tax credit is
     not  available  for cash flow  purposes  until after  October 1, 2001.  The
     realization of these deferred tax assets will depend on future income.  The
     Company  believes  that  operating  income  will  more  likely  than not be
     sufficient to fully realize the net deferred tax asset at December 31, 2000
     of $735,000.

     The Company  has  estimated  that it  generated  $153,000  in research  and
     development  tax  credits  during  1999.  Upon  completion  of the  current
     research and  development tax credit  analysis,  the Company plans to amend
     its 1999 tax return to reflect the benefit of the research and  development
     credit.

6.   RELATED PARTIES TRANSACTIONS

     LG  Electronics  Inc.  (LGE),  the  Company's  principal  supplier,   owned
     approximately  20.4% of the Company's  outstanding common stock at December
     31, 2000. The Company purchased approximately $20.7 million, $18.4 million,
     and $16.3 million of key telephone  systems,  commercial grade  telephones,
     and voice mail products from LGE and an affiliate of LGE during 2000, 1999,
     and 1998, respectively. Management believes that the purchases from LGE and
     its  affiliate  approximate  terms  which  would be charged to  non-related
     parties.

7.   SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest  and income  taxes for the years ended  December 31,
     2000, 1999, and 1998 was as follows:

                                             2000       1999       1998
                                            -------    -------    -------
                                                    (in thousands)

     Interest                               $   705    $   676    $   791
     Income taxes                               368        677         58

     On June 24,  1999,  the  Company  sold its  repair  center  division's  net
     inventory,  property,  and other  assets with a net book value of $531,000.
     The buyer  paid  consideration  of  $100,000  cash,  a note  receivable  of
     $200,000  (paid on July 31, 1999) and a note  receivable  of $195,000  with

                                      F-15
<PAGE>
     monthly  payments of  approximately  $16,000 for twelve  months  commencing
     August 1, 1999.  This note was paid in full,  according to the terms, as of
     December 31,  2000.  The Company also  incurred  liabilities  of $50,000 in
     connection with this transaction,  which were paid in the fourth quarter of
     1999. The Company  recorded a loss of $86,000 in connection  with the sale.
     As part of this  transaction,  the Company entered into a seven-year repair
     and  refurbishment  agreement  with the buyer.  Under this  agreement,  the
     Company  appointed the buyer as the exclusive  authorized repair center for
     the Company's products.

     Supplemental  schedule  of non-cash  activities  for the sale of the repair
     center division is as follows:

                                                                   1999
                                                                 --------
                                                              (in thousands)

     Carrying amount of net assets sold                          $    531
     Notes receivable from buyer                                     (395)
     Loss on sale                                                     (86)
                                                                 --------
        Net cash proceeds from disposition
          of repair center division                              $     50
                                                                 ========

     The Company also issued warrants to an investor relations firm during 1999,
     which were valued utilizing the  Black-Scholes  option pricing model.  This
     calculation resulted in a value of $26,000, which was amortized over twelve
     months.

8.   SUMMARY OF QUARTERLY RESULTS (UNAUDITED):

                                 First    Second     Third     Fourth
                                Quarter   Quarter   Quarter   Quarter    Year
                                -------   -------   -------   -------   -------
                                     (thousands, except per share amounts)
     2000

      Revenue, net              $ 9,603   $13,158   $13,190   $11,754   $47,705

      Gross margin                3,593     4,771     4,895     4,244    17,503

      Income (loss) before
       income taxes                (603)      692       808      (140)      757

      Provision for (benefit
       from) income taxes          (222)      266       311       (46)      309

      Net income (loss)            (381)      426       497       (94)      448

      Diluted earnings (loss)
       per share                  (0.09)     0.10      0.12     (0.02)     0.10

                                      F-16
<PAGE>
                                 First    Second     Third     Fourth
                                Quarter   Quarter   Quarter   Quarter    Year
                                -------   -------   -------   -------   -------
                                     (thousands, except per share amounts)
     1999

        Revenue, net            $11,434   $12,758   $14,161   $11,458   $49,811

        Gross margin              3,838     4,449     5,028     4,571    17,886

        Income before income
         taxes                      388       365       974       231     1,958

        Provision for income
         taxes                      149       133       365        71       718

        Net income                  239       232       609       160     1,240

        Diluted earnings
          per share                0.06      0.05      0.14      0.04      0.29

9.   SUBSEQUENT EVENTS

     In March 2001,  all of Mittel's and Taslimi's  claims (as discussed in Note
     3) were dismissed by the court and the Company was given leave to amend its
     complaint and to assert claims against Mittel and Taslimi for breach of the
     agreement and for fraud.

                                      F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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)  included in this Form 10-K, and have issued our
report  thereon  dated  February  2, 2001  (except  with  respect  to the matter
discussed  in Note 9, as to which the date is March 13,  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-2 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  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.


                                      /s/ Arthur Andersen LLP

Phoenix, Arizona
February 2, 2001

                                       S-1
<PAGE>
                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

                                  IN THOUSANDS

                                                   2000       1999       1998
                                                  -------    -------    -------
Reserve for doubtful accounts and sales returns:
  Balance at beginning of year                    $ 1,239    $   674    $   249
  Provision                                           628        589        451
  Write-offs                                         (285)       (24)       (26)
                                                  -------    -------    -------
  Balance at end of year                          $ 1,582    $ 1,239    $   674
                                                  =======    =======    =======

Restructuring reserve:
  Balance at beginning of year                    $    --    $    94    $   702
  Provision                                            --         --         --
  Payments                                             --        (94)      (608)
                                                  -------    -------    -------
  Balance at end of year                          $    --    $    --    $    94
                                                  =======    =======    =======

                                       S-2