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, 2001       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)


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


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


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


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

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

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

As  of  March  22,  2002,  there  were  outstanding   4,349,788  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  (3,046,035 shares) based on the closing price of the common stock as
reported on the Nasdaq SmallCap  Market on March 22, 2002, was  $4,721,354.  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 2002 Annual Meeting of Stockholders  are incorporated by
reference into Part III of the Report.
<PAGE>
                             VODAVI TECHNOLOGY, INC.

                           ANNUAL REPORT ON FORM 10-K

                       FISCAL YEAR ENDED DECEMBER 31, 2001

                                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.........................................................  30
     ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA...................  30
     ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE..........................  30

PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........  30
     ITEM 11.  EXECUTIVE COMPENSATION.......................................  30
     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
               OWNERS AND MANAGEMENT........................................  30
     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............  30

PART IV

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
               FORM 8-K.....................................................  31

SIGNATURES     .............................................................  33

                 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 2002 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 Internet  messaging,  automated
attendant, and voice and fax mail. Our computer-telephony  products enable users
to integrate the  functionality  of their telephone  systems with their computer
systems.  We market our products  primarily  in the United  States as well as in
foreign countries through a distribution model consisting primarily of wholesale
distributors and direct dealers.

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

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

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

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

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

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

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

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

          --   internal research and development efforts.

     Our corporate  offices are located at 4717 East Hilton  Avenue,  Suite 400,
Phoenix,  Arizona,  and our telephone  number is (480)  443-6000.  Our 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.

INDUSTRY OVERVIEW

     Virtually every business 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  influenced  the
telecommunications industry, including the following:

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

     *    advances in telephone and computer hardware and software;

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

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

     *    regulatory changes.

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

                                       1
<PAGE>
     Accelerated   technological   advances   in  recent   years  have   enabled
telecommunications  system providers to develop sophisticated systems that offer
a wide  variety of  applications  in  addition  to  traditional  call  switching
functions.  Businesses  of all sizes now  demand  affordable  telecommunications
systems that provide the capacity for

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

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

Automatic  call  distribution,  IP telephony,  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 automated  attendant,  automatic
          call  distribution,  voice mail and fax mail,  and  unified  messaging
          systems; and

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

TELEPHONY PRODUCTS

     KEY TELEPHONE SYSTEMS

     Sales of key telephone systems represented approximately 74% of our revenue
during 2001, 71% during 2000, and 70% in 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" or "interconnects."

     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.

     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.

                                       2
<PAGE>
     COMMERCIAL GRADE TELEPHONES

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

     Our commercial grade telephones offer a myriad of features,  functions, and
designs  ranging  from  simple,   traditionally  styled  desk  and  wall-mounted
telephones  to  programmable  telephones  with  contemporary  styling.  Our more
advanced commercial grade telephones contain a central processing unit, built-in
memory, built-in data jacks, built-in speakerphones, built-in Caller ID, and the
capability to use custom calling features provided by local telephone companies.
Sales of commercial grade telephones represented approximately 7% of our revenue
during 2001, 8% during 2000, and 10% in 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 19% of our revenue during 2001,
21% during 2000, and 20% in 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 personal computer.

     ADVANCED MESSAGING PLATFORM

     Our  Microsoft(R)   Windows  NT-based  messaging  systems,   which  provide
virtually unlimited port capacities, combine voice mail functions with facsimile
messaging  capabilities  (known  as fax  mail) as well as the  ability  to share
messages with other voice messaging systems over the Internet. Fax mail provides
the ability to receive,  store,  retrieve, and forward facsimile messages in the
same  manner  that  voice  mail  handles  voice  messages.  Our fax mail  system
digitizes and stores facsimile messages and notifies the user that messages have
been received.  The user can retrieve and print the  facsimiles  from his or her
office or remote  locations  (such as a hotel  room) and can also  instruct  the
system  to  forward  facsimiles  to other  recipients.  "Fax-on-demand"  enables
callers to access information stored by a business,  such as sales and marketing
brochures, technical specifications, and pricing data, and request the system to
transmit the desired information to the caller's facsimile machine.

     Our Windows  NT-based system also uses Internet e-mail  protocols to enable
voice messages to be transported  over the Internet or other  electronic  fields
for  efficient,   low-cost  information  exchange  between  remote  systems.  In
addition,  our Windows NT-based Internet fax delivery systems connect the user's
telephone  and  computer  to enable the user to transmit  facsimile  messages or
documents to conventional facsimile machines via the

                                       3
<PAGE>
Internet.  These systems provide ease of use and avoid problems  associated with
e-mail  attachments,  mismatched  data  encryption  techniques,  or  private  or
switched network costs. Our Internet fax delivery systems provide spoken prompts
that guide the user through the transmission  process and also transmit delivery
confirmations  to the user's  mailbox.  As a result,  a business  with  multiple
offices  can  extend its voice  messaging  system so as to permit  employees  in
different locations to create,  receive,  answer, or forward voice and facsimile
messages via the Internet  more  quickly,  efficiently,  and  economically  than
traditional long-distance telephone calls.

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

     AUTOMATIC CALL DISTRIBUTION

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

COMPUTER-TELEPHONY INTEGRATION PRODUCTS

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

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

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

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

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

NEW PRODUCT DEVELOPMENT

     We engage in an ongoing  program to develop  enhancements  to our  existing
product lines and to develop new products that address the increasing demands of
business organizations for low-cost productivity enhancing  communication tools.
We believe that  continuous  development  of new  products and features  will be
necessary to enable us to continue to offer telephony systems,  voice processing
products,  computer-telephony  products,  and  related  business  communications
products  that  will be in  greatest  demand  and  that  will  provide  the best
opportunities  for our growth and  profitability  on an ongoing  basis.  We have
developed and  introduced  several new or enhanced  products and product  lines,
including new ACD reporting  packages,  additional  enhancements  to our Windows
NT-based  voice  messaging  systems and IVR  systems,  a new line of digital key
telephone systems, a new line of commercial grade telephones, and an IP gateway.
Recent  developments  include  our  Discovery  VoIP and  Express  VoIP  gateways
allowing IP connectivity to our current digital systems, our new XTS digital key
system  platform  expandable  from 12 to 384 ports,  a full featured  networking
package to connect up to 16 customer locations, and our new Pathfinder 9.0 voice
processing system provide enhanced client and serve applications.

                                       4
<PAGE>
     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 digital version of Pathfinder 9.0 allowing direct digital connection
          to our key Infinite and Trade key system products, which will transmit
          Caller  ID  information  to the  voice  processing  systems  providing
          potential for feature enhancements;

     *    an expanded version of our new XTS switching platform from 384 port to
          600 ports allowing this product to reach a larger customer base;

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

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

     *    a new "In-Skin"  voice mail platform  utilizing our  Pathfinder  voice
          processing application and offering direct connection into our XTS key
          service cabinet.

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

SALES, MARKETING, AND DISTRIBUTION

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

                                                YEAR ENDED DECEMBER 31,
                                            ------------------------------
     DISTRIBUTION CHANNEL                    2001        2000        1999
     --------------------                   ------      ------      ------
     Wholesale Distributors                     55%         65%         75%
     Direct Dealers                             41%         30%         19%
     IVR Customers                               4%          5%          6%
                                            ------      ------      ------
                                               100%        100%        100%
                                            ======      ======      ======

                                       5
<PAGE>
     The following diagram illustrates the current distribution channels for our
product lines.

                                     [LOGO]
                                     VODAVI

     TRIAD             STARPLUS            INFINITE           INTERNATIONAL
       |                   |                  |                     |
       |                   |                  |                     |
  DISTRIBUTOR         DISTRIBUTOR             |               INTERNATIONAL
       |                   |                  |                DISTRIBUTOR
       |                   |                  |                     |
       |                   |                  |                     |
   AUTHORIZED            DEALER           AUTHORIZED              DEALER
     DEALER                |                DEALER                  |
       |                   |                  |                     |
       |                   |                  |                     |
    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  and their  dealers  to sell our
products  more  effectively  and to provide the  interconnects  and  independent
telephone  companies with technical  assistance they may request with respect to
installation, maintenance, and customer support.

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

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

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

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

     *    security of receivables;

     *    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 27% of
our  revenue  during  2001,  32% in 2000,  and 41% in 1999.  Our second  largest
customer in each of the respective  years accounted for 9% of our revenue during
2001, 12% during 2000, and 11% in 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, Target, and other distributors that

                                       6
<PAGE>
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, Target, and other distributors.

     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
marketing,  sales,  and  product  support  services.  We had  approximately  150
authorized and active Triad dealers as of December 31, 2001.

     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  control over the  application and  installation of our products
and the ability to obtain  market  feedback  on product  pricing,  quality,  and
technology.  Sales to direct dealers, however,  generally involve greater credit
risks,  the  necessity  to provide  increased  direct  marketing  and  technical
support,  and  additional  costs  associated  with  developing  and training the
independent  sales staff of the various direct dealers to enable them to solicit
purchases of our products.

     As of December 31, 2001, we had  approximately 150 direct dealers that sell
our INFINITE  products.  We maintain a program to focus on selling to fewer, but
larger   and   better-established,   dealers.   We  secure   arrangements   with
large-volume, well-qualified dealers and have discontinued sales to dealers that
have not provided a sufficient  level of sales or support for our INFINITE line.
We strive to secure  dealers that maintain  large customer bases and possess the
resources  needed to provide  quality sales  presentations  and support to their
customers.

     IN-HOUSE SALES STAFF

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

     VODAVI DIRECT

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

     INTERNATIONAL SALES

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

                                       7
<PAGE>
infrastructures  are improved,  and as regulatory  differences between countries
are  eliminated.  All of our sales in foreign  countries are denominated in U.S.
dollars.

RESEARCH AND DEVELOPMENT; STRATEGIC ALLIANCES WITH LGE AND OTHER COMPANIES

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

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

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

MANUFACTURING

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

     We obtained a majority of our 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.  We purchased  $13.0 million,  $16.5 million,  and $11.6 million of
product from

                                       8
<PAGE>
LGE in 2001,  2000, and 1999,  which  represented 67%, 61%, and 41% of our total
purchases, respectively. LGE currently owns approximately 20% of our outstanding
common  stock.  See  Item  1,  "Special  Considerations  - We  rely  on LGE as a
strategic  partner" and "Special  Considerations - Certain conflicts of interest
may arise as a result of LGE's ownership interest in our company."

     We  obtained  all of our 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
products covered by the agreement from any other manufacturer during the term of
the agreement.  The agreement renews automatically for successive one-year terms
unless  either  party  provides  notice to the other of its intent to cancel the
agreement at least three months prior to the end of the  then-current  term.  We
make all  purchases  pursuant to the  agreement on a purchase  order  basis.  We
purchased $2.4 million,  $4.2 million, and $11.6 million of product from LGST in
2001,  2000,  and  1999,  which  represented  12%,  15.7%,  and 41% of our total
purchases, respectively. See Item 1, "Special Considerations - We rely on LGE as
a strategic partner" and "Special Considerations - Certain conflicts of interest
may arise as a result of LGE's ownership interest in our company."

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

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

QUALITY CONTROL

     We recognize that product quality and  reliability are critical  factors in
distinguishing  our  products  from  those of our  competitors.  We  design  our
products to include  components  meeting specified quality standards in order to
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  to  specified  standards  and to detect  substandard  products  before
shipment.  We have an inspection  program in which we examine varying numbers of
our  products as they arrive at our  warehouse  in Arizona,  depending  upon the
manufacturer and the type of product.

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 1999, we operated our own repair  center and performed  repairs on
certain of our products.  During 1999, we sold the repair center and  outsourced
the repair and  refurbishment of 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

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<PAGE>
overhead and other expenses associated with operating the repair facility.  This
arrangement  also  provides a sales  outlet for selected  refurbished  products.
During 2001, the repair and refurbishment agreement was cancelled when the buyer
filed for bankruptcy.  We entered into a new repair and refurbishment  agreement
with a third-party in 2001.

COMPETITION

     Markets for communications products are extremely competitive. We currently
compete principally on the basis of the technical  innovation and performance of
our products,  including their ease of installation and use, reliability,  cost,
and the  technical  support  both  before  and  after  sales to end  users.  Our
competitors  for the sale of telephone  systems and  telephones  include  Avaya,
Inc., 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. Competitors in the
market for IP telephony  systems include Cisco Systems,  Inc.,  Artisoft,  Inc.,
3Com Corporation, and AltiGen Communications, Inc., in addition to other PBX and
key system manufacturers that offer IP enabled systems.

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

PATENTS, TRADEMARKS, AND LICENSES

     As of December  31,  2001,  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.

     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

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<PAGE>
infringement of patents and other  intellectual  property  rights of others.  To
date,  we have been able to  successfully  defend  these  claims or to negotiate
settlements to these claims on terms we believe to be favorable.  In the future,
however,  the defense of such claims, fees paid in settlement of such claims, or
costs  associated  with  licensing  rights to use the  intellectual  property of
others or to develop  alternative  technology may have a material adverse impact
on our operations.

GOVERNMENT REGULATION

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

EMPLOYEES

     As of March 22, 2002, we employed a total of 113 persons,  all of which are
full-time  employees  at our  facilities  in  Phoenix,  Arizona,  and  Norcross,
Georgia.  This reflects a reduction from 123 full-time  employees as of February
28, 2001.  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  24  persons  in  engineering  and  product  development;  55 in sales,
marketing,  and technical support;  16 in warehouse and distribution  functions;
and  18 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.

EXECUTIVE OFFICERS

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

         NAME            AGE                      POSITION
         ----            ---                      --------
William J. Hinz.......    56    Chairman of the Board
Gregory K. Roeper.....    41    President, Chief Executive Officer, and Director
David A. Husband......    33    Vice President-Finance, Chief Financial Officer,
                                  Secretary, and Treasurer
Stephen L. Borcich....    55    Vice President - Sales and Marketing
Kent R. Burgess.......    55    Vice President - Product Development
Marc F. Niknam........    43    Vice President - Engineering, Manufacturing, and
                                  Technical Support

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

     GREGORY K. ROEPER has served as our  President  since  December 1998 and as
Chief  Executive  Officer and a director of our company since December 1999. Mr.
Roeper served as our Chief Operating Officer from June 1998 until December 1999.
Between  November  1994  and June  1998,  Mr.  Roeper  held a  variety  of other
executive  positions  with  our  company,  including  Chief  Financial  Officer;
Executive Vice President - Finance, Administration,  and Operations;  Secretary;
and  Treasurer.  From 1982 until  November  1994,  Mr.  Roeper was employed with
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>
     DAVID  A.  HUSBAND  has  served  as our Vice  President  -  Finance,  Chief
Financial Officer,  Secretary,  and Treasurer since March 2001. Prior to joining
our company,  Mr. Husband served in various  capacities with Action  Performance
Companies,   Inc.,  a  publicly   held  company   engaged  in  the   motorsports
merchandising  business,  from May 1998 until  December  2000,  most recently as
Executive Vice President and Chief Operating  Officer.  Mr. Husband was employed
as an accountant with Arthur  Andersen LLP from July 1992 to May 1998,  where he
was primarily  engaged in auditing  publicly held  companies.  Mr.  Husband is a
Certified Public Accountant in the state of Arizona.

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

     KENT R.  BURGESS  has served as our Vice  President  - Product  Development
since April 2000. Mr. Burgess was a member of the senior  management team, which
launched the predecessor to our company in 1983. During this period, Mr. Burgess
served as our Executive  Vice  President  from March 1984 until  February  1986,
Senior Vice President - Business Operations from September 1987 until July 1996,
and  President of Vodavi - CT from July 1996 until  October  1997.  From October
1997 until April 2000, Mr.  Burgess served as 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.

     MARC  F.  NIKNAM  has  served  as  our  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 Director of Engineering  from April 2000 until November 2000.  From July 1997
until March 2000,  he served as Executive  Director of  Manufacturing,  Quality,
Hardware  Engineering,  and Repair. From January 1995 until June 1997, he served
as Manufacturing  Manager.  From 1989 until 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.

                             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.

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

     We currently market our products through a distribution  network consisting
primarily of large wholesale  distributors  and telephone sales and installation
companies known as "direct dealers." Distributors generally maintain inventories
in amounts that they consider sufficient to fill anticipated orders 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,   including  orders  related  to  support  and
maintenance.  As a result, distributors and direct dealers may cancel orders and
delay or change  volume  levels on short  notice to us.  Because the sale of key
telephone  systems,  voice processing  products,  and related products typically
involves a long sales cycle,  we may not be able to accurately  forecast our own
inventory levels.  Our reliance on third-party  distributors and dealers to sell
our products could further  exaggerate any inventory  shortages or excesses that
we might experience, particularly if our distributors or dealers are not able to
give us adequate notice of anticipated changes in demand for our products.

     Additionally, we offer our distributors price protection on their inventory
of our products. If we reduce the list price of our products, we will compensate
our distributors  for the respective  products that remain in their inventory on
the date the price adjustment  becomes  effective.  If we do not have sufficient
cash resources to

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<PAGE>
compensate  distributors  on  terms  satisfactory  to  them  or  us,  our  price
protection  obligations  may  prevent us from  reacting  quickly to  competitive
market conditions.

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

     Graybar  accounted for 27% of our sales during 2001,  32% during 2000,  and
41% during 1999. Accounts receivable from Graybar comprised approximately 32% of
total accounts  receivable at December 31, 2001. Our second largest  customer in
each of the  respective  years  accounted  for 9% of our sales during 2001,  12%
during 2000, and 11% during 1999.  Accounts  receivable  from our second largest
customer  comprised  approximately 16% of total accounts  receivable at December
31, 2001.

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,  the size and timing of sales of our new voice processing,
IP systems, and computer-telephony  products may vary from quarter to quarter to
a greater extent in

                                       13
<PAGE>
future periods.  The expanding  importance of these new products could result in
significant variations in our overall operating results on a quarterly basis.

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

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

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  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;

     *    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.

                                       14
<PAGE>
     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
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 2001, we purchased $15.4 million
of  product  from LGE and  LGST,  constituting  approximately  79% of our  total
purchases in 2001.  During 2000, we purchased  $20.6 million of product from LGE
and LGST,  constituting  approximately  77% of our total  purchases in 2000.  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.

                                       15
<PAGE>
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:

     *    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; and

     *    metals.

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

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

                                       16
<PAGE>
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.

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.

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  SMALLCAP  MARKET,  WOULD  LIKELY MAKE OUR COMMON
STOCK AN ILLIQUID INVESTMENT.

     The Nasdaq Stock  Market has certain  rules that must be met in order for a
listed  company to maintain its listing on Nasdaq.  During fiscal 2001, we moved
the listing of our common  stock from the Nasdaq  National  Market to the Nasdaq
SmallCap Market. We may be required to delist from the Nasdaq SmallCap Market if
we fail to

                                       17
<PAGE>
comply with those rules. Should that occur, market makers may choose to create a
market for our common stock on the over-the-counter bulletin board. If that does
not occur,  our stock  could be traded in the "pink  sheets"  maintained  by the
National  Quotation  Bureau.  As  a  result,  investors  would  likely  find  it
significantly more difficult to dispose of, or to obtain accurate  quotations as
to the value of, our shares.

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

     As of March 22, 2002, we had outstanding  options to acquire 840,500 shares
of our common stock at a weighted  average exercise price of $2.93 per share. An
additional 107,000 shares remain available for grant under our 1994 Stock Option
Plan.  During the terms of these  options,  the  holders  thereof  will have the
opportunity  to profit from an increase in the market price of the common stock.
The existence of these  options may  adversely  affect the terms on which we can
obtain additional financing, and the holders of these options can be expected to
exercise  such  options at a time when we, in all  likelihood,  would be able to
obtain  additional  capital by offering shares of our common stock on terms more
favorable to us than those provided by the exercise of these options.

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

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

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

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

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

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

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

          --   a public offering of our capital stock;
          --   the merger  with or the  acquisition  of another  business or the
               acquisition  of a  significant  amount of the  assets of  another
               business;
          --   the sale of a significant amount of our assets;
          --   our entering into contracts with our stockholders or directors;
          --   our  assumption or acquisition of debt in excess of $1.0 million;
               and
          --   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 sublease,  for a ten year term expiring in December 2011,  approximately
55,000 square feet of space in Phoenix,  Arizona,  where we maintain engineering
and design laboratories,  a sound engineering  laboratory,  software development
facilities,  testing  laboratories,  product  development  facilities,  customer
service  support  facilities,  an  employee  training  facility,  warehouse  and
distribution  areas,  sales  and  marketing  offices,   and  administrative  and
executive offices.

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

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

ITEM 3. LEGAL PROCEEDINGS

     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,

                                       19
<PAGE>
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.

     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.

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

     We held our 2001 Annual  Meeting of  Stockholders  on October 15, 2001. The
following  nominees  were  elected to our Board of  Directors to serve until the
next annual meeting of stockholders,  until their successors are elected or have
been qualified, or until their earlier resignation or removal:

     Nominee                      Votes in Favor                 Withheld
     -------                      --------------                 --------
     William J. Hinz                3,715,150                   105,423
     Gregory K. Roeper              3,715,150                   105,423
     Stephen A McConnell            3,715,150                   105,423
     Emmett E. Mitchell             3,715,150                   105,423
     Do-Hyun Kim                    3,712,225                   108,348

     Mr.  Gilbert H. Engels,  a director of our company since January 1996,  did
not stand for  re-election,  and his term as a  director  expired  at the annual
meeting.

                                       20
<PAGE>
                                     PART II

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

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

                                                            HIGH       LOW
                                                            -----     -----
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......................................    $2.50     $1.03
     Second quarter.....................................     1.19      0.63
     Third quarter......................................     1.40      0.76
     Fourth quarter.....................................     1.45      0.76

2002:
     First quarter (through March 22, 2002).............    $1.65     $1.24

     On March 22,  2002,  the closing  sales price of our common stock was $1.55
per share.  As of March 22, 2002,  there were 37 holders of record of our common
stock.

DIVIDEND POLICY

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

                                       21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated  financial data presented below as of and for the
year  ended  December  31,  2001 are  derived  from our  consolidated  financial
statements, which have been audited by Deloitte & Touche LLP, independent public
accounts. The selected consolidated financial data presented below as of and for
each of the years in the  four-year  period ended  December 31, 2000 are derived
from our consolidated  financial  statements,  which have been audited by Arthur
Andersen  LLP,  independent  public  accountants.   The  selected   consolidated
financial  information provided below should be read in conjunction with Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and the Consolidated Financial Statements of our company and related
notes thereto. No dividends were paid during the periods presented.

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                 ------------------------------------------------------------
                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:      2001         2000         1999         1998         1997
                                 --------     --------     --------     --------     --------
<S>                              <C>          <C>          <C>          <C>          <C>
Revenue ....................     $ 34,153(1)  $ 47,705     $ 49,811     $ 48,322     $ 47,675
Gross margin ...............       11,170(2)    17,503       17,886       15,802       15,667
Operating expenses .........       13,183(3)    16,041       15,252       14,358       14,647(4)
Operating income (loss) ....       (2,013)       1,462        2,634        1,444        1,020
Interest expense ...........          406          705          676          791          663
                                 --------     --------     --------     --------     --------
Income (loss) before income
  taxes ....................       (2,419)         757        1,958          653          357
Provision for (benefit from)
  income taxes .............         (863)         309          718         (330)         142
                                 --------     --------     --------     --------     --------
Net income (loss) ..........     $ (1,556)    $    448     $  1,240     $    983     $    215
                                 ========     ========     ========     ========     ========
Net income (loss) per share,
  diluted ..................     $  (0.37)    $   0.10     $   0.29     $   0.23     $   0.05
                                 ========     ========     ========     ========     ========
Weighted average shares
  outstanding, diluted .....        4,235        4,305        4,344        4,342        4,342
                                 ========     ========     ========     ========     ========

                                                      AS OF DECEMBER 31,
                                 ------------------------------------------------------------
                                                        (IN THOUSANDS)
BALANCE SHEET DATA:                2001         2000         1999         1998         1997
                                 --------     --------     --------     --------     --------
Assets:
  Current assets ...........     $ 14,080     $ 19,938     $ 19,645     $ 16,766     $ 19,507
  Property and equipment, net       1,581        2,033        2,356        2,663        2,616
  Goodwill, net ............        1,638        1,772        1,906        2,244        2,395
  Other, net ...............          815        1,152        1,307        1,169        1,146
                                 --------     --------     --------     --------     --------
                                 $ 18,114     $ 24,895     $ 25,214     $ 22,842     $ 25,664
                                 ========     ========     ========     ========     ========
Liabilities:
  Current liabilities ......     $  7,045     $ 12,176     $ 13,208     $ 12,044     $ 15,743
  Other long-term obligations          41          135          186          199          306
                                 --------     --------     --------     --------     --------
Total liabilities ..........        7,086       12,311       13,394       12,243       16,049
Stockholders' equity .......       11,028       12,584       11,820       10,599        9,615
                                 --------     --------     --------     --------     --------
                                 $ 18,114     $ 24,895     $ 25,214     $ 22,842     $ 25,664
                                 ========     ========     ========     ========     ========
</TABLE>

----------
(1)  Includes special charges of $432 related to price protection obligations.
(2)  Cost of goods sold  includes  special  charges of $568 related to inventory
     impairments.
(3)  Includes special charges of $761 related to severance, receivable reserves,
     and exit costs.
(4)  Includes restructuring charges and asset impairments of $819.

                                       22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

CUSTOMER INCENTIVES

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

BAD DEBTS

     We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments.  If the financial
condition of our customers  were to  deteriorate,  resulting in an impairment of
their  ability  to  make  payments,   additional  allowances  may  be  required.
Additionally,  we have a significant  concentration of accounts  receivable with
our largest distributor, Graybar Electric Company, Inc. As of December 31, 2001,
Graybar  accounted  for  32% of our  total  accounts  receivable.  If  Graybar's
financial  condition were to  deteriorate,  resulting in their inability to make
payments  to us,  it could  have a  material  adverse  impact  on our  financial
condition and results of operations.

SALES RETURNS

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

EXCESS AND OBSOLETE INVENTORY

     We  record  our  inventory  at the  lower  of cost  or  market  value.  Our
assessment of market value is determined by, among other things,  historical and
forecasted sales activity, the condition of specific inventory

                                       23
<PAGE>
items, and competitive pricing considerations. When the assessed market value is
less than the historical cost,  provision is made in the financial statements to
write-down  the  carrying  amount of the  respective  inventory  items to market
value.  If actual results are less favorable than our original  assumptions  for
determining market value, additional inventory write-downs may be required.

     The  above  listing  is not  intended  to be a  comprehensive  list  of our
accounting policies. See our audited consolidated financial statements and notes
thereto,  which  begin on page F-1 of this  Annual  Report on Form  10-K,  which
contain accounting policies and other disclosures required by generally accepted
accounting principles in the United States.

RESULTS OF OPERATIONS

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

                                                   2001       2000       1999
                                                  ------     ------     ------
Revenue......................................      100.0%     100.0%     100.0%
Cost of goods sold...........................       67.3       63.3       64.0
                                                  ------     ------     ------
   Gross margin..............................       32.7       36.7       36.0

Operating expenses:
Engineering and product development..........        5.9        3.6        3.2
Selling, general, and administrative.........       32.7       30.0       27.5
                                                  ------     ------     ------
                                                    38.6       33.6       30.7

Operating income (loss)......................       (5.9)       3.1        5.3
Interest expense, net........................        1.2        1.5        1.4
                                                  ------     ------     ------
Pretax income (loss).........................       (7.1)       1.6        3.9
Income tax expense (benefit).................       (2.5)       0.7        1.4
                                                  ------     ------     ------
Net income (loss)............................       (4.6)%      0.9%       2.5%
                                                  ======     ======     ======

2001 SPECIAL CHARGES

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

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

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

                                       24
<PAGE>
                                      Amount             Inclusion in
                                      ($000)        Statement of Operations
                                      ------        -----------------------
     Non-cash Charges:
       Inventory impairments          $  568   Cost of goods sold
       Allowance for bad debts           328   Selling, general & administrative
                                               expenses
       Distributor price protection      151   Revenue
       Property and equipment             15   Selling, general & administrative
                                               expenses
                                      ------
                                       1,062
                                      ------
     Cash Charges:
       Distributor price protection      281   Revenue
       Severance-related costs           168   Selling, general & administrative
                                               expenses
       Other shut-down costs             250   Selling, general & administrative
                                               expenses
                                      ------
                                         699
                                      ------
                                      $1,761
                                      ======

     The  following  table sets forth the activity of accrued cash charges as of
December 31, 2001: (IN THOUSANDS)

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

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

REVENUE

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

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

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

                                       25
<PAGE>
economic and market conditions for small- to mid-sized  businesses in the United
States and by our decision to reduce prices on certain voice mail products.

GROSS MARGIN

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

ENGINEERING AND PRODUCT DEVELOPMENT

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

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

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

INTEREST EXPENSE

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

INCOME TAXES

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

FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
1999

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

                                       26
<PAGE>
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 our repair center in the second quarter of 1999.  Repair revenue was
approximately $327,000 in 2000 as compared to $772,000 in 1999.

GROSS MARGIN

     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.

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.

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.

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.

INCOME TAXES

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

LIQUIDITY AND CAPITAL RESOURCES

     Our net working  capital  position  was $7.0  million at December  31, 2001
compared  with $7.8  million at  December  31,  2000.  We had a cash  balance of
$340,000 at December 31, 2001.  Changes in working  capital that  increased  our
cash  position  during 2001 included  reductions in accounts  receivable of $4.0
million and  inventory  of $1.4  million.  Factors that reduced our cash balance
during 2001 included a pre-tax operating loss of $2.4 million,  cash payments of
$3.7  million on our  revolving  credit  facility,  purchases  of  property  and
equipment  of  $172,000,  and  other  changes  in  working  capital,   including
reductions in accounts payable and accrued liabilities of $1.5 million.

                                       27
<PAGE>
     As a result of our net operating loss during 2001, and our ability to carry
back those losses to prior years in which we paid federal income taxes,  we have
recorded  an income tax  receivable  as of December  31,  2001 of  approximately
$839,000, which we expect to receive during the second quarter of 2002.

     Our days sales  outstanding,  calculated  on quarterly  sales,  improved to
approximately  71 days  as of  December  31,  2001  compared  with 90 days as of
December  31,  2000.  The  reduction  in days sales  outstanding  is a result of
improved credit  management as well as a more even  distribution of sales during
the fourth  quarter of 2001 compared with the fourth  quarter of 2000.  Our days
sales outstanding,  and our liquidity, is significantly influenced by the timing
of payments received from our largest distributors. Our two largest distributors
comprised 48% of our total  accounts  receivable as of December 31, 2001 and 50%
of our total accounts receivable as of December 31, 2000.

     Our inventory  turnover,  measured in terms of days sales  outstanding on a
quarterly basis, remained relatively constant at 84 days as of December 31, 2001
compared with 80 days as of December 31, 2000.

     Trade payables and accrued  liabilities,  including payables to third-party
and related-party manufacturers,  were approximately $4.5 million as of December
31, 2001  compared  with $5.9 million as of December 31, 2000.  The reduction in
trade payables and accrued liabilities between periods reflects the general slow
down in our  business  and not a change in payment  terms from our  vendors.  We
generally pay trade payables within 45 days from the invoice date.

     We maintain a $15.0 million credit facility with General  Electric  Capital
Corporation that expires during April 2003. The line of credit bears interest at
2.5% over the 30-day  commercial  paper rate,  or 4.52% as of December 31, 2001.
Advances  under the line of credit are based upon eligible  accounts  receivable
and  inventory of our wholly owned  subsidiary  Vodavi  Communications  Systems,
Inc., and are secured by substantially all of our assets.  The revolving line of
credit contains  covenants that are customary for similar credit  facilities and
also prohibit our operating  subsidiaries  from paying  dividends to our company
without  the  consent  of GE  Capital.  As of  December  31,  2001,  we  were in
compliance with all of the covenants.

     We had total  borrowing  capacity of  approximately  $8.9 million under the
credit  facility at December 31, 2001, of which $2.6 million was outstanding and
$6.3 million was unused and available.

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

     We  have  no  special  purpose  entities  or off  balance  sheet  financing
arrangements,  commitments, or guarantees other than certain long-term operating
lease agreements for our office and warehouse facilities and short-term purchase
commitments to our third-party suppliers.

                                       28
<PAGE>
     The  following  table sets forth all known  commitments  as of December 31,
2001 and the year in which those  commitments  become due or are  expected to be
settled (IN THOUSANDS):

                                                         Accounts
                                                         Payable &
               Operating     Credit       Purchase        Accrued
   Year         Leases      Facility     Commitments    Liabilities      Total
----------     --------     --------     -----------    -----------     --------
2002           $  1,102     $     --       $  3,715       $  4,452      $  9,269
2003                965        2,593             --             --         3,558
2004                965           --             --             --           965
2005                785           --             --             --           785
2006                785           --             --             --           785
Thereafter        3,927           --             --             --         3,927
               --------     --------       --------       --------      --------
Total          $  8,529     $  2,593       $  3,715       $  4,452      $ 19,289
               ========     ========       ========       ========      ========

     We are a defendant in various lawsuits. See Item 3, "Legal Proceedings." We
have not made any material  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.

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

INTERNATIONAL MANUFACTURING SOURCES

     We  currently  obtain  most of our  products  under  various  manufacturing
arrangements  with  third-party  manufacturers  in Asia,  including LGE who owns
approximately  20.4% of our  outstanding  common  stock.  As of the date of this
report, we do not believe that the current economic or political  environment in
Asia will have any adverse impact on our operations.

IMPACT OF RECENTLY ISSUED STANDARDS

     In 2001,  the FASB  issued  Statement  No.  141,  ACCOUNTING  FOR  BUSINESS
COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These
statements modify accounting for business  combinations  after June 30, 2001 and
will affect our  treatment of goodwill  and other  intangible  assets  effective
January 1, 2002.  The statements  require that goodwill  existing at the date of
adoption  be reviewed  for  possible  impairment  and that  impairment  tests be
performed at least annually,  with impaired  assets  written-down to fair value.
Additionally,  existing  goodwill  and  intangible  assets must be assessed  and
classified  consistent with the  statements'  criteria.  Intangible  assets with
estimated  useful  lives will  continue  to be  amortized  over  those  periods.
Amortization  of goodwill and intangible  assets with  indeterminate  lives will
cease.  Goodwill amortization expense was $134,000,  $134,000,  and $141,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.

     We have  determined  that upon  adoption of these  statements on January 1,
2002, the entire $1.6 million carrying amount of the goodwill was impaired. This
determination  was based principally on the total market value of our issued and
outstanding  common stock on January 1, 2002 of $5.5 million  compared  with our
book value on December 31, 2001 of $11.0  million.  In accordance  with SFAS No.
142, early adoption is not permitted. Therefore, the goodwill impairment will be
recognized  in the first  quarter of 2002 as a change in  accounting  principle.
Except as disclosed  above,  the adoption of these statements is not expected to
have a material impact on our financial condition or results from operations.

                                       29
<PAGE>
     In October 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial  accounting and
reporting for the  impairment or disposal of long-lived  assets.  This statement
also extends the reporting  requirements to report  separately,  as discontinued
operations,  components  of an entity that have  either been  disposed of or are
classified as held-for-sale. We adopted the provisions of SFAS No. 144 effective
January 1, 2002.  The adoption of this  statement did not have any impact on our
financial condition or results from operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of December 31, 2001, 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 2.50% over the 30 day commercial  paper
rate, a total of 4.52% at December 31, 2001.  The  principal of loans under this
line of credit is due in April 2003.  At December 31, 2001,  we had  outstanding
borrowings on the line of credit of approximately $2.6 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.

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

     Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information  required by this Item relating to directors of our company
is  incorporated  herein by reference to the  definitive  Proxy  Statement to be
filed pursuant to Regulation 14A of the Securities  Exchange Act of 1934 for our
2002  Annual  Meeting of  Stockholders.  The  information  required by this Item
relating  to our  executive  officers  is  included  in Item 1, "Our  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 2002 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 2002 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 2002 Annual Meeting of Stockholders.

                                       30
<PAGE>
                                     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-3 of this report.

(b)  REPORTS ON FORM 8-K.

     None.

(c)  EXHIBITS

EXHIBIT
NUMBER                               EXHIBIT
------                               -------
3.1       Amended Certificate of Incorporation of the Registrant (l)
3.2       Amended and Restated Bylaws of the Registrant (l)
4.1       Form of  Certificate  representing  shares of Common Stock,  par value
          $.001 per share (1)
10.9      Vodavi Technology,  Inc. Second Amended and Restated 1994 Stock Option
          Plan (4)
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)
10.35     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)

                                       31
<PAGE>
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)
10.44     Waiver and Amendment of Credit  Agreement dated May 11, 2001,  between
          Vodavi  Communications  Systems,  Inc.  and General  Electric  Capital
          Corporation (9)
10.45     Sublease Agreement dated August 8, 2001, between Vodavi Communications
          Systems, Inc. and SpeedFam-IPEC, Inc. (10)
10.46     Employment  Agreement,  effective October 1, 2001,  between Gregory K.
          Roeper and Vodavi Technology, Inc.
21        List of Subsidiaries
23.1      Consent of Deloitte and Touche LLP
23.2      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.
(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.
(9)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended March 31, 2001, as filed on May 15, 2001.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 2001, as filed on November 13, 2001.

                                       32
<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 27, 2002                   By: /s/ Gregory K. Roeper
                                           -------------------------------------
                                           Gregory K. Roeper
                                           President and Chief Executive Officer

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

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

/s/ William J. Hinz              Chairman of the Board            March 27, 2002
----------------------------
William J. Hinz


/s/ Gregory K. Roeper            President, Chief Executive       March 27, 2002
----------------------------     Officer, and Director
Gregory K. Roeper                (Principal Executive Officer)


/s/ David A. Husband             Vice President - Finance,        March 27, 2002
----------------------------     Chief Financial Officer,
David A. Husband                 and Secretary (Principal
                                 Financial and Accounting
                                 Officer)

/s/ Jack A. Henry                Director                         March 27, 2002
----------------------------
Jack A. Henry


/s/ Kyeong-Woo Lee               Director                         March 27, 2002
----------------------------
Kyeong-Woo Lee


/s/ Stephen A McConnell          Director                         March 27, 2002
----------------------------
Stephen A McConnell


/s/ Emmett E. Mitchell           Director                         March 27, 2002
----------------------------
Emmett E. Mitchell


/s/ Frederick M. Pakis           Director                         March 27, 2002
----------------------------
Frederick M. Pakis

                                       33
<PAGE>
                    VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

                                                                            Page
                                                                            ----

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

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

Consolidated Balance Sheets as of December 31, 2001 and 2000.................F-4

Consolidated Statements of Operations for the Years Ended
  December 31, 2001, 2000, and 1999..........................................F-5

Consolidated Statements of Changes in Stockholders' Equity for
  the Years Ended December 31, 2001, 2000, and 1999..........................F-6

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2001, 2000, and 1999..........................................F-7

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

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

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

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

                                       F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

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

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Vodavi
Technology,  Inc. and  subsidiaries  as of December  31,  2001,  and the related
consolidated statements of operations,  changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audit.

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

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


DELOITTE & TOUCHE LLP
Phoenix, Arizona
  February 8, 2002
  (March 4, 2002 as to Note 10)

                                       F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Vodavi Technology, Inc. and Subsidiaries:

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

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

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


ARTHUR ANDERSEN LLP
Phoenix, Arizona
  February 2, 2001

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

Consolidated Balance Sheets
IN THOUSANDS EXCEPT SHARE AMOUNTS

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                          --------------------
                                                                            2001        2000
                                                                          --------    --------
<S>                                                                       <C>         <C>
                                     Assets

Current Assets
  Cash                                                                    $    340    $    564
  Accounts receivable, net of reserves for doubtful accounts and sales
    returns of $730 in 2001 and $1,582 in 2000                               6,996      11,797
  Inventories                                                                5,331       6,707
  Income tax receivable                                                        839          --
  Prepared expenses and other                                                  574         870
                                                                          --------    --------

                 Total current assets                                       14,080      19,938

Property and Equipment, net                                                  1,581       2,033

Goodwill, net                                                                1,638       1,772

Deferred Income Taxes                                                          622         735

Other-Long-Term Assets, net                                                    193         417
                                                                          --------    --------
                                                                          $ 18,114    $ 24,895
                                                                          ========    ========

                      Liabilities and Stockholders' Equity

Current Liabilities:
  Accounts payable                                                        $  1,454    $  1,374
  Accrued liabilities                                                        1,437       1,302
  Accrued rebates                                                              577         859
  Accounts payable to stockholder                                              984       2,382
  Revolving credit facility borrowings                                       2,593       6,259
                                                                          --------    --------

                 Total current liabilities                                   7,045      12,176
                                                                          --------    --------

Other Long-Term Obligations                                                     41         135
                                                                          --------    --------

Commitments and Contingencies (Note 4)

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 shares issued at December 31, 2001 and 2000                        5           5
  Additional paid-in capital                                                13,363      13,363
  Accumulated deficit                                                       (1,581)        (25)
  Treasury stock, at cost; 318,700 shares at December 31, 2001 and 2000       (759)       (759)
                                                                          --------    --------
                                                                            11,028      12,584
                                                                          --------    --------
                                                                          $ 18,114    $ 24,895
                                                                          ========    ========
</TABLE>

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

                                       F-4
<PAGE>


VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
IN THOUSANDS EXCEPT PER SHARE AMOUNTS

                                                    Years Ended December 31,
                                                 -------------------------------
                                                   2001        2000       1999
                                                 --------    --------   --------
Revenue, Net                                     $ 34,153    $ 47,705   $ 49,811

Cost of Goods Sold                                 22,983      30,202     31,925
                                                 --------    --------   --------

          Gross Margin                             11,170      17,503     17,886

Operating Expenses:
  Engineering and product development               1,998       1,742      1,568
  Selling, general and administrative              11,185      14,299     13,684
                                                 --------    --------   --------
                                                   13,183      16,041     15,252
                                                 --------    --------   --------

Operating Income (Loss)                            (2,013)      1,462      2,634

Interest Expense                                      406         705        676
                                                 --------    --------   --------

Income (Loss) Before Income Taxes                  (2,419)        757      1,958

Provision for (Benefit from) Income Taxes            (863)        309        718
                                                 --------    --------   --------

Net Income (Loss)                                $ (1,556)   $    448   $  1,240
                                                 ========    ========   ========

Basic Earnings (Loss) per Share                  $  (0.37)   $   0.10   $   0.29
                                                 ========    ========   ========

Diluted Earnings (Loss) per Share                $  (0.37)   $   0.10   $   0.29
                                                 ========    ========   ========

Weighted Average Shares Outstanding - Basic         4,235       4,273      4,340
                                                 ========    ========   ========

Weighted Average Shares Outstanding - Diluted       4,235       4,305      4,344
                                                 ========    ========   ========

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

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

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

<TABLE>
<CAPTION>
                                    Common Stock           Additional                      Treasury Stock
                              -------------------------     Paid-In     Accumulated    ----------------------
                              Shares Issued    Amount       Capital       Deficit       Shares        Value         Total
                              -------------   ---------    ---------     ---------     ---------    ---------     ---------
<S>                             <C>           <C>          <C>           <C>           <C>          <C>           <C>
Balance, December 31, 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
  Net loss                             --            --           --        (1,556)           --           --        (1,556)
                                ---------     ---------    ---------     ---------     ---------    ---------     ---------

Balance, December 31, 2001      4,553,488     $       5    $  13,363     $  (1,581)     (318,700)   $    (759)    $  11,028
                                =========     =========    =========     =========     =========    =========     =========
</TABLE>

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

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

Consolidated Statements of Cash Flows
IN THOUSANDS

                                                    Years ended December 31,
                                                  -----------------------------
                                                   2001       2000       1999
                                                  -------    -------    -------
Cash flows from Operating Activities:
  Net income (loss)                               $(1,556)   $   448    $ 1,240
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                   988        940        830
      Tax benefit on stock option exercises            --        193         --
      Provision for doubtful accounts and sales
        returns                                       839        628        589
      Deferred taxes                                  113        154       (162)
      Rent equalization                               (94)       (51)       (13)
      Loss on sale of repair center division           --         --         86
  Changes in working capital:
    Accounts receivable                             3,962     (2,362)    (1,898)
    Inventories                                     1,376        196       (627)
    Income tax receivable                            (839)        --         --
    Prepaid expenses and other                        296        167       (338)
    Other long-term assets                             (6)      (191)       462
    Accounts payable and accounts payable to
      stockholder                                  (1,318)       766        635
    Accrued liabilities and accrued rebates          (147)       615       (307
                                                  -------    -------    -------
          Net cash flows provided by
            operating activities                    3,614      1,503        497
                                                  -------    -------    -------

Cash flows from Investing Activities:
  Cash paid for license agreement                      --         --       (500)
  Cash paid to acquire property and equipment        (172)      (291)      (387)
  Net proceeds from disposition of repair
    center division                                    --         --         50
  Cash received on notes receivable                    --        114        281
                                                  -------    -------    -------
          Net cash flows used in investing
            activities                               (172)      (177)      (556)
                                                  -------    -------    -------

Cash Flows from Financing Activities:
  Net borrowings (payments) on revolving
    credit facility                                (3,666)    (2,413)       961
  Payments on capital leases                           --         --       (125)
  Purchase of common stock                             --       (714)       (45)
  Stock options exercised                              --        837         --
                                                  -------    -------    -------
          Net cash flows provided by (used in)
            financing activities                   (3,666)    (2,290)       791
                                                  -------    -------    -------

Change in Cash                                       (224)      (964)       732

Cash, beginning of period                             564      1,528        796
                                                  -------    -------    -------

Cash, end of period                               $   340    $   564    $ 1,528
                                                  =======    =======    =======

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

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

Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999

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 through a distribution network consisting of
     wholesale distributors, direct dealers, and its own sales personnel.

     The Company  currently  obtains  most of its  products  from  manufacturers
     located in South Korea,  Thailand,  Taiwan,  and the  People's  Republic of
     China.  While the Company  believes  that  production  of its product lines
     overseas enhances its profitability,  these arrangements expose the Company
     to certain  economic and political  risks. The Company does not own most of
     the equipment,  tools and molds used in the  manufacturing  process and has
     only limited control over the manufacturing of its products.  A majority of
     these purchases are made from a stockholder (see Note 7).

     b.   CUSTOMER CONCENTRATIONS

     Sales to the Company's largest distributor, Graybar Electric Company, Inc.,
     accounted for 27%,  32%, and 41% of total  revenues  during 2001,  2000 and
     1999, respectively.  During the same periods, sales to the Company's second
     largest  distributor  accounted for an additional 9%, 12%, and 11% of total
     revenues,   respectively.   Accounts   receivable   from  the  two  largest
     distributors  comprise  48%  and 50% of  total  accounts  receivable  as of
     December 31, 2001 and 2000, respectively.  No other customers accounted for
     more than 10% of the Company's revenues.

     c.   PRINCIPLES OF CONSOLIDATION

     The  consolidated  financial  statements  include  the  accounts  of Vodavi
     Technology,  Inc. and its wholly owned subsidiaries  Vodavi  Communications
     Systems,  Inc. (VCS), and Vodavi-CT,  Inc.  (Vodavi-CT),  formerly known as
     Enhanced  Systems,  Inc.  (together herein referred to as the Company).  In
     February 2002, Vodavi Direct,  Inc. was formed as a wholly owned subsidiary
     of VCS (see Note 10).  All  material  intercompany  transactions  have been
     eliminated in consolidation.

     d.   USE OF ESTIMATES

     The  preparation  of financial  statements  in conformity  with  accounting
     principles  generally  accepted in the United States requires the Company's
     management  to make  estimates  and  assumptions  that affect the  reported
     amounts of assets and liabilities  and disclosure of contingent  assets and
     liabilities  at the  date of the  financial  statements,  and the  reported
     amounts of revenue and expenses during the reporting period. Actual results
     could differ from those estimates.

     Estimates  are  used  in  accounting  for,  among  other  things,  customer
     incentive  programs,  allowances  for doubtful  accounts and sales returns,
     price  protection,  reserves for excess  inventory  and  obsolescence,  and
     contingencies  and  litigation.  Estimates  and  assumptions  are  reviewed
     periodically and the effects of revisions are reflected in the consolidated
     financial statements in the period they are determined to be necessary.

     e.   INVENTORIES

     Inventories   consist  of  purchased  finished  products  from  third-party
     manufacturers  and are  stated  at the lower of cost  (first-in,  first-out
     method) or market.  The Company's  assessment of market value is determined
     by, among other things,  historical  and  forecasted  sales  activity,  the
     condition of specific

                                       F-8
<PAGE>
     inventory items, and competitive pricing considerations.  When the assessed
     market  value is less than the  historical  cost,  provision is made in the
     financial  statements  to reduce  the  carrying  amount  of the  respective
     inventory items to market value.

     The Company generally takes title to inventory when it is shipped.

     f.   PROPERTY AND EQUIPMENT

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

     Property  and  equipment  and  the  related  useful  lives  consist  of the
     following as of December 31, 2001 and 2000, respectively.

                                           Useful Life
               Type of Asset                 In Years       2001         2000
               -------------                 --------     --------     --------
                                                           ($000)       ($000)
     Office and computer equipment              5         $  2,825     $  2,741
     Furniture and fixtures                     10             409          346
     Tooling and manufacturing equipment       5-8           1,662        1,693
                                                          --------     --------
                                                             4,896        4,780
     Less - accumulated depreciation                        (3,315)      (2,747)
                                                          --------     --------
                                                          $  1,581     $  2,033
                                                          ========     ========

     Depreciation expense was $627,000,  $614,000,  and $604,000,  for the years
     ended December 31, 2001, 2000, and 1999, 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,
     $134,000,  and $141,000,  for the years ended December 31, 2001,  2000, and
     1999, respectively. Accumulated amortization was $1,037,000 and $903,000 at
     December 31, 2001 and 2000, respectively.

     h.   OTHER LONG TERM ASSETS

     Other long-term assets consists  principally of acquired  licensing rights,
     including a licensing agreement the Company entered into in 1999 to acquire
     the licensing and  manufacturing  rights to certain voice mail products for
     $500,000.  This  agreement  is being  amortized  utilizing a useful life of
     three years.  Amortization  expense  related to this asset was $167,000 for
     each of the years ended December 31, 2001 and 2000 and $42,000 for the year
     ended  December 31, 1999.  The various other  licensing-related  assets are
     being amortized over their remaining useful lives.

     i.   IMPAIRMENT OF LONG-LIVED ASSETS

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

                                      F-9
<PAGE>
     j.   RECENT ACCOUNTING PRONOUNCEMENTS

     In 2001,  the FASB  issued  Statement  No.  141,  ACCOUNTING  FOR  BUSINESS
     COMBINATIONS,  and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
     These Statements modify accounting for business combinations after June 30,
     2001  and will  affect  the  Company's  treatment  of  goodwill  and  other
     intangible  assets effective  January 1, 2002. The Statements  require that
     goodwill  existing  at the  date  of  adoption  be  reviewed  for  possible
     impairment and that impairment  tests be performed at least annually,  with
     impaired assets written-down to fair value. Additionally, existing goodwill
     and intangible  assets must be assessed and classified  consistent with the
     Statements'  criteria.  Intangible  assets with estimated useful lives will
     continue to be amortized over those periods.  Amortization  of goodwill and
     intangible   assets  with   indeterminate   lives  will   cease.   Goodwill
     amortization  expense was  $134,000,  $134,000,  and $141,000 for the years
     ended December 31, 2001, 2000, and 1999, respectively.

     The Company  has  determined  that upon  adoption  of these  Statements  on
     January 1, 2002,  the entire $1.6 million  carrying  amount of the goodwill
     was impaired.  This determination was based principally on the total market
     value of the Company's  issued and  outstanding  common stock on January 1,
     2002 of $5.5 million  compared to the Company's  book value on December 31,
     2001 of $11.0 million.  In accordance  with SFAS No. 142, early adoption is
     not permitted. Therefore, the goodwill impairment will be recognized in the
     first quarter of 2002 as a change in accounting principle.

     Except as disclosed above, the adoption of these Statements is not expected
     to have a material impact on the Company's  financial  condition or results
     from operations.

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

     k.   INCOME TAXES

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

     l.   REVENUE RECOGNITION

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

     m.   STOCK OPTION PLANS

     Statement of Financial  Accounting  Standard (SFAS) No. 123, ACCOUNTING FOR
     STOCK-BASED COMPENSATION,  encourages entities to recognize as expense over
     the vesting period the fair value of all stock-based awards

                                      F-10
<PAGE>
     on the date of  grant.  Alternatively,  SFAS No.  123  allows  entities  to
     continue to apply the  provisions  of APB Opinion  No. 25,  ACCOUNTING  FOR
     STOCK  ISSUED  TO  EMPLOYEES,  and  provide  pro forma  earnings  per share
     disclosures  for employee  stock option  grants as if the  fair-value-based
     method as defined in SFAS No. 123 had been applied. The Company applies the
     recognition  provisions of APB No. 25 and provides the pro forma disclosure
     provisions of SFAS No. 123 (see Note 5).

     n.   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:

                                             2001          2000          1999
                                            -------       -------       -------
                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)

     Net Income (loss)                      $(1,556)      $   448       $ 1,240
                                            =======       =======       =======

     Weighted average common shares for
       basic earnings per share               4,235         4,273         4,340

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

     Weighted average common shares for
       diluted earnings per share             4,235         4,305         4,344
                                            =======       =======       =======

     Basic earnings per share               $ (0.37)      $  0.10       $  0.29
                                            =======       =======       =======

     Diluted earnings per share             $ (0.37)      $  0.10       $  0.29
                                            =======       =======       =======

     (1)  Dilutive securities are calculated using the treasury stock method and
          the  average  market  price  during the  period.  Options on  646,500,
          328,000 and  537,300  shares had an exercise  price  greater  than the
          average market price during the years ended  December 31, 2001,  2000,
          and 1999, respectively,  and therefore did not enter into the earnings
          per share calculation.

     o.   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.

     p.   SEGMENTS

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

2.   SPECIAL CHARGES

     During the first quarter of 2001, the Company  implemented a  restructuring
     plan aimed at reducing  its  operating  expenses to coincide  with its then
     current sales  outlook.  Pursuant to the  restructuring  plan,  the Company
     reduced  its  workforce  by  approximately  20  percent,  discontinued  its
     Interactive Voice Response product group, and implemented broad-based price
     reductions on certain voice mail products and single-

                                      F-11
<PAGE>
     line  telephones.  These actions created  severance-related  obligations of
     $168,000,  estimated shut-down costs of $265,000, and estimated distributor
     price protection obligations of $432,000.

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

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

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

     The  following  table sets forth the activity of accrued cash charges as of
     December 31, 2001: (IN THOUSANDS)

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

     The remaining balance of $284,000 is included in current liabilities in the
     accompanying  consolidated  balance  sheet  at  December  31,  2001  and is
     expected to be paid in 2002.

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

                                            2001        2000        1999
                                           -------     -------     -------
     Revenue                               $ 1,331     $ 2,420     $ 2,960
     Operating income (loss)                  (359)       (186)       (210)

3.   REVOLVING CREDIT FACILITY

     As of December 31, 2001, the Company had a $15.0 million  revolving  credit
     facility  with a  financial  institution.  Available  borrowings  under the
     facility are based on eligible  inventory and accounts  receivable  and are
     secured by substantially all of the Company's  assets.  Interest is payable
     monthly at a variable rate based on the 30-day  commercial  paper rate plus
     2.50% (4.52% and 9.15% at December 31, 2001 and 2000,

                                      F-12
<PAGE>
     respectively).  The credit facility  expires in April 2003. At December 31,
     2001, $2.6 million was outstanding on the revolving credit facility with an
     additional $6.3 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, 2001, the Company was
     in compliance with these financial covenants.

4.   COMMITMENTS AND CONTINGENCIES

     a.   LEGAL MATTERS

     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.  No  provision  has  been  made  in  the  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.

     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)

         2002                                                 $ 1,102
         2003                                                     965
         2004                                                     965
         2005                                                     785
         2006                                                     785
         Thereafter                                             3,927
                                                              -------
         Total Minimum lease commitments                        8,529
         Total minimum noncancellable sublease rentals           (558)
                                                              -------
                                                              $ 7,971
                                                              =======

                                      F-13
<PAGE>
     Certain of the Company's  lease  agreements  provide for initial periods of
     free or  discounted  rental  payments.  Rent  expense  is  recognized  on a
     straight-line basis and was approximately  $1,112,000 for each of the years
     ended  December 31, 2001,  2000,  and 1999,  respectively.  The  difference
     between  rent  expensed  and rent paid ("rent  equalization")  was $94,000,
     $51,000, and $13,000 for the years ended December 31, 2001, 2000, and 1999,
     respectively.

     c.   401(k) PROFIT SHARING PLAN

     The Company  sponsors a profit  sharing plan (the 401(k) Plan)  pursuant to
     Section 401(k) of the Internal Revenue Code of 1986. The 401(k) Plan covers
     substantially all full-time employees who meet the eligibility requirements
     and provides for a discretionary profit sharing contribution by the Company
     and an employee elective contribution with a discretionary Company matching
     provision. The Company expensed discretionary contributions pursuant to the
     401(k) Plan in the amounts of $63,000,  $76,000, and $68,000, for the years
     ended December 31, 2001, 2000, and 1999, respectively.

5.   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,  2001,  the  Company had  purchased
     318,700 shares 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
     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. The warrants expired unexercised in 2001.

     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 the  exercise  price may not be less than 100% (110% if
     the  option  is  granted  to a  stockholder  who at the time the  option is
     granted owns stock representing more than ten percent of the total

                                      F-14
<PAGE>
     combined  voting power of all classes of the  Company's  stock) of the fair
     market value of the common stock at the time of the grant.

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

<TABLE>
<CAPTION>
                                         December 31, 2001           December 31, 2000           December 31, 1999
                                      -----------------------     -----------------------     -----------------------
                                                    Weighted                    Weighted                    Weighted
                                                     Average                     Average                     Average
                                      Number of     Exercise      Number of     Exercise      Number of     Exercise
                                       Options        Price        Options        Price        Options        Price
                                      ---------     ---------     ---------     ---------     ---------     ---------
<S>                                   <C>           <C>           <C>           <C>           <C>           <C>
Options outstanding at beginning
  of period                             725,000     $    3.68       779,800     $    4.03       592,400     $    4.88
    Granted                             188,000          1.04       179,500          2.72       267,500          2.62
    Forfeited                          (108,500)         3.49       (81,800)         4.30       (80,100)         4.95
    Exercised                                --            --      (152,500)         4.00            --            --
                                      ---------     ---------     ---------     ---------     ---------     ---------
Options outstanding at end of
  period                                804,500     $    3.08       725,000     $    3.68       779,800     $    4.03
                                      =========     =========     =========     =========     =========     =========
Options available for grant             143,000                     222,500                      70,200
                                      =========                   =========                   =========
Exercisable at end of period            407,375     $    4.11       334,125     $    4.60       384,100     $    4.83
                                      =========     =========     =========     =========     =========     =========
Weighted average fair value of
  options granted                                   $    0.69                   $    1.80                   $    1.69
                                                    =========                   =========                   =========

                                   Options Outstanding                 Options Exercisable
                   ---------------------------------------------    -------------------------
                                       Weighted-
                       Number           Average         Weighted-       Number       Weighted-
                   Outstanding at      Remaining         Average    Exercisable at    Average
    Range of        December 31,      Contractual       Exercise       December      Exercise
Exercise Prices        2001          Life (in years)     Price         31, 2001       Price
---------------    --------------    ---------------    --------    --------------   --------
 $0.80 - $2.65         516,750            8.4           $   2.07         147,125     $   2.59
 $2.66 - $4.51         120,000            5.6           $   3.86         102,500     $   3.93
 $4.52 - $7.00         167,750            3.4           $   5.65         157,750     $   5.64
                     ---------                          --------       ---------     --------
                       804,500                          $   3.08         407,375     $   4.11
                     =========                          ========       =========     ========
</TABLE>

     The Company has computed,  for pro forma disclosure purposes,  the value of
     all options  granted during 2001,  2000 and 1999,  using the  Black-Scholes
     option pricing model with the following weighted average assumptions:

                                                 Years Ended December 31,
                                               ----------------------------
                                                2001       2000       1999
                                               ------     ------     ------
     Risk free interest rate                    5.03%      6.14%      5.23%
     Expected dividends                         None       None       None
     Expected lives in years                     5.0        4.9        4.8
     Expected volatility                        79.0%      78.1%      71.6%

                                      F-15
<PAGE>
     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,
                                          -----------------------------------
                                           2001          2000          1999
                                          -------       -------       -------
                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
     Net income (loss):
       As reported                        $(1,556)      $   448       $ 1,240
       Pro forma                          $(1,682)      $   290       $ 1,035
     Earnings (loss) per share:
       As reported - basic and diluted    $ (0.37)      $  0.10       $  0.29
       Pro forma - basic and diluted      $ (0.40)      $  0.07       $  0.24

     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.

6.   INCOME TAXES

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

                                                2001       2000       1999
                                               ------     ------     ------
                                                      (IN THOUSANDS)

     Current                                   $ (839)    $  463     $  808
     Deferred                                     (24)      (154)       (90)
                                               ------     ------     ------
                                               $ (863)    $  309     $  718
                                               ======     ======     ======

     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, 2001 and 2000, were as follows:

                                                         2001         2000
                                                        ------       ------
                                                           (IN THOUSANDS)

     Current deferred tax assets:
       Receivable reserves                              $  226       $  268
       UNICAP adjustment                                    84           84
       Other accruals                                      372          472
       Research and development credit                      99          197
                                                        ------       ------
                                                           781        1,021
     Long-term deferred tax assets (liabilities):
       State net operating losses                           82           --
       Depreciation and amortization differences          (241)        (286)
                                                        ------       ------
                                                          (159)        (286)

     Net deferred tax asset                             $  622       $  735
                                                        ======       ======

                                      F-16
<PAGE>
     Reconciliation  of the federal  income tax rate to the Company's  effective
     income tax rate is as follows:

                                                   2001       2000       1999
                                                  ------     ------     ------
     Federal statutory tax rate                    (34.0)%     34.0%      34.0%
     State taxes, net                               (3.3)       3.3        3.0
     Research and development tax credits           (3.1)     (13.9)     (10.0)
     Non-deductible expenses and other permanent
       differences                                   4.7       17.4        9.7
                                                  ------     ------     ------
                                                   (35.7)%     40.8%      36.7%
                                                  ======     ======     ======

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

7.   RELATED PARTY TRANSACTIONS

     LG  Electronics  Inc.  (LGE),  the  Company's  principal  supplier,   owned
     approximately  20.4% of the Company's  outstanding common stock at December
     31, 2001 and has a designated  member on the Company's  board of directors.
     The Company purchased approximately $15.4 million, $20.6 million, and $18.4
     million of key telephone  systems,  commercial grade telephones,  and voice
     mail products from LGE and an affiliate of LGE during 2001, 2000, and 1999,
     respectively.  Management  believes  that  the  purchases  from LGE and its
     affiliate  approximate terms that would be offered by non-related  parties.
     The Company owed LGE and its  affiliate a total of $984,000 and  $2,382,000
     for product purchases at December 31, 2001 and 2000, respectively.  Payment
     terms  are  generally  30 days  after  products  are  placed  on board  for
     shipment. Current balances are non-interest bearing.

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

     In July 2001,  the Company  entered into a development  agreement  with LGE
     under  which the  Company  will  develop  for LGE  certain  advanced  voice
     messaging  technologies.  During  2001,  the  Company  recorded  revenue of
     $210,000  for work  performed  under the  development  agreement  using the
     percentage  of  completion  method.  LGE made cash  payments to the Company
     during 2001 of $150,000 pursuant to the agreement.

8.   SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest  and income  taxes for the years ended  December 31,
     2001, 2000, and 1999 was as follows:

                                                2001       2000       1999
                                               ------     ------     ------
                                                      (IN THOUSANDS)

     Interest                                  $  406     $  705     $  676
     Income taxes                                  --        368        677

     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
     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. During 2001, the Repair and

                                      F-17
<PAGE>
     refurbishment  agreement was cancelled  when the buyer filed for bankruptcy
     and the Company entered into a new agreement with a third-party.

     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
                                                                   ======

9.   SUMMARY OF QUARTERLY RESULTS (UNAUDITED):  (IN THOUSANDS,  EXCEPT PER SHARE
     AMOUNTS)

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

     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
</TABLE>

10.  SUBSEQUENT EVENTS

     On March 4, 2002, the Company,  through its wholly owned subsidiary  Vodavi
     Direct, Inc., acquired  substantially all of the assets and assumed certain
     liabilities  of DataSpeak  Systems,  Inc., an  Arizona-based  dealer of the
     Company's products.  Under the terms of the purchase agreement, the Company
     paid cash of $624,000 and issued 100,000 shares of restricted common stock.

                                      F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES

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

We have audited the consolidated financial statements of Vodavi Technology, Inc.
and  subsidiaries  (the "Company") as of December 31, 2001 and for the year then
ended,  and have issued our report thereon dated February 8, 2002 (March 4, 2002
as to Note 10); such financial  statements and report are included  elsewhere in
this annual report on Form 10-K of Vodavi Technology, Inc. and subsidiaries. Our
audit also included the consolidated  financial  statement schedules for 2001 of
Vodavi  Technology,  Inc.  and  subsidiaries,  listed in item 14. The  financial
statement  schedules are the  responsibility  of the Company's  management.  Our
responsibility is to express an opinion based on our audit. In our opinion, such
2001 consolidated financial statement schedules,  when considered in relation to
the basic  2001  consolidated  financial  statements  taken as a whole,  present
fairly in all material respects the information set forth therein.


DELOITTE & TOUCHE LLP
Phoenix, Arizona
  February 8, 2002
  (March 4, 2002 as to Note 10)

                                       S-1
<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) as of December 31, 2000 and for each of the two
years in the period ended  December 31,  2000,  included in this Form 10-K,  and
have issued our report  thereon dated February 2, 2001. Our audits were made for
the  purpose of forming an  opinion on those  statements  taken as a whole.  The
schedule included at page S-3 is the responsibility of the Company's  management
and is  presented  for purposes of complying  with the  Securities  and Exchange
Commission's  rules  and is not part of the  basic  financial  statements.  This
schedule,  for the two years ended  December 31, 2000, has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion,  fairly  states in all  material  respects  the  financial  data
required to be set forth therein in relation to the basic  financial  statements
taken as a whole.


ARTHUR ANDERSEN LLP
Phoenix, Arizona
  February 2, 2001

                                       S-2
<PAGE>
                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

                                  IN THOUSANDS

<TABLE>
<CAPTION>
                                                      2001        2000        1999
                                                     -------     -------     -------
<S>                                                  <C>         <C>         <C>
Reserves for doubtful accounts and sales returns:
  Balance at beginning of year                       $ 1,582     $ 1,239     $   674
  Provision charged to expense                           839         628         589
  Write-offs                                          (1,691)       (285)        (24)
                                                     -------     -------     -------
  Balance at end of year                             $   730     $ 1,582     $ 1,239
                                                     =======     =======     =======

Restructuring reserve:
  Balance at beginning of year                       $    --     $    --     $    94
  Provision charged to expense                           699          --          --
  Payments                                              (415)         --         (94)
                                                     -------     -------     -------
  Balance at end of year                             $   284     $    --     $    --
                                                     =======     =======     =======

Reserves for excess and obsolete inventory:
  Balance at beginning of year                       $   741     $   433     $   426
  Provision charged to expense                         1,027         331         157
  Write-offs                                          (1,147)        (23)       (150)
                                                     -------     -------     -------
  Balance at end of year                             $   621     $   741     $   433
                                                     =======     =======     =======
</TABLE>

                                       S-3
<PAGE>
                                  EXHIBIT INDEX

EXHIBIT
NUMBER                               EXHIBIT
------                               -------
3.1       Amended Certificate of Incorporation of the Registrant (l)
3.2       Amended and Restated Bylaws of the Registrant (l)
4.1       Form of  Certificate  representing  shares of Common Stock,  par value
          $.001 per share (1)
10.9      Vodavi Technology,  Inc. Second Amended and Restated 1994 Stock Option
          Plan (4)
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)
10.35     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)
10.39     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)
10.44     Waiver and Amendment of Credit  Agreement dated May 11, 2001,  between
          Vodavi  Communications  Systems,  Inc.  and General  Electric  Capital
          Corporation (9)
10.47     Sublease Agreement dated August 8, 2001, between Vodavi Communications
          Systems, Inc. and SpeedFam-IPEC, Inc. (10)
10.48     Employment  Agreement,  effective October 1, 2001,  between Gregory K.
          Roeper and Vodavi Technology, Inc.
21        List of Subsidiaries
23.1      Consent of Deloitte and Touche LLP
23.2      Consent of Arthur Andersen LLP
<PAGE>
----------
(1)  Incorporated  by  reference  to  Registration  Statement  on Form  S-1 (No.
     33-95926) and amendments thereto which became effective on October 6, 1995.
(2)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1997, as filed on August 11, 1997.
(3)  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1995, as filed on April 1, 1996.
(4)  Incorporated  by reference to the  Registrant's  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.
(9)  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended March 31, 2001, as filed on May 15, 2001.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 2001, as filed on November 13, 2001.