##### Table of Contents



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 EndedDecember 31, 2005
    
    Commission File Number0-26912
 VODAVI TECHNOLOGY, INC.
  Delaware
    
    86-0789350(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)4717 East Hilton Avenue, Suite 400Phoenix, Arizona
    
    85034-6402(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
   o þ
 o þ
 þ o
 o
 o o  þ
  o þ
   Documents incorporated by reference.




---



##### 



VODAVI TECHNOLOGY, INC.
 ANNUAL REPORT ON FORM 10-K
 FISCAL YEAR ENDED DECEMBER 31, 2005
  
 TABLE OF CONTENTS
 PagePART IITEM 1. BUSINESS
    
    
    1ITEM 1A. RISK FACTORS
    
    
    11ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    17ITEM 2. PROPERTIES
    
    
    18ITEM 3. LEGAL PROCEEDINGS
    
    
    18ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    18PART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
    
    
    19ITEM 6. SELECTED FINANCIAL DATA
    
    
    21ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    22ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    28ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
    
    
    28ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    28ITEM 9A. CONTROLS AND PROCEDURES
    
    
    28ITEM 9B. OTHER INFORMATION
    
    
    28PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    29ITEM 11. EXECUTIVE COMPENSATION
    
    
    32ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
    
    
    41ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    43ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    44PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    45SIGNATURES
    
    
    47INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1Exhibit 21Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  Statement Regarding Forward-Looking Statements
 The statements contained in this report on Form 10-K that are not purely historical are
forward-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 2006 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 of 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 1A,  Risk Factors.
 - i -




---



##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
 Introduction
   
    
    focus on IP telephony product developments that provide more Voice over IP, or
VoIP, functionality for our legacy products and our IP local area network, or LAN,
telephony system;
    
    continued expansion of our core business of supplying telephone systems,
telephony applications, and commercial grade telephones;
    
    develop marketing strategies and applications for vertical markets;
    
    emphasize sales of larger and more advanced systems through our dealers;
    
    expand our product lines and distribution to participate in the emerging Hosted
IP Services Market;
    
    expand our strategic relationship with LG-Nortel Co. LTD., or LGN, which is a
joint venture between the multi-billion dollar, Korean-based LG Group and Nortel
Networks Corporation;
    
    enhance our existing products and expand our product lines by expanding our
technological expertise and distribution channels through
 --
    
    internal research and development efforts, and--
    
    business acquisitions, license arrangements, and other strategic relationships.
 www.vodavi.com
 1




---



##### Table of Contents



Industry Overview
   
    
    broadband connectivity;
    
    successive technological developments that have resulted in enhanced features and services;
    
    optical networking technologies;
    
    wireless and mobile communications;
    
    emphasis on the use of communications systems to provide cost-effective customer service; and
    
    regulatory changes.
  
    
    IP-enabled telephone systems, which represent products based on TDM technology that
have been blended with IP technology, to create IP capable business communications
systems that retain certain TDM functionality while taking advantage of newer IP
technology for certain applications;
    
    IP telephony, which represents products based exclusively on IP technology for
voice and data communications. These products take advantage of a common
infrastructure, provide scalability, and integrate with data networks to simplify
administration;
    
    Voice processing applications that automate call answering, provide voice mail and
automated call distribution functions, provide the capacity to manage facsimile
messages, and unified messaging applications, which allow users to receive all message
types (voice, e-mail, fax) to be managed from their e-mail program;
    
    Computer-telephony applications, which greatly enhances efficiency and productivity
by integrating businesses voice and data networks; and
    
    Contact Center applications, wireless offerings, and remote worker applications to
further increase employee mobility and efficiency.
 Our Products
  
    
    telephone systems, which include traditional digital and IP-based key telephone
systems;
 2




---



##### Table of Contents




    
    telephony applications, which include voice messaging, automated attendant,
automatic call distribution, as well as advanced messaging products that include 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 to PBX connection packages, IP gateways, and Internet messaging systems;
and
    
    commercial grade telephones, which include single-line and multi-line traditional
and IP-based telephones.
 Telephony Systems
      Telephony Applications
  3




---



##### Table of Contents



Voice Mail Systems
   Advanced Messaging Platform
 ®
  ®
 Automatic Call Distribution
  4




---



##### Table of Contents



Computer-Telephony Integration Products
  
    
    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;
    
    to connect Windows-based local area networks to the users telephone system; and
    
    to access and analyze call accounting information quickly and inexpensively.
 Commercial Grade Telephones
   New Product Development
  
    
    the fourth phase of our IP telephone system, the Telenium, providing advance audio
and video conferencing capabilities;
 5




---



##### Table of Contents




    
    a more economical, second generation WiFi phone;
    
    enhancing our XTS IP telephone system to include IP trunking capabilities;
    
    a next generation, router-based data and voice appliance, or gateway, providing
wired and wireless data and voice services for small businesses; and
    
    a software-based administration tool that provides advanced management interfaces
into our telephone systems that reduce installation times and maintenance.
  Sales, Marketing, and Distribution
  Authorized Vodavi Dealers
    Wholesale Distributors
  6




---



##### Table of Contents




    
    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;
    
    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 dealers.
  Vodavi Direct
  International Sales
  In-house Sales Support Staff
  Research and Development; Strategic Alliances with LGN and Other Companies
  7




---



##### Table of Contents



Manufacturing
    8




---



##### Table of Contents



Quality Control
  Support Services
   Competition
   9




---



##### Table of Contents



Patents, Trademarks, and Licenses
     Government Regulation
  Employees
  10




---



##### Table of Contents



ITEM 1A. RISK FACTORS
 You should carefully consider the following factors, in addition to those discussed elsewhere
in this report, in evaluating our company and our business. Some of the statements and information
contained in this report that are not historical facts are forward-looking statements, as such term
is defined in the securities laws. These include statements concerning future, proposed, and
anticipated activities of our company; certain trends with respect to our revenue, operating
results, capital resources, and liquidity; and certain trends with respect to the markets where we
compete or the telecommunications industry in general. Forward-looking statements, by their very
nature, include risks and uncertainties, many of which are beyond our control. Accordingly, actual
results may differ, perhaps materially, from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially include those discussed
under this Item 1A, Risk Factors.
 We rely upon LGN as a strategic partner
   Certain conflicts of interest may arise as a result of LGNs ownership interest in our company.
   Our stock price may be volatile.
  
    
    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;
 11




---



##### Table of Contents




    
    limited trading activity and a relatively small public float;
    
    developments or disputes concerning proprietary rights;
    
    regulatory developments;
    
    general industry conditions; and
    
    worldwide economic and financial conditions.
  Our reliance on our independent distribution network affects our inventory levels, the timing and
predictability of our revenue, and our overall operating results.
     12




---



##### Table of Contents



We face risks associated with international manufacturing sources.
  
    
    political instability in Asia, and in particular on the Korean Peninsula;
    
    the business and financial condition of our third-party manufacturers;
    
    the possibility of expropriation, supply disruption, currency controls, and currency
exchange fluctuations;
    
    changes in tax laws, tariffs, and freight rates; and
    
    strikes, work slow downs, or lockouts at any ports where our products arrive in the United States.
   We depend on new products and technologies.
    13




---



##### Table of Contents



The telecommunications industry is cyclical.
  We must finance the maintenance and expansion of our business and the development of new products.
  We depend on third parties for manufacturing.
  
    
    product defects;
    
    production delays;
    
    cost overruns; or
    
    the inability to fulfill orders on a timely basis.
  Markets for our products are intensely competitive, and we cannot assure you that we will be able
to compete successfully in the future.
  14




---



##### Table of Contents




    
    the quality, performance, reliability, features, ease of use, pricing, and diversity of our product lines;
    
    the performance of our distributors and dealers;
    
    the quality of our customer services;
    
    our ability to address the needs of our customers;
    
    our success in designing and manufacturing new products, including those
implementing new technologies;
    
    the availability of adequate sources of raw materials, finished components, and
other supplies at acceptable prices;
    
    our suppliers efficiency of production;
    
    the rate at which end users upgrade or expand their existing telephone systems,
applications, and services;
    
    new product introductions by our competitors;
    
    the number, nature, and success of our competitors in a given market; and
    
    general market and economic conditions.
  We face risks associated with patents, licenses, and intellectual property.
  
    
    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;
 15




---



##### Table of Contents




    
    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.
  Our third-party manufacturers may experience shortages of raw materials and supplies.
  
    
    semiconductor components;
    
    unfinished printed circuit boards;
    
    molded plastic parts; and
    
    metals.
  We depend on management and other key personnel.
  Rights to acquire our common stock could result in dilution to other holders of our common stock.
  16




---



##### Table of Contents



Sales of additional shares of our common stock could have a negative effect on the market price of
our common stock.
  It may be difficult for a third party to acquire us, even if the acquisition would be in the best
interest of stockholders.
  
    
    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.
  We do not pay cash dividends.
  
 ITEM 1B.UNRESOLVED STAFF COMMENTS
  17




---



##### Table of Contents



ITEM 2. PROPERTIES
    
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Nominee
    
    Votes in Favor
    
    WithheldWilliam J. Hinz
    
    
    3,368,544
    
    
    
    62,350Gregory K. Roeper
    
    
    3,368,379
    
    
    
    62,515Jong Dae An
    
    
    3,337,220
    
    
    
    93,674Jack A. Henry
    
    
    3,351,420
    
    
    
    79,474Emmett E. Mitchell
    
    
    3,352,220
    
    
    
    78,674Paul D. Sonkin
    
    
    3,399,044
    
    
    
    31,850Donald L. Bliss
    
    
    3,400,844
    
    
    
    30,050
 18




---



##### Table of Contents



PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITIES
  High
    
    Low2004:First quarter
    
    $
    8.27
    
    
    $
    5.52Second quarter
    
    
    6.66
    
    
    
    4.15Third quarter
    
    
    6.07
    
    
    
    4.56Fourth quarter
    
    
    8.00
    
    
    
    5.272005:First quarter
    
    $
    7.55
    
    
    $
    5.86Second quarter
    
    
    6.75
    
    
    
    4.90Third quarter
    
    
    6.50
    
    
    
    4.46Fourth quarter
    
    
    6.30
    
    
    
    4.462006:First quarter (through March 29, 2006)
    
    $
    7.75
    
    
    $
    5.34
  Issuer Purchases of Equity Securities
  Maximum Number (orTotal Number of
    
    
    Approximate DollarShares Purchased as
    
    
    Value) of Shares thatTotal Number
    
    
    
    
    
    
    Part of Publicly
    
    
    May Yet Be Purchasedof Shares
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Under the Plans orMonth
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsApril
    
    None
    
    
    N/A
    
    
    
    May
    

    10,100
    
    
    
    5.33
    
    
    
    10,100June
    

    1,500
    
    
    
    5.38
    
    
    
    11,600July
    
    None
    
    
    N/A
    
    
    
    11,600August
    

    2,900
    
    
    $
    5.48
    
    
    
    14,500September
    

    21,339
    
    
    $
    5.03
    
    
    
    35,839October
    
    None
    
    
    N/A
    
    
    
    35,839November
    
    None
    
    
    N/A
    
    
    
    35,839December
    
    None
    
    
    N/A
    
    
    
    35,83935,839
    
    
    
    
    
    
    
    
    
    
    $
    815,000
 19




---



##### Table of Contents



Dividend Policy
  20




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  Years Ended December 31,(in thousands, except per share amounts)Statement of Operations Data:
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Revenue
    
    $
    43,675
    
    
    $
    43,791
    
    
    $
    41,270
    
    
    $
    37,328
    
    
    $
    34,153
    (2)Gross margin
    
    
    15,788
    
    
    
    15,431
    
    
    
    14,285
    
    
    
    13,449
    
    
    
    11,170
    (3)Operating expenses
    
    
    13,879
    (1)
    
    
    12,451
    
    
    
    12,082
    
    
    
    12,164
    
    
    
    13,183
    (4)Operating income (loss)
    
    
    1,909
    
    
    
    2,980
    
    
    
    2,203
    
    
    
    1,285
    
    
    
    (2,013
    )Interest (income) expense
    
    
    (108
    )
    
    
    6
    
    
    
    128
    
    
    
    97
    
    
    
    406Income (loss) before income
taxes and change in accounting
principle
    
    
    2,017
    
    
    
    2,974
    
    
    
    2,075
    
    
    
    1,188
    
    
    
    (2,419
    )Provision for (benefit from)
income taxes
    
    
    764
    
    
    
    1,144
    
    
    
    804
    
    
    
    471
    
    
    
    (863
    )Income (loss) before change in
accounting principle
    
    
    1,253
    
    
    
    1,830
    
    
    
    1,271
    
    
    
    717
    
    
    
    (1,556
    )Change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,263
    )
    
    
    Net income (loss)
    
    $
    1,253
    
    
    $
    1,830
    
    
    $
    1,271
    
    
    $
    (546
    )
    
    $
    (1,556
    )Net income (loss) per share,
diluted
    
    $
    0.31
    
    
    $
    0.44
    
    
    $
    0.30
    
    
    $
    (0.13
    )
    
    $
    (0.37
    )Weighted average shares
outstanding, diluted
    
    
    4,090
    
    
    
    4,120
    
    
    
    4,170
    
    
    
    4,428
    
    
    
    4,235
 As of December 31,(in thousands)Balance Sheet Data:
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Assets:Current assets
    
    $
    18,161
    
    
    $
    16,687
    
    
    $
    16,240
    
    
    $
    14,829
    
    
    $
    14,861Property and equipment, net
    
    
    1,228
    
    
    
    1,363
    
    
    
    1,453
    
    
    
    1,631
    
    
    
    1,581Goodwill
    
    
    
    
    
    
    725
    
    
    
    725
    
    
    
    725
    
    
    
    1,638Other
    
    
    213
    
    
    
    50
    
    
    
    105
    
    
    
    203
    
    
    
    193$
    19,602
    
    
    $
    18,825
    
    
    $
    18,523
    
    
    $
    17,388
    
    
    $
    18,273Liabilities:Current liabilities
    
    $
    5,945
    
    
    $
    6,480
    
    
    $
    7,634
    
    
    $
    6,748
    
    
    $
    7,045Other long-term obligations
    
    
    
    
    
    
    24
    
    
    
    700
    
    
    
    18
    
    
    
    200Total liabilities
    
    
    5,945
    
    
    
    6,504
    
    
    
    8,334
    
    
    
    6,766
    
    
    
    7,245Stockholders equity
    
    
    13,657
    
    
    
    12,321
    
    
    
    10,189
    
    
    
    10,622
    
    
    
    11,028$
    19,602
    
    
    $
    18,825
    
    
    $
    18,523
    
    
    $
    17,388
    
    
    $
    18,273
 
 (1)
    
    Includes a non-cash charge of $725 related to the impairment of goodwill.(2)
    
    Includes special charges of $432 related to price protection obligations.(3)
    
    Cost of goods sold includes special charges of $568 related to inventory impairments.(4)
    
    Includes special charges of $761 related to severance, receivable reserves, and exit costs. 21




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  Critical Accounting Policies and Estimates
   Customer Incentives
  Accounts Receivable
  22




---



##### Table of Contents



Sales Returns
  Excess and Obsolete Inventory
   Results of Operations
  2005
    
    2004
    
    2003Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    63.9
    
    
    
    64.8
    
    
    
    65.4Gross margin
    
    
    36.1
    
    
    
    35.2
    
    
    
    34.6Operating expenses:Engineering and product development
    
    
    4.5
    
    
    
    4.3
    
    
    
    5.0Selling, general, and administrative
    
    
    25.6
    
    
    
    24.1
    
    
    
    24.3Goodwill impairment
    
    
    1.7
    
    
    
    
    
    
    
    31.8
    
    
    
    28.4
    
    
    
    29.3Operating income
    
    
    4.3
    
    
    
    6.8
    
    
    
    5.3Interest (income) expense, net
    
    
    (0.3
    )
    
    
    
    
    
    
    0.3Income before taxes
    
    
    4.6
    
    
    
    6.8
    
    
    
    5.0Income tax expense
    
    
    1.7
    
    
    
    2.6
    
    
    
    1.9Net income
    
    
    2.9
    %
    
    
    4.2
    %
    
    
    3.1
    %
 Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
 Revenue
  23




---



##### Table of Contents



Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  Goodwill Impairment
   24




---



##### Table of Contents



Interest (Income) Expense
  Provision for Income Taxes
  Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
 Revenue
    Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  25




---



##### Table of Contents



Interest Expense
  Provisions for Income Taxes
  Liquidity and Capital Resources
       26




---



##### Table of Contents



(in thousands)
 Payment due by periodContractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    More thanObligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating Lease Obligations
    
    $
    4,738
    
    
    $
    813
    
    
    $
    1,570
    
    
    $
    1,570
    
    
    $
    785Purchase Obligations
    
    
    6,483
    
    
    
    6,483
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    11,221
    
    
    $
    7,296
    
    
    $
    1,570
    
    
    $
    1,570
    
    
    $
    785
   International Manufacturing Sources
  Impact of Recently Issued Accounting Standards
  Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.
 27




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B.OTHER INFORMATION
  28




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionWilliam J. Hinz
    
    
    60
    
    
    Chairman of the BoardGregory K. Roeper
    
    
    45
    
    
    President, Chief Executive Officer, and DirectorDavid A. Husband
    
    
    37
    
    
    Vice President-Finance, Chief Financial Officer,
Secretary, and TreasurerJong Dae An
    
    
    46
    
    
    DirectorDonald A. Bliss (1)(2)
    
    
    73
    
    
    DirectorJack A. Henry (2)(3)
    
    
    62
    
    
    DirectorEmmett E. Mitchell (1)(2)(3)
    
    
    50
    
    
    DirectorPaul D. Sonkin (1)(3)
    
    
    37
    
    
    Director
 
 (1)
    
    Member of the Compensation Committee(2)
    
    Member of the Audit Committee(3)
    
    Member of the Nominating and Corporate Governance Committee William J. Hinz
 Gregory K. Roeper
 David A. Husband
 Jong Dae An
 Donald A. Bliss
 29




---



##### Table of Contents



Jack A. Henry
 Emmett E. Mitchell
 Paul D. Sonkin
 Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics and Committee Charters
 www.vodavi.com
 30




---



##### Table of Contents



Information Relating to Our Audit Committee of the Board of Directors
   31




---



##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION
 Summary of Cash and Other Compensation
  SUMMARY COMPENSATION TABLE
 Long TermCompensationAwardsSecuritiesAnnual Compensation


    
    
    Underlying
    
    
    All OtherName and Principal Position(1)
    
    Year
    
    Salary($)
    
    Bonus ($)
    
    
    Options(#)(2)
    
    
    Compensation($)Gregory K. Roeper
    
    
    2005
    
    
    $
    220,000
    
    
    $
    
    
    
    
    
    10,000
    
    
    
    $
    7,579
    (3)President and Chief Executive
    
    
    2004
    
    
    $
    200,000
    
    
    $
    98,957
    
    
    
    
    8,750
    
    
    
    $
    7,579
    (3)Officer
    
    
    2003
    
    
    $
    182,500
    
    
    $
    114,068
    
    
    
    
    35,000
    
    
    
    $
    7,329
    (3)David A. Husband
Vice President  Finance,
    
    
    2005
    
    
    $
    165,000
    
    
    $
    
    
    
    
    
    7,500
    
    
    
    $
    1,000
    (5)Chief Financial Officer,
    
    
    2004
    
    
    $
    150,000
    
    
    $
    41,791
    
    
    
    
    5,000
    
    
    
    $
    1,000
    (5)Secretary, and Treasurer
    
    
    2003
    
    
    $
    135,500
    
    
    $
    59,412
    
    
    
    
    25,000
    
    
    
    $
    750
    (5)Stephen L. Borcich (4)
    
    
    2005
    
    
    $
    116,669
    
    
    $
    
    
    
    
    
    5,000
    
    
    
    $
    35,750Former Vice President 
    
    
    2004
    
    
    $
    130,000
    
    
    $
    31,631
    
    
    
    
    5,000
    
    
    
    $
    1,000
    (5)Distribution Sales
    
    
    2003
    
    
    $
    125,000
    
    
    $
    54,780
    
    
    
    
    
    
    
    
    $
    750
    (5)
 
 (1)
    
    We consider Messrs. Roeper and Husband to be our executive officers. Mr. Borcich , our
former Vice President  Distribution Sales, resigned from our company during October 2005.
 (2)
    
    The exercise price of all stock options granted were equal to the fair market value of our
common stock on the date of grant.
 (3)
    
    Represents premium payment of $3,579 for a long-term disability insurance policy and $3,000
for a term life insurance policy paid by our company for each of 2005, 2004 and 2003. Also
includes a 401(k) plan matching contribution in the amount of $1,000 for 2005 and 2004 and
$750 for 2003.
 (4)
    
    Mr. Borcich resigned from our company in October 2005. Annual compensation amounts include
his base salary through the date of his resignation. Included in All Other Compensation for
Mr. Borcich is severance of $35,750.
 (5)
    
    Represents a 401(k) plan matching contribution.
 32




---



##### Table of Contents



Option Grants
  OPTION GRANTS IN LAST FISCAL YEAR
 Potential RealizableIndividual Grants
    
    Value at AssumedNumber of
    
    Percentage of Total
    
    
    
    
    
    
    
    
    
    Annual RatesSecurities
    
    Options
    
    
    
    
    
    
    
    
    
    of Stock PriceUnderlying
    
    Granted to
    
    
    
    
    
    
    
    
    
    Appreciation forOptions
    
    Employees in
    
    Exercise
    
    Expiration
    
    Option Term(2)Name
    
    Granted (#)(1)
    
    Fiscal Year
    
    Price
    
    Date
    
    5%
    
    10%Gregory K. Roeper
    
    
    
    
    
    
    10,000
    
    
    
    15.7
    %
    
    $
    6.56
    
    
    
    2/10/10
    
    
    $
    18,124
    
    
    $
    40,049David A. Husband
    
    
    
    
    
    
    7,500
    
    
    
    11.8
    %
    
    $
    6.56
    
    
    
    2/10/10
    
    
    $
    13,593
    
    
    $
    30,037Stephen L. Borcich
    
    
    
    
    
    
    5,000
    
    
    
    7.8
    %
    
    $
    6.56
    
    
    
    2/10/10
    
    
    $
    9,062
    
    
    $
    20,025
 
 (1)
    
    Each of the options granted vested on October 20, 2005.(2)
    
    Potential gains are net of the exercise price, but before taxes associated with the exercise.
Amounts represent hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with SEC rules and do not represent our estimate or
projection of the future price of our common stock. Actual gains, if any, on stock option
exercises will depend upon the future market prices of our common stock. Aggregate Option Exercises and Fiscal Year-End Option Holdings
  AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
 AND FISCAL YEAR-END OPTION VALUES
 Number of securities

    
    Value of UnexercisedUnderlying Unexercised(#)

    
    
    
    In-the-Money Options at FiscalShares Acquired on
    
    Value
    
    Options at Fiscal Year-End
    
    Year-End ($) (1)Name
    
    Exercise (#)
    
    Realized ($)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableGregory K. Roeper
    
    
    
    
    
    $
    
    
    
    
    263,750
    
    
    
    
    
    
    $
    647,000
    
    
    
    David A. Husband
    
    
    
    
    
    
    
    
    
    
    103,750
    
    
    
    
    
    
    $
    392,938
    
    
    
    Stephen L. Borcich (2)
    
    
    60,000
    
    
    $
    193,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Calculated based upon the closing price of our common stock as reported on the Nasdaq
SmallCap Market on December 31, 2005 of $5.50 per share.(2)
    
    Mr. Borcich resigned as an officer of our company during October 2005. All of his
unvested options were cancelled at that time and his vested options that were not exercised
were terminated during December 2005. 33




---



##### Table of Contents



Employment Agreements
 Gregory K. Roeper
    David A. Husband
     
    
    reimburse each executive for all travel, entertainment, and other ordinary and
necessary expenses incurred in connection with our business and their duties under
their respective employment agreements; and
 34




---



##### Table of Contents




    
    provide such other fringe benefits that we make generally available to all of our
employees on a non-discriminatory basis.
  
    
    competing with us for a period of 12 months after the termination of the executives
employment with our company,
    
    taking certain actions intended to solicit other persons to terminate their business
relationship with us or to terminate his or her employment relationship with us, and
    
    making unauthorized use or disclosure of our trade names, fictitious names, or
confidential information.
 Other Arrangements
  401(k) Profit Sharing Plan
  1994 Stock Option Plan
  
    
    the granting of incentive stock options or nonqualified options to acquire our common stock;
    
    the granting of stock appreciation rights;
    
    the direct granting of shares of our common stock; and
    
    the granting of other cash awards to key employees of our company and to consultants
or independent contractors who provide valuable services to us.
   35




---



##### Table of Contents



2003 Incentive Compensation Plan
   General Terms of the 2003 Plan; Shares Available for Issuance
   Eligibility and Administration
   36




---



##### Table of Contents



Terms of Awards
 General
  Options
    37




---



##### Table of Contents



Stock Appreciation Rights
  Restricted Stock
    Bonus Stock and Awards in Lieu of Obligations
  Other Stock-Based Awards
  38




---



##### Table of Contents



Automatic Grant Program
   Other Provisions
  Duration and Modification
   Director Compensation and Other Information
  39




---



##### Table of Contents



Compensation Committee Interlocks and Insider Participation
  Limitation of Directors Liability and Indemnification
  
    
    for any breach of the directors duty of loyalty to our company or our stockholders;
    
    for acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law;
    
    in respect of certain unlawful dividend payments or stock purchases; or
    
    for any transaction from which the director derived an improper personal benefit.
   40




---



##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Number ofName and Address of Beneficial Owner (1)
    
    Shares (2)
    
    Percent (2)Directors and Executive Officers:William J. Hinz
    
    
    80,000
    (3)
    
    
    2.1
    %Gregory K. Roeper
    
    
    274,475
    (4)
    
    
    6.8
    %David A. Husband
    
    
    123,600
    (5)
    
    
    3.2
    %Stephen L. Borcich
    
    
    23,000
    
    
    
    *Jong Dae An
    
    
    10,000
    (6)
    
    
    *Donald A. Bliss
    
    
    5,000
    (7)
    
    
    *Jack A. Henry
    
    
    25,900
    (8)
    
    
    *Emmett E. Mitchell
    
    
    18,300
    (9)
    
    
    *Paul D. Sonkin
    
    
    520,414
    (10)
    
    
    13.7
    %All directors and officers as a group (9 persons)
    
    
    1,080,689
    
    
    
    25.2
    %Non-management 5% Stockholders:LG-Nortel Co. Ltd.
    
    
    862,500
    (11)
    
    
    22.9
    %Hummingbird Management, LLC
    
    
    505,414
    (10)
    
    
    13.4
    %Barclays Global Investors,
NA
    
    
    222,343
    (12)
    
    
    5.4
    %
 
 *
    
    Less than 1%(1)
    
    Each person named in the table has sole voting and investment power with respect to all
common stock beneficially owned by him, subject to applicable community property law, except
as otherwise indicated. Except as otherwise indicated, each person may be reached at 4717
East Hilton Avenue, Suite 400, Phoenix, Arizona 85034.(2)
    
    The percentages shown are calculated based upon 3,774,233 shares of our common stock
outstanding on December 31, 2005. The percentages shown include the shares of common stock
that each named stockholder has the right to acquire within 60 days of December 31, 2005. In
calculating ownership percentage, all shares of common stock that the named stockholder has
the right to acquire upon exercise of stock options within 60 days of December 31, 2005 are
deemed to be outstanding for the purpose of computing the percentage of common stock owned by
such stockholder, but are not deemed to be outstanding for the purpose of computing the
ownership percentage of any other stockholder. Percentages may be rounded. Includes, when
applicable, shares owned of record by such persons children and spouse and by other related
individuals and entities over whose shares of common stock such person has sole or shared
voting control or power of disposition.(3)
    
    Includes 80,000 shares of common stock issuable upon exercise of options.(4)
    
    Includes 10,725 shares of common stock and 263,750 shares of common stock issuable upon
exercise of options.(5)
    
    Includes 19,850 shares of common stock and 103,750 shares of common stock issuable upon
exercise of options.(6)
    
    Includes 10,000 shares of common stock issuable upon exercise of options.
(7) Includes 5,000 shares of common stock issuable upon exercise of options.(8)
    
    Includes 900 shares of common stock and 25,000 shares of common stock issuable upon exercise
of stock options. 41




---



##### Table of Contents



(9)
    
    Includes 3,300 shares of common stock and 15,000 shares issuable upon exercise of options.(10)
    
    Mr. Sonkin is a control person of Humingbird Management, LLC. Amounts listed for Hummingbird
represent 505,414 shares of common stock beneficially owned by Hummingbird Management, LLC
(f/k/a Morningside Value Investors, LLC), as investment manager to The Hummingbird Value Fund,
L.P. The managing member of Hummingbird Management is Paul D. Sonkin, who also serves as the
managing member of HVF Capital, the general partner of The Hummingbird Value Fund and The
Hummingbird Microcap Value Fund. Hummingbird Management has sole voting and dispositive power
over the shares, and Hummingbird Management disclaims any economic interest or beneficial
ownership of the shares. The address of Hummingbird Management, LLC is 460 Park Avenue,
12th Floor, New York, New York 10022. In addition to the amounts listed for
Hummingbird Management, Mr. Sonkins beneficial ownership, for which Mr. Sonkin has sole
voting and dispositive power, includes 15,000 shares issuable upon exercise of options, which
is not included in the beneficial ownership of Hummingbird Management.(11)
    
    Represents 862,500 shares of our common stock held by LG-Nortel Co. Ltd., a Korean
corporation. LG-Nortel is a joint venture between LG Electronics Inc. and Nortel Networks
Limited, a wholly owned subsidiary of Nortel Networks Corporation. LG-Nortel has sole voting
and dispositive power over such shares, however, NNL is the majority shareholder of LG-Nortel.
NNL and NNC have shared voting and dispositive power over such shares. The principal
executive offices of LG-Nortel is 7th, 8th Floor, GS Kangnam Tower 679, Yeoksam-dong,
Kangnam-gu, Seoul, 135-985, Korea. The principal executive offices of NNL and NNC is 8200
Dixie Road, Suite 100, Brampton, Ontario, Canada L6T 5P6.(12)
    
    Represents shares of common stock beneficially owned by Barclays Global Investors, NA.
Barclays has sole voting power and sole dispositive power over all of such shares. The
address of Barclays is 45 Fremont Street, San Francisco, California 94105. 42




---



##### Table of Contents



Equity Compensation Plan Information
  (c)Number of(a)
    
    
    
    
    
    
    SecuritiesNumber of
    
    
    
    
    
    
    Remaining AvailableSecurities to be
    
    
    (b)
    
    
    for Future IssuanceIssued Upon
    
    
    Weighted Average
    
    
    Under EquityExercise of
    
    
    Exercise Price of
    
    
    Compensation PlansOutstanding
    
    
    Outstanding
    
    
    (ExcludingOptions, Warrants,
    
    
    Options, Warrants,
    
    
    SecuritiesPlan Category
    
    and Rights
    
    
    and Rights
    
    
    Reflected in Column (a))Equity Compensation
Plans Approved by
Stockholders
    
    
    717,865
    
    
    $
    3.27
    
    
    
    447,500Equity Compensation
Plans Not Approved
by Stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    717,865
    
    
    $
    3.27
    
    
    
    447,500
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
   43




---



##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  2005
    
    2004Audit Fees (1)
    
    $
    79,000
    
    
    $
    80,000Audit-Related Fees (2)
    
    $
    7,875
    
    
    $
    7,000Tax Fees (3)
    
    $
    15,850
    
    
    $
    21,404All Other Fees
    
    $
    
    
    
    $
    
 
 (1)
    
    Represents fees associated with the audit of our annual consolidated financial statements,
review of our quarterly consolidated financial statements, and related consents.(2)
    
    Represents fees associated with the audit of our 401(k) benefit plan.(3)
    
    Represents fees associated with the preparation of our corporate, federal, and state income
tax returns and assistance with our quarterly estimated tax payments. Audit Committee Pre-Approval Policies
     44




---



##### Table of Contents



PART IV
 
 ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.
 (a) Financial Statements and Financial Statement Schedules
 (1)
    
    Financial Statements are listed in the Index to Consolidated Financial
Statements on page F-1 of this report.(2)
    
    Financial Statement Schedules: Schedule II, Valuation and Qualifying Accounts
is set forth on page S-2 of this report.
 (b) Exhibits
 ExhibitNumber
    
    Exhibit3.1
    
    Amended Certificate of Incorporation of the Registrant (l)3.2
    
    Amended and Restated Bylaws of the Registrant (l)4.1
    
    Form of Certificate representing shares of Common Stock, par value $.001 per share (1)10.13A
    
    Vodavi Single Line Telephone Agreement Extension dated April 4, 1997 between Vodavi
Communications Systems, Inc. and L.G. Srithai Electronics Co., Ltd. (2)10.35
    
    Repair and Refurbishment Agreement dated June 24, 1999, between Vodavi Communication
Systems, Inc. and Aztec International LLC (4)10.47
    
    Sublease Agreement dated August 8, 2001, between Vodavi Communications Systems, Inc. and
SpeedFam-IPEC, Inc. (5)10.49
    
    Second Amended and Restated 1994 Stock Option Plan (amended through May 13, 2002) (6)10.53
    
    Credit Agreement dated as of April 10, 2003 by and between Vodavi Communication Systems,
Inc. and Comerica Bank  California. (7)10.54
    
    Vodavi Technology, Inc. 2003 Incentive Compensation Plan (8)10.55
    
    Employment Agreement, effective October 1, 2003, between Gregory K. Roeper and Vodavi
Technology, Inc. (8)10.56
    
    Employment Agreement, effective January 1, 2004, between David A. Husband and Vodavi
Technology, Inc. (8)10.58
    
    Modification to Credit Agreement, dated February 15, 2005, between Vodavi Communications
Systems, Inc. and Comerica Bank (9)10.59
    
    Vodavi Key System Agreement, dated January 1, 2005, between Vodavi Communications Systems,
Inc. and LG Electronics, Inc. (9)21
    
    List of Subsidiaries23.1
    
    Consent of Mayer Hoffman McCann P.C.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (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)
    
    Not Used.(4)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, as filed on August 16, 1999. 45




---



##### Table of Contents



(5)
    
    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.(6)
    
    Incorporated by reference to Registration Statement on Form S-8 (No. 333-98819) as filed by
the Registrant on August 27, 2002.(7)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2003, as filed on April 29, 2003.(8)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2003, as filed on March 12, 2004.(9)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 30, 2004, as filed on March 29, 2005. 46




---



##### Table of Contents



SIGNATURES
  VODAVI TECHNOLOGY, INC.Date:  March 29, 2006
    By:
    /s/ Gregory K. RoeperGregory K. RoeperPresident and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ William J. Hinz

William J. Hinz
    
    Chairman of the Board
    
    March 29, 2006/s/ Gregory K. Roeper

Gregory K. Roeper
    
    President, Chief Executive Officer, and
Director
(Principal Executive Officer)
    
    March 29, 2006/s/ David A. Husband

David A. Husband
    
    Vice President  Finance, Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial and Accounting Officer)
    
    March 29, 2006/s/ Jong Dae An

Jong Dae An
    
    Director
    
    March 29, 2006/s/ Donald A. Bliss

Donald A. Bliss
    
    Director
    
    March 29, 2006/s/ Jack A. Henry

Jack A. Henry
    
    Director
    
    March 29, 2006/s/ Emmett E. Mitchell

Emmett E. Mitchell
    
    Director
    
    March 29, 2006/s/ Paul D. Sonkin
    
    Director
    
    March 29, 2006Paul D. Sonkin
 47




---



##### Table of Contents



VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
 
 Index to Consolidated Financial Statements and Schedule
 PageReport of Independent Registered Public Accounting Firm  Mayer Hoffman McCann P.C
    
    
    F-2Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-3Consolidated Statements of Operations for the Years Ended
December 31, 2005, 2004, and 2003
    
    
    F-4Consolidated Statements of Changes in Stockholders Equity for
the Years Ended December 31, 2005, 2004, and 2003
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004, and 2003
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Report of Independent Registered Public Accounting Firm on Schedule  Mayer Hoffman McCann P.C.
    
    
    S-1Schedule II  Valuation and Qualifying Accounts
    
    
    S-2
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  VODAVI TECHNOLOGY, INC.
    
 F-2




---



##### Table of Contents



VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
 
  In thousands except share and per share amounts
 December 31,2005
    
    
    2004AssetsCurrent AssetsCash
    
    $
    6,538
    
    
    $
    4,000Accounts receivable, net of reserves for doubtful accounts
and sales returns of $279 in 2005 and $387 in 2004
    
    
    7,126
    
    
    
    7,145Inventories
    
    
    3,543
    
    
    
    4,569Deferred income taxes
    
    
    446
    
    
    
    454Prepaid expenses and other
    
    
    508
    
    
    
    519Total current assets
    
    
    18,161
    
    
    
    16,687Property and equipment, net
    
    
    1,228
    
    
    
    1,363Goodwill
    
    
    
    
    
    
    725Deferred Income Taxes
    
    
    168
    
    
    
    Other Long-Term Assets, net
    
    
    45
    
    
    
    50$
    19,602
    
    
    $
    18,825Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    451
    
    
    $
    497Accrued liabilities
    
    
    944
    
    
    
    1,352Accrued rebates
    
    
    453
    
    
    
    641Trade accounts payable to stockholder
    
    
    4,097
    
    
    
    3,990Total current liabilities
    
    
    5,945
    
    
    
    6,480Deferred Income Taxes
    
    
    
    
    
    
    24Commitments and Contingencies (Note 3)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;
3,850,974 and 3,747,464 shares issued at December 31, 2005
and 2004, respectively
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    11,814
    
    
    
    11,495Retained earnings
    
    
    2,227
    
    
    
    974Treasury stock, 76,741 and 32,402 shares at cost, respectively
    
    
    (388
    )
    
    
    (152
    )13,657
    
    
    
    12,321$
    19,602
    
    
    $
    18,825
  F-3




---



##### Table of Contents



VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
 
  In thousands except per share amounts
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Revenue, net
    
    $
    43,675
    
    
    $
    43,791
    
    
    $
    41,270Cost
of Goods Sold
    
    
    27,887
    
    
    
    28,360
    
    
    
    26,985Gross Margin
    
    
    15,788
    
    
    
    15,431
    
    
    
    14,285Operating Expenses:Engineering and product development
    
    
    1,969
    
    
    
    1,889
    
    
    
    2,071Selling, general, and administrative
    
    
    11,185
    
    
    
    10,562
    
    
    
    10,011Goodwill Impairment
    
    
    725
    
    
    
    
    
    
    
    13,879
    
    
    
    12,451
    
    
    
    12,082Operating Income
    
    
    1,909
    
    
    
    2,980
    
    
    
    2,203Interest (Income) Expense
    
    
    (108
    )
    
    
    6
    
    
    
    128Income Before Income Taxes
    
    
    2,017
    
    
    
    2,974
    
    
    
    2,075Provision for Income Taxes
    
    
    764
    
    
    
    1,144
    
    
    
    804Net Income
    
    $
    1,253
    
    
    $
    1,830
    
    
    $
    1,271Earnings Per Share:Basic
    
    $
    0.34
    
    
    $
    0.50
    
    
    $
    0.33Diluted
    
    $
    0.31
    
    
    $
    0.44
    
    
    $
    0.30Weighted Average Shares Outstanding:Basic
    
    
    3,725
    
    
    
    3,651
    
    
    
    3,906Diluted
    
    
    4,090
    
    
    
    4,120
    
    
    
    4,170
 
 F-4




---



##### Table of Contents



VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
 
  In thousands except share amounts
 Additional
    
    
    RetainedCommon Stock
    
    
    Paid-In
    
    
    Earnings
    
    
    Treasury StockShares Issued
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)
    
    
    Shares
    
    
    Amount
    
    
    TotalBalance, December 31, 2002
    
    
    4,668,488
    
    
    $
    5
    
    
    $
    13,503
    
    
    $
    (2,127
    )
    
    
    (318,700
    )
    
    $
    (759
    )
    
    $
    10,622Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,271
    
    
    
    
    
    
    
    
    
    
    
    1,271Stock Repurchase
    
    
    (829,199
    )
    
    
    (1
    )
    
    
    (2,062
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,063
    )Options Exercised
    
    
    89,875
    
    
    
    
    
    
    
    218
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218Stock Option Tax Benefit
    
    
    
    
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136Stockholder Contribution
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Balance, December 31, 2003
    
    
    3,929,164
    
    
    
    4
    
    
    
    11,800
    
    
    
    (856
    )
    
    
    (318,700
    )
    
    
    (759
    )
    
    
    10,189Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,830
    
    
    
    
    
    
    
    
    
    
    
    1,830Stock Repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,402
    )
    
    
    (152
    )
    
    
    (152
    )Retire Treasury Stock
    
    
    (318,700
    )
    
    
    
    
    
    
    (759
    )
    
    
    
    
    
    
    318,700
    
    
    
    759
    
    
    
    Options Exercised
    
    
    137,000
    
    
    
    
    
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    322Stock Option Tax Benefit
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132Balance, December 31, 2004
    
    
    3,747,464
    
    
    
    4
    
    
    
    11,495
    
    
    
    974
    
    
    
    (32,402
    )
    
    
    (152
    )
    
    
    12,321Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,253
    
    
    
    
    
    
    
    
    
    
    
    1,253Stock Repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,339
    )
    
    
    (236
    )
    
    
    (236
    )Options Exercised
    
    
    103,510
    
    
    
    
    
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    213Stock Option Tax Benefit
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106Balance, December 31, 2005
    
    
    3,850,974
    
    
    $
    4
    
    
    $
    11,814
    
    
    $
    2,227
    
    
    
    (76,741
    )
    
    $
    (388
    )
    
    $
    13,657
  F-5




---



##### Table of Contents



VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
 
  In thousands
 Years ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from Operating Activities:Net income
    
    $
    1,253
    
    
    $
    1,830
    
    
    $
    1,271Adjustments to reconcile net income to net
cash provided by operating activities:Loss on sale of property and equipment
    
    
    13
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    469
    
    
    
    492
    
    
    
    467Goodwill impairment
    
    
    725
    
    
    
    
    
    
    
    Tax benefit on stock option exercises
    
    
    106
    
    
    
    132
    
    
    
    136Provision for doubtful accounts and
sales returns
    
    
    48
    
    
    
    88
    
    
    
    146Deferred taxes
    
    
    (184
    )
    
    
    49
    
    
    
    117Changes in working capital:Accounts receivable
    
    
    (29
    )
    
    
    (245
    )
    
    
    (463
    )Inventories
    
    
    1,026
    
    
    
    546
    
    
    
    435Income tax receivable
    
    
    
    
    
    
    
    
    
    
    300Prepaid expenses and other
    
    
    11
    
    
    
    249
    
    
    
    (37
    )Other long-term assets
    
    
    
    
    
    
    
    
    
    
    (47
    )Accounts payable
    
    
    (46
    )
    
    
    (534
    )
    
    
    (219
    )Trade accounts payable to stockholder
    
    
    107
    
    
    
    (218
    )
    
    
    243Accrued liabilities and accrued rebates
    
    
    (596
    )
    
    
    (202
    )
    
    
    644Net cash provided by
operating activities
    
    
    2,903
    
    
    
    2,187
    
    
    
    2,993Cash flows from Investing Activities:Cash paid to acquire property and equipment
    
    
    (348
    )
    
    
    (381
    )
    
    
    (270
    )Proceeds from sale of property and equipment
    
    
    6
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (342
    )
    
    
    (381
    )
    
    
    (270
    )Cash Flows from Financing Activities:Borrowings on term loan
    
    
    
    
    
    
    
    
    
    
    1,000Repayments on term loan
    
    
    
    
    
    
    (900
    )
    
    
    (100
    )Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    (2,063
    )Purchase of treasury stock
    
    
    (236
    )
    
    
    (152
    )
    
    
    Stock options exercised
    
    
    213
    
    
    
    322
    
    
    
    218Stockholder contribution
    
    
    
    
    
    
    
    
    
    
    5Net cash used in financing
activities
    
    
    (23
    )
    
    
    (730
    )
    
    
    (940
    )Change in Cash
    
    
    2,538
    
    
    
    1,076
    
    
    
    1,783Cash, beginning of period
    
    
    4,000
    
    
    
    2,924
    
    
    
    1,141Cash, end of period
    
    $
    6,538
    
    
    $
    4,000
    
    
    $
    2,924
  F-6




---



##### Table of Contents



VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
 
   Nature of Business and Summary of Significant Accounting Policies
 Nature of Business
   Concentrations
   Principles of Consolidation
  Use of Estimates
   F-7




---



##### Table of Contents



Inventories
   Property and Equipment
   Useful LifeType of Asset
    
    In Years

    
    2005
    
    
    2004(in thousands)Office and computer equipment
    
    
    3-5
    
    
    $
    2,510
    
    
    $
    2,913Furniture and fixtures
    
    
    7-10
    
    
    
    495
    
    
    
    494Tooling and test equipment
    
    
    5-8
    
    
    
    1,956
    
    
    
    1,9254,962
    
    
    
    5,332Less  accumulated depreciation
    
    
    
    
    
    
    (3,734
    )
    
    
    (3,969
    )$
    1,228
    
    
    $
    1,363
  Goodwill
   F-8




---



##### Table of Contents



Other Long-Term Assets
  Impairment of Long-Lived Assets
  Recent Accounting Pronouncements
  Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.
 Income Taxes
  F-9




---



##### Table of Contents



Revenue Recognition
  Engineering and Product Development
  Stock Option Plans
    F-10




---



##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003(in thousands, except per share amounts)Net income :As reported
    
    $
    1,253
    
    
    $
    1,830
    
    
    $
    1,271Employee compensation included in net income
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted, net of taxes (1)
    
    
    (258
    )
    
    
    (198
    )
    
    
    (105
    )Pro forma
    
    $
    995
    
    
    $
    1,632
    
    
    $
    1,166Earnings per share:As reported  basic
    
    $
    0.34
    
    
    $
    0.50
    
    
    $
    0.33As reported  diluted
    
    $
    0.31
    
    
    $
    0.44
    
    
    $
    0.30Pro forma  basic
    
    $
    0.27
    
    
    $
    0.45
    
    
    $
    0.30Pro forma  diluted
    
    $
    0.24
    
    
    $
    0.40
    
    
    $
    0.28
 
 (1)
    
    The fair value of options granted was determined by using the Black-Scholes
option pricing model using the following assumptions: Years Ended December 31,2005
    
    2004
    
    2003Risk free interest rate
    
    
    3.90%-4.40
    %
    
    
    3.20
    %
    
    
    3.05
    %Expected dividends
    
    None
    
    None
    
    NoneExpected lives in years
    
    
    3.0-4.3
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    47.4%-56.1
    %
    
    
    86.4
    %
    
    
    76.1
    %
 Earnings Per Share
   2005
    
    
    2004
    
    
    2003(In thousands, except per share data)Net Income
    
    $
    1,253
    
    
    $
    1,830
    
    
    $
    1,271Weighted average common shares for
basic earnings per share
    
    
    3,725
    
    
    
    3,651
    
    
    
    3,906Effect of dilutive stock options(1)
    
    
    365
    
    
    
    469
    
    
    
    264Weighted average common shares for
diluted earnings per share
    
    
    4,090
    
    
    
    4,120
    
    
    
    4,170Basic earnings per share
    
    $
    0.34
    
    
    $
    0.50
    
    
    $
    0.33Diluted earnings per share
    
    $
    0.31
    
    
    $
    0.44
    
    
    $
    0.30
 
 (1)
    
    Dilutive securities are calculated using the treasury stock method and the average market price
during the period. Options on 129,000, 87,000 and 243,000 shares had an exercise price greater
than the average market price during the years ended December 31, 2005, 2004, and 2003,
respectively, and therefore did not enter into the earnings per share calculation as their effect
would have been anti-dilutive. F-11




---



##### Table of Contents



Fair Value of Financial Instruments
  Segments
  Revolving Credit Facility
    Commitments and Contingencies
 Legal Matters
  Operating Leases
  F-12




---



##### Table of Contents



Years Ending December 31,
    
    Operating Leases2006
    
    
    8132007
    
    
    7852008
    
    
    7852009
    
    
    7852010
    
    
    785Thereafter
    
    
    785Total minimum lease commitments
    
    $
    4,738
  401(k) Profit Sharing Plan
  Stockholders Equity
 Treasury Stock
  Vodavi Technology, Inc. 1994 Stock Option Plan (the 1994 Plan)
  Vodavi Technology, Inc. 2003 Incentive Compensation Plan (the 2003
Plan)
  F - 13




---



##### Table of Contents



December 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOptions outstanding at
beginning of period
    
    
    738,625
    
    
    $
    2.84
    
    
    
    863,125
    
    
    $
    2.46
    
    
    
    880,500
    
    
    $
    2.89Granted
    
    
    93,750
    
    
    
    5.70
    
    
    
    73,750
    
    
    
    6.19
    
    
    
    185,000
    
    
    
    1.81Forfeited
    
    
    (11,000
    )
    
    
    6.61
    
    
    
    (61,250
    )
    
    
    7.00
    
    
    
    (112,500
    )
    
    
    4.84Exercised
    
    
    (103,510
    )
    
    
    2.05
    
    
    
    (137,000
    )
    
    
    2.35
    
    
    
    (89,875
    )
    
    
    2.43Options outstanding at end
of period
    
    
    717,865
    
    
    $
    3.27
    
    
    
    738,625
    
    
    $
    2.84
    
    
    
    863,125
    
    
    $
    2.46Options available for grant
    
    
    447,500
    
    
    
    
    
    
    
    531,250
    
    
    
    
    
    
    
    1,094,500(1)Exercisable at end of
period
    
    
    717,865
    
    
    $
    3.27
    
    
    
    532,250
    
    
    $
    2.79
    
    
    
    517,000
    
    
    $
    3.00Weighted average fair
value of options granted
    
    
    
    
    
    $
    2.41
    
    
    
    
    
    
    $
    4.28
    
    
    
    
    
    
    $
    0.82
 
 (1)
    
    Options available for grant at December 31, 2003 included 494,500 under the 1994
Plan and 600,000 under the 2003 Plan. The Company canceled all remaining options available for
grant under the 1994 Plan when it expired in April 2004. F - 14




---



##### Table of Contents



As of December 31, 2005Weighted-AverageNumber



    Remaining
    


    Weighted-Range of
    

    Outstanding



    Contractual



    AverageExercise Prices
    

    and Exercisable



    Life(in years)



    Exercise Price$0.99- $2.19
    

    231,865
    


    6.3
    


    $1.30$2.20 - $3.40
    

    207,000
    


    3.6
    


    $2.63$3.41 - $5.83
    

    149,750
    


    5.0
    


    $4.51$5.84 - $7.05
    

    129,250
    


    4.1
    


    $6.38717,865
    


    4.9
    


    $3.27
 Income Taxes
  2005
    
    
    2004
    
    
    2003(in thousands)Current
    
    $
    948
    
    
    $
    1,095
    
    
    $
    687Deferred
    
    
    (184
    )
    
    
    49
    
    
    
    117$
    764
    
    
    $
    1,144
    
    
    $
    804
  2005
    
    
    2004(in thousands)Current deferred tax assets:Receivable reserves
    
    $
    74
    
    
    $
    73UNICAP adjustment
    
    
    79
    
    
    
    79Other reserves and accruals
    
    
    253
    
    
    
    262Research and development credits
    
    
    40
    
    
    
    40$
    446
    
    
    $
    454Long-term deferred tax assets (liabilities):Depreciation and amortization differences (1)
    
    $
    168
    
    
    $
    (24
    )
 
 (1)The Company had a valuation allowance of $122,000 and $127,000 on
certain long-term deferred tax assets as of December 31, 2005 and 2004,
respectively.  F - 15




---



##### Table of Contents



2005
    
    2004
    
    2003Federal statutory tax rate
    
    34.0%
    
    34.0%
    
    34.0%State taxes, net
    
    3.6
    
    3.6
    
    3.3Research and development and other tax credits
    
    (0.1)
    
    (0.5)
    
    (1.6)Non-deductible expenses, reserves, and other
permanent differences
    
    0.4
    
    1.4
    
    3.037.9%
    
    38.5%
    
    38.7%
 Related Party Transactions
   Supplemental Cash Flow Information
  2005
    
    2004
    
    2003(in thousands)Interest
    
    $
    
    
    
    $
    15
    
    
    $
    128Income taxes
    
    $
    970
    
    
    $
    1,232
    
    
    $
    195
  F - 16




---



##### Table of Contents



Summary of Quarterly Results (unaudited) (in thousands, except per share amounts)
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2005Revenue, net
    
    $
    9,866
    
    
    $
    10,598
    
    
    $
    12,256
    
    
    $
    10,955Gross margin
    
    
    3,474
    
    
    
    3,861
    
    
    
    4,527
    
    
    
    3,926Income before income taxes
    
    
    314
    
    
    
    595
    
    
    
    1,074
    
    
    
    34Provision for income taxes
    
    
    119
    
    
    
    226
    
    
    
    408
    
    
    
    11Net income
    
    $
    195
    
    
    $
    369
    
    
    $
    666
    
    
    $
    23Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.002004Revenue, net
    
    $
    9,787
    
    
    $
    11,240
    
    
    $
    11,690
    
    
    $
    11,074Gross margin
    
    
    3,380
    
    
    
    3,944
    
    
    
    4,161
    
    
    
    3,946Income before income taxes
    
    
    350
    
    
    
    736
    
    
    
    1,068
    
    
    
    820Provision for income taxes
    
    
    134
    
    
    
    283
    
    
    
    411
    
    
    
    316Net income
    
    $
    216
    
    
    $
    453
    
    
    $
    657
    
    
    $
    504Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.12
 F - 17




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE
  VODAVI TECHNOLOGY, INC.
  
 S - 1




---



##### Table of Contents



SCHEDULE II
 
 Valuation and Qualifying Accounts
 For the years ended December 31, 2005, 2004, and 2003   In thousands
 2005
    
    
    2004
    
    
    2003Reserves for doubtful accounts and sales returns:Balance at beginning of year
    
    $
    387
    
    
    $
    345
    
    
    $
    422Provision charged to expense
    
    
    48
    
    
    
    88
    
    
    
    146Write-offs
    
    
    (156
    )
    
    
    (46
    )
    
    
    (223
    )Balance at end of year
    
    $
    279
    
    
    $
    387
    
    
    $
    345Reserves for excess and obsolete inventory:Balance at beginning of year
    
    $
    412
    
    
    $
    321
    
    
    $
    344Provision charged to expense
    
    
    90
    
    
    
    240
    
    
    
    310Write-offs
    
    
    (217
    )
    
    
    (149
    )
    
    
    (333
    )Balance at end of year
    
    $
    285
    
    
    $
    412
    
    
    $
    321
 S - 2




---



##### Table of Contents






EXHIBIT
INDEX


ExhibitNumber
    
    Exhibit3.1
    
    Amended Certificate of Incorporation of the Registrant (l)3.2
    
    Amended and Restated Bylaws of the Registrant (l)4.1
    
    Form of Certificate representing shares of Common Stock, par value $.001 per share (1)10.13A
    
    Vodavi Single Line Telephone Agreement Extension dated April 4, 1997 between Vodavi
Communications Systems, Inc. and L.G. Srithai Electronics Co., Ltd. (2)10.35
    
    Repair and Refurbishment Agreement dated June 24, 1999, between Vodavi Communication
Systems, Inc. and Aztec International LLC (4)10.47
    
    Sublease Agreement dated August 8, 2001, between Vodavi Communications Systems, Inc. and
SpeedFam-IPEC, Inc. (5)10.49
    
    Second Amended and Restated 1994 Stock Option Plan (amended through May 13, 2002) (6)10.53
    
    Credit Agreement dated as of April 10, 2003 by and between Vodavi Communication Systems,
Inc. and Comerica Bank  California. (7)10.54
    
    Vodavi Technology, Inc. 2003 Incentive Compensation Plan (8)10.55
    
    Employment Agreement, effective October 1, 2003, between Gregory K. Roeper and Vodavi
Technology, Inc. (8)10.56
    
    Employment Agreement, effective January 1, 2004, between David A. Husband and Vodavi
Technology, Inc. (8)10.58
    
    Modification to Credit Agreement, dated February 15, 2005, between Vodavi Communications
Systems, Inc. and Comerica Bank (9)10.59
    
    Vodavi Key System Agreement, dated January 1, 2005, between Vodavi Communications Systems,
Inc. and LG Electronics, Inc. (9)21
    
    List of Subsidiaries23.1
    
    Consent of Mayer Hoffman McCann P.C.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (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)
    
    Not Used.(4)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, as filed on August 16, 1999.(5)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001, as filed on November 13, 2001.(6)
    
    Incorporated by reference to Registration Statement on Form S-8 (No. 333-98819) as filed by
the Registrant on August 27, 2002.(7)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2003, as filed on April 29, 2003.(8)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, as filed on March 12, 2004.(9)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 30, 2004, as filed on March 29, 2005.