##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM
10-K/A
 Amendment
No. 2
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 Commission file number 1-10211
 INTER-TEL
(DELAWARE), INCORPORATED
 
 Delaware
(State or other jurisdiction of incorporation or organization)
    
    86-0220994
(I.R.S. Employer Identification No.)1615 S. 52nd Street
Tempe, Arizona
(Address of principal executive offices)
(Registrants telephone number, including area code)
    
    85281
(Zip Code)
(480) 449-8900
   o þ
 o þ
 þ o
 o þ
  Large accelerated filer o
    
    Accelerated Filer þ
    
    Non-accelerated filer o
 o þ




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##### 



DOCUMENTS INCORPORATED BY REFERENCE
  INTER-TEL
(DELAWARE), INCORPORATED
2005 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
 PagePART IIItem 8
    
    Financial Statements and Supplementary Data
    
    
    3PART IVItem 15
    
    Exhibits, Financial Statement Schedule and Reports on Form 8-K
    
    
    34Signatures
    
    
    34Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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##### Table of Contents



EXPLANATORY
NOTE
 There are no changes to the Companys financial
statements whatsoever.
   
 PART
II
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
 
      /s/ Ernst & Young LLP 
 3




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##### Table of Contents



INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)2005
    
    
    2004RestatedASSETSCURRENT ASSETSCash and equivalents
    
    $
    103,774
    
    
    $
    152,330Short-term investments
    
    
    63,689
    
    
    
    52,644TOTAL CASH AND SHORT-TERM INVESTMENTS
    
    
    167,463
    
    
    
    204,974Accounts receivable, net of allowances of $6,235
in 2005 and $9,921 in 2004
    
    
    44,072
    
    
    
    44,167Inventories
    
    
    19,644
    
    
    
    16,055Net investment in sales-leases, net of allowances
of $998 in 2005 and $886 in 2004
    
    
    19,699
    
    
    
    17,151Income taxes receivable
    
    
    2,062
    
    
    
    4,017Deferred income taxes
    
    
    12,590
    
    
    
    10,563Prepaid expenses and other assets
    
    
    14,253
    
    
    
    7,194TOTAL CURRENT ASSETS
    
    
    279,783
    
    
    
    304,121LONG-TERM INVESTMENTS
    
    
    
    
    
    
    9,900PROPERTY, PLANT & EQUIPMENT
    
    
    28,236
    
    
    
    27,840GOODWILL
    
    
    29,840
    
    
    
    21,057PURCHASED INTANGIBLE ASSETS
    
    
    23,651
    
    
    
    10,987NET INVESTMENT IN SALES-LEASES, net of allowances
of $1,926 in 2005 and $1,810 in 2004
    
    
    34,758
    
    
    
    33,877TOTAL ASSETS
    
    $
    396,268
    
    
    $
    407,782LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    29,879
    
    
    $
    30,801Other current liabilities
    
    
    54,386
    
    
    
    52,923TOTAL CURRENT LIABILITIES
    
    
    84,265
    
    
    
    83,724DEFERRED TAX LIABILITY
    
    
    70,439
    
    
    
    65,925LEASE RECOURSE LIABILITY
    
    
    14,199
    
    
    
    12,241OTHER LIABILITIES
    
    
    7,034
    
    
    
    7,063SHAREHOLDERS EQUITYCommon stock, no par value-authorized 100,000,000
shares; issued  27,161,823 shares;outstanding 
26,264,458 shares at December 31, 2005 and
26,125,799 shares at December 31, 2004
    
    
    120,489
    
    
    
    116,598Retained earnings
    
    
    114,653
    
    
    
    133,853Accumulated other comprehensive income (loss)
    
    
    (36
    )
    
    
    924235,106
    
    
    
    251,375Less: Treasury stock at cost  897,365 shares in
2005 and 1,036,024 shares in 2004.
    
    
    (14,775
    )
    
    
    (12,546
    )TOTAL SHAREHOLDERS EQUITY
    
    
    220,331
    
    
    
    238,829TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    396,268
    
    
    $
    407,782
  4




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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share data)2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedNET SALESTelecommunications systems, software and related
    
    $
    387,606
    
    
    $
    367,969
    
    
    $
    330,014Resale of local, long distance and network services
    
    
    55,288
    
    
    
    48,799
    
    
    
    43,624TOTAL NET SALES
    
    
    442,894
    
    
    
    416,768
    
    
    
    373,638Cost of salesTelecommunications systems, software and related
    
    
    182,789
    
    
    
    165,345
    
    
    
    150,237Resale of local, long distance and network services
    
    
    33,795
    
    
    
    29,973
    
    
    
    26,526TOTAL COST OF SALES
    
    
    216,584
    
    
    
    195,318
    
    
    
    176,763GROSS PROFIT
    
    
    226,310
    
    
    
    221,450
    
    
    
    196,875Research and development
    
    
    33,258
    
    
    
    28,815
    
    
    
    21,978Selling, general and administrative
    
    
    151,586
    
    
    
    139,917
    
    
    
    128,964Amortization of purchased intangible assets
    
    
    4,194
    
    
    
    1,867
    
    
    
    1,803In-process research and development
    
    
    2,600Other charges
    
    
    11,986
    
    
    
    9,261
    
    
    
    203,624
    
    
    
    179,860
    
    
    
    152,745OPERATING INCOME
    
    
    22,686
    
    
    
    41,590
    
    
    
    44,130Recovery of investment in Inter-Tel.NET / Vianet
    
    
    
    
    
    
    
    
    
    
    124Interest and other income
    
    
    4,073
    
    
    
    2,654
    
    
    
    1,683Foreign currency transaction gains (losses)
    
    
    215
    
    
    
    (399
    )
    
    
    18Interest expense
    
    
    (85
    )
    
    
    (118
    )
    
    
    (155
    )INCOME BEFORE INCOME TAXES
    
    
    26,889
    
    
    
    43,727
    
    
    
    45,800INCOME TAXES (BENEFIT)Current
    
    
    7,136
    
    
    
    5,675
    
    
    
    (12,784
    )Deferred
    
    
    1,899
    
    
    
    10,839
    
    
    
    29,9499,035
    
    
    
    16,514
    
    
    
    17,165NET INCOME
    
    $
    17,854
    
    
    $
    27,213
    
    
    $
    28,635NET INCOME PER SHAREBasic
    
    $
    0.68
    
    
    $
    1.06
    
    
    $
    1.14Diluted
    
    $
    0.66
    
    
    $
    1.00
    
    
    $
    1.08Weighted average basic common shares
    
    
    26,261
    
    
    
    25,767
    
    
    
    25,078Weighted average diluted common shares
    
    
    27,207
    
    
    
    27,266
    
    
    
    26,473
  5




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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 AccumulatedShare-
    
    
    
    
    
    
    OtherOutstanding
    
    
    Common
    
    
    holder
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury(in thousands)
    
    Shares
    
    
    Stock
    
    
    Loans
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance
at December 31, 2002 (Restated)
    
    
    24,910
    
    
    $
    111,639
    
    
    $
    (338
    )
    
    $
    88,765
    
    
    $
    195
    
    
    $
    (27,236
    )
    
    $
    173,025Net income  Restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,635
    
    
    
    
    
    
    
    
    
    
    
    28,635Gain on currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    830
    
    
    
    
    
    
    
    830Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,465Stock repurchase
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (149
    )
    
    
    (207
    )Exercise of stock options
    
    
    470
    
    
    
    
    
    
    
    
    
    
    
    (465
    )
    
    
    
    
    
    
    5,701
    
    
    
    5,236Tax benefit from stock options
    
    
    
    
    
    
    2,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,321Shareholder loan repayments
    
    
    
    
    
    
    
    
    
    
    338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    338Stock issued under ESPP
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    705
    
    
    
    915Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,549
    )
    
    
    
    
    
    
    
    
    
    
    (4,549
    )Balance
at December 31, 2003 (Restated)
    
    
    25,430
    
    
    
    113,960
    
    
    
    
    
    
    
    112,538
    
    
    
    1,025
    
    
    
    (20,979
    )
    
    
    206,544Net income  Restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,213
    
    
    
    
    
    
    
    
    
    
    
    27,213Loss on currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101
    )
    
    
    
    
    
    
    (101
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,112Exercise of stock options
    
    
    646
    
    
    
    
    
    
    
    
    
    
    
    380
    
    
    
    
    
    
    
    7,830
    
    
    
    8,210Tax benefit from stock options
    
    
    
    
    
    
    2,638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,638Stock issued under ESPP
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    448
    
    
    
    
    
    
    
    603
    
    
    
    1,051Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,726
    )
    
    
    
    
    
    
    
    
    
    
    (6,726
    )Balance
at December 31, 2004 (Restated)
    
    
    26,126
    
    
    
    116,598
    
    
    
    
    
    
    
    133,853
    
    
    
    924
    
    
    
    (12,546
    )
    
    
    238,829Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,854
    
    
    
    
    
    
    
    
    
    
    
    17,854Loss on currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (960
    )
    
    
    
    
    
    
    (960
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,894Stock repurchase
    
    
    (717
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,777
    )
    
    
    (13,777
    )Exercise of stock options
    
    
    786
    
    
    
    
    
    
    
    
    
    
    
    (1,980
    )
    
    
    
    
    
    
    10,406
    
    
    
    8,426Tax benefit from stock options
    
    
    
    
    
    
    3,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,891Stock issued under ESPP
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    1,142
    
    
    
    1,196Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,128
    )
    
    
    
    
    
    
    
    
    
    
    (35,128
    )Balance
at December 31, 2005
    
    
    26,264
    
    
    $
    120,489
    
    
    $
    
    
    
    $
    114,653
    
    
    $
    (36
    )
    
    $
    (14,775
    )
    
    $
    220,331
  6




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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedOPERATING ACTIVITIES:Net income
    
    $
    17,854
    
    
    $
    27,213
    
    
    $
    28,635Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of fixed assets
    
    
    9,260
    
    
    
    7,915
    
    
    
    7,109Amortization of purchased intangibles
    
    
    4,194
    
    
    
    1,867
    
    
    
    1,803Amortization of patents included in research and
development expenses
    
    
    199
    
    
    
    222
    
    
    
    222In-process research and development
    
    
    2,600
    
    
    
    
    
    
    
    Non-cash portion of other charges (recoveries)
    
    
    
    
    
    
    
    
    
    
    (124
    )Provision for losses on receivables
    
    
    1,151
    
    
    
    1,525
    
    
    
    3,164Provision for losses on leases
    
    
    3,772
    
    
    
    3,839
    
    
    
    4,528Provision for inventory valuation
    
    
    579
    
    
    
    1,377
    
    
    
    991Decrease in other liabilities
    
    
    (1,110
    )
    
    
    (2,380
    )
    
    
    (3,564
    )Loss on sale of property and equipment
    
    
    83
    
    
    
    10
    
    
    
    118Deferred income tax expense
    
    
    1,899
    
    
    
    10,839
    
    
    
    29,949Changes in operating assets and liabilities
    
    
    (10,994
    )
    
    
    2,123
    
    
    
    (18,771
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    29,487
    
    
    
    54,550
    
    
    
    54,060INVESTING ACTIVITIES:Purchases of available for sale short-term investments
    
    
    (60,832
    )
    
    
    (78,411
    )
    
    
    (170,464
    )Maturities and sales of available for sale short-term
investments
    
    
    57,687
    
    
    
    87,100
    
    
    
    152,046Purchases of held-to-maturity investments
    
    
    
    
    
    
    (11,900
    )
    
    
    Maturities of held-to-maturity investments
    
    
    2,000
    
    
    
    
    
    
    
    Additions to property and equipment and equipment
held under lease
    
    
    (8,706
    )
    
    
    (10,705
    )
    
    
    (7,048
    )Proceeds from sale of property and equipment
and equipment held under lease
    
    
    32
    
    
    
    25
    
    
    
    76Proceeds from investment in Inter-Tel.NET/Vianet
    
    
    
    
    
    
    
    
    
    
    1,450Cash used in acquisitions and other investments
    
    
    (28,208
    )
    
    
    (6,205
    )
    
    
    (3,100
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (38,027
    )
    
    
    (20,096
    )
    
    
    (27,040
    )FINANCING ACTIVITIES:Cash dividends paid
    
    
    (34,854
    )
    
    
    (6,422
    )
    
    
    (3,756
    )Payments on term debt
    
    
    (47
    )
    
    
    (59
    )
    
    
    (102
    )Treasury stock purchases
    
    
    (13,777
    )
    
    
    
    
    
    
    (207
    )Proceeds from stock issued under the
Employee Stock Purchase Plan
    
    
    1,196
    
    
    
    1,051
    
    
    
    915Proceeds from exercise of stock options, including
shareholder loan repayments
    
    
    8,426
    
    
    
    8,210
    
    
    
    5,574NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES
    
    
    (39,056
    )
    
    
    2,780
    
    
    
    2,424Effect of exchange rate changes
    
    
    (960
    )
    
    
    (101
    )
    
    
    830(DECREASE) INCREASE IN CASH AND EQUIVALENTS
    
    
    (48,556
    )
    
    
    37,133
    
    
    
    30,274CASH AND EQUIVALENTS AT BEGINNING OF YEAR
    
    
    152,330
    
    
    
    115,197
    
    
    
    84,923CASH AND EQUIVALENTS AT END OF YEAR
    
    $
    103,774
    
    
    $
    152,330
    
    
    $
    115,197
  7




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INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
     Year Ended December 31, 2004
    
    
    Year Ended December 31, 2003As Previously
    
    
    As
    
    
    As Previously
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    RestatedSelected Statement of Income
Data:Net sales from resale of local,
long distance and network
services
    
    $
    48,924
    
    
    $
    48,799
    
    
    $
    43,822
    
    
    $
    43,624Total net sales
    
    
    416,893
    
    
    
    416,768
    
    
    
    373,836
    
    
    
    373,638Gross profit
    
    
    221,575
    
    
    
    221,450
    
    
    
    197,073
    
    
    
    196,875Operating income
    
    
    41,715
    
    
    
    41,590
    
    
    
    44,328
    
    
    
    44,130Income before income taxes
    
    
    43,852
    
    
    
    43,727
    
    
    
    45,998
    
    
    
    45,800Income taxes
    
    
    16,798
    
    
    
    16,514
    
    
    
    17,480
    
    
    
    17,165Net income
    
    $
    27,054
    
    
    $
    27,213
    
    
    $
    28,518
    
    
    $
    28,635Net income per share  basic
    
    $
    1.05
    
    
    $
    1.06
    
    
    $
    1.14
    
    
    $
    1.14Net income per share  diluted
    
    $
    0.99
    
    
    $
    1.00
    
    
    $
    1.08
    
    
    $
    1.08
  8




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##### Table of Contents



December 31, 2004As Previously
    
    
    AsReported
    
    
    RestatedSelected Balance Sheet Data:Accounts receivable net of allowance
    
    $
    45,176
    
    
    $
    44,167Deferred income taxes
    
    
    9,905
    
    
    
    10,563Total current assets
    
    
    304,472
    
    
    
    304,121Goodwill
    
    
    19,890
    
    
    
    21,057Total assets
    
    
    406,966
    
    
    
    407,782Other current liabilities
    
    
    52,196
    
    
    
    52,923Total current liabilities
    
    
    82,997
    
    
    
    83,724Deferred tax liability
    
    
    65,234
    
    
    
    65,925Retained earnings
    
    
    134,455
    
    
    
    133,853Total liability and shareholders equity
    
    $
    406,966
    
    
    $
    407,782
  Year Ended December 31, 2004
    
    
    Year Ended December 31, 2003As Previously
    
    
    As
    
    
    As Previously
    
    
    AsReported
    
    
    Restated
    
    
    Reported
    
    
    RestatedSelected Cash Flow Data:Net income
    
    $
    27,054
    
    
    $
    27,213
    
    
    $
    28,518
    
    
    $
    28,635Deferred income tax
expense
    
    
    11,122
    
    
    
    10,839
    
    
    
    30,264
    
    
    
    29,949Changes in operating
assets and liabilities
    
    $
    1,998
    
    
    $
    2,123
    
    
    $
    (18,969
    )
    
    $
    (18,771
    )
 NOTE B SIGNIFICANT ACCOUNTING POLICIES
 Description of Business ®
 Principles of Consolidation.
 Cash and Equivalents, Short-Term Investments and Long-term Investments
  9




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Allowance for Doubtful Accounts
 Inventories
 Property, Plant and Equipment
 Goodwill and Other Intangible Assets. Business Combinations Goodwill and Other Intangible Assets.
   10




---



##### Table of Contents



Sales-Leases
 Income Taxes
 Advertising
 Revenue Recognition
 End-user sales through our direct sales offices and national, government and education
accounts division
 Dealer and VAR sales
 11




---



##### Table of Contents



Resale of long distance
 Extended Maintenance.
 Software, software support and maintenance agreements.
 Sales Returns.
 Warranties.
 Shipping and Handling Costs.
 Stock Based Compensation
 Years Ended December 31,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedNet income, as reported
    
    $
    17,854
    
    
    $
    27,213
    
    
    $
    28,635Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects
(1)
    
    
    (8,663
    )
    
    
    (3,340
    )
    
    
    (3,007
    )Pro forma net income
    
    $
    9,191
    
    
    $
    23,873
    
    
    $
    25,628
 12




---



##### Table of Contents



Years Ended December 31,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedEarnings per share:Basic  as reported
    
    $
    0.68
    
    
    $
    1.06
    
    
    $
    1.14Basic  pro forma
    
    $
    0.35
    
    
    $
    0.93
    
    
    $
    1.02Diluted  as reported
    
    $
    0.66
    
    
    $
    1.00
    
    
    $
    1.08Diluted  pro forma
    
    $
    0.34
    
    
    $
    0.88
    
    
    $
    0.97
 (1)
    
    Total stock-based employee compensation expense for the year ended December 31, 2005
includes the impact from the May 3, 2005 acceleration of vesting of certain stock options.
This acceleration of the vesting provision increased the stock based compensation expense and
decreased the pro forma net income $5.4 million for the year ended December 31, 2005. See
Note L for further discussion.
  Foreign Currency Translation and Transactions
 Contingencies.
  13




---



##### Table of Contents



Use of Estimates
 14




---



##### Table of Contents



Reclassifications
 Recent Accounting Pronouncements
     NOTE C  ACQUISITIONS, TECHNOLOGY INVESTMENTS, DISPOSITIONS AND RESTRUCTURING CHARGES
 Lake.
 ®
 15




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##### Table of Contents



New Sales Offices in 2004.
 New Technology Investments in 2004. ®
 Technology Investment in 2003
 (In thousands)
    
    2005
    
    
    2004
    
    
    2003Milestone bonus payments accrued
    
    $
    250
    
    
    $
    750
    
    
    $
    Development activities on a cost
reimbursement basis
    
    
    
    
    
    
    665
    
    
    
    525Totals
    
    $
    250
    
    
    $
    1,415
    
    
    $
    525
 Swan.
   16




---



##### Table of Contents



Executone.
    (In thousands)2000
    
    
    Activity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ReserveCash/
    
    
    Restructuring
    
    
    through
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    BalanceDescription
    
    Non-Cash
    
    
    Charge
    
    
    2002
    
    
    Activity
    
    
    Activity
    
    
    Activity
    
    
    At 12/31/05Personnel Costs:Severance and termination costs
    
    Cash
    
    $
    (1,583
    )
    
    $
    1,580
    
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    Other Plant closure costs
    
    Cash
    
    
    (230
    )
    
    
    230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lease termination and other
contractual obligations (net
of anticipated recovery):Building and equipment leases
    
    Cash
    
    
    (7,444
    )
    
    
    5,431
    
    
    
    767
    
    
    
    1,238
    
    
    
    8
    
    
    
    Other contractual obligations
    
    Cash
    
    
    (1,700
    )
    
    
    1,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment of Assets:Inventories
    
    Non-Cash
    
    
    (3,454
    )
    
    
    3,454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prepaid inventory and other
expenses
    
    Non-Cash
    
    
    (2,485
    )
    
    
    2,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accounts receivable
    
    Non-Cash
    
    
    (1,685
    )
    
    
    854
    
    
    
    831
    
    
    
    
    
    
    
    
    
    
    
    Fixed assets
    
    Non-Cash
    
    
    (3,151
    )
    
    
    2,995
    
    
    
    14
    
    
    
    26
    
    
    
    116
    
    
    
    Net intangible assets
    
    Non-Cash
    
    
    (29,184
    )
    
    
    29,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    (50,916
    )
    
    $
    47,913
    
    
    $
    1,615
    
    
    $
    1,264
    
    
    $
    124
    
    
    $
    
 17




---



##### Table of Contents



NOTE D SHORT-TERM AND LONG-TERM INVESTMENTS
    December 31, 2005
    
    
    
    
    
    Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Gross Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueShort-term, available-for-sale:Equity securities
    
    $
    2,988
    
    
    $
    
    
    
    $
    
    
    
    $
    2,988Mutual funds
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    370Certificate of deposit
    
    
    1,034
    
    
    
    
    
    
    
    
    
    
    
    1,034Municipal bonds
    
    
    49,397
    
    
    
    
    
    
    
    
    
    
    
    49,397Totals
    
    $
    53,789
    
    
    $
    
    
    
    $
    
    
    
    $
    53,789Short-term, held-to-maturity:Federal agency issues (mature in 2006)
    
    $
    9,900
    
    
    $
    
    
    
    $
    72
    
    
    $
    9,828Totals
    
    $
    9,900
    
    
    $
    
    
    
    $
    72
    
    
    $
    9,828
 December 31, 2004
    
    
    
    
    
    
    
    
    
    Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Gross Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueShort-term, available-for-sale:Equity securities
    
    $
    12,998
    
    
    $
    
    
    
    $
    
    
    
    $
    12,998Mutual funds
    
    
    6,662
    
    
    
    
    
    
    
    
    
    
    
    6,662Certificate of deposit
    
    
    1,008
    
    
    
    
    
    
    
    
    
    
    
    1,008Municipal bonds
    
    
    29,150
    
    
    
    
    
    
    
    
    
    
    
    29,150Totals
    
    $
    49,818
    
    
    $
    
    
    
    $
    
    
    
    $
    49,818
 18




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##### Table of Contents



December 31, 2004
    
    
    
    
    
    Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Gross Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueShort-term, held-to-maturity:Federal agency issues (mature in 2005)
    
    $
    2,000
    
    
    $
    
    
    
    $
    18
    
    
    $
    1,982Municipal bonds
    
    
    826
    
    
    
    
    
    
    
    
    
    
    
    826Totals
    
    $
    2,826
    
    
    $
    
    
    
    $
    18
    
    
    $
    2,808Long-term, held-to-maturity:Federal agency issues (mature in 2006)
    
    $
    9,900
    
    
    $
    
    
    
    $
    140
    
    
    $
    9,760Totals
    
    $
    9,900
    
    
    $
    
    
    
    $
    140
    
    
    $
    9,760
 NOTE E NET INVESTMENT IN SALES-LEASES
 SM
 December 312005
    
    
    2004
    
    
    2003Lease balances included in
consolidated accounts receivable,
net of allocated allowances of
$980 in 2005; $1,177 in 2004; and
$1,774 in 2003
    
    $
    8,860
    
    
    $
    6,390
    
    
    $
    7,240Net investment in Sales-Leases:Current portion, net of
allowances of $998 in 2005;
$886 in 2004; and $749 in 2003
    
    
    19,699
    
    
    
    17,151
    
    
    
    15,502Long-term portion, includes
residual amounts of $625 in
2005; $510 in 2004; and $652 in 2003, net of allowances of
$1,926 in 2005; $1,810 in
2004; and $1,985 in 2003
    
    
    34,758
    
    
    
    33,877
    
    
    
    32,529Total investment in Sales-Leases,
net of allowances of $3,904 in
2005; $3,873 in 2004; and $4,508
in 2003
    
    
    63,318
    
    
    
    57,418
    
    
    
    55,271Sold rental payments remaining
unbilled (subject to limited
recourse provisions), net of lease
recourse liability reserves of
$14,199 in 2005; $12,241 in 2004;
and $12,020 in 2003
    
    
    256,143
    
    
    
    229,163
    
    
    
    198,091Total balance of sales-leases and
sold rental payments remaining
unbilled, net of allowances and
reserves
    
    $
    319,460
    
    
    $
    286,581
    
    
    $
    253,362Total allowances and reserves for
entire lease portfolio (including
lease recourse liabilities)
    
    $
    18,103
    
    
    $
    16,114
    
    
    $
    16,528
  Years Ended December 31(In thousands)
    
    2005
    
    
    2004
    
    
    2003Sales of rental payments
    
    $
    119,060
    
    
    $
    113,172
    
    
    $
    88,352Sold payments remaining unbilled at end of year
    
    $
    270,342
    
    
    $
    241,404
    
    
    $
    210,111
 19




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##### Table of Contents



NOTE F PROPERTY, PLANT & EQUIPMENT
 December 31(In thousands)
    
    2005
    
    
    2004Computer systems, data processing and other office equipment
    
    $
    63,572
    
    
    $
    46,397Transportation equipment
    
    
    4,026
    
    
    
    3,820Furniture and fixtures
    
    
    5,212
    
    
    
    4,221Leasehold improvements
    
    
    4,341
    
    
    
    4,673Building
    
    
    7,318
    
    
    
    7,318Land
    
    
    2,499
    
    
    
    2,49986,968
    
    
    
    68,928Less: Accumulated depreciation and amortization
    
    
    (58,732
    )
    
    
    (41,088
    )Net property, plant & equipment
    
    $
    28,236
    
    
    $
    27,840
 NOTE G  GOODWILL AND PURCHASED INTANGIBLE ASSETS
 December 31(In thousands)
    
    2005
    
    
    2004RestatedGoodwill
    
    $
    34,865
    
    
    $
    26,082Less: Accumulated amortization
    
    
    (5,025
    )
    
    
    (5,025
    )Net Goodwill
    
    $
    29,840
    
    
    $
    21,057Purchased intangible assets:Acquired developed technology
    
    $
    26,332
    
    
    $
    15,517Customer lists and non-competition agreements
    
    
    9,793
    
    
    
    3,55036,125
    
    
    
    19,067Less: Accumulated amortization
    
    
    12,474
    
    
    
    8,080Net Purchased intangible assets
    
    $
    23,651
    
    
    $
    10,987
  20




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##### Table of Contents



NOTE H OTHER CURRENT LIABILITIES
 December 31(In thousands)
    
    2005
    
    
    2004RestatedCompensation and employee benefits
    
    $
    15,703
    
    
    $
    17,378Customer deposits
    
    
    4,252
    
    
    
    4,641Deferred revenues
    
    
    8,344
    
    
    
    7,664Miscellaneous taxes payable
    
    
    3,295
    
    
    
    2,842Legal settlements
    
    
    10,081
    
    
    
    9,261Other accrued expenses
    
    
    12,711
    
    
    
    11,137$
    54,386
    
    
    $
    52,923
 NOTE I CREDIT LINE
  NOTE J LEASES
  (In thousands)
    
    2005
    
    
    2004
    
    
    2003Rental expense, gross (1)
    
    $
    10,329
    
    
    $
    9,926
    
    
    $
    9,811Less: Sublease receipts, gross
    
    
    (429
    )
    
    
    (545
    )
    
    
    (221
    )Net rental expense
    
    $
    9,900
    
    
    $
    9,381
    
    
    $
    9,590
   NOTE K INCOME TAXES
  21




---



##### Table of Contents



December 31,(in thousands)
    
    2005
    
    
    2004RestatedDeferred tax liabilities:Leasesales and capitalized costs
    
    $
    82,777
    
    
    $
    80,921Write-off of Japan intercompany receivables
    
    
    
    
    
    
    1,051Foreign Intangibles
    
    
    2,325
    
    
    
    691Tax over book depreciation
    
    
    2,417
    
    
    
    2,986Other
    
    
    3,057
    
    
    
    3,579Total deferred tax liabilities
    
    
    90,576
    
    
    
    89,228Deferred tax assets:Net operating loss carryforward
    
    
    
    
    
    
    2,905Tax credit carryforward
    
    
    5,052
    
    
    
    4,026Insurance reserves
    
    
    672
    
    
    
    1,559Accounts receivable reserves
    
    
    2,196
    
    
    
    3,457Accrued vacation pay
    
    
    2,188
    
    
    
    1,906Inventory reserve
    
    
    982
    
    
    
    294Accrued legal
    
    
    1,425
    
    
    
    875Foreign loss carryforwards
    
    
    2,553
    
    
    
    1,051In-process R&D write-off
    
    
    4,354
    
    
    
    4,852Restructuring/Special Charge
    
    
    1,156
    
    
    
    1,167Lease receivable reserves
    
    
    9,655
    
    
    
    8,047Other  net
    
    
    3,994
    
    
    
    3,727Deferred tax assets
    
    
    34,227
    
    
    
    33,866Less valuation reserve
    
    
    1,500
    
    
    
    Net deferred tax assets
    
    
    32,727
    
    
    
    33,866Net deferred tax liabilities (total deferred tax
liabilities less net deferred tax assets)
    
    $
    57,849
    
    
    $
    55,362
 SM
   22




---



##### Table of Contents



(In thousands)
    
    2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedFederal
    
    $
    3,202
    
    
    $
    14,203
    
    
    $
    15,057State
    
    
    3,401
    
    
    
    2,468
    
    
    
    1,614Foreign
    
    
    2,432
    
    
    
    (157
    )
    
    
    494$
    9,035
    
    
    $
    16,514
    
    
    $
    17,165
  2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedFederal tax at statutory rates
applied to pre-tax income
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State tax net of federal benefit
    
    
    9.9
    
    
    
    3.7
    
    
    
    2.3Credit for research activities
    
    
    (3.7
    )
    
    
    (1.6
    )
    
    
    (1.1
    )Write-off of Japan
    
    
    
    
    
    
    (3.4
    )
    
    
    E-Rate settlement
    
    
    
    
    
    
    6.8
    
    
    
    Release of reserve
    
    
    (5.3
    )
    
    
    
    
    
    
    Tax exempt interest
    
    
    (3.4
    )
    
    
    (1.5
    )
    
    
    (.5
    )Other  net
    
    
    1.1
    
    
    
    (1.2
    )
    
    
    1.833.6
    %
    
    
    37.8
    %
    
    
    37.5
    %
      NOTE L EQUITY TRANSACTIONS
 Treasury Stock
 23




---



##### Table of Contents



Treasury shares
    
    2005
    
    
    2004
    
    
    2003Balance on January 1
    
    
    1,036,024
    
    
    
    1,732,181
    
    
    
    2,252,840Stock repurchases, including ESOP
    
    
    716,500
    
    
    
    
    
    
    
    8,271Shares reissued
    
    
    (855,159
    )
    
    
    (696,157
    )
    
    
    (528,930
    )Balance on December 31
    
    
    897,365
    
    
    
    1,036,024
    
    
    
    1,732,181
 Dividend Policy
 Period
    
    Q1
    
    Q2
    
    Q3
    
    Q4
    

Totals1997
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.01
    
    
    $
    0.011998
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.041999
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.042000
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.042001
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.052002
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.102003
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.182004
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.262005
    
    $
    0.08
    
    
    $
    1.08
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    1.32
 Stock Option Plans.
  24




---



##### Table of Contents



Year
    
    Shares2002
    
    604,1612003
    
    622,7252004
    
    635,7412005
    
    653,1452006
    
    656,611
    25




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##### Table of Contents



Years Ended December 31,(Number of shares)
    
    2005
    
    
    2004
    
    
    2003Outstanding at beginning of year
    
    
    4,124,118
    
    
    
    4,416,131
    
    
    
    4,188,641Granted
    
    
    707,300
    
    
    
    484,000
    
    
    
    879,950Exercised (1)
    
    
    (788,338
    )
    
    
    (649,543
    )
    
    
    (476,410
    )Expired or canceled
    
    
    (187,092
    )
    
    
    (126,470
    )
    
    
    (176,050
    )Outstanding at end of year
    
    
    3,855,988
    
    
    
    4,124,118
    
    
    
    4,416,131Exercisable at end of year
    
    
    2,462,798
    
    
    
    2,002,768
    
    
    
    1,877,151Weighted-average grant price of
options granted
    
    $
    16.36
    
    
    $
    14.88
    
    
    $
    13.66
 
 (1)
    
    The difference between shares exercised in the table above and shares exercised as
reflected in the Consolidated Statements of Shareholders Equity relates to mature shares
tendered in connection with the shares exercised. The Company permits the tendering of
mature shares to exercise stock options provided that the shares have been held for six
months or more. Mature shares tendered for the years ended December 31, 2005, 2004 and 2003
were 2,504, 3,144 and 5,722 shares, respectively.
   Number
    
    Weighted-Average
    
    WeightedRange of
    
    Outstanding
    
    Remaining
    
    AverageExercise Price
    
    at 12-31-05
    
    Contractual Life
    
    Exercise Price$5.25 - $10.00
    
    956,690
    
    4.8 years
    
    $9.30$10.01 - $15.12
    
    879,621
    
    6.4 years
    
    $13.58$15.13 - $19.13
    
    967,100
    
    7.7 years
    
    $18.47$19.14 - $43.44
    
    1,052,577
    
    6.6 years
    
    $23.16
 26




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##### Table of Contents



Number
    
    Weighted-Average
    
    WeightedRange of
    
    Exercisable
    
    Remaining
    
    AverageExercise Price
    
    at 12-31-05
    
    Contractual Life
    
    Exercise Price$5.25 - $10.00
    
    678,920
    
    4.8 years
    
    $9.20$10.01 - $15.12
    
    442,801
    
    6.4 years
    
    $13.52$15.13 - $19.13
    
    296,300
    
    7.7 years
    
    $17.30$19.14 - $43.44
    
    1,044,777
    
    6.6 years
    
    $23.18
   2005
    
    2004
    
    2003Expected dividend yield
    
    
    1.55
    %
    
    
    0.93
    %
    
    
    1.2
    %Expected stock price volatility
    
    
    0.488
    
    
    
    0.478
    
    
    
    0.560Risk-free interest rate
    
    
    3.98
    %
    
    
    3.29
    %
    
    
    3.05
    %Expected life of options
    
    3-5 years
    
    5 years
    
    5 years
  1997 Employee Stock Purchase Plan
 27




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##### Table of Contents



NOTE M  EARNINGS PER SHARE
  Years Ended December 31,(In thousands, except per share amounts)
    
    2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedNumerator:Net income
    
    $
    17,854
    
    
    $
    27,213
    
    
    $
    28,635Denominator:Denominator for basic earnings per
share  weighted average shares
    
    
    26,261
    
    
    
    25,767
    
    
    
    25,078Effect of dilutive securities:Employee and director stock options
    
    
    946
    
    
    
    1,499
    
    
    
    1,395Denominator for diluted earnings per
share  adjusted weighted average
shares and assumed conversions
    
    
    27,207
    
    
    
    27,266
    
    
    
    26,473Basic income per share
    
    $
    0.68
    
    
    $
    1.06
    
    
    $
    1.14Diluted income per share
    
    $
    0.66
    
    
    $
    1.00
    
    
    $
    1.08
  NOTE N  RETIREMENT PLANS
  NOTE O  SEGMENT INFORMATION
  ®
 28




---



##### Table of Contents



Resale ofLocal, LongLegal
    
    Subtotal
    
    DistancePrincipal
    
    Judgment &
    
    Principal
    
    and Network(In thousands, except per share amounts)
    
    Segment
    
    Settlement
    
    Segment
    
    Services
    
    Total2005Net sales
    
    $
    387,606
    
    
    $
    
    
    
    $
    387,606
    
    
    $
    55,288
    
    
    $
    442,894Gross profit
    
    
    204,817
    
    
    
    
    
    
    
    204,817
    
    
    
    21,493
    
    
    
    226,310Operating income
    
    
    24,689
    
    
    
    (11,986
    )
    
    
    12,703
    
    
    
    9,983
    
    
    
    22,686Interest and other income
    
    
    3,901
    
    
    
    
    
    
    
    3,901
    
    
    
    172
    
    
    
    4,073Gain on foreign currency transactions
    
    
    215
    
    
    
    
    
    
    
    215
    
    
    
    0
    
    
    
    215Interest expense
    
    
    (80
    )
    
    
    
    
    
    
    (80
    )
    
    
    (5
    )
    
    
    (85
    )Net income (loss)
    
    $
    18,436
    
    
    $
    (7,862
    )
    
    $
    10,574
    
    
    $
    7,280
    
    
    $
    17,854Net income (loss) per diluted share (1)
    
    $
    0.68
    
    
    $
    (0.29
    )
    
    $
    0.39
    
    
    $
    0.27
    
    
    $
    0.66Weighted average diluted shares (1)
    
    
    27,207
    
    
    
    27,207
    
    
    
    27,207
    
    
    
    27,207
    
    
    
    27,207Goodwill
    
    $
    27,705
    
    
    $
    
    
    
    $
    27,705
    
    
    $
    2,135
    
    
    $
    29,840Total assets
    
    
    381,729
    
    
    
    
    
    
    
    381,729
    
    
    
    14,539
    
    
    
    396,268Depreciation and amortization
    
    $
    13,596
    
    
    $
    
    
    
    $
    13,596
    
    
    $
    57
    
    
    $
    13,653
 Resale ofLocal, LongSubtotal
    
    DistancePrincipal
    
    
    
    
    
    Principal
    
    and Network(In thousands, except per share amounts)
    
    Segment
    
    E-Rate
    
    Segment
    
    Services
    
    Total2004(as restated)Net sales
    
    $
    367,969
    
    
    $
    
    
    
    $
    367,969
    
    
    $
    48,799
    
    
    $
    416,768Gross profit
    
    
    202,624
    
    
    
    
    
    
    
    202,624
    
    
    
    18,826
    
    
    
    221,450Operating income
    
    
    43,177
    
    
    
    (9,261
    )
    
    
    33,916
    
    
    
    7,674
    
    
    
    41,590Interest and other income
    
    
    2,463
    
    
    
    
    
    
    
    2,463
    
    
    
    191
    
    
    
    2,654Gain on foreign currency transactions
    
    
    (399
    )
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    (399
    )Interest expense
    
    
    (109
    )
    
    
    
    
    
    
    (109
    )
    
    
    (9
    )
    
    
    (118
    )Net income (loss)
    
    $
    30,761
    
    
    $
    (8,957
    )
    
    $
    21,804
    
    
    $
    5,409
    
    
    $
    27,213Net income (loss) per diluted share (1)
    
    $
    1.13
    
    
    $
    (0.33
    )
    
    $
    0.80
    
    
    $
    0.20
    
    
    $
    1.00Weighted average diluted shares (1)
    
    
    27,266
    
    
    
    27,266
    
    
    
    27,266
    
    
    
    27,266
    
    
    
    27,266Goodwill
    
    $
    18,923
    
    
    $
    
    
    
    $
    18,923
    
    
    $
    2,135
    
    
    $
    21,058Total assets
    
    
    399,069
    
    
    
    
    
    
    
    399,069
    
    
    
    8,714
    
    
    
    407,783Depreciation and amortization
    
    $
    9,897
    
    
    $
    
    
    
    $
    9,897
    
    
    $
    107
    
    
    $
    10,004
 Resale ofLocal, LongLegal
    
    Subtotal
    
    DistancePrincipal
    
    Judgment &
    
    Principal
    
    and Network(In thousands, except per share amounts)
    
    Segment
    
    Settlement
    
    Segment
    
    Services
    
    Total2003(as restated)Net sales
    
    $
    330,014
    
    
    $
    
    
    
    $
    330,014
    
    
    $
    43,624
    
    
    $
    373,638Gross profit
    
    
    179,777
    
    
    
    
    
    
    
    179,777
    
    
    
    17,098
    
    
    
    196,875Operating income
    
    
    37,379
    
    
    
    
    
    
    
    37,379
    
    
    
    6,751
    
    
    
    44,130Interest and other income
    
    
    1,650
    
    
    
    
    
    
    
    1,650
    
    
    
    157
    
    
    
    1,807Gain on foreign currency transactions
    
    
    18
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    18Interest expense
    
    
    (153
    )
    
    
    
    
    
    
    (153
    )
    
    
    (2
    )
    
    
    (155
    )Net income (loss)
    
    $
    24,326
    
    
    $
    
    
    
    $
    24,326
    
    
    $
    4,309
    
    
    $
    28,635Net income (loss) per diluted share (1)
    
    $
    0.92
    
    
    $
    
    
    
    $
    0.92
    
    
    $
    0.16
    
    
    $
    1.08Weighted average diluted shares (1)
    
    
    26,473
    
    
    
    26,473
    
    
    
    26,473
    
    
    
    26,473
    
    
    
    26,473Goodwill
    
    $
    17,000
    
    
    $
    
    
    
    $
    17,000
    
    
    $
    2,135
    
    
    $
    19,135Total assets
    
    
    339,804
    
    
    
    
    
    
    
    339,804
    
    
    
    20,790
    
    
    
    360,594Depreciation and amortization
    
    $
    8,973
    
    
    $
    
    
    
    $
    8,973
    
    
    $
    161
    
    
    $
    9,134
 (1)
    
    Options that are antidilutive because the exercise price was greater than the average
market price of the common shares are not included in the computation of diluted earnings per
share. See Note L for additional information.
 29




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##### Table of Contents



(in thousands,
    
    Year Ended December 31,except percentages)2004
    
    2003Source of net sales
    
    2005
    
    Restated
    
    Restated$
    
    %
    
    $
    
    %
    
    $
    
    %Domestic
    
    
    405,607
    
    
    
    91.6
    
    
    
    403,620
    
    
    
    96.8
    
    
    
    362,592
    
    
    
    97.0Lake Communications
    
    
    22,996
    
    
    
    5.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other International
    
    
    14,291
    
    
    
    3.2
    
    
    
    13,148
    
    
    
    3.2
    
    
    
    11,046
    
    
    
    3.0Total net sales
    
    
    442,894
    
    
    
    100.0
    
    
    
    416,768
    
    
    
    100.0
    
    
    
    373,638
    
    
    
    100.0
   NOTE P FINANCIAL INSTRUMENTS
 Concentration of Credit Risk
 Fair Value of Financial Instruments
 NOTE Q SUPPLEMENTAL CASH FLOW
 Years Ended December 31,(In thousands)
    
    2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedCash paid for:Interest
    
    $
    85
    
    
    $
    118
    
    
    $
    155Income taxes paid (received)
    
    
    1,222
    
    
    $
    (1,156
    )
    
    $
    (9,384
    )Additional disclosure of cash flow information:Tax benefit from stock options
    
    $
    3,891
    
    
    $
    2,638
    
    
    $
    2,321
 30




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##### Table of Contents



Years Ended December 31,(In thousands)
    
    2005
    
    
    2004
    
    
    2003Restated
    
    
    RestatedChanges in operating assets and liabilities:Increase in receivables and current net
investment in sales-leases
    
    $
    (1,295
    )
    
    $
    (4,494
    )
    
    $
    (6,082
    )Increase in inventories
    
    
    (2,988
    )
    
    
    (2,192
    )
    
    
    (4,069
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    (998
    )
    
    
    5,933
    
    
    
    (2,935
    )Increase in long-term net investment in
sales-leases and other assets
    
    
    (1,348
    )
    
    
    (1,809
    )
    
    
    (6,962
    )(Decrease) increase in accounts payable and
other current liabilities
    
    
    (4,365
    )
    
    
    4,685
    
    
    
    1,277$
    (10,994
    )
    
    $
    2,123
    
    
    $
    (18,771
    )
 NOTE R QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
   2005
    
    1st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th QtrRestated
    
    
    Restated
    
    
    Restated(1)
    
    
    (1)
    
    
    (1)Net sales
    
    $
    105,618
    
    
    $
    115,265
    
    
    $
    111,335
    
    
    $
    110,676Gross profit
    
    $
    53,965
    
    
    $
    60,045
    
    
    $
    56,260
    
    
    $
    56,040Other charges
    
    $
    
    
    
    $
    
    
    
    $
    10,378
    
    
    $
    1,608Net income
    
    $
    1,958
    
    
    $
    6,941
    
    
    $
    735
    
    
    $
    8,220Net income per shareBasic
    
    $
    0.07
    
    
    $
    0.26
    
    
    $
    0.03
    
    
    $
    0.31Net income per shareDiluted
    
    $
    0.07
    
    
    $
    0.26
    
    
    $
    0.03
    
    
    $
    0.31Weighted average basic common shares
    
    
    26,373
    
    
    
    26,301
    
    
    
    26,147
    
    
    
    26,222Weighted average diluted common shares
    
    
    27,788
    
    
    
    27,069
    
    
    
    27,056
    
    
    
    26,914
 2004
    
    1st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th QtrRestated
    
    
    Restated
    
    
    Restated
    
    
    Restated(1)
    
    
    (1)
    
    
    (1)
    
    
    (1)Net sales
    
    $
    97,927
    
    
    $
    102,657
    
    
    $
    105,344
    
    
    $
    110,840Gross profit
    
    $
    51,994
    
    
    $
    54,048
    
    
    $
    55,772
    
    
    $
    59,636Other charges  e-Rate
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9,261Net income
    
    $
    6,815
    
    
    $
    8,019
    
    
    $
    9,165
    
    
    $
    3,214Net income per shareBasic
    
    $
    0.27
    
    
    $
    0.31
    
    
    $
    0.36
    
    
    $
    0.12Net income per shareDiluted
    
    $
    0.25
    
    
    $
    0.29
    
    
    $
    0.34
    
    
    $
    0.12Weighted average basic common shares
    
    
    25,543
    
    
    
    25,715
    
    
    
    25,816
    
    
    
    25,994Weighted average diluted common shares
    
    
    27,350
    
    
    
    27,262
    
    
    
    26,944
    
    
    
    27,509
 (1)
    
    The Company has restated its previously reported consolidated financial statements for
changes in net sales and income tax provision as described in Note A. The effect of the
restatement on net income is a decrease of approximately $5,000, $98,000, and $41,000 for the
first, second and third quarter of fiscal 2004, respectively, and an increase of approximately
$103,000 for the fourth quarter in fiscal 2004. The effect of the restatement on net income is an
increase of approximately $23,000 and $88,000 in the first and third quarter of fiscal 2005,
respectively, and a decrease in net income of approximately $52,000 for the second quarter of
fiscal 2005. The effect on reported quarterly basic net income per share was a decrease of $0.01
for both the second quarter of fiscal 2004 and the second quarter of fiscal 2005, and an increase
of $0.01 for both the fourth quarter of fiscal 2004 and the third quarter of fiscal 2005. There
was no effect on reported quarterly basic net income per share for the first and third quarters of
fiscal 2004 or for the first quarter of fiscal 2005. The effect on reported quarterly diluted net
income per share was a decrease of $0.01 for the second quarter of fiscal 2004 and an increase of
$0.01 for the fourth quarter of fiscal 2004 and the third quarter of fiscal 2005. There was no effect on quarterly diluted net income per
share for the first and third quarters of fiscal 2004 or for the first and second quarters of
fiscal 2005.
 31




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##### Table of Contents



NOTE S  SUBSEQUENT EVENT
  32




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 (In Thousands)Col. A
    
    
    Col. B
    
    
    Col. C
    
    
    Col. D
    
    
    Col. E.Balance
    
    
    Charged
    
    
    
    
    
    
    
    
    
    
    Balanceat
    
    
    to Costs
    
    
    Charged
    
    
    
    
    
    
    at EndBeginning
    
    
    &
    
    
    to Other
    
    
    Charged to
    
    
    ofDESCRIPTION
    
    of Period
    
    
    Expenses
    
    
    Accounts
    
    
    Deductions
    
    
    PeriodYear ended December 31, 2005Deducted from asset accounts:Allowance for Doubtful Accounts
    
    $
    9,921
    
    
    $
    1,151
    
    
    $
    (405)
    (2)
    
    $
    4,432
    (1)
    
    $
    6,235Allowance for Sales-Leases
    
    
    2,696
    
    
    
    683
    
    
    
    
    
    
    
    455
    
    
    
    2,924Lease Recourse Liability
    
    
    12,241
    
    
    
    3,089
    
    
    
    
    
    
    
    1,131
    (1)
    
    
    14,199Year ended December 31, 2004Deducted from asset accounts:Allowance for Doubtful Accounts
    
    $
    11,010
    
    
    $
    1,525
    
    
    $
    (349)
    (2)
    
    $
    2,265
    (1)
    
    $
    9,921Allowance for Sales-Leases
    
    
    2,734
    
    
    
    711
    
    
    
    
    
    
    
    749
    
    
    
    2,696Lease Recourse Liability
    
    
    12,020
    
    
    
    3,128
    
    
    
    
    
    
    
    2,907
    (1)
    
    
    12,241Year ended December 31, 2003Deducted from asset accounts:Allowance for Doubtful Accounts
    
    $
    12,159
    
    
    $
    3,164
    
    
    $
    (770)
    (2)
    
    $
    3,543
    (1)
    
    $
    11,010Allowance for Sales-Leases
    
    
    1,927
    
    
    
    765
    
    
    
    
    
    
    
    (42
    )
    
    
    2,734Lease Recourse Liability
    
    
    11,125
    
    
    
    3,763
    
    
    
    
    
    
    
    2,868
    (1)
    
    
    12,020
 (1)
    
    Uncollectible accounts written off, net of recoveries.
 (2)
    
    Acquisition related adjustments.
 33




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##### Table of Contents



PART
IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
 (a) The following documents are filed as part of this Report:
 1. Financial Statements
  -
    
    Report of Independent Registered Public Accounting Firm-
    
    Consolidated balance sheetsDecember 31, 2005 and 2004 (Restated)
 34




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##### Table of Contents



-
    
    Consolidated statements of incomeyears ended December 31, 2005, 2004 (Restated) and
2003 (Restated)-
    
    Consolidated statements of shareholders equityyears ended December 31, 2005, 2004
(Restated) and 2003 (Restated)-
    
    Consolidated statements of cash flowsyears ended December 31, 2005, 2004 (Restated)
and 2003 (Restated)-
    
    Notes to consolidated financial statements (portions restated)
 2. Financial Statement Schedules
     3. Exhibits
  3.1(10)
    
    Articles of Incorporation, as amended.3.2(22)
    
    By-Laws, as amended.10.15(1)
    
    Registrants form of standard Distributor Agreement.10.16(1)
    
    Registrants form of standard Service Agreement.10.35(3)
    
    Agreement between Registrant and Samsung Semiconductor and Telecommunications Company,
Ltd. dated October 17, 1984.10.37(3) *
    
    Tax Deferred Savings Plan.10.51(11) *
    
    1990 Directors Stock Option Plan and form of Stock Option Agreement.10.52(15) *
    
    Inter-Tel, Incorporated 1994 Long-Term Incentive Plan and forms of Stock Option
Agreements.10.53(12)
    
    Agreement between Registrant and Maxon Systems, Inc. dated February 27, 1990.10.54(12)
    
    Agreement between Registrant and Varian Tempe Electronics Center dated February 26,
1991.10.55(12)
    
    Agreement between Registrant and Jetcrown Industrial Ltd. dated February 18, 1993.10.56(13) *
    
    Employee Stock Ownership Plan.10.57(14)
    
    Loan and Security Agreement dated March 4, 1997 between Bank One, Arizona, N.A. and
Registrant and Modification Agreement dated July 25, 1997.10.58 (16)
    
    Development, Supply and License Agreement between Registrant and QUALCOMM dated
January 17, 1996.10.59(17) *
    
    Inter-Tel, Incorporated 1997 Long-Term Incentive Plan.10.60(18) *
    
    Inter-Tel, Incorporated 1997 Employee Stock Purchase Plan.10.61(19) *
    
    Inter-Tel, Incorporated Acquisition Stock Option Plan and form of Stock Option
Agreement.
 35




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##### Table of Contents



10.62(20)
    
    Computer Telephony Asset Purchase Agreement dated as of October 17, 1999 by and between
Executone Information Systems, Inc., Inter-Tel, Incorporated and Executone Inter-Tel
Business Information Systems, Inc.10.63(21) *
    
    Form of Key Employee Tier 1 Change of Control Severance Agreement.10.64(21) *
    
    Form of Key Employee Tier 2 Change of Control Severance Agreement.23.0(23)
    
    Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm.
 
 (1)
    
    Incorporated by reference to Registrants Registration Statement on Form S-1 (File
No. 2-70437).(3)
    
    Incorporated by reference to Registrants Annual Report on Form 10-K for the year
ended November 30, 1984 (File No. 0-10211), Registration Statement on Form S-8 (File No.
333-106868) and Registrants Annual Report on Form 11-K for the year ended December 31,
2002 (File No. 0-10211)(10)
    
    Incorporated by reference to Registrants Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 0-10211).(11)
    
    Incorporated by reference to Registrants Registration Statement on Form S-8 (File
No. 33-40353).(12)
    
    Incorporated by reference to Registrants Registration Statement on Form S-1 (File
No. 33-70054).(13)
    
    Incorporated by reference to Registrants Registration Statement on Form S-8 (File
No. 33-73620).(14)
    
    Incorporated by reference to Registrants Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 0-10211).(15)
    
    Incorporated by reference to Registrants Proxy Statement dated March 23, 1994 and to
Registrants Registration Statement on Form S-8 (File No. 33-83826).(16)
    
    Incorporated by reference to Registrants Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-10211).(17)
    
    Incorporated by reference to Registrants Registration Statements on Forms S-8 (File
Nos. 333-41197, 333-85098, 333-104642, 333-113600, and 333-123506).(18)
    
    Incorporated by reference to Registrants Registration Statements on Forms S-8 (File
Nos. 333-41197 and 333-87474).(19)
    
    Incorporated by reference to Registrants Registration Statements on Forms S-8 (File
Nos. 333-56872, 333-67261 and 333-85098).(20)
    
    Incorporated by reference to Registrants Report on Form
8-K (File No. 0-10211, filed on January 14, 2000).(21)
    
    Incorporated by reference to Registrants Annual Report on Form 10-K for the year
ended December 31, 2003 (File No. 0-10211).(22)
    
    Incorporated by reference to Registrants Report on Form
8-K (File No. 0-10211, filed on February 27, 2006).(23)
    
    Incorporated by reference to Registrants Annual Report on Form
10-K for the year ended December 31, 2005 (File No. 0-10211).*
    
    Management contracts or compensatory plan or arrangement required to be filed as an
exhibit to this report on Form 10-K. (b) Exhibits filed herewith.
 31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code).
  (c)
    
    Financial Statement Schedule.The response to this portion of Item 15 is submitted as a
separate section of this report. See Item 8.
 36




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SIGNATURES
  INTER-TEL (DELAWARE) INCORPORATEDBY: /s/ Norman StoutNorman StoutDirector and Chief Executive Officer  37