SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the Fiscal Year Ended December 31, 2004                     Commission File Number 0-26912

VODAVI TECHNOLOGY, INC.

(480) 443-6000

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

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

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

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

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

The aggregate market value of common stock held by nonaffiliates of the registrant (2,181,986 shares) based on the closing price of the common stock as reported on the Nasdaq SmallCap Market on June 30, 2004, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $10,102,595. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

As of March 25, 2005, there were outstanding 3,715,062 shares of the registrant’s common stock, $.001 par value, which excludes 32,402 treasury shares.

Documents incorporated by reference

     None.

VODAVI TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS

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 2005 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 1, “Business — Risk Factors.”

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PART I

ITEM 1. BUSINESS

Introduction

     We design, develop, market, and support a broad range of business telecommunications solutions, including traditional, converged, and IP-based telephone systems and telephony applications, as well as traditional and IP-based commercial grade telephones, that address a wide variety of business applications. Our telephone systems incorporate sophisticated features such as automatic call distribution, scalable networking, Internet Protocol, or IP, as well as wireless solutions. Our telephony applications include Internet messaging, automated attendant, voice and fax mail and computer-telephony products that enable users to integrate the functionality of their telephone systems with their computer systems. We market our products primarily in the United States as well as in foreign countries through a distribution model consisting primarily of wholesale distributors and direct dealers.

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

	•	continued expansion of our core business of supplying telephone systems, telephony applications, and commercial grade telephones;
	•	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;
	•	emphasize sales of larger and more advanced systems through our dealers;
	•	focus on the integration of existing and newly developed products to provide complete, industry standard-based business communications products to our customers;
	•	expand our strategic relationship with LG Electronics Inc., or LGE, which is a member of the multi-billion dollar, Korean-based LG Group; and
	•	enhance our existing products and expand our product lines by expanding our technological expertise and distribution channels through

		-- internal research and development efforts, and
		-- business acquisitions, license arrangements, and other strategic relationships.

     Our corporate offices are located at 4717 East Hilton Avenue, Suite 400, Phoenix, Arizona, and our telephone number is (480) 443-6000. All references to our business operations in this report include the operations of Vodavi Technology, Inc. and our subsidiaries. Our website is located at www.vodavi.com. Through our website, we make available free of charge our annual report on Form 10-K, our proxy statement, our quarterly reports on Form 10-Q, our current reports on Form 8-K, amendments to reports filed under the Securities Exchange Act of 1934, and earnings press releases. These filings are available as soon as reasonably practical after we electronically file them with the Securities and Exchange Commission. We also post on our website the charters of our Audit, Compensation, and Nomination and Corporate Governance Committees; our Corporate Governance Guidelines, Code of Conduct, Code of Ethics for the CEO and Senior Financial Officers, and any amendments and waivers thereto; and any other corporate governance materials contemplated by SEC or Nasdaq regulations. These documents are also available in print to any stockholder requesting a copy from our corporate secretary at our principal executive offices.

Industry Overview

     The telecommunications industry encompasses a broad range of equipment and service providers. We focus our efforts in the customer premise equipment, or CPE, segment of the industry. Within the CPE segment, we

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provide business telephone systems, telephony applications, and commercial grade telephones that help small to medium sized businesses streamline operations, reduce costs, and communicate more effectively.

     Many factors have influenced the telecommunications industry over the years, including the following:

	•	successive technological developments that have resulted in enhanced features and services;
	•	optical networking technologies;
	•	broadband connectivity;
	•	wireless and mobile communications;
	•	emphasis on the use of communications systems to provide cost-effective customer service; and
	•	regulatory changes.

     Perhaps the most significant technological advancement in recent years has been the evolution and acceptance of the Internet and other packet-switched networks to carry voice and data traffic. This evolution is transforming the way businesses communicate and allows equipment providers to develop sophisticated systems that offer a wide variety of applications in addition to traditional call switching functions. While utilizing packet-switched networks to carry voice and data traffic can offer more efficiencies and value to businesses, the traditional telephone network utilizing analog and digital time-division-multiplexing, or TDM, technologies remains the standard for voice communications today. Nevertheless, businesses of all sizes will increasingly demand affordable telecommunications systems that provide the capacity for the following:

	•	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

     We currently design, develop, market, and support a broad range of products that can be categorized as follows:

	•	telephone systems, which include traditional digital and IP-based key telephone systems;
	•	telephony applications, which include voice messaging, automated attendant, automatic call distribution, as well as advanced messaging products that include fax mail, and unified messaging

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		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

     Sales of telephone systems represented approximately 83% of our revenue during 2004, 81% in 2003, and 72% in 2002. A telephone system consists primarily of a sophisticated switching unit located at the user’s place of business, along with the individual telephone sets and other devices, such as facsimile machines and modems, located at individual “stations.” We supply various models of telephone sets with progressive features for use in conjunction with each of our telephone systems.

     We currently market various lines of telephone systems under our STARPLUS and Vodavi brand names for businesses requiring as few as eight stations up to 492 stations (a 600-port system). Our flagship digital telephone systems are the XTS (eXpandable Telephone System) for larger applications and the STS for smaller businesses and residences. These systems employ a digital architecture in order to provide digital voice transmission and system control. Most of our digital telephone systems feature flexible software combined with modular hardware and card slot design, which allow cost-effective system customization and expansion to meet the needs of individual users. Our digital telephone systems are fully compatible with industry-standard commercial grade telephones and contain an extensive array of standard features that add sophistication generally found only in larger telephone systems. We design our telephone systems to permit expansion or customization for specific business applications by the installation of a variety of voice processing or computer-telephony integration applications.

     In addition, our XTS system can be IP-enabled with the addition of a VoIP Gateway, or LAN card. An IP-enabled XTS, together with our IP networking software package allows up to 32 XTS systems to communicate as one large system using an IP infrastructure. This configuration allows companies with multiple locations or remote workers to communicate more efficiently and to reduce costs by utilizing a common network to connect multiple locations together.

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

     Our flagship IP-based telephone system, the Telenium, is based exclusively on IP technology, which allows a business’ local area network or wide area network to be utilized as the communication medium. The Telenium system provides an extensive array of standard features that operate in much the same manner as a traditional system. The Telenium system also offers web-based administration, which simplifies administration locally or from a remote location. The Telenium system accommodates IP telephones, commercial grade telephones, and a variety of incoming lines including traditional as well as ISDN types.

Telephony Applications

     Telephony applications include a combination of various software and hardware solutions designed to improve customer service and reduce labor costs while providing faster, more efficient routing of incoming calls as well as speeding up and simplifying message delivery and storage. Some of our telephony applications may be integrated with telephone systems sold by competing manufacturers while other applications only integrate with our telephone systems sold by to differentiate them from our competitors’ products and to provide a value-added basis for increased sales and profit margins. Sales of telephony applications accounted for approximately 11% of our revenue during 2004, 13% during 2003, and 17% during 2002.

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     Voice Mail Systems

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

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

     Advanced Messaging Platform

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

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

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

     Automatic Call Distribution

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

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     Our ACD reporting package provides real-time statistics and comprehensive reports on calling activity for review by the user’s management. These statistics allow users to analyze and make informed decisions regarding their business operations.

     Computer-Telephony Integration Products

     We market CTI products that use an open architecture to integrate computer and telephone systems into a user-friendly information processing and storage system. Our CTI products allow a user:

	•	to use the Internet to access voice, facsimile, and e-mail messages via personal computers;
	•	to incorporate telephone functions with computer software to speed call handling and permit the user to personalize telephone functions;
	•	to identify incoming callers and immediately access computer files relating to the caller;
	•	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

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

     Our commercial grade telephones offer a myriad of features, functions, and designs ranging from simple, traditionally styled desk and wall-mounted telephones to programmable telephones with contemporary styling. Our more advanced commercial grade telephones contain a central processing unit, built-in memory, built-in data jacks, built-in speakerphones, built-in Caller ID, and the capability to use custom calling features provided by local telephone companies. Sales of commercial grade telephones represented approximately 5% of our revenue during 2004, 5% of our revenue during 2003, and 7% during 2002.

New Product Development

     We engage in an ongoing program to develop enhancements to our existing product lines and to develop new products that address the increasing demands of business organizations for productivity enhancing communication solutions. We believe that continuous development of new products and features will be necessary to enable us to continue to offer telephony systems, voice processing products, computer-telephony products, and related business communications products that will be in greatest demand and that will provide the best opportunities for our growth and profitability on an ongoing basis. We are currently focusing our product development efforts on new products and enhancements that will address broader market applications, sophistication, and value to our current product offerings. In addition, through new developments, we are targeting specific market segments that we do not currently serve. Examples of our current developments include the following:

	•	An IP software based telephone for mobile worker and remote contact center applications.
	•	Advanced IP Interface PCB that provides higher densities, cover cost, and advanced IP feature set for the XTS.
	•	a wireless IP product that will offer complete mobility for users of the XTS telephone system;

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	•	The third phase of our IP telephony system, providing a WiFi offering for mobility applications, softphone software that allows computers and PDA devices to perform as a Telenium station, as well as CTI and contact center enhancements,
	•	a new “In Skin” PC platform for our XTS that will provide software applications, such as voice processing, ACD, and CTI, eliminating the need for external computer platforms on the XTS System;

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

Sales, Marketing, and Distribution

     We currently market our products in all 50 states and, to a limited extent, internationally through a distribution network consisting primarily of Authorized Dealers and wholesale distributors, who resell our products to general sales and installation companies and to Authorized Vodavi Dealers that do not buy directly from our company. In March 2002, through our acquisition of Dataspeak Systems, Inc., we began distributing our products and services directly to end-users in the Phoenix metropolitan area. We have in the past and may in the future market our products on a private label basis to original equipment manufacturers, or OEMs.

     Authorized Vodavi Dealers

     We have approximately 300 Authorized Dealers that sell our products. Approximately 200 Authorized Dealers buy our products directly from our company and approximately 100 Authorized Dealers buy our products through our wholesale distributors. Our Authorized Dealers generally must commit to minimum purchases of our products and must be trained and certified through our formal product and sales training program. Our goal is to encourage Authorized Dealers to promote our products to their customers as the preferred line of telecommunications equipment. We provide Authorized Dealers with marketing, sales, and product support services as well as incentive programs to encourage the sale of our products.

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

     We believe that the principal advantages of having an authorized dealer program include greater control over the application and installation of our products and the ability to obtain market feedback on product pricing, quality, and technology. Purchases from our Authorized Dealers represented approximately 60% of our total revenue in 2004, whether those purchases were made directly from our company or through our wholesale distributors.

     Wholesale Distributors

     We have a select number of wholesale distributors that resell our full line of products to Authorized Dealers and our STARPLUS line and commercial grade telephones to general telephone sales and installation companies and independent telephone companies. Our STARPLUS line of products consists of our STS, DHS, DHSE, and DHSL telephone systems. We provide ongoing support and training to enable our wholesale distributors to sell more effectively our products and to provide their customers with technical assistance in installation, maintenance, and customer support. We believe that sales through wholesale distributors offer several advantages, including the following:

	•	established distribution systems and access to a large number of dealer and national customer accounts;
	•	maintenance of customer credit facilities and an established inventory of our products;

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	•	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.

     Wholesale distributors that currently resell our products include Graybar Electric Co., Inc., Alltel Supply, Inc., Sprint/North Supply, Famous Telephone Supply, ADI, Target Distributing, Inc, and Power & Telephone Supply Company. Graybar accounted for 26% of our revenue during 2004, and 27% during each of 2003 and 2002. Target, our second largest distributor, accounted for 17% of our revenue during 2004, 14% in 2003 and 12% in 2002.

     Vodavi Direct

     We have a direct sales office that sells our products and provides pre- and post-sales support services directly to end-users in the Phoenix metropolitan area. We acquired this operation during March 2002 through our acquisition of Dataspeak Systems, Inc.

     International Sales

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

     In-house Sales Staff

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

Research and Development; Strategic Alliances with LGE and Other Companies

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

     We conduct joint development activities with LGE for the design and development of hardware incorporated into some of our existing or planned telephone systems and commercial grade telephone product lines. Under our joint development projects with LGE, we provide market analysis, product management, functional and performance standards, software development, quality control program development, sales and distribution, and

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customer service and support, while LGE provides hardware research, design, and development, development of components such as integrated circuits and semiconductor chips, and manufacturing and production engineering. Generally, LGE contributes the ongoing research and development costs for the product hardware in return for an arrangement under which LGE produces the finished goods developed under the alliance. As a result of this arrangement, we have been able to obtain access to LGE’s research and development expertise and resources while controlling our capital expenditures for much of our product development efforts. In addition, our arrangement with LGE enables us to minimize the risks inherent in making significant investments in research and development infrastructure or personnel. To the extent that we develop new hardware in conjunction with LGE or another development partner, the development partner typically retains ownership rights to the new hardware and we retain the right to sell products incorporating that hardware throughout North America and the Caribbean. See Item 1, “Business — - Manufacturing” and Item 1, “Business - - - Risk Factors – We rely on LGE as a strategic partner.” We have successfully engaged in such projects with LGE in the past and believe that we will continue to have access to LGE’s advanced hardware research and development capabilities as we develop new product lines.

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

Manufacturing

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

     We obtain a majority of our telephone systems, voice mail products and IP-based commercial grade telephones from LGE, which owns the rights to produce this equipment. We purchase products manufactured by LGE in Korea on a purchase order basis. We purchased $20.8 million, $20.0 million, and $15.9 million of product from LGE in 2004, 2003, and 2002, which represented 82%, 82%, and 74%, of our total purchases, respectively. LGE currently owns approximately 23% of our outstanding common stock. See Item 1, “Business — Risk Factors — We rely on LGE as a strategic partner” and “Business — Risk Factors — Certain conflicts of interest may arise as a result of LGE’s ownership interest in our company.”

     We obtain all of our traditional commercial grade telephones and replacement parts for such telephones from LG Information and Communications Thailand, or LGICTH, a joint venture between LGE and Srithai Group, a Thailand-based entity. Under an agreement with our company, LGICTH granted us the right to distribute and sell throughout the United States and Canada the products that LGICTH manufactures for us in Thailand. Our agreement with LGICTH prohibits us from purchasing the products covered by the agreement from any other manufacturer during the term of the agreement. The agreement renews automatically for successive one-year terms unless either party provides notice to the other of its intent to cancel the agreement at least three months prior to the end of the then-current term. We make all purchases pursuant to the agreement on a purchase order basis. We purchased $1.4 million, $1.1 million, and $2.6 million of product from LGICTH in 2004, 2003, and 2002, which represented 6%, 5%, and 12% of our total purchases, respectively. See Item 1, “Business — Risk Factors — We rely on LGE as a strategic partner” and “Business — Risk Factors — Certain conflicts of interest may arise as a result of LGE’s ownership interest in our company.”

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

Quality Control

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

Support Services

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

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

Competition

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

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

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

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Patents, Trademarks, and Licenses

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

     We own a number of registered and unregistered trademarks that we consider to be an important factor in marketing our products. Our ability to compete may be enhanced by our ability to protect our proprietary information, including the issuance of patents, copyrights, and trademarks. We also have taken steps to protect our proprietary information through a “trade secrets” program that includes copy protection of our software programs and obtaining confidentiality agreements with our employees. We cannot assure you, however, that these efforts will be effective in preventing misappropriation, reverse engineering or independent development of our proprietary information by our competitors. While none of our intellectual property rights have been invalidated or declared unenforceable, we cannot assure you that our rights will be upheld in the future. Accordingly, we believe that, due to the rapid pace of technological change in the telecommunications industry, the technical and creative skills of our engineers and other personnel will be extremely important in determining our future technological success.

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

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

Government Regulation

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

Employees

     As of December 31, 2004, we employed a total of 114 persons, all of which are full-time employees at our facilities in Phoenix, Arizona, and Lawrenceville, Georgia. Our current number of full-time employees includes 28 persons in engineering and product development; 61 in sales, marketing, and technical support; 10 in warehouse and distribution functions; and 15 in administration, including executive personnel. We consider our relationship with our employees to be good, and none of our employees currently are represented by a union.

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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 1, “Business — Risk Factors.”

Our reliance on our independent distribution network affects our inventory levels, the timing and predictability of our revenue, and our overall operating results.

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

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

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

     Graybar accounted for 26% of our sales during 2004, and 27% during each of 2003 and 2002. Accounts receivable from Graybar comprised approximately 32% of total accounts receivable at December 31, 2004. Our second largest distributor in each of the respective years accounted for 17% of our sales during 2004, 14% of our sales during 2003 and 12% during 2002. Accounts receivable from our second largest distributor comprised approximately 25% of total accounts receivable at December 31, 2004.

We face risks associated with international manufacturing sources.

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

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	•	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.

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

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

We rely upon LGE as a strategic partner

     We rely on LGE to supply most of our key telephone systems and voice mail products and all of our commercial grade telephones. We also rely on LGE’s engineering, hardware and circuit development, and manufacturing capabilities. We purchased approximately $22.2 million, $21.1 million, and $18.5 million of product LGE and LGITCH, constituting approximately 88%, 87%, and 86% of our total purchases in 2004, 2003, and 2002, respectively. Although we have executed as manufacturing agreement with LGE to supply our products, we cannot be assured that LGE will continue to support our business or operations.

     In January 2005, LGE announced that it plans to establish a joint venture with a division of Nortel Networks Corporation to provide telecommunications networking solutions. Based on the announcement, the proposed joint venture is intended to support the strategy of both companies for ongoing development of telecommunications equipment and networking solutions. LGE management has informed us that the proposed joint venture should not have any adverse effect on our ongoing relationship and, in March 2005, entered into a new five-year agreement with us. The long-term impacts to our business as a result of this joint venture are not known at the present time.

We depend on new products and technologies.

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

     Our future operating results will depend to a significant extent on our ability to identify, develop, and market enhancements or improvements to existing product lines as well as to introduce new product lines that compare favorably on the basis of time to market, cost, and performance with the product lines offered by our competitors. The success of new product lines depends on various factors, including proper market segment selection, utilization of advances in technology, innovative development of new product concepts, timely completion and delivery of new product lines, efficient and cost-effective features, and market acceptance of our products. Because of the complexity of the design and manufacturing processes required by our products, we may experience delays from time to time in completing the design and manufacture of improvements to existing product

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lines or the introduction of new product lines. In addition, customers or markets may not accept new product lines. Our failure to design and implement enhancements to existing product lines or failure to introduce new products on a timely and cost-effective basis would adversely affect our future operating results.

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

The telecommunications industry is cyclical.

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

We must finance the maintenance and expansion of our business and the development of new products.

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

We depend on third parties for manufacturing.

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

	•	product defects;
	•	production delays;
	•	cost overruns; or
	•	the inability to fulfill orders on a timely basis.

     Our operations would be adversely affected if we were to lose our relationship with any of our suppliers, if any of our suppliers’ operations were interrupted or terminated, or if overseas or air transportation services were disrupted even for a relatively short period of time. We do not maintain an inventory of sufficient size to provide protection

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for any significant period against an interruption of supply, particularly if we were required to locate and use alternative sources of supply.

Markets for our products are intensely competitive, and we cannot assure you that we will be able to compete successfully in the future.

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

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

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

We face risks associated with patents, licenses, and intellectual property.

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

	•	the steps we have taken to protect our proprietary rights may be inadequate to protect misappropriation of such rights;
	•	third parties may independently develop equivalent or superior technology;

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	•	the process of seeking patent protection can be long and expensive, and patents may not issue from future applications;
	•	existing patents or any new patents that are issued may not be of sufficient scope or strength to provide us meaningful protection or any commercial advantage;
	•	we may be subject to or may initiate interference proceedings in the U.S. Patent and Trademark Office, which can demand significant financial and management resources; and
	•	we may commence litigation to enforce patents or other intellectual property rights, or to defend us against claimed infringement of the rights of others, which could result in substantial cost to us and diversion of our management’s attention.

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

Our third-party manufacturers may experience shortages of raw materials and supplies.

	•	semiconductor components;
	•	unfinished printed circuit boards;
	•	molded plastic parts; and
	•	metals.

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

We depend on management and other key personnel.

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

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Certain conflicts of interest may arise as a result of LGE’s ownership interest in our company.

     LGE currently owns approximately 23% of our outstanding common stock. We obtain most of our digital telephone systems, IP-based products, and voice mail products from LGE and obtain all of our commercial grade telephones and replacement parts for such telephones from LGICTH, an affiliate of LGE. See Item 1, “Business – Manufacturing” and “Risk Factors – LGE’s proposed joint venture with Nortel to develop telecommunications equipment and networking solutions may have a material adverse effect on our business.” As a result of LGE’s direct ownership interest in us, an inherent conflict of interest exists in establishing the volume and terms and conditions of our purchases from LGE and LGICTH. In order to mitigate such conflicts, all decisions with respect to such purchases are made by our officers and reviewed by directors who have no relationship with LGE.

     Our relationship with LGE may have the effect of making more difficult or delaying attempts by others to obtain control of us, even when these attempts may be in the best interests of stockholders. Through LGE’s stockholder interest and business interests in our company, LGE may have significant influence over our business.

Our stock price may be volatile.

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

	•	wide fluctuations in response to quarterly variations in our operating results or the operating results of our competitors;
	•	actual or anticipated announcements of technological innovations or new product developments by us or our competitors;
	•	significant actual or anticipated expenditures for property or equipment, research and development, sales and marketing activities, or other planned or unanticipated events;
	•	changes in analysts’ estimates of our financial performance;
	•	developments or disputes concerning proprietary rights;
	•	regulatory developments;
	•	general industry conditions; and
	•	worldwide economic and financial conditions.

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

Rights to acquire our common stock could result in dilution to other holders of our common stock.

     As of March 25, 2005, we had outstanding options to acquire 753,875 shares of our common stock at a weighted average exercise price of $3.10 per share. An additional 488,750 shares remain available for grant under our 2003 Incentive Compensation Plan. During the terms of these options, the holders thereof will have the opportunity to profit from an increase in the market price of the common stock. Additionally, all outstanding options become fully vested and exercisable upon a change of control of our company. The existence of these options may adversely affect the terms on which we can obtain additional financing, and the holders of these options can be expected to exercise such options at a time when we, in all likelihood, would be able to obtain additional

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capital by offering shares of our common stock on terms more favorable to us than those provided by the exercise of these options.

Sales of additional shares of our common stock could have a negative effect on the market price of our common stock.

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

It may be difficult for a third party to acquire us, even if the acquisition would be in the best interest of stockholders.

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

	•	authorize our board of directors to fill vacancies on our board of directors;
	•	authorize our board of directors to issue preferred stock in series with such voting rights and other powers as our board of directors may determine; and
	•	require the affirmative vote of two-thirds of the directors then in office to approve:

		-- a public offering of our capital stock;
		-- the merger with or the acquisition of another business or the acquisition of a significant amount of the assets of another business;
		-- the sale of a significant amount of our assets;
	--•	ur entering into contracts with our stockholders or directors;
	--•	ur assumption or acquisition of debt in excess of $1.0 million; and
		-- any amendment of our Amended Certificate of Incorporation and Bylaws of our wholly owned subsidiary Vodavi Communications Systems, Inc.

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

We do not pay cash dividends.

     We have never paid any cash dividends on our common stock. Instead, we have retained our earnings to provide funds for use in our business. Our board of directors reviews our dividend policy from time to time and may elect to pay dividends on our common stock in the future. However, the terms of the revolving line of credit facility between our wholly owned subsidiary Vodavi Communications Systems, Inc. and Comerica Bank prohibit our subsidiary from paying dividends to us without the consent of Comerica. This restriction could limit our ability to pay dividends in the future.

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ITEM 2. PROPERTIES

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

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

     We also lease, for a term ending in May 2005, approximately 5,000 square feet of office and warehouse space in Tempe, Arizona. This space is subleased to a third party.

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

ITEM 3. LEGAL PROCEEDINGS

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

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

     Not applicable.

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PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

     Our common stock is listed on the NASDAQ SmallCap Market under the symbol “VTEK.” The following table sets forth the high and low sales prices of our common stock on the NASDAQ SmallCap Market for the periods indicated.

     On March 25, 2005, the closing sales price of our common stock was $6.92 per share. As of March 25, 2005 , there were approximately 40 holders of record of our common stock.

Dividend Policy

     We have never paid any cash dividends on our common stock. Instead, we have retained our earnings to provide funds for use in our business. Our board of directors reviews our dividend policy from time to time and may elect to pay dividends on our common stock in the future. However, the terms of the revolving line of credit facility between our wholly owned subsidiary Vodavi Communications Systems, Inc. and Comerica Bank prohibit our subsidiary from paying dividends to us without the consent of Comerica. This restriction could limit our ability to pay dividends in the future.

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ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated financial data presented below as of and for the years ended December 31, 2004, and 2003 are derived from our consolidated financial statements, which have been audited by Mayer Hoffman McCann P.C., independent registered public accounting firm. The selected consolidated financial data presented below as of and for each of the years in the two-year period ended December 31, 2002 are derived from our consolidated financial statements, which have been audited by Deloitte & Touche LLP, independent auditors. The selected consolidated financial data presented below as of and for year ended December 31, 2000 are derived from our consolidated financial statements, which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial information provided below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of our company and related notes thereto. No dividends were paid during the periods presented.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

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

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

Customer Incentives

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

Bad Debts

     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Additionally, we have a significant concentration of accounts receivable with our two largest distributors, Graybar Electric Company, Inc. and Target Distributing, Inc. As of December 31, 2004, Graybar accounted for 32% and Target accounted for 25% of our total accounts receivable. If either Graybar or Target’s financial condition were to deteriorate, resulting in their inability to make payments to us, it could have a material adverse impact on our financial condition and results of operations.

Sales Returns

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

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Excess and Obsolete Inventory

     We record our inventory at the lower of cost or market value. Our assessment of market value is determined by, among other things, historical and forecasted sales activity, the condition of specific inventory items, and competitive pricing considerations. When the assessed market value is less than the historical cost, provision is made in the financial statements to write-down the carrying amount of the respective inventory items to market value. If actual results are less favorable than our original assumptions for determining market value, additional inventory write-downs may be required.

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

Results of Operations

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

Year Ended December 31, 2004 Compared with Year Ended December 31, 2003

Revenue

     Revenue for the year ended December 31, 2004 totaled $43.8 million, an increase of 6.1%, from revenue of $41.3 million for the same period of 2003. Sales of our telephone systems increased 8.8% to $36.4 million during fiscal 2004 compared to $33.4 million in fiscal 2003. The increase in telephone system sales is attributed to an increase in unit sales of our STS product line and the sale of larger systems within the XTS product line. Sales of commercial grade single line telephones declined 8.1% to $2.1 million during 2004 compared to $2.2 million in 2003. During the third quarter of 2004, we discontinued our 2700 Series of single line telephones and in June 2004 we introduced the 2800 Series. We expect sales of single line telephones to accelerate in 2005. Sales of telephony applications, including voice processing, computer telephony integration, and unified messaging decreased to $4.8 million from $5.2 million between the respective years of 2004 and 2003. The decline in telephony applications is a direct result of selling more embedded voice mail applications, which are reported in telephone system sales.

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     Sales through our direct sales office in the Phoenix Metropolitan area totaled $2.1 million during fiscal 2004 compared with $1.3 million in fiscal 2003. The increase in sales through our direct sales office is attributable to the expansion of our sales force and the positive impact of a focused sales and marketing program.

     Our reported revenue includes shipping and handling charges and is recorded net of reserves for sales returns, discounts and customer incentive programs. These items resulted in a net reduction to revenue of $1.4 million in 2004 compared with a net reduction of $905,000 in 2003.

Gross Margin

     Our gross margin was approximately $15.4 million in 2004 compared with $14.3 million in 2003. Our gross margin as a percentage of total revenue increased to 35.2% during 2004 from 34.6% during 2003. The increase in our gross margin percentage during 2004 is a direct result of the mix of product sales, a higher volume of sales to cover the fixed component of cost of sales, and increased sales at our direct sales office.

Engineering and Product Development

     Engineering and product development expenditures decreased to $1.9 million during 2004 from $2.1 million in 2003. As a percentage of revenue, engineering and product development expenditures decreased to 4.3% of total revenue during fiscal 2004 from 5.0% during fiscal 2003. This reduction reflects a slight decrease in headcount and outsourced development costs primarily related to a specific development that was completed in 2003.

Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses increased to $10.6 million in 2004 compared to $10.0 million in 2003. Factors that increased our expenses include increased compensation and additional marketing and promotional activity. As a percentage of revenue, selling, general, and administrative expenses declined to 24.1% compared with 24.3% in 2003.

Interest Expense

     Interest expense decreased to $6,000 during 2004 compared with $128,000 during 2003. The reduction in interest expense is a direct result of the elimination of interest-bearing debt in the first half of 2004.

Income Taxes

     We provided for federal and state income taxes using an effective rate of 38.5% in 2004 compared with 38.7% for the same period in 2003.

Year Ended December 31, 2003 Compared With Year Ended December 31, 2002

Revenue

     Revenue for the year ended December 31, 2003 totaled $41.3 million, an increase of $3.9 million, or 10.6%, from revenue of $37.3 million in 2002. Sales to our supply house customers accounted for approximately $24.9 million of our total revenue during 2003 compared with $20.8 million in 2002. The increase in sales to our supply house customers in 2003 is related principally to sales of our new STS telephone system that we introduced in January 2003. The STS product line is a full-featured telephone system designed and priced to capture a larger portion of the small business telephone system market. While the STS telephone system has been accepted well into the marketplace, sales of this product have had the effect of reducing the level of sales of similar products that we sell through supply houses.

     Sales through our direct dealer program totaled $16.0 million in 2003 compared with $15.4 million in 2002. The increase in sales to our direct dealers is reflective of our program to focus on selling to fewer, but larger and

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better-established, dealers that are more effective at selling our larger systems. During 2003, our direct dealers also purchased our new STS product line directly from our supply house customers .

     Sales through our direct sales office in the Phoenix Metropolitan area totaled $1.3 million during 2003 compared with $1.6 million in 2002. The reduction in sales through our direct sales office from 2002 was directly attributable to a large school system sale in 2002 that did not recur in 2003.

     Our revenue is reported net of reserves for sales returns, discounts, customer incentive programs, inter-company eliminations, and shipping and handling charges. These items resulted in a reduction to revenue of $905,000 in 2003 compared with a reduction of $400,000 in 2002.

Gross Margin

     Our gross margin was approximately $14.3 million in 2003 compared with $13.5 million in 2002. Our gross margin as a percentage of total revenue decreased to 34.6% during 2003 from 36.0% during 2002. The decrease in our gross margin percentage during 2003 was a direct result of the product mix of sales to our supply house customers with a heavier emphasis of sales of our new STS telephone system, which generates a lower overall gross margin percentage than most of our other products.

Engineering and Product Development

     Engineering and product development expenditures decreased to $2.1 million during 2003 from $2.3 million in 2002. The expenditures in 2002 reflected additional headcount and outsourced development costs associated with a development project that we completed in 2002 pursuant to a development agreement with LG Electronics. While engineering and product development expenditures decreased from a year ago, we continue to invest in the development of our next generation IP telephone system, the convergence of and enhancements to our existing telephone systems, and enhancements to our voice processing products.

Selling, General, and Administrative Expenses

     Selling, general, and administrative expenses increased to $10.0 million in 2003 from $9.8 million in 2002. As percentage of revenue, such expenses declined to 24.3% in 2003 compared with 26.3 % in 2002. The reduction in selling, general and administrative expenses as a percentage of revenue reflects improved operating leverage in 2003 and the impact of a $300,000 charge for the settlement of litigation in 2002 that did not recur in 2003.

Interest Expense

     Interest expense increased to $128,000 during 2003 compared with $97,000 during 2002. Our interest expense increased in 2003 as a result of additional borrowings on our revolving credit facility to repurchase our common stock in June 2003 and the amortization of bank commitment fees and other costs associated with the credit facility that we entered into with Comerica Bank-California in April 2003.

Income Taxes

     We provided for federal and state income taxes using an effective rate of 38.7% in 2003 compared with an effective rate of 39.6% in 2002. Our effective tax rate was lower in 2003 as we incurred less non-deductible expenses as a percentage of our taxable income in 2003 than we did in 2002.

Liquidity and Capital Resources

     Our net working capital position was approximately $10.2 million at December 31, 2004 compared with $8.6 million at December 31, 2003. We had a cash balance of $4.0 million at December 31, 2004 compared with a cash balance of $2.9 million at December 31, 2003. Sources of cash included positive income from operations, a reduction in inventory of $546,000 and other current assets of $249,000, and $322,000 from the exercise of stock options. Uses of cash during 2004 included an increase in accounts receivable of $245,000 and the pay down of accounts payable and accrued liabilities of $752,000 and $202,000, respectively. We also used approximately $381,000 in 2004 for the purchase of property and equipment, $152,000 to repurchase 32,402 shares of our common stock , and $900,000 to pay off our term loan.

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     Our accounts receivable days sales outstanding, calculated on a quarterly basis, were approximately 59 days during each of 2004 and 2003. The timing of payments received from our largest distributors greatly influence our days sales outstanding. Our two largest distributors comprised 57% of our total accounts receivable as of December 31, 2004 and 51% as of December 31, 2003.

     Our inventory turnover, measured in terms of days outstanding on a quarterly basis, was 59 days as of December 31, 2004 compared to 67 days as of December 31, 2003. The decrease in inventory days outstanding is a direct result of our efforts to rationalize our product lines and an increase in sales.

     Trade payables and accrued liabilities, including payables to third-party and related-party manufacturers, were approximately $6.5 million as of December 31, 2004 compared with $7.4 million as of December 31, 2003. The level of our trade payables and accrued liabilities between periods is largely influenced by the timing of payments we make to our largest suppliers for inventory items and payments to cover payroll, income taxes, and customer rebates. We generally pay trade payables within 45 days from the invoice date, except for payments to our largest supplier, which are 60 days from the invoice date.

     We had a $15.0 million credit facility with General Electric Capital Corporation that expired in April 2003. The line of credit bore interest at 2.5% over the 30-day commercial paper rate. Advances under the line of credit were based upon eligible accounts receivable and inventory of our wholly owned subsidiary, Vodavi Communications Systems, Inc., and were secured by substantially all of our assets. The revolving line of credit contained covenants that are customary for similar credit facilities and also prohibited our operating subsidiaries from paying dividends to us without the consent of GE Capital.

     In April 2003, we entered into a credit agreement with Comerica Bank (Comerica) of a size that is more reflective of the operational requirements of our business. The credit agreement established a $5.0 million revolving line of credit and a $1.0 million term loan. Advances under the credit facility are based upon eligible accounts receivable and inventory of our wholly owned subsidiary, Vodavi Communications Systems, Inc., and are secured by substantially all of our assets. The credit facility contains covenants that are customary for similar credit facilities and also prohibits our operating subsidiaries from paying dividends to us without the consent of Comerica. As of December 31, 2004, we had no outstanding borrowings on our line of credit and $5.0 million available for future advances.

     The $5.0 million revolving line of credit bears interest at Comerica’s prime rate, or 5.25% at December 31, 2004, and requires monthly payments of interest only with all unpaid principal and accrued interest due at its expiration in April 2005. In March 2005, we entered into a modification agreement with Comerica extending the expiration date to April 2006.

     The $1.0 million term loan was available to us only for the purpose of acquiring our common stock. Borrowings on the term loan bore interest at Comerica’s prime rate plus 0.5%. In April 2004, we repaid the amount outstanding on our term loan.

     We have no special purpose entities or off balance sheet financing arrangements, commitments, or guarantees other than certain long-term operating lease agreements for our office and warehouse facilities and short-term purchase commitments to our third-party suppliers. The following table sets forth all known commitments as of December 31, 2004 and the year in which those commitments become due or are expected to be settled (in thousands):

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     From time to time we are subject to certain asserted and unasserted claims encountered in the normal course of business. We believe that the resolution of these matters will not have a material adverse effect on our financial position or results of operations. However, we cannot provide assurance that damages resulting from the resolution of these matters, if any, will not have a material adverse effect on our financial position or results of operations.

     We believe that our cash flows from operations, working capital, and credit facilities are sufficient to fund our capital needs during the next 12 months. We intend to continue to explore business acquisition opportunities as they arise and may be required to seek additional financing in the future to meet such opportunities.

International Manufacturing Sources

     We currently obtain a substantial majority of our products under various manufacturing arrangements with third-party manufacturers in South Korea and Thailand, including LGE who owns approximately 23% of our outstanding common stock. We face risks associated with international manufacturing sources. For a more detailed discussion of these risks, please see Item 1, “Business - - — Risk Factors – We face risks associated with international manufacturing sources.”

Impact of Recently Issued Accounting Standards

     In 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Accounting For Business Combinations, and SFAS No. 142, Goodwill And Other Intangible Assets. These statements modified accounting for business combinations after June 30, 2001 and affected the Company’s treatment of goodwill and other intangible assets effective January 1, 2002. The statements required that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be performed at least annually, with impaired assets written-down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified consistent with the statements’ criteria. Intangible assets with estimated useful lives continue to be amortized over those periods. Amortization of goodwill and intangible assets with indefinite lives have ceased.

     We determined that upon adoption of these statements on January 1, 2002, the $1.6 million carrying amount of the goodwill as of that date was impaired. The goodwill impairment was recognized in 2002 as a change in accounting principle, net of $375,000 of income taxes.

     In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS 151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) by requiring those items to be recognized currently in earnings. SFAS 151 is effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. The company believes the adoption of this statement will not have a material impact on our financial condition or results from operations.

     In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29 (“SFAS 153”). SFAS 153 amends APB Opinion No. 29 to eliminate certain exceptions to the principle that exchanges of nonmonetary assets should be measured based on fair value. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The company believes that adoption of this statement will not have a material impact on our financial condition or results from operations.

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     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” This Statement replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R requires companies to recognize the grant date fair value of stock options and other equity-based compensation issued to employees in the income statement. The statement becomes effective for interim or annual periods beginning after June 15, 2005. The Company has not determined the financial impact that the adoption of SFAS No. 123R may have on its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not participate in any activities involving derivative financial instruments or other financial and commodity instruments. We do not hold investment securities that would require disclosure of market risk. Our market risk exposure is limited to interest rate risk associated with our credit facility. We incur interest at a variable rate of prime on advances made under our revolving line of credit and prime plus 0.5% on our term loan. At December 31, 2004, we had no outstanding borrowings on the line of credit or term loan.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

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

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

     Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

     We have evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2004. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are effective to ensure that we record, process, summarize, and report information required to be disclosed by us in our quarterly reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. During the quarterly period covered by this report, there have not been any changes in our internal controls over financial reporting that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

ITEM 9B. OTHER INFORMATION

     In March 2005 we entered into an exclusive supply and distribution agreement with LG. Pursuant to the terms of the agreement, LG granted us exclusive rights to sell our current products manufactured by LG and any future products jointly developed by LG and us, in the United States, Canada, and the Caribbean Islands (except Cuba) and non-exclusive rights to sell certain products in Mexico. The agreement expires in December 2009.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

     William J. Hinz has served as Chairman of the Board of our company since October 1997 and as a director of our company since April 1997. From October 1999 until March 2004, Mr. Hinz served as Group President for the Triumph Components Group, which is a group of seven divisional companies within Triumph Group, Inc., a publicly held company. Mr. Hinz served as President of Stolper-Fabralloy Company, a precision aerospace engine component manufacturer that is a subsidiary of Triumph Group, Inc., from September 1997 until October 1999 and as Executive Vice President of Operations of Stolper-Fabralloy from March 1996 until September 1997. Mr. Hinz served as Vice President of Global Repair and Overhaul Operations for AlliedSignal Aerospace Company from June 1994 until March 1996. During this period, Mr. Hinz also was responsible for aerospace aftermarket merger and acquisition activity.

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

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

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

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     Jack A. Henry has served as a director of our company since November 2001. Mr. Henry began his career in 1966 with Arthur Andersen LLP and held positions in Detroit, Michigan, San Jose, California, Seattle, Washington and Phoenix, Arizona. In 2000, Mr. Henry retired as Managing Partner of the Phoenix office and formed Sierra Blanca Ventures LLC, a private advisory and investment firm. Mr. Henry currently serves on the board of directors of White Electronic Designs Corporation and Tickets.com, Inc. Mr. Henry previously served on the boards of directors of Simula, Inc., and SOS Staffing Services, Inc., both public companies. Mr. Henry attended the U.S. Naval Academy and holds both a Bachelors and Masters of Business Administration from the University of Michigan.

     Jong Dae An has served as a director of our company since August 2004. Mr. An has served as a group leader of the export business within the Network Division of LG Electronics Inc. where his career began in 1986. During most of this tenure with LGE, Mr. An managed the export of telecommunications equipment, establishing considerable market share in North America and Europe through relationships with leading distributors and world-class telecom service providers. Mr. An received a Master of Business Administration degree from the Helsinki School of Economy.

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

     Paul D. Sonkin has served as a director of our company since February 2004. Mr. Sonkin has served as the portfolio manager of the Hummingbird Value Fund, The Hummingbird Microcap Value Fund, and The Hummingbird Concentrated Fund since June 1999. He also serves as an adjunct professor at Columbia University Graduate School of Business, where he teaches courses on security analysis and value investing. From May 1998 to June 1999, Mr. Sonkin served as a senior analyst and portfolio manager at First Manhattan & Co., a firm that specialized in mid- and large-cap value investing. Prior to that, from April 1995 to May 1998, Mr. Sonkin served as an analyst and portfolio manager at Royce & Associates, the investment advisor to the Royce Funds. Prior to receiving an MBA from Columbia University, he worked at Goldman Sachs & Co. and at the U.S. Securities and Exchange Commission. Mr. Sonkin is co-author of “Value Investing: From Graham to Buffet and Beyond.”

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Exchange Act requires our directors, officers, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon our review of the copies of such forms we received during the fiscal year ended December 31, 2004, and written representations that no other reports were required, we believe that each person who, at any time during such fiscal year, was a director, officer, or beneficial owner of more than 10% of our common stock complied with all Section 16(a) filing requirements during such fiscal year, except as follows: (1) Mr. Sonkin filed a late Form 3 regarding his initial beneficial ownership and grant of options upon becoming a director of our company, as well as a late Form 4 covering a grant of options from our company; and (2) each of Messrs. Borcich, Francis, Henry, Mitchell, and Roeper filed one late Form 4 covering the grant of options from our company.

Code of Ethics and Committee Charters

     Our Board of Directors has adopted Corporate Governance Guidelines, a Code of Conduct, a Code of Ethics for the CEO and Senior Financial Officers, an amended and restated Audit Committee Charter, a Compensation Committee Charter, a Nominating/Corporate Governance Charter, and any other corporate governance materials contemplated by SEC or NASDAQ regulations. We post on our website at www.vodavi.com, these corporate governance materials. These documents are also available in print to any stockholder who requests by contacting our corporate secretary at our executive offices.

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Information Relating to Our Audit Committee of the Board of Directors

     The purpose of the Audit Committee is to assist our board of directors in the oversight of the integrity of the consolidated financial statements of our company, our company’s compliance with legal and regulatory matters, the independent auditor’s qualifications and independence, and the performance of our company’s independent auditors. The primary responsibilities of the Audit Committee are set forth in its charter, and include various matters with respect to the oversight of our company’s accounting and financial reporting process and audits of the consolidated financial statements of our company on behalf of our board of directors. The Audit Committee also selects the independent certified public accountants to conduct the annual audit of the consolidated financial statements of our company; reviews the proposed scope of such audit; reviews accounting and financial controls of our company with the independent public accountants and our financial accounting staff; and reviews and approves transactions between us and our directors, officers, and their affiliates.

     The Audit Committee currently consists of Messrs. Mitchell, Henry, and Hinz. Messrs. Mitchell and Henry are independent directors of our company under applicable NASDAQ rules as well as under rules adopted by the Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act of 2002. Mr. Hinz is not considered an independent director under such rules and is participating as a member of our Audit Committee on a temporary basis pursuant to the exemption provided in NASDAQ MarketPlace Rule 4350(d)(2)(B). The board of directors has determined that each of Messrs. Henry and Mitchell qualify as an “audit committee financial expert” in accordance with applicable rules and regulations of the SEC.

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ITEM 11. EXECUTIVE COMPENSATION

Summary of Cash and Other Compensation

     The following table sets forth certain information with respect to the compensation we paid to our Chief Executive Officer, and two other executive officers who received cash compensation in excess of $100,000 during fiscal 2004. The table also sets forth certain information regarding one former officer of our company.

SUMMARY COMPENSATION TABLE

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Option Grants

     The following table sets forth certain information with respect to stock options granted to the officers listed during the fiscal year ended December 31, 2004.

OPTION GRANTS IN LAST FISCAL YEAR

Aggregate Option Exercises and Fiscal Year-End Option Holdings

     The following table provides information on options exercised during fiscal 2004 by the officers listed and the value of each such officer’s unexercised options of December 31, 2004.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

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Employment Agreements

     William J. Hinz

     We had an employment agreement with William J. Hinz that expired in September 2004. The agreement provided for Mr. Hinz to serve as our Chairman of the Board and to receive a base salary of $75,000 per annum. See “Director Compensation and Other Information.”

     Gregory K. Roeper

     Effective October 1, 2003, we renewed and amended Mr. Roeper’s employment agreement for a term expiring on December 31, 2004. The agreement automatically renews for successive one-year terms unless either party terminates by giving the other party at least 30 days’ written notice. The employment agreement provides for Mr. Roeper to serve as our President and Chief Executive Officer. The employment agreement provided for Mr. Roeper to receive a base salary of $200,000 during fiscal 2004.

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

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

     David A. Husband

     Effective January 1, 2004, we entered into a new employment agreement with Mr. Husband. The agreement has an initial term of one year, and automatically renews for successive one-year terms unless either party terminates by giving the other party at least 30 days’ written notice. The employment agreement provides for Mr. Husband to serve as our Vice President – Finance and Chief Financial Officer. The employment agreement provided for Mr. Husband to receive a base salary of $150,000 per annum.

     The agreement provides for Mr. Husband to receive his fixed compensation to the date of termination of his employment by reason of resignation, death, or as a result of termination of employment “for cause,” as defined the agreement. If we terminate Mr. Husband’s employment, or if his employment is terminated by reason of disability, we will pay Mr. Husband his base salary and benefits for a nine-month period. In addition, Mr. Husband’s vested options as of the date of termination will remain outstanding through the 120-day period following the then-current term of the agreement. All unvested options as of the date of termination will be cancelled.

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

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     Steven R. Francis

     Effective January 1, 2004 we entered into a new employment agreement with Mr. Francis. The agreement had an initial term through December 31, 2004, and automatically renewed for successive one-year terms unless either party terminated by giving the other party at least 30 days’ written notice. The employment agreement provided for Mr. Francis to serve as Vice President – Dealer Sales for a base salary of $135,000 per annum.

     During August 2004, Mr. Francis resigned as an officer of our company. Under the terms of his employment agreement, Mr. Francis was not entitled to receive any further compensation upon his resignation and all of his unvested options were cancelled. Any vested options held by Mr. Francis that were not exercised were terminated during September 2004.

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

	•	reimburse each executive for all travel, entertainment, and other ordinary and necessary expenses incurred in connection with our business and their duties under their respective employment agreements; and
	•	provide such other fringe benefits that we make generally available to all of our employees on a non-discriminatory basis.

Each employment agreement also contains provisions that prohibit the executive from

	•	competing with us for a period of 12 months after the termination of the executive’s employment with our company,
	•	taking certain actions intended to solicit other persons to terminate their business relationship with us or to terminate his or her employment relationship with us, and
	•	making unauthorized use or disclosure of our trade names, fictitious names, or confidential information.

     Other Arrangements

     We maintain agreements with each of our other officers and employees that prohibit such persons from disclosing confidential information obtained while employed by us. We offer our employees medical, life, and disability insurance benefits. Our executive officers and other key personnel (including directors who also are employees of our company) are eligible to receive stock options under our stock option plan.

401(k) Profit Sharing Plan

     In April 1994, we adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code of 1986. Pursuant to the 401(k) Plan, all eligible employees may make elective contributions through payroll deductions. In addition, we may make matching and discretionary contributions in such amounts as may be determined by our Board of Directors. During fiscal 2004, we expensed matching contributions pursuant to the 401(k) Plan to all executive officers as a group in the amount of $3,000.

1994 Stock Option Plan

     The 1994 Stock Option Plan, as amended, provided for

	•	the granting of incentive stock options or nonqualified options to acquire our common stock;
	•	the granting of stock appreciation rights;

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	•	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.

     The plan also provided for automatic grants of stock options to non-employee directors of our company under an automatic program. Under the automatic program, each newly elected non-employee member of our Board of Directors received an automatic initial grant of options to acquire 5,000 shares of common stock on the date of his or her first appointment or election to our Board of Directors. In addition, options to acquire 5,000 shares of common stock were automatically granted to each non-employee director at the meeting of our Board of Directors held immediately after each annual meeting of stockholders.

     We were authorized to issue 1,600,000 shares of Common Stock under the 1994 Plan. As of March 25, 2005, 405,625 shares of common stock have been issued upon exercise of options granted under the plan, and there were outstanding options to acquire 642,625 shares of our common stock under the plan. The 1994 Plan expired in April 2004 and all remaining options available for grant were cancelled. We may not grant additional awards under the 1994 Plan. Any awards outstanding on the expiration date were not affected by virtue of the expiration of the 1994 Plan. In approving the 2003 Plan discussed below, the Board considered that the remaining shares available under the 1994 Plan would be cancelled in favor of the new shares available under the 2003 Plan.

     To exercise an option, the option holder will be required to deliver to us full payment of the exercise price for the shares as to which the option is being exercised. Generally, options may be exercised by delivery of cash, bank cashier’s check, or shares of our common stock.

2003 Incentive Compensation Plan

     Our Board of Directors approved the Vodavi 2003 Incentive Compensation Plan in August 2003, and our stockholders approved the 2003 Plan during October 2003.

     The purpose of the 2003 Plan is to assist us in attracting, motivating, retaining, and rewarding high-quality executives and other employees, officers, directors, and consultants by enabling such persons to acquire or increase a proprietary interest in our company in order to strengthen the mutuality of interests between such persons and our stockholders, and providing such persons with annual and long-term performance incentives to expend their maximum efforts in the creation of stockholder value.

General Terms of the 2003 Plan; Shares Available for Issuance

     The 2003 Plan provides for the granting of awards in the form of incentive stock options, nonqualified stock options, stock appreciation rights, shares of restricted common stock, bonus stock in lieu of obligations, or other stock-based awards to employees, directors, and independent contractors who provide valuable services to our company. The 2003 Plan authorizes the issuance of 600,000 shares of stock, and no more than 500,000 shares may be issued pursuant to incentive stock options. As of March 25, 2005, no shares of common stock have been issued upon exercise of options granted under the 2003 Plan, and there were outstanding options to acquire 111,250 shares of our common stock under the 2003 Plan. As of March 25, 2005, an additional 488,750 shares of common stock were available for grant under the 2003 Plan. The maximum number of shares of common stock covered by awards granted to any individual in any year may not exceed 200,000. If any award previously granted under the 2003 Plan is forfeited, terminated, canceled, surrendered, does not vest, or expires without having been exercised in full, stock not issued under such award will again be available for grant for purposes of the 2003 Plan. If any change is made in the stock subject to the 2003 Plan, or subject to any award granted under the 2003 Plan (through consolidation, spin-off, recapitalization, stock dividend, split-up, combination of shares, exchange of shares, or otherwise), the 2003 Plan provides that appropriate adjustments will be made as to the aggregate number and type of shares available for awards, the maximum number and type of shares that may be subject to awards to any individual, the number and type of shares covered by each outstanding award, the exercise price grant price, or purchase price relating to any award, and any other aspect of any award that the Board of Directors or Committee determines appropriate.

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     The 2003 Plan provides that it is not intended to be the exclusive means by which we may issue options to acquire our common stock or any other type of award. To the extent permitted by applicable law and the rules and regulations of the NASDAQ SmallCap Market, we may issue other options, warrants, or awards other than pursuant to the 2003 Plan without stockholder approval.

Eligibility and Administration

     Employees, executive officers, directors, and independent contractors of our company will be eligible to receive awards under the 2003 Plan. Options that are incentive stock options may be granted only to employees of our company.

     A committee designated by the Board of Directors will administer the 2003 Plan, however, the Board may exercise any power or authority granted to the committee under the 2003 Plan. The Board may designate more than one committee to administer the 2003 Plan as to various categories of eligible persons. The committee will consist of at least two directors, and each member of which will be (a) a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act, unless administration of the 2003 Plan by “non-employee directors” is not then required in order for exemptions under Rule 16b-3 to apply to transactions under the 2003 Plan, and (b) an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code, unless administration of the 2003 Plan by “outside directors” is not then required in order to qualify for tax deductibility under Section 162(m) of the Internal Revenue Code. The Board and/or any committee that has been delegated the authority to administer the 2003 Plan is referred to as the “Plan Administrator.” Where appropriate, the Plan Administrator will satisfy the then requirements of any stock exchange or automated quotation system upon which our stock is listed or quoted.

     The Plan Administrator will have the authority, in its discretion, to determine all matters relating to awards, including the selection of the individuals to be granted awards, the type of awards, the number of shares of common stock subject to an award, vesting conditions, and any and all other terms, conditions, restrictions, and limitations, if any, of an award. The Plan Administrator will also have the authority to construe and interpret the 2003 Plan, and to make all decisions and determinations as the Plan Administrator may deem necessary or advisable for administration of the 2003 Plan. The Plan Administrator may delegate to officers or managers of our company certain functions, in each case to the extent permitted by the Board, under the 2003 Plan, and applicable law.

Terms of Awards

     General

     Awards granted under the 2003 Plan may be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other award or any award granted under another plan of our company. Such additional, tandem, and substitute or exchange award may be granted at any time. The term of each award will be for such period as may be determined by the Plan Administrator, provided that in no event will the term of any option or stock appreciation right exceed a period of 10 years, or such shorter period as may be required in the case of an incentive stock option.

     Options

     Options granted under the 2003 Plan may be either incentive stock options, as defined under the Internal Revenue Code, or nonqualified options. The expiration date, maximum number of shares purchasable, vesting provisions, type of consideration to be paid upon exercise, and any other provisions of options granted under the 2003 Plan will be established at the time of grant. The Plan Administrator will set the term of each option, and in the case of incentive stock options, such terms will be subject to compliance in all respects with the Internal Revenue Code and the 2003 Plan. Options will vest and become exercisable in whole or in one or more installments at such time as may be determined by the Plan Administrator, including based on achievement of performance goals or future service requirements.

     The exercise prices of options will be determined by the Plan Administrator, provided that the exercise price of all options granted under the 2003 Plan may not be less than 100% of the fair market value of the common

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stock on the date of the grant (110% of the fair market value if the option intended to be an incentive stock options granted to a stockholder who at the time the option is granted owns stock possessing more than 10% of the total combined voting power of all classes of stock of our company or of its subsidiaries).

     The Plan Administrator will also have the discretion to grant options that are immediately exercisable for restricted shares of stock that will vest over a period of time or pursuant to certain performance criteria established by the Plan Administrator. Should the optionee’s continuous service cease while holding such unvested shares, we will have the right to repurchase, at the exercise price paid per share, any or all of the unvested shares. The terms upon which such repurchase right will be exercisable will be established by the Plan Administrator and set forth in the document evidencing such repurchase right.

     Stock Appreciation Rights

     The Plan Administrator is authorized to grant stock appreciation rights, which provide the holder the right to receive, upon exercise thereof, the excess of (a) the fair market value of one share of stock on the date of exercise, over (b) the grant price of the stock appreciation right as determined by the Plan Administrator. The grant price of a stock appreciation right will not be less than the fair market value of a share of stock on the date of grant, except under limited circumstances set forth in the 2003 Plan. The Plan Administrator will determine at the date of grant the terms and conditions of the stock appreciation right, including the form of consideration payable in settlement. Stock appreciation rights may be either freestanding or granted in tandem with other awards. The Plan Administrator may grant “limited stock appreciation rights,” which may be exercised only in the event of a “change of control,” as defined in the 2003 Plan.

     Restricted Stock

     The Plan Administrator is authorized to grant shares of restricted stock, which will be subject to such restrictions on transferability, risk of forfeiture, and other restrictions as the Plan Administrator will determine or as otherwise provided in the 2003 Plan. The restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Plan Administrator may determine at the date of grant or thereafter. A holder granted restricted stock will have all of the rights of a stockholder, including the right to vote and receive dividends. During the applicable restricted period, the shares may not be sold, transferred, pledged, hypothecated, margined, or otherwise encumbered by the holder.

     Except as otherwise determined by the Plan Administrator at the time of the award, upon termination of a participant’s service during the applicable restricted period, the participant’s restricted stock that is at that time subject to restrictions will be forfeited and reacquired by us, provided that the Plan Administrator may provide or determine that restrictions or forfeiture conditions will be waived in whole or in part in the event of terminations resulting from specified causes, and the Plan Administrator may in other cases waive in whole or in part the forfeiture of restricted stock.

     As a condition to the grant of an award of restricted stock, the Plan Administrator may require that any cash dividends paid on a share of restricted stock be automatically reinvested in additional shares of restricted stock or applied to the purchase of additional awards under the 2003 Plan, which will be subject to restrictions and a risk of forfeiture to the same extent as the restricted stock with respect to which such stock or other property has been distributed.

     Bonus Stock and Awards in Lieu of Obligations

     The Plan Administrator is authorized to grant stock as a bonus, or to grant stock or other awards in lieu of company obligations to pay cash or deliver other property under the 2003 Plan or under other plans or compensatory arrangements, subject to certain exceptions in the case of participants subject to Section 16 of the Exchange Act or other terms as determined by the Plan Administrator.

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     Other Stock-Based Awards

     The Plan Administrator is authorized to grant participants such other awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on stock as deemed by the Plan Administrator to be consistent with the purposes of the 2003 Plan. Such awards may be convertible or exchangeable debt securities, other rights convertible or exchangeable into stock, purchase rights for stock, awards with value and payment contingent upon performance of our company or any other factors designated by the Plan Administrator. The Plan Administrator will determine the terms and conditions of such awards, including the nature of the right, consideration to be paid upon exercise, vesting conditions, repurchase rights for unvested shares, and the like. Cash awards, as an element of or supplement to any other award under the 2003 Plan, may also be granted under the 2003 Plan.

Automatic Grant Program

     The 2003 Plan includes an automatic grant program that automatically grants options to our non-employee directors. The automatic grant program under the 2003 Plan will begin upon the earlier of (a) the expiration of the 1994 Plan, (b) the date upon which there are no shares available for grant under the 1994 Plan, or (c) the date upon which we voluntarily terminate the 1994 Plan. Under the automatic grant program, each newly elected non-employee member of the Board will receive an option to purchase 5,000 shares of common stock, if available, on the date of his or her first appointment or election to the board of directors. In addition, an option to acquire 5,000 shares of common stock, if available, will be granted to each non-employee director at the meeting of the board of directors held immediately after each annual meeting of stockholders. A non-employee member of the board of directors will not be eligible to receive this annual grant if the grant date of such annual grant would be within 90 days of the date on which the non-employee member received his or her initial grant. Each initial grant will vest and become exercisable immediately on the date of grant.

     The exercise price per share of common stock subject to automatic options granted under the 2003 Plan will be equal to 100% of the fair market value of our common stock on the date such option is granted. Each automatic option will expire on the tenth anniversary of the date of grant. In the event the non-employee director ceases to serve as a member of the board of directors, the option holder may exercise the automatic options until the earlier of (1) 90 days after the cessation of service, or (2) the expiration of the term of the automatic option. If the non-employee director dies while serving as a director or within 90 days after ceasing to serve as a director, the option holder’s estate or the persons to whom the automatic options are transferred under the option holder’s will or the laws of descent and distribution may exercise the automatic options until the earlier of (a) 90 days after the cessation of service, or (b) the expiration of the term of the automatic option.

Other Provisions

     In the event of a proposed sale of all or substantially all of our assets or any reorganization, merger, consolidation, or other form of corporate transaction in which our company does not survive, or in which shares of stock are exchanged for or converted into securities issued by another entity, then the successor or acquiring entity may, with the consent of the committee or the Board, assume each outstanding option or substitute an equivalent option or right. If the successor or acquiring entity does not assume or substitute such options, then (a) each option will terminate upon consummation of sale, merger, consolidation, or other corporate transaction, and (b) the committee will have the discretion and authority exercisable at any time to provide for the automatic acceleration of vesting or exercisability of one or more awards granted by it under the 2003 Plan.

Duration and Modification

     The Plan will terminate at such time as no shares of stock remain available for issuance under the 2003 Plan and we have no further rights or obligations with respect to outstanding awards under the 2003 Plan. The Board may amend, alter, suspend, discontinue, or terminate the 2003 Plan without the consent of stockholders, except that any amendment or alteration to the 2003 Plan will be subject to stockholder approval no later than the next annual meeting following such Board action if required by applicable law or the rules or any applicable stock exchange or quotation system on which the stock may then be listed or quoted. In addition, without the consent of

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an affected participant, the Board may not amend or alter the 2003 Plan to affect the rights of any participant under any previously granted and outstanding award.

     Despite the foregoing, the Board of Directors, in its sole discretion, may bifurcate the 2003 Plan so as to restrict, limit, or condition the use of any provision of the 2003 Plan to participants who are officers, directors, or stockholders subject to Section 16 of the Exchange Act without so restricting, limiting, or conditioning the 2003 Plan with respect to other participants.

Director Compensation and Other Information

     Employees of our company do not receive compensation for serving as members of our Board of Directors. Each independent director receives a quarterly retainer fee of $3,750 payable on the first day of each quarter. Each independent director also receives a $500 fee for each meeting attended by telephone or in person and reimbursement for reasonable expenses incurred in attending meetings of our Board of Directors.- Committee members receive a $500 fee for attendance at committee meetings that are held on days other than days on which a Board of Directors’ meeting is held. Our Chairman, William J. Hinz, receives a quarterly retainer fee of $4,688 payable on the first day of each quarter. Mr. Hinz also receives a $625 fee for each meeting attended by telephone or in person and reimbursement for reasonable expenses incurred in attending board meetings. Mr. Hinz also receives a $625 fee for his attendance at Audit Committee meetings that are held on days other than days on which a Board of Directors meeting is held. Non-employees who serve as directors of our company also receive an annual automatic stock option grant to purchase 5,000 shares of stock under our 2003 Incentive Compensation Plan. Each automatic grant under the 2003 Plan shall vest and become exercisable on the earlier of (1) the first anniversary of the date of grant, or (2) the day prior to the next regularly held annual meeting of our stockholders.

Compensation Committee Interlocks and Insider Participation

     Performance evaluation and compensation decisions relating to 2004 were made by the Compensation Committee of our Board of Directors, which consisted of Messrs. Henry, Mitchell, and Sonkin. During fiscal 2004, Mr. Stephen A McConnell, a former director of our company, also served on our Compensation Committee. Mr. McConnell’s term as a director of our company expired during May 2004 and he did not stand for re-election. None of such persons had any contractual or other relationships with us during fiscal 2004 except as directors. See Item 11, “Executive Compensation—Director Compensation and Other Information.”

Limitation of Directors’ Liability and Indemnification

     Our certificate of incorporation provides that no director of our company will be personally liable to our company or our stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption or limitation of liability is not permitted under the Delaware General Corporation law, or Delaware GCL. Under the Delaware GCL, a director may be held liable

	•	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.

     The effect of this provision in our certificate of incorporation is to eliminate the rights of our company and our stockholders (through stockholders’ derivative suits on behalf of our company) to recover monetary damages from a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described above. In addition, our certificate of incorporation provides that any repeal or modification of this provision by our stockholders will not adversely affect any right or protection of a director of our company existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. These provisions do not limit or eliminate the rights of our company or any stockholder to seek non-monetary relief such as an injunction or recision in the event of a breach of a directors’ duty of care.

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     Our certificate of incorporation requires us to indemnify our directors, officers, and certain other representatives of our company against expenses and certain other liabilities arising out of their conduct on behalf of our company to the maximum extent permitted by the Delaware GCL. Indemnification is not available with respect to proceedings or claims initiated or brought voluntarily by an officer, director, or other representative of our company against us unless such proceeding or claim is approved by our Board of Directors.

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ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The following table sets forth certain information with respect to beneficial ownership of our common stock as of December 31, 2004 by (i) each director; (ii) the executive officers set forth in the Summary Compensation Table under Item 11, “Executive Compensation;” (iii) all of our directors and executive officers as a group; and (iv) each other person who is known by us to beneficially own or to exercise voting or dispositive control over more than 5% of our common stock.

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Equity Compensation Plan Information

     The following table sets forth information with respect to our common stock that may be issued upon the exercise of stock options under our 1994 Stock Option Plan and our 2003 Incentive Compensation Plan as of December 31, 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     LG Electronics Inc., our principal supplier, owns approximately 23% of our outstanding common stock. Jong Dae An, a director of our company since August 2004 and Jong Hwa Choi, a director of our company from February 2003 until August 2004, are officers of LGE or its affiliates. We purchased approximately $22.2 million of key telephone systems, commercial grade telephones, and voice mail products from LGE and an affiliate of LGE during 2004. We believe that the purchases from LGE and its affiliate approximate terms that would be offered by non-related parties. We owed LGE and its affiliate approximately $4.0 million for product purchases as of December 31, 2004.

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

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

     Aggregate fees billed to our company for the fiscal years ended December 31, 2004 and 2003 by our principal accounting firm are as follows:

Audit Committee Pre-Approval Policies

     The charter of our Audit Committee provides that the duties and responsibilities of our Audit Committee include the pre-approval of all audit, audit related, tax, and other services permitted by law or applicable SEC regulations (including fee and cost ranges) to be performed by our independent auditor. Any pre-approved services that will involve fees or costs exceeding pre-approved levels will also require specific pre-approval by the Audit Committee. Unless otherwise specified by the Audit Committee in pre-approving a service, the pre-approval will be effective for the 12-month period following pre-approval. The Audit Committee will not approve any non-audit services prohibited by applicable SEC regulations or any services in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported by the Internal Revenue Code and related regulations.

     To the extent deemed appropriate, the Audit Committee may delegate pre-approval authority to the Chairman of the Board or any one or more other members of the Audit Committee provided that any member of the Audit Committee who has exercised any such delegation must report any such pre-approval decision to the Audit Committee at its next scheduled meeting. The Audit Committee will not delegate the pre-approval of services to be performed by the independent audit to management.

     Our Audit Committee requires that our independent auditor, in conjunction with our Chief Financial Officer, be responsible for seeking pre-approval for providing services to us and that any request for pre-approval must inform the Audit Committee about each service to be provided and must provide detail as to the particular service to be provided.

     All of the services provided by our principal accounting firm described above under the captions “Audit-Related Fees” and “Tax Fees” were approved by our Audit Committee.

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PART IV

ITEM 15. EXHIBITS, 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-3 of this report.

(b)

Exhibits

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SIGNATURES

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

	VODAVI TECHNOLOGY, INC.
Date: March 29, 2005	By:	/s/ Gregory K. Roeper
		Gregory K. Roeper
		President and Chief Executive Officer

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

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VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of

VODAVI TECHNOLOGY, INC.

We have audited the accompanying consolidated balance sheets of Vodavi Technology, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vodavi Technology, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ Mayer Hoffman McCann P.C.
MAYER HOFFMAN MCCANN P.C.
Phoenix, Arizona
February 10, 2005

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Vodavi Technology, Inc.:

We have audited the accompanying consolidated balance sheet of Vodavi Technology and subsidiaries (the “Company”) as of December 31, 2002, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

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

As discussed in Note 1. j. to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 14, 2003

F-3

VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
In thousands except share and per share amounts

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

F-4

VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
In thousands except per share amounts

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

F-5

VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

In thousands except share amounts