SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended March 31, 2006

Commission File No. 0-26912

Vodavi Technology, Inc.

(Exact name of registrant as specified in its charter)


Delaware		86-0789350

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

4717 East Hilton Avenue, Ste. 400, Phoenix, Arizona		85034

(Address of principal executive offices)		(Zip Code)

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

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares outstanding of registrant’s Common Stock, $0.001 par value per share, as of May 1, 2006 was 3,776,350 shares.

VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006

TABLE OF CONTENTS


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets — March 31, 2006 and December 31, 2005		3

	Unaudited Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2006 and 2005		4

	Unaudited Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2006 and 2005		5

	Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		8

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		13

Item 4.	Controls and Procedures		13

PART II.	OTHER INFORMATION		14

	SIGNATURES		15
Exhibit 10.60
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VODAVI TECHNOLOGY, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share amounts


	March 31,			December 31,
	2006			2005
CURRENT ASSETS:
Cash	$	7,022		$	6,538
Accounts receivable, net of reserves for doubtful accounts and sales returns of $302 and $279, respectively		5,674			7,126
Inventory		3,985			3,543
Deferred income taxes		446			446
Prepaid and other current assets		659			508

Total current assets		17,786			18,161

PROPERTY AND EQUIPMENT, net		1,173			1,228

DEFERRED INCOME TAXES		168			168

OTHER LONG-TERM ASSETS		57			45

	$	19,184		$	19,602


CURRENT LIABILITIES:
Trade accounts payable	$	638		$	451
Accrued liabilities		910			944
Accrued rebates		331			453
Trade accounts payable to stockholder		3,446			4,097

Total current liabilities		5,325			5,945


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:

Preferred stock, $.001 par value; 1,000,000 shares authorized, no shares issued		—			—
Common stock, $.001 par value; 10,000,000 shares authorized; 3,857,349 and 3,850,974 shares issued, respectively		4			4
Additional paid-in capital		11,836			11,814
Retained earnings		2,431			2,227
Treasury stock, 80,999 and 76,741 shares at cost, respectively		(412	)		(388	)

		13,859			13,657

	$	19,184		$	19,602

The accompanying notes are an integral part of these consolidated balance sheets.

VODAVI TECHNOLOGY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands except per share amounts


	Three Months Ended
	March 31,
	2006		2005
REVENUE, net	$	10,005	$	9,866

COST OF GOODS SOLD		6,553		6,392


GROSS MARGIN		3,452		3,474


OPERATING EXPENSES:
Engineering and product development		478		518
Selling, general and administrative		2,699		2,654

		3,177		3,172


OPERATING INCOME		275		302

INTEREST INCOME		54		12


INCOME BEFORE INCOME TAXES		329		314

INCOME TAX PROVISION		125		119


NET INCOME	$	204	$	195


EARNINGS PER COMMON SHARE:
Basic	$	0.05	$	0.05

Diluted	$	0.05	$	0.05


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		3,775		3,721

Diluted		4,116		4,144

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

VODAVI TECHNOLOGY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands


	Three Months Ended
	March 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	204		$	195
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		112			116
Tax benefit on stock option exercises		9			46
Loss on sale of property and equipment		18			—
Changes in working capital:
Accounts receivable, net		1,452			695
Inventory		(442	)		788
Prepaid and other current assets		(151	)		(82	)
Other long-term assets and deferred taxes		(12	)		—
Trade accounts payable		(464	)		(832	)
Accrued liabilities		(156	)		(758	)

Net cash flows provided by operating activities		570			168


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment		16			—
Cash paid to acquire property and equipment		(91	)		(94	)

Net cash flows used in investing activities		(75	)		(94	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock		(24	)		(51	)
Stock options exercised		13			38

Net cash flows used in financing activities		(11	)		(13	)


CHANGE IN CASH		484			61

CASH, beginning of period		6,538			4,000


CASH, end of period	$	7,022		$	4,061


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	—		$	—

Cash paid for income taxes	$	45		$	113

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

VODAVI TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2006

(a) INTERIM FINANCIAL REPORTING

The accompanying Unaudited Consolidated Financial Statements have been prepared by Vodavi Technology, Inc. and subsidiaries (“Vodavi” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals and adjustments) necessary for a fair presentation of results of operations, financial position, and cash flows as of and for the periods presented.

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, customer incentive programs, allowances for bad debts and sales returns, inventory obsolescence, product warranty, depreciation, taxes and other contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the Consolidated Financial Statements in the period they are determined to be necessary.

The results for the three months ended March 31, 2006 are not necessarily indicative of financial results for the full year. These financial statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in Vodavi’s Annual Report on Form 10-K for the year ended December 31, 2005.

[SPACE INTENTIONALLY LEFT BLANK]

(b) CONCENTRATIONS

The Company currently obtains a substantial majority of its products under manufacturing agreements with LGN in South Korea and an affiliate of LGN in Thailand. As of March 31, 2006, the Company owed LGN or its affiliate approximately $3.4 million for products purchased under these agreements.

The Company also has a significant concentration of sales and accounts receivable with its two largest distributors, Graybar Electric Company, Inc. and Target Distributing, Inc. These distributors comprised 50% of the Company’s total accounts receivable as of March 31, 2006 compared with 57% as of December 31, 2005.

The Company presents basic and diluted earnings per share (EPS). Basic EPS is determined by dividing net income by the weighted average number of common shares outstanding. The basic weighted average number of common shares outstanding excludes all dilutive securities. Diluted EPS is determined by dividing net income by the weighted average number of common shares and dilutive securities outstanding.

A reconciliation of the numerator and denominator (weighted average number of shares outstanding) of the basic and diluted EPS computation is as follows:


	Three Months Ended
	March 31,
	2006		2005
	(in thousands)
Net income	$	204	$	195


Weighted average common shares:
Basic		3,775		3,721
Effect of dilutive stock options (1)		341		423


Diluted		4,116		4,144


Anti-dilutive stock options (2)		66		34


(1)		Dilutive securities are calculated using the treasury stock method and the average market price during the period.

(2)		Options having an exercise price greater than the average market price during the reporting period are anti-dilutive and, therefore, do not enter into the diluted earnings per share calculation.

(d) STOCK OPTION PLANS

On January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R). 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. During the quarterly period ended March 31, 2006, no new options were granted and no equity-based compensation expense was recognized in the income statement as all previously granted options were fully vested prior to the adoption of SFAS No. 123R. As a result, the adoption of SFAS No. 123R had no effect on the consolidated financial statements.

The following table sets forth the Company’s net income and earning per share as if the provisions of SFAS No. 123R had been adopted from the earliest period presented.


	For the Quarter Ended
	March 31, 2005
	(In Thousands, Except Per
	Share Amounts)
Net income:
As reported	$	195
Share-based employee compensation included in net income		—
Fair value of options granted, net of taxes		(65	)


Pro forma net income	$	130


Earnings per share:
As reported — Basic	$	0.05
As reported — Diluted	$	0.05
Pro forma — Basic	$	0.03
Pro forma — Diluted	$	0.03

(e) SEGMENT REPORTING

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

(f) COMMITMENTS AND CONTINGENCIES

The Company is subject to certain asserted and unasserted claims encountered in the normal course of business. The Company believes that the resolution of these matters will not have a material adverse effect on its financial position or results of operations. The Company cannot provide assurance, however, that damages that result in a material adverse effect on its financial position or results of operations will not be imposed by these matters.

(g) EQUITY TRANSACTIONS

During the quarterly period ended March 31, 2006, the Company repurchased 4,258 shares of its common stock in the open market for approximately $24,000. Also, during the quarterly period ended March 31, 2006, options for 6,375 shares were exercised with total proceeds of approximately $13,000 that resulted in a tax benefit of $9,000.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

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.

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. Certain 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.

Accounts Receivable

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 March 31, 2006, Graybar accounted for 23% and Target accounted for 27% of our total accounts receivable. If either Graybar or Target’s financial condition was to deteriorate, resulting in their inability to make payments to us, it could have a material adverse impact on our financial condition and results of operations.

Sales Returns

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

Excess and Obsolete Inventory

We record our inventory at the lower of cost or market value. Our assessment of market value is determined by, among other things, historical and forecasted sales activity, the condition of specific inventory 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 included in our Annual Report on Form 10-K for the year ended December 31, 2005, which contains accounting policies and other disclosures required by generally accepted accounting principles in the United States of America.

Results of Operations

The following table sets forth, for the periods indicated the percentage of total revenue represented by certain income 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.


	Three Months Ended
	March 31,
	2006			2005
Revenue		100.0	%		100.0	%
Cost of goods sold		65.5			64.8

Gross margin		34.5			35.2

Operating expenses:
Engineering and product development		4.8			5.2
Selling, general, and administrative		27.0			26.9

		31.8			32.1

Operating income		2.7			3.1
Interest income		0.5			—

Income before income taxes		3.2			3.1
Income tax provision		1.2			1.2

Net income		2.0	%		1.9	%

Quarter Ended March 31, 2006 Compared With Quarter Ended March 31, 2005

Revenue

Revenue for the quarter ended March 31, 2006 totaled $10.0 million, an increase of 1.4% from revenue of $9.9 million for the same period of 2005. Sales of our telephone systems increased 4.8% to $9.0 million during the first quarter of 2006 compared to $8.6 million during the first quarter of 2005. The increase in telephone system sales is attributed to an increase in the sale of larger and more advanced systems, including an increase in the number of systems that contain VoIP cards, or LAN cards, and “in-skin” voice mail cards, within the XTS product line. Sales of commercial grade telephones increased 2.1%to $460,000 during the first quarter of 2006 compared to $451,000 in 2005. During the first quarter of 2006, we began selling more IP-based phones into the Hosted IP Services Market that helped off-set a sharp decline in sales of traditional commercial grade telephones. Sales of telephony applications, including voice processing, computer technology integration, and unified messaging decreased to $636,000 from $728,000 between the first quarters of 2006 and 2005. The decline in telephony applications is a direct result of selling more embedded voice mail applications, which are reported in telephone system sales.

Sales through our direct sales office in the Phoenix Metropolitan area totaled $384,000 during the first three months of 2006 compared with $422,000 during the same period of 2005. During the first quarter of 2006, we hired new management to conduct the operations of our direct sales office. We anticipate that sales from our direct sales office will improve over prior year levels during the second half of 2006.

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 $451,000 in 2006 compared with a net reduction of $303,000 in 2005. The change between periods reflects additional incentive programs we offered during the first quarter of 2006.

Gross Margin

Our gross margin was approximately $3.5 million in the first quarter of 2006 compared with $3.5 million in 2005. Our gross margin as a percentage of total revenue decreased to 34.5% during 2006 from 35.2% during 2005. The decrease in our gross margin percentage during the first quarter of 2006 is a direct result of the liquidation of discontinued and slower moving inventory items during the first quarter of 2006, additional customer incentive programs we offered to stimulate sales, and lower margins from our direct sales office.

Engineering and Product Development

Engineering and product development expenditures decreased to $478,000 during the first quarter of 2006 compared with $518,000 in the same period of 2005. As a percentage of revenue, engineering and product development expenditures decreased to 4.8% of total revenue during the first quarter of 2006 from 5.2% during the first quarter of 2005.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses were relatively consistent at $2.7 million for the first quarters of 2006 and 2005. As a percentage of revenue, selling, general and administrative expenses increased to 27.0% compared with 26.9% in 2005. During the first three months of 2006, we increased our level of expenditures for business development and customer support, and reduced our expenditures related to our direct sales office.

Interest Income

Interest income was $54,000 during the first quarter of 2006 compared with $12,000 during the same period of 2005. The increase in interest income is a direct result of additional interest income earned on higher cash balances and greater yields on our bank accounts.

Income Taxes

We provided for federal and state income taxes using an effective rate of 38.0% for each of the first quarters of 2006 and 2005.

Liquidity and Capital Resources

Our net working capital position was approximately $12.5 million at March 31, 2006 compared to $12.2 million at December 31, 2005. We had a cash balance of $7.0 million at March 31, 2006 compared with a cash balance of $6.5 million at December 31, 2005. Sources of cash included positive income from operations, and a reduction in accounts receivable of $1,452,000. Uses of cash during the first quarter of 2006 included an increase in inventory of $442,000, other current assets of $151,000 and the pay down of trade accounts payable and accrued liabilities of $464,000 and $156,000, respectively. We also used approximately of $91,000 in the first quarter of 2006 for the purchase of property and equipment, and $24,000 to repurchase 4,258 shares of our common stock.

Our accounts receivable days sales outstanding, calculated on a quarterly basis, were approximately 51 days at March 31, 2006 compared to 59 days as of December 31, 2005. The timing of payments received from our largest distributors greatly influences our days sales outstanding. Our two largest distributors comprised 50% of our total accounts receivable as of March 31, 2006 and 57% as of December 31, 2005.

Our inventory days on-hand, measured in terms of days outstanding on a quarterly basis, was 55 days as of March 31, 2006 compared with 46 days as of December 31, 2005. The change in inventory days on-hand reflects a timing difference between the purchase of long lead-time inventory items and anticipated sales of those items and not a fundamental change in our business practices.

Trade payables and accrued liabilities, including payables to third-party and related-party manufacturers, were approximately $5.3 million as of March 31, 2006 compared with $5.9 million as of December 31, 2005. 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 have a credit agreement with Comerica Bank (Comerica) that provides for a $5.0 million revolving line of credit. 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 March 31, 2006, 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 7.75% at March 31, 2006, and requires monthly payments of interest only with all unpaid principal and accrued interest due at its expiration in May 2008.

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, short-term purchase commitments to our third-party suppliers, and certain contractual commitments for marketing programs. The following table sets forth all known commitments as of March 31, 2006 and the year in which those commitments become due or are expected to be settled (in thousands):


	Payment due by period
Contractual			Less than						More than
Obligations	Total		1 year		1-3 years		3-5 years		5 years
Operating Lease Obligations	$	4,533	$	804	$	1,570	$	1,570	$	589
Other Obligations		200		100		100		—		—
Purchase Obligations		5,610		5,610		—		—		—

Total	$	10,343	$	6,514	$	1,670	$	1,570	$	589

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 LGN 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 1A, “Risk Factors — We face risks associated with international manufacturing sources” and “we rely on LGN as a strategic partner” included in our annual report on Form 10-K for

the year ended December 31, 2005.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This report contains forward-looking statements, including statements regarding our business strategies, our business, and the industry in which we operate. These forward-looking statements are based primarily on our expectations and are subject to a number of risks and uncertainties, some of which are beyond our control. Actual results could differ materially from the forward-looking statements as a result of numerous factors, including those set forth in our Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission.

ITEM 3. 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.. At March 31, 2006, we had no outstanding borrowings on the line of credit.

ITEM 4. 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 March 31, 2006. 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 regulations. 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 are 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 2.

Board Authorization to Repurchase up to $1.0 million of the Company’s Common Stock . On April 27, 2005, the Company announced that its Board of Directors approved a stock repurchase program under which the Company may purchase up to $1.0 million of its Common Stock in the open market or through privately negotiated transactions through March 31, 2006. During the quarterly period ended March 31, 2006, the Company repurchased 4,258 shares of its Common Stock pursuant to the repurchase program.

ISSUER PURCHASES OF EQUITY SECURITIES

Maximum Number (or

Total Number of

Approximate Dollar Value)

Total

Shares

of Shares that

Number of

Purchased as Part of

May Yet Be Purchased

Shares

Average

Publicly Announced

Under the Plans or

Period

Purchased

Price Paid per Share

Plans or Programs

Programs

January 1 — January 31

None

February 1 — February 28

None

March 1 — March 31

4,258

5.55

4,258

Total

4,258

—

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

	10.60		Second Modification to Credit Agreement, dated April 28, 2006, between Vodavi Communications Systems, Inc. and Comerica Bank.

	31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

	31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

	32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	(b)		Reports on Form 8-K:

			Not applicable

SIGNATURES

Pursuant to the requirements 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.
Dated: May 1, 2006	/s/ Gregory K. Roeper
	Gregory K. Roeper
	President and Chief Executive Officer (Principal Executive Officer)


Dated: May 1, 2006	/s/ David A. Husband
	David A. Husband
	Chief Financial Officer and Vice President — Finance (Principal Financial and Accounting Officer)

EXHIBIT INDEX

10.60		Second Modification to Credit Agreement, dated April 28, 2006, between Vodavi Communications Systems, Inc. and Comerica Bank.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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VODAVI TECHNOLOGY INC 10-Q