XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

April 30, 2007

October 31, 2006

(UNAUDITED)

ASSETS

Current assets:

Cash and cash equivalents

$
188,182

$
174,567

Current portion of net investment in sales-type leases and other receivables

386,221

329,619

Trade accounts receivable, net

11,333,316

12,245,507

Inventories, net

5,880,412

4,942,973

Deferred tax asset, net

797,311

709,343

Prepaid taxes

13,789

22,622

Prepaid expenses and other assets

606,377

300,738

Total current assets

19,205,608

18,725,369

Noncurrent assets:

Goodwill

26,392,881

26,420,669

Intangible assets, net

122,959

141,875

Net investment in sales-type leases, less current portion above

122,126

128,708

Property, plant & equipment, net

10,430,677

10,485,018

Other assets

27,475

11,124

Total noncurrent assets

37,096,118

37,187,394

Total assets

$
56,301,726

$
55,912,763

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of long-term debt

$
171,123

$
171,123

Revolving line of credit

513,317

3,119,445

Lease payable

—

810

Accounts payable

5,679,224

4,325,758

Current unearned revenue

2,392,342

1,802,665

Accrued liabilities

3,508,757

2,993,831

Total current liabilities

12,264,763

12,413,632

Noncurrent liabilities:

Long-term debt, less current portion above

1,440,404

1,525,950

Accrued long-term liability

351,250

436,850

Noncurrent unearned service revenue

74,293

79,132

Noncurrent deferred tax liability, net

3,859,757

3,572,089

Total noncurrent liabilities

5,725,704

5,614,021

Contingencies

Shareholders’ equity:

Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued

—

—

Common stock; $.001 par value; 50,000,000 shares authorized, 11,233,529 issued at April 30, 2007 and October 31, 2006

11,233

11,233

Paid-in capital

13,115,545

13,067,676

Retained earnings

27,429,140

27,050,860

Less 1,018,788 shares of treasury stock, at cost

(2,244,659
)
(2,244,659
)
Total shareholders’ equity

38,311,259

37,885,110

Total liabilities and shareholders’ equity

$
56,301,726

$
55,912,763

(UNAUDITED)

	July 31, 2007			October 31, 2006

ASSETS
Current assets:
Cash and cash equivalents	$	55,420		$	174,567
Current portion of net investment in sales-type leases and other receivables	436,578			329,619
Trade accounts receivable, net	14,597,339			12,245,507
Inventories, net	4,289,405			4,942,973
Deferred tax asset, net	999,438			709,343
Prepaid taxes	16,237			22,622
Prepaid expenses and other assets	671,616			300,738
Total current assets	21,066,033			18,725,369

Noncurrent assets:
Goodwill	26,378,987			26,420,669
Intangible assets, net	113,500			141,875
Net investment in sales-type leases, less current portion above	154,904			128,708
Property, plant & equipment, net	10,497,650			10,485,018
Other assets	7,657			11,124
Total noncurrent assets	37,152,698			37,187,394

Total assets	$	58,218,731		$	55,912,763

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	171,123		$	171,123
Revolving line of credit	2,476,446			3,119,445
Lease payable	—			810
Accounts payable	4,154,745			4,325,758
Current unearned revenue	2,667,493			1,802,665
Accrued liabilities	4,004,543			2,993,831
Total current liabilities	13,474,350			12,413,632

Noncurrent liabilities:
Long-term debt, less current portion above	1,397,632			1,525,950
Accrued long-term liability	244,900			436,850
Noncurrent unearned service revenue	91,061			79,132
Noncurrent deferred tax liability, net	4,291,990			3,572,089
Total noncurrent liabilities	6,025,583			5,614,021

Contingencies

Shareholders’ equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued	—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,233,529 and 11,233,529 issued at July 31, 2007 and October 31, 2006, respectively	11,233			11,233
Paid-in capital	13,146,230			13,067,676
Retained earnings	27,805,994			27,050,860
Less treasury stock, at cost (1,018,788 shares at July 31, 2007 and October 31, 2006)	(2,244,659		)	(2,244,659		)
Total shareholders’ equity	38,718,798			37,885,110
Total liabilities and shareholders’ equity	$	58,218,731		$	55,912,763

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

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months					For the Six Months						For the Three Months						For the Nine Months
	Ended April 30,					Ended April 30,						Ended July 31,						Ended July 31,
	2007		2006			2007			2006			2007			2006			2007			2006

Managed Services	$	8,792,452	$	7,248,178		$	17,569,215		$	13,667,118
Systems sales	7,762,223		7,556,449			14,789,071			13,257,725			$	8,657,120		$	7,791,020		$	23,446,191		$	21,048,745
Services												9,463,504			7,778,472			27,032,719			21,445,590
Other revenues	134,363		89,463			381,431			651,759			127,669			91,003			509,100			742,762
Net sales and service revenues	16,689,038		14,894,090			32,739,717			27,576,602			18,248,293			15,660,495			50,988,010			43,237,097

Managed Services costs	6,116,344		5,197,965			12,464,441			10,293,864
Cost of systems sales	5,926,906		5,723,797			11,234,735			9,841,398			6,684,447			6,155,423			17,919,182			15,996,821
Services costs												6,557,194			5,120,431			19,021,635			15,414,295
Cost of other revenues & corporate COGS	446,730		436,582			889,870			1,129,243			477,190			224,989			1,367,060			1,354,232
Total cost of sales and service	12,489,980		11,358,344			24,589,046			21,264,505			13,718,831			11,500,843			38,307,877			32,765,348

Gross profit	4,199,058		3,535,746			8,150,671			6,312,097			4,529,462			4,159,652			12,680,133			10,471,749

Operating expenses
Selling, general and administrative	3,713,011		3,315,060			7,241,421			6,142,258			3,705,080			3,574,585			10,946,501			9,716,843
Amortization	146,767		102,532			287,044			203,729			183,721			103,356			470,765			307,085
Total operating expenses	3,859,778		3,417,592			7,528,465			6,345,987			3,888,801			3,677,941			11,417,266			10,023,928

Income (loss) from operations	339,280		118,154			622,206			(33,890		)	640,661			481,711			1,262,867			447,821

Interest expense	—		(25,902		)	(10,387		)	(97,799		)	(28,536		)	(25,096		)	(38,923		)	(122,895		)
Interest and other income	8,890		11,377			26,461			19,591			8,729			13,671			35,190			33,262
Total interest and other income (expense)	8,890		(14,525		)	16,074			(78,208		)	(19,807		)	(11,425		)	(3,733		)	(89,633		)

Income (loss) before provision (benefit) for income taxes	348,170		103,629			638,280			(112,098		)
Income (loss) before provision for income taxes												620,854			470,286			1,259,134			358,188
Provision (benefit) for income taxes	140,000		47,000			260,000			(28,000		)	244,000			184,000			504,000			156,000

Net income (loss)	$	208,170	$	56,629		$	378,280		$	(84,098	)	$	376,854		$	286,286		$	755,134		$	202,188

Earnings (loss) per share
Basic	$	0.02	$	0.01		$	0.04		$	(0.01	)	$	0.04		$	0.03		$	0.07		$	0.02

Diluted	$	0.02	$	0.01		$	0.04		$	(0.01	)	$	0.04		$	0.03		$	0.07		$	0.02

Weighted average shares outstanding	10,214,741		10,214,567			10,214,741			10,201,651			10,214,741			10,214,741			10,214,741			10,180,728

Weighted average equivalent shares	10,214,741		10,214,606			10,214,741			10,205,033			10,214,741			10,214,741			10,214,741			10,208,553

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

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

	Common Stock			Treasury Stock										Common Stock			Treasury Stock
	Shares Issued	Par Value		Shares	Amount			Paid-in Capital		Retained Earnings		Total		Shares Issued	Par Value		Shares	Amount			Paid-in Capital		Retained Earnings		Total

Balance- October 31, 2006	11,233,529	$	11,233	1,018,788	$	(2,244,659	)	$	13,067,676	$	27,050,860	$	37,885,110	11,233,529	$	11,233	1,018,788	$	(2,244,659	)	$	13,067,676	$	27,050,860	$	37,885,110

Stock based compensation	—	—		—	—			47,869		—		47,869									78,554				78,554
Net Income	—	—		—	—			—		378,280		378,280		—	—		—	—			—		755,134		755,134

Balance- April 30, 2007	11,233,529	$	11,233	1,018,788	$	(2,244,659	)	$	13,115,545	$	27,429,140	$	38,311,259
Balance- July 31, 2007														11,233,529	$	11,233	1,018,788	$	(2,244,659	)	$	13,146,230	$	27,805,994	$	38,718,798

The accompanying notes are an integral part of this consolidated financial statement.

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months						For the Nine Months
	Ended April 30,						Ended July 31,
	2007			2006			2007			2006
Cash flows from operating activities:
Net income (loss)	$	378,280		$	(84,098	)
Net income							$	755,134		$	202,188

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	253,561			253,077			393,304			380,300
Amortization	287,045			203,729			470,765			307,084
Stock based compensation	47,869			—			78,554
Loss (gain) on sale of assets	(5,000		)	4,184			(5,000		)	4,466
Provision for excess and obsolete inventory	51,000			51,000			76,500			76,500
Increase (decrease) in deferred taxes	315,456			(221,381		)
Change in assets and liabilities:
Increase in deferred tax liability							761,583			260,501
Change in assets and liabilities, net of acquisitions:
(Increase) decrease in net investment in sales-type leases & other receivables	(50,020		)	158,988			(133,155		)	224,028
Decrease in trade accounts receivable	912,191			833,235
(Increase) decrease in inventories	(988,439		)	979,258
(Increase) in trade account receivables							(2,351,832		)	(902,672		)
Decrease in inventories							577,068			587,705
(Increase) decrease in deferred tax asset	(87,968		)	146,495			(290,095		)	105,682
Increase in prepaid expenses and other assets	(321,990		)	(279,348		)
(Increase) in prepaid expenses and other assets							(367,411		)	(215,597		)
Decrease in prepaid taxes	8,833			61,269			6,385			57,669
Increase (decrease) in accounts payable	1,353,466			(1,401,362		)
(Decrease) in accounts payable							(171,013		)	(1,078,064		)
Increase in unearned revenue	584,838			728,402			876,757			464,468
Increase in accrued taxes	—			19,108
Increas in accrued taxes							—			28,662
Increase in accrued liabilities and lease payable	428,516			158,663			817,952			582,342
Total adjustments							740,362			883,074

Net cash provided by operating activities	3,167,638			1,611,219			1,495,496			1,085,262

Cash flows from investing activities:
Additions to property, plant & equipment	(467,349		)	(507,770		)	(848,326		)	(708,852		)
Proceeds from sale of assets	5,000			17,632			5,000			17,632
Net cash used in investing activities	(462,349		)	(490,138		)	(843,326		)	(691,220		)

Cash flows from financing activities:
Net payments on revolving line of credit	(2,606,128		)	(688,200		)
Principal payments on long-term debt	(85,546		)	(604,691		)
Proceeds from draws on revolving line of credit							19,563,572			18,048,711
Principal payments on debt							(128,318		)	(907,035		)
Payments on revolving line of credit							(20,206,571		)	(17,721,118		)
Exercise of stock options	—			52,584			—			52,584
Net cash used in financing activities	(2,691,674		)	(1,240,307		)	(771,317		)	(526,858		)

Net increase (decrease) in cash and cash equivalents	13,615			(119,226		)
Net (decrease) in cash and cash equivalents							(119,147		)	(132,816		)

Cash and cash equivalents, beginning of period	174,567			176,688			174,567			176,688
Cash and cash equivalents, end of period	$	188,182		$	57,462		$	55,420		$	43,872

Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amount capitalized of $114,814 in 2007 and $146,596 in 2006	$	31,233		$	88,678
Cash paid during the period for interest, net of amount capitalized of $161,772 in 2007 and $227,934 in 2006							$	54,234		$	119,823
Cash paid during the period for income taxes	$	23,679		$	27,304		$	26,159		$	30,904

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

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

~~April 30,~~July 31, 2007

(Unaudited)

1. BASIS OF PRESENTATION:

XETA Technologies, Inc. (“XETA” or the “Company”) is a leading provider of communications solutions with nationwide sales and ~~service locations nationwide, serving~~service. XETA serves a diverse group of business clients in sales, engineering, project management, installation, and service support. The Company sells products ~~which are manufactured~~produced by a variety of manufacturers including Avaya, Inc. (“Avaya”), Nortel Networks Corporation (“Nortel”), and Spectralink Corporation. In addition, the Company manufactures and markets a line of proprietary call accounting systems to the hospitality industry. XETA is an Oklahoma corporation.

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto made a part of the Company’s Annual Report on Form 10-K, Commission File No. 0-16231, which was filed with the Commission on January 16, 2007. Management believes that the financial statements contain all adjustments necessary for a fair statement of the results for the interim periods presented. All adjustments made were of a normal recurring nature. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. Certain reclassifications of prior year amounts have been made to conform to current year presentations. These reclassifications had no impact on net income.

Segment Information

The Company has three reportable segments: Managed Services, commercial system sales, and lodging system sales. Managed Services revenues represent revenues earned from installing and maintaining systems for customers in both the commercial and lodging segments. The Company defines commercial system sales as sales to the non-lodging industry.

The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements and described in the Summary of Significant Accounting Policies in the Company’s Form 10-K described above. Company management evaluates a segment’s performance based upon gross margins. Assets are not allocated to the segments. Sales to customers located outside of the U.S. are immaterial.

The following is a tabulation of business segment information for the three months ended ~~April 30,~~July 31, 2007 and 2006.

	Managed			Commercial			Lodging
	Services			Systems			Systems			Other
	Revenues			Sales			Sales			Revenue			Total			Managed Services Revenues			Commercial Systems Sales			Lodging Systems Sales			Other Revenue			Total
2007
Sales	$	8,792,452		$	5,478,709		$	2,283,514		$	134,363		$	16,689,038		$	9,463,504		$	6,522,225		$	2,134,895		$	127,669		$	18,248,293
Cost of sales	(6,116,344		)	(4,192,565		)	(1,734,341		)	(446,730		)	(12,489,980		)	(6,557,194		)	(5,152,119		)	(1,532,328		)	(477,190		)	(13,718,831		)
Gross profit	$	2,676,108		$	1,286,144		$	549,173		$	(312,367	)	$	4,199,058		$	2,906,310		$	1,370,106		$	602,567		$	(349,521	)	$	4,529,462

2006
Sales	$	7,248,178		$	5,324,036		$	2,232,413		$	89,463		$	14,894,090		$	7,778,472		$	6,280,894		$	1,510,126		$	91,003		$	15,660,495
Cost of sales	(5,197,965		)	(4,044,850		)	(1,678,947		)	(436,582		)	(11,358,344		)	(5,120,431		)	(4,987,908		)	(1,167,515		)	(224,989		)	(11,500,843		)
Gross profit	$	2,050,213		$	1,279,186		$	553,466		$	(347,119	)	$	3,535,746		$	2,658,041		$	1,292,986		$	342,611		$	(133,986	)	$	4,159,652

The following is a tabulation of business segment information for the ~~six~~nine months ended ~~April 30,~~July 31, 2007 and 2006.

	Managed			Commercial			Lodging
	Services			Systems			Systems			Other
	Revenues			Sales			Sales			Revenue			Total			Managed Services Revenues			Commercial Systems Sales			Lodging Systems Sales			Other Revenue			Total
2007
Sales	$	17,569,215		$	10,731,107		$	4,057,964		$	381,431		$	32,739,717		$	27,032,719		$	17,253,332		$	6,192,859		$	509,100		$	50,988,010
Cost of sales	(12,464,441		)	(8,176,796		)	(3,057,939		)	(889,870		)	(24,589,046		)	(19,021,635		)	(13,328,915		)	(4,590,267		)	(1,367,060		)	(38,307,877		)
Gross profit	$	5,104,774		$	2,554,311		$	1,000,025		$	(508,439	)	$	8,150,671		$	8,011,084		$	3,924,417		$	1,602,592		$	(857,960	)	$	12,680,133

2006
Sales	$	13,667,118		$	9,512,891		$	3,744,834		$	651,759		$	27,576,602		$	21,445,590		$	15,793,785		$	5,254,960		$	742,762		$	43,237,097
Cost of sales	(10,293,864		)	(7,058,654		)	(2,782,744		)	(1,129,243		)	(21,264,505		)	(15,414,295		)	(12,046,562		)	(3,950,259		)	(1,354,232		)	(32,765,348		)
Gross profit	$	3,373,254		$	2,454,237		$	962,090		$	(477,484	)	$	6,312,097		$	6,031,295		$	3,747,223		$	1,304,701		$	(611,470	)	$	10,471,749

Stock-Based Compensation Plans

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. The valuation provisions of SFAS 123(R) apply to new awards and to awards that are outstanding at the effective date and subsequently modified or cancelled. The Company adopted on a prospective basis SFAS 123(R) beginning November 1, 2005 for stock-based compensation awards granted after that date and for unvested awards outstanding at that date using the modified prospective application method. The Company recognizes the fair value of stock-based compensation awards as selling, general and administrative expense as appropriate in the consolidated statements of operations on a straight-line basis over the vesting period. We recognized compensation in the statement of operations as follows.

2007

2006

Three months ended April 30,

$
23,935

$
—

Six months ended April 30,

$
47,869

$
—

	2007		2006
Three months ended July 31,	$	30,685	$	—

Six months ended July 31,	$	78,554	$	—

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications of prior year amounts have been made to conform to current year presentations. These reclassifications had no impact on net income.

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006, and therefore will apply beginning with the Company’s fiscal year ~~ending~~ended October 31, 2008. The Company is currently evaluating the impact of this interpretation.

In September 2006, the FASB issued Statement of Financial Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have a material impact on the Company’s consolidated financial position or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Liabilities”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 will be effective for the Company’s fiscal year beginning November 1, 2008. Early adoption is permitted. The Company has not determined the impact, if any, that adopting this standard may have on its consolidated financial position or results of operations.

2. ACCOUNTS RECEIVABLE:

				(Audited)
	April 30,			October 31,
	2007			2006			July 31, 2007			(Audited) October 31, 2006

Trade receivables	$	11,537,159		$	12,499,407		$	14,770,016		$	12,499,407
Less- reserve for doubtful accounts	(203,843		)	(253,900		)	(172,677		)	(253,900		)
Net trade receivables	$	11,333,316		$	12,245,507		$	14,597,339		$	12,245,507

3. INVENTORIES:

Inventories are stated at the lower of cost (first-in, first-out or average) or market and consist of the following:

				(Audited)
	April 30,			October 31,
	2007			2006			July 31, 2007			(Audited) October 31, 2006

Finished goods and spare parts	$	6,596,305		$	5,565,484		$	5,057,968		$	5,565,484
Less- reserve for excess and obsolete inventories	(715,893		)	(622,511		)	(768,563		)	(622,511		)
Total inventories, net	$	5,880,412		$	4,942,973		$	4,289,405		$	4,942,973

4. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consists of the following:

	Estimated				(Audited)			Estimated Useful Lives	July 31, 2007			(Audited) October 31, 2006
	Useful	April 30,			October 31,
	Lives	2007			2006

Building	20	$	2,397,954		$	2,397,954
Building and building improvements								3-20	$	2,500,095		$	2,397,954
Data processing and computer field equipment	3-10	2,614,814			2,469,671			2-7	2,630,170			2,469,671
Software development costs, work-in-process	N/A	4,728,432			5,274,299			N/A	3,704,041			5,274,299
Software development costs of components placed Into service	3-10	3,102,325			2,339,644			3-10	4,256,126			2,339,644
Hardware	3-5	599,751			599,751			3-5	599,751			599,751
Land	—	611,582			611,582			—	611,582			611,582
Office furniture	5	932,252			932,252			5-7	945,578			932,252
Auto	5	516,183			428,214			5	516,183			428,214
Other	3-7	261,870			252,780			3-7	254,780			252,780

Total property, plant and equipment		15,765,163			15,306,147				16,018,306			15,306,147
Less- accumulated depreciation		(5,334,486		)	(4,821,129		)		(5,520,656		)	(4,821,129		)

Total property, plant and equipment, net		$	10,430,677		$	10,485,018			$	10,497,650		$	10,485,018

Interest costs related to an investment in long-lived assets are capitalized as part of the cost of the asset during the period the asset is being prepared for use. The Company capitalized ~~$114,814~~$161,772 and ~~$146,596~~$227,934 in interest costs in the ~~six~~nine months ended ~~April 30,~~July 31, 2007 and 2006, respectively.

5. INCOME TAXES:

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

				(Audited)
	April 30,			October 31,
	2007			2006			July 31, 2007			(Audited) October 31, 2006
Deferred tax assets:
Net operating loss carryforward	$	1,576,855		$	1,156,913		$	1,365,031		$	1,156,913
Currently nondeductible reserves	289,044			256,764			309,977			256,764
Accrued liabilities	372,886			392,449			473,352			392,449
Prepaid service contracts	113,788			30,770			191,536			30,770
Stock based compensation expense							30,793			—
Other	32,569			40,436			35,232			40,436
Total deferred tax asset	2,385,142			1,877,332			2,405,921			1,877,332

Deferred tax liabilities:
Intangible assets	4,032,924			3,686,779			4,205,997			3,686,779
Depreciation	1,394,338			1,032,788			1,472,738			1,032,788
Tax income to be recognized on sales-type lease contracts	20,326			20,511			19,738			20,511
Total deferred tax liability	5,447,588			4,740,078			5,698,473			4,740,078
Net deferred tax liability	$	(3,062,446	)	$	(2,862,746	)	$	(3,292,552	)	$	(2,862,746	)

				(Audited)
	April 30,			October 31,
	2007			2006			July 31, 2007			(Audited) October 31, 2006
Net deferred liability as presented on the balance sheet:
Current deferred tax asset	$	797,311		$	709,343		$	999,438		$	709,343
Noncurrent deferred tax liability	(3,859,757		)	(3,572,089		)	(4,291,990		)	(3,572,089		)
Net deferred tax liability	$	(3,062,446	)	$	(2,862,746	)	$	(3,292,552	)	$	(2,862,746	)

The Company has recorded a tax provision of ~~$260,000~~$504,000 or ~~41%~~40% and ~~a tax benefit of $28,000~~$156,000 or ~~25%~~44% for the ~~six~~nine months ended ~~April 30,~~July 31, 2007 and 2006, respectively, reflecting the statutory federal tax rate of 34% plus a blended state income tax rate of approximately 7%6% and the impact of minimum income tax payments in certain states.

6. CREDIT AGREEMENTS:

The Company’s credit facility consists of a revolving credit and term loan agreement with a commercial bank including a mortgage agreement maturing on September 30, 2009 and amortizing based on a 13 year life and a $7.5 million revolving credit agreement to finance growth in working capital. The revolving line of credit is collateralized by trade accounts receivable and inventories. At ~~April 30,~~July 31, 2007 and October 31, 2006, the Company had approximately ~~$513 thousand~~$2.476 million and $3.119 million, respectively, outstanding on the revolving line of credit. The Company had approximately ~~$6.9~~$5.0 million available under the revolving line of credit at ~~April 30,~~July 31, 2007. Advance rates are defined in the agreement, but are generally at the rate of 80% on qualified trade accounts receivable and 40% of qualified inventories. The revolving line of credit matures on September 28, ~~2007.~~2008. Long-term debt consisted of the following:

			(Audited)
	April 30,		October 31,
	2007		2006		July 31, 2007		(Audited) October 31, 2006

Real estate term note, payable in monthly installments of $14,257 plus interest, plus a fixed payment of $1,198,061 due September 30, 2009, collateralized by a first mortgage on the Company’s building	$	1,611,527	$	1,697,073	$	1,568,755	$	1,697,073

Less-current maturities	171,123		171,123		171,123		171,123

Total long-term debt, less current maturities	$	1,440,404	$	1,525,950	$	1,397,632	$	1,525,950

Interest on all outstanding debt under the credit facility accrues at either a) the London Interbank Offered Rate (which was 5.32% at ~~April 30,~~July 31, 2007) plus 1.25% to 2.75% depending on the Company’s funded debt to cash flow ratio, or b) the bank’s prime rate (which was 8.25% at ~~April 30,~~July 31, 2007) minus 0% to minus 1.125% also depending on the Company’s funded debt to cash flow ratio. At ~~April 30,~~July 31, 2007, the Company was paying ~~7.875%~~7.125% on the revolving line of credit borrowings and ~~7.07%~~6.57% on the mortgage note. The credit facility contains several financial covenants common in such agreements, including tangible net worth requirements, limitations on the amount of funded debt to earnings before interest, taxes, depreciation and amortization, limitations on capital spending, and debt service coverage requirements. The Company was in compliance with these covenants at ~~April 30,~~July 31, 2007.

7. EARNINGS PER SHARE:

Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the reporting periods. Diluted earnings per common share were computed by dividing net income by the weighted average number of shares of common stock and

dilutive potential common stock outstanding during the reporting periods. A reconciliation of net income and weighted average shares used in computing basic and diluted earnings per share is as follows:

	For the Three Months Ended April 30, 2007
	Income		Shares	Per Share		For the Three Months Ended July 31, 2007
	(Numerator)		(Denominator)	Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	208,170	10,214,741	$	0.02	$	376,854	10,214,741	$	0.04
Dilutive effect of stock options			—					—

Diluted EPS
Net income	$	208,170	10,214,741	$	0.02	$	376,854	10,214,741	$	0.04

	For the Three Months Ended April 30, 2006
	Income		Shares	Per Share		For the Three Months Ended July 31, 2006
	(Numerator)		(Denominator)	Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	56,629	10,214,567	$	0.01	$	286,286	10,214,741	$	0.03
Dilutive effect of stock options			39					—

Diluted EPS
Net income	$	56,629	10,214,606	$	0.01	$	286,286	10,214,741	$	0.03

	For the Six Months Ended April 30, 2007
	Income		Shares	Per Share		For the Nine Months Ended July 31, 2007
	(Numerator)		(Denominator)	Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	378,280	10,214,741	$	0.04	$	755,134	10,214,741	$	0.07
Dilutive effect of stock options			—					—

Diluted EPS
Net income	$	378,280	10,214,741	$	0.04	$	755,134	10,214,741	$	0.07

	For the Six Months Ended April 30, 2006
	Income			Shares	Per Share			For the Nine Months Ended July 31, 2006
	(Numerator)			(Denominator)	Amount			Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net loss	$	(84,098	)	10,201,651	$	(0.01	)
Net Income								$	202,188	10,180,728	$	0.02
Dilutive effect of stock options				3,382						27,825

Diluted EPS
Net loss	$	(84,098	)	10,205,033	$	(0.01	)
Net Income								$	202,188	10,208,553	$	0.02

Options to purchase ~~1,103,668~~978,668 shares of common stock at an average exercise price of ~~$7.17~~$7.00 and 1,119,768 shares of common stock at an average exercise price of $7.17 were not included in the computation of diluted earnings per share for the ~~three-~~three months ended July 31, 2007 and ~~six-month periods~~2006, respectively, because inclusion of these options would be antidilutive. Options to purchase 1,068,668 shares of common stock at an average exercise price of $6.69 and 1,105,668 shares of common stock at an average exercise price of $7.17 were not included in the computation of diluted earnings per share for the nine months ended ~~April 30,~~July 31, 2007 and 2006, respectively, because inclusion of these options would be antidilutive.

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

Preliminary Note Regarding Forward-Looking Statements

In the following discussion, we make forward-looking statements regarding future events and our future performance and results. These and other forward-looking statements are not guarantees of performance, but rather reflect our current expectations, estimates, and forecasts about the industry and markets in which we ~~operate, and~~operate. We base our assumptions and beliefs ~~based upon~~on information currently available to us. Forward-looking statements can generally be identified by words such as “expects,” “anticipates,” “may”, “plans,” “believes,” “intends,” “projects,” “estimates,” “targets,” “may,” “should” and similar words or expressions. These statements are subject to risks and uncertainties which are difficult to predict or ~~which we~~that are ~~unable to~~beyond control, including but not limited to factors such ~~factors~~ as customer demand for advanced communications products; our dependence upon a few large companies to drive ~~our~~ growth in our Managed Services revenues; capital spending trends within our ~~market,~~market; the financial condition of our suppliers and changes ~~by them~~ in their distribution strategies and support,; technological changes,; fluxuating margins and product ~~mix,~~mix;, the ability to attract and ~~retain~~acquiring and retaining highly skilled personnel and technical competencies; intense competition. These and other risks and uncertainties are discussed under the heading “Risk Factors” under Part I of the Company’s Form 10-K for the fiscal year ended October 31, 2006 (filed with the Commission on January 16, 2007), and in updates to such risk factors set forth in Item 1A of Part II of this and previously filed quarterly reports filed for quarters during fiscal 2007. As a result of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, investors are cautioned to read and consider all forward-looking statements in conjunction with such risk factors and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements made by the Company.

Overview

Strategy. ~~Our financial results in~~In the third quarter of fiscal 2007, ~~reflect~~we continued our ~~continued success in building~~efforts to grow our commercial Managed Services ~~business. This~~business, improve Managed Services margins, and align sales efforts with our major manufacturing partners. Our third quarter results reflect improvement in all these areas, with the most ~~important portion~~significant gains coming from our wholesale Managed Services offering. Our total Managed Services gross margins were above 30% for the second consecutive quarter and year-to-date Managed Services gross margins have improved 2 points over the first three quarters of ~~our business which includes recurring contract maintenance fees and time and materials (“T&M”) revenues, implementation fees, and cabling revenues earned from commercial customers~~fiscal 2006. Systems sales increased ~~$2.6 million or 75%~~11% in the ~~first half~~third quarter due primarily to success in the sale of ~~fiscal 2007 compared~~Nortel systems to ~~last year. It is our foremost strategy to continue to build~~the commercial and lodging customer segments. Finally, we also realized approximately 2 points of improvement in operating expense during the quarter. All of these ~~revenues through acquisition~~items are discussed more fully below under “Results of new services customers and deeper penetration into existing customers. This initiative is integral to our long-term strategy to reduce our dependence on systems sales in favor of more predictable, recurring services revenues.Operations”.

Operating Summary. In the ~~second~~third quarter of fiscal 2007, we earned ~~$208,000 in~~ net income of $377,000 on revenues of ~~$16.7~~$18.2 million compared to net income of ~~$57,000~~$286,000 on revenues of ~~$14.9~~$15.7 million in the ~~second~~third quarter of last year. For the first ~~six~~nine months of fiscal 2007, we earned ~~$378,000 in~~ net income of $755,000 on revenues of ~~$32.7~~$50.9 million compared to a net ~~loss~~income of ~~$84,000~~$202,000 on revenues of ~~$27.6 million.~~$43.2 million for the same period last year. These ~~improvements primarily~~positive results reflect the ~~increases in the Managed Services revenues earned from commercial customers as~~improvements discussed above, ~~coupled with improved gross margins on those revenues. These items as well as~~and other contributing factors which are discussed in more detail under “Results of Operations” below.

Financial Position Summary. Our financial condition improved during the first ~~half~~three quarters of fiscal 2007. WeTo date in fiscal 2007 we generated positive cash flows from operations of ~~$3.2 million in the quarter and used that cash primarily to reduce the borrowings on our~~$1.5 million., Our working capital ~~revolver by $2.6 million or over 83%~~position improved 20%, and our total debt was reduced 16%. These and other financial ~~position~~ items are discussed in more detail under “Financial Condition” below.

The following discussion presents additional information regarding our financial condition and results of operations for the three- and ~~six-month~~nine-month periods ~~ending April 30,~~ended July 31, 2007 and 2006 and should be read in conjunction with our comments above as well as the “Risk Factors” section below.

Financial Condition

Cash provided by operations for the ~~six~~nine months ended ~~April 30,~~July 31, 2007 was ~~$3.2~~$1.5 million, consisting of net income and non-cash charges of $1$1.8 million, a reduction in ~~accounts receivable~~inventory of ~~$912,000,~~$577,000, and an increase in current liabilities of ~~$2.7~~$2.3 million. These increases were partially offset by an increase in ~~inventories~~accounts receivable of ~~$988,000~~$2.4 million and other changes in working capital items which netted to a decrease in cash of ~~$456,000.~~$789,000. We used these cash flows to reduce our borrowings on our working capital line of credit by ~~$2.6 million,~~$643,000, reduce our mortgage balance through scheduled principal payments by ~~$85,000,~~$128,000, and to fund capital expenditures of ~~$462,000.~~$843,000. Non-cash charges included depreciation expense of ~~$254,000,~~$393,000, amortization expense of ~~$287,000,~~$471,000, stock-based compensation expense of ~~$48,000,~~$79,000, and a provision for obsolete inventory of ~~$51,000.~~$77,000.

At ~~April 30,~~July 31, 2007 our total borrowings were ~~$2.1~~$4.1 million, consisting of a mortgage on our headquarters building of $1.6 million and ~~$513,000~~$2.5 million due on our revolving line of credit. At ~~April 30,~~July 31, 2007 there was ~~$6.9~~$5.0 million available under the revolver to meet working capital needs. There have been no stock repurchases to date under the repurchase program announced in October 2006. Under the program, our board of directors authorized the Company to utilize up to $960,000 per year to repurchase our common stock in open market, block purchases or in privately negotiated transactions and at prices we deem appropriate.

The table below presents our contractual obligations at ~~April 30,~~July 31, 2007 as well as payment obligations over the next five years:

				Payments due by period
				Less than		2 – 3		4 – 5		Payments due by period
		Total		1 year		Years		Years		Total		Less than 1 year		2 – 3 Years		4 – 5 Years
Contractual Obligations	Contractual Obligations
Long-term debt	Long-term debt	$	1,852,830	$	279,543	$	1,573,287	$	—	$	1,783,419	$	277,310	$	1,506,109	$	—
Operating leases	Operating leases	474,332		228,747		231,801		13,784		422,481		232,655		189,826		—
Total		$	2,327,162	$	508,290	$	1,805,088	$	13,784	$	2,205,900	$	509,965	$	1,695,935	$	—

Results of Operations

In the ~~second~~third quarter of fiscal 2007, our revenues increased ~~12%~~17% or ~~$1.8~~$2.6 million compared to the same period last year ~~resulting in an increase in~~and our net income ~~of $152,000~~increased $91,000 or ~~268%~~32%. In the first ~~six~~nine months of the year, our revenues increased ~~19%~~18% or ~~$5.2~~$7.8 million ~~resulting in an increase in earnings of $462,000.~~and our net income increased $553,000 or 73%. These ~~improved~~positive results reflect improvements in all of our major revenue ~~categories and improved margins in our Managed Services business.~~categories. The narrative below provides further explanation of these results.

Managed Services Revenues. Managed Services revenues consist of the following:

	For the Three Months Ended				For the Six Months Ended
	April 30,				April 30,				For the Three Months Ended July 31,				For the Nine Months Ended July 31,
	2007		2006		2007		2006		2007		2006		2007		2006
Contract & T&M	$	6,309,000	$	5,491,000	$	12,314,000	$	10,476,000	$	6,745,000	$	5,762,000	$	19,059,000	$	16,238,000
Implementation	1,781,000		1,451,000		3,913,000		2,505,000		2,075,000		1,628,000		5,988,000		4,133,000
Cabling	702,000		306,000		1,342,000		686,000		644,000		388,000		1,986,000		1,075,000
Total Managed Services revenues	$	8,792,000	$	7,248,000	$	17,569,000	$	13,667,000	$	9,464,000	$	7,778,000	$	27,033,000	$	21,446,000

Managed Services revenues increased ~~21%~~22% for the quarter ~~ending April 30,~~ended July 31, 2007 compared to the same period last year and ~~29%~~26% for the first ~~half~~nine months of fiscal 2007 compared to the same period in fiscal 2006. This growth ~~came from~~is the ~~acquisition~~product of ~~new commercial customers~~increases in Contract and ~~penetration~~time and materials (“T&M”) revenues in association with customer adoption of ~~previously acquired customers adopting~~ our wholesale Managed Services ~~offerings and~~program. Adding a new customer under the wholesale Managed Services offering typically means we begin providing field services support on behalf of our customer to a new end-user.. Revenues from ~~increases~~our wholesale service programs are in the form of contract maintenance fees or time charges for services provided. Some accounts provide additional revenues from minimum monthly charges. A key aspect to our ~~national structured cabling initiative. Recurring~~success with these programs has been our flexibility in structuring the service delivery model to meet the unique needs or demands of our customers’ end users. These recurring contract and T&M revenues ~~earned from commercial customers~~ increased ~~48%~~$1.0 million or 17% in ~~the second~~third quarter of fiscal 2007 and ~~59%~~increased $2.8 million or 17% in the year-to-date period ended July 31, 2007 compared to ~~those same periods last year. Recurring~~a year ago.

Implementation services revenues ~~from lodging customers~~ increased 1%27% and 2%45% in the quarter and ~~six~~nine month periods ended April 30, 2007, respectively, compared to those same periods last year. The primary driver in the growth of our recurring commercial services revenues is from our newly established relationships with network providers, manufacturers, and systems integrators. Under these relationships, we

~~provide services on behalf of these customers, usually supporting the end user with our national field resources.~~

~~Implementation services revenues increased 23% and 56% in the quarter and six month periods ended April 30,~~July 31, 2007, respectively, compared to those same periods last year. These increases ~~primarily~~ reflect higher systems sales and a ~~higher~~greater proportion of more complex applications sold to date in fiscal 2007 ~~which generates~~compared to last year. These complex applications generate disproportionately higher professional services and installation fees. In the ~~second~~third quarter of fiscal 2007, implementation revenues were ~~23%~~24% of systems sales compared to ~~19%~~21% in the ~~second~~third quarter of fiscal 2006. In the first ~~six~~nine months of fiscal 2007, implementation revenues were ~~27%~~26% of systems sales compared to ~~19%~~20% in the same period in fiscal 2006. The complexity of implementations varies significantly between ~~projects, but in~~projects. In general we expect implementation revenues, as a proportion of systems sales, to increase over time as the market ~~continues to move~~moves toward high-end, software-oriented voice applications, and as we increase our sales of stand-alone professional services such as call center tune-ups and network traffic studies.

Our structured cabling ~~initiative~~revenues grew ~~129%~~66% in the ~~second~~third quarter and ~~96%~~85% in the first ~~half~~nine months of fiscal 2007, respectively, compared to those same periods in fiscal 2006. The increases in these revenues are the result of our success in establishing a national structured cabling business that markets our cabling services to existing and new ~~enterprise~~customers. With this product and ~~lodging customers.~~service offering, we are better able to compete for projects where structured cabling is wrapped into an overall communications infrastructure purchase. We’re also able to compete for stand-alone structured cabling business often associated with new construction. Our third quarter results reflect the initial cabling revenues from a $1.2 million cabling project, the largest such project in our history. We expect revenues from this ~~portion of our Managed Services business will improve~~project to be recognized ratably over ~~time, but is not yet a predictable revenue stream.~~the next three fiscal quarters.

Systems Sales. Systems sales were ~~$7.8~~$8.7 million in the ~~second~~third quarter of fiscal 2007 compared to ~~$7.5~~$7.8 million last ~~year.~~year, an 11% increase. Year-to-date systems sales were ~~$14.8~~$23.4 million in fiscal 2007 compared to ~~$13.3~~$21.0 million last ~~year.~~year, also an 11% increase. These increases reflect ~~the strong systems~~success in aligning our sales ~~experienced~~efforts with our major manufacturers. Sales of Nortel and Avaya products have increased approximately 32% and 2%, respectively, in the ~~first quarter~~year-to-date period as compared to the same period last year. Systems sales continue to be an unpredictable segment of ~~fiscal 2007 which was due primarily to favorable~~our business as the timing of ~~equipment shipments~~the receipt of orders, product delivery, and ~~low prior year comparisons. As expected, our year-to-date systems sales came~~customer installation schedules sometimes fluctuate dramatically. Systems orders’ backlogs typically range from thirty to forty-five days providing short visibility into balance with the first half results from last year and produced a modest 3% increase. These increases included small increases in systems sales to both commercial and lodging customers. We expect our historical trend of stronger second half systems sales to be reflected in thefuture results for ~~the balance~~this line of ~~the year.~~business.

Gross Margins. The table below presents the gross margins earned on our primary revenue streams:

	For the Three				For the Six
	Months Ended				Months Ended
	April 30,				April 30,
	2007		2006		2007		2006		For the Three Months Ended July 31,				For the Nine Months Ended July 31,
Gross Margins									2007		2006		2007		2006
Managed Services revenues	30.4	%	28.3	%	29.0	%	24.7	%	30.7	%	34.2	%	29.6	%	28.1	%
Systems sales	23.6	%	24.3	%	24.0	%	25.8	%	22.8	%	21.0	%	23.6	%	24.0	%
Other revenues	-6.2	%	10.1	%	38.1	%	33.6	%	40.9	%	243.7	%	38.8	%	59.3	%
Corporate cost of goods sold	-1.8	%	-2.4	%	-2.0	%	-2.5	%	-2.2	%	-2.3	%	-2.1	%	-2.4	%
Total	25.2	%	23.7	%	24.9	%	22.9	%	24.8	%	26.6	%	24.9	%	24.2	%

~~We have enjoyed improved~~The gross margins ~~from~~earned on our Managed Services business in the ~~first half~~third quarter represented the second consecutive fiscal quarter in which these margins were above 30%. This level of ~~fiscal 2007 as our~~gross profits must continue to improve to enhance the long-term profitability of the company. As Managed Services revenues have ~~increased sufficiently to absorb our investments in all three major service initiatives. The most significant factor in~~grown during the ~~improvement in Managed Services gross margins is the growth of our recurring revenues from commercial customers. As these revenues began to grow during fiscal 2006,~~year, our gross margins on ~~overall Managed Services~~these revenues have improved as we ~~were able~~have begun to ~~absorb~~realize a return on the ~~extra costs~~investments we ~~incurred~~made to build our Nortel capability. ~~As discussed above,~~Gross margins earned on Managed Services in the third quarter of fiscal 2007 were lower than the same period last year due to unusually strong margins in the implementation and cabling sectors in the third quarter of fiscal 2006. Our year-to-date margin improvement of almost 1.5 points better reflects the progress we have made in this ~~portion~~area of our business is our most important growth driver, as it represents the greatest opportunity for revenue growth while at the same time improving overall gross margins. Another factor helping improve overall Managed Services gross margins has been sustained higher implementation revenues during fiscal 2007. As discussed above, we have enjoyed higher levels of implementation and professional service fees as a proportion of total project orders to date in fiscal 2007. These higher revenues have helped to absorb our fixed personnel costs associated with maintaining our ability to design, sell and implement advanced communications networks. Finally, our success in increasing our structured cabling revenues has also helped to improve our Managed Services margins. The gross margins we earn on our structured cabling revenues depends upon the mix of cabling projects that are fulfilled with third party providers versus Company employees. This mix is determined primarily by the location and timing of the project.this year.

The gross margins on systems sales in the ~~second~~third quarter ~~of fiscal 2007~~were slightly improved over last year and ~~for~~are essentially the first half of the fiscal year are within our targets for this revenue stream. The products we sell are becoming commoditized, putting greater pressure on pricing as the industry moves to server-based technology. As such, the primary value of the systems sold residessame in the year-to-date period. We expect to earn gross margins of 23% to 25% on systems sales. The gross margins earned in the current fiscal quarter are at the low end of that range and reflect strategic decisions to capture important market share near our headquarters. Margins on systems sales have been under pressure for several years as hardware becomes commoditized. We believe that we can sustain

current margins through emphasizing the sale of software applications ~~installed on~~which typically carry greater margins as converged voice and data products continue to evolve. Another key contributor to our systems sales margins is the ~~hardware and, more importantly, in the design and configuration of those software applications.~~pricing support we receive from our vendors. We expect these trends to continue and possibly accelerate. To offset these factors, we emphasize our in-house installation expertise, nationwide geographic presence, and after-installation care to focus customers on the value of purchasing systems from us. Additionally, we work ~~closely with our distributors and manufacturers~~diligently to maximize ~~their pricing support. Our desire to maintain the gross margins~~this support; however, no assurance can be given that future support will continue at ~~their~~ historical ~~levels may impact our revenue volumes and may limit our ability to increase our revenues.~~levels.

A final component to our gross margins is the margins earned on other revenues and our corporate cost of goods sold. A portion of our other revenues typically represents sales and cost of goods sold on equipment or services outside our normal provisioning ~~processes and~~processes. These revenues by their nature vary significantly in both sales volume and gross margins earned. Another segment of other revenues represents the sale of Avaya maintenance contracts for which we earn either a gross profit or ~~commission from Avaya.~~commission. We have no continuing service obligation associated with these revenues and gross profits. This is an unpredictable revenue stream ~~which is~~ dependent upon expiration dates of existing contracts, installation dates of new systems, and the number of years that customers contract for services. Corporate cost of goods sold represents our material logistics and purchasing functions that support all of our revenue segments.

Operating Expenses. Our total operating expenses increased ~~$442,000~~$211,000 or ~~13%~~6% in the ~~second~~third quarter of fiscal 2007 compared to the ~~second~~third quarter of fiscal 2006. Operating expenses increased ~~$1.2~~$1.4 million or ~~19%~~14% for the first ~~half~~nine months of fiscal 2007 compared to the same period a year ago. Operating expenses ~~have remained at approximately 23%~~were 21.3% of ~~total~~ revenues in the third quarter of fiscal 2007 compared to 23.5% a year ago and were 22.4% for ~~all~~ the ~~comparison periods reflecting~~nine month period ended July 31, 2007 compared to 23.2% in the ~~fact that most of the increases related to increased commissions and incentive compensation costs due to higher revenues and gross profits. Other increases~~previous year. This improvement in operating expense margins was expected as we have made balanced investments in sales and administrative expenses ~~included increased personnel costs~~to drive top-line growth. We have targeted our operating expense margins to decline to between 18% and ~~additional marketing expenses. Amortization expense in~~20% over the ~~second quarter was $147,000 compared~~next three to ~~$103,000 in the second quarter last year. Year-to-date amortization expense was $287,000 compared to $204,000 for the same period last year.~~five years through economies of scale and improved operating efficiencies.

Interest Expense and Other Income. ~~Other income~~Net interest and other expense was ~~$9,000~~$20,000 in the ~~second~~third quarter of fiscal 2007 compared to ~~net interest and other expense of $15,000~~$11,000 in the ~~second~~third quarter of fiscal 2006. For the ~~six~~nine month period ended ~~April 30,~~July 31, 2007, net interest and other ~~income~~expense was ~~$16,000~~$4,000 compared to ~~$78,000 in net expense~~$90,000 in the same period of fiscal 2006. These changes primarily reflect lower overall borrowing costs in 2007 compared to last year ~~as a result of lower~~due to less outstanding debt.

Tax Provision. We recorded a combined federal and state tax provision of ~~40%~~39% for the ~~second~~third quarter of fiscal 2007 ~~compared to 45% for the second quarter of fiscal~~and 2006. ~~At lower levels of profitability, as experienced in the second quarter of fiscal 2006, minimum taxes required by certain state jurisdictions increases the tax provision rate.~~ For the ~~six month period~~nine months ended ~~April 30,~~July 31, 2007, we recorded a tax provision of ~~41%~~40% compared to a tax ~~benefit~~provision of ~~25%~~44% for the ~~first six months of fiscal 2006. As stated above,~~same period a year ago. The tax provision recorded for the ~~effect of~~year-to-date period reflects the effective federal tax rate plus the composite state income tax rates adjusted for states that require minimum ~~state taxes reduced the impact of~~ tax ~~benefits resulting from the small operating loss reported in the first half of last year.~~payments even if tax losses are incurred. Generally, we expect our tax provision rate to be approximately 40%.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to our operations ~~result~~results primarily from changes in interest rates. We did not use derivative financial instruments for speculative or trading purposes during the three or ~~six~~nine month periods ~~ending April 30,~~ended July 31, 2007.

Interest Rate Risk. WeDue to utilization of variable interest rate debt, we are subject to the risk of fluctuation in interest rates in the normal course of ~~business due to our utilization of variable debt.~~business. Our credit facility bears interest at a floating rate at either the London Interbank Offered Rate (“LIBOR”) (5.32% at ~~April 30,~~July 31, 2007) plus 1.25% to 2.75% or the bank’s prime rate (8.25% at ~~April 30,~~July 31, 2007) less 0.0% to minus 1.125%. A hypothetical 1% increase in interest rates would not have a material impact on our financial position or cash flows.

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

		For the quarterly period ended ~~April 30,~~July 31, 2007

		OR

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

Oklahoma		73-1130045
(State or other jurisdiction of		(I.R.S. Employee
incorporation or organization)		Identification No.)


1814 W. Tacoma, Broken Arrow, OK		74012-1406
(Address of principal executive offices)		(Zip Code)

Class		Outstanding at ~~May 25,~~August 30, 2007
Common Stock, $.001 par value		10,214,741


PART I. FINANCIAL INFORMATION

	ITEM ~~1. FINANCIAL~~1.FINANCIAL STATEMENTS (Unaudited)

	Consolidated Balance Sheets - ~~April 30,~~July 31, 2007 and October 31, 2006

		Consolidated Statements of Operations - For the Three and ~~Six~~Nine Months Ended ~~April 30,~~July 31, 2007 and 2006

		Consolidated Statement of Shareholders’ Equity - For the ~~Six~~Nine Months Ended ~~April 30,~~July 31, 2007

		Consolidated Statements of Cash Flows - For the ~~Six~~Nine Months Ended ~~April 30,~~July 31, 2007 and 2006

		Notes to Consolidated Financial Statements

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

	ITEM 4.	CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

	ITEM 1.	LEGAL PROCEEDINGS

	ITEM 1A. RISK FACTORS

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

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

	ITEM 5.	~~OTHER~~5.OTHER INFORMATION

	ITEM 6.	EXHIBITS

	April 30, 2007			October 31, 2006
	(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents	$	188,182		$	174,567
Current portion of net investment in sales-type leases and other receivables	386,221			329,619
Trade accounts receivable, net	11,333,316			12,245,507
Inventories, net	5,880,412			4,942,973
Deferred tax asset, net	797,311			709,343
Prepaid taxes	13,789			22,622
Prepaid expenses and other assets	606,377			300,738
Total current assets	19,205,608			18,725,369

Noncurrent assets:
Goodwill	26,392,881			26,420,669
Intangible assets, net	122,959			141,875
Net investment in sales-type leases, less current portion above	122,126			128,708
Property, plant & equipment, net	10,430,677			10,485,018
Other assets	27,475			11,124
Total noncurrent assets	37,096,118			37,187,394

Total assets	$	56,301,726		$	55,912,763

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	171,123		$	171,123
Revolving line of credit	513,317			3,119,445
Lease payable	—			810
Accounts payable	5,679,224			4,325,758
Current unearned revenue	2,392,342			1,802,665
Accrued liabilities	3,508,757			2,993,831
Total current liabilities	12,264,763			12,413,632

Noncurrent liabilities:
Long-term debt, less current portion above	1,440,404			1,525,950
Accrued long-term liability	351,250			436,850
Noncurrent unearned service revenue	74,293			79,132
Noncurrent deferred tax liability, net	3,859,757			3,572,089
Total noncurrent liabilities	5,725,704			5,614,021

Contingencies

Shareholders’ equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued	—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,233,529 issued at April 30, 2007 and October 31, 2006	11,233			11,233
Paid-in capital	13,115,545			13,067,676
Retained earnings	27,429,140			27,050,860
Less 1,018,788 shares of treasury stock, at cost	(2,244,659		)	(2,244,659		)
Total shareholders’ equity	38,311,259			37,885,110
Total liabilities and shareholders’ equity	$	56,301,726		$	55,912,763

	2007		2006
Three months ended April 30,	$	23,935	$	—

Six months ended April 30,	$	47,869	$	—

Nominee	For	Withhold

Ron B. Barber	9,145,783	426,254
Donald T. Duke	9,144,983	427,054
Edward F. Keller	9,288,590	283,447
Robert D. Hisrich	7,939,308	1,632,729
Jack R. Ingram	9,292,358	279,679
Ronald L. Siegenthaler	9,104,381	467,656

SEC Exhibit No.		Description

~~10.1~~		~~Letter Agreement with Ron Barber~~

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1		Certification of Chief Executive Officer Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	XETA Technologies, Inc.
	(Registrant)


Dated: ~~May 25,~~September 7, 2007	By:	~~/s/ Jack R. Ingram~~ /s/ Greg D. Forrest
		~~Jack R. Ingram~~Greg D. Forrest
		Chief Executive Officer

Dated: ~~May 25,~~September 7, 2007	By:	~~/s/~~ /s/ Robert B. Wagner
		Robert B. Wagner
		Chief Financial Officer

For		Against		Withhold
9,290,484		258,674		22,879