UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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, 2008

		OR

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

Commission File Number 0-16231

XETA Technologies, Inc.

(Exact name of registrant as specified in its charter)

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

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

918-664-8200

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 past 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined by Rule 12b-2 of the Exchange Act).

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company x
				(Do not check if a smaller reporting company)

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

Yes o No x

As of ~~May 30,~~August 31, 2008, there were 10,254,310 shares of the registrant’s common stock, par value $0.001, outstanding

Table of Contents

INDEX

			PAGE
PART I. FINANCIAL INFORMATION


	ITEM 1. FINANCIAL STATEMENTS (Unaudited)


Consolidated Balance Sheets - ~~April 30,~~July 31, 2008 and October 31, 2007		3

		Consolidated Statements of Operations - For the Three and ~~Six~~Nine Months Ended ~~April 30,~~July 31, 2008 and 2007		4

		Consolidated Statement of Shareholders’ Equity - For the ~~Six~~Nine Months Ended ~~April 30,~~July 31, 2008		5

		Consolidated Statements of Cash Flows - For the ~~Six~~Nine Months Ended ~~April 30,~~July 31, 2008 and 2007		6

		Notes to Consolidated Financial Statements		7

	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS			13

	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		17
	18

	ITEM 4. CONTROLS AND PROCEDURES			18

PART II. OTHER INFORMATION

	~~ITEM 1. LEGAL PROCEEDINGS~~		18

	ITEM ~~1A. RISK FACTORS~~1. LEGAL PROCEEDINGS			18

ITEM 1A. RISK FACTORS		19

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	19

	~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~		19

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		20

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	19

	~~ITEM 5. OTHER INFORMATION~~		20

ITEM 5. OTHER INFORMATION		20

ITEM 6. EXHIBITS		20

Table of Contents

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

ASSETS

April 30, 2008

October 31, 2007

(Unaudited)

Current assets:

Cash and cash equivalents

$
125,408

$
402,918

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

716,088

490,033

Trade accounts receivable, net

19,257,903

16,236,137

Inventories, net

4,871,241

4,296,574

Deferred tax asset

627,154

916,259

Prepaid taxes

12,443

19,737

Prepaid expenses and other assets

737,608

517,757

Total current assets

26,347,845

22,879,415

Noncurrent assets:

Goodwill

26,337,305

26,365,093

Intangible assets, net

242,516

104,042

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

115,210

136,493

Property, plant & equipment, net

10,589,866

10,610,820

Other Assets

25,289

—

Total noncurrent assets

37,310,186

37,216,448

Total assets

$
63,658,031

$
60,095,863

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of long-term debt

$
171,123

$
171,123

Revolving line of credit

4,586,938

2,758,660

Accounts payable

7,249,989

5,670,240

Current unearned revenue

2,547,260

2,212,247

Accrued liabilities

2,440,107

3,565,031

Total current liabilities

16,995,417

14,377,301

Noncurrent liabilities:

Long-term debt, less current portion above

1,268,986

1,354,530

Accrued long-term liability

144,100

211,300

Noncurrent unearned service revenue

62,597

81,650

Noncurrent deferred tax liability

4,776,708

4,631,917

Total noncurrent liabilities

6,252,391

6,279,397

Contingencies

Shareholders’ equity:

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

—

—

Common stock; $.001 par value; 50,000,000 shares authorized, 11,256,193 and 11,233,529 shares issued at April 30, 2008 and October 31, 2007, respectively

11,255

11,233

Paid-in capital

13,362,906

13,189,311

Retained earnings

29,243,530

28,483,280

Less treasury stock, at cost (1,001,883 shares at April 30,2008 and 1,018,788 shares at October 31, 2007)

(2,207,468
)
(2,244,659
)
Total shareholders’ equity

40,410,223

39,439,165

Total liabilities and shareholders’ equity

$
63,658,031

$
60,095,863

	July 31, 2008			October 31, 2007

ASSETS
Current assets:
Cash and cash equivalents	$	74,177		$	402,918
Current portion of net investment in sales-type leases and other receivables	773,723			490,033
Trade accounts receivable, net	23,442,635			16,236,137
Inventories, net	5,839,652			4,296,574
Deferred tax asset, net	670,698			916,259
Prepaid taxes	51,693			19,737
Prepaid expenses and other assets	1,276,467			517,757
Total current assets	32,129,045			22,879,415

Noncurrent assets:
Goodwill	26,323,411			26,365,093
Intangible assets, net	219,600			104,042
Net investment in sales-type leases, less current portion above	118,145			136,493
Property, plant & equipment, net	10,736,742			10,610,820
Other assets	15,563			—
Total noncurrent assets	37,413,461			37,216,448

Total assets	$	69,542,506		$	60,095,863

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	171,123		$	171,123
Revolving line of credit	6,109,050			2,758,660
Accounts payable	7,652,706			5,670,240
Current portion of obligations under capital lease	146,798			—
Current unearned revenue	3,450,622			2,212,247
Accrued liabilities	4,027,172			3,565,031
Total current liabilities	21,557,471			14,377,301

Noncurrent liabilities:
Long-term debt, less current portion above	1,226,214			1,354,530
Accrued long-term liability	144,100			211,300
Long-term portion of obligations under capital lease	297,743			—
Noncurrent unearned service revenue	64,335			81,650
Noncurrent deferred tax liability, net	5,186,359			4,631,917
Total noncurrent liabilities	6,918,751			6,279,397

Contingencies

Shareholders’ equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued	—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,256,193 and 11,233,529 issued at July 31, 2008 and October 31, 2007, respectively	11,256			11,233
Paid-in capital	13,428,126			13,189,311
Retained earnings	29,834,370			28,483,280
Less treasury stock, at cost (1,001,883 shares at July 31,2008 and 1,018,788 shares at October 31, 2007)	(2,207,468		)	(2,244,659		)
Total shareholders’ equity	41,066,284			39,439,165
Total liabilities and shareholders’ equity	$	69,542,506		$	60,095,863

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

Table of Contents

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,
	2008			2007		2008			2007			2008			2007			2008			2007

Systems sales	$	10,271,761		$	7,762,223	$	17,985,920		$	14,789,071		$	10,662,567		$	8,657,120		$	28,648,487		$	23,446,191
Services	10,134,470			8,792,452		19,859,412			17,569,215			12,028,241			9,463,504			31,887,653			27,032,719
Other revenues	405,592			134,363		916,226			381,431			512,724			127,669			1,428,950			509,100
Net sales and service revenues	20,811,823			16,689,038		38,761,558			32,739,717			23,203,532			18,248,293			61,965,090			50,988,010

Cost of systems sales	7,541,560			5,926,906		13,328,382			11,234,735			7,846,284			6,684,447			21,174,666			17,919,182
Services costs	7,600,057			6,116,344		14,730,981			12,464,441			8,373,080			6,557,194			23,104,061			19,021,635
Cost of other revenues & corporate COGS	483,972			446,730		925,351			889,870			781,806			477,190			1,707,157			1,367,060
Total cost of sales and service	15,625,589			12,489,980		28,984,714			24,589,046			17,001,170			13,718,831			45,985,884			38,307,877

Gross profit	5,186,234			4,199,058		9,776,844			8,150,671			6,202,362			4,529,462			15,979,206			12,680,133

Operating expenses
Selling, general and administrative	4,263,500			3,713,011		7,925,762			7,241,421			4,870,068			3,705,080			12,795,830			10,946,501
Amortization	254,513			146,767		457,411			287,044			265,152			183,721			722,563			470,765
Total operating expenses	4,518,013			3,859,778		8,383,173			7,528,465			5,135,220			3,888,801			13,518,393			11,417,266

Income from operations	668,221			339,280		1,393,671			622,206			1,067,142			640,661			2,460,813			1,262,867

Interest expense	(68,731		)	—		(171,716		)	(10,387		)	(96,401		)	(28,536		)	(268,117		)	(38,923		)
Interest and other income	9,531			8,890		27,295			26,461			99			8,729			27,394			35,190
Total interest and other income (expense)	(59,200		)	8,890		(144,421		)	16,074
Total interest and other expense												(96,302		)	(19,807		)	(240,723		)	(3,733		)

Income before provision for income taxes	609,021			348,170		1,249,250			638,280			970,840			620,854			2,220,090			1,259,134
Provision for income taxes	238,000			140,000		489,000			260,000			380,000			244,000			869,000			504,000

Net income	$	371,021		$	208,170	$	760,250		$	378,280		$	590,840		$	376,854		$	1,351,090		$	755,134

Earnings per share
Basic	$	0.04		$	0.02	$	0.07		$	0.04		$	0.06		$	0.04		$	0.13		$	0.07

Diluted	$	0.04		$	0.02	$	0.07		$	0.04		$	0.06		$	0.04		$	0.13		$	0.07

Weighted average shares outstanding	10,254,310			10,214,741		10,231,120			10,214,741			10,254,310			10,214,741			10,241,861			10,214,741

Weighted average equivalent shares	10,263,297			10,214,741		10,246,272			10,214,741			10,254,310			10,214,741			10,246,811			10,214,741

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

Table of Contents

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, 2007	11,233,529	$	11,233	1,018,788		$	(2,244,659	)	$	13,189,311		$	28,483,280	$	39,439,165	11,233,529	$	11,233	1,018,788		$	(2,244,659	)	$	13,189,311		$	28,483,280	$	39,439,165

Stock options exercised $.001 par value	22,664	22		—		—			90,193			—		90,215		22,664	22		—		—			90,193			—		90,215
Issuance of restricted common stock				(16,905	)	37,191			(37,191		)			—		—	—		(16,905	)	37,191			(37,191		)	—		—
Tax benefit of stock options	—	—		—		—			4,032			—		4,032		—	—		—		—			4,032			—		4,032
Stock based compensation	—	—		—		—			116,561			—		116,561		—	—		—		—			181,782			—		181,782

Net Income	—	—		—		—			—			760,250		760,250		—	—		—		—			—			1,351,090		1,351,090

Balance- April 30, 2008	11,256,193	$	11,255	1,001,883		$	(2,207,468	)	$	13,362,906		$	29,243,530	$	40,410,223
Balance- July 31, 2008																11,256,193	$	11,255	1,001,883		$	(2,207,468	)	$	13,428,127		$	29,834,370	$	41,066,284

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

Table of Contents

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,
	2008			2007			2008			2007
Cash flows from operating activities:
Net income	$	760,250		$	378,280		$	1,351,090		$	755,134

Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	338,743			253,561			528,811			393,304
Amortization	457,415			287,045			722,563			470,765
Stock based compensation	116,561			47,869			181,782			78,554
Loss (gain) on sale of assets	425			(5,000		)	425			(5,000		)
Provision for returns and doubtful accounts receivable							7,924
Provision for excess and obsolete inventory	51,000			51,000			76,500			76,500
Increase in deferred tax liability	176,611			315,456			600,156			761,583
Change in assets and liabilities, net of acquisitions:
(Increase) in net investment in sales-type leases & other receivables	(204,772		)	(50,020		)
(Increase) decrease in trade account receivables	(2,987,711		)	912,191
(Increase) in inventories	(596,390		)	(988,439		)
Increase in net investment in sales-type leases and other receivables							(265,342		)	(133,155		)
Increase in trade account receivables							(7,180,367		)	(2,351,832		)
(Increase) decrease in inventories							(1,590,301		)	577,068
Decrease (increase) in deferred tax asset	289,105			(87,968		)	245,561			(290,095		)
(Increase) in prepaid expenses and other assets	(245,140		)	(321,990		)
Decrease in prepaid taxes	7,294			8,833
Increase in accounts payable	1,579,670			1,353,466
Increase in prepaid expenses and other assets							(774,273		)	(367,411		)
(Increase) decrease in prepaid taxes							(31,956		)	6,385
Increase (decrease) in accounts payable							1,982,387			(171,013		)
Increase in unearned revenue	241,806			584,838			1,146,906			876,757
(Decrease) increase in accrued liabilities and lease payable	(1,376,433		)	428,516
Increase in accrued liabilities							210,632			817,952
Total adjustments	(2,151,816		)	2,789,358			(4,138,592		)	740,362

Net cash (used in) provided by operating activities	(1,391,566		)	3,167,638			(2,787,502		)	1,495,496

Cash flows from investing activities:
Cash flows used in investing activities:
Additions to property, plant & equipment	(718,893		)	(467,349		)	(841,549		)	(848,326		)
Proceeds from sale of assets	—			5,000
Proceeds from sale of property, plant and equipment							—			5,000
Net cash used in investing activities	(718,893		)	(462,349		)	(841,549		)	(843,326		)

Cash flows from financing activities:
Proceeds from draws on revolving line of credit	19,320,405			11,509,265
Principal payments on debt	(85,544		)	(85,546		)
Payments on revolving line of credit	(17,492,127		)	(14,115,393		)
Net borrowings (reductions) on revolving line of credit							3,350,390			(642,999		)
Principal payments on long-term debt							(128,316		)	(128,318		)
Payments on capital lease obligations							(11,979		)	—
Exercise of stock options	90,215						90,215			—
Net cash provided by (used in) financing activities	1,832,949			(2,691,674		)	3,300,310			(771,317		)

Net (decrease) increase in cash and cash equivalents	(277,510		)	13,615
Net (decrease) in cash and cash equivalents							(328,741		)	(119,147		)

Cash and cash equivalents, beginning of period	402,918			174,567			402,918			174,567
Cash and cash equivalents, end of period	$	125,408		$	188,182		$	74,177		$	55,420

Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amount capitalized of $0 in 2008 and $114,814 in 2007	$	179,779		$	31,233
Cash paid during the period for interest, net of $161,772 capitalized in 2007							$	268,919		$	54,234
Cash paid during the period for income taxes	$	15,958		$	23,679		$	55,208		$	26,159
Capital lease obligations incurred							$	456,520		$	—

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

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

~~April 30,~~July 31, 2008

(Unaudited)

1. BASIS OF PRESENTATION:

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

The Company prepared the accompanying unaudited consolidated financial statements 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~~reasonably insure the information ~~presented~~is not misleading. ~~It is suggested~~Management suggests 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 7, 2008. 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.

Segment Information

The Company has three reportable segments: services, commercial system sales, and lodging system sales. 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 are 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 on gross margins. Assets are not allocated to the segments. Sales 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, 2008 and 2007.

	Services Revenues			Commercial Systems Sales			Lodging Systems Sales			Other Revenue			Total			Services Revenues			Commercial Systems Sales			Lodging Systems Sales			Other Revenue			Total
2008
Sales	$	10,134,470		$	8,775,074		$	1,496,687		$	405,592		$	20,811,823		$	12,028,241		$	8,366,333		$	2,296,234		$	512,724		$	23,203,532
Cost of sales	(7,600,057		)	(6,483,890		)	(1,057,670		)	(483,972		)	(15,625,589		)	(8,373,080		)	(6,161,782		)	(1,684,502		)	(781,806		)	(17,001,170		)
Gross profit	$	2,534,413		$	2,291,184		$	439,017		$	(78,380	)	$	5,186,234		$	3,655,161		$	2,204,551		$	611,732		$	(269,082	)	$	6,202,362

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

Table of Contents

The following is a tabulation of business segment information for the ~~six~~nine months ended ~~April 30,~~July 31, 2008 and 2007.

	Services Revenues			Commercial Systems Sales			Lodging Systems Sales			Other Revenue			Total			Services Revenues			Commercial Systems Sales			Lodging Systems Sales			Other Revenue			Total
2008
Sales	$	19,859,412		$	14,805,009		$	3,180,911		$	916,226		$	38,761,558		$	31,887,653		$	23,171,342		$	5,477,145		$	1,428,950		$	61,965,090
Cost of sales	(14,730,981		)	(11,085,549		)	(2,242,833		)	(925,351		)	(28,984,714		)	(23,104,061		)	(17,247,331		)	(3,927,335		)	(1,707,157		)	(45,985,884		)
Gross profit	$	5,128,431		$	3,719,460		$	938,078		$	(9,125	)	$	9,776,844		$	8,783,592		$	5,924,011		$	1,549,810		$	(278,207	)	$	15,979,206

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

Stock-Based Compensation Plans

The Company accounts for stock-based compensation in accordance with 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. Compensation expense was recognized in the ~~statement~~statements of operations as follows:

2008

2007

Three months ended April 30,

$
62,045

$
23,935

Six months ended April 30,

$
116,561

$
47,869

	2008		2007
Three months ended July 31,	$	65,221	$	30,685

Nine months ended July 31,	$	181,782	$	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.

New Accounting Pronouncements

In June 2006, the ~~FASB~~Financial Accounting Standards Board (“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. The Company adopted this interpretation on November 1, 2007 and there was no impact to the Company’s financial statements.

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,

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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 December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” ~~(SFAS~~(“SFAS No. 141(R)”). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs are recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. The adoption of SFAS No. 141(R) will change

the accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2010.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” ~~(SFAS~~(“SFAS No. ~~160)~~160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. SFAS No. 160 is effective for us on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal year 2010. As of ~~January~~July 31, 2008, the Company did not have any minority interests, therefore the adoption of SFAS No. 160 is not expected to have an impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133” (“SFAS 161”). This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The Company is required to adopt SFAS No. 161 on or before November 1, 2009. The Company currently does not participate in any derivative instruments or hedging activities as defined under SFAS 133 and therefore it is unlikely that the adoption of SFAS No. 161 will have any impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position on Financial Accounting Standard No. 142-3, “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007) “Business Combinations” and other U.S. generally accepted accounting principles. The Company will adopt this FSP in the first quarter of fiscal 2010 and will apply the guidance prospectively to intangible assets acquired after adoption.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS No.162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.

2. ACCOUNTS RECEIVABLE:

April 30,
2008

(Audited)
October 31,
2007

Trade receivables

$
19,409,504

$
16,411,981

Less reserve for doubtful accounts

(151,601
)
(175,844
)
Net trade receivables

$
19,257,903

$
16,236,137

Accounts receivable consists of the following:

	July 31, 2008			(Audited) October 31, 2007

Trade receivables	$	23,597,028		$	16,411,981
Less reserve for doubtful accounts	(154,393		)	(175,844		)
Net trade receivables	$	23,442,635		$	16,236,137

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3. INVENTORIES:

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

April 30,
2008

(Audited)
October 31,
2007

Finished goods and spare parts

$
5,735,434

$
5,068,227

Less- reserve for excess and obsolete inventories

(864,193
)
(771,653
)
Total inventories, net

$
4,871,241

$
4,296,574

	July 31, 2008			(Audited) October 31, 2007

Finished goods and spare parts	$	6,709,559		$	5,068,227
Less- reserve for excess and obsolete inventories	(869,907		)	(771,653		)
Total inventories, net	$	5,839,652		$	4,296,574

4. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

								Estimated Useful Lives	July 31, 2008			(Audited) October 31, 2007
	Estimated Useful Lives	April 30, 2008			(Audited) October 31, 2007
Building and building improvements	3-20	$	2,905,362		$	2,686,753		3-20	$	2,927,261		$	2,686,753
Data processing and computer field equipment	2-7	2,646,692			2,556,878			2-7	3,169,779			2,556,878
Software development costs, work-in-process	N/A	2,441,832			3,792,567			N/A	2,291,619			3,792,567
Software development costs of components placed into service	3-10	6,057,508			4,355,953			3-10	6,275,087			4,355,953
Hardware	3-5	612,902			599,751			3-5	605,876			599,751
Land	—	611,582			611,582			—	611,582			611,582
Office furniture	5-7	944,048			947,094			5-7	944,048			947,094
Auto	5	528,793			539,184			5	516,185			539,184
Other	3-7	265,683			239,533			3-7	239,533			239,533

Total property, plant and equipment		17,014,402			16,329,295				17,580,970			16,329,295
Less- accumulated depreciation		(6,424,536		)	(5,718,475		)		(6,844,228		)	(5,718,475		)

Total property, plant and equipment, net		$	10,589,866		$	10,610,820			$	10,736,742		$	10,610,820

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 ~~$0 and $114,814~~$161,772 in interest costs in the ~~six~~nine months ended ~~April 30, 2008 and 2007, respectively.~~July 31, 2007.

5. INCOME TAXES:

The Company has recorded a tax provision of ~~$489,000~~$869,000 or 39% and ~~$260,000~~$504,000 or ~~41%~~40% for the ~~six~~nine months ended ~~April 30,~~July 31, 2008 and 2007, respectively, reflecting the statutory federal tax rate of 34% plus a blended state income tax rate of approximately 5% and the impact of minimum income tax payments in certain states. The Company currently estimates its annual effective income tax rate ~~to be~~for fiscal 2008 at approximately 40% ~~for fiscal 2008.~~.

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6. CREDIT AGREEMENTS:

The Company’s credit facility consists of a revolving line of credit and term loan ~~agreement~~ with a commercial ~~bank including~~bank. The agreement includes a mortgage ~~agreement maturing~~that matures on September 30, 2009 ~~and amortizing~~with amortization based on a 13-year life, and a $7.5 million revolving line of credit agreement to finance ~~growth in~~ working ~~capital.~~capital needs. Trade accounts receivable and inventories collateralize the revolving line of ~~credit at April 30, 2008 and October 31, 2007.~~credit. The Company had approximately ~~$4.587~~$6.109 million and $2.759 million, respectively, outstanding on the revolving line of credit. The Company had approximately ~~$2.9~~$1.4 million available under the revolving line of credit at ~~April 30,~~July 31, 2008. 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 ~~23, 2008.~~30, 2009. Long-term debt consisted of the following:

					July 31, 2008		(Audited) October 31, 2007
	April 30, 2008		(Audited) October 31, 2007
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	$	1,440,109	$	1,525,653	$	1,397,337	$	1,525,653

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

Total long-term debt, less current maturities	$	1,268,986	$	1,354,530	$	1,226,214	$	1,354,530

Interest on all outstanding debt under the credit facility accrues at either a) the London Interbank Offered Rate ~~(2.80%~~(2.461% at ~~April 30,~~July 31, 2008) plus 1.25% to 2.75% depending on the Company’s funded debt to cash flow ratio, or b) the bank’s prime rate (5.0% at ~~April 30,~~July 31, 2008) minus 0% to minus 1.125% also depending on the Company’s funded debt to cash flow ratio. At ~~April 30,~~July 31, 2008, the Company was paying ~~3.875%~~4.125% on the revolving line of credit borrowings and ~~4.2%~~4.211% on the ~~mortgage note.~~mortgage. 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.

7. EARNINGS PER SHARE:

The Company computes basic earnings per common share by dividing net income by the weighted average number of shares of common stock outstanding during the reporting periods. Dividing net income by the weighted average number of shares of common stock and dilutive potential common stock outstanding during the reporting periods computes diluted earnings per common share. 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, 2008					For the Three Months Ended July 31, 2008
	Income (Numerator)		Shares (Denominator)	Per Share Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	371,021	10,254,310	$	0.04	$	590,840	10,254,310	$	0.06
Dilutive effect of stock options			8,987					—

Diluted EPS
Net income	$	371,021	10,263,297	$	0.04	$	590,840	10,254,310	$	0.06

For the Three Months Ended April 30, 2007

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Basic EPS

Net income

$
208,170

10,214,741

$
0.02

Dilutive effect of stock options

—

Diluted EPS

Net income

$
208,170

10,214,741

$
0.02

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

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

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For the Six Months Ended April 30, 2008

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Basic EPS

Net income

$
760,250

10,231,120

$
0.07

Dilutive effect of stock options

15,152

Diluted EPS

Net income

$
760,250

10,246,272

$
0.07

	For the Six Months Ended April 30, 2007					For the Nine Months Ended July 31, 2008
	Income (Numerator)		Shares (Denominator)	Per Share Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	378,280	10,214,741	$	0.04	$	1,351,090	10,241,861	$	0.13
Dilutive effect of stock options			—					4,950

Diluted EPS
Net income	$	378,280	10,214,741	$	0.04	$	1,351,090	10,246,811	$	0.13

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

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

Options to purchase 1,029,500 shares of common stock at an average exercise price of $7.28 and 978,668 shares of common stock at an average exercise price of $7.00 were not included in the computation of diluted earnings per share for the three months ended July 31, 2008 and 2007, respectively, because inclusion of these options would be antidilutive. Options to purchase 844,900 shares of common stock at an average exercise price of $8.08 and ~~1,103,668~~1,068,668 shares of common stock at an average exercise price of ~~$7.17~~$6.69 were not included in the computation of diluted earnings per share for the ~~three~~nine months ended April 30, 2008 and 2007, respectively, because inclusion of these options would be antidilutive. Options to purchase 828,636 shares of common stock at an average exercise price of $8.16 and 1,103,668 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 six months ended April 30,July 31, 2008 and 2007, respectively, because inclusion of these options would be antidilutive.

8. CAPITAL LEASES:

During 2008, the Company leased software licenses under an agreement that is classified as a capital lease. The book value of the licenses is included in the balance sheet as property, plant, and equipment and was $443,839 at July 31, 2008. Accumulated amortization of the leased equipment at July 31, 2008 was $12,681. Amortization of assets under the capital lease is included in depreciation expense. The future minimum lease payments required under the capital lease and the present value of the net minimum lease payments as of July 31, 2008, are as follows:

	Capital Lease Payments

1 Year	$	161,435
2 Years	161,435
3 Years	147,982
Total minimum lease payments	470,852
Less- imputed interest	26,311
Present value of minimum payments	444,541
Less-current maturities of capital lease obligation	146,798
Long-term capital lease obligation	$	297,743

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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 about future events, performance and results. Such statements are not guarantees of performance, but rather reflect our current expectations, estimates, and forecasts about the industry and markets where we ~~operate, based on information available to us.~~operate. Forward-looking statements ~~can~~ generally ~~be identified by~~include 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 that are difficult to predict or are beyond our control, such as customer demand for advanced communications products; an uncertain, U.S. economy capital spending trends within our market; ~~delays in installation schedules for the Miami-Dade County Public School District orders;~~ our ability to successfully develop the Mitel product and services offering; the financial condition of our suppliers and changes in their distribution strategies and support; technological changes; fluctuating margins and product mix; failure to expand our wholesale service relationships; the ability to attract and retain highly skilled personnel and technical competencies; and 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, 2007 (filed with the Commission on January 7, 2008), and in updates to such risk factors set forth in Item 1A of Part II of this quarterly report and our quarterly ~~report~~reports for the first and second quarter of fiscal ~~2007.~~2008. Because of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, we caution investors 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.

In fiscal 2008, we have continued to focus on three primary strategies: acquire, penetrate, and retain targeted customers; expand our wholesale service offerings; and improve organizational alignment with our major business partners.

Our sales efforts target large, multi-location, national, or super-regional customers. Our national technical footprint and 24/7/365 contact center are complimentary to the communication needs of these customers. Additionally, these larger enterprises often have a mixture of manufacturer platforms within their communications equipment portfolio and our ability to sell and service both the Avaya and Nortel product lines is an important competitive advantage. Because of our extensive array of products and services, we enjoy multiple sales opportunities with these customers, including new product sales, implementation of advanced applications, and a variety of potential service relationships. Once we establish a relationship with a customer, we search for opportunities to penetrate deeper into the account by assessing the customer’s communications needs, proposing appropriate technologies, establishing or expanding the service relationship, and proposing equipment and service solutions to other divisions or subsidiaries.

We launched our wholesale service offering in fiscal 2006 and its success has been a key ~~factor in~~contributor to our growth in recurring revenue. Under this service offering, we ~~partner~~collaborate with manufacturers, network service providers and systems integrators to provide services to their end-user customers. In many instances, we provide field resources to carry out service responsibilities. However, under a full outsourcing arrangement we may provide a broader range of services, including call center support, remote technical support, on-site labor and spare parts. Our entry into the wholesale services market has succeeded because ~~we provide~~of excellent service to end-user customers and our willingness to create and execute flexible service programs and billing arrangements. The continued success of this strategic initiative is a vital ingredient to our long-term goal of shifting our revenue mix toward more recurring services revenues.

Finally, we strive to align our Company’s sales, marketing, and services programs with those of our manufacturing partners. Avaya and Nortel approach the communications technology market differently and therefore we have assigned separate executive sales management to each manufacturer’s products and services. Our Avaya sales and marketing efforts focus on partnering with ~~the Avaya~~Avaya’s national sales force to

sell equipment to large and medium sized enterprises and to sell Avaya implementation and post-warranty

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maintenance contracts. Our Nortel initiatives focus on creating relationships with Nortel’s regional sales management to sell equipment and applications. In addition, we work to deepen our relationships with key Nortel services decision makers to create wholesale service offerings for large Nortel end-users. Since starting this initiative in late fiscal 2006, we have improved our relationships and penetration with both Nortel and Avaya, resulting in a demonstrable increase in equipment and services revenues.

~~Effective November 1, 2007,~~In early fiscal 2008 we ~~completed~~became a dealer for Mitel, selling their communications systems primarily to smaller properties in the ~~acquisition~~hospitality market thereby opening up a new segment of the ~~commercial division of HCI Technologies, Inc. (“HCI”). Under~~market for us. Additionally, the ~~terms of the acquisition, we assumed the service responsibilities~~Mitel product line provides us an opportunity to serve certain hotel chains and the associated revenue stream of all of HCI’s non-Federal government customers. No cash was paid at closing; however, in exchange for the assets and customer relationships purchased, we agreed to pay HCI a portion of the gross profits earned from the service relationships in place at closing. These payments continue on a quarterly basis for three years from the effective date. Before the acquisition, we occasionally engaged HCI as a third-party contractor to provide technical services to our customers. At closing, HCI owed us $43,000 in accounts receivable plus accrued interest of $6,800, which under the terms of the acquisition, was deducted from the earn-out payments. Wemanagement companies who have ~~recorded the assets acquired, including an intangible asset related to the value of the customer relationships, at their fair values~~standardized on the ~~date of acquisition. We have also recorded an initial estimate of the ultimate earn-out liability. The assets acquired in this transaction were not material to our financial statements.~~Mitel platform.

Operating Summary.

In the ~~second~~third quarter of fiscal 2008 we earned net income of ~~$371,000~~$591,000 on revenues of ~~$20.8~~$23.2 million compared to net income of ~~$208,000~~$377,000 on revenues of ~~$16.7~~$18.2 million in the ~~second~~third fiscal quarter of last year. For the first ~~six~~nine months of fiscal 2008, we earned ~~$760,000~~$1.351 million in net income on revenues of ~~$38.8~~$61.9 million compared to net income of ~~$378,000~~$755,000 on revenues of ~~$32.7~~$51.0 million. These results reflect ~~our~~the successful execution of ~~the~~our strategies discussed above and other contributing factors such as our large equipment and implementation project with the Miami Dade County Public School system (“M-DCPS”) system all of which are discussed in more detail under “Results of Operations” below.

Financial Position Summary.

~~Our financial condition was relatively unchanged during the first half of fiscal 2008 as compared to~~Since October 31, ~~2007. Our~~2007, our working capital increased approximately ~~10% during~~24%. This is due in part to the ~~first half of fiscal 2008 since October 31, 2007; however~~receivables associated with the M-DCPS project that have grown rapidly due to the complex procedures required to collect the funds from both the school district and the Federal agency that administers the project funding . The growth in ~~our~~these receivables ~~and inventory balances~~has resulted in increased borrowings on our working capital revolver in ~~the first six months of~~ fiscal 2008. We discuss these and other financial items 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 ended ~~April 30,~~July 31, 2008 and 2007 and should be considered in conjunction with our above comments as well as the “Risk Factors” section below.

Financial Condition

Cash used by operations for the ~~six~~nine months ended ~~April 30,~~July 31, 2008 was ~~$1.40~~$2.8 million. ~~Increases~~As stated above, the complex and lengthy procedures required to collect funds on the M-DCPS project has resulted in higher than expected growth in accounts receivable and ~~inventories as well as capital expenditures were partially offset~~increased short-term borrowing on our revolving credit facility. The M-DCPS project is jointly funded by ~~net income~~the school district and ~~non-cash charges resulting in~~ the ~~cash deficit in~~Federal Government. Generally, the first half of fiscal 2008. For the six months ended April 30, 2008, our accounts receivable balances increased by approximately $3.0 million. This change reflects strong revenue growth in the last monthschool district pays ten percent (10%) of the ~~second quarter~~project plus amounts for certain equipment and ~~temporary declines in~~services not covered by the ~~pace of completion~~program and ~~billing of complex equipment projects, in particular our large project with~~ the ~~Miami-Dade County Public Schools (“M-DCPS”~~federal government pays approximately ninety percent (90%)~~. We expect the M-DCPS project to yield over $10 million in revenues during fiscal 2008. Installation~~ of the ~~M-DCPS systems commenced~~qualifying expenditures. Under the rules of the program, the Universal Service Administration Company which is the agency tasked with administering this program, cannot release funding until they receive proof of payment from the school district. These requirements have extended the collection period on these projects beyond our original expectations. The collection of these accounts is not in question and we are regularly receiving payments on projects, however we do not expect collection of all the proceeds until well into the first quarter of the year and we have received payment only on the initial month of installations. Additional payments have been delayed due to complexities in configuring the invoices to meet M-DCPS and Federal government requirements. The billing and collection of these projects is a complicated process with funding from both M-DCPS and the Federal government. While the collectability of these receivables is not in question, the previously mentioned complexities have affected our first half cash flows.fiscal 2009.

In addition to the cash used by operations, we invested approximately ~~$719,000~~$842,000 in capital projects, including ~~$355,000~~$417,000 in equipment and fixtures, as part of our normal replacement and refurbishment cycles.

Additionally, we invested ~~$364,000~~$424,000 in the continued implementation of Oracle’s eBusiness Suite. Early in the second fiscal quarter of fiscal 2008, we completed the cutover of the last major functional module to the Oracle platform. During the remainder of fiscal 2008, we expect to implement additional features, including sales management, customer relationship management and an online service ticket ~~initiation~~creation and tracking system.

At ~~April 30,~~July 31, 2008 our total borrowings were ~~$6.0~~$7.5 million, consisting of a mortgage on our headquarters building of $1.4 million and ~~$4.6~~$6.1 million due on our revolving line of credit. At ~~April 30,~~July 31, 2008 there was ~~$2.9~~$1.4 million

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available under the revolver to meet working capital needs. We believe that the current amount of working capital available under our revolving line of credit is sufficient to meet our needs for the remainder of fiscal 2008. In addition, we believe that should the need arise, we could arrange supplemental short-term financing under acceptable terms and prices.

The table below presents our contractual obligations at ~~April 30,~~July 31, 2008 as well as payment obligations over the next five years:

											Payments due by period
			Payments due by period						Total		Less than 1 year		2 – 3 Years		4 – 5 Years
Contractual Obligations	Total		Less than 1 year		2 - 3 Years		4 - 5 Years
Long-term debt	$	1,519,029	$	228,328	$	1,290,701	$	—	$	1,461,453	$	226,680	$	1,234,773	$	—
Capital lease									470,852		161,435		309,417		—
Operating leases	598,593		310,469		284,822		3,302		541,650		299,110		241,580		960
Total	$	2,117,622	$	538,797	$	1,575,523	$	3,302	$	2,473,955	$	687,225	$	1,785,770	$	960

Results of Operations

In the ~~second~~third quarter of fiscal 2008 our revenues increased ~~$4.1~~$5.0 million or ~~25%~~27% compared to the ~~second~~third quarter last year, and our net income increased ~~$163,000~~$214,000 or ~~78%~~57%. In the first ~~six~~nine months of the year, our revenues increased $6$11.0 million or ~~18% resulting in an increase in~~22% and our earnings ~~of $382,000~~increased $596,000 or ~~101%~~79%. These ~~positive~~ results primarily reflect ~~improvements~~increased revenues in all of our major revenue categories ~~partially offset by lower gross profit~~coupled with higher margins on ~~services revenues and higher operating costs.~~sales of equipment. The narrative below provides further explanation of these results.

Services Revenues.

Our services revenues increased $2.6 million or 27% in the third quarter and $4.9 million or 18% for the year-to-date periods compared to the same periods last year. Services revenues consist of the following:

	For the Three Months Ended April 30,				For the Six Months Ended April 30,				For the Three Months Ended July 31,				For the Nine Months Ended July 31,
	2008		2007		2008		2007		2008		2007		2008		2007
Contract & T&M	$	7,028,000	$	6,309,000	$	14,236,000	$	12,314,000	$	7,202,000	$	6,745,000	$	21,438,000	$	19,059,000
Implementation	2,344,000		1,781,000		4,386,000		3,913,000		3,864,000		2,075,000		8,250,000		5,988,000
Cabling	762,000		702,000		1,237,000		1,342,000		962,000		644,000		2,199,000		1,986,000
Total Services revenues	$	10,134,000	$	8,792,000	$	19,859,000	$	17,569,000	$	12,028,000	$	9,464,000	$	31,887,000	$	27,033,000

Contract and ~~time and materials (“T&M”)~~time-and-materials (T&M) revenues increased ~~11%~~7% and ~~16%,~~ 12%respectively in the ~~second~~third quarter and year-to-date periods. These ~~increases~~growth rates reflect ~~additions to~~slowing growth in our base of commercial contract revenues, weak demand for T&M services throughout fiscal 2008, and the relative stability of our lodging maintenance contract base, which represents approximately 50% of our total Contract and T&M revenues. As discussed above, one of our primary strategies is to grow our commercial maintenance revenues to improve our profit margins and the predictability of our results. We are pleased with the continued growth of this part of our business, even though the rate of growth in commercial contract revenues has decreased during fiscal 2008 due to fewer additions of new customer programs. Under most of our large commercial maintenance contracts, our customer is a network service provider, manufacturer, or a technology integrator who has the direct contractual relationship with the end-user of the equipment. These customers contract with end-users who are often large, national enterprises to provide a range of services which include servicing the communications equipment and ancillary technology. Competition is fierce for the opportunity to contract with these large end-users and a range of service delivery issues must be addressed. This process can take months as details are debated and negotiated. Once the end user selects their service provider, the contracting process is often prolonged as well. Finally, the transition of services to a new provider is often stretched out over several months to minimize the impact to the end-user. Our involvement in this process varies from full participation with our customer in the ~~last half~~sales process to being transparent to the end user. Regardless of ~~fiscal 2007~~our role in the sales process, our ability to impact the pace of decisions and the ~~addition~~pace of ~~HCI contracts~~contract negotiations is usually minimal. Because of these reasons and ~~T&M relationships beginning~~the fact that there a only few large opportunities available at any given time, the timing our acquisition of new revenues in ~~November 2007.~~this area is unpredictable. Through the first ~~half~~nine months of fiscal 2008, ~~organic additions~~we are encouraged by the number and size of

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new ~~contract maintenance or contracted~~service program opportunities. and we are confident that we will eventually incorporate many of these opportunities into our service revenue base.

Throughout fiscal 2008, we have experienced a decline in T&M ~~customers~~revenues. We believe this decline is largely due to ~~our base~~macro economic conditions that have ~~been modest. However, as discussed above under “Strategy”,~~slowed the ~~pursuit~~growth of ~~contract~~customer workforces and ~~T&M revenues, particularly under our wholesale service program is a key strategic initiative in fiscal 2008 and we continue to expect it to be the primary driver of our services revenue growth.~~ reduced non-essential spending.

Implementation revenues increased ~~32%~~86% and ~~12%~~38%, respectively in the ~~second~~third fiscal quarter and year-to-date periods. These increases are attributable to growth in systems sales and also reflect M-DCPS system implementations. The pace of installations at M-DCPS accelerated toward the end of the second fiscal quarter and continued through most of the third quarter generating record implementation revenues for the third fiscal ~~2008. Based on~~quarter.

Cabling revenues increased 49% and 11%, respectively in the ~~customer’s current schedule, installations are expected to continue at a considerable pace through the first half of our~~ third fiscal quarter ~~followed~~and year-to-date periods. This revenue category was also helped by the surge in installations of systems under the M-DCPS contract as a ~~pause during~~large portion of the schools required reconfiguration of their summer school break. we anticipate completing the project during our fourth fiscal quarter. Cabling revenues increased 9% in the second fiscal quarter, but are down approximately 8% in the year-to-date period. We

enjoyed strong cabling revenues from three significant projects during the second quarter as construction delays that hampered first quarter revenues subsided. As a national provider of structured cabling installations, we can secure major stand-alone cabling projects as well as significant turn-key projects where the customer combines the cabling, equipment and professional services.communications wiring.

Systems Sales.

~~Systems sales increased approximately $2.5 million or 32% in~~In the ~~second~~third quarter of fiscal 2008, systems sales increased approximately $2.0 million or 23% compared to the same period last year. This increase includes a ~~$3.3~~$1.8 million or ~~60%~~28% increase in sales of systems to commercial customers and a ~~$787,000~~$161,000 or ~~35% decrease~~8% increase in sales of systems to lodging customers. Year-to-date systems sales increased ~~$3.2~~$5.2 million or 22% compared to last year. This ~~increase~~ includes an increase in sales of systems to commercial customers of ~~$4.1~~$5.9 million or ~~38%~~34% and a decrease in sales of systems to lodging customers of ~~$877,000~~$716,000 or ~~22%~~12%. The increase in sales to commercial customers primarily reflects sales of systems to M-DCPS. ~~As previously discussed, shipments~~Shipments and installations for M-DCPS accelerated in the last half of the second fiscal quarter and ~~will remain~~continued strong through most of ~~our~~the third fiscal quarter. We anticipate completion of this project ~~will complete~~ during our fourth fiscal quarter. Orders for systems to commercial customers other than M-DCPS are slightly below last year’s pace. We believe this decline primarily reflects customers extending the sales cycle due ~~the current~~to uncertainty in the U.S. economy.

The quarterly growth in sales of systems to lodging customers reflects our continued success in this niche market and the early success of our new Mitel product offering. The Mitel product line provides us with the opportunity to work with certain hotel chains and property management companies that have standardized on the Mitel product line. The year-to-date decline in sales of systems to lodging customers ~~reflects~~is a difficult ~~comparisons~~comparison to fiscal 2007. Results for fiscal 2007 ~~results which~~ were ~~temporarily impacted~~beneficially influenced by an acceleration of orders from customers ~~who were avoiding~~wanting to avoid a mid-year manufacturer’s price ~~increase from~~increase. Because of strong order rates in the ~~manufacturer. In general,~~third fiscal quarter, our ~~sales of systems to~~year-to-date lodging ~~customers~~equipment orders are ~~slightly less than our expected run-rates, reflecting uncertainties of the economy.~~outpacing last year.

Gross Margins.

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

	For the Three Months Ended April 30,				For the Six Months Ended April 30,				For the Three Months Ended July 31,				For the Nine Months Ended July 31,
Gross Margins	2008		2007		2008		2007		2008		2007		2008		2007
Services revenues	25.0	%	30.4	%	25.8	%	29.1	%	30.4	%	30.7	%	27.5	%	29.6	%
Systems sales	26.6	%	23.6	%	25.9	%	24.0	%	26.4	%	22.8	%	26.1	%	23.6	%
Other revenues	79.1	%	-6.2	%	84.6	%	38.1	%	22.1	%	40.9	%	62.2	%	38.8	%
Corporate cost of goods sold	-1.9	%	-1.8	%	-2.0	%	-2.0	%	-1.7	%	-2.2	%	-1.9	%	-2.1	%
Total	24.9	%	25.2	%	25.2	%	24.9	%	26.7	%	24.8	%	25.8	%	24.9	%

The ~~decline in~~ gross margins earned on ~~our~~ Services business in the second quarter reflects lower than expected profitability in our implementation and cabling businesses and slower than expected growth in our Contract and T&M revenues. Although we have enjoyed strong revenue growth in all three major Services revenue streams, our cost structures to support those revenue streams anticipated higher levels of growth, particularly in our Contract and T&M revenue category. In response to the slower than anticipated growth rate of these revenues we have adjusted personnel levels to mitigate some excess capacity. Specific to our implementation business, we are contractually obligated to maintain a significant level of Company-employed personnel to support the M-DCPS project. Due to customer initiated changes in the implementation schedule, the pace of installations has been inconsistent in the first half of the year and therefore the profitability of the implementation and cabling portions of the project have been lower than our expectations and normal run-rates. We expect improvementreflect mixed results in this area of our business. In the third fiscal quarter, record levels of implementation revenues, slight improvement in T&M revenues, and some adjustments in the ~~third~~Services cost structure combined to produce gross margins above 30%, which is a key metric for this portion of our business. On a year-to-date basis, our Services gross margins are lagging behind last year’s performance and reflect a cost structure based on faster growth. Consequently, we have made adjustments to our cost structure in the fourth fiscal ~~quarters.~~quarter to continue to address this issue and will

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continue to monitor the balance between revenue growth and cost structure to try to maintain our targeted profitability levels for this portion of our business.

Gross margins on systems sales in the ~~second~~third fiscal quarter and the year-to-date period were up over last year and ~~are above~~exceed our target of 23% to 25% for systems revenues. This trend is consistent for ~~both~~system sales ~~of systems~~ to our commercial ~~as well as~~and lodging customers. We continue to receive strong pricing support from our vendors in the form of project-specific discounts and incentive rebates. These incentives are material to our gross margins and we work diligently to maximize this support; however, no assurance can be given that future support will continue at historical levels.

The final component of our gross margins is the margins earned on other revenues and our corporate cost of goods sold. We earn the majority of our other revenues from the sale of Avaya maintenance contracts on which we earn either a commission or gross profit. We have no continuing service obligation associated

with these revenues and gross profits. In the first ~~quarter~~nine months of the year, we enjoyed significantly higher commission revenues from sales of Avaya maintenance contracts. These revenues were material to our overall operating ~~income.~~income in all periods presented. This is an unpredictable revenue stream that depends on the expiration dates of existing contracts, installation dates of new systems, the customer type as defined by Avaya, and the number of years that customers contract for services. Consequently, it is unlikely that we can sustain the results enjoyed in the first ~~half~~three quarters of the fiscal year. Other revenues may also include sales and cost of goods sold on equipment or services outside our normal provisioning processes. These revenues vary in both sales volume and gross margins earned. 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 ~~$658,000~~$1,246,000 or ~~17%~~32% in the ~~second~~third quarter of fiscal 2008 compared to the ~~second~~third quarter of fiscal 2007. Operating expenses were ~~21.7%~~22.1% of revenues in the ~~second~~third quarter compared to ~~23.1%~~21.3% last year. Operating expenses increased ~~$855,000~~$2,101,000 or ~~11%~~18% for the ~~first half of fiscal 2008~~year to date period compared to the same period a year ago. Operating expenses were ~~21.6%~~21.8% of revenues in the first ~~half~~three quarters of fiscal 2008 compared to ~~23.0%~~22.4% for the same period last year. The growth ~~rates~~ in operating expenses in the ~~first half of~~third fiscal ~~2008 are slightly above our targets and reflect a number of factors such as personnel~~quarter reflects several factors:

·Personnel additions ~~in sales and general and administrative areas - increased stock compensation expense; increases in costs associated with maintenance of our~~to exploit new managed services opportunities

·Increased expenditures to support the Oracle ~~software platform; and increases in~~eBusiness platform

·Increased board of director fees ~~due~~ to ~~expansion~~support the addition of independent membership to the board

·Increased non-cash charges related to stock compensation expense for equity grants provided to management and ~~increases in director responsibilities. Additionally, our~~key employees

·Increased amortization ~~expense has increased in the first half of fiscal 2008 from increased utilization~~ of the Oracle platform ~~to support business operations. Finally, year-to-date~~capitalized costs in associated with the expanded implementation

For the year, operating ~~expense comparisons were favorably~~expenses have been impacted by all of the factors listed above. Partially offsetting these increases were improved sales and marketing incentives received from ~~vendors~~manufacturers in the first fiscal quarter. The incentives we receive from ~~vendors~~manufacturers to support the sales and marketing of their products come in the form of payments for growth in sales of their products, reimbursement for ~~specific,~~certain, pre-approved marketing programs, and additions to ~~sales~~sales-related headcount. The amount of these funds was higher than normal in the first quarter due to special growth incentives offered by one of ~~the manufacturers that we represent.~~our manufacturers. These funds returned to normal levels in the second ~~quarter. Overall, we are pleased with~~and third quarters. Our expenditures to promote our managed services business and to support the ~~direction and progress made~~Oracle platform have exceeded our projection to date in ~~reducing our~~fiscal 2008. We believe, however that operating expenses ~~as a percentage of revenues. We anticipate our operating expense margins~~ will ~~decline~~diminish to ~~between~~ 18% ~~and~~to 20% of revenues over the next two to four years ~~through~~as we realize economies of ~~scale and improved operating efficiencies.~~scale.

Interest Expense and Other Income.

Net interest and other expense was ~~$59,000~~$96,000 in the ~~second~~third quarter of fiscal 2008 compared to ~~$9,000~~$20,000 in net other ~~income~~expense in the ~~second~~third quarter of fiscal 2007. Net interest and other expense was ~~$144,000~~$240,000 for the ~~six-month~~nine-month period ended ~~April 30,~~July 31, 2008 compared to ~~$16,000~~$4,000 in net other ~~income~~expense in the same period last year. This increase in expense reflects the discontinuation of capitalizing interest expense related to the implementation of the Company’s Oracle platform and higher than average borrowings in the periods presented.

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Tax Provision.

We recorded a combined ~~federal~~Federal and state tax provision of 39% for both the ~~second~~third quarter of fiscal 2008 ~~compared to a tax provision of 40% in the second quarter of~~and fiscal 2007. For the ~~six-month~~nine-month period ended ~~April 30,~~July 31, 2008, we recorded a tax provision of 39% compared to a tax provision of ~~41%~~40% for the first ~~six~~nine months of fiscal 2007. The tax provision reflects the effective ~~federal~~Federal tax rate plus the composite state income tax rates adjusted for states that require minimum tax 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~~Changes in interest rates represents the primary market risk relating to our ~~operations results primarily from changes in interest rates.~~operating results. We did not use derivative financial instruments for speculative or trading purposes during the ~~three month~~three-month period ended ~~April 30,~~July 31, 2008.

Interest Rate Risk. Due to utilization of variable interest rate debt, we are subject to the risk of fluctuation in interest rates in the normal course of business. Our credit facility bears interest at a floating rate at either the London Interbank Offered Rate ~~(2.8%~~(2.461% at ~~April 30,~~July 31, 2008) plus 1.25% to 2.75% or the bank’s prime rate (5.0% at ~~April 30,~~July 31, 2008) 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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Based on an evaluation conducted as of ~~April 30,~~July 31, 2008 by our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are effective to reasonably ensure that information required to be disclosed in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls. There were no changes in our internal controls or in other factors that could materially affect, or is reasonably likely to materially affect, these controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On or about April 8, 2008, Design Business Communications, Inc., d/b/a/ American Telephone (“AMTEL”) filed a claim with the American Arbitration Association against the Company and Hitachi Telecom (USA) Inc. (“HITEL”) alleging a breach of AMTEL’s Authorized Distributorship Agreement with HITEL (the “Distributor Agreement”). The Company is involved in this matter by virtue of the fact that in 2006, the Company acquired HITEL’s PBX business and agreed to fulfill HITEL’s surviving service obligations to its authorized distributors under their distributor agreements with HITEL. The AMTEL Distributor Agreement provides that AMTEL may order and the Company shall provide “spare parts, software and third level technical support as required for the maintenance of HITEL PRODUCT for a period of ten years from the ship date of the HITEL PRODUCT.” In April 2007, AMTEL placed an order with the Company under the Distributor Agreement for 48 new telephones totaling approximately $12,200; however, this product had previously been discontinued by HITEL. Because this order has not been fulfilled, AMTEL claims that the Company is in breach of the Distributor Agreement and that as a result, AMTEL has suffered damages in the amount of $5 million (for loss of service and spare part revenues; loss of business reputation; loss of customers; and possible claims by AMTEL customers for breach of its service

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obligations and sales and service warranties). While HITEL is also contesting AMTEL’s claim, it has notified the Company that it will seek indemnity against the Company under the terms of the 2006 purchase and sale agreement between HITEL and the Company. The Company has ~~filed~~offered to assume the defense of HITEL in this matter under a ~~response~~reservation of rights; however HITEL has refused this offer. The Company is vigorously contesting this matter and, along with HITEL, may seek a stay of the arbitration pending discussions among the parties concerning a possible resolution to AMTEL’s claims. If the arbitration ~~claim and intends~~proceeds as scheduled, the Company expects the arbitration to ~~vigorously contest this matter.~~be completed during the first quarter of fiscal 2009.

In addition to the foregoing, we are involved as a defendant in an employment related matter and as a plaintiff in another matter, both of which we consider to be routine and incidental to the operation of our business. We do not believe that either of these proceedings will have a material affect on our financial position or results of operations.

ITEM 1A. RISK FACTORS.

The information presented below is an update to the “Risk Factors” included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2007 and should be read in conjunction therewith. Except as set forth below, the Risk Factors included in the Company’s Form 10-K for its 2007 fiscal year have not materially changed.

Avaya’s strategies regarding the provision of services to its customers are changing dramatically and may have a material impact on our operating results.

Avaya is repositioning itself as a hardware and software vendor providing a wide range of voice communications hardware and applications to its customers. As part of this strategy, Avaya is segmenting

its hardware maintenance and software support. The new software support offerings include technical support for specific voice applications and upgrade services to ensure customers can access all software patches and upgrades. Currently, we earn revenues from some of our customers, particularly lodging customers, to provide the products and services now being included by Avaya in its new software support offerings. These changes could have a material, negative impact on our operating results if our revenues or margins are reduced in response to these mandated changes by Avaya.

If in connection with the series of orders from the Miami-Dade County Public School system (“MDCPS”), we incur delays in our anticipated installation schedule, significant installation challenges, product performance issues, weather-related catastrophes and/or delays in the collection of amounts due, our expected revenues, gross profits, and cash flows in fiscal 2008 from the sale of equipment and installation services to MDCPS could be materially different than expected

In November, 2007, we announced the award of a series of orders from M-DCPS totaling in excess of $10 million to provide and install communications equipment. Over the course of the project we have experienced delays in the installation schedule due to circumstances beyond our control as the customer has substantially altered the installation schedule to accommodate their operational and financial requirements. These changes have compacted the bulk of the installations into a relatively short period of time, thus reducing our ability to maximize the utilization of our staff dedicated to the project. Additional risks associated with this project include delays or a halt in installations due to other factors including catastrophic weather conditions such as hurricanes, which are prone to the Miami area. Additionally, while not experienced to date, installation challenges or product performance issues could occur resulting in delays in the recognition of revenues or erosion of gross profits from these orders. Lastly, we have experienced delays in successfully billing and collecting the amounts due on the initial installations. These delays have increased our short-term borrowings and negatively affected our operating results. We are working through these processing details and expect improved cash flows on this project for the balance of the year. However, if billing and collection difficulties persist, it would create additional interest expense and consume borrowing capacity under our revolving line of credit.

If economic conditions in the U.S. continue be uncertain or deteriorate further, our revenues, gross margins and net income could be negatively impacted.

In the first ~~half~~nine months of fiscal ~~2007,~~2008, we have seen a decline in order rates for new equipment and for some discretionary (i.e. T&M) services that we offer. We believe that ~~at least a portion of~~ these declines isare largely due to uncertainty about the condition and near-term future of the U.S. economy. These uncertainties have caused some customers to delay capital ~~spending decisions.~~spending. Should these uncertainties persist or worsen, it is likely that our business would continue to ~~feel its~~experience the effects.

Our long-term targeted levels of profitability may not be achievable.

In fiscal 2007, we set targets for our net profit margins, measured as net income divided by revenues, to be 4% to 6% within three to five years. These targets reflected more detailed key financial goals such as consistently earning gross margins on Services revenues in the 30% to 35% range, earning gross margins on total revenues at more than 30%, and lowering operating expenses to less than 20% of revenues. We believe that economies of scale in our business, particularly in our Services, Sales, Accounting and Administrative functions, will be the key driver toward meeting these financial targets. To date in fiscal 2008, we have experienced revenue growth of 22%; however we have not realized significant improvements in Services gross margins or in operating expenses when measured as a percent of revenues. While we continue to believe that our profitability targets will ultimately be achieved as we continue to expand our revenue base, we have yet to prove this operating model through actual results.

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

None.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

~~On April 8, 2008, at our Annual Meeting of Shareholders, the following directors were elected to the Board of Directors. Votes cast for each nominee were as follows:~~None.

Nominee

For

Against

Abstain

Donald T. Duke

8,813,813

690,986

203,310

Greg D. Forrest

9,614,985

84,369

8,755

Ron B. Barber

8,244,689

851,665

611,755

S. Lee Crawley

8,818,070

380,746

509,293

Robert D. Hisrich

9,094,360

413,439

200,310

Edward F. Keller

9,135,656

371,143

201,310

Ronald L. Siegenthaler

9,032,138

667,570

8,401

~~The shareholders also voted at the Annual Meeting to ratify the selection of Tullius Taylor Sartain & Sartain LLP as our independent auditors for the 2008 fiscal year, with votes cast as follows:~~

For

Against

Withhold
9,290,502

298,844

118,763

ITEM 5. OTHER INFORMATION.

(a) None.

ITEM 6. EXHIBITS.

Exhibits (filed herewith):

SEC Exhibit No.		Description

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.

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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.

		XETA Technologies, Inc.
			(Registrant)

~~Dated: June 3, 2008~~		~~By:~~	~~/s/ Greg D. Forrest~~

Dated: September 10, 2008	By:	/s/ Greg D. Forrest
		Greg D. Forrest
			Chief Executive Officer

Dated: ~~June 3,~~September 10, 2008		By:	~~/s/~~ /s/ Robert B. Wagner
			Robert B. Wagner
			Chief Financial Officer

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EXHIBIT INDEX

SEC Exhibit No.		Description

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.

ASSETS
	April 30, 2008			October 31, 2007
	(Unaudited)

Current assets:
Cash and cash equivalents	$	125,408		$	402,918
Current portion of net investment in sales-type leases and other receivables	716,088			490,033
Trade accounts receivable, net	19,257,903			16,236,137
Inventories, net	4,871,241			4,296,574
Deferred tax asset	627,154			916,259
Prepaid taxes	12,443			19,737
Prepaid expenses and other assets	737,608			517,757
Total current assets	26,347,845			22,879,415

Noncurrent assets:
Goodwill	26,337,305			26,365,093
Intangible assets, net	242,516			104,042
Net investment in sales-type leases, less current portion above	115,210			136,493
Property, plant & equipment, net	10,589,866			10,610,820
Other Assets	25,289			—
Total noncurrent assets	37,310,186			37,216,448

Total assets	$	63,658,031		$	60,095,863

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	171,123		$	171,123
Revolving line of credit	4,586,938			2,758,660
Accounts payable	7,249,989			5,670,240
Current unearned revenue	2,547,260			2,212,247
Accrued liabilities	2,440,107			3,565,031
Total current liabilities	16,995,417			14,377,301

Noncurrent liabilities:
Long-term debt, less current portion above	1,268,986			1,354,530
Accrued long-term liability	144,100			211,300
Noncurrent unearned service revenue	62,597			81,650
Noncurrent deferred tax liability	4,776,708			4,631,917
Total noncurrent liabilities	6,252,391			6,279,397

Contingencies

Shareholders’ equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued	—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,256,193 and 11,233,529 shares issued at April 30, 2008 and October 31, 2007, respectively	11,255			11,233
Paid-in capital	13,362,906			13,189,311
Retained earnings	29,243,530			28,483,280
Less treasury stock, at cost (1,001,883 shares at April 30,2008 and 1,018,788 shares at October 31, 2007)	(2,207,468		)	(2,244,659		)
Total shareholders’ equity	40,410,223			39,439,165
Total liabilities and shareholders’ equity	$	63,658,031		$	60,095,863

	2008		2007
Three months ended April 30,	$	62,045	$	23,935

Six months ended April 30,	$	116,561	$	47,869

Nominee	For	Against	Abstain
Donald T. Duke	8,813,813	690,986	203,310
Greg D. Forrest	9,614,985	84,369	8,755
Ron B. Barber	8,244,689	851,665	611,755
S. Lee Crawley	8,818,070	380,746	509,293
Robert D. Hisrich	9,094,360	413,439	200,310
Edward F. Keller	9,135,656	371,143	201,310
Ronald L. Siegenthaler	9,032,138	667,570	8,401

Oklahoma

73-1130045

1814 W. Tacoma Street, Broken Arrow, OK

74012-1406

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

13

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

17

18

ITEM 4. CONTROLS AND PROCEDURES

18

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

18

ITEM 1A. RISK FACTORS1. LEGAL PROCEEDINGS

18

19

Overview

Financial Condition

Results of Operations