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

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

For the quarterly period ended July 31, ~~2009~~2010

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

~~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)		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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No ox

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 August ~~28, 2009~~23, 2010 there were ~~10,222,861~~10,699,186 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 - July 31, ~~2009~~2010 and October 31, ~~2008~~2009		3

		Consolidated Statements of Operations - For the Three and Nine Months Ended July 31, ~~2009~~2010 and ~~2008~~2009		4

		Consolidated Statement of Shareholders’ Equity - For the Nine Months Ended July 31, ~~2009~~2010		5

		Consolidated Statements of Cash Flows - For the Nine Months Ended July 31, ~~2009~~2010 and ~~2008~~2009		6

		Notes to Consolidated Financial Statements		7

	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS		17	15

	ITEM ~~4T.~~4. CONTROLS AND PROCEDURES		22	19

PART II. OTHER INFORMATION

	ITEM 1. LEGAL PROCEEDINGS		22	19

	ITEM 1A. RISK FACTORS		23	19

	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		24	21

	ITEM 3. DEFAULTS UPON SENIOR SECURITIES		24	21

~~ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~	24

	ITEM 5. OTHER INFORMATION		24	21

	ITEM 6. EXHIBITS		24	21

Table of Contents

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	(UNAUDITED)
	July 31, 2009			October 31, 2008				(UNAUDITED)
								July 31, 2010			October 31, 2009
ASSETS							ASSETS

Current assets:
Cash and cash equivalents	$	2,980,984		$	63,639			$	3,765,276		$	4,731,926
Current portion of net investment in sales-type leases and other receivables	364,502			353,216				1,207,697			470,025
Trade accounts receivable, net	11,382,724			19,995,498				14,540,631			13,832,452
Inventories, net	5,108,844			5,236,565				4,864,340			5,036,198
Deferred tax asset	418,420			588,926				1,325,200			1,136,351
Prepaid taxes	33,374			64,593				65,613			39,784
Prepaid expenses and other assets	1,622,308			1,608,113				2,271,230			2,057,514
Total current assets	21,911,156			27,910,550				28,039,987			27,304,250

Noncurrent assets:
Goodwill	15,845,869			26,825,498				14,303,926			12,031,975
Intangible assets, net	729,855			828,825				1,032,017			570,740
Net investment in sales-type leases, less current portion above	358,976			103,037
Net investment in sales-type leases and other receivables, less current portion above								327,404			335,413
Property, plant & equipment, net	6,997,784			10,722,539				6,655,190			6,825,916
Deferred tax asset	213,548			—				—			739,216
Other assets	—			2,271
Total noncurrent assets	24,146,032			38,482,170				22,318,537			20,503,260

Total assets	$	46,057,188		$	66,392,720			$	50,358,524		$	47,807,510

LIABILITIES AND SHAREHOLDERS’ EQUITY							LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	1,226,248		$	1,354,565			$	—		$	1,183,475
Revolving line of credit	—			2,524,130
Accounts payable	4,001,866			6,691,550				5,997,032			5,785,225
Current portion of obligations under capital lease	152,589			148,225				145,155			154,072
Current unearned service revenue	3,211,064			3,237,296
Current unearned services revenue								4,729,261			5,194,601
Accrued liabilities	3,526,417			4,593,725				3,950,248			3,444,396
Total current liabilities	12,118,184			18,549,491				14,821,696			15,761,769

Noncurrent liabilities:
Accrued long-term liability	144,100			144,100				144,100			144,100
Long-term portion of obligations under capital lease	145,154			260,148				—			106,076
Noncurrent unearned service revenue	55,759			56,393
Noncurrent unearned services revenue								49,215			36,691
Noncurrent deferred tax liability	—			5,545,692				222,417			—
Total noncurrent liabilities	345,013			6,006,333				415,732			286,867

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 issued at July 31, 2009 and October 31, 2008	11,255			11,255
Common stock; $.001 par value; 50,000,000 shares authorized, 11,654,071 issued at July 31, 2010 and 11,256,193 issued at October 31, 2009								11,653			11,255
Paid-in capital	13,636,544			13,493,395				15,623,224			13,704,460
Retained earnings	22,126,202			30,539,714				21,581,086			20,223,169
Less treasury stock, at cost (994,695 shares at July 31, 2009 and 1,001,883 shares at October 31, 2008)	(2,180,010		)	(2,207,468		)
Less treasury stock, at cost (954,885 shares at July 31, 2010 and 993,763 shares at October 31, 2009)								(2,094,867		)	(2,180,010		)
Total shareholders’ equity	33,593,991			41,836,896				35,121,096			31,758,874
Total liabilities and shareholders’ equity	$	46,057,188		$	66,392,720			$	50,358,524		$	47,807,510

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

Table of Contents

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months						For the Nine Months						For the Three Months						For the Nine Months
	Ended July 31,						Ended July 31,						Ended July 31,						Ended July 31,
	2009			2008			2009			2008			2010			2009			2010			2009

Systems sales	$	6,522,569		$	10,662,567		$	22,897,460		$	28,648,487		$	8,536,584		$	6,522,569		$	25,146,279		$	22,897,460
Services	10,524,397			12,028,241			30,359,279			31,887,653			12,166,889			10,524,397			35,661,654			30,359,279
Other revenues	136,271			512,724			263,126			1,428,950			188,300			136,271			325,980			263,126
Net sales and service revenues	17,183,237			23,203,532			53,519,865			61,965,090
Net sales and services revenues													20,891,773			17,183,237			61,133,913			53,519,865

Cost of systems sales	4,639,749			7,846,284			16,791,637			21,174,666			6,021,390			4,639,749			18,270,980			16,791,637
Services costs	7,505,892			8,373,080			21,258,445			23,104,061			8,223,095			7,505,892			24,236,849			21,258,445
Cost of other revenues & corporate COGS	425,480			781,806			1,308,525			1,707,157			434,436			425,480			1,287,991			1,308,525
Total cost of sales and service	12,571,121			17,001,170			39,358,607			45,985,884
Total cost of sales and services													14,678,921			12,571,121			43,795,820			39,358,607

Gross profit	4,612,116			6,202,362			14,161,258			15,979,206			6,212,852			4,612,116			17,338,093			14,161,258

Operating expenses
Selling, general and administrative	4,388,488			4,870,068			12,925,794			12,795,830			5,178,574			4,388,488			14,566,200			12,925,794
Amortization	344,727			265,152			1,001,984			722,563			206,386			344,727			580,471			1,001,984
Impairment of Goodwill & Other Assets	14,000,000			—			14,000,000			—
Impairment of goodwill & other assets													—			14,000,000			—			14,000,000
Total operating expenses	18,733,215			5,135,220			27,927,778			13,518,393			5,384,960			18,733,215			15,146,671			27,927,778

(Loss) income from operations	(14,121,099		)	1,067,142			(13,766,520		)	2,460,813
Income (loss) from operations													827,892			(14,121,099		)	2,191,422			(13,766,520		)

Interest expense	(20,810		)	(96,401		)	(79,211		)	(268,117		)	(4,372		)	(20,810		)	(15,286		)	(79,211		)
Interest and other income (expense)	(1,159		)	99			14,219			27,394			20,254			(1,159		)	58,781			14,219
Total interest and other expense	(21,969		)	(96,302		)	(64,992		)	(240,723		)
Net interest and other income (expense)													15,882			(21,969		)	43,495			(64,992		)

(Loss) income before provision for income taxes	(14,143,068		)	970,840			(13,831,512		)	2,220,090
(Benefit) provision for income taxes	(5,544,000		)	380,000			(5,418,000		)	869,000
Income (loss) before provision for income taxes													843,774			(14,143,068		)	2,234,917			(13,831,512		)
Provision (benefit) for income taxes													331,000			(5,544,000		)	877,000			(5,418,000		)

Net (loss) income	$	(8,599,068	)	$	590,840		$	(8,413,512	)	$	1,351,090
Net income (loss)													$	512,774		$	(8,599,068	)	$	1,357,917		$	(8,413,512	)

(Loss) earnings per share
Earnings (loss) per share
Basic	$	(0.84	)	$	0.06		$	(0.82	)	$	0.13		$	0.05		$	(0.84	)	$	0.13		$	(0.82	)

Diluted	$	(0.84	)	$	0.06		$	(0.82	)	$	0.13		$	0.05		$	(0.84	)	$	0.13		$	(0.82	)

Weighted average shares outstanding	10,223,753			10,254,310			10,223,881			10,241,861			10,533,335			10,223,753			10,328,689			10,223,881

Weighted average equivalent shares	10,223,753			10,254,310			10,223,881			10,246,811			10,611,403			10,223,753			10,386,218			10,223,881

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

Shares Issued

Par Value

Shares

Amount

Paid-in Capital

Retained Earnings

Total

Balance- October 31, 2008

11,256,193

$
11,255

1,001,883

$
(2,207,468
)
$
13,493,395

$
30,539,714

$
41,836,896

Purchase of treasury stock

—

—

31,728

(58,157
)
—

—

(58,157
)
Issuance of restricted common stock from treasury

—

—

(38,916
)
85,615

(85,615
)
—

—

Stock based compensation

—

—

—

—

228,764

—

228,764

Net loss

—

—

—

—

—

(8,413,512
)
(8,413,512
)

Balance- July 31, 2009

11,256,193

$
11,255

994,695

$
(2,180,010
)
$
13,636,544

$
22,126,202

$
33,593,991

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

Balance- October 31, 2009	11,256,193	$	11,255	993,763		$	(2,180,010	)	$	13,704,460		$	20,223,169	$	31,758,874

Issuance of restricted common stock from treasury	—	—		(38,878	)	85,143			(85,143		)	—		—
Issuance of common stock	397,878	398		—		—			1,499,602			—		1,500,000
Issuance of warrants	—	—		—		—			279,000			—		279,000
Stock-based compensation	—	—		—		—			225,305			—		225,305

Net income	—	—		—		—			—			1,357,917		1,357,917

Balance- July 31, 2010	11,654,071	$	11,653	954,885		$	(2,094,867	)	$	15,623,224		$	21,581,086	$	35,121,096

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

Table of Contents

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months						For the Nine Months
	Ended July 31,						Ended July 31,
	2009			2008			2010			2009
Cash flows from operating activities:
Net (loss) income	$	(8,413,512	)	$	1,351,090
Net income (loss)							$	1,357,917		$	(8,413,512	)

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	722,945			528,811			906,435			722,944
Amortization	1,001,983			722,563			580,471			1,001,984
Impairment of Goodwill & Other Assets	14,000,000			—
Stock based compensation	219,476			181,782
Impairment of goodwill & other assets							—			14,000,000
Stock-based compensation							200,240			219,476
Loss on sale of assets	3,764			425			—			3,764
Provision for returns & doubtful accounts receivable	395,000			7,924			45,000			395,000
Provision for excess and obsolete inventory	76,500			76,500			76,500			76,500
(Decrease) increase in deferred tax liability	(5,504,010		)	600,156
Deferred taxes							814,466			(5,547,052		)
Change in assets and liabilities:
Increase in net investment in sales-type leases & other receivables	(7,440		)	(265,342		)	(729,663		)	(7,440		)
Decrease (increase) in trade accounts receivable	8,628,795			(7,180,367		)
Decrease (increase) in inventories	295,968			(1,590,301		)
(Increase) decrease in deferred tax asset	(43,042		)	245,561
Decrease (increase) in prepaid expenses and other assets	109,831			(774,273		)
Decrease (increase) in prepaid taxes	31,219			(31,956		)
(Decrease) increase in accounts payable	(2,739,735		)	1,982,387
(Decrease) increase in unearned revenue	(446,734		)	1,146,906
(Decrease) increase in accrued liabilities	(408,020		)	210,632
(Increase) decrease in trade accounts receivable							(323,541		)	8,628,795
Decrease in inventories							338,080			295,968
(Increase) decrease in prepaid expenses and other assets							(200,708		)	109,831
(Increase) decrease in prepaid taxes							(25,829		)	31,219
Decrease in accounts payable							(589,907		)	(2,739,735		)
Decrease in unearned revenue							(554,824		)	(446,734		)
Increase (decrease) in accrued liabilities							483,251			(408,020		)
Total adjustments	16,336,500			(4,138,592		)	1,019,971			16,336,500

Net cash provided by (used in) operating activities	7,922,988			(2,787,502		)
Net cash provided by operating activities							2,377,888			7,922,988

Cash flows from investing activities:
Additions to property, plant & equipment	(636,586		)	(841,549		)	(1,046,070		)	(636,586		)
Proceeds from sale of assets	5,064			—			—			5,064
Acquisitions, net of cash acquired	(802,887		)	—			(1,000,000		)	(802,887		)
Investment in capitalized service contracts	(750,000		)	—			—			(750,000		)
Net cash used in investing activities	(2,184,409		)	(841,549		)	(2,046,070		)	(2,184,409		)

Cash flows from financing activities:
Principal payments on debt	(128,317		)	(128,316		)	(1,183,475		)	(128,317		)
Net (payments) borrowings on revolving line of credit	(2,524,130		)	3,350,390
Net payments on revolving line of credit							—			(2,524,130		)
Payments on capital lease obligations	(110,630		)	(11,979		)	(114,993		)	(110,630		)
Payments to acquire treasury stock	(58,157		)	—			—			(58,157		)
Exercise of stock options	—			90,215
Net cash (used in) provided by financing activities	(2,821,234		)	3,300,310
Net cash used in financing activities							(1,298,468		)	(2,821,234		)

Net increase (decrease) in cash and cash equivalents	2,917,345			(328,741		)
Net (decrease) increase in cash and cash equivalents							(966,650		)	2,917,345

Cash and cash equivalents, beginning of period	63,639			402,918			4,731,926			63,639
Cash and cash equivalents, end of period	$	2,980,984		$	74,177		$	3,765,276		$	2,980,984

Supplemental disclosure of cash flow information:

Cash paid during the period for interest	$	87,523		$	268,919		$	22,679		$	87,523
Cash paid during the period for income taxes	$	102,095		$	55,208		$	47,582		$	102,095
Capital lease obligations incurred	$	—		$	456,520
Non-cash investing and financing activity:
Issuance of common stock for acquisition							$	1,500,000		$	—
Issuance of warrants for acquisition							$	279,000		$	—

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

Table of Contents

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

July 31, ~~2009~~2010

(Unaudited)

1. BASIS OF PRESENTATION:

XETA Technologies, Inc. (“XETA”, the “Company”, “we”, “us”, or ~~the “Company”~~“our”), an Oklahoma corporation formed in 1981, is a leading integrator of advanced communications technologies with nationwide sales and service. XETA ~~serves a diverse group of business clients in~~provides sales, ~~engineering,~~design, project management, implementation, and ~~service support.~~maintenance services in support of the products it represents. The Company sells and/or supports products produced by ~~a variety of~~several manufacturers including Avaya, Inc. (“Avaya”), ~~Nortel Networks Corporation (“Nortel”), and~~ Mitel Corporation (“Mitel”), and Samsung Business Communications Systems (“Samsung”). ~~In addition,~~Through its recent acquisition of the assets of Hotel Technology Solutions, Inc. (“Lorica”) the Company provides high speed internet access, network monitoring services, and guest help desk services to the hospitality industry. The Company also 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~~regulations. The Company believes that the disclosures are reasonably adequate to ~~reasonably insure~~ensure the information is not misleading. 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. The Company filed the 10-K as Commission File No. 0-16231, ~~which was filed~~ with the Commission on January ~~23, 2009.~~8, 2010. Management believes that the financial statements contain ~~all~~the necessary adjustments ~~necessary~~ for a fair statement of the results for the interim periods presented. All adjustments 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.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:

The carrying value of cash and cash equivalents, customer deposits, trade accounts receivable, sales-type leases, accounts payable and short-term debt approximate their respective fair values due to their short maturities.

Based upon the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the long-term debt approximates the carrying value.

Segment Information

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

Table of Contents

The following is a tabulation of business segment information for the three months ended July 31, ~~2009~~2010 and ~~2008:~~2009:

~~Table of Contents~~

																Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total
2010
Sales																$	12,166,889		$	7,296,428		$	1,240,156		$	188,300		$	20,891,773
Cost of sales																(8,223,095		)	(5,136,934		)	(884,456		)	(434,436		)	(14,678,921		)
Gross profit																$	3,943,794		$	2,159,494		$	355,700		$	(246,136	)	$	6,212,852
	Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total
2009
Sales	$	10,524,397		$	4,032,103		$	2,490,466		$	136,271		$	17,183,237		$	10,524,397		$	4,032,103		$	2,490,466		$	136,271		$	17,183,237
Cost of sales	(7,505,892		)	(2,828,437		)	(1,811,312		)	(425,480		)	(12,571,121		)	(7,505,892		)	(2,828,437		)	(1,811,312		)	(425,480		)	(12,571,121		)
Gross profit	$	3,018,505		$	1,203,666		$	679,154		$	(289,209	)	$	4,612,116		$	3,018,505		$	1,203,666		$	679,154		$	(289,209	)	$	4,612,116

2008
Sales	$	12,028,241		$	8,366,333		$	2,296,234		$	512,724		$	23,203,532
Cost of sales	(8,373,080		)	(6,161,782		)	(1,684,502		)	(781,806		)	(17,001,170		)
Gross profit	$	3,655,161		$	2,204,551		$	611,732		$	(269,082	)	$	6,202,362

The following is a tabulation of business segment information for the nine months ended July 31, ~~2009~~2010 and ~~2008:~~2009:

																Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total
2010
Sales																$	35,661,654		$	22,062,341		$	3,083,938		$	325,980		$	61,133,913
Cost of sales																(24,236,849		)	(16,134,299		)	(2,136,681		)	(1,287,991		)	(43,795,820		)
Gross profit																$	11,424,805		$	5,928,042		$	947,257		$	(962,011	)	$	17,338,093
	Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total
2009
Sales	$	30,359,279		$	15,608,586		$	7,288,874		$	263,126		$	53,519,865		$	30,359,279		$	15,608,586		$	7,288,874		$	263,126		$	53,519,865
Cost of sales	(21,258,445		)	(11,591,536		)	(5,200,101		)	(1,308,525		)	(39,358,607		)	(21,258,445		)	(11,591,536		)	(5,200,101		)	(1,308,525		)	(39,358,607		)
Gross profit	$	9,100,834		$	4,017,050		$	2,088,773		$	(1,045,399	)	$	14,161,258		$	9,100,834		$	4,017,050		$	2,088,773		$	(1,045,399	)	$	14,161,258

2008
Sales	$	31,887,653		$	23,171,342		$	5,477,145		$	1,428,950		$	61,965,090
Cost of sales	(23,104,061		)	(17,247,331		)	(3,927,335		)	(1,707,157		)	(45,985,884		)
Gross profit	$	8,783,592		$	5,924,011		$	1,549,810		$	(278,207	)	$	15,979,206

Stock-Based Compensation Plans

The Company ~~accounts for stock-based compensation in accordance with Statement~~applies the provisions of ~~Financial Accounting Standards No. 123 (revised 2004)~~ASC 718, “Compensation — Stock Compensation”, ~~“Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R)~~which requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. 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 statements of operations as follows:

	2009		2008		2010		2009
Three months ended July 31,	$	74,878	$	65,221	$	65,510	$	74,878

Nine months ended July 31,	$	219,476	$	181,782	$	200,240	$	219,476

Use of Estimates

The preparation of the financial statements ~~in conformity with~~conforms to the accounting principles generally accepted in the U.S., and requires management to make estimates and assumptions ~~that affect~~affecting the reported amounts of assets and ~~liabilities and~~liabilities: disclosure of contingent assets and liabilities at the date of the financial ~~statements~~statements; and the reported amounts of revenues and expenses during the reporting period. Actual results ~~could~~may differ from ~~those~~these estimates.

~~New Accounting Pronouncements~~8

In June 2009 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 establishes the Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with GAAP. The Codification will supersede existing non-SEC accounting and reporting standards. This

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~~Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.~~New Accounting Pronouncements

In ~~June 2009~~July 2010 the ~~FASB issued Statement of~~ Financial Accounting Standards ~~No. 167, “Amendments~~Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20, “Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. ASU 2010-20 requires disclosures designed to ~~FASB Interpretation No. 46(R), Consolidation~~enhance transparency regarding credit losses and the credit quality of ~~Variable Interest Entities” (“SFAS No. 167”). SFAS No. 167 replaces~~loan and lease receivables. Disclosures include an evaluation of the ~~quantitative based calculation~~nature of credit risk inherent in the entity’s financing receivables; how the risk is analyzed to arrive at the allowance for ~~determining which variable interest entities have a controlling financial interest with an approach that is expected~~credit losses and the changes and reasons for changes in the allowance for credit losses. Under this guidance, the allowance for credit losses and fair value are to be primarily qualitative. The requirement for consolidation will be based on the reporting entity’s ability to direct the activities of the other entity’s economic performance as well as the other entity’s purpose and design. The reporting entity will be required to provide additional disclosures regarding involvement with variable interest entities and any significant changes in risk exposure resulting from that involvement. SFAS No. 167disclosed by portfolio segment. ASU 2010-20 will be effective for fiscal years beginning on or after ~~November 15, 2009.~~December 31, 2010. The ~~Company does not currently have any variable interest relationships; therefore, the~~ adoption of ~~SFAS No. 167~~this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In February 2010 the FASB issued ASU 2010-09, “Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements”. The guidance in ASU 2010-09 removes the requirement for SEC filers to disclose the date through which subsequent events have been evaluated. The adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In ~~June~~November 2009 the ~~FASB issued Statement of Financial~~Company adopted Accounting Standards ~~No. 166, “Accounting~~Codification (“ASC”) 810, “Consolidation”. ASC 810 changes the accounting and reporting for Transfers of Financial Assets - an amendment of FASB Statement No. 140” (“SFAS No. 166”). SFAS No. 166 amends FASB Statement No. 140 by removing the concept of a qualifying special-purpose entityminority interests, which are now recharacterized as non-controlling interests and modifies the financial-components approach used in that statement. SFAS No. 166 limits the circumstances in which a transferor derecognizes a portion of a financial asset or when the transferor has continuing involvement with the financial asset. The statement establishes conditions for reporting a transfer of a portion of a financial assetclassified as a ~~sale. SFAS No. 166 will be effective for fiscal years beginning after November 15, 2009.~~component of equity. The Company does not have any minority interests; therefore the adoption of this statement ~~is not expected to have a material impact on the Company’s financial position or results of operations.~~

In May 2009 the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes the general standards of accounting for and disclosures required for events occurring after the balance sheet date but before financial statements are issued or are available to be issued. Under SFAS No. 165 the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, are required to be recognized in the financial statements. Subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued should not be recognized in the financial statements. Subsequent events that are not recognized in the financials statements may need to be disclosed to prevent the financial statements from being misleading. The disclosure should include the nature of event and an estimate of the financial effect or a statement that an estimate cannot be made. SFAS No. 165 is effective for interim and annual financial periods ending after June 15, 2009.

In April 2009 the FASB issued FASB Staff Position (“FSP”) on Financial Accounting Standard No. 115-2 and No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities. The intent of the FSP is to provide guidance on the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements; it does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP is effective for financial statements issued for interim and annual periods ending after June 15, 2009. The implementation of this FSP is not expected to have a material impact on the Company’s financial position or results of operations.

In April 2009 the FASB issued FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which requires a company to disclose the fair value of its financial instruments for interim reporting periods. FSP FAS No. 107-1 and APB No. 28-1 is effective for interim periods ending after June 15, 2009.

On November 1, 2008 the Company adopted Statement of Financial Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 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

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measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The FASB issued FSP SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which amends SFAS No. 157 to remove certain leasing transactions from its scope. The FASB issued FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157”, which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. The FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”, which clarifies the application of SFAS No. 157 in a market that is not active and provides guidance in key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. On April 2009 the FASB issued FSP SFAS No. 157-4, “Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and guidance on identifying circumstances that indicate a transaction is not orderly. FSP SFAS No. 157-4 is effective for interim and periods ending after June 15, 2009. The adoption of SFAS No. 157 did not have ~~a material~~an impact on the Company’s consolidated financial ~~position or results of operations.~~statements.

In ~~December 2007~~November 2009 the ~~FASB issued SFAS No. 141 (revised 2007),~~Company adopted ASC 805, “Business Combinations” ~~(“SFAS No. 141(R)”)~~. Under ~~SFAS No. 141(R),~~ASC 805, 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 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~~Company began applying the ~~accounting treatment for~~guidance to 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 No. 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 July 31,November 2009 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.~~

~~On February 20, 2008 the FASB issued FASB Staff Position (“FSP”) on Financial Accounting Standards No. 140-3, “Accounting for Transfers of Financial Assets~~adopted ASC 350 “Intangibles — Goodwill and ~~Repurchase Financing Transactions”~~Other”. The ~~FSP provides~~ guidance on the accounting for a transfer of a financial asset and a repurchase financing. Repurchase financing is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties (or consolidated affiliates of either counterparty), that is entered into contemporaneously with, or in contemplation of, the initial transfer. Under the FSP, a transferor and transferee will not separately account for a transfer of a financial asset and a related repurchase financing unless: (a) the two transactions have a valid and distinct business or economic purpose for being entered into separately; and (b) the repurchase financing does not result in the initial transferor regaining control over the financial asset. An initial transfer of a financial asset and repurchase financing that are entered into contemporaneously with, or in contemplation of, one another shall be considered linked unless all of the following criteria are met at the inception of the transaction:

·~~The initial transfer and the repurchase financing are not contractually contingent on one another.~~

·~~The repurchase financing provides the initial transferor with recourse to the initial transferee upon default.~~

·~~The financial asset subject to the initial transfer and repurchase financing is readily obtainable in the marketplace.~~

·~~The financial asset and repurchase agreement are not coterminous (the maturity of the repurchase financing must be before the maturity of the financial asset).~~

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The FSP is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted. The Company does not currently utilize repurchase financing; therefore, the implementation of this FSP is not expected to have a material impact on the Company’s financial position or results of operations.

In March 2008 the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”, (“SFAS No. 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 No. 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”.~~assets. The intent of ~~this FSP~~the guidance is to improve the consistency between the useful life of a recognized intangible asset under ~~SFAS No. 142~~the accounting standards 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.~~asset. The Company ~~will adopt this FSP in~~began applying the ~~first quarter of fiscal 2010 and will apply the~~ guidance ~~prospectively~~ to intangible assets acquired ~~after adoption.~~in fiscal 2010.

In ~~May 2008~~October 2009 the FASB issued ~~SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”)~~ASU 2009-13, “Revenue Recognition - Multiple-Deliverable Revenue Arrangements”. ~~SFAS No. 162 identifies~~The guidance in ASU 2009-13 amends the ~~sources~~criteria for separating consideration in multiple-deliverable arrangements. The guidance eliminates the estimated fair value approach for revenue allocation between the separate units of accounting ~~principles~~ and replaces it with a sales-based approach referred so as the ~~framework~~relative-selling-price method. ASU 2009-13 expands required disclosures related to a company’s multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for ~~selecting~~fiscal years beginning on or after June 15, 2010. The Company is currently assessing the ~~principles used in the preparation of financial statements. SFAS No. 162 became effective~~impact that adoption will have on November 15, 2008 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 did not have a material impact on the Company’s consolidatedrequired disclosures, its financial position and results of operations.

~~Goodwill and~~ Other ~~Long-lived Assets~~accounting standards that have been issued or proposed that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

The Company accounts for goodwill under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, goodwill recorded as a part of a business combination is not amortized, but instead is subject to at least an annual assessment for impairment by applying a fair-value-based test. During the third quarter the Company experienced a continued decline in revenues in its commercial equipment reporting unit due to poor economic conditions and uncertainty regarding Nortel’s product line. Additionally, the Company also experienced a sustained decline in its market capitalization. These factors, taken together, prompted an interim test for impairment. The Company conducted step 1 of its review as of July 31, 2009 and engaged an independent valuation consultant to assist in the formulation of fair values for each of its reporting units. In order to make this assessment, the Company prepared a long-term forecast of the operating results and cash flows associated with the major reporting units of its business. The forecast was prepared to determine the net discounted cash flows associated with each of these units. The Company, with the assistance of its valuation consultant, also developed market-based approaches to estimate the value of its reporting units. These market-based approaches utilize current valuations of businesses similar to the Company’s and apply various valuation techniques to estimate fair value. These estimated income-based and market-based valuations were weighted and the corresponding valuation was then compared to the book value of each of the reporting units. Making this assessment requires a great deal of judgment, including the growth rates of various business lines, gross margins, operating margins, discount rates, and the capital expenditures needed to support the projected growth in revenues. The valuation consultant engaged to assist in this evaluation examined additional data regarding competitors and market conditions which also required a great amount of subjectivity and assumptions. The methodologies used in this interim analysis were consistent with the methodologies and valuation techniques used in past impairment assessments. Based on completion of step 1 of the analysis, management determined that the carrying value of the commercial equipment reporting unit was greater than its estimated fair value and therefore an impairment of the goodwill associated with this unit exists.

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Management has estimated the impairment to be between $9 million and $13 million and an impairment charge of $11.0 million was recorded in the third fiscal quarter representing the Company’s best estimate of the probable impairment at this time. The Company will adjust the impairment charge, if necessary, after completing step two of its impairment test in connection with its next periodic report filing with the Securities and Exchange Commission.

In accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” an impairment loss on long-lived assets used in operations is recorded when events and circumstances indicate that the carrying amount of the asset may not be recoverable. During the third fiscal quarter, it was determined that certain identifiable assets related to our Oracle ERP platform were impaired because the Company estimates that full cost of the system cannot be reasonably recovered based on near-term projected financial results. An impairment charge of $3.0 million was recorded as of July 31, 2009 to reduce the Company’s carrying value of this asset to the mid-point of management’s estimate of the replacement cost of an ERP system that would be adequate for the Company’s current and near-term operating needs.

2. ACCOUNTS RECEIVABLE:

~~Accounts~~Trade accounts receivable consist of the following:

July 31,
2009

(Audited)
October 31,
2008

Trade accounts receivables

$
11,938,936

$
20,188,378

Less reserve for doubtful accounts

(556,212
)
(192,880
)
Net trade accounts receivables

$
11,382,724

$
19,995,498

	July 31, 2010			(Audited) October 31, 2009

Trade accounts receivable	$	15,090,558		$	14,393,681
Less- reserve for doubtful accounts	(549,927		)	(561,229		)
Net trade accounts receivable	$	14,540,631		$	13,832,452

On January 14, 2009, Nortel Networks Corporation filed for bankruptcy protection in the United ~~States. The~~States Bankruptcy Court for the District of Delaware. Subsequent to the filing the administrators of the bankruptcy ~~have~~ adopted a business disposal strategy. Under ~~this~~the strategy, the administrators ~~have~~ segmented Nortel into three primary business units: Virtual Service Switches, CDMA businesses and Enterprise Solutions. We ~~conduct~~conducted all of our Nortel business through the Enterprise Solutions unit.

On ~~July 21,~~December 18, 2009, Avaya completed the ~~administrators~~purchase of ~~the bankruptcy announced they had entered into a stalking horse assets and share sale agreement with Avaya for the~~Nortel’s Enterprise Solutions unit and this process is proceeding. Due to the nature of the stalking horse auction process, a final determination of the purchaser of the Enterprise Solutions unit is not expected until near the end of our fiscal year. At the time of Nortel’s filing, they owedbusiness unit. Nortel owes XETA approximately ~~$685,000 for services rendered under the Company’s wholesale managed services program~~$700,000 in which the Company is engaged by Nortel to provide field technical services to Nortel’s end-user customers. At the time of filing this Form 10-Q the deadline for filing a plan of reorganization was September 11, 2009, but this date is subject to extension. Until Nortel files its reorganization plan; our ability to assess the probability of recovering pre-petition ~~amounts due is limited. As of July 31, 2009 we have recorded $350,000 as a reserve against possible bad debts.~~accounts receivable. On July 17, 2009 the bankruptcy court granted ~~the Company’s~~XETA’s request for offset of $116,000 in charges ~~the Company~~ owed to Nortel at the time of the filing. ~~We are following~~In fiscal year 2009, the Company recorded $350,000 as a reserve against possible Nortel bad debts. Nortel filed its plan of reorganization on July 12, 2010 (the “Nortel Plan”). XETA’s claim is classified as a Class 3 claim, “General Unsecured Claims”. The Nortel Plan states that priority non-tax claims and secured claims will be paid in full, but that Class 3 claims will be impaired. No indication or estimate is given as to the potential extent of the impairment. According to the Nortel Plan, XETA and other Class 3 claimants will receive a pro rata share of the assets of Nortel at the time the Nortel Plan goes into affect. The next significant action in this matter is expected to be Nortel’s filing of a Disclosure Statement in mid-September providing more information regarding Nortel’s assets and potentially an estimate of payouts to Class 3 creditors. Based on the information presently available, the Company can make no further determination regarding the adequacy of its reserve in this matter. The Company will continue to carefully follow developments inassociated with the bankruptcy case and will assert ~~our available~~its legal rights and defenses ~~when~~as appropriate.

3. INVENTORIES:

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

	July 31, 2009			(Audited) October 31, 2008			July 31, 2010			(Audited) October 31, 2009

Finished goods and spare parts	$	6,010,738		$	6,084,830		$	5,899,077		$	5,977,703
Less- reserve for excess and obsolete inventories	(901,894		)	(848,265		)	(1,034,737		)	(941,505		)
Total inventories, net	$	5,108,844		$	5,236,565		$	4,864,340		$	5,036,198

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4. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

	Estimated Useful Lives	July 31, 2009			(Audited) October 31, 2008			Estimated Useful Lives	July 31, 2010			(Audited) October 31, 2009

Building and building improvements	3-20	$	3,119,404		$	3,054,563		3-20	$	3,378,035		$	3,253,693
Data processing and computer field equipment	2-7	3,225,850			3,351,229			2-7	3,977,439			3,248,126
Software development costs, work-in-process	N/A	220,911			2,069,234			N/A	227,862			197,097
Software development costs of components placed into service	3-10	2,619,700			6,631,805			3-10	2,731,310			2,697,806
Computer hardware	3-5	631,848			615,657
Hardware								3-5	643,635			643,635
Land	—	611,582			611,582			—	611,582			611,582
Office furniture	5-7	779,588			944,048			5-7	813,556			779,588
Auto	5	502,521			516,185			5	545,548			537,300
Other	3-7	293,938			239,533			3-7	145,779			149,484

Total property, plant and equipment		12,005,342			18,033,836				13,074,746			12,118,311
Less- accumulated depreciation and amortization		(5,007,558		)	(7,311,297		)		(6,419,556		)	(5,292,395		)

Total property, plant and equipment, net		$	6,997,784		$	10,722,539			$	6,655,190		$	6,825,916

5. INCOME TAXES:

The tax provision reflects the effective 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%.

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

July 31,
2009

(Audited)
October 31,
2008

Deferred tax assets:

Net operating loss carryforward

$
1,889,299

$
1,158,195

Currently nondeductible reserves

555,173

353,000

Accrued liabilities

451,458

172,258

Prepaid service contracts

34,895

43,547

Stock based compensation expense

230,559

144,525

Other

33,067

29,488

Total deferred tax asset

3,194,451

1,901,013

Deferred tax liabilities:

Intangible assets

1,219,942

5,051,498

Depreciation

675,945

1,788,933

Other

643,936

—

Tax income to be recognized on sales-type lease contracts

22,660

17,348

Total deferred tax liability

2,562,483

6,857,779

Net deferred tax asset (liability)

$
631,968

$
(4,956,766
)

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July 31,
2009

(Audited)
October 31,
2008

Net deferred asset (liability) as presented on the balance sheet:

Current deferred tax asset

$
418,420

$
588,926

Noncurrent deferred tax asset (liability)

213,548

(5,545,692
)
Net deferred tax asset (liability)

$
631,968

$
(4,956,766
)

The tax effect of impairment charges recognized as of July 31, 2009 resulted in a decrease in noncurrent deferred tax liabilities of approximately $5.5 million. For tax purposes the Company is amortizing its goodwill balances over a statutory life of 15 years. The combination of these tax deductions and lower levels of taxable income generated from operations in recent years has created net operating losses that are reflected in the Company’s balance sheet as deferred tax assets. Management believes that future operating income will be sufficient to realize these loss carryforwards and that no valuation allowance is required.

6. CREDIT AGREEMENTS:

~~The~~In November 2009, the Company ~~has~~entered into a one-year loan agreement with a new financial institution. This agreement replaced our previous credit facility, ~~with a commercial bank that includes a term loan and a $7.5 million revolving line of credit. The facility matures~~which was scheduled to mature on ~~September~~November 30, 2009. The ~~term~~ loan ~~which is collateralized with a first mortgage on the Broken Arrow, Oklahoma, headquarters, amortizes based on a 13 year life. The~~agreement consists of an $8.5 million revolving ~~line of~~ credit ~~is used to finance growth in working capital and is~~facility collateralized by ~~qualifying~~ trade accounts receivable, inventories, and inventories. The Company is in discussions with several lenders, including its existing lender, to establish a new credit facility and expects to have a new agreement established prior to the expiration of its current agreement.real estate.

At July 31, ~~2009~~2010, the Company did not have an outstanding balance on the revolving line of ~~credit and had approximately $2.524 million outstanding at October 31, 2008.~~credit. The Company had approximately ~~$5.2~~$8.5 million available under the revolving line of credit at July 31, ~~2009. Advance~~2010. The advance rates are defined in the agreement, but are generally at the rate of ~~80%~~75% on qualified trade accounts receivable and ~~40%~~50% of qualified ~~inventories.~~inventories and real estate, subject to a maximum of $2.0 million each. Long term debt consisted of the following:

	July 31, 2009		(Audited) October 31, 2008		July 31, 2010		(Audited) October 31, 2009

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	$	1,226,248	$	1,354,565
Term note, payable with a fixed payment of $1,183,475 due November 30, 2009, collateralized by a first mortgage on the Company’s building					$	—	$	1,183,475

Less-current maturities	1,226,248		1,354,565		—		1,183,475

Total long-term debt, less current maturities	$	—	$	—	$	—	$	—

Interest on all outstanding debt under the credit facility accrues at the greater of either a) the London Interbank Offered Rate (“LIBOR”) ~~(0.279%~~(0.305% at July 31, ~~2009)~~2010) plus ~~1.25% to 2.75% depending on the Company’s funded debt to cash flow ratio,~~3.0% or b) the bank’s prime rate (3.25% at July 31, 2009) minus 0% to minus 1.125% also depending on the Company’s funded debt to cash flow ratio. At July 31, 2009 the Company was paying 2.875% on the revolving line of credit borrowings and 3.00% on the mortgage note.4.5%. The credit facility contains several financial covenants common in such agreements including tangible net worth requirements, limitations on the amount of funded debt to annual earnings before interest, taxes, depreciation and amortization, limitations on ~~capital spending,~~cash dividends, and debt service coverage requirements. At July 31, ~~2009,~~2010 the Company was ~~either~~ in compliance with the covenants of the credit ~~facility or had received the appropriate waivers from its bank.~~facility.

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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 July 31, 2009							For the Three Months Ended July 31, 2010
	Income (Numerator)			Shares (Denominator)	Per Share Amount			Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net loss	$	(8,599,068	)	10,223,753	$	(0.84	)
Net income								$	512,774	10,533,335	$	0.05
Dilutive effect of stock options				—						78,068

Diluted EPS
Net loss	$	(8,599,068	)	10,223,753	$	(0.84	)
Net income								$	512,774	10,611,403	$	0.05

	For the Three Months Ended July 31, 2008					For the Three Months Ended July 31, 2009
	Income (Numerator)		Shares (Denominator)	Per Share Amount		Loss (Numerator)			Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	590,840	10,254,310	$	0.06
Net loss						$	(8,599,068	)	10,223,753	$	(0.84	)
Dilutive effect of stock options			—						—

Diluted EPS
Net income	$	590,840	10,254,310	$	0.06
Net loss						$	(8,599,068	)	10,223,753	$	(0.84	)

	For the Nine Months Ended July 31, 2009							For the Nine Months Ended July 31, 2010
	Income (Numerator)			Shares (Denominator)	Per Share Amount			Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net loss	$	(8,413,512	)	10,223,881	$	(0.82	)
Net income								$	1,357,917	10,328,689	$	0.13
Dilutive effect of stock options				—						57,529

Diluted EPS
Net loss	$	(8,413,512	)	10,223,881	$	(0.82	)
Net income								$	1,357,917	10,386,218	$	0.13

	For the Nine Months Ended July 31, 2008					For the Nine Months Ended July 31, 2009
	Income (Numerator)		Shares (Denominator)	Per Share Amount		Loss (Numerator)			Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	1,351,090	10,241,861	$	0.13
Net loss						$	(8,413,512	)	10,223,881	$	(0.82	)
Dilutive effect of stock options			4,950						—

Diluted EPS
Net income	$	1,351,090	10,246,811	$	0.13
Net loss						$	(8,413,512	)	10,223,881	$	(0.82	)

Options to purchase 712,450 shares of common stock at an average exercise price of $5.82 and 1,269,900 shares of common stock at an average exercise price of $6.42 ~~and 1,029,500 shares of common stock at an average exercise price of $7.28~~ were not included in the computation of diluted earnings per share for the three months ended July 31, ~~2009~~2010 and ~~2008,~~2009, respectively, because inclusion of these options would be antidilutive. Options to purchase ~~1,269,900 shares of common stock at~~

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~~an average exercise price of $6.42 and 844,900~~834,595 shares of common stock at an average exercise price of ~~$8.08~~$5.23 and 1,269,900 shares of common stock at an average exercise price of $6.42 were not included in the computation of diluted earnings per share for the nine months ended July 31, ~~2009~~2010 and ~~2008,~~2009, respectively, because inclusion of these options would be antidilutive.

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8.CONTINGENCIES:

In addition to potential losses related to Nortel’s pre-petition receivables, the Company may be subject to preference payment claims asserted by Nortel. It is routine in bankruptcy proceedings for the debtor in possession or bankruptcy trustee to assert a statutory “preference claim” to seek to recover payments made by the bankrupt entity to creditors during the 90-day period immediately preceding the filing of the bankruptcy petition. This period is known as the “preference period”. Although the debtor is entitled to make a claim based solely upon when the payments were made, the payments are not recoverable if they were made in the debtor’s ordinary course of dealings with the creditor. Nortel has filed a schedule showing approximately $1.6 million in payments made to the Company during the preference period. To date Nortel has not asserted a preference claim against the Company. However, if a preference claim is brought, the Company believes it has good defenses to any such potential claim against it, including that the subject payments were made in the ordinary course of the Company’s business dealings with Nortel. These defenses must be argued on each individual Company invoice paid during the preference period. The Company is unable at this time to determine the extent, if any, of any material loss that might occur if a claim to recover preference payments is asserted. Therefore, no provision for loss has been made beyond the amount discussed above related to unpaid invoices at the time of the bankruptcy filing.

9. 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 ~~$291,666~~$139,492 at July 31, ~~2009.~~2010. Accumulated amortization of the leased licenses at July 31, ~~2009~~2010 was ~~$168,854.~~$317,028. Amortization 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, ~~2009,~~2010, are as follows:

	Capital Lease Payments		Capital Lease Payments

1 Year	$	161,435
2 Years	147,982
Total minimum lease payments	309,417		$	147,982
Less- imputed interest	11,674		2,827
Present value of minimum payments	297,743		145,155
Less-current maturities of capital lease obligation	152,589		145,155
Long-term capital lease obligation	$	145,154	$	—

~~9. SUBSEQUENT EVENTS:~~10. ACQUISITIONS:

~~The~~On May 24, 2010, the Company ~~evaluated subsequent events through August 28, 2009. The~~completed the purchase of the operating assets of Hotel Technologies Solutions, Inc., d/b/a Lorica Solutions (“Lorica”), a privately-held company headquartered in Buffalo, New York. Lorica is an emerging leader in the delivery of high-speed internet access and network administration to the hospitality industry. Under the terms of the purchase agreement, total consideration to be paid by the Company is $2.8 million plus certain assumed liabilities. The purchase price included $833,000 paid in cash at closing; 397,878 shares of XETA common stock valued at $1.5 million based on the May 21, 2010 closing price of $3.77; five year warrants to purchase 150,000 shares of XETA common stock at $3.77 valued at $279,000; and $167,000 in cash deposited into an escrow account as required under the purchase agreement. The acquisition is not ~~aware of any significant events that occurred subsequent~~material to the ~~balance sheet date but prior to the filing of this report that would have a material impact on our~~Company’s financial position or results of operations.

16The fair values of the assets acquired and liabilities assumed for Lorica are provisional and are based on the information available as of the acquisition date. The Company believes that the information available provides a reasonable basis for estimating the fair value but additional information may be necessary to finalize the valuation. The provisional measurements of fair value are subject to change. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

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11. SUBSEQUENT EVENTS:

On August 2, 2010, the Company completed the purchase of 100% of the voting stock of Pyramid Communications Services, Inc., (“Pyramid”) a Dallas, Texas based privately held company providing communications equipment and related services. Pyramid’s 2009 revenues exceeded $10.0 million. The purchase price included $1.8 million paid in cash at closing; $675,000 in subordinated promissory notes payable to the sellers in eight quarterly installments bearing interest at three percent per year; $200,000 in cash deposited into an escrow account as required under the purchase agreement; and $100,000 payable to the former CEO of Pyramid in thirty six monthly installments under personal goodwill and non-compete agreements. Additionally, the Company retired $648,222 in principal and accrued interest on Pyramid’s outstanding line of credit with its bank. The Company used $2.65 million from existing cash balances to fund the purchase price. The acquisition is not material to the Company’s financial position or results of operations.

On September 2, 2010, the Company completed the purchase of the operating assets of Data-Com Telecomunications, Inc., (“Data-Com”) a New Jersey based privately held company providing communications equipment and related services to the greater New York City area. The purchase price was $3.070 million cash. Of this amount, $604,000 was put into escrow until certain tax liabilities are determined; customer overpayments are resolved; and the final value of the net assets purchased is established. The acquisition is not material to the Company’s financial position or results of operations.

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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~~This report contains forward-looking statements ~~concerning~~within the meaning of the Private Securities Litigation Reform Act of 1995, relating to future events and our future performance ~~events~~ and results. ~~Other~~Many of these statements appear in the discussions under the headings “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than those that are purely historical ~~statements, all others are likely forward-looking.~~may be forward-looking statements. Forward-looking statements can generally ~~include~~be identified by words such as “expects,” “anticipates,” “may,” “likely,” “plans,” “believes,” “intends,” “projects,” “estimates,” ~~“targets,” “should”~~ and similar words or expressions. ~~Such~~Forward-looking statements are not guarantees of performance, but rather reflect ~~our perspective on~~management’s current expectations, estimates, and forecasts about the industry and markets in which we ~~operate. Any statements containing estimates~~operate, and ~~forecasts are not guarantees of performance, but rather,~~ our assumptions and beliefs based upon information currently available to ~~us. These~~management. Investors are cautioned that all forward-looking statements are subject to certain risks and uncertainties ~~that~~which are difficult to predict or ~~beyond our control. Examples of these risks include:~~which we are unable to control, and that could cause actual results to differ materially from those projected, including but not limited to such factors as the condition of the U.S. economy and its impact on capital ~~spending; reduced availability~~spending trends in the Company’s markets; whether the integration of ~~credit;~~recently acquired businesses into that of the ~~Nortel Networks bankruptcy filing;~~Company and realization of anticipated synergies and growth opportunities from such transactions are successful; success in our overall strategy; the financial condition of our suppliers and changes by them in their distribution strategies and support; ~~our ability to maintain~~the Nortel Networks bankruptcy filing and ~~improve current gross profit margins;~~the potential negative impact that it may have on the Company’s prepetition accounts receivable claim against Nortel or if Nortel succeeds in bringing a preference claim against the Company; unpredictable quarter to quarter revenues; ~~continuing market success~~changes in Avaya’s strategies regarding the provision of ~~the Mitel product~~equipment and services ~~offerings;~~to its customers, and in its policies regarding the availability of tier IV hardware and software support; inconsistent gross profit margins; availability of credit to finance growth; intense ~~competition;~~competition and industry consolidation; ~~our~~ dependence upon a few large wholesale customers in ~~our~~the Company’s Managed Services offering; and ~~our ability to attract~~the availability and ~~retain talented sales, operational~~retention of revenue professionals and ~~technical personnel.~~certified technicians. 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, ~~2008~~2009 (filed with the Commission on January ~~23, 2009),~~8, 2010) and in updates to such risk factors set forth in Item 1A of Part II of ~~our~~this quarterly ~~reports during fiscal 2009. Because~~report. As a result of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, ~~we caution~~ 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.

~~During the third quarter~~In advance of fiscal 2010, senior management ~~continued to lead execution~~conducted its periodic review of the ~~five primary strategies identified at~~strategic direction of the ~~outset~~Company. This review resulted in a threefold refinement of ~~fiscal 2009. These strategies include: continue~~the strategic focus and direction of the organization including: continued emphasis on aggressive growth in our managed services business; use of our unique position to ~~acquire market share through targeted~~search out and pursue organic and acquisitive growth opportunities resulting from Avaya’s acquisition of Nortel’s enterprise business (NES); and advance a longer-term business initiative focused on the sales, ~~activities; take advantage~~design, integration and maintenance and repair of ~~Avaya’s new channel-centric go-to-market strategy; focus on fast growing applications such as unified communications; focus on industry verticals such as hospitality, healthcare~~collaborative technologies and ~~education; and augment growth through targeted acquisitions.~~advanced applications.

In addition to monitoring trends in order rates and holding discussions with customers, management also monitors macroeconomic conditions, sales trends among our major suppliers, and sales activity across the communications industry. Based on information derived fromManagement believes these activities, management believes that market conditions will remain challenging for the fourth fiscal quarter and perhaps beyond. As such, in the third quarter management developed and executed a multi-pronged cost reduction plan designed to align sales and operating costs with market conditions.

~~The reductions were carefully designed to aggressively reduce costs, while preserving the key resources necessary~~strategies are appropriate to fully realize ~~growth opportunities as~~the benefits of our investments in high value talent and competencies, to capitalize on the market ~~recovers. The beneficial effects~~realignment resulting from Avaya’s acquisition of ~~these actions were only partially realized~~NES and to ready ourselves in ~~the third quarter. Management anticipates the full benefit~~anticipation of ~~these measures will materialize~~growth in ~~the fourth quarter,~~demand for advanced applications and ~~into next fiscal year.~~collaborative technologies.

~~Our third quarter financial results reflect an impairment charge on goodwill~~Even though we are experiencing growth in our services revenue, the overall market for our products and ~~other assets of $14.0 million. Poor economic conditions and uncertainty regarding Nortel’s product line contributed to continued deterioration~~services remains challenging. While some of our ~~commercial equipment business. Additionally, we experienced a sustained decline~~customers are enjoying improvements in ~~our market valuation. These factors, taken together, prompted a review of the value of goodwill~~their business and ~~certain other long-lived assets. Through applying the applicable accounting rules, we determined that the carrying cost of our Oracle ERP would not be recovered over the near term~~are therefore purchasing and that a write-down of that asset to its estimated replacement cost was appropriate. Accordingly, we recorded a $3.0 million impairment on this asset. Likewise, we conducted step one of the impairment test on goodwill and determined that the carryingimplementing new communications systems, many others remain

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~~value~~cautiously optimistic about near-term economic improvement and are continuing to limit new spending and are furthering their efforts to reduce ongoing operating costs. Consequently, we have not experienced an overall improvement in purchases of ~~goodwill is estimated to be impaired between $9.0 million~~new systems and ~~$13.0 million. Accordingly, we recorded an impairment charge~~related services. Additionally, some of ~~$11.0 million as~~ our best estimate of the impairment at the time of filing this report. We will adjust the impairment charge, if necessary, after completing step two of the impairment test during our fourth fiscal quarter. These items are discussedmajor customers have faced unique challenges in ~~additional detail in “Results of Operations” below and in Note 1 to the Consolidated Condensed Financial Statements above.~~

In April 2009 XETA purchased the assets of Summatis Communications, LLC (“Summatis”) located in Southboro, MA. Summatis provides communications solutions, integration and maintenance services primarily targeted at the Nortel product line. The acquisition strengthens our presence in the northeastern U.S. and adds to our Nortel competencies. Whiletheir operations which have slowed expected orders. Finally, the acquisition ~~is not material to our financial position or results~~ of ~~operations, it represents an incremental step~~NES by Avaya has created a pause in ~~our overall acquisitions strategy.~~some customers’ normal buying patterns as they evaluate Avaya’s technology roadmap and service strategies.

On ~~January 14, 2009 Nortel Networks Corporation filed for bankruptcy protection~~May 24, 2010, the Company completed the purchase of the operating assets of Hotel Technologies Solutions, Inc., d/b/a Lorica Solutions (“Lorica”), a privately-held company headquartered in Buffalo, New York. Lorica is an emerging leader in the ~~United States Bankruptcy Court for~~delivery of high-speed internet access and network administration to the ~~District of Delaware.~~hospitality industry. The ~~administrators~~terms of the bankruptcy have adopted a business disposal strategy. Under this strategy, the administrators have segmented Nortel into three business units: Virtual Service Switches, CDMA businesses and Enterprise Solutions. We conduct all of our Nortel business through the Enterprise Solutions unit. On July 21, 2009, the administratorspurchase agreement are described in Note 10 of the ~~bankruptcy announced they had entered into a stalking horse assets and share sale agreement with Avaya for~~Notes to Consolidated Financial Statements.

On August 2, 2010, the ~~Enterprise Solutions unit and this process is proceeding. Due to~~Company completed the ~~nature~~purchase of the ~~stalking horse auction process,~~stock of Pyramid Communications Services, Inc. (“Pyramid”), a ~~final determination~~privately held company headquartered in Dallas, Texas. Pyramid provides communications equipment and related services with 2009 revenues in excess of $10.0 million. The terms of the ~~purchaser~~purchase agreement are described in Note 11 of the Enterprise Solutions unit is not expected until near the end of our fiscal year. Nortel is one of our major suppliers and represents a significant portion of our business. As such this filing is of considerable concern. At the time of filing this Form 10-Q, our post-petition relationship with Nortel continues without interruption. However, management recognizes the potential impact of Nortel’s filing on the Company’s financial performance (see Item 1A. “Risk Factors” below). Nortel owes XETA approximately $685,000 in pre-petition accounts receivable. Presently, Nortel has until September 11, 2009Notes to file its reorganization plan. However, this date is subject to further extension. Until a plan of reorganization is filed, our ability to assess the probability of recovering pre-petition amounts due is limited. On July 17, 2009 the bankruptcy court granted our request for offset of $116,000 in charges we owed Nortel at the time of the filing. As of July 31, 2009 we have recorded $350,000 as a reserve against possible Nortel bad debts. We are following developments in the bankruptcy case and will assert our legal rights and defenses as appropriate.Consolidated Financial Statements.

Operating Summary.

In the third quarter of fiscal ~~2009~~2010, we recorded net income of $513,000 on revenues of $20.9 million compared to a net loss of $8.6 million on revenues of $17.2 million ~~compared to net income of $591,000 on revenues of $23.2 million~~ in the third quarter of last year. ~~Excluding the $14.0 million impairment charge and related tax benefit of $5.5 million in the third quarter, our non-GAAP net loss was $87,000.~~ For the first nine months of fiscal ~~2009~~2010, we ~~recorded~~earned $1.4 million in net income on revenues of $61.1 million compared to a net loss of $8.4 million on revenues of $53.5 million ~~compared to net income of $1.4 million on revenues of $62.0 million. Excluding the impairment charge and tax benefit, our non-GAAP net income~~ for the first nine months of last year. In the third quarter of fiscal 2009, we recorded an impairment charge on goodwill and other assets of $14.0 million and related tax benefit of $5.5 million. Our non-GAAP net income was ~~$98,000.~~$98,000 for the first nine months of last year. Apart from the impairment charges ~~to goodwill and our Oracle ERP system which are discussed~~recorded in ~~more detail above, these~~2009, the improved 2010 results primarily reflect ~~the challenging market conditions stemming from the ongoing macroeconomic contraction~~an increase in revenues and ~~the associated decline in demand for commercial systems.~~gross profits partially offset by increased selling, general and administrative costs. We discuss this and other contributing factors in more detail under “Results of Operations” below.

Financial Position Summary.

Since October 31, ~~2008~~2009, we have generated positive cash flows from operations of ~~$7.9~~$2.4 million and we primarily ~~through the collections of accounts receivable. We have~~ used these cash flows to reduce borrowings, purchase the net operating assets of Lorica and make capital expenditures to support our operations. We have improved our working capital approximately 5%15%. 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 nine-month periods ended July 31, ~~2009~~2010 and ~~2008~~2009 and should be considered in conjunction with our above comments as well as the “Risk Factors” section below.

18Financial Condition

During the first three fiscal quarters of 2010 our working capital increased by 15% to $13.2 million. We generated $2.4 million in cash flows from operations. These cash flows included earnings and non-cash charges of $3.2 million; a decrease in inventory of $338,000; an increase in accrued liabilities of $483,000; and a decrease in deferred taxes of $814,000. These positive cash flow items were partially offset by an increase in accounts receivable of $324,000; a decrease in unearned revenue of $555,000; a decrease in accounts payable of $590,000; and other changes in working capital items. These items netted to a decrease in cash of $956,000. Non-cash charges included amortization of $580,000; depreciation of $906,000; provisions for doubtful accounts receivable and obsolete inventories of $122,000; and stock-based compensation of $200,000.

We used these positive cash flows to pay off term debt of $1.2 million; to purchases the net operating assets of Lorica of $1.0 million, acquire capital assets of $1.1 million; and fund other financing and investing activities of $115,000. The acquisition of capital assets was part of normal replacement of Information Technology infrastructure and headquarters facility improvements.

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Financial Condition

During the first three fiscal quarters of 2009 our working capital increased by 5% to $9.8 million. We generated $7.9 million in cash flows from operations. These cash flows included a decrease in accounts receivable of $8.6 million and a decrease in inventory of $296,000. These increases were partially offset by a decrease in deferred tax liabilities of $5.5 million; a decrease in accounts payable of $2.7 million; a decrease in accrued liabilities of $408,000; and other changes in working capital items, which netted a decrease in cash of $356,000. The impairment charge to goodwill and other assets of $14.0 million did not impact cash flows in the period. Other Non-cash charges included amortization of $1.0 million; depreciation of $723,000; provisions for doubtful accounts receivable and obsolete inventories of $471,000; stock-based compensation of $219,000; and a loss on the sale of assets of $4,000.

We used these positive cash flows to reduce borrowings on our working capital line of credit by $2.5 million; to make asset purchases of capitalized hospitality service contracts as well as certain net assets of Summatis, together totaling $1.53 million; acquire capital assets of $636,000; reduce our mortgage balance through scheduled principal payments by $128,000; and fund other financing and investing activities of $169,000. The acquisition of capital assets included $414,000 spent as part of normal replacement of our Information Technology infrastructure and headquarters facility improvements. The remaining $222,000 was spent on our Oracle ERP implementation.

At July 31, ~~2009~~2010, our cash balance was $3.8 million and there ~~were~~was no outstanding ~~draws~~balance on our working capital revolver. ~~Based on~~In accordance with the collateral base defined in the credit facility, ~~there~~$8.5 million was ~~$5.2 million~~ available for borrowing on the ~~$7.5~~$8.5 million facility at the end of the ~~quarter and our cash balance was $3.0 million. We believe our cash balances and available borrowing capacity are sufficient to support our operating requirements for the foreseeable future.~~quarter. The working capital revolver ~~and the mortgage on our headquarters facility are~~is scheduled to mature on ~~September 30, 2009.~~November 5, 2010. We ~~are in discussions with several lenders, including our existing bank,~~expect to ~~secure~~renew this instrument for a ~~new credit facility~~12-month or longer period prior to the ~~expiration of our existing agreement. We expect to establish a new credit facility prior to~~expiration. It is possible that the ~~expiration of the current agreement. However, given current credit market conditions, it is likely any new credit agreement will contain~~renewal could result in higher borrowing costs and/or reduced availability for unsecured borrowings.

We expect to utilize a variety of common financing tools to fund acquisitions. We believe our cash balances, expected free cash flows from operations, and available borrowing capacity will be our primary sources of capital. However, we also expect to employ seller financing in the form of subordinated notes, earn-out agreements, indemnity hold-backs, and occasionally restricted stock and/or warrants. The level to which we employ these various methods, particularly the use of our equity, will depend upon a multitude of factors which are unique to each negotiation. In addition to the available capacity under our working capital line of credit, ~~to finance investments beyond our current operating needs~~ we believe we ~~may~~ have access to a variety of capital sources such as private placements of subordinated debt, and public or private sales of ~~equity.~~equity to finance investments beyond our current needs.

Results of Operations

In the third quarter of fiscal ~~2009~~2010 revenues were ~~$17.2~~$20.9 million compared to ~~$23.2~~$17.2 million in the third quarter ~~2008.~~2009. Our net ~~loss~~income in the third quarter of fiscal ~~2009~~2010 was $513,000, compared to a net loss of $8.6 million ~~compared to net income of $591,000 compared to~~in the same quarter a year ago. In the first nine months of the year, revenues were $53.5 million compared to $62.0 million for the first nine months of fiscal 2008. Our net loss for the first nine months of fiscal 2009 was $8.4 million compared to net income of $1.4 million in the first nine months of fiscal 2008. Net of the impairment charges and tax benefits recorded in the third quarter we incurred a non-GAAP net loss of $87,000 in the third quarter and generated non-GAAP net income of $98,000 year-to-date. Apart from the impairment charges on goodwill and other assets of $14.0 million ~~which are discussed above under “Overview”,~~recorded in the third quarter of fiscal 2009, these results primarily reflect ~~lower sales~~increased services and equipment revenues partially offset by higher selling, general and administrative costs. In the first nine months of ~~commercial systems and lower commissions earned from~~ the ~~sale~~year, revenues were $61.1 million compared to $53.5 million for the first nine months of ~~Avaya post-warranty maintenance contracts.~~fiscal 2009. Our net income for the first nine months of fiscal 2010 was $1.4 million compared to a net loss of $8.4 million in the first nine months of fiscal 2009. The year-to-date results, ~~were also impacted by~~excluding the ~~$350,000 bad debt provision associated with Nortel’s bankruptcy filing.~~impairment charge recorded in 2009, primarily reflect our strong first and third quarter results in all of our major revenue and gross profit categories. The narrative below provides further explanation of these results.

Systems Sales.

In the third quarter of fiscal ~~2009~~2010 systems sales ~~decreased~~increased approximately ~~$4.1~~$2.0 million or ~~39%~~31% compared to the same period last year. This ~~decrease~~increase includes a ~~$4.3~~$3.3 million or ~~52% decrease~~81% increase in sales of systems to commercial customers ~~partially offset by~~and a ~~$194,000~~$1.3 million or ~~8% increase~~50% decrease in sales of systems to hospitality customers. Year-to-date systems sales ~~decreased $5.8~~increased $2.2 million or ~~20%~~10% compared to last year. This ~~decrease~~increase includes ~~a decrease~~an increase in sales of systems to commercial customers of ~~$7.6~~$6.5 million or ~~33%~~41% which was ~~partially~~ offset by ~~an increase~~a decrease in sales of systems to hospitality customers of ~~$1.8~~$4.2 million or ~~33%~~58%. The ~~decrease~~third quarter increase in systems sales reflects a large project with one of our major customers in the education vertical market. Orders for systems to other commercial customers ~~reflects difficult comparisons related~~are above last year’s pace but reflect the general unpredictable nature of this segment of our business and reluctance on the part of some customers to ~~the revenues earned from the Miami-Dade County Public School’s (“M-DCPS”) project. Additionally macroeconomic~~make significant new investments in technology. In addition, uncertain U.S. economic conditions ~~Nortel’s bankruptcy and shipments scheduled for the third quarter but delayed at the customers’ request, impacted~~continue to present complex challenges to our ~~sales results.~~

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~~Throughout fiscal 2008 we enjoyed strong commercial systems sales, installation revenues, and cabling revenues generated~~hospitality customers as evidenced by the ~~series of orders received from M-DCPS. In total, these orders generated over $10 million~~decline in revenues for the Company during the year. We have not received a similar order during fiscal 2009, making comparisons to last year’s results more difficult. Additionally, customers continue to reduce capital spending in response to recessionary conditions, and access to credit remains problematic. As these conditions have intensified, customers have limited their capital spending to necessity purchases and investments with clear, rapid returns. Finally, uncertainty around the Nortel bankruptcy continues to severely dampen demand for equipment in this product line.

The quarterly and year to date growth in sales of systems to hospitality customers, particularly during a challenging hospitality market, reflects our continued success in this niche market. Results support our strategy to expand our product offering to Mitel products which has provided us with the opportunity to work with hotel chains and property management companies that have previously standardized on the Mitel product line. While we anticipate continued success in the hospitality market, given economic conditions, downward pressure on revenues in this ~~segment may intensify~~sector. The hospitality industry as a whole is experiencing cyclical weakness in demand and ~~as such revenues may be at or less than historical levels in the fourth quarter of the fiscal year.~~has limited its spending on new communications equipment and solutions.

Services Revenues.

Services revenues consist of the following:

	For the Three Months Ended July 31,				For the Nine Months Ended July 31,				For the Three Months Ended July 31,				For the Nine Months Ended July 31,
	2009		2008		2009		2008		2010		2009		2010		2009
Contract & T&M	$	7,358,000	$	7,202,000	$	21,384,000	$	21,438,000
Maintenance & repair									$	8,253,000	$	7,358,000	$	23,984,000	$	21,384,000
Implementation	2,469,000		3,864,000		6,926,000		8,251,000		3,164,000		2,469,000		9,453,000		6,926,000
Cabling	697,000		962,000		2,049,000		2,199,000		750,000		697,000		2,225,000		2,049,000
Total Services revenues	$	10,524,000	$	12,028,000	$	30,359,000	$	31,888,000	$	12,167,000	$	10,524,000	$	35,662,000	$	30,359,000

~~Contract~~17

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Maintenance and ~~time-and-materials (T&M)~~repair revenues increased ~~2% and decreased 0.3%, respectively~~12% in the third quarter and year-to-date periods. This year-to-date performance reflects ~~relatively flat revenues in~~the continued success of our wholesale services programs and ~~a modest decline~~repair revenues as well as the addition to our base of maintenance customers associated with the purchase of Lorica in ~~T&M service revenues. We believe T&M revenues were influenced by general economic conditions as customers reduced spending on non-critical services.~~the third quarter of fiscal 2010. We continue to aggressively market our national service footprint and multi-product line technical capabilities to ~~end-users,~~existing and potential wholesale service partners such as network service providers, and large ~~integrators of~~ voice and data ~~technologies. In the third quarter we realized beneficial returns from the new~~integrators. We also continue to market our service programs with Marriott International and Lockheed Martin Corporation that we secured in the second quarter. Additionally, the acquired customer relationships from Summatis beneficially influenced our results.capabilities to end-users. We expect growth in these ~~new~~ programs ~~and relationships~~ to positively impact our ~~Contract & T&M~~maintenance and repair revenues for the foreseeable future.

Implementation revenues ~~decreased 36% and 16%, respectively~~increased 28% in the third fiscal quarter reflecting an increase in revenues from our Professional Services Organization (“PSO”) and relatively flat installation revenues. For the year-to-date ~~periods. These declines, while significant, reflect a lower rate of decline than the corresponding decrease~~period, Implementation revenues increased 36% reflecting an increase in ~~systems sales, traditionally the primary driver of these revenues.~~revenues from PSO. We attribute this to increasing demand for more complex communications systems requiring significant fee-generating design and engineering ~~services provided by our Professional Services Organization (“PSO”).~~services. In the near term, Implementation revenues will continue to be closely aligned with the sale of new systems. From a long term perspective, however, as customers displace conventional communications platforms and adopt more complex systems, we anticipate growth in this area of our business through the fee-based utilization of these highly skilled technical resources.

Cabling revenues ~~decreased 28%~~increased 8% and 7%9%, respectively in the third fiscal quarter and year-to-date periods. ~~The third quarter decline~~These increases are primarily from a new wholesale service program added late in ~~cabling revenues is primarily associated with the difficult comparisons to~~ fiscal ~~2008 which were helped significantly by the M-DCPS orders as discussed above.~~2009.

Gross Margins.

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

~~Table of Contents~~

For the Three
Months Ended
July 31,

For the Nine
Months Ended
July 31,

Gross Margins

2009

2008

2009

2008

Services revenues

28.7
%
30.4
%
30.0
%
27.5
%
Systems sales

28.9
%
26.4
%
26.7
%
26.1
%
Other revenues

41.4
%
22.1
%
9.6
%
62.2
%
Corporate cost of goods sold

-2.0
%
-1.6
%
-2.0
%
-1.9
%
Total

26.8
%
26.7
%
26.5
%
25.8
%

Gross margins earned on Services revenues reflect mixed results between improved margins earned on our contract & T&M services which were offset by significantly lower margins earned on implementation activities. As a result of improved cost controls and reduced headcounts, we earned higher gross margins on our contract & T&M services revenues in the third quarter and in the year-to-date periods. However, due to lower utilization of installation and professional services personnel in the implementation department and difficult comparisons to the third quarter of fiscal 2008, our gross margins in this area suffered dramatically in the third quarter. For the year-to-date period implementation gross margins are also down, but cost reductions and on-boarding the new Samsung service program have helped to dampen the impact of lower revenues in this area. Similar to the Samsung program, developing additional billable consulting services which are not directly associated with new system installations is an important aspect of our services strategy to create more predictability and higher gross margins in this area.

	For the Three Months Ended July 31,				For the Nine Months Ended July 31,
Gross Margins	2010		2009		2010		2009
Systems sales	29.5	%	28.9	%	27.3	%	26.7	%
Services revenues	32.4	%	28.7	%	32.0	%	30.0	%
Other revenues	70.7	%	41.4	%	42.6	%	9.6	%
Corporate cost of goods sold	-1.8	%	-2.0	%	-1.8	%	-2.0	%
Total	29.7	%	26.8	%	28.4	%	26.5	%

Gross margins on systems sales in the third quarter and the year-to-date periods are above our target of 23% to 25% for systems revenues. ~~We continue~~Our consistent performance above our expected targets in this area is due to ~~receive considerable~~disciplined pricing practices and pricing support received from our manufacturers in the form of project-specific discounts and incentive ~~rebates.~~rebates which are recorded as reductions to cost of goods sold. These discounts and incentives are material to our gross margins.

Gross margins earned on Services revenues primarily reflect an increase in recurring service revenues combined with improved cost controls, the use of third party Quality Service Partners, and ~~we work diligently~~improved utilization of our professional services personnel for consulting and fee-based engagements. These items contributed to ~~maximize this support; however, no assurance can be given that future support will continue at historical levels.~~gross Services margins in our target range of 30-35%.

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 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 three quarters of fiscal 2009 we experienced a dramatic drop in other revenues as compared to the same period last year. Some decline in this segment was expected as we benefited from accelerated customer decisions throughout 2008. In 2008 many customers accelerated their purchases or renewals of Avaya service contracts in anticipation of manufacturer-driven changes in the structure of these service programs. 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. ~~While no assurance can be given, we expect sales of Avaya service contracts to return to pre fiscal 2008 levels.~~ Other revenues may also include sales and cost of goods sold on equipment or services sold 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.

Table of Contents

Operating Expenses.

Our total operating expenses ~~increased $13.6~~in the third quarter were $5.4 million or 25.8% of revenues compared to$4.7 million or 27.5% of revenues in the third quarter of fiscal 2009 ~~compared to~~excluding $14.0 million in impairment charges recorded in the third quarter of fiscal 2008. Operating expenses, including the $14.0 million impairment charges, were 109.0% of revenues in the third quarter compared to 22.1% in the third quarter last year. Excluding the impairment charges,2009. Our operating expenses were ~~27.5% of revenue in the third quarter. Operating expenses were 52.2%~~24.8% of revenues in the first three quarters of fiscal ~~2009~~2010 compared to ~~21.8%~~26.0% last ~~year. Excluding~~year, excluding the impairment ~~charges operating expenses~~charges. As discussed in the ~~first three quarters of fiscal 2009 were 26.0% of revenues. Apart from the impairment charges recognized in the third quarter,~~overview above, we have made strategic choices to focus on aggressively expanding our ~~year-to-date operating expenses reflect the following factors:~~

·~~A significant bad debt provision in response to the Nortel bankruptcy filing~~

·~~The addition of sales expense as a result of the Summatis acquisition~~

·~~Increased legal fees~~managed services business and on expanding through acquisitions. We have increased our expenditures to support ~~litigation~~these strategies. These expenditures coupled with slower than expected growth in our systems sales and ~~board governance activities~~

·~~Increased amortization of: the Oracle platform~~increased investments in ~~association with its expanded utilization;~~our Information Technology group to increase efficiencies and ~~intangible assets associated with recent acquisitions of service contracts and~~improve customer ~~lists~~

~~Table of Contents~~

~~The level of~~satisfaction has resulted in our operating expenses as a percentage of revenues ~~is above~~to continue to exceed our targets and we took steps in the third quarter to bring these costs more in line with our expectations. These steps included reductions of our sales force and sales support staffs, company-wide temporary suspension of the matching contribution on our 401k Plan, and a mandatory week of unpaid leave for each employee in the company. These steps were taken during the last half of the third quarter and had minimal impact to our third quarter results. Presently, rapidly declining systems sales make it difficult to meet our targets for operating expenses as a percent of revenues. Furthermore, wetargets. We consider it tactically appropriate, given our strong cash flows, to support operating expenses above our targets in the near term to ~~take advantage of improving economic conditions in subsequent quarters.~~capitalize on these opportunities to expand our revenues and increase our net profit margins.

Interest Expense and Other Income.

Net interest and other ~~expense~~income was ~~$22,000~~$16,000 in the third quarter of fiscal ~~2009~~2010 compared to ~~$96,000~~$22,000 in net other expense in the third quarter of fiscal ~~2008.~~2009. Net interest and other ~~expense~~income was ~~$65,000~~$43,000 for the nine-month period ended July 31, ~~2009~~2010 compared to ~~$241,000~~$65,000 in net other expense in the same period last year. This ~~decrease~~ reflects both reduced debt levels and lower interest ~~rates and a reduction in borrowings.~~rates.

Tax Provision.

ITEM ~~4T.~~4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Based on an evaluation conducted as of July 31, ~~2009~~2010 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 during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

During the fiscal quarter covered by this report, AMTEL had still not filed its dismissal of the arbitration claim filed in April 2008 by Design Business Communications, Inc., d/b/a/ American Telephone (“AMTEL”) against us and Hitachi Telecom (USA) Inc. (“HITEL”) alleging a breach of AMTEL’s Authorized Distributorship Agreement with HITEL (“Distributor Agreement”). The dismissal is to be filed pursuant to the terms of a settlement agreement in this case, which has been described in our previous periodic and annual reports.None.

Additionally, we are involved as a plaintiff in another matter which we consider to be routine and incidental to the operation of our business. We do not believe this proceeding will have a material affect on our financial position or results of operations.

~~Table of Contents~~

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, ~~2008~~2009 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 ~~2008~~2009 fiscal year have not materially changed.

~~Our business is affected by capital spending. Current economic conditions and the ability~~19

Table of ~~our customers to access credit may continue to reduce capital spending for the foreseeable future.~~Contents

~~The U.S. economy is mired in a recessionary contraction~~Avaya’s recently implemented requirements regarding minimum level service agreements and ~~despite efforts by the Federal Government to stabilize the banking~~hardware and financial systems, credit availability remains limited for nearly all enterprises, hence the outlook for corporate profits is uncertain. These factors are contributing to a high degree of uncertainty concerning capital spending. Because our business is affected by capital spending for technology and equipment, we may continue to experience declining demand for our products. Thissoftware upgrade requirements could have a material, negative impact on our ~~operating results and financial condition.~~

~~We may incur additional goodwill and other asset impairments.~~services gross margins.

~~Our business has been~~Avaya implemented new policies, effective July 1, 2010, requiring all customers to contract with Avaya for minimum service levels to access Tier IV support, and ~~may continue~~ to ~~be materially adversely affected by~~maintain their software at no more than two trailing major version releases than the current ~~macroeconomic conditions. During~~version. The impact of these changes to our business will be negative, but the ~~fiscal year we have experienced~~materiality of the impact is uncertain at this time. These impacts could include a significant decline in ~~revenues in~~ our ~~commercial equipment reporting unit and a sustained decline in~~services gross margins if we are required to purchase Avaya service contracts on behalf of all of our ~~market capitalization. Based~~customers. Conversely, if we chose to forego such purchases on behalf of our customers, we risk reduced customer satisfaction due to the ~~results~~lack of ~~an interim test~~access to Avaya’s Tier IV support. We might also experience reduced sales of new Avaya systems if customers choose to abandon the product line due to increased costs for ~~impairment, management determined that goodwill associated with our commercial equipment reporting unit was impaired and accordingly we recorded an impairment charge of $11.0 million~~the mandatory Avaya maintenance contract. Avaya has provided some transition relief in the ~~third fiscal quarter. This represents~~form of blanket contracts and other exceptions to its stated policy, but it is too early to determine with confidence the long-term impact of these changes on our ~~best estimate of the probable impairment at~~business. At this time. We may have to adjust the impairment charge after completing step two of the impairment test in connection with our next periodic report filing with the Securities and Exchange Commission. Furthermore, we could experience further deterioration in this area or other areas of our business which might create additional impairment of our remaining goodwill balances. Additional impairment charges couldtime, no assurance can be given that these policy changes will not have a material, adverse ~~effect~~impact on our ~~financial condition and~~operating results ~~of operations. See Note 1 to our Consolidated Financial Statements for additional information regarding our goodwill and other asset impairment charges.~~beginning as soon as fiscal 2011.

Nortel’s Chapter 11 ~~bankruptcy~~Bankruptcy filing and subsequent sale of its enterprise solution business to Avaya may ~~result in both a short-term and long-term~~negatively impact our revenues and/or financial ~~loss for the Company.~~condition.

Nortel filed a voluntary petition for Chapter 11 bankruptcy protection on January 14, 2009. ~~We are owed approximately $685,000 in pre-petition accounts receivable less approximately $116,000 in approved offsets for amounts we owed~~On July 12, 2010 Nortel filed its plan of reorganization which was essentially a plan of liquidation. This matter poses a variety of risks to ~~Nortel at the time of the filing. If~~ our pre-petition claims are not collectible either in whole or in large part, we could experience material, negative operating results in the near term. Based on filings approved by the bankruptcy court allowing Nortel to fund post-petition business, operations, we have continued to provide services to Nortel’s end-user customers under our wholesale services relationship, which currently produces approximately $3 million in annual revenues. To date, payment for these services have been paid generally according to their terms which were significantly tightened after the filing.as follows:

The administrators of the bankruptcy have adopted a business disposal strategy. Under this strategy, the administrators have segmented Nortel into three business units: Virtual Service Switches, CDMA businesses and Enterprise Solutions. We conduct all of our Nortel business through the Enterprise Solutions unit. On July 21, 2009, the administrators of the bankruptcy announced they had entered into a stalking horse assets and share sale agreement with Avaya for the Enterprise Solutions unit and this process is proceeding. Due to the nature of the stalking horse auction process, a final determination of the purchaser of the Enterprise Solutions unit is not expected until near the end of our fiscal year. Because neither Avaya nor other potential bidders have publicly stated their operating and marketing strategy should they prevail in the auction process, it is impossible for us to predict the impact of this process to our business. We believe we can present compelling value propositions to any potential purchaser of Nortel enterprise business unit, but the ultimate success of those strategies cannot be assured.
·
Uncertainty surrounding Nortel’s bankruptcy has significantly dampened demand for equipment in this product line as existing Nortel customers evaluate costs and risks associated with maintaining their commitment to the Nortel platform and the associated Avaya product roadmap versus transitioning their installed based to other manufacturers’ platform.
·
We are owed approximately $717,000 in pre-petition accounts receivable less approximately $116,000 in approved offsets for amounts we owed to Nortel at the time of the filing. Nortel’s July 12 filing classifies our claim as a Class 3 “General Unsecured” claim. As such, our claim will be impaired and any distribution made by Nortel to Class 3 unsecured creditors will be shared among such creditors on a pro-rata basis. We do not know the extent to which this receivable will be impaired but it is apparent we will not collect the full amount. If this claim is not collectible in large part, we could experience material, negative operating results in the near term.
·
Nortel has filed a statement of financial affairs under which it shows payments to the Company against multiple invoices of approximately $1.6 million which were made during the 90-day statutory “preference period” under bankruptcy law. XETA’s figure for these payments is $1.14 million. As such, these payments are considered “preference payments” and are subject to a “preference claim” which can be asserted by Nortel. Bankruptcy law allows the debtor to recover these payments unless the creditor successfully establishes that the payments were made in the ordinary course of business between the debtor and creditor or if the payments were offset by subsequent new value given by XETA in the form of goods or services. If Nortel elects to assert a preference claim against the Company for this amount or any portion thereof and the Company is unable to successfully defend the claim, the Company would have to return any such amounts to Nortel.
·
Avaya’s purchase of the Nortel enterprise solution business (“NES”) may result in a significant disruption and/or material decline in our revenues and gross profits. NES is both one of our major suppliers and is an important customer in that NES outsources significant volumes of service calls to us under various managed services programs that NES has with end-user customers. Avaya and NES are large, complex companies with global operations. They have had very different marketing strategies and both have long, deep cultural traditions. The integration of these two companies will be challenging and disruptive to the market. There can be no assurance given that the combination of Avaya and NES will not have near-term and/or long-term material, negative impact on our operating results, financial position, market position, and overall reputation.

~~Avaya’s strategies regarding the provision of equipment and services to their customers are changing and could have a material impact on our operating results.~~20

Table of Contents

~~Avaya is repositioning itself as~~The acquisition and integration of businesses by the Company may not produce the desired financial and/or operating results.
We have recently completed the acquisition of the operating assets of Lorica Solutions and the stock of Pyramid Communication Services, Inc. These developments are a ~~hardware and software manufacturer providing a wide range of voice communications hardware and applications to its customers. As~~ part of ~~this~~our stated strategy ~~Avaya~~to take advantage of the current disruption in our market by acquiring assets that increase our market share and establish a presence in the advanced communications applications market segment. Integrating new operating assets into an existing organization is ~~segmenting its hardware maintenance~~a complex business proposition. Expected synergies and ~~software support. The new software support offerings include technical support~~growth often do not materialize as planned. We used existing cash balances to fund the acquisitions and their integration costs. Furthermore, we will devote significant time and effort to improve the probability of success for ~~specific voice applications~~these investments. However, no assurance can be given that these acquisitions will meet our expectations for revenues and ~~upgrade services to ensure customers can access all software patches and upgrades. Currently, we earn revenues from some of~~operating results, or that our ~~customers, particularly hospitality customers, to provide the products and services now being included by Avaya in its new software support offerings. These changes~~capital could have ~~a material, negative impact on~~been used more efficiently to improve our financial condition or operating ~~results if our revenues or margins are reduced in response to these mandated changes by Avaya.~~results.

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

~~(a)~~ None.
~~(b) None.~~
~~(c) Issuer Purchases of Equity Securities~~
On October 29, 2008 the Board of Directors approved a stock repurchase program authorizing the Company to use up to $1.0 million to repurchase its outstanding common stock on the open market. Since the inception of the program, we have repurchased a total of 31,728 shares of our common stock for a total cash investment of $58,157. This program does not have an expiration date. The following table presents repurchase activity for the third quarter of fiscal 2009:
Fiscal
Period

Total Number of Shares
Purchased

Average Price Paid per
Share

Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Program

Approximate
Dollar Value
of Shares
that May Yet
Be Purchased
Under the
Program

May 2009

—

$
—

—

$
944,049

June 2009

—

—

—

944,049

July 2009

1,000

2.21

1,000

941,843

Total

1,000

$
2.21

1,000

$
941,843

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.
~~ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.~~
~~None.~~

ITEM 5. OTHER INFORMATION.

~~(a)~~ None.

ITEM 6. EXHIBITS.

Exhibits (filed herewith):
24

~~Table of Contents~~

SEC Exhibit No.

Description
2.1
Asset Purchase Agreement dated May 10, 2010 between XETA Technologies, Inc. as Purchaser, Hotel Technology Solutions, Inc. as Seller, and Seller Principals.*
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT.
2.2
Stock Purchase Agreement dated July 9, 2010 by and among Sellers, Pyramid Communications Services, Inc. and XETA Technologies, Inc.*
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT.
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
21

Table of Contents
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.
*
The schedules to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A list of the omitted schedules appears at the end of the Exhibit. The Registrant hereby agrees to furnish a copy of any omitted schedules to the Commission upon request.
22

Table of Contents
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: September 3, 2010
By:
/s/ Greg D. Forrest
Greg D. Forrest
Chief Executive Officer
Dated: September 3, 2010
By:
/s/ Robert B. Wagner
Robert B. Wagner
Chief Financial Officer
23

Table of Contents
EXHIBIT INDEX
SEC Exhibit No.
Description
2.1
Asset Purchase Agreement dated May 10, 2010 between XETA Technologies, Inc. as Purchaser, Hotel Technology Solutions, Inc. as Seller, and Seller Principals.*
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE COMPANY’S APPLICATION FOR CONFIDENTIAL TREATMENT.
2.2
Stock Purchase Agreement dated July 9, 2010 by and among Sellers, Pyramid Communications Services, Inc. and XETA Technologies, Inc.*
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE COMPANY’S APPLICATION FOR CONFIDENTIAL TREATMENT.

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.

25

~~Table of Contents~~
~~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: August 28, 2009~~
~~By:~~
~~/s/ Greg D. Forrest~~
~~Greg D. Forrest~~
~~Chief Executive Officer~~
~~Dated: August 28, 2009~~
~~By:~~
~~/s/ Robert B. Wagner~~
~~Robert B. Wagner~~
~~Chief Financial Officer~~The schedules to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A list of the omitted schedules appears at the end of the Exhibit. The Registrant hereby agrees to furnish a copy of any omitted schedules to the Commission upon request.

26

~~Table of Contents~~
~~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.~~
27

	July 31, 2009			(Audited) October 31, 2008

Trade accounts receivables	$	11,938,936		$	20,188,378
Less reserve for doubtful accounts	(556,212		)	(192,880		)
Net trade accounts receivables	$	11,382,724		$	19,995,498

	July 31, 2009		(Audited) October 31, 2008
Deferred tax assets:
Net operating loss carryforward	$	1,889,299	$	1,158,195
Currently nondeductible reserves	555,173		353,000
Accrued liabilities	451,458		172,258
Prepaid service contracts	34,895		43,547
Stock based compensation expense	230,559		144,525
Other	33,067		29,488
Total deferred tax asset	3,194,451		1,901,013

Deferred tax liabilities:
Intangible assets	1,219,942		5,051,498
Depreciation	675,945		1,788,933
Other	643,936		—
Tax income to be recognized on sales-type lease contracts	22,660		17,348
Total deferred tax liability	2,562,483		6,857,779
Net deferred tax asset (liability)	$	631,968	$	(4,956,766	)

	July 31, 2009		(Audited) October 31, 2008
Net deferred asset (liability) as presented on the balance sheet:
Current deferred tax asset	$	418,420	$	588,926
Noncurrent deferred tax asset (liability)	213,548		(5,545,692		)
Net deferred tax asset (liability)	$	631,968	$	(4,956,766	)

·		Uncertainty surrounding Nortel’s bankruptcy has significantly dampened demand for equipment in this product line as existing Nortel customers evaluate costs and risks associated with maintaining their commitment to the Nortel platform and the associated Avaya product roadmap versus transitioning their installed based to other manufacturers’ platform.
·		We are owed approximately $717,000 in pre-petition accounts receivable less approximately $116,000 in approved offsets for amounts we owed to Nortel at the time of the filing. Nortel’s July 12 filing classifies our claim as a Class 3 “General Unsecured” claim. As such, our claim will be impaired and any distribution made by Nortel to Class 3 unsecured creditors will be shared among such creditors on a pro-rata basis. We do not know the extent to which this receivable will be impaired but it is apparent we will not collect the full amount. If this claim is not collectible in large part, we could experience material, negative operating results in the near term.
·		Nortel has filed a statement of financial affairs under which it shows payments to the Company against multiple invoices of approximately $1.6 million which were made during the 90-day statutory “preference period” under bankruptcy law. XETA’s figure for these payments is $1.14 million. As such, these payments are considered “preference payments” and are subject to a “preference claim” which can be asserted by Nortel. Bankruptcy law allows the debtor to recover these payments unless the creditor successfully establishes that the payments were made in the ordinary course of business between the debtor and creditor or if the payments were offset by subsequent new value given by XETA in the form of goods or services. If Nortel elects to assert a preference claim against the Company for this amount or any portion thereof and the Company is unable to successfully defend the claim, the Company would have to return any such amounts to Nortel.
·		Avaya’s purchase of the Nortel enterprise solution business (“NES”) may result in a significant disruption and/or material decline in our revenues and gross profits. NES is both one of our major suppliers and is an important customer in that NES outsources significant volumes of service calls to us under various managed services programs that NES has with end-user customers. Avaya and NES are large, complex companies with global operations. They have had very different marketing strategies and both have long, deep cultural traditions. The integration of these two companies will be challenging and disruptive to the market. There can be no assurance given that the combination of Avaya and NES will not have near-term and/or long-term material, negative impact on our operating results, financial position, market position, and overall reputation.

Fiscal Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program

May 2009	—	$	—	—	$	944,049
June 2009	—	—		—	944,049
July 2009	1,000	2.21		1,000	941,843
Total	1,000	$	2.21	1,000	$	941,843

SEC Exhibit No.		Description

2.1		Asset Purchase Agreement dated May 10, 2010 between XETA Technologies, Inc. as Purchaser, Hotel Technology Solutions, Inc. as Seller, and Seller Principals.*

		PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT.

2.2		Stock Purchase Agreement dated July 9, 2010 by and among Sellers, Pyramid Communications Services, Inc. and XETA Technologies, Inc.*

		PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT.

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: September 3, 2010	By:	/s/ Greg D. Forrest
		Greg D. Forrest
		Chief Executive Officer


Dated: September 3, 2010	By:	/s/ Robert B. Wagner
		Robert B. Wagner
		Chief Financial Officer

	~~XETA Technologies, Inc.~~
	~~(Registrant)~~
*

~~Dated: August 28, 2009~~	~~By:~~	~~/s/ Greg D. Forrest~~
		~~Greg D. Forrest~~
		~~Chief Executive Officer~~

~~Dated: August 28, 2009~~	~~By:~~	~~/s/ Robert B. Wagner~~
		~~Robert B. Wagner~~
		~~Chief Financial Officer~~The schedules to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A list of the omitted schedules appears at the end of the Exhibit. The Registrant hereby agrees to furnish a copy of any omitted schedules to the Commission upon request.

~~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.~~