UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2010 OR o TRANSITION 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 January 31, 2010~~

OR

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

Commission File Number 0-16231

XETA Technologies, Inc.

(Exact name of registrant as specified in its charter)

Oklahoma		73-1130045
(State or other jurisdiction of		(I.R.S. Employee
incorporation or organization)		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 x

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 ~~February 20,~~August 23, 2010 there were ~~10,298,302~~10,699,186 shares of the registrant’s common stock, par value $0.001, outstanding.

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INDEX

			PAGE

PART I. FINANCIAL INFORMATION

	ITEM 1. FINANCIAL STATEMENTS (Unaudited)

		Consolidated Balance Sheets - ~~January~~July 31, 2010 and October 31, 2009	3

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

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

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

		Notes to Consolidated Financial Statements	7

	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS		1315

	ITEM ~~4T.~~4. CONTROLS AND PROCEDURES		1619

PART II. OTHER INFORMATION

	ITEM 1. LEGAL PROCEEDINGS		1719

	ITEM 1A. RISK FACTORS		1719

	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		1821

	ITEM 3. DEFAULTS UPON SENIOR SECURITIES		1821

	~~ITEM 4. OTHER INFORMATION~~		18

	ITEM 5. OTHER INFORMATION		21

	ITEM 6. EXHIBITS		1921

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

Current assets:
Cash and cash equivalents	$	5,409,390		$	4,731,926			$	3,765,276		$	4,731,926
Current portion of net investment in sales-type leases and other receivables	533,290			470,025				1,207,697			470,025
Trade accounts receivable, net	13,647,965			13,832,452				14,540,631			13,832,452
Inventories, net	4,918,901			5,036,198				4,864,340			5,036,198
Deferred tax asset	1,169,711			1,136,351				1,325,200			1,136,351
Prepaid taxes	45,079			39,784				65,613			39,784
Prepaid expenses and other assets	2,397,220			2,057,514				2,271,230			2,057,514
Total current assets	28,121,556			27,304,250				28,039,987			27,304,250

Noncurrent assets:
Goodwill	12,018,081			12,031,975				14,303,926			12,031,975
Intangible assets, net	514,175			570,740				1,032,017			570,740
Net investment in sales-type leases and other receivables, less current portion above	349,210			335,413				327,404			335,413
Property, plant & equipment, net	6,616,018			6,825,916				6,655,190			6,825,916
Deferred tax asset	310,749			739,216				—			739,216
Total noncurrent assets	19,808,233			20,503,260				22,318,537			20,503,260

Total assets	$	47,929,789		$	47,807,510			$	50,358,524		$	47,807,510

LIABILITIES AND SHAREHOLDERS’ EQUITY							LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	—		$	1,183,475			$	—		$	1,183,475
Accounts payable	6,091,355			5,785,225				5,997,032			5,785,225
Current portion of obligations under capital lease	155,569			154,072				145,155			154,072
Current unearned services revenue	5,060,093			5,194,601				4,729,261			5,194,601
Accrued liabilities	3,888,975			3,444,396				3,950,248			3,444,396
Total current liabilities	15,195,992			15,761,769				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	66,618			106,076				—			106,076
Noncurrent unearned services revenue	53,289			36,691				49,215			36,691
Noncurrent deferred tax liability								222,417			—
Total noncurrent liabilities	264,007			286,867				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 January 31, 2010 and October 31, 2009	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	13,704,028			13,704,460				15,623,224			13,704,460
Retained earnings	20,855,957			20,223,169				21,581,086			20,223,169
Less treasury stock, at cost (957,891 shares at January 31, 2010 and 993,763 shares at October 31, 2009)	(2,101,450		)	(2,180,010		)
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	32,469,790			31,758,874				35,121,096			31,758,874
Total liabilities and shareholders’ equity	$	47,929,789		$	47,807,510			$	50,358,524		$	47,807,510

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

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

Systems sales	$	10,867,058		$	8,585,753		$	8,536,584		$	6,522,569		$	25,146,279		$	22,897,460
Services	12,116,857			9,993,233			12,166,889			10,524,397			35,661,654			30,359,279
Other revenues	60,228			1,039			188,300			136,271			325,980			263,126
Net sales and services revenues	23,044,143			18,580,025			20,891,773			17,183,237			61,133,913			53,519,865

Cost of systems sales	8,076,587			6,342,365			6,021,390			4,639,749			18,270,980			16,791,637
Services costs	8,231,080			6,983,739			8,223,095			7,505,892			24,236,849			21,258,445
Cost of other revenues & corporate COGS	397,635			447,770			434,436			425,480			1,287,991			1,308,525
Total cost of sales and services	16,705,302			13,773,874			14,678,921			12,571,121			43,795,820			39,358,607

Gross profit	6,338,841			4,806,151			6,212,852			4,612,116			17,338,093			14,161,258

Operating expenses
Selling, general and administrative	5,125,283			4,456,109			5,178,574			4,388,488			14,566,200			12,925,794
Amortization	186,855			322,251			206,386			344,727			580,471			1,001,984
Impairment of goodwill & other assets							—			14,000,000			—			14,000,000
Total operating expenses	5,312,138			4,778,360			5,384,960			18,733,215			15,146,671			27,927,778

Income from operations	1,026,703			27,791
Income (loss) from operations							827,892			(14,121,099		)	2,191,422			(13,766,520		)

Interest expense	(6,170		)	(29,903		)	(4,372		)	(20,810		)	(15,286		)	(79,211		)
Interest and other income	21,255			11,380
Interest and other income (expense)							20,254			(1,159		)	58,781			14,219
Net interest and other income (expense)	15,085			(18,523		)	15,882			(21,969		)	43,495			(64,992		)

Income before provision for income taxes	1,041,788			9,268
Provision for income taxes	409,000			7,000
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 income	$	632,788		$	2,268
Net income (loss)							$	512,774		$	(8,599,068	)	$	1,357,917		$	(8,413,512	)

Earnings per share
Earnings (loss) per share
Basic	$	0.06		$	0.00		$	0.05		$	(0.84	)	$	0.13		$	(0.82	)

Diluted	$	0.06		$	0.00		$	0.05		$	(0.84	)	$	0.13		$	(0.82	)

Weighted average shares outstanding	10,237,405			10,222,494			10,533,335			10,223,753			10,328,689			10,223,881

Weighted average equivalent shares	10,277,361			10,222,494			10,611,403			10,223,753			10,386,218			10,223,881

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

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

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

Balance- October 31, 2009	11,256,193	$	11,255	993,763		$	(2,180,010	)	$	13,704,460		$	20,223,169	$	31,758,874	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	—	—		(35,872	)	78,560			(78,560		)	—		—		—	—		(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	—	—		—		—			78,128			—		78,128		—	—		—		—			225,305			—		225,305

Net income	—	—		—		—			—			632,788		632,788		—	—		—		—			—			1,357,917		1,357,917

Balance- January 31, 2010	11,256,193	$	11,255	957,891		$	(2,101,450	)	$	13,704,028		$	20,855,957	$	32,469,790
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.

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Three Months						For the Nine Months
	Ended January 31,						Ended July 31,
	2010			2009			2010			2009
Cash flows from operating activities:
Net income	$	632,788		$	2,268
Net income (loss)							$	1,357,917		$	(8,413,512	)

Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	285,801			224,947			906,435			722,944
Amortization	186,855			322,251			580,471			1,001,984
Impairment of goodwill & other assets							—			14,000,000
Stock-based compensation	74,060			70,365			200,240			219,476
Loss on sale of assets	—			3,764			—			3,764
Provision for returns & doubtful accounts receivable	15,000			365,000			45,000			395,000
Provision for excess and obsolete inventory	25,500			25,500			76,500			76,500
Deferred taxes	409,001			(28,306		)	814,466			(5,547,052		)
Change in assets and liabilities:
Increase in net investment in sales-type leases & other receivables	(77,062		)	(145,586		)	(729,663		)	(7,440		)
Decrease in trade accounts receivable	68,599			1,593,819
Decrease (increase) in inventories	191,797			(882,926		)
Increase in prepaid expenses and other assets	(339,706		)	(73,282		)
(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	(5,295		)	24,140			(25,829		)	31,219
Increase (decrease) in accounts payable	306,130			(1,297,187		)
(Decrease) increase in unearned revenue	(17,022		)	400,226
Decrease in accounts payable							(589,907		)	(2,739,735		)
Decrease in unearned revenue							(554,824		)	(446,734		)
Increase (decrease) in accrued liabilities	348,647			(80,309		)	483,251			(408,020		)
Total adjustments	1,472,305			522,416			1,019,971			16,336,500

Net cash provided by operating activities	2,105,093			524,684			2,377,888			7,922,988

Cash flows from investing activities:
Additions to property, plant & equipment	(206,193		)	(218,552		)	(1,046,070		)	(636,586		)
Proceeds from sale of assets	—			5,064			—			5,064
Acquisitions, net of cash acquired							(1,000,000		)	(802,887		)
Investment in capitalized service contracts	—			(750,000		)	—			(750,000		)
Net cash used in investing activities	(206,193		)	(963,488		)	(2,046,070		)	(2,184,409		)

Cash flows from financing activities:
Principal payments on debt	(1,183,475		)	(42,773		)	(1,183,475		)	(128,317		)
Net payments on revolving line of credit	—			655,977			—			(2,524,130		)
Payments on capital lease obligations	(37,961		)	(36,521		)	(114,993		)	(110,630		)
Payments to acquire treasury stock	—			(48,093		)	—			(58,157		)
Net cash (used in) provided by financing activities	(1,221,436		)	528,590
Net cash used in financing activities							(1,298,468		)	(2,821,234		)

Net increase in cash and cash equivalents	677,464			89,786
Net (decrease) increase in cash and cash equivalents							(966,650		)	2,917,345

Cash and cash equivalents, beginning of period	4,731,926			63,639			4,731,926			63,639
Cash and cash equivalents, end of period	$	5,409,390		$	153,425		$	3,765,276		$	2,980,984

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	13,651		$	30,149		$	22,679		$	87,523
Cash paid during the period for income taxes	$	5,295		$	12,860		$	47,582		$	102,095
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.

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

~~January~~July 31, 2010

(Unaudited)

1. BASIS OF PRESENTATION:

XETA Technologies, Inc. (“XETA”, the “Company”, “we”, “us”, or “our”), an Oklahoma corporation formed in 1981, is a leading integrator of advanced communications technologies with nationwide sales and service. XETA provides sales, design, project management, implementation, and maintenance services in support of the products it represents. The Company sells and/or supports products produced by several manufacturers including Avaya, Inc. (“Avaya”), ~~Nortel Networks Corporation (“Nortel”),~~ 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.

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. The Company believes that the disclosures are reasonably adequate to 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, with the Commission on January 8, 2010. Management believes that the financial statements contain the necessary adjustments 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.

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

	Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total			Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total
2010
Sales	$	12,116,857		$	10,038,581		$	828,477		$	60,228		$	23,044,143		$	12,166,889		$	7,296,428		$	1,240,156		$	188,300		$	20,891,773
Cost of sales	(8,231,080		)	(7,540,985		)	(535,602		)	(397,635		)	(16,705,302		)	(8,223,095		)	(5,136,934		)	(884,456		)	(434,436		)	(14,678,921		)
Gross profit	$	3,885,777		$	2,497,596		$	292,875		$	(337,407	)	$	6,338,841		$	3,943,794		$	2,159,494		$	355,700		$	(246,136	)	$	6,212,852

2009
Sales	$	9,993,233		$	6,296,705		$	2,289,048		$	1,039		$	18,580,025		$	10,524,397		$	4,032,103		$	2,490,466		$	136,271		$	17,183,237
Cost of sales	(6,983,739		)	(4,801,767		)	(1,540,598		)	(447,770		)	(13,773,874		)	(7,505,892		)	(2,828,437		)	(1,811,312		)	(425,480		)	(12,571,121		)
Gross profit	$	3,009,494		$	1,494,938		$	748,450		$	(446,731	)	$	4,806,151		$	3,018,505		$	1,203,666		$	679,154		$	(289,209	)	$	4,612,116

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

2009
Sales	$	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		)
Gross profit	$	9,100,834		$	4,017,050		$	2,088,773		$	(1,045,399	)	$	14,161,258

Stock-Based Compensation Plans

The Company applies the provisions of ASC 718, “Compensation — Stock Compensation”, 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 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:

2010

2009

Three months ended January 31,

$
74,060

$
70,365

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

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

Use of Estimates

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

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New Accounting Pronouncements

In July 2010 the Financial Accounting Standards 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 enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Disclosures include an evaluation of the nature of credit risk inherent in the entity’s financing receivables; how the risk is analyzed to arrive at the allowance for 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 disclosed by portfolio segment. ASU 2010-20 will be effective for fiscal years beginning on or after December 31, 2010. The adoption of 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 November 2009 the Company adopted ~~ASC~~Accounting Standards Codification (“ASC”) 810, “Consolidation”. ASC 810 changes the accounting and reporting for minority interests, which ~~will be~~are now recharacterized as non-controlling interests and classified as a component of equity. The Company does not have any minority interests; therefore the adoption of this statement did not have an impact on the Company’s consolidated financial statements.

In November 2009 the Company adopted ASC 805, “Business Combinations”. Under 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 Company ~~will apply~~began applying the guidance ~~prospectively~~ to business ~~combinations.~~combinations in fiscal 2010.

In November 2009 the Company adopted ASC 350 “Intangibles — Goodwill and Other”. The guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets. The intent of the guidance is to improve the consistency between the useful life of a recognized intangible asset under the accounting standards and the period of the

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expected cash flows used to measure the fair value of the asset. The Company ~~will apply~~began applying the guidance ~~prospectively~~ to intangible assets acquired ~~after adoption.~~in fiscal 2010.

In October 2009 the FASB issued ~~Accounting Standards Update (“ASU”)~~ASU 2009-13, “Revenue Recognition - Multiple-Deliverable Revenue Arrangements”. The guidance in ASU 2009-13 amends the criteria for separating consideration in multiple-deliverable ~~arrangements~~arrangements. The guidance eliminates the estimated fair value approach for revenue allocation between the separate units of accounting and replaces it with a sales-based approach referred so as the 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 fiscal years beginning on or after June 15, 2010. The Company is currently assessing the impact that adoption will have on required disclosures, its financial position orand results of operations.

Other 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.

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2. ACCOUNTS RECEIVABLE:

Trade accounts receivable consist of the following:

January 31,
2010

(Audited)
October 31,
2009

Trade accounts receivables

$
14,198,928

$
14,393,681

Less- reserve for doubtful accounts

(550,963
)
(561,229
)
Net trade accounts receivables

$
13,647,965

$
13,832,452

	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 Bankruptcy Court for the District of Delaware. Subsequent to the filing the administrators of the bankruptcy adopted a business disposal strategy. Under the strategy, the administrators 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 December 18, 2009, Avaya completed the purchase of Nortel’s Enterprise Solutions business unit. Nortel is one of our major suppliers and is an important customer. In addition, its product line represents a significant portion of our business. At the time of filing this Form 10-Q, our post-petition relationship with Nortel continues uninterrupted. However, management recognizes the potential impact of Nortel’s filing on the Company’s financial performance. Nortel owes XETA approximately $700,000 in pre-petition accounts receivable. On July 17, 2009 the bankruptcy court granted ~~our~~XETA’s request for offset of $116,000 in charges we owed to Nortel at the time of the filing. In fiscal year 2009, wethe Company recorded $350,000 as a reserve against possible Nortel bad debts. Nortel ~~has until~~filed its plan of reorganization on July ~~13,~~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 ~~file~~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 ~~reorganization plan; however,~~reserve in this ~~date is subject to further extension. Until the administrators file Nortel’s reorganization plan our ability to assess the probability of recovering pre-petition amounts due is limited.~~

matter. The Company iswill continue to carefully ~~following~~follow developments associated with the bankruptcy case and will assert its legal rights and defenses as appropriate.

3. INVENTORIES:

Inventories are stated at the lower of average cost or market and consist of the following:

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

Finished goods and spare parts	$	5,881,709		$	5,977,703		$	5,899,077		$	5,977,703
Less- reserve for excess and obsolete inventories	(962,808		)	(941,505		)	(1,034,737		)	(941,505		)
Total inventories, net	$	4,918,901		$	5,036,198		$	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	January 31, 2010			(Audited) October 31, 2009			Estimated Useful Lives	July 31, 2010			(Audited) October 31, 2009

Building and building improvements	3-20	$	3,292,623		$	3,253,693		3-20	$	3,378,035		$	3,253,693
Data processing and computer field equipment	2-7	3,396,173			3,248,126			2-7	3,977,439			3,248,126
Software development costs, work-in-process	N/A	197,934			197,097			N/A	227,862			197,097
Software development costs of components placed into service	3-10	2,708,930			2,697,806			3-10	2,731,310			2,697,806
Hardware	3-5	643,635			643,635			3-5	643,635			643,635
Land	—	611,582			611,582			—	611,582			611,582
Office furniture	5-7	790,547			779,588			5-7	813,556			779,588
Auto	5	537,300			537,300			5	545,548			537,300
Other	3-7	145,779			149,484			3-7	145,779			149,484

Total property, plant and equipment		12,324,503			12,118,311				13,074,746			12,118,311
Less- accumulated depreciation and amortization		(5,708,485		)	(5,292,395		)		(6,419,556		)	(5,292,395		)

Total property, plant and equipment, net		$	6,616,018		$	6,825,916			$	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%.

6. CREDIT AGREEMENTS:

In November 2009, the Company entered into a one-year loan agreement with a new financial institution. This agreement replaced our previous credit facility, which was scheduled to mature on November 30, 2009. The loan agreement consists of an $8.5 million revolving credit facility collateralized by trade accounts receivable, inventories, and real estate.

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

January 31,
2010

(Audited)
October 31,
2009

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

—

1,183,475

Total long-term debt, less current maturities

$
—

$
0-

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	July 31, 2010		(Audited) October 31, 2009

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	—		1,183,475

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

Interest on all outstanding debt under the credit facility accrues at the greater of either the London Interbank Offered Rate (“LIBOR”) ~~(0.229%~~(0.305% at ~~January~~July 31, 2010) plus 3.0% or 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 cash dividends, and debt service coverage requirements. At July 31, 2010 the Company was in compliance with the covenants of the credit 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 January 31, 2010					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 income	$	632,788	10,237,405	$	0.06	$	512,774	10,533,335	$	0.05
Dilutive effect of stock options			39,956					78,068

Diluted EPS
Net income	$	632,788	10,277,361	$	0.06	$	512,774	10,611,403	$	0.05

	For the Three Months Ended January 31, 2009					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	$	2,268	10,222,494	$	0.00
Net loss						$	(8,599,068	)	10,223,753	$	(0.84	)
Dilutive effect of stock options			—						—

Diluted EPS
Net income	$	2,268	10,222,494	$	0.00
Net loss						$	(8,599,068	)	10,223,753	$	(0.84	)

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

Diluted EPS
Net income	$	1,357,917	10,386,218	$	0.13

	For the Nine Months Ended July 31, 2009
	Loss (Numerator)			Shares (Denominator)	Per Share Amount
Basic EPS
Net loss	$	(8,413,512	)	10,223,881	$	(0.82	)
Dilutive effect of stock options				—

Diluted EPS
Net loss	$	(8,413,512	)	10,223,881	$	(0.82	)

Options to purchase ~~993,438~~712,450 shares of common stock at an average exercise price of ~~$6.63~~$5.82 and ~~1,288,300~~1,269,900 shares of common stock at an average exercise price of ~~$6.43~~$6.42 were not included in the computation of diluted earnings per share for the three months ended ~~January~~July 31, 2010 and 2009, respectively, because inclusion of these options would be antidilutive. Options to purchase 834,595 shares of common stock at an average exercise price of $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, 2010 and 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

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defenses must be argued on each individual Company invoice paid during the preference period. The ~~Company has not completed its evaluation of its potential defenses against each individual invoice. As such 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 ~~$215,579~~$139,492 at ~~January~~July 31, 2010. Accumulated amortization of the leased licenses at ~~January~~July 31, 2010 was ~~$240,941.~~$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 ~~January~~July 31, 2010, are as follows:

	Capital Lease Payments		Capital Lease Payments

2010	$	161,435
2011	67,265
Total minimum lease payments	228,700		$	147,982
Less- imputed interest	6,513		2,827
Present value of minimum payments	222,187		145,155
Less-current maturities of capital lease obligation	155,569		145,155
Long-term capital lease obligation	$	66,618	$	—

10. ~~SUBSEQUENT EVENTS:~~ACQUISITIONS:

~~The~~On 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 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.

The 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

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, relating to future events and our future performance and results. 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 may be forward-looking statements. Forward-looking statements can generally be identified by words such as “expects,” “anticipates,” ~~“may”,~~“may,” “likely,” “plans,” “believes,” “intends,” “projects,” “estimates,” and similar words or expressions. Forward-looking statements are not guarantees of performance, but rather reflect ~~our~~management’s current expectations, estimates, and forecasts about the industry and markets in which we operate, and 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 which are difficult to predict or 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 trends in the Company’s markets; whether the integration of recently acquired businesses into that of the Company and realization of anticipated synergies and growth opportunities from such transactions are successful; success in our ~~markets,~~overall strategy; the financial condition of our suppliers and changes by them in their distribution strategies and ~~support, Nortel’s~~support; the Nortel Networks bankruptcy ~~proceedings,~~filing and 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 ~~revenue levels from~~ quarter to quarter revenues; changes in Avaya’s strategies regarding the provision of equipment and services to its customers, and in its policies regarding the availability of tier IV hardware and software support; inconsistent gross profit ~~margins, continuing acceptance and success of the Mitel product and services offering,~~margins; availability of credit to finance ~~growth,~~growth; intense competition and industry ~~consolidation,~~consolidation; dependence upon a few large wholesale customers in ~~our~~the Company’s Managed Services ~~offering,~~offering; and the availability and retention of revenue professionals and 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, 2009 (filed with the Commission on January 8, 2010) and in updates to such risk factors set forth in Item 1A of Part II of this quarterly report. As a result of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, investors are cautioned to read and consider all forward-looking statements in conjunction with such risk factors and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements made by the Company.

Overview

Strategy.

In advance of fiscal 2010, senior management conducted its periodic review of the strategic direction of the Company. This review resulted in a threefold refinement of the strategic focus and direction of the ~~organization. First, the Company will continue to emphasize~~organization including: continued emphasis on aggressive growth in our managed services ~~business. Second, the Company will~~business; use ~~its~~of our unique position to search out and pursue organic and acquisitive growth opportunities resulting from Avaya’s acquisition of Nortel’s enterprise ~~business. Finally the Company will~~business (NES); and advance a longer-term business initiative focused on the sales, design, ~~development~~integration and ~~support~~maintenance and repair of collaborative technologies and advanced applications.

Management believes these ~~refinements of our longstanding~~ strategies are ~~necessary~~appropriate to fully realize the benefits of our investments in high value talent and competencies, to capitalize on the market realignment resulting from Avaya’s acquisition of ~~Nortel~~NES and to ready ourselves in anticipation of growth in demand for advanced applications and collaborative technologies.

~~The~~Even though we are experiencing growth in our services revenue, the overall market ~~appears~~for our products and services remains challenging. While some of our customers are enjoying improvements in their business and are therefore purchasing and implementing new communications systems, many others remain

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cautiously optimistic about near-term economic improvement and are continuing to belimit new spending and are furthering their efforts to reduce ongoing operating costs. Consequently, we have not experienced an overall improvement in purchases of new systems and related services. Additionally, some of our major customers have faced unique challenges in their operations which have slowed expected orders. Finally, the acquisition of NES by Avaya has created a pause in some customers’ normal buying patterns as they evaluate Avaya’s technology roadmap and service strategies.

On 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 ~~early stages~~delivery of ~~recovery from~~high-speed internet access and network administration to the ~~economic downturn that affected our business throughout fiscal 2009. Market indicators, while tepid, point~~hospitality industry. The terms of the purchase agreement are described in Note 10 of the Notes to ~~market growth~~Consolidated Financial Statements.

On August 2, 2010, the Company completed the purchase of the stock of Pyramid Communications Services, Inc. (“Pyramid”), a privately held company headquartered in ~~2010. After successfully weathering~~Dallas, Texas. Pyramid provides communications equipment and related services with 2009 ~~by focusing on cost control, operating efficiencies and a strengthening~~revenues in excess of ~~our balance sheet, management is optimistic that our refined strategic direction will capitalize on opportunities resulting from a recovering economy.~~$10.0 million. The terms of the purchase agreement are described in Note 11 of the Notes to Consolidated Financial Statements.

Operating Summary.

In the ~~first~~third quarter of fiscal 2010, we recorded a net income of ~~$633,000~~$513,000 on revenues of ~~$23.0~~$20.9 million compared to a net ~~income~~loss of ~~$2,000~~$8.6 million on revenues of ~~$18.6~~$17.2 million in the ~~first~~third quarter of last year. ~~These~~For the first nine months of fiscal 2010, we 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 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 for the first nine months of last year. Apart from the impairment charges recorded in 2009, the improved 2010 results primarily reflect an increase in ~~demand for commercial systems.~~revenues and 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.

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Financial Position Summary.

Since October 31, 2009, we have generated positive cash flows from operations of ~~$2.1~~$2.4 million and we primarily used these cash flows to reduce ~~borrowings.~~borrowings, purchase the net operating assets of Lorica and make capital expenditures to support our operations. We have improved our working capital approximately ~~12%~~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 month period~~three- and nine-month periods ended ~~January~~July 31, 2010 and 2009 and should be considered in conjunction with our above comments as well as the “Risk Factors” section below.

Financial Condition

During the first three fiscal ~~quarter~~quarters of 2010 our working capital increased by ~~12%~~15% to ~~$12.9~~$13.2 million. We generated ~~$2.1~~$2.4 million in cash flows from operations. These cash flows included earnings and non-cash charges of ~~$1.2~~$3.2 million; ~~a decrease in accounts receivable of $69,000;~~ a decrease in inventory of ~~$192,000;~~$338,000; an increase in accrued liabilities of $483,000; and a decrease in deferred taxes of ~~$409,000;~~$814,000. These positive cash flow items were partially offset by an increase in accounts ~~payable~~receivable of ~~$306,000; and an increase in accrued liabilities of $349,000. These increases were partially offset by~~$324,000; a decrease in unearned revenue of ~~$17,000;~~$555,000; a decrease in accounts payable of $590,000; and other changes in working capital items. These items ~~which~~ netted to a decrease in cash of ~~$422,000.~~$956,000. Non-cash charges included amortization of ~~$187,000;~~$580,000; depreciation of ~~$286,000;~~$906,000; provisions for doubtful accounts receivable and obsolete inventories of ~~$41,000;~~$122,000; and stock-based compensation of ~~$74,000.~~$200,000.

We used these positive cash flows to ~~make the final scheduled payment on the mortgage~~pay off term debt of $1.2 million; to purchases the net operating assets of Lorica of $1.0 million, acquire capital assets of ~~$206,000;~~$1.1 million; and fund other financing and investing activities of ~~$38,000.~~$115,000. The acquisition of capital assets was part of normal replacement of Information Technology infrastructure and headquarters facility improvements.

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At ~~January~~July 31, 2010, our cash balance was $3.8 million and there was no outstanding balance on our working capital revolver. In accordance with the collateral base defined in the credit facility, $8.5 million was available for borrowing on the $8.5 million facility at the end of the quarter. ~~Our cash balance at the end of the quarter was $5.4 million. Management believes our cash balances and available borrowing capacity are sufficient to support our expected operating requirements.~~ The working capital revolver is scheduled to mature on November 5, 2010. We expect to renew this instrument for a 12-month or longer period prior to the expiration. It is possible that the 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, we believe we have access to a variety of capital sources such as private placements of subordinated debt, and public or private sales of equity to finance investments beyond our current ~~operating~~ needs.

Results of Operations

In the ~~first~~third quarter of fiscal 2010 revenues were ~~$23.0~~$20.9 million compared to ~~$18.6~~$17.2 million in the ~~first~~third quarter 2009. Our net income in the ~~first~~third quarter of fiscal 2010 was ~~$633,000~~$513,000, compared to a net ~~income~~loss of ~~$2,000 compared to~~$8.6 million in the same quarter a year ago. ~~These~~Apart from the impairment charges on goodwill and other assets of $14.0 million recorded in the third quarter of fiscal 2009, these results primarily reflect increased ~~sales~~services and equipment revenues partially offset by higher selling, general and administrative costs. In the first nine months of ~~commercial systems~~the year, revenues were $61.1 million compared to $53.5 million for the first nine months of 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, excluding the impairment charge recorded in 2009, primarily reflect our strong first and ~~services revenues.~~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 ~~first~~third quarter of fiscal 2010 systems sales increased approximately ~~$2.3~~$2.0 million or ~~27%~~31% compared to the same period last year. This increase includes a ~~$3.7~~$3.3 million or ~~59%~~81% increase in sales of systems to commercial customers ~~partially offset by~~and a ~~$1.5~~$1.3 million or ~~64%~~50% decrease in sales of systems to hospitality customers. Year-to-date systems sales increased $2.2 million or 10% compared to last year. This increase includes an increase in sales of systems to commercial customers of $6.5 million or 41% which was offset by a decrease in sales of systems to hospitality customers of $4.2 million or 58%. The 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 a combination of some of our customers spending remaining 2009 budgets, improvement in enterprise spending for communications equipment, and~~are above last year’s pace but reflect the general unpredictable nature of this segment of our ~~business. As~~business and reluctance on the ~~U.S economy emerges from recession, management believes~~part of some customers to make significant new investments in technology. In addition, uncertain U.S. economic ~~indicators point~~conditions continue to improved market conditions in 2010 and our commercial systems sales during the period reflect the improved economic environment. While we are pleased with our overall results for the first quarter, these results are not necessarily a predictor of our performance for the remainder of the year. Economic headwinds remain and we expect

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~~growth of the U.S. economy in 2010 to be slow and uneven. While we are cautiously optimistic about 2010, the market is fraught with many~~present complex challenges ~~whether positive or negative, that will likely impact~~to our ~~systems sales. Furthermore,~~hospitality customers as evidenced by the decline in revenues in ~~our hospitality systems sales, some sectors of the economy remain mired in difficult economic circumstances.~~this sector. The hospitality industry as a whole is experiencing ~~continued~~cyclical weakness in demand and ~~as a result~~ has limited its ~~expenditures~~spending on new communications equipment and solutions.

Services Revenues.

Services revenues consist of the following:

	For the Three Months Ended January 31,				For the Three Months Ended July 31,				For the Nine Months Ended July 31,
	2010		2009		2010		2009		2010		2009
Maintenance & repair	$	8,218,000	$	6,980,000	$	8,253,000	$	7,358,000	$	23,984,000	$	21,384,000
Implementation	3,042,000		2,181,000		3,164,000		2,469,000		9,453,000		6,926,000
Structured cabling	857,000		832,000
Cabling					750,000		697,000		2,225,000		2,049,000
Total Services revenues	$	12,117,000	$	9,993,000	$	12,167,000	$	10,524,000	$	35,662,000	$	30,359,000

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Maintenance and repair revenues increased ~~18%~~12% in the ~~first~~third quarter ~~compared to the same period last year.~~and year-to-date periods. This year-to-date performance reflects ~~a modest increase in revenues in~~the continued success of our wholesale services programs and ~~relatively flat T&M service revenues.~~repair revenues as well as the addition to our base of maintenance customers associated with the purchase of Lorica in 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.~~integrators. We also continue to market our service capabilities to end-users. We expect growth in these ~~new~~ programs to positively impact our maintenance ~~& T&M~~and repair revenues for the foreseeable future.

Implementation revenues increased ~~39%~~28% in the ~~first~~third fiscal quarter ~~compared to the same period last year. This increase is primarily driven by the increase in systems sales as well as~~reflecting an increase in revenues from our Professional Services Organization (“PSO”). and relatively flat installation revenues. For the year-to-date period, Implementation revenues increased 36% reflecting an increase in revenues from PSO. We attribute this to increasing demand for more complex communications systems requiring significant fee-generating design and engineering 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.

~~Structured cabling~~Cabling revenues increased 3%8% and 9%, respectively in the ~~first~~third fiscal quarter ~~compared to the same period last year.~~and year-to-date periods. These increases are primarily from a new wholesale service program added late in fiscal 2009.

Gross Margins.

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

For the Three Months Ended
January 31,

Gross Margins

2010

2009

Services revenues

32.1
%
30.1
%
Systems sales

25.7
%
26.1
%
Other revenues

19.3
%
-7,869.4
%
Corporate cost of goods sold

-1.5
%
-2.0
%
Total

27.5
%
25.9
%

The improved gross margins earned on Services revenues primarily reflect improved margins earned on implementation and structured cabling activities. The primary driver for implementation revenues is systems sales. As a result of strong growth in systems sold, we realized improved utilization of our installation and professional services personnel during the first quarter, significantly improving the margins on these revenues. These improvements combined with strong gross margins earned on our Cabling revenues in the first quarter pushed our overall gross margins on Services revenues well into our target range of 30-35%.

	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 ~~first~~third quarter and the year-to-date periods are ~~slightly~~ above our target of 23% to 25% for systems revenues. ~~This success~~Our consistent performance above our expected targets in this area is due to ~~continued focus on costs throughout the supply chain~~disciplined pricing practices and pricing support

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received from our manufacturers in the form of project-specific discounts and incentive rebates which are recorded as reductions to cost of goods sold. These discounts and incentives are material to our gross margins.~~Avaya has recently announced significant changes~~

Gross margins earned on Services revenues primarily reflect an increase in ~~its pricing structure~~recurring service revenues combined with improved cost controls, the use of third party Quality Service Partners, and ~~incentive programs which are scheduled~~improved utilization of our professional services personnel for consulting and fee-based engagements. These items contributed to take effect on April 19, 2010. According to Avaya these changes are being made to simplify its pricing structure and eliminate the need to request special discounts and administer complex incentive programs. Avaya has stated these changes should be neutral togross Services margins in our ~~profit margins; however our initial review~~target range of these changes contradicts Avaya’s statements regarding the neutrality of these changes on our profit margins. We are continuing to evaluate these changes and at this time no assurance can be given that the pricing and incentive program changes eventually implemented by Avaya will not have a material, adverse impact on our operating results.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. 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. 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.

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Operating Expenses.

Our total operating expenses ~~increased $534,000~~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 excluding $14.0 million in impairment charges recorded in the third quarter of fiscal 2009. Our operating expenses were 24.8% of revenues in the first ~~quarter~~three quarters of fiscal 2010 compared to 26.0% last year, excluding the ~~first quarter of fiscal 2009. Operating expenses were 23.1% of revenues~~impairment charges. As discussed in the ~~first quarter compared~~overview above, we have made strategic choices to ~~25.7%~~focus on aggressively expanding our managed services business and on expanding through acquisitions. We have increased our expenditures to support these strategies. These expenditures coupled with slower than expected growth in ~~the first quarter last year. The level of~~our systems sales and increased investments in our Information Technology group to increase efficiencies and improve customer satisfaction has resulted in our operating expenses as a percentage of revenues ~~are above~~to continue to exceed our ~~targets and reflect a number of factors including increased sales commissions associated with increased gross profit and reduced sales and marketing incentives from vendors during the first quarter.~~targets. 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 expected 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 income was ~~$15,000~~$16,000 in the ~~first~~third quarter of fiscal 2010 compared to ~~$19,000~~$22,000 in net other expense in the ~~first~~third quarter of fiscal 2009. Net interest and other income was $43,000 for the nine-month period ended July 31, 2010 compared to $65,000 in net other expense in the same period last year. This reflects both reduced debt levels and lower interest ~~rates and a reduction in debt.~~rates.

Tax Provision.

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

Evaluation of Disclosure Controls and Procedures. Based on an evaluation conducted as of ~~January~~July 31, 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.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On November 10, 2009, the Company was named as an additional defendant in a lawsuit originally filed on March 16, 2009 by Pangaia Partners against two of Pangaia’s former employees who subsequently went to work for the Company. The lawsuit was filed in Superior Court of New Jersey Law Division, Bergen County. Pangaia’s claims against the Company are made in relation to a Nortel account to which the employee defendants were assigned when they worked for Pangaia and which they now service as employees of the Company. Pangaia’s claims against the Company and the individual defendants include unfair competition, tortuous interference with prospective economic advantage, tortuous interference with contract, misappropriation of trade secrets, conversion and unjust enrichment. In its original claim against its former employees, Pangaia sought but was denied a preliminary injunction to enforce non-competition agreements. Pangaia now seeks monetary damages against all defendants, but has not alleged a specific dollar amount. A preliminary investigation indicates the claims are without merit and the Company expects to mount a vigorous defense.None.

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, 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 2009 fiscal year have not materially changed.

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Avaya’s recently implemented requirements regarding minimum level service agreements and hardware and software upgrade requirements could have a material, negative impact on our services gross margins.

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 to maintain their software at no more than two trailing major version releases than the current version. The impact of these changes to our business will be negative, but the materiality of the impact is uncertain at this time. These impacts could include a significant decline in our services gross margins if we are required to purchase Avaya service contracts on behalf of all of our customers. Conversely, if we chose to forego such purchases on behalf of our customers, we risk reduced customer satisfaction due to the lack of 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 the mandatory Avaya maintenance contract. Avaya has provided some transition relief in the 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 business. At this time, no assurance can be given that these policy changes will not have a material, adverse impact on our operating results beginning as soon as fiscal 2011.

Nortel’s Chapter 11 Bankruptcy filing and subsequent sale of its enterprise solution business to Avaya may negatively impact our revenues and/or financial condition.

Nortel filed a voluntary petition for Chapter 11 bankruptcy protection on January 14, 2009. ~~To date~~On July 12, 2010 Nortel ~~has not~~ filed its plan of ~~reorganization. In the meantime the administrators~~reorganization which was essentially a plan of ~~the bankruptcy have adopted a business disposal strategy, pursuant to which they have sold the Nortel enterprise solution business (“NES”) to Avaya. All of the foregoing developments pose~~liquidation. This matter poses a variety of risks to our business, as follows:

·Uncertainty surrounding Nortel’s bankruptcy has significantly dampened demand for equipment in this product line. Until Nortel files it plan of reorganization, this uncertainty is likely to continue. Nortel has until July 13, 2010 to file its plan of reorganization unless such date is further extended by the court. Although Avaya’s acquisition of NES may help to reduce the uncertainly in the market over the course of fiscal 2010, in the near term we anticipate continued weakness in demand for Nortel equipment. ·We are owed approximately $700,000 in pre-petition accounts receivable less approximately $116,000 in approved offsets for amounts we owed to Nortel at the time of the filing. 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. ·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. 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. 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 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 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		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.

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~~challenging~~The acquisition and ~~disruptive to~~integration of businesses by the ~~market. There can be no assurance given that~~Company may not produce the ~~combination of Avaya and NES will not have near-term~~desired financial and/or ~~long-term material, negative impact on our operating results, financial position, market position, and overall reputation.~~

~~Avaya has announced a significant change in their pricing structure and incentive programs, which may affect our~~ operating results.

~~Avaya has~~We have recently ~~announced significant changes in its pricing structure~~completed the acquisition of the operating assets of Lorica Solutions and ~~incentive programs which~~the stock of Pyramid Communication Services, Inc. These developments are ~~scheduled~~a part of our stated strategy to take effect on varying dates during our fourth fiscal quarter. As a large business partner of Avaya we receive substantial discounts off of list price and the payments we receive under Avaya’s various incentive programs are material to our operating results. Avaya may make additional adjustments to the announced changes before that date and/or may delay the implementation of some or alladvantage of the changes as it continues to receive feedback from its business partners. At this time, no assurance can be given that the pricing and incentive program changes eventually implemented by Avaya will not have a material, adverse impact on our operating results.

Avaya’s recently published requirements regarding minimum level service agreements and hardware and software upgrade requirements could have a material, negative impact on our services gross margins.

Avaya has announced new policies, effective July 1, 2010, requiring all customers to contract with Avaya for minimum service levels to have access to Tier IV hardware and software support and also to maintain their hardware and software at no more than two major version levels less than the current ~~release.~~ ~~We are evaluating the potential impact of these changes to our business which could include a decline~~disruption in our ~~services gross margins if~~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 a complex business proposition. Expected synergies and growth often do not materialize as planned. We used existing cash balances to fund the acquisitions and their integration costs. Furthermore, we ~~are required~~will devote significant time and effort to ~~purchase Avaya service contracts on behalf our customers, reduced customer satisfaction with~~improve the ~~quality~~probability of our services due to the lack of access to Avaya’s Tier IV support network, and/or reduced sales of new Avaya systems if customers choose to abandon the product line. Presently, it is too early to determine with specificity the most likely impact ofsuccess for these ~~changes on our business. Additionally, these changes are still being refined as Avaya receives feedback from both end users and business partners. At this time,~~investments. However, no assurance can be given that these ~~policy changes if implemented by Avaya~~acquisitions will ~~not~~meet our expectations for revenues and operating results, or that our capital could have ~~a material, adverse impact on~~been used more efficiently to improve our financial condition or operating results.

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

~~(a)~~ None.

~~(b) None.~~

~~(c) Issuer Purchases of Equity Securities~~

In 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. During the first quarter of fiscal 2010 there was no repurchase activity and the program was withdrawn by the Board of Directors.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.5. OTHER INFORMATION.

(a) On December 29, 2009, the Compensation Committee (the “Committee”) approved an annual incentive plan formula for fiscal 2010 which will transition the total bonus pool from its current level of approximately 10% of pre-tax, pre-bonus profits to approximately 11% of after-tax net income as net income approaches and exceeds $5 million. Under the plan the Committee intends to target 40% of the total annual incentive pool toward the CEO and CFO and to pay 25% to 50% of the award in restrictedNone.

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~~Company stock. The Committee has the discretion to adjust these targets when in its opinion, conditions warrant.~~

ITEM 5.6. EXHIBITS.

Exhibits (filed herewith):

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.

19

~~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: March 1, 2010~~
~~By:~~
~~/s/ Greg D. Forrest~~
~~Greg D. Forrest~~
~~Chief Executive Officer~~
~~Dated: March 1, 2010~~
~~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.

20

~~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.~~
21

	2010		2009
Three months ended January 31,	$	74,060	$	70,365

	January 31, 2010			(Audited) October 31, 2009

Trade accounts receivables	$	14,198,928		$	14,393,681
Less- reserve for doubtful accounts	(550,963		)	(561,229		)
Net trade accounts receivables	$	13,647,965		$	13,832,452

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: March 1, 2010~~	~~By:~~	~~/s/ Greg D. Forrest~~
		~~Greg D. Forrest~~
		~~Chief Executive Officer~~


~~Dated: March 1, 2010~~	~~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.~~