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, 2009~~


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 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~~February 20, 2010 there were ~~10,222,861~~10,298,302 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~~January 31, ~~2009~~2010 and October 31, ~~2008~~2009
3

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

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

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

Notes to Consolidated Financial Statements
7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
17
13

ITEM 4T. CONTROLS AND PROCEDURES
22
16

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
22
17

ITEM 1A. RISK FACTORS
23
17

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
24
18

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
24
18

ITEM 4. ~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~OTHER INFORMATION
24
18

~~ITEM 5. OTHER INFORMATION~~
24

ITEM 6.5. EXHIBITS
24
19

2

Table of Contents

XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

July 31, 2009

October 31, 2008

(UNAUDITED)

January 31, 2010

October 31, 2009

ASSETS

Current assets:

Cash and cash equivalents

$
2,980,984

$
63,639

$
5,409,390

$
4,731,926

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

364,502

353,216

533,290

470,025

Trade accounts receivable, net

11,382,724

19,995,498

13,647,965

13,832,452

Inventories, net

5,108,844

5,236,565

4,918,901

5,036,198

Deferred tax asset

418,420

588,926

1,169,711

1,136,351

Prepaid taxes

33,374

64,593

45,079

39,784

Prepaid expenses and other assets

1,622,308

1,608,113

2,397,220

2,057,514

Total current assets

21,911,156

27,910,550

28,121,556

27,304,250

Noncurrent assets:

Goodwill

15,845,869

26,825,498

12,018,081

12,031,975

Intangible assets, net

729,855

828,825

514,175

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

349,210

335,413

Property, plant & equipment, net

6,997,784

10,722,539

6,616,018

6,825,916

Deferred tax asset

213,548

—

310,749

739,216

Other assets

—

2,271

Total noncurrent assets

24,146,032

38,482,170

19,808,233

20,503,260

Total assets

$
46,057,188

$
66,392,720

$
47,929,789

$
47,807,510

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

6,091,355

5,785,225

Current portion of obligations under capital lease

152,589

148,225

155,569

154,072

Current unearned service revenue

3,211,064

3,237,296

Current unearned services revenue

5,060,093

5,194,601

Accrued liabilities

3,526,417

4,593,725

3,888,975

3,444,396

Total current liabilities

12,118,184

18,549,491

15,195,992

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

66,618

106,076

Noncurrent unearned service revenue

55,759

56,393

Noncurrent deferred tax liability

—

5,545,692

Noncurrent unearned services revenue

53,289

36,691

Total noncurrent liabilities

345,013

6,006,333

264,007

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, 11,256,193 issued at January 31, 2010 and October 31, 2009

11,255

11,255

Paid-in capital

13,636,544

13,493,395

13,704,028

13,704,460

Retained earnings

22,126,202

30,539,714

20,855,957

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 (957,891 shares at January 31, 2010 and 993,763 shares at October 31, 2009)

(2,101,450
)
(2,180,010
)
Total shareholders’ equity

33,593,991

41,836,896

32,469,790

31,758,874

Total liabilities and shareholders’ equity

$
46,057,188

$
66,392,720

$
47,929,789

$
47,807,510

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

3

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

Ended July 31,

Ended July 31,

Ended January 31,

2009

2008

2009

2008

2010

2009

Systems sales

$
6,522,569

$
10,662,567

$
22,897,460

$
28,648,487

$
10,867,058

$
8,585,753

Services

10,524,397

12,028,241

30,359,279

31,887,653

12,116,857

9,993,233

Other revenues

136,271

512,724

263,126

1,428,950

60,228

1,039

Net sales and service revenues

17,183,237

23,203,532

53,519,865

61,965,090

Net sales and services revenues

23,044,143

18,580,025

Cost of systems sales

4,639,749

7,846,284

16,791,637

21,174,666

8,076,587

6,342,365

Services costs

7,505,892

8,373,080

21,258,445

23,104,061

8,231,080

6,983,739

Cost of other revenues & corporate COGS

425,480

781,806

1,308,525

1,707,157

397,635

447,770

Total cost of sales and service

12,571,121

17,001,170

39,358,607

45,985,884

Total cost of sales and services

16,705,302

13,773,874

Gross profit

4,612,116

6,202,362

14,161,258

15,979,206

6,338,841

4,806,151

Operating expenses

Selling, general and administrative

4,388,488

4,870,068

12,925,794

12,795,830

5,125,283

4,456,109

Amortization

344,727

265,152

1,001,984

722,563

186,855

322,251

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

5,312,138

4,778,360

(Loss) income from operations

(14,121,099
)
1,067,142

(13,766,520
)
2,460,813

Income from operations

1,026,703

27,791

Interest expense

(20,810
)
(96,401
)
(79,211
)
(268,117
)

(6,170
)
(29,903
)
Interest and other income (expense)

(1,159
)
99

14,219

27,394

Total interest and other expense

(21,969
)
(96,302
)
(64,992
)
(240,723
)
Interest and other income

21,255

11,380

Net interest and other income (expense)

15,085

(18,523
)

(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 before provision for income taxes

1,041,788

9,268

Provision for income taxes

409,000

7,000

Net (loss) income

$
(8,599,068
)
$
590,840

$
(8,413,512
)
$
1,351,090

Net income

$
632,788

$
2,268

(Loss) earnings per share

Earnings per share

Basic

$
(0.84
)
$
0.06

$
(0.82
)
$
0.13

$
0.06

$
0.00

Diluted

$
(0.84
)
$
0.06

$
(0.82
)
$
0.13

$
0.06

$
0.00

Weighted average shares outstanding

10,223,753

10,254,310

10,223,881

10,241,861

10,237,405

10,222,494

Weighted average equivalent shares

10,223,753

10,254,310

10,223,881

10,246,811

10,277,361

10,222,494

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

4

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

—

—

(35,872
)
78,560

(78,560
)
—

—

Stock-based compensation

—

—

—

—

78,128

—

78,128

Net income

—

—

—

—

—

632,788

632,788

Balance- January 31, 2010

11,256,193

$
11,255

957,891

$
(2,101,450
)
$
13,704,028

$
20,855,957

$
32,469,790

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

5

Table of Contents

XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

For the Nine Months

For the Three Months

Ended July 31,

Ended January 31,

2009

2008

2010

2009

Cash flows from operating activities:

Net (loss) income

$
(8,413,512
)
$
1,351,090

Net income

$
632,788

$
2,268

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

722,945

528,811

285,801

224,947

Amortization

1,001,983

722,563

186,855

322,251

Impairment of Goodwill & Other Assets

14,000,000

—

Stock based compensation

219,476

181,782

Stock-based compensation

74,060

70,365

Loss on sale of assets

3,764

425

—

3,764

Provision for returns & doubtful accounts receivable

395,000

7,924

15,000

365,000

Provision for excess and obsolete inventory

76,500

76,500

25,500

25,500

(Decrease) increase in deferred tax liability

(5,504,010
)
600,156

Deferred taxes

409,001

(28,306
)
Change in assets and liabilities:

Increase in net investment in sales-type leases & other receivables

(7,440
)
(265,342
)

(77,062
)
(145,586
)
Decrease (increase) in trade accounts receivable

8,628,795

(7,180,367
)
Decrease in trade accounts receivable

68,599

1,593,819

Decrease (increase) in inventories

295,968

(1,590,301
)

191,797

(882,926
)
(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

Increase in prepaid expenses and other assets

(339,706
)
(73,282
)
(Increase) decrease in prepaid taxes

(5,295
)
24,140

Increase (decrease) in accounts payable

306,130

(1,297,187
)
(Decrease) increase in unearned revenue

(446,734
)
1,146,906

(17,022
)
400,226

(Decrease) increase in accrued liabilities

(408,020
)
210,632

Increase (decrease) in accrued liabilities

348,647

(80,309
)
Total adjustments

16,336,500

(4,138,592
)

1,472,305

522,416

Net cash provided by (used in) operating activities

7,922,988

(2,787,502
)
Net cash provided by operating activities

2,105,093

524,684

Cash flows from investing activities:

Additions to property, plant & equipment

(636,586
)
(841,549
)

(206,193
)
(218,552
)
Proceeds from sale of assets

5,064

—

—

5,064

Acquisitions, net of cash acquired

(802,887
)
—

Investment in capitalized service contracts

(750,000
)
—

—

(750,000
)
Net cash used in investing activities

(2,184,409
)
(841,549
)

(206,193
)
(963,488
)

Cash flows from financing activities:

Principal payments on debt

(128,317
)
(128,316
)

(1,183,475
)
(42,773
)
Net (payments) borrowings on revolving line of credit

(2,524,130
)
3,350,390

Net payments on revolving line of credit

—

655,977

Payments on capital lease obligations

(110,630
)
(11,979
)

(37,961
)
(36,521
)
Payments to acquire treasury stock

(58,157
)
—

—

(48,093
)
Exercise of stock options

—

90,215

Net cash (used in) provided by financing activities

(2,821,234
)
3,300,310

(1,221,436
)
528,590

Net increase (decrease) in cash and cash equivalents

2,917,345

(328,741
)
Net increase in cash and cash equivalents

677,464

89,786

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

$
5,409,390

$
153,425

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

$
87,523

$
268,919

$
13,651

$
30,149

Cash paid during the period for income taxes

$
102,095

$
55,208

$
5,295

$
12,860

Capital lease obligations incurred

$
—

$
456,520

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

6

Table of Contents

XETA TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
~~July~~January 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, the Company manufactures and markets a line of proprietary call accounting systems to the hospitality industry. ~~XETA is an Oklahoma corporation.~~

The Company prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and ~~regulations, although the~~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.

7

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

7

~~Table of Contents~~

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

Cost of sales

(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

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 and 2008:~~

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

Cost of sales

(8,231,080
)
(7,540,985
)
(535,602
)
(397,635
)
(16,705,302
)
Gross profit

$
3,885,777

$
2,497,596

$
292,875

$
(337,407
)
$
6,338,841

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

$
9,993,233

$
6,296,705

$
2,289,048

$
1,039

$
18,580,025

Cost of sales

(21,258,445
)
(11,591,536
)
(5,200,101
)
(1,308,525
)
(39,358,607
)

(6,983,739
)
(4,801,767
)
(1,540,598
)
(447,770
)
(13,773,874
)
Gross profit

$
9,100,834

$
4,017,050

$
2,088,773

$
(1,045,399
)
$
14,161,258

$
3,009,494

$
1,494,938

$
748,450

$
(446,731
)
$
4,806,151

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

Three months ended July 31,

$
74,878

$
65,221

Nine months ended July 31,

$
219,476

$
181,782

2010

2009

Three months ended January 31,

$
74,060

$
70,365

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

In ~~June~~November 2009 the ~~Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification (“Codification”) and~~Company adopted ASC 810, “Consolidation”. ASC 810 changes 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~~
8

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~~Statement is effective~~ for ~~financial statements issued for interim and annual periods ending after September 15, 2009.~~
In June 2009 the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities” (“SFAS No. 167”). SFAS No. 167 replaces the quantitative based calculation for determiningminority interests, which ~~variable interest entities have a controlling financial interest with an approach that is expected to be primarily qualitative. The requirement for consolidation~~ will be ~~based on the reporting entity’s ability to direct the activities~~recharacterized as non-controlling interests and classified as a component 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. 167 will be effective for fiscal years beginning after November 15, 2009.equity.   The Company does not ~~currently~~ have any ~~variable interest relationships;~~minority interests; therefore the adoption of ~~SFAS No. 167 is not expected to have a material impact on the Company’s financial position or results of operations.~~
In June 2009 the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting 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 entity 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 asset as a sale. SFAS No. 166 will be effective for fiscal years beginning after November 15, 2009. 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
9

~~Table of Contents~~
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)~~Company will ~~change~~apply the ~~accounting treatment for~~guidance prospectively to business ~~combinations on a prospective basis beginning in the first quarter of fiscal year 2010.~~combinations.

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).~~
10

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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
8

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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 the first quarter of fiscal 2010 and~~ will apply the guidance prospectively to intangible assets acquired after adoption.

In ~~May 2008~~October 2009, the FASB issued ~~SFAS No. 162, “The Hierarchy of Generally Accepted~~ Accounting ~~Principles”~~Standards Update (“~~SFAS No. 162”~~ASU”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 became effective 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” 2009-13, “Revenue Recognition - Multiple-Deliverable Revenue Arrangements”. The ~~implementation~~guidance in ASU 2009-13 amends the criteria for separating consideration in multiple-deliverable arrangements and 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 its financial position or results of ~~this standard did~~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 ~~the Company’s~~our consolidated financial ~~position and results of operations.~~
~~Goodwill and Other Long-lived Assets~~
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.
11

~~Table of Contents~~
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.statements upon adoption.

2. ACCOUNTS RECEIVABLE:

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

July 31,
2009

(Audited)
October 31,
2008

January 31,
2010

(Audited)
October 31,
2009

Trade accounts receivables

$
11,938,936

$
20,188,378

$
14,198,928

$
14,393,681

Less reserve for doubtful accounts

(556,212
)
(192,880
)
Less- reserve for doubtful accounts

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

$
11,382,724

$
19,995,498

$
13,647,965

$
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 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~~business unit. Nortel 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~~one of our ~~fiscal year. At the time~~major suppliers and is an important customer. In addition, its product line represents a significant portion of Nortel’s filing, they owed approximately $685,000 for services rendered under the Company’s wholesale managed services program in which the Company is engaged by Nortel to provide field technical services to Nortel’s end-user customers.our business. At the time of filing this Form 10-Q, our post-petition relationship with Nortel continues uninterrupted. However, management recognizes the ~~deadline~~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 request for ~~filing~~offset of $116,000 in charges we owed Nortel at the time of the filing. In fiscal year 2009, we recorded $350,000 as a ~~plan of~~reserve against possible Nortel bad debts. Nortel has until July 13, 2010 to file its reorganization ~~was September 11, 2009, but~~plan; however, this date is subject to further extension. Until ~~Nortel files its~~the administrators file Nortel’s reorganization ~~plan;~~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. On July 17, 2009 the bankruptcy court granted the Company’s request for offset of $116,000 in charges the~~
The Company ~~owed Nortel at the time of the filing. We are~~is carefully following 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

January 31,
2010

(Audited)
October 31,
2009

Finished goods and spare parts

$
6,010,738

$
6,084,830

$
5,881,709

$
5,977,703

Less- reserve for excess and obsolete inventories

(901,894
)
(848,265
)

(962,808
)
(941,505
)
Total inventories, net

$
5,108,844

$
5,236,565

$
4,918,901

$
5,036,198

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Table of Contents

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

January 31,
2010

(Audited)
October 31,
2009

Building and building improvements

3-20

$
3,119,404

$
3,054,563

3-20

$
3,292,623

$
3,253,693

Data processing and computer field equipment

2-7

3,225,850

3,351,229

2-7

3,396,173

3,248,126

Software development costs, work-in-process

N/A

220,911

2,069,234

N/A

197,934

197,097

Software development costs of components placed into service

3-10

2,619,700

6,631,805

3-10

2,708,930

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

790,547

779,588

Auto

5

502,521

516,185

5

537,300

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

12,324,503

12,118,311

Less- accumulated depreciation and amortization

(5,007,558
)
(7,311,297
)

(5,708,485
)
(5,292,395
)

Total property, plant and equipment, net

$
6,997,784

$
10,722,539

$
6,616,018

$
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
)
13

~~Table of Contents~~

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~~January 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~~January 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. Long term debt consisted of the following:

July 31,
2009

(Audited)
October 31,
2008

January 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

$
—

$
—

$
—

$
0-

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Table of Contents

Interest on all outstanding debt under the credit facility accrues at the greater of either a) the London Interbank Offered Rate (“LIBOR”) ~~(0.279%~~(0.229% at ~~July~~January 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, the Company was either in compliance with the covenants of the credit facility or had received the appropriate waivers from its bank.~~
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~~Table of Contents~~

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 January 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

$
632,788

10,237,405

$
0.06

Dilutive effect of stock options

—

39,956

Diluted EPS

Net loss

$
(8,599,068
)
10,223,753

$
(0.84
)
Net income

$
632,788

10,277,361

$
0.06

For the Three Months Ended July 31, 2008

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Basic EPS

Net income

$
590,840

10,254,310

$
0.06

Dilutive effect of stock options

—

Diluted EPS

Net income

$
590,840

10,254,310

$
0.06

For the Nine Months Ended July 31, 2009

Income
(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
)

For the Nine Months Ended July 31, 2008

For the Three Months Ended January 31, 2009

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Basic EPS

Net income

$
1,351,090

10,241,861

$
0.13

$
2,268

10,222,494

$
0.00

Dilutive effect of stock options

4,950

—

Diluted EPS

Net income

$
1,351,090

10,246,811

$
0.13

$
2,268

10,222,494

$
0.00

Options to purchase ~~1,269,900~~993,438 shares of common stock at an average exercise price of ~~$6.42~~$6.63 and ~~1,029,500~~1,288,300 shares of common stock at an average exercise price of ~~$7.28~~$6.43 were not included in the computation of diluted earnings per share for the three months ended ~~July~~January 31, ~~2009~~2010 and ~~2008, 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 shares of common stock at an average exercise price of $8.08 were not included in the computation of diluted earnings per share for the nine months ended July 31, 2009, ~~and 2008,~~ respectively, because inclusion of these options would be antidilutive.

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 ~~$291,666~~$215,579 at ~~July~~January 31, ~~2009.~~2010. Accumulated amortization of the leased licenses at ~~July~~January 31, ~~2009~~2010 was ~~$168,854.~~$240,941. 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~~January 31, ~~2009,~~2010, are as follows:

Capital
Lease Payments

Capital
Lease Payments

1 Year

$
161,435

2 Years

147,982

2010

$
161,435

2011

67,265

Total minimum lease payments

309,417

228,700

Less- imputed interest

11,674

6,513

Present value of minimum payments

297,743

222,187

Less-current maturities of capital lease obligation

152,589

155,569

Long-term capital lease obligation

$
145,154

$
66,618

9. 10. SUBSEQUENT EVENTS:

~~The Company evaluated subsequent events through August 28, 2009.~~ The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our 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~~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,”~~“may”, “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~~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 statements are subject to risks and uncertainties ~~that~~which are difficult to predict or ~~beyond our control. Examples of these risks include:~~which we are unable to control, including but not limited to such factors as the condition of the U.S. economy and its impact on capital ~~spending; reduced availability of credit; the Nortel Networks bankruptcy filing;~~spending trends in our markets, the financial condition of our suppliers and changes by them in their distribution strategies and ~~support; our ability to maintain and improve current gross profit margins;~~support, Nortel’s bankruptcy proceedings, unpredictable revenue levels from quarter to quarter, ~~revenues;~~inconsistent gross profit margins, continuing ~~market~~acceptance and success of the Mitel product and services ~~offerings;~~offering, availability of credit to finance growth, intense ~~competition;~~competition and industry ~~consolidation; our~~consolidation, dependence upon a few large wholesale customers in our Managed Services ~~offering;~~offering, the availability and ~~our ability to attract~~retention of revenue professionals and ~~retain talented sales, operational 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:~~the strategic focus and direction of the organization. First, the Company will continue to ~~acquire market share through targeted~~emphasize aggressive growth in our managed services business. Second, the Company will use its 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 advance a longer-term business initiative focused on the sales, ~~activities; take advantage~~design, development and support 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~~Management believes these refinements of our major suppliers, and sales activity across the communications industry. Based on information derived from 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~~longstanding strategies are necessary to fully realize ~~growth opportunities as~~the benefits of our investments in high value talent and competencies, the market ~~recovers.~~ realignment resulting from Avaya’s acquisition of Nortel and in anticipation of growth in demand for advanced applications and collaborative technologies.
The ~~beneficial effects of these actions were only partially realized~~market appears to be in the ~~third quarter. Management anticipates~~early stages of recovery from the ~~full benefit of these measures will materialize~~economic downturn that affected our business throughout fiscal 2009. Market indicators, while tepid, point to market growth in ~~the fourth quarter,~~2010. After successfully weathering 2009 by focusing on cost control, operating efficiencies and ~~into next fiscal year.~~
Our third quarter financial results reflect an impairment charge on goodwill and other assets of $14.0 million. Poor economic conditions and uncertainty regarding Nortel’s product line contributed to continued deteriorationa strengthening of our ~~commercial equipment business. Additionally, we experienced~~balance sheet, management is optimistic that our refined strategic direction will capitalize on opportunities resulting from a sustained decline in our market valuation. These factors, taken together, prompted a review of the value of goodwill 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 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 carrying
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value of goodwill is estimated to be impaired between $9.0 million and $13.0 million. Accordingly, we recorded an impairment charge 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 discussed 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. While the acquisition is not material to our financial position or results of operations, it represents an incremental step in our overall acquisitions strategy.
On January 14, 2009 Nortel Networks Corporation filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. 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. 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, 2009 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.economy.

Operating Summary.
In the ~~third~~first quarter of fiscal ~~2009~~2010, we recorded a net ~~loss~~income of ~~$8.6 million~~$633,000 on revenues of ~~$17.2~~$23.0 million compared to net income of ~~$591,000~~$2,000 on revenues of ~~$23.2~~$18.6 million in the ~~third~~first 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 we recorded 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 fiscal 2009 was $98,000. Apart from the impairment charges to goodwill and our Oracle ERP system which are discussed in more detail above, theseThese results primarily reflect ~~the challenging market conditions stemming from the ongoing macroeconomic contraction and the associated decline~~an increase in demand for commercial systems. 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, ~~2008~~2009, we have generated positive cash flows from operations of ~~$7.9~~$2.1 million and we primarily ~~through the collections of accounts receivable. We have~~ used these cash flows to reduce ~~borrowings and~~borrowings. We have improved our working capital approximately 5%12%. 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-~~three month period ended January 31, 2010 and ~~nine-month periods ended July 31,~~ 2009 ~~and 2008~~ and should be considered in conjunction with our above comments as well as the “Risk Factors” section below.

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Financial Condition
During the first ~~three~~ fiscal ~~quarters~~quarter of ~~2009~~2010 our working capital increased by 5%12% to ~~$9.8~~$12.9 million. We generated ~~$7.9~~$2.1 million in cash flows from operations. These cash flows included earnings and non-cash charges of $1.2 million; a decrease in accounts receivable of ~~$8.6 million and~~$69,000; a decrease in inventory of ~~$296,000.~~$192,000; a decrease in deferred taxes of $409,000; an increase in accounts payable of $306,000; and an increase in accrued liabilities of $349,000. These increases were partially offset by a decrease in ~~deferred tax liabilities~~unearned revenue of ~~$5.5 million; a decrease in accounts payable of $2.7 million; a decrease in accrued liabilities of $408,000;~~$17,000; 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~~$422,000. Non-cash charges included amortization of ~~$1.0 million;~~$187,000; depreciation of ~~$723,000;~~$286,000; provisions for doubtful accounts receivable and obsolete inventories of ~~$471,000;~~$41,000; and stock-based compensation of ~~$219,000; and a loss on the sale of assets of $4,000.~~$74,000.

We used these positive cash flows to ~~reduce borrowings~~make the final scheduled payment on ~~our working capital line~~the mortgage 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~~$1.2 million; acquire capital assets of ~~$636,000; reduce our mortgage balance through scheduled principal payments by $128,000;~~$206,000; and fund other financing and investing activities of ~~$169,000.~~$38,000. The acquisition of capital assets ~~included $414,000 spent as~~was 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~~January 31, ~~2009~~2010, 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~~quarter. Our cash balance at the end of the quarter was ~~$3.0~~$5.4 million. ~~We believe~~Management believes our cash balances and available borrowing capacity are sufficient to support our expected operating ~~requirements for the foreseeable future.~~requirements. 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 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. 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 operating needs.

Results of Operations

In the ~~third~~first quarter of fiscal ~~2009~~2010, revenues were ~~$17.2~~$23.0 million compared to ~~$23.2~~$18.6 million in the ~~third~~first quarter ~~2008.~~2009. Our net ~~loss~~income in the ~~third~~first quarter of fiscal ~~2009~~2010 was ~~$8.6 million~~$633,000 compared to net income of ~~$591,000~~$2,000 compared to 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”, theseThese results primarily reflect ~~lower~~increased sales of commercial systems and lower commissions earned from the sale of Avaya post-warranty maintenance contracts. The year-to-date results were also impacted by the $350,000 bad debt provision associated with Nortel’s bankruptcy filing.services revenues. The narrative below provides further explanation of these results.

Systems Sales.
In the ~~third~~first quarter of fiscal ~~2009~~2010, systems sales ~~decreased~~increased approximately ~~$4.1~~$2.3 million or ~~39%~~27% compared to the same period last year. This ~~decrease~~increase includes a ~~$4.3~~$3.7 million or ~~52% decrease~~59% increase in sales of systems to commercial customers partially offset by a ~~$194,000~~$1.5 million or ~~8% increase~~64% decrease in sales of systems to hospitality customers. Year-to-date systems sales decreased $5.8 million or 20% compared to last year. This decrease includes a decrease in sales of systems to commercial customers of $7.6 million or 33% which was partially offset by anThe increase ~~in sales of systems to hospitality customers of $1.8 million or 33%. The decrease~~ in systems sales to commercial customers reflects ~~difficult comparisons related~~a combination of some of our customers spending remaining 2009 budgets, improvement in enterprise spending for communications equipment, and the general unpredictable nature of this segment of our business. As the U.S economy emerges from recession, management believes economic indicators point to improved market conditions in 2010 and our commercial systems sales during the ~~revenues earned from~~period reflect the ~~Miami-Dade County Public School’s (“M-DCPS”) project. Additionally macroeconomic conditions, Nortel’s bankruptcy and shipments scheduled~~improved economic environment. While we are pleased with our overall results for the ~~third~~first quarter, ~~but delayed at~~these results are not necessarily a predictor of our performance for the ~~customers’ request, impacted our sales results.~~remainder of the year. Economic headwinds remain and we expect

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~~Throughout fiscal 2008~~growth of the U.S. economy in 2010 to be slow and uneven. While we ~~enjoyed strong commercial~~are cautiously optimistic about 2010, the market is fraught with many complex challenges, whether positive or negative, that will likely impact our systems sales. Furthermore, as evidenced by the decline in revenues in our hospitality systems sales, ~~installation revenues, and cabling revenues generated by~~some sectors of the ~~series of orders received from M-DCPS. In total, these orders generated over $10 million~~economy remain mired in ~~revenues for the Company during the year. We have not received~~difficult economic circumstances. The hospitality industry as a ~~similar order during fiscal 2009, making comparisons to last year’s results more difficult. Additionally, customers continue to reduce capital spending~~whole is experiencing continued weakness 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 and as ~~such revenues may be at or less than historical levels in the fourth quarter of the fiscal year.~~a result has limited its expenditures 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
January 31,

2009

2008

2009

2008

2010

2009

Contract & T&M

$
7,358,000

$
7,202,000

$
21,384,000

$
21,438,000

Maintenance & repair

$
8,218,000

$
6,980,000

Implementation

2,469,000

3,864,000

6,926,000

8,251,000

3,042,000

2,181,000

Cabling

697,000

962,000

2,049,000

2,199,000

Structured cabling

857,000

832,000

Total Services revenues

$
10,524,000

$
12,028,000

$
30,359,000

$
31,888,000

$
12,117,000

$
9,993,000

~~Contract~~Maintenance and ~~time-and-materials (T&M)~~repair revenues increased ~~2% and decreased 0.3%, respectively~~18% in the ~~third~~first quarter ~~and year-to-date periods.~~compared to the same period last year. This ~~year-to-date~~ performance reflects ~~relatively flat~~a modest increase in revenues in our wholesale services programs and ~~a modest decline in~~relatively flat T&M service revenues. ~~We believe T&M revenues were influenced by general economic conditions as customers reduced spending on non-critical services.~~ We continue to aggressively market our national service footprint and multi-product line technical capabilities to end-users, network service providers, and large integrators of voice and data technologies. In the third quarter we realized beneficial returns from the new 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. We expect growth in these new programs ~~and relationships~~ to positively impact our ~~Contract~~maintenance & T&M revenues for the foreseeable future.

Implementation revenues ~~decreased 36% and 16%, respectively~~increased 39% in the ~~third~~first fiscal quarter ~~and year-to-date periods. These declines, while significant, reflect a lower rate of decline than~~compared to the ~~corresponding decrease~~same period last year. This increase is primarily driven by the increase in systems sales ~~traditionally the primary driver of these revenues.~~as well as an increase in revenues from our Professional Services Organization (“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~~Structured cabling revenues ~~decreased 28% and 7%, respectively~~increased 3% in the ~~third~~first fiscal quarter ~~and year-to-date periods. The third quarter decline in cabling revenues is primarily associated with~~compared to the ~~difficult comparisons to fiscal 2008 which were helped significantly by the M-DCPS orders as discussed above.~~same period last year.

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
%
20
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%.
Gross margins on systems sales in the first quarter are slightly above our target of 23% to 25% for systems revenues. This success is due to continued focus on costs throughout the supply chain and pricing support
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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.
~~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 to receive considerable 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~~margins. Avaya has recently announced significant changes in its pricing structure and ~~we work diligently~~incentive programs which are scheduled to ~~maximize~~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 to our profit margins; however our initial review 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 ~~support; however,~~time no assurance can be given that ~~future support~~the pricing and incentive program changes eventually implemented by Avaya will ~~continue at historical levels.~~not have a material, adverse impact on our operating results.

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.

Operating Expenses.
Our total operating expenses increased ~~$13.6 million~~$534,000 in the ~~third~~first quarter of fiscal ~~2009~~2010 compared to the ~~third~~first 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, operating expenses were 27.5% of revenue in the third quarter.2009. Operating expenses were ~~52.2%~~23.1% of revenues in the first ~~three quarters of fiscal 2009~~quarter compared to ~~21.8% last year. Excluding the impairment charges operating expenses~~25.7% in the first ~~three quarters of fiscal 2009 were 26.0% of revenues. Apart from the impairment charges recognized in the third~~ quarter ~~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 to support litigation and board governance activities~~
·~~Increased amortization of: the Oracle platform in association with its expanded utilization; and intangible assets associated with recent acquisitions of service contracts and customer lists~~
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last year. The level of operating expenses as a percentage of revenues isare above our targets and ~~we took steps in the third quarter to bring these costs more in line~~reflect a number of factors including increased sales commissions associated with ~~our expectations. These steps included reductions of our~~increased gross profit and reduced 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~~marketing incentives from vendors 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, wefirst quarter. 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.

Interest Expense and Other Income.
Net interest and other ~~expense~~income was ~~$22,000~~$15,000 in the ~~third~~first quarter of fiscal ~~2009~~2010 compared to ~~$96,000~~$19,000 in net other expense in the ~~third~~first quarter of fiscal ~~2008. Net interest and other expense was $65,000 for the nine-month period ended July 31, 2009 compared to $241,000 in net other expense in the same period last year.~~2009. This ~~decrease~~ reflects both lower interest rates and a reduction in ~~borrowings.~~debt.

Tax Provision.
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%.

ITEM 4T.   CONTROLS AND PROCEDURES

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

16

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PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

~~During~~On November 10, 2009, the ~~fiscal quarter covered~~Company was named as an additional defendant in a lawsuit originally filed on March 16, 2009 by ~~this report, AMTEL had still not~~Pangaia Partners against two of Pangaia’s former employees who subsequently went to work for the Company. The lawsuit was filed ~~its dismissal~~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 ~~arbitration~~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 ~~filed in April 2008 by Design Business Communications, Inc., d/b/a/ American Telephone (“AMTEL”)~~ against usits 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 ~~Hitachi Telecom (USA) Inc. (“HITEL”) alleging~~the Company expects to mount 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.vigorous defense.
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.
22

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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 of our customers to access credit may continue to reduce capital spending for the foreseeable future.~~
The U.S. economy is mired in a recessionary contraction and, despite efforts by the Federal Government to stabilize the banking 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. This could have a material, negative impact on our operating results and financial condition.
~~We may incur additional goodwill and other asset impairments.~~
Our business has been and may continue to be materially adversely affected by the current macroeconomic conditions. During the fiscal year we have experienced a significant decline in revenues in our commercial equipment reporting unit and a sustained decline in our market capitalization. Based on the results of an interim test 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 in the third fiscal quarter. This represents our best estimate of the probable impairment 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 could have a material adverse effect on our financial condition and results of operations. See Note 1 to our Consolidated Financial Statements for additional information regarding our goodwill and other asset impairment charges.
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. To date Nortel has not filed its plan of reorganization. In the meantime the administrators 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 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 ~~$685,000~~$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. ~~Based on filings approved by~~
·Nortel has filed a statement of financial affairs under which it shows payments to 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 producesCompany against multiple invoices of approximately $3$1.6 million ~~in annual revenues. To date, payment for these services have been paid generally according to their terms~~ which were ~~significantly tightened after~~made during the ~~filing.~~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

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.
~~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.~~17
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challenging and disruptive to the market. There can be no assurance given that the combination of Avaya ~~is repositioning itself~~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 has announced a significant change in their pricing structure and incentive programs, which may affect our operating results.
Avaya has recently announced significant changes in its pricing structure and incentive programs which are scheduled 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 all 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 manufacturer providing a wide range of voice communications hardware and applications to its customers. As part of this strategy, Avaya is segmenting its hardware maintenance and software support. The new software support offerings include technical support for specific voice applications and upgrade services to ensure customers can access all software patches and upgrades. Currently, we earn revenues from some of our customers, particularly hospitality customers, to provide the products and services now being included by Avaya in its new software support offerings.    These changesrequirements 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 in our services gross margins if we are required to purchase Avaya service contracts on behalf our customers, reduced customer satisfaction with the quality 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 of 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, no assurance can be given that these policy changes if implemented by Avaya will not have a material, adverse impact on our 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,~~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. ~~Since~~During 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 thirdfirst quarter of fiscal ~~2009:~~2010 there was no repurchase activity and the program was withdrawn by the Board of Directors.
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 5.4. OTHER INFORMATION.

(a) ~~None.~~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 restricted
18

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

ITEM 6.5.   EXHIBITS.

Exhibits (filed herewith):
24

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SEC Exhibit No.

Description

31.1

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

31.2

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

32.1

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

32.2

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

XETA Technologies, Inc.

(Registrant)

Dated: ~~August 28, 2009~~March 1, 2010
By:
/s/ Greg D. Forrest

Greg D. Forrest

Chief Executive Officer

Dated: ~~August 28, 2009~~March 1, 2010
By:
/s/ Robert B. Wagner

Robert B. Wagner

Chief Financial Officer

2620

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EXHIBIT INDEX

SEC Exhibit No.

Description

31.1

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

31.2

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

32.1

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

32.2

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

2721

				PAGE
PART I. FINANCIAL INFORMATION

	ITEM 1. FINANCIAL STATEMENTS (Unaudited)

		Consolidated Balance Sheets - ~~July~~January 31, ~~2009~~2010 and October 31, ~~2008~~2009		3

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

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

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

		Notes to Consolidated Financial Statements		7

	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS		17	13

	ITEM 4T. CONTROLS AND PROCEDURES		22	16

PART II. OTHER INFORMATION

	ITEM 1. LEGAL PROCEEDINGS		22	17

	ITEM 1A. RISK FACTORS		23	17

	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		24	18

	ITEM 3. DEFAULTS UPON SENIOR SECURITIES		24	18

	ITEM 4. ~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~OTHER INFORMATION		24	18

~~ITEM 5. OTHER INFORMATION~~	24

ITEM 6.5. EXHIBITS	24	19

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

Current assets:
Cash and cash equivalents	$	2,980,984		$	63,639		$	5,409,390		$	4,731,926
Current portion of net investment in sales-type leases and other receivables	364,502			353,216			533,290			470,025
Trade accounts receivable, net	11,382,724			19,995,498			13,647,965			13,832,452
Inventories, net	5,108,844			5,236,565			4,918,901			5,036,198
Deferred tax asset	418,420			588,926			1,169,711			1,136,351
Prepaid taxes	33,374			64,593			45,079			39,784
Prepaid expenses and other assets	1,622,308			1,608,113			2,397,220			2,057,514
Total current assets	21,911,156			27,910,550			28,121,556			27,304,250

Noncurrent assets:
Goodwill	15,845,869			26,825,498			12,018,081			12,031,975
Intangible assets, net	729,855			828,825			514,175			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							349,210			335,413
Property, plant & equipment, net	6,997,784			10,722,539			6,616,018			6,825,916
Deferred tax asset	213,548			—			310,749			739,216
Other assets	—			2,271
Total noncurrent assets	24,146,032			38,482,170			19,808,233			20,503,260

Total assets	$	46,057,188		$	66,392,720		$	47,929,789		$	47,807,510

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			6,091,355			5,785,225
Current portion of obligations under capital lease	152,589			148,225			155,569			154,072
Current unearned service revenue	3,211,064			3,237,296
Current unearned services revenue							5,060,093			5,194,601
Accrued liabilities	3,526,417			4,593,725			3,888,975			3,444,396
Total current liabilities	12,118,184			18,549,491			15,195,992			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			66,618			106,076
Noncurrent unearned service revenue	55,759			56,393
Noncurrent deferred tax liability	—			5,545,692
Noncurrent unearned services revenue							53,289			36,691
Total noncurrent liabilities	345,013			6,006,333			264,007			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, 11,256,193 issued at January 31, 2010 and October 31, 2009							11,255			11,255
Paid-in capital	13,636,544			13,493,395			13,704,028			13,704,460
Retained earnings	22,126,202			30,539,714			20,855,957			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 (957,891 shares at January 31, 2010 and 993,763 shares at October 31, 2009)							(2,101,450		)	(2,180,010		)
Total shareholders’ equity	33,593,991			41,836,896			32,469,790			31,758,874
Total liabilities and shareholders’ equity	$	46,057,188		$	66,392,720		$	47,929,789		$	47,807,510

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

Systems sales	$	6,522,569		$	10,662,567		$	22,897,460		$	28,648,487		$	10,867,058		$	8,585,753
Services	10,524,397			12,028,241			30,359,279			31,887,653			12,116,857			9,993,233
Other revenues	136,271			512,724			263,126			1,428,950			60,228			1,039
Net sales and service revenues	17,183,237			23,203,532			53,519,865			61,965,090
Net sales and services revenues													23,044,143			18,580,025

Cost of systems sales	4,639,749			7,846,284			16,791,637			21,174,666			8,076,587			6,342,365
Services costs	7,505,892			8,373,080			21,258,445			23,104,061			8,231,080			6,983,739
Cost of other revenues & corporate COGS	425,480			781,806			1,308,525			1,707,157			397,635			447,770
Total cost of sales and service	12,571,121			17,001,170			39,358,607			45,985,884
Total cost of sales and services													16,705,302			13,773,874

Gross profit	4,612,116			6,202,362			14,161,258			15,979,206			6,338,841			4,806,151

Operating expenses
Selling, general and administrative	4,388,488			4,870,068			12,925,794			12,795,830			5,125,283			4,456,109
Amortization	344,727			265,152			1,001,984			722,563			186,855			322,251
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			5,312,138			4,778,360

(Loss) income from operations	(14,121,099		)	1,067,142			(13,766,520		)	2,460,813
Income from operations													1,026,703			27,791

Interest expense	(20,810		)	(96,401		)	(79,211		)	(268,117		)	(6,170		)	(29,903		)
Interest and other income (expense)	(1,159		)	99			14,219			27,394
Total interest and other expense	(21,969		)	(96,302		)	(64,992		)	(240,723		)
Interest and other income													21,255			11,380
Net interest and other income (expense)													15,085			(18,523		)

(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 before provision for income taxes													1,041,788			9,268
Provision for income taxes													409,000			7,000

Net (loss) income	$	(8,599,068	)	$	590,840		$	(8,413,512	)	$	1,351,090
Net income													$	632,788		$	2,268

(Loss) earnings per share
Earnings per share
Basic	$	(0.84	)	$	0.06		$	(0.82	)	$	0.13		$	0.06		$	0.00

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

Weighted average shares outstanding	10,223,753			10,254,310			10,223,881			10,241,861			10,237,405			10,222,494

Weighted average equivalent shares	10,223,753			10,254,310			10,223,881			10,246,811			10,277,361			10,222,494

	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

	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
Cost of sales	(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

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

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

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

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

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

Trade accounts receivables	$	11,938,936		$	20,188,378		$	14,198,928		$	14,393,681
Less reserve for doubtful accounts	(556,212		)	(192,880		)
Less- reserve for doubtful accounts							(550,963		)	(561,229		)
Net trade accounts receivables	$	11,382,724		$	19,995,498		$	13,647,965		$	13,832,452

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

Building and building improvements	3-20	$	3,119,404		$	3,054,563		3-20	$	3,292,623		$	3,253,693
Data processing and computer field equipment	2-7	3,225,850			3,351,229			2-7	3,396,173			3,248,126
Software development costs, work-in-process	N/A	220,911			2,069,234			N/A	197,934			197,097
Software development costs of components placed into service	3-10	2,619,700			6,631,805			3-10	2,708,930			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	790,547			779,588
Auto	5	502,521			516,185			5	537,300			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				12,324,503			12,118,311
Less- accumulated depreciation and amortization		(5,007,558		)	(7,311,297		)		(5,708,485		)	(5,292,395		)

Total property, plant and equipment, net		$	6,997,784		$	10,722,539			$	6,616,018		$	6,825,916

	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	)

	For the Three Months Ended July 31, 2009							For the Three Months Ended January 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								$	632,788	10,237,405	$	0.06
Dilutive effect of stock options				—						39,956

Diluted EPS
Net loss	$	(8,599,068	)	10,223,753	$	(0.84	)
Net income								$	632,788	10,277,361	$	0.06

	For the Nine Months Ended July 31, 2009
	Income (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	)

	Capital Lease Payments		Capital Lease Payments

1 Year	$	161,435
2 Years	147,982
2010			$	161,435
2011			67,265
Total minimum lease payments	309,417		228,700
Less- imputed interest	11,674		6,513
Present value of minimum payments	297,743		222,187
Less-current maturities of capital lease obligation	152,589		155,569
Long-term capital lease obligation	$	145,154	$	66,618

	For the Three Months Ended July 31,				For the Nine Months Ended July 31,				For the Three Months Ended January 31,
	2009		2008		2009		2008		2010		2009
Contract & T&M	$	7,358,000	$	7,202,000	$	21,384,000	$	21,438,000
Maintenance & repair									$	8,218,000	$	6,980,000
Implementation	2,469,000		3,864,000		6,926,000		8,251,000		3,042,000		2,181,000
Cabling	697,000		962,000		2,049,000		2,199,000
Structured cabling									857,000		832,000
Total Services revenues	$	10,524,000	$	12,028,000	$	30,359,000	$	31,888,000	$	12,117,000	$	9,993,000

	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	%

	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	%

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

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: ~~August 28, 2009~~March 1, 2010	By:	/s/ Greg D. Forrest
		Greg D. Forrest
		Chief Executive Officer


Dated: ~~August 28, 2009~~March 1, 2010	By:	/s/ Robert B. Wagner
		Robert B. Wagner
		Chief Financial Officer