UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

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

For the quarterly period ended ~~July~~January 31, ~~2010~~2011


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

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~~
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.

Yesþx Noo

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~~

Not applicableþo No x

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

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

Yeso No No þx

As of ~~August 23, 2010~~March 3, 2011 there were ~~10,699,186~~10,779,757 shares of the registrant’s common stock, par value $0.001, outstanding.

~~Table of Contents~~

~~INDEX~~

INDEX

		~~PAGE~~
		PAGE

PART I. FINANCIAL INFORMATION

	ITEM 1. FINANCIAL STATEMENTS (Unaudited)

	Consolidated Balance Sheets ~~- July~~— January 31, ~~2010~~2011 and October 31, ~~2009~~2010		3

	Consolidated Statements of Operations -— For the Three ~~and Nine~~ Months Ended ~~July~~January 31, ~~2010~~2011 and ~~2009~~2010		4

	Consolidated Statement of Shareholders’ Equity -— For the ~~Nine~~ Three Months Ended ~~July~~January 31, ~~2010~~2011		5

	Consolidated Statements of Cash Flows -— For the ~~Nine~~ Three Months Ended ~~July~~January 31, ~~2010~~2011 and ~~2009~~2010		6

	Notes to Consolidated Financial Statements		7

	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS		15	13

	ITEM 4. CONTROLS AND PROCEDURES		19	17

PART II. OTHER INFORMATION

	ITEM 1. LEGAL PROCEEDINGS		19	17

	ITEM 1A. RISK FACTORS		19	18

	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		21	19

	ITEM 3. DEFAULTS UPON SENIOR SECURITIES		21	19

	ITEM 5. OTHER INFORMATION		21	19

	ITEM 6. EXHIBITS		21	20

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

~~Table of Contents~~

XETA TECHNOLOGIES, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

July 31, 2010

October 31, 2009

ASSETS

Current assets:

Cash and cash equivalents

$
3,765,276

$
4,731,926

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

1,207,697

470,025

Trade accounts receivable, net

14,540,631

13,832,452

Inventories, net

4,864,340

5,036,198

Deferred tax asset

1,325,200

1,136,351

Prepaid taxes

65,613

39,784

Prepaid expenses and other assets

2,271,230

2,057,514

Total current assets

28,039,987

27,304,250

Noncurrent assets:

Goodwill

14,303,926

12,031,975

Intangible assets, net

1,032,017

570,740

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

327,404

335,413

Property, plant & equipment, net

6,655,190

6,825,916

Deferred tax asset

—

739,216

Total noncurrent assets

22,318,537

20,503,260

Total assets

$
50,358,524

$
47,807,510

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of long-term debt

$
—

$
1,183,475

Accounts payable

5,997,032

5,785,225

Current portion of obligations under capital lease

145,155

154,072

Current unearned services revenue

4,729,261

5,194,601

Accrued liabilities

3,950,248

3,444,396

Total current liabilities

14,821,696

15,761,769

Noncurrent liabilities:

Accrued long-term liability

144,100

144,100

Long-term portion of obligations under capital lease

—

106,076

Noncurrent unearned services revenue

49,215

36,691

Noncurrent deferred tax liability

222,417

—

Total noncurrent liabilities

415,732

286,867

Contingencies

Shareholders’ equity:

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

—

—

Common stock; $.001 par value; 50,000,000 shares authorized, 11,654,071 issued at July 31, 2010 and 11,256,193 issued at October 31, 2009

11,653

11,255

Paid-in capital

15,623,224

13,704,460

Retained earnings

21,581,086

20,223,169

Less treasury stock, at cost (954,885 shares at July 31, 2010 and 993,763 shares at October 31, 2009)

(2,094,867
)
(2,180,010
)
Total shareholders’ equity

35,121,096

31,758,874

Total liabilities and shareholders’ equity

$
50,358,524

$
47,807,510


	(UNAUDITED)
	January 31, 2011			October 31, 2010
ASSETS

Current assets:
Cash and cash equivalents	$	721,985		$	1,003,180
Current portion of net investment in sales-type leases and other receivables		612,537			996,148
Trade accounts receivable, net		18,328,219			17,805,992
Inventories, net		6,429,522			6,715,076
Deferred tax asset		1,196,966			1,168,544
Prepaid taxes		81,390			69,980
Prepaid expenses and other assets		2,817,373			2,402,111

Total current assets		30,187,992			30,161,031


Noncurrent assets:
Goodwill		18,214,166			17,783,911
Intangible assets, net		2,988,797			3,161,791
Net investment in sales-type leases and other receivables, less current portion above		233,265			326,454
Property, plant & equipment, net		7,570,668			6,931,927

Total noncurrent assets		29,006,896			28,204,083


Total assets	$	59,194,888		$	58,365,114


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	337,500		$	337,500
Revolving line of credit		3,391,918			1,756,361
Accounts payable		7,803,404			10,031,900
Current portion of obligations under capital lease		78,623			122,401
Current unearned services revenue		5,976,995			6,529,330
Accrued liabilities		5,008,328			3,883,303

Total current liabilities		22,596,768			22,660,795


Noncurrent liabilities:
Long-term debt, less current portion above		172,514			255,315
Accrued long-term liability		100,100			144,100
Noncurrent unearned services revenue		37,440			48,629
Noncurrent deferred tax liability		395,945			12,417

Total noncurrent liabilities		705,999			460,461


Contingencies

Shareholders’ equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued		—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,654,071 issued at January 31, 2011 and October 31, 2010		11,653			11,653
Paid-in capital		15,669,918			15,662,689
Retained earnings		22,167,327			21,596,383
Less treasury stock, at cost (891,830 shares at January 31, 2011 and 923,835 shares at October 31, 2010)		(1,956,777	)		(2,026,867	)

Total shareholders’ equity		35,892,121			35,243,858

Total liabilities and shareholders’ equity	$	59,194,888		$	58,365,114

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

~~Table of Contents~~

XETA TECHNOLOGIES, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

For the Three Months

For the Nine Months

Ended July 31,

Ended July 31,

2010

2009

2010

2009

Systems sales

$
8,536,584

$
6,522,569

$
25,146,279

$
22,897,460

Services

12,166,889

10,524,397

35,661,654

30,359,279

Other revenues

188,300

136,271

325,980

263,126

Net sales and services revenues

20,891,773

17,183,237

61,133,913

53,519,865

Cost of systems sales

6,021,390

4,639,749

18,270,980

16,791,637

Services costs

8,223,095

7,505,892

24,236,849

21,258,445

Cost of other revenues & corporate COGS

434,436

425,480

1,287,991

1,308,525

Total cost of sales and services

14,678,921

12,571,121

43,795,820

39,358,607

Gross profit

6,212,852

4,612,116

17,338,093

14,161,258

Operating expenses

Selling, general and administrative

5,178,574

4,388,488

14,566,200

12,925,794

Amortization

206,386

344,727

580,471

1,001,984

Impairment of goodwill & other assets

—

14,000,000

—

14,000,000

Total operating expenses

5,384,960

18,733,215

15,146,671

27,927,778

Income (loss) from operations

827,892

(14,121,099
)
2,191,422

(13,766,520
)

Interest expense

(4,372
)
(20,810
)
(15,286
)
(79,211
)
Interest and other income (expense)

20,254

(1,159
)
58,781

14,219

Net interest and other income (expense)

15,882

(21,969
)
43,495

(64,992
)

Income (loss) before provision for income taxes

843,774

(14,143,068
)
2,234,917

(13,831,512
)
Provision (benefit) for income taxes

331,000

(5,544,000
)
877,000

(5,418,000
)

Net income (loss)

$
512,774

$
(8,599,068
)
$
1,357,917

$
(8,413,512
)

Earnings (loss) per share

Basic

$
0.05

$
(0.84
)
$
0.13

$
(0.82
)

Diluted

$
0.05

$
(0.84
)
$
0.13

$
(0.82
)

Weighted average shares outstanding

10,533,335

10,223,753

10,328,689

10,223,881

Weighted average equivalent shares

10,611,403

10,223,753

10,386,218

10,223,881


	For the Three Months
	Ended January 31,
	2011			2010

Systems sales	$	11,987,842		$	10,867,058
Services		15,296,203			12,116,857
Other revenues		122,317			60,228

Net sales and services revenues		27,406,362			23,044,143


Cost of systems sales		8,945,436			8,076,587
Services costs		11,017,103			8,231,080
Cost of other revenues & corporate COGS		447,841			397,635

Total cost of sales and services		20,410,380			16,705,302


Gross profit		6,995,982			6,338,841


Operating expenses
Selling, general and administrative		5,837,558			5,125,283
Amortization		312,048			186,855

Total operating expenses		6,149,606			5,312,138


Income from operations		846,376			1,026,703

Interest expense		(19,275	)		(6,170	)
Interest and other income		112,843			21,255

Net interest and other income		93,568			15,085

Income before provision for income taxes		939,944			1,041,788
Provision for income taxes		369,000			409,000


Net income	$	570,944		$	632,788


Earnings per share
Basic	$	0.05		$	0.06


Diluted	$	0.05		$	0.06


Weighted average shares outstanding		10,741,534			10,237,405


Weighted average equivalent shares		10,809,696			10,277,361

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

~~Table of Contents~~

XETA TECHNOLOGIES, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

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, 2009

11,256,193

$
11,255

993,763

$
(2,180,010
)
$
13,704,460

$
20,223,169

$
31,758,874

Issuance of restricted common stock from treasury

—

—

(38,878
)
85,143

(85,143
)
—

—

Issuance of common stock

397,878

398

—

—

1,499,602

—

1,500,000

Issuance of warrants

—

—

—

—

279,000

—

279,000

Stock-based compensation

—

—

—

—

225,305

—

225,305

Net income

—

—

—

—

—

1,357,917

1,357,917

Balance- July 31, 2010

11,654,071

$
11,653

954,885

$
(2,094,867
)
$
15,623,224

$
21,581,086

$
35,121,096


	Common Stock				Treasury Stock
	Shares Issued		Par Value		Shares			Amount			Paid-in Capital			Retained Earnings		Total
Balance- October 31, 2010		11,654,071	$	11,653		923,835		$	(2,026,867	)	$	15,662,689		$	21,596,383	$	35,243,858

Issuance of restricted common stock from treasury (net of 7,441 forfeited shares)		—		—		(32,005	)		70,090			(70,090	)		—		—
Stock-based compensation		—		—		—			—			77,319			—		77,319

Net income		—		—		—			—			—			570,944		570,944


Balance- January 31, 2011		11,654,071	$	11,653		891,830		$	(1,956,777	)	$	15,669,918		$	22,167,327	$	35,892,121

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

~~Table of Contents~~

XETA TECHNOLOGIES, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

For the Nine Months

Ended July 31,

2010

2009

Cash flows from operating activities:

Net income (loss)

$
1,357,917

$
(8,413,512
)

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

Depreciation

906,435

722,944

Amortization

580,471

1,001,984

Impairment of goodwill & other assets

—

14,000,000

Stock-based compensation

200,240

219,476

Loss on sale of assets

—

3,764

Provision for returns & doubtful accounts receivable

45,000

395,000

Provision for excess and obsolete inventory

76,500

76,500

Deferred taxes

814,466

(5,547,052
)
Change in assets and liabilities:

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

(729,663
)
(7,440
)
(Increase) decrease in trade accounts receivable

(323,541
)
8,628,795

Decrease in inventories

338,080

295,968

(Increase) decrease in prepaid expenses and other assets

(200,708
)
109,831

(Increase) decrease in prepaid taxes

(25,829
)
31,219

Decrease in accounts payable

(589,907
)
(2,739,735
)
Decrease in unearned revenue

(554,824
)
(446,734
)
Increase (decrease) in accrued liabilities

483,251

(408,020
)
Total adjustments

1,019,971

16,336,500

Net cash provided by operating activities

2,377,888

7,922,988

Cash flows from investing activities:

Additions to property, plant & equipment

(1,046,070
)
(636,586
)
Proceeds from sale of assets

—

5,064

Acquisitions, net of cash acquired

(1,000,000
)
(802,887
)
Investment in capitalized service contracts

—

(750,000
)
Net cash used in investing activities

(2,046,070
)
(2,184,409
)

Cash flows from financing activities:

Principal payments on debt

(1,183,475
)
(128,317
)
Net payments on revolving line of credit

—

(2,524,130
)
Payments on capital lease obligations

(114,993
)
(110,630
)
Payments to acquire treasury stock

—

(58,157
)
Net cash used in financing activities

(1,298,468
)
(2,821,234
)

Net (decrease) increase in cash and cash equivalents

(966,650
)
2,917,345

Cash and cash equivalents, beginning of period

4,731,926

63,639

Cash and cash equivalents, end of period

$
3,765,276

$
2,980,984

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

$
22,679

$
87,523

Cash paid during the period for income taxes

$
47,582

$
102,095

Non-cash investing and financing activity:

Issuance of common stock for acquisition

$
1,500,000

$
—

Issuance of warrants for acquisition

$
279,000

$
—


	For the Three Months
	Ended January 31,
	2011			2010
Cash flows from operating activities:
Net income	$	570,944		$	632,788


Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		428,834			285,801
Amortization		312,048			186,855
Stock-based compensation		70,999			74,060
Provision for returns & doubtful accounts receivable		15,000			15,000
Provision for excess and obsolete inventory		25,500			25,500
Deferred taxes		369,000			409,001
Change in assets and liabilities:
Decrease (increase) in net investment in sales-type leases & other receivables		476,800			(77,062	)
(Increase) decrease in trade accounts receivable		(346,983	)		68,599
Decrease in inventories		298,045			191,797
Increase in prepaid expenses and other assets		(407,587	)		(339,706	)
Increase in prepaid taxes		(11,410	)		(5,295	)
(Decrease) increase in accounts payable		(2,228,496	)		306,130
Decrease in unearned revenue		(787,360	)		(17,022	)
Increase in accrued liabilities		936,976			348,647

Total adjustments		(848,634	)		1,472,305


Net cash (used in) provided by operating activities		(277,690	)		2,105,093


Cash flows from investing activities:
Additions to property, plant & equipment		(1,181,629	)		(206,193	)
Acquisitions, net of cash acquired		(330,854	)		—

Net cash used in investing activities		(1,512,483	)		(206,193	)


Cash flows from financing activities:
Principal payments on debt		(82,801	)		(1,183,475	)
Net proceeds on revolving line of credit		1,635,557			—
Payments on capital lease obligations		(43,778	)		(37,961	)

Net cash provided by (used in) financing activities		1,508,978			(1,221,436	)


Net (decrease) increase in cash and cash equivalents		(281,195	)		677,464

Cash and cash equivalents, beginning of period		1,003,180			4,731,926

Cash and cash equivalents, end of period	$	721,985		$	5,409,390


Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	25,102		$	13,651
Cash paid during the period for income taxes	$	11,410		$	5,295

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

~~Table of Contents~~

XETA TECHNOLOGIES, INC. AND ~~SUBSIDIARY~~SUBSIDIARIES

Notes to Consolidated Financial Statements

~~July~~January 31, ~~2010~~2011

(Unaudited)

1.BASIS OF PRESENTATION:

XETA Technologies, Inc. (“XETA”, the “Company”, “we”, “us”, or “our”), an Oklahoma corporation formed in 1981, is a leading ~~integrator~~provider of advanced communications ~~technologies~~solutions with nationwide sales and service. ~~XETA provides sales, design, project management, implementation,~~We provide a wide variety of applications including voice messaging, wireless voice and ~~maintenance services in~~data solutions, video applications, contact center solutions, unified communication, and high speed internet access solutions to hospitality and conference center customers. We sell and/or support ~~of the products it represents. The Company sells and/or supports products~~communications solutions produced by several manufacturers including Avaya, Inc. (“Avaya”), Mitel Corporation (“Mitel”), ~~and~~ Samsung Business Communications Systems (“Samsung”)~~. Through its recent acquisition of the assets of Hotel Technology Solutions, Inc. (“Lorica”) the Company provides high speed internet access, network monitoring services,~~, Juniper Networks, Polycom, Microsoft and ~~guest help desk services to the hospitality industry. The Company also manufactures and markets a line of proprietary call accounting systems to the hospitality industry.~~

ShoreTel Corporation (“ShoreTel”).

The Company prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures are reasonably adequate to ensure the information is not misleading. Management suggests that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto made a part of the Company’s Annual Report on Form 10-K. The Company filed the 10-K as Commission File No. 0-16231, with the Commission on January ~~8, 2010.~~25, 2011 and subsequently amended on January 28, 2011 and February 25, 2011. Management believes that the financial statements contain the necessary adjustments for a fair statement of the results for the interim periods presented. All adjustments were of a normal recurring nature. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year.

Fair Value of Financial Instruments

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

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

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

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

Segment Information

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

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

~~Table of Contents~~

The following is a tabulation of business segment information for the three months ended ~~July~~January 31, ~~2010~~2011 and ~~2009:~~

Services
Revenues

Commercial
Systems
Sales

Hospitality
Systems
Sales

Other
Revenue

Total

2010

Sales

$
12,166,889

$
7,296,428

$
1,240,156

$
188,300

$
20,891,773

Cost of sales

(8,223,095
)
(5,136,934
)
(884,456
)
(434,436
)
(14,678,921
)
Gross profit

$
3,943,794

$
2,159,494

$
355,700

$
(246,136
)
$
6,212,852

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

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

Services
Revenues

Commercial
Systems
Sales

Hospitality
Systems
Sales

Other
Revenue

Total

2010

Sales

$
35,661,654

$
22,062,341

$
3,083,938

$
325,980

$
61,133,913

Cost of sales

(24,236,849
)
(16,134,299
)
(2,136,681
)
(1,287,991
)
(43,795,820
)
Gross profit

$
11,424,805

$
5,928,042

$
947,257

$
(962,011
)
$
17,338,093

2009

Sales

$
30,359,279

$
15,608,586

$
7,288,874

$
263,126

$
53,519,865

Cost of sales

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

$
9,100,834

$
4,017,050

$
2,088,773

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

2010:


				Commercial			Hospitality
	Services			Systems			Systems			Other
	Revenues			Sales			Sales			Revenue			Total
2011
Sales	$	15,296,203		$	9,711,076		$	2,276,766		$	122,317		$	27,406,362
Cost of sales		(11,017,103	)		(7,417,096	)		(1,528,340	)		(447,841	)		(20,410,380	)
Gross profit	$	4,279,100		$	2,293,980		$	748,426		$	(325,524	)	$	6,995,982

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

Stock-Based Compensation Plans

The Company applies the provisions of ASC 718, “Compensation — Stock Compensation”, which requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. The Company recognizes the fair value of stock-based compensation awards as selling, general and administrative expense in the consolidated statements of operations on a straight-line basis over the vesting period. Compensation expense was recognized in the statements of operations as follows:

2010

2009

Three months ended July 31,

$
65,510

$
74,878

Nine months ended July 31,

$
200,240

$
219,476


	2011		2010
Three months ended January 31,	$	70,999	$	74,060

Use of Estimates

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

~~Table of Contents~~

New Accounting Pronouncements

In ~~July~~December 2010 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations”. ASU 2010-29 requires that if comparative financial statements are presented, the company disclose revenue and earnings of the combined entity as though the business combination had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-20 also expands the supplemental pro forma disclosures to include a description and amount of material, nonrecurring pro forma adjustments that are attributable to the business combination. ASU 2010-29 will be effective for fiscal years beginning after December 15, 2010. The Company will apply the guidance to material business combinations after adoption.

In December 2010 the FASB issued ASU 2010-28, “Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update will be effective for fiscal years beginning after December 15, 2010. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2010 the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. ASU 2010-20 requires disclosures designed to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Disclosures include an evaluation of the nature of credit risk inherent in the entity’s financing receivables; how the risk is analyzed to arrive at the allowance for credit losses and the changes and reasons for changes in the allowance for credit losses. Under this guidance, the allowance for credit losses and fair value are to be disclosed by portfolio segment. ~~ASU 2010-20 will be effective for fiscal years beginning on or after December 31, 2010.~~ The adoption of this guidance ~~is not expected to have an impact on the Company’s consolidated financial statements.~~

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

In November 2009 the Company adopted Accounting Standards Codification (“ASC”) 810, “Consolidation”. ASC 810 changes the accounting and reporting for minority interests, which are now recharacterized as non-controlling interests and classified as a component of equity. The Company does not have any minority interests; therefore the adoption of this statement did not have an impact on the Company’s consolidated financial statements.

In November 2009 the Company adopted ASC 805, “Business Combinations”. Under ASC 805, an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs are recognized separately from the acquisition and expensed as incurred, restructuring costs generally expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. The Company began applying the guidance to business combinations in fiscal 2010.

In November 2009 the Company adopted ASC 350 “Intangibles — Goodwill and Other”. The guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets. The intent of the guidance is to improve the consistency between the useful life of a recognized intangible asset under the accounting standards and the period of the expected cash flows used to measure the fair value of the asset. The Company began applying the guidance to intangible assets acquired in fiscal 2010.

In October 2009 the FASB issued ASU 2009-13, “Revenue Recognition -— Multiple-Deliverable Revenue Arrangements”. The guidance in ASU 2009-13 amends the criteria for separating consideration in multiple-deliverable arrangements. The guidance eliminates the estimated fair value approach for revenue allocation between the separate units of accounting and replaces it with a sales-based approach referred so as the relative-selling-price method. ASU 2009-13 expands required disclosures related to a company’s multiple-deliverable revenue arrangements. ~~ASU 2009-13 is effective prospectively for fiscal years beginning~~The adoption of this guidance did not have a material impact on ~~or after June 15, 2010. The Company is currently assessing~~ the ~~impact that adoption will have on required disclosures, its~~Company’s consolidated financial ~~position and results of operations.~~

statements.

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

~~Table of Contents~~

2.ACCOUNTS RECEIVABLE:

Trade accounts receivable consist of the following:

July 31,
2010

(Audited)
October 31,
2009

Trade accounts receivable

$
15,090,558

$
14,393,681

Less- reserve for doubtful accounts

(549,927
)
(561,229
)
Net trade accounts receivable

$
14,540,631

$
13,832,452


				(Audited)
	January 31,			October 31,
	2011			2010

Trade accounts receivable	$	18,899,562		$	18,352,519
Less- reserve for doubtful accounts		(571,343	)		(546,527	)

Net trade accounts receivable	$	18,328,219		$	17,805,992

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

Onunit which was purchased by Avaya in December ~~18, 2009, Avaya completed the purchase of Nortel’s Enterprise Solutions business unit.~~ 2009.

Nortel owes XETA approximately $700,000 in pre-petition accounts receivable. On July 17, 2009 the bankruptcy court granted XETA’s request for offset of $116,000 in charges owed to Nortel at the time of the filing. In fiscal year 2009, the Company recorded $350,000 as a reserve against possible Nortel bad debts. Nortel filed its plan of reorganization on July 12, 2010 (the “Nortel Plan”). XETA’s claim is classified as a Class 3 claim, “General Unsecured Claims”. The Nortel Plan states that priority non-tax claims and secured claims will be paid in full, but that Class 3 claims will be impaired. No indication or estimate is given as to the potential extent of the impairment. According to the Nortel Plan, XETA and other Class 3 claimants will receive a pro rata share of the assets of Nortel at the time the Nortel Plan goes into ~~affect. The next significant action in this matter is~~affect but the Administrator has provided no guidance as to an expected ~~to be Nortel’s filing of a Disclosure Statement in mid-September providing more information regarding Nortel’s assets and potentially an estimate of payouts to Class 3 creditors.~~payout level. Based on the information presently available, the Company can make no further determination regarding the adequacy of its reserve in this matter. The Company will continue to carefully follow developments associated with the bankruptcy case and will assert its legal rights and defenses as appropriate.

3.INVENTORIES:

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

July 31,
2010

(Audited)
October 31,
2009

Finished goods and spare parts

$
5,899,077

$
5,977,703

Less- reserve for excess and obsolete inventories

(1,034,737
)
(941,505
)
Total inventories, net

$
4,864,340

$
5,036,198


				(Audited)
	January 31,			October 31,
	2011			2010

Finished goods and spare parts	$	7,546,349		$	7,785,951
Less- reserve for excess and obsolete inventories		(1,116,827	)		(1,070,875	)

Total inventories, net	$	6,429,522		$	6,715,076

~~Table of Contents~~

4.PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

Estimated
Useful
Lives

July 31,
2010

(Audited)
October 31,
2009

Building and building improvements

3-20

$
3,378,035

$
3,253,693

Data processing and computer field equipment

2-7

3,977,439

3,248,126

Software development costs, work-in-process

N/A

227,862

197,097

Software development costs of components placed into service

3-10

2,731,310

2,697,806

Hardware

3-5

643,635

643,635

Land

—

611,582

611,582

Office furniture

5-7

813,556

779,588

Auto

5

545,548

537,300

Other

3-7

145,779

149,484

Total property, plant and equipment

13,074,746

12,118,311

Less- accumulated depreciation and amortization

(6,419,556
)
(5,292,395
)

Total property, plant and equipment, net

$
6,655,190

$
6,825,916


	Estimated				(Audited)
	Useful	January 31,			October 31,
	Lives	2011			2010

Building and building improvements	3-20	$	3,420,231		$	3,379,059
Data processing and computer field equipment	2-7		4,917,782			4,438,556
Software development costs, work-in-process	N/A		98,067			272,097
Software development costs of components placed into service	3-10		2,929,244			2,731,310
Hardware	3-5		643,635			643,635
Land	—		611,582			611,582
Office furniture	5-7		944,493			880,635
Autos	5		710,608			710,608
Other	3-7		754,600			156,131


Total property, plant and equipment			15,030,242			13,823,613
Less- accumulated depreciation and amortization			(7,459,574	)		(6,891,686	)


Total property, plant and equipment, net		$	7,570,668		$	6,931,927

5.INCOME TAXES:

The tax provision reflects the effective Federal tax rate plus the composite state income tax rates adjusted for states that require minimum tax payments even if tax losses are incurred. Generally, we expect our tax provision rate to be approximately 40%.

6.CREDIT AGREEMENTS:

~~In November 2009,~~

At January 31, 2011 the ~~Company entered into~~Company’s credit facility consisted of a ~~one-year~~ loan agreement with a ~~new financial institution. This agreement replaced our previous credit facility, which was scheduled to mature on November 30, 2009. The loan agreement consists of an~~commercial bank including a $8.5 million revolving credit ~~facility~~agreement collateralized by trade accounts receivable, inventories, and real estate.

~~At July 31, 2010, the Company did not have an outstanding balance~~ The facility matures on ~~the revolving line of credit. The Company had approximately $8.5 million available under the revolving line of credit at July 31, 2010. The advance~~November 5, 2011. Advance rates are defined in the agreement, but are generally at the rate of 75% on qualified trade accounts receivable and 50% of qualified inventories and real ~~estate, subject to a maximum of $2.0 million each. Long term debt consisted of the following:~~

July 31,
2010

(Audited)
October 31,
2009

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

$
—

$
1,183,475

Less-current maturities

—

1,183,475

Total long-term debt, less current maturities

$
—

$
—

~~Interest on all outstanding debt under the credit facility accrues at the greater of either the London Interbank Offered Rate (“LIBOR”) (0.305% at July 31, 2010) plus 3.0% or 4.5%.~~estate. The credit facility contains several financial covenants common in such agreements including tangible net worth requirements, limitations on the amount of funded debt to annual earnings before interest, taxes, depreciation and amortization, limitations on cash dividends, and debt service coverage requirements. Interest on the loan agreement accrues at the greater of either a) the London Interbank Offered Rate (“LIBOR”) (0.26% at January 31, 2011) plus 3.00% or b) 4.5%. The outstanding balance on the revolving line of credit was $3.4 million at January 31, 2011. At ~~July~~January 31, ~~2010 the Company was~~2011 we were in compliance with the covenants of the credit facility.

1110

~~Table~~At January 31, 2011 the Company was paying 4.5% on the revolving line of ~~Contents~~

credit borrowings.

On August 2, 2010 the Company purchased the common stock of Pyramid Communications Services, Inc. The purchase price included subordinated promissory notes payable to the sellers in quarterly installments through July 31, 2012 bearing interest at 3% per year. At January 31, 2011 the total notes payable was $510,000. We reduced our balance through scheduled principal payments by $83,000 in the first quarter of fiscal 2011.

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, 2010

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Basic EPS

Net income

$
512,774

10,533,335

$
0.05

Dilutive effect of stock options

78,068

Diluted EPS

Net income

$
512,774

10,611,403

$
0.05

For the Three Months Ended July 31, 2009

Loss
(Numerator)

Shares
(Denominator)

Per Share
Amount

Basic EPS

Net loss

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

$
(0.84
)
Dilutive effect of stock options

—

Diluted EPS

Net loss

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

$
(0.84
)

For the Nine Months Ended July 31, 2010

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Basic EPS

Net income

$
1,357,917

10,328,689

$
0.13

Dilutive effect of stock options

57,529

Diluted EPS

Net income

$
1,357,917

10,386,218

$
0.13

For the Nine Months Ended July 31, 2009

Loss
(Numerator)

Shares
(Denominator)

Per Share
Amount

Basic EPS

Net loss

$
(8,413,512
)
10,223,881

$
(0.82
)
Dilutive effect of stock options

—

Diluted EPS

Net loss

$
(8,413,512
)
10,223,881

$
(0.82
)


	For the Three Months Ended January 31, 2011
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS
Net income	$	570,944		10,741,534	$	0.05

Dilutive effect of stock options				68,162


Diluted EPS
Net income	$	570,944		10,809,696	$	0.05


	For the Three Months Ended January 31, 2010
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS
Net income	$	632,788		10,237,405	$	0.06

Dilutive effect of stock options				39,956


Diluted EPS
Net income	$	632,788		10,277,361	$	0.06

Options to purchase ~~712,450~~715,500 shares of common stock at an average exercise price of ~~$5.82~~$4.71 and ~~1,269,900~~993,438 shares of common stock at an average exercise price of ~~$6.42~~$6.63 were not included in the computation of diluted earnings per share for the three months ended ~~July~~January 31, ~~2010~~2011 and ~~2009,~~2010, respectively, because inclusion of these options would be antidilutive. Options to purchase 834,595 shares of common stock at an average exercise price of $5.23 and 1,269,900 shares of common stock at an average exercise price of $6.42 were not included in the computation of diluted earnings per share for the nine months ended July 31, 2010 and 2009, respectively, because inclusion of these options would be antidilutive.

~~Table of Contents~~

8.~~CONTINGENCIES:~~

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

9. CAPITAL LEASES:

During 2008 the Company leased software licenses under an agreement that is classified as a capital lease. The book value of the licenses is included in the balance sheet as property, plant, and equipment and was ~~$139,492~~$63,406 at ~~July~~January 31, ~~2010.~~2011. Accumulated amortization of the ~~leased~~ licenses at ~~July~~January 31, ~~2010~~2011 was ~~$317,028.~~$393,114. Amortization of assets under the capital lease is included in depreciation expense. ~~The~~As of January 31, 2011 the future minimum lease payments required under the ~~capital~~ lease is $67,265 and the present value of the net minimum lease payments asis $66,618. At January, 31, 2011 future minimum lease payments required under a vehicle lease assumed in a recent acquisition is $12,410 and the present value of ~~July 31, 2010, are as follows:~~

Capital
Lease Payments

Total minimum lease payments

$
147,982

Less- imputed interest

2,827

Present value of minimum payments

145,155

Less-current maturities of capital lease obligation

145,155

Long-term capital lease obligation

$
—

the lease payments is $12,005.

~~10.~~ 11

9.ACQUISITIONS:

On ~~May 24,~~November 19, 2010, the Company completed the purchase of ~~the~~certain operating assets of ~~Hotel Technologies Solutions,~~New Vision Comunications, Inc., ~~d/b/a Lorica Solutions~~ (“~~Lorica”~~New Vision”), a privately-held company ~~headquartered~~based in ~~Buffalo, New York. Lorica is an emerging leader in the delivery of high-speed internet access~~Omaha, Nebraska providing communications equipment and ~~network administration to the hospitality industry. Under the terms of the purchase agreement, total consideration to be paid by the Company is $2.8 million plus certain assumed liabilities.~~related services. The purchase price included ~~$833,000~~$331,000 paid in cash at ~~closing; 397,878 shares~~closing and a hold-back of ~~XETA common stock valued at $1.5 million based on the May 21, 2010 closing price of $3.77; five year warrants~~$45,000 to purchase 150,000 shares of XETA common stock at $3.77 valued at $279,000; and $167,000 in cash deposited into an escrow account as required under the purchase agreement. The acquisition is not materialbe paid to the ~~Company’s financial position or results~~seller subject to reductions related to the final value of ~~operations.~~

the net assets purchased.

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

~~Table of Contents~~

~~11.~~ 10.SUBSEQUENT ~~EVENTS:~~EVENT:

On ~~August 2, 2010,~~February 8, 2011, the Company ~~completed~~entered into a merger agreement with PAETEC Holding Corp., a Delaware corporation (“PAETEC”), and Hera Corporation, an Oklahoma corporation and an indirect wholly-owned subsidiary of PAETEC (“Hera”). Under the ~~purchase of 100%~~terms and subject to the conditions of the ~~voting~~Merger Agreement, Hera will merge with and into XETA (the “Merger”), with XETA surviving the Merger as an indirect wholly-owned subsidiary of PAETEC. The Merger Agreement has been approved unanimously by the board of directors of each of XETA and PAETEC.

At the effective time of the Merger, each share of XETA common stock issued and outstanding immediately prior to the effective time (other than shares held in the treasury of ~~Pyramid Communications Services, Inc., (“Pyramid”) a Dallas, Texas based privately held company providing communications equipment~~XETA or any subsidiary of XETA and ~~related services. Pyramid’s 2009 revenues exceeded $10.0 million. The purchase price included $1.8 million paid~~any shares owned by PAETEC or any of its subsidiaries) will be automatically converted into the right to receive $5.50 in cash, ~~at closing; $675,000 in subordinated promissory notes payable~~without interest (the “Merger Consideration”). In addition, immediately prior to the ~~sellers~~effective time of the Merger, all remaining forfeiture restrictions applicable to restricted shares of XETA common stock will expire and the holders thereof will be entitled to receive the Merger Consideration with respect to each such share. Certain options to purchase shares of XETA common stock outstanding immediately prior to the effective time shall become fully vested immediately prior to the effective time. Holders of warrants and vested options will be entitled to receive (in each case, in ~~eight quarterly installments bearing interest at three percent per year; $200,000~~accordance with the terms of their respective plans and agreements) the product of (i) the number of shares of XETA common stock that would have been acquired upon the exercise of the stock option or warrant, multiplied by (ii) the excess, if any, of the Merger Consideration over the exercise price to acquire a share of XETA common stock under such option or warrant. The Merger Consideration will be approximately $61 million in ~~cash deposited into an escrow account~~the aggregate.

The consummation of the Merger is subject to customary conditions, including, without limitation, (a) approval by the holders of a majority of the outstanding shares of XETA’s common stock entitled to vote on the Merger, (b) receipt of any required antitrust or regulatory approvals (including, if applicable, the expiration or termination, as ~~required~~the case may be, of the waiting period under the ~~purchase agreement;~~Hart-Scott-Rodino Antitrust Improvements Act of 1976), and ~~$100,000 payable~~(c) the absence of any law, regulation, order or injunction prohibiting the Merger. Moreover, each party’s obligation to consummate the ~~former CEO~~Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of ~~Pyramid~~the other party’s representations and warranties (subject to customary materiality qualifiers and other qualifying disclosures which are not necessarily reflected in ~~thirty six monthly installments under personal goodwill and non-compete agreements. Additionally,~~ the ~~Company retired $648,222 in principal and accrued interest on Pyramid’s outstanding line of credit~~Merger Agreement), (ii) the other party’s compliance with its ~~bank. The Company used $2.65 million from existing cash balances to fund~~covenants and agreements contained in the ~~purchase price. The acquisition is~~Merger Agreement, (iii) there not being holders of more than 15% of the outstanding shares of XETA common stock properly exercising appraisal rights and (iv) there not having been a material toadverse effect on the ~~Company’s~~business, financial ~~position~~condition or results of ~~operations.~~

operations of XETA and its subsidiaries (subject to certain limitations) or the ability of XETA to consummate the transactions under the Merger Agreement that has not been cured.

The Merger Agreement contains customary representations, warranties and covenants of XETA, PAETEC and Acquisition Sub, including, among others, covenants by XETA to conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger and not to engage in certain types of transactions during such period.

On ~~September 2, 2010,~~February 14 and 16, 2011, three separate putative stockholder class action complaints were filed in the District Court of Tulsa County, State of Oklahoma against the Company, ~~completed~~ the ~~purchase~~members of our board of directors, and PAETEC Holding Corp. (“PAETEC”) and its indirect subsidiary Hera Corporation (“Hera”). The lawsuits concern the proposed merger with PAETEC, and generally assert claims alleging, among other things, that each member of our board of directors breached his fiduciary duties by agreeing to the terms of the ~~operating assets of Data-Com Telecomunications, Inc., (“Data-Com”) a New Jersey based privately held company providing communications equipment~~merger and by allegedly failing to provide stockholders with material information related ~~services~~ to the greater New York City area. The purchase price was $3.070 million cash. Of this amount, $604,000 was put into escrow until certain tax liabilities are determined; customer overpayments are resolved;proposed merger; and that PAETEC and Hera aided and abetted the ~~final value~~alleged breaches of fiduciary duty by the members of the ~~net assets purchased is established.~~Company’s board of directors. The ~~acquisition is not material to~~lawsuits seek, among other things, class action certification and monetary and injunctive relief. The Company believes that all claims asserted in the ~~Company’s financial position or results of operations.~~

14lawsuits are without merit and are merely opportunistic.


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

PAETEC offers a comprehensive suite of IP, voice, data, and Internet services, as well as enterprise communications management software, network security solutions, CPE, and managed services. We will become a part of PAETEC’s managed services portfolio which consists of a wide variety of products including hosted services, service lifecycle management software, and Allworx IP-PBX’s. These managed services can be sold on a stand-alone basis, but is often bundled with a variety of PAETEC’s network services to drive more revenues and deeper relationships with customers.

The Merger is expected to close in the third fiscal quarter. The merger agreement includes covenants by us to conduct business in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Merger and not to engage in certain types of transactions during such period. Additionally, while integration planning is ongoing during this period, none of our operations can be integrated into PAETEC’s prior to the closing of the transaction. As a result of these ~~risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, investors~~factors, we are cautioned to read and consider all forward-looking statements in conjunction with such risk factors and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements made by the Company.

~~Overview~~

~~Strategy.~~

~~In advance of fiscal 2010, senior management conducted its periodic review of the strategic direction of the Company. This review resulted~~operating in a ~~threefold refinement~~manner consistent with previously stated strategic, financial and operating goals.

Strategy.

To adjust to market conditions and to improve the profitability and predictability of our business, we are continuing to shift our go-to-market strategy from an equipment-centric model to a customer-centric model through the ~~strategic focus~~addition of new professional and ~~direction of the organization including: continued emphasis on aggressive~~managed services offerings and through adding new relationships with manufacturers. Additionally, we expect to continue to augment our organic growth through acquisitions and other corporate development activities.

Historically, our revenues have been closely associated with a few major vendors such as Avaya, Nortel, and Hitachi. Our strategy to increase our services revenues coupled with rapid changes in our market requires us to diversify our relationships to more manufacturers as well as develop new customer relationships, particularly related to our managed services ~~business; use~~business. As a result, in the last two years we have expanded our relationships with manufacturers from five to seventeen, greatly increasing the number of hardware and software applications we sell. We have also expanded our ~~unique position~~service offerings to ~~search out~~include more data-centric services such as managed network services, hospitality guest support services (help desk), wireless long-range bridging, data security consulting, and ~~pursue organic~~environment virtualization. These changes are creating opportunities for us to earn additional revenues from existing customers as well as create opportunities with new customers. We believe these expanded capabilities will lead to improved predictiablitily and acquisitive growth opportunities resulting from Avaya’s acquisition of Nortel’s enterprise business (NES); and advance a longer-term business initiative focused on the sales, design, integration and maintenance and repair of collaborative technologies and advanced applications.

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

~~Even though we are experiencing growth~~profitability in our ~~services revenue, the overall market for our products and services remains challenging. While some of our customers are enjoying improvements in their~~ business and ~~are therefore purchasing~~will help to diversify our revenues.

In fiscal 2010, we initiated a corporate development effort to identify and ~~implementing new communications systems, many others remain~~

~~Table~~make investments which create rapid scale and scope to our business. As a result of ~~Contents~~

~~cautiously optimistic about near-term economic improvement and are continuing to limit new spending and are furthering their~~those efforts ~~to reduce ongoing operating costs. Consequently,~~ we have not experienced an overall improvement in purchases of new systems and related services. Additionally, some of our major customers have faced unique challenges in their operations which have slowed expected orders. Finally,completed the acquisition of ~~NES~~three companies and absorbed the operating assets of a fourth business unit which was being dissolved by ~~Avaya has created a pause~~its owner. These acquisitions provided: (i) new geographic presence for us in ~~some customers’ normal buying patterns as they evaluate Avaya’s technology roadmap~~the northeastern and southwestern regions of the country; (ii) new high speed product and service ~~strategies.~~

offering for our hospitality vertical market; and (iii) personnel and applications to launch our new network operations center. We expect to continue to use cash flows and debt financing to further these corporate development activies in fiscal 2011.

On ~~May 24,~~November 19, 2010, ~~the Company~~we completed the purchase of ~~the~~certain operating assets of ~~Hotel Technologies Solutions,~~New Vision Comunications, Inc.~~, d/b/a Lorica Solutions~~ (“~~Lorica”~~New Vision”), a privately-held company ~~headquartered~~based in ~~Buffalo, New York. Lorica is an emerging leader in the delivery of high-speed internet access~~Omaha, Nebraska providing communications equipment and ~~network administration to the hospitality industry.~~related services. The terms of the purchase agreement are described in Note 109 of the Notes to Consolidated Financial Statements.

On August 2, 2010, the Company completed the purchase of the stock of Pyramid Communications Services, Inc. (“Pyramid”), a privately held company headquartered in Dallas, Texas. Pyramid provides communications equipment and related services with 2009 revenues in excess of $10.0 million. The terms of the purchase agreement are described in Note 11 of the Notes to Consolidated Financial Statements.

Operating Summary.

In the ~~third~~first quarter of fiscal ~~2010,~~2011, we recorded net income of ~~$513,000~~$571,000 on revenues of ~~$20.9~~$27.4 million compared to a net ~~loss~~income of ~~$8.6 million~~$633,000 on revenues of ~~$17.2~~$23.0 million in the ~~third~~first quarter of last year. For the first nine months of fiscal 2010, we earned $1.4 million in net income on revenues of $61.1 million compared to a net loss of $8.4 million on revenues of $53.5 million for the first nine months of last year. In the third quarter of fiscal 2009, we recorded an impairment charge on goodwill and other assets of $14.0 million and related tax benefit of $5.5 million. Our non-GAAP net income was $98,000 for the first nine months of last year. Apart from the impairment charges recorded in 2009, the improved 2010The 2011 results primarily reflect an increase in revenues and gross profits ~~partially~~ offset by increased selling, general and administrative ~~costs.~~costs, including $324,000 in costs associated with the PAETEC merger process and other corporate development activities. We discuss this and other contributing factors in more detail under “Results of Operations” below.

Financial Position Summary.

Since October 31, ~~2009, we have generated positive cash flows~~2010, our working capital position remained relatively unchanged at $7.6 million. Cash from operations and net borrowing on the revolving line of ~~$2.4 million and we~~credit was primarily used ~~these cash flows~~ to reduce ~~borrowings,~~accounts payable, make capital expenditures to support our operations and purchase the net operating assets of ~~Lorica and make capital expenditures to support our operations. We have improved our working capital approximately 15%.~~New Vision. We discuss these and other financial items in more detail under “Financial Condition” below.

The following discussion presents additional information regarding our financial condition and results of operations for the ~~three- and nine-month~~three-month periods ended ~~July~~January 31, ~~2010~~2011 and ~~2009~~2010 and should be considered in conjunction with our above comments as well as the “Risk Factors” section below.

Financial Condition

~~During the first three fiscal quarters of 2010~~

At January 31, 2011 our working capital ~~increased by 15%~~was $7.6 million compared to ~~$13.2 million.~~$7.5 million at October 31, 2010. We ~~generated $2.4~~used our cash balances and $1.6 million short-term borrowings from our $8.5 million line of credit to fund our operating activities, acquisition activities and capital expenditures during the quarter.

Our capital expenditures in ~~cash flows from operations. These cash flows~~the first quarter were $1.2 million which included ~~earnings~~approximately $688,000 in expenditures to build our new network operations center (“NOC”) in Hazelwood, Missouri. The NOC facility provides a platform for a variety of new revenue streams including proactive network monitoring, remote break/fix of network devices, and ~~non-cash charges of $3.2 million;~~help desk services. The expenditures above included remodeling a ~~decrease~~small area in inventory of $338,000; an increase in accrued liabilities of $483,000; and a decrease in deferred taxes of $814,000. These positive cash flow items were partially offset by an increase in accounts receivable of $324,000; a decrease in unearned revenue of $555,000; a decrease in accounts payable of $590,000; and other changes in working capital items. These items nettedour headquarters facility to ~~a decrease in~~create redundancy for the NOC. We used cash of $956,000. Non-cash charges included amortization of $580,000; depreciation of $906,000; provisions for doubtful accounts receivable and obsolete inventories of $122,000; and stock-based compensation of $200,000.

~~We used these positive cash flows~~$331,000 to ~~pay off term debt of $1.2 million; to purchases~~purchase the net operating assets of ~~Lorica~~New Vision. This small acquisition provides us with new personnel and applications to integrate Microsoft applications more effectively with other products and applications we sell. The remaining capital expenditures made in the first quarter were for implementation of ~~$1.0 million, acquire capital assets of $1.1 million;~~a CRM tool to increase our sale management capabilities and ~~fund other financing and investing activities of $115,000. The acquisition of capital assets was part of~~to support normal replacement cycles of ~~Information Technology infrastructure and headquarters facility improvements.~~

technology infrastructure.

~~Table of Contents~~

At ~~July~~January 31, ~~2010,~~2011, our cash balance was ~~$3.8~~$722,000 and we had a $3.4 million ~~and there was no~~ outstanding balance on our ~~working capital revolver.~~line of credit. In accordance with the collateral base defined in the credit facility, ~~$8.5~~$5.1 million was available for borrowing on the ~~$8.5 million~~ facility at the end of the quarter. ~~The working capital revolver is scheduled to mature on November 5, 2010. We expect to renew this instrument for a 12-month or longer period prior to~~At January 31, 2011, we were in compliance with the ~~expiration. It is possible that~~covenants of the ~~renewal could result in higher borrowing costs and/or reduced availability for unsecured borrowings.~~

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

facility.

Services Revenues.

Services revenues consist of the following:

For the Three Months Ended
July 31,

For the Nine Months Ended
July 31,

2010

2009

2010

2009

Maintenance & repair

$
8,253,000

$
7,358,000

$
23,984,000

$
21,384,000

Implementation

3,164,000

2,469,000

9,453,000

6,926,000

Cabling

750,000

697,000

2,225,000

2,049,000

Total Services revenues

$
12,167,000

$
10,524,000

$
35,662,000

$
30,359,000


	For the Three Months Ended
	January 31,
	2011		2010
Maintenance & repair	$	10,283,000	$	7,498,000
Implementation		4,108,000		3,762,000
Structured cabling		905,000		857,000

Total Services revenues	$	15,296,000	$	12,117,000


	For the Three
	Months Ended
	January 31,
Gross Margins	2011			2010
Systems sales		25.4	%		25.7	%
Services revenues		28.0	%		32.1	%
Other revenues		48.7	%		19.3	%
Corporate cost of goods sold		-1.4	%		-1.5	%
Total		25.5	%		27.5	%

~~Table of Contents~~

Operating Expenses.

Our total operating expenses in the ~~third~~first quarter were ~~$5.4~~$6.1 million or ~~25.8%~~22.4% of revenues compared ~~to$4.7~~to $5.3 million or ~~27.5% of revenues in the third quarter of fiscal 2009 excluding $14.0 million in impairment charges recorded in the third quarter of fiscal 2009. Our operating expenses were 24.8%~~23.1% of revenues in the first ~~three quarters~~quarter of fiscal ~~2010 compared to 26.0% last year, excluding the impairment charges. As discussed~~2010. The modest improvement in the overview above, we have made strategic choices to focus on aggressively expanding our managed services business and on expanding through acquisitions. We have increased our expenditures to support these strategies. These expenditures coupled with slower than expected growth in our systems sales and increased investments in our Information Technology group to increase efficiencies and improve customer satisfaction has resulted in our operating expenses as a ~~percentage~~percent of revenues was realized despite $324,000 in non-recurring expenses for professional fees and other costs related to ~~continue to exceed our targets. We consider it tactically appropriate, given our strong cash flows, to support operating~~the PAETEC merger and other corporate development activities. These expenses ~~above our targets in the near term to capitalize on these opportunities to expand our revenues~~included professional fees such as investment banking and ~~increase our net profit margins.~~

legal fees, tax services, and travel costs directly associated with integration activities.

Interest Expense and Other Income.

Net interest and other income was ~~$16,000~~$94,000 in the ~~third~~first quarter of fiscal ~~2010~~2011 compared to ~~$22,000~~$15,000 in net other ~~expense~~income in the ~~third~~first quarter of fiscal 2009. Net interest and other income was $43,000 for the nine-month period ended July 31, 2010 compared to $65,000 in net other expense in the same period last year. This reflects both reduced debt levels and lower interest rates.

2010.

Tax Provision.

~~ITEM 4. CONTROLS AND PROCEDURES~~


ITEM 4.		CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.Based on an evaluation conducted as of ~~July~~January 31, ~~2010~~2011 by our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are effective to reasonably ensure that information required to be disclosed in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls. There were no changes in our internal controls during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls over financial reporting.

PART II. OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS.

On February 14 and 16, 2011, three separate putative stockholder class action complaints were filed in the District Court of Tulsa County, State of Oklahoma against the Company, the members of our board of directors, and PAETEC Holding Corp. (“PAETEC”) and its indirect subsidiary Hera Corporation (“Hera”). The lawsuits concern the proposed merger between us and PAETEC, and generally assert claims alleging, among other things, that each member of our board of directors breached his fiduciary duties by agreeing to the terms of the merger and by allegedly failing to provide stockholders with material information related to the proposed merger; and that PAETEC and Hera aided and abetted the alleged breaches of fiduciary duty by the members of our board of directors. The lawsuits seek, among other things, class action certification and monetary and injunctive relief. We believe that all claims asserted in the lawsuits are without merit and are merely opportunistic.

~~ITEM 1. LEGAL PROCEEDINGS.~~17

~~None.~~

~~ITEM 1A. RISK FACTORS.~~


ITEM 1A.		RISK FACTORS.

The information presented below is an update to the “Risk Factors” included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, ~~2009~~2010 and should be read in conjunction therewith. Except as set forth below, the Risk Factors included in the Company’s Form 10-K for its ~~2009~~2010 fiscal year have not materially changed.

~~Table~~The proposed merger with PAETEC is subject to satisfaction or waiver of ~~Contents~~

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

Avaya implemented new policies, effective July 1, 2010, requiring all customers to contract with Avaya for minimum service levels to access Tier IV support, and to maintain their software at no more than two trailing major version releases thancertain customary conditions, including the ~~current version.~~ ~~The impact of these changes to our business will be negative, but the materiality~~approval of the ~~impact is uncertain at this time. These impacts could include a significant decline in~~merger by our ~~services gross margins if we are required to purchase Avaya service contracts on behalf of~~stockholders.

Until all ~~of our customers. Conversely, if we chose to forego such purchases on behalf of our customers, we risk reduced customer satisfaction due~~conditions to the ~~lack~~merger agreement are satisfied, we cannot be certain that the proposed merger will close. We will incur significant transaction costs relating to the proposed merger, whether or not the merger is completed. Completion of ~~access~~the merger is subject to ~~Avaya’s Tier IV support. We might also experience reduced sales~~the satisfaction or waiver of ~~new Avaya systems if customers choose to abandon the product line due to increased costs for the mandatory Avaya maintenance contract. Avaya has provided some transition relief~~certain customary conditions set forth in the ~~form~~merger agreement, including without limitation the approval of ~~blanket contracts~~the merger agreement by our stockholders, receipt of any required antitrust approvals (or termination or expiration of applicable waiting periods), the accuracy of the representations and ~~other exceptions~~warranties of the parties and compliance by the parties with their respective obligations under the merger agreement. The transaction is expected to ~~its stated policy, but it is too early to determine with confidence~~close in the ~~long-term impact~~third quarter of ~~these changes on our business. At this time,~~fiscal 2011. However, no ~~assurance~~assurances can be given that ~~these policy changes~~the transaction contemplated by the merger agreement will be consummated or, if not consummated, that we will enter into a comparable or superior transaction with another party.

Our future business and financial position may be adversely affected if the merger is not completed.

If the merger agreement with PAETEC is terminated and the merger is not consummated, we will have ~~a material,~~incurred substantial expenses without realizing the expected benefits of the merger. In addition, we may also be subject to additional risks including, without limitation:

	•		upon termination of the merger agreement under specified circumstances, we may be required to pay PAETEC a termination fee of $1.92 million;

	•		substantial costs related to the merger, such as legal, accounting and financial advisory fees, must be paid regardless of whether the merger is completed; and

	•		potential disruption to the current plan, operations, businesses and distraction of our workforce and management team.

Litigation related to the Merger could adversely affect our financial results.

Several putative stockholder class action complaints were filed against us, the members of our board of directors, and PAETEC in connection with the proposed merger. The cost of defending such lawsuits and paying any judgment or settlement in connection therewith could have an adverse impact on our ~~operating~~financial results ~~beginning~~in the event these amounts exceed our insurance limits or are not covered by those limits.

The proposed merger creates unique risks in the time leading up to closing, and there are also risks of completing the conditions to closing.

The merger agreement generally requires us to operate our business in the ordinary course pending consummation of the proposed merger, but restricts us, without PAETEC’s consent, from taking certain specified actions until the merger is complete or the merger agreement is terminated. Additionally, matters relating to the merger may require substantial commitments of time and resources, which could otherwise have been devoted to other beneficial opportunities. There may also be potential difficulties in employee retention pending consummation of the merger. Any loss of business opportunities or key personnel could have an adverse impact on future business, and, as ~~soon as fiscal 2011.~~

a result, result in lower future sales and earnings.

If we are unable to complete our proposed merger our stock price could suffer.

The termination of the merger agreement would likely result in a decline in our stock price to the extent that our stock price reflects a market assumption that we will complete the merger and our stockholders will receive the merger consideration specified in the merger agreement.

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

Nortel filed a voluntary petition for Chapter 11 bankruptcy protection on January 14, 2009. On July 12, 2010 Nortel filed its plan of reorganization which was essentially a plan of liquidation. This matter poses a variety of risks to our business, as follows:

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


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

None.


ITEM 3.		DEFAULTS UPON SENIOR SECURITIES.

None.


ITEM 5.		OTHER INFORMATION.

None.

2019

~~Table of Contents~~

~~The acquisition and integration of businesses by the Company may not produce the desired financial and/or operating results.~~

~~We have recently completed the acquisition of~~ the operating assets of Lorica Solutions and the stock of Pyramid Communication Services, Inc. These developments are a part of our stated strategy to take advantage of the current disruption in our market by acquiring assets that increase our market share and establish a presence in the advanced communications applications market segment. Integrating new operating assets into an existing organization is a complex business proposition. Expected synergies and growth often do not materialize as planned. We used existing cash balances to fund the acquisitions and their integration costs. Furthermore, we will devote significant time and effort to improve the probability of success for these investments. However, no assurance can be given that these acquisitions will meet our expectations for revenues and operating results, or that our capital could have been used more efficiently to improve our financial condition or operating results.

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

~~None.~~

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

~~None.~~

~~ITEM 5. OTHER INFORMATION.~~

~~None.~~

~~ITEM 6. EXHIBITS.~~


ITEM 6.		EXHIBITS.

Exhibits (filed herewith):


SEC Exhibit No.			Description

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

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

~~2.2~~		~~Stock Purchase Agreement dated July 9, 2010 by and~~Plan of Merger among ~~Sellers, Pyramid Communications Services, Inc.~~PAETEC Holding Corp., Hera Corporation and XETA Technologies, Inc.* dated Feburary 8, 2011(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the U. S. Securities and Exchange Commission on February 10, 2011).

	3.1	PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT.	Amendment to Section 2.1 of the Company’s Amended and Restated Bylaws(incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 10, 2011)

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

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

~~Table of Contents~~

~~32.1~~
	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~~	32.2	Certification of Chief Financial Officer Pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

2220

SIGNATURES

~~Table of Contents~~

~~SIGNATURES~~

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


	XETA Technologies, Inc. (Registrant)
Dated: March 4, 2011	~~(Registrant)~~
By:

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

Dated: March 4, 2011	By:
~~Dated: September 3, 2010~~	~~By:~~	/s/ Robert B. Wagner
		Robert B. Wagner
		Chief Financial Officer

2321

~~Table of Contents~~

EXHIBIT INDEX


SEC Exhibit No.			Description

~~2.1~~	2.1	~~Asset Purchase~~	Agreement ~~dated May 10, 2010 between~~and Plan of Merger among PAETEC Holding Corp., Hera Corporation and XETA Technologies, Inc. ~~as Purchaser, Hotel Technology Solutions, Inc. as Seller,~~dated Feburary 8, 2011(incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the U. S. Securities and Seller Principals.* Exchange Commission on February 10, 2011).

	3.1	PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE COMPANY’S APPLICATION FOR CONFIDENTIAL TREATMENT.	Amendment to Section 2.1 of the Company’s Amended and Restated Bylaws(incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 10, 2011)

~~2.2~~	31.1	Stock Purchase Agreement dated July 9, 2010 by and among Sellers, Pyramid Communications Services, Inc. and XETA Technologies, Inc.*

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

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

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

~~32.1~~	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~~	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.

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

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

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

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

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	—		$	1,183,475
Accounts payable	5,997,032			5,785,225
Current portion of obligations under capital lease	145,155			154,072
Current unearned services revenue	4,729,261			5,194,601
Accrued liabilities	3,950,248			3,444,396
Total current liabilities	14,821,696			15,761,769

Noncurrent liabilities:
Accrued long-term liability	144,100			144,100
Long-term portion of obligations under capital lease	—			106,076
Noncurrent unearned services revenue	49,215			36,691
Noncurrent deferred tax liability	222,417			—
Total noncurrent liabilities	415,732			286,867

Contingencies

Shareholders’ equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued	—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,654,071 issued at July 31, 2010 and 11,256,193 issued at October 31, 2009	11,653			11,255
Paid-in capital	15,623,224			13,704,460
Retained earnings	21,581,086			20,223,169
Less treasury stock, at cost (954,885 shares at July 31, 2010 and 993,763 shares at October 31, 2009)	(2,094,867		)	(2,180,010		)
Total shareholders’ equity	35,121,096			31,758,874
Total liabilities and shareholders’ equity	$	50,358,524		$	47,807,510

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

Systems sales	$	8,536,584		$	6,522,569		$	25,146,279		$	22,897,460
Services	12,166,889			10,524,397			35,661,654			30,359,279
Other revenues	188,300			136,271			325,980			263,126
Net sales and services revenues	20,891,773			17,183,237			61,133,913			53,519,865

Cost of systems sales	6,021,390			4,639,749			18,270,980			16,791,637
Services costs	8,223,095			7,505,892			24,236,849			21,258,445
Cost of other revenues & corporate COGS	434,436			425,480			1,287,991			1,308,525
Total cost of sales and services	14,678,921			12,571,121			43,795,820			39,358,607

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

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

Income (loss) from operations	827,892			(14,121,099		)	2,191,422			(13,766,520		)

Interest expense	(4,372		)	(20,810		)	(15,286		)	(79,211		)
Interest and other income (expense)	20,254			(1,159		)	58,781			14,219
Net interest and other income (expense)	15,882			(21,969		)	43,495			(64,992		)

Income (loss) before provision for income taxes	843,774			(14,143,068		)	2,234,917			(13,831,512		)
Provision (benefit) for income taxes	331,000			(5,544,000		)	877,000			(5,418,000		)

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

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

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

Weighted average shares outstanding	10,533,335			10,223,753			10,328,689			10,223,881

Weighted average equivalent shares	10,611,403			10,223,753			10,386,218			10,223,881

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

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

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

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

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

	Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total
2010
Sales	$	12,166,889		$	7,296,428		$	1,240,156		$	188,300		$	20,891,773
Cost of sales	(8,223,095		)	(5,136,934		)	(884,456		)	(434,436		)	(14,678,921		)
Gross profit	$	3,943,794		$	2,159,494		$	355,700		$	(246,136	)	$	6,212,852

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

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

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

	July 31, 2010			(Audited) October 31, 2009

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

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

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

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

Total property, plant and equipment, net		$	6,655,190		$	6,825,916

	July 31, 2010		(Audited) October 31, 2009

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

Less-current maturities	—		1,183,475

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

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

Diluted EPS
Net income	$	512,774	10,611,403	$	0.05

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

Diluted EPS
Net loss	$	(8,599,068	)	10,223,753	$	(0.84	)

	Capital Lease Payments
Total minimum lease payments	$	147,982
Less- imputed interest	2,827
Present value of minimum payments	145,155
Less-current maturities of capital lease obligation	145,155
Long-term capital lease obligation	$	—

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

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