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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****      QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended July 31, 2010**

** **

**OR**

 

**o****         TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission File Number 0-16231**

 

 

**XETA Technologies, Inc.**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

**918-664-8200**

(Registrant’s telephone number, including area code)

 

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   Yes o No x

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes o No x

 

Asof August 23, 2010 there were 10,699,186 shares of the registrant’s commonstock, par value $0.001, outstanding.

 

 

 

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INDEX

 
| ** **                          | ** **                                                                                                | **PAGE** |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------|----------|
|                                |                                                                                                      |     |
| PART I.  FINANCIAL INFORMATION |                                                                                                      |     |
|                                |                                                                                                      |     |
|                                | ITEM  1. FINANCIAL STATEMENTS (Unaudited)                                                                 |     |   |
|                                |                                                                                                      |     |
|                                | Consolidated  Balance Sheets - July 31, 2010 and October 31, 2009                               |     | 3 |
|                                |                                                                                                      |     |   |
|                                | Consolidated  Statements of Operations - For the Three and Nine Months Ended July 31,  2010 and 2009 |     | 4 |
|                                |                                                                                                      |     |   |
|                                | Consolidated Statement of Shareholders’ Equity - For  the Nine Months Ended July 31, 2010       |     | 5 |
|                                |                                                                                                      |     |   |
|                                | Consolidated Statements of Cash Flows - For the Nine  Months Ended July 31, 2010 and 2009            |     | 6 |
|                                |                                                                                                      |     |   |
|                                | Notes to Consolidated Financial Statements                                                                |     | 7 |
|                                |                                                                                                      |     |
|                                | ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS                                                        |     | 15 |
|                                |                                                                                                      |     |   |
|                                | ITEM 4. CONTROLS AND PROCEDURES                                                                           |     | 19 |
|                                |                                                                                                      |     |   |
| PART II. OTHER INFORMATION     |                                                                                                      |     |
|                                |                                                                                                      |     |   |
|                                | ITEM  1. LEGAL PROCEEDINGS                                                                                |     | 19 |
|                                |                                                                                                      |     |   |
|                                | ITEM  1A. RISK FACTORS                                                                                    |     | 19 |
|                                |                                                                                                      |     |   |
|                                | ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                      |     | 21 |
|                                |                                                                                                      |     |   |
|                                | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                   |     | 21 |
|                                |                                                                                                      |     |   |
|                                | ITEM  5. OTHER INFORMATION                                                                                |     | 21 |
|                                |                                                                                                      |     |   |
|                                | ITEM  6. EXHIBITS                                                                                         |     | 21 |
|                                     |                                                                                                           |          |  |  |

 

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

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 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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** **

XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS 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 |   |

** **

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OFSHAREHOLDERS’ 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 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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XETA TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OFCASH 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    |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**XETA TECHNOLOGIES, INC. AND SUBSIDIARY**

**Notes to Consolidated FinancialStatements**

**July 31, 2010**

(Unaudited)

 

1.  BASIS OF PRESENTATION:

 

XETATechnologies, Inc. (“XETA”, the “Company”, “we”, “us”, or “our”), anOklahoma corporation formed in 1981, is a leading integrator of advancedcommunications technologies with nationwide sales and service.  XETAprovides sales, design, project management, implementation, and maintenanceservices in support of the products it represents.  The Company sells and/or supports productsproduced by several manufacturers including Avaya, Inc. (“Avaya”), MitelCorporation (“Mitel”), and Samsung Business Communications Systems (“Samsung”).  Through its recent acquisition of the assetsof Hotel Technology Solutions, Inc. (“Lorica”) the Company provides highspeed internet access, network monitoring services, and guest help deskservices to the hospitality industry. The Company also manufactures and markets a line of proprietary callaccounting systems to the hospitality industry.

 

TheCompany prepared the accompanying unaudited consolidated financial statementspursuant to the rules and regulations of the Securities and ExchangeCommission (the “Commission”).  Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant tothose rules and regulations.  TheCompany believes that the disclosures are reasonably adequate to ensure theinformation is not misleading. Management suggests that these condensed financial statements be read inconjunction with the consolidated financial statements and the notes theretomade a part of the Company’s Annual Report on Form 10-K.  The Company filed the 10-K as Commission FileNo. 0-16231, with the Commission on January 8, 2010.  Management believes that the financialstatements contain the necessary adjustments for a fair statement of theresults for the interim periods presented. All adjustments were of a normal recurring nature.  The results of operations for the interimperiod are not necessarily indicative of the results for the entire fiscalyear.

 

FairValue of Financial Instruments

 

Thefollowing methods and assumptions were used to estimate the fair value of eachclass of financial instruments for which it is practicable to estimate thevalue:

 

Thecarrying value of cash and cash equivalents, customer deposits, trade accountsreceivable, sales-type leases, accounts payable and short-term debt approximatetheir respective fair values due to their short maturities.

 

Basedupon the borrowing rates currently available to the Company for bank loans withsimilar terms and average maturities, the fair value of the long-term debtapproximates the carrying value.

 

SegmentInformation

 

TheCompany has three reportable segments: services, commercial system sales, andhospitality system sales.  Servicesrevenues represent revenues earned from installing and maintaining systems forcustomers in both the commercial and hospitality segments.  The Company defines commercial system salesas sales to the non-hospitality industry.

 

Thereporting segments follow the same accounting policies used for the Company’sconsolidated financial statements and are described in the Summary ofSignificant Accounting Policies in the Company’s Form 10-K describedabove.  Company management evaluates asegment’s performance based on gross margins. Assets are not allocated to the segments.  Sales outside of the U.S. are immaterial.

 

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Thefollowing is a tabulation of business segment information for the three monthsended July 31, 2010 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 |   |

 

Thefollowing is a tabulation of business segment information for the nine monthsended July 31, 2010 and 2009:

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

 

Stock-BasedCompensation Plans

 

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

 
| ** **                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Three months ended July 31, |       | $        | 65,510     |     | $          | 74,878 |   |
|                             |       |     |       |     |       |
| Nine months ended July 31,  |       | $        | 200,240    |     | $          | 219,476 |   |

 

Use ofEstimates

 

Thepreparation of the financial statements conforms to the accounting principles generallyaccepted in the U.S., and requires management to make estimates and assumptionsaffecting the reported amounts of assets and liabilities: disclosure ofcontingent assets and liabilities at the date of the financial statements; andthe reported amounts of revenues and expenses during the reporting period.  Actual results may differ from theseestimates.

 

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NewAccounting Pronouncements

 

InJuly 2010 the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2010-20, “Receivables (Topic 310): Disclosure about theCredit Quality of Financing Receivables and the Allowance for Credit Losses”.  ASU 2010-20 requires disclosuresdesigned to enhance transparency regarding credit losses and the credit qualityof loan and lease receivables.  Disclosures include an evaluation of the nature of credit risk inherentin the entity’s financing receivables; how the risk is analyzed to arrive atthe allowance for credit losses and the changes and reasons for changes in theallowance for credit losses.  Under thisguidance, the allowance for credit losses and fair value are to be disclosed byportfolio segment.  ASU 2010-20 will beeffective for fiscal years beginning on or after December 31, 2010.  The adoption of this guidance is not expectedto have an impact on the Company’s consolidated financial statements.

 

InFebruary 2010 the FASB issued ASU 2010-09, “Subsequent Events: Amendmentsto Certain Recognition and Disclosure Requirements”.  Theguidance in ASU 2010-09 removes the requirement for SEC filers to disclose thedate through which subsequent events have been evaluated.  The adoption of this update did nothave a material impact on the Company’s financial position or results ofoperations.

 

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

 

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

 

InNovember 2009 the Company adopted ASC 350 “Intangibles — Goodwill and Other”.  The guidance amends the factors that shouldbe considered in developing renewal or extension assumptions used to determinethe useful life of intangible assets.  The intent of the guidance is toimprove the consistency between the useful life of a recognized intangibleasset under the accounting standards and the period of the expected cash flowsused to measure the fair value of the asset.  The Company began applyingthe guidance to intangible assets acquired in fiscal 2010.

 

InOctober 2009 the FASB issued ASU 2009-13, “Revenue Recognition - Multiple-DeliverableRevenue Arrangements”.  The guidance inASU 2009-13 amends the criteria for separating consideration in multiple-deliverablearrangements.  The guidance eliminatesthe estimated fair value approach for revenue allocation between the separateunits of accounting and replaces it with a sales-based approach referred so asthe relative-selling-price method. ASU 2009-13 expands required disclosuresrelated to a company’s multiple-deliverable revenue arrangements.  ASU 2009-13 is effective prospectively forfiscal years beginning on or after June 15, 2010.  TheCompany is currently assessing the impact that adoption will have on requireddisclosures, its financial position and results of operations.

 

Otheraccounting standards that have been issued or proposed that do not requireadoption until a future date are not expected to have a material impact on ourconsolidated financial statements upon adoption.

 

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2.  ACCOUNTS RECEIVABLE:

 

Tradeaccounts 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 |   |

 

OnJanuary 14, 2009, Nortel Networks Corporation filed for bankruptcyprotection in the United States Bankruptcy Court for the District ofDelaware.  Subsequent to the filing theadministrators of the bankruptcy adopted a business disposal strategy.  Underthe strategy, the administrators segmented Nortel into three primary businessunits: Virtual Service Switches, CDMA businesses and Enterprise Solutions. Weconducted all of our Nortel business through the Enterprise Solutions unit.

 

OnDecember 18, 2009, Avaya completed the purchase of Nortel’s EnterpriseSolutions business unit.  Nortel owesXETA approximately $700,000 in pre-petition accounts receivable.  On July 17, 2009 the bankruptcy courtgranted XETA’s request for offset of $116,000 in charges owed to Nortel at thetime of the filing.  In fiscal year 2009,the Company recorded $350,000 as a reserve against possible Nortel baddebts.  Nortel filed its plan ofreorganization on July 12, 2010 (the “Nortel Plan”).  XETA’s claim is classified as a Class 3claim, “General Unsecured Claims”.  TheNortel Plan states that priority non-tax claims and secured claims will be paidin full, but that Class 3 claims will be impaired.  No indication or estimate is given as to thepotential extent of the impairment. According to the Nortel Plan, XETA and other Class 3 claimants willreceive a pro rata share of the assets of Nortel at the time the Nortel Plangoes into affect.  The next significantaction in this matter is expected to be Nortel’s filing of a DisclosureStatement in mid-September providing more information regarding Nortel’sassets and potentially an estimate of payouts to Class 3 creditors.  Based on the information presently available,the Company can make no further determination regarding the adequacy of itsreserve in this matter.  The Company willcontinue to carefully follow developments associated with the bankruptcy caseand will assert its legal rights and defenses as appropriate.

 

3.  INVENTORIES:

 

Inventories are stated at the lower of average cost or market andconsist 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 |   |

 

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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 |   |

 

5.  INCOME TAXES:

 

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

 

6.  CREDIT AGREEMENTS:

 

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

 

AtJuly 31, 2010, the Company did not have an outstanding balance on therevolving line of credit.  The Companyhad approximately $8.5 million available under the revolving line of credit at July 31,2010.  The advance rates are defined inthe agreement, but are generally at the rate of 75% on qualified trade accountsreceivable and 50% of qualified inventories and real estate, subject to amaximum of $2.0 million each.  Long termdebt 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                                                                                                         |       | $                                  | —     |                                            | $          | — |   |

 

Intereston all outstanding debt under the credit facility accrues at the greater ofeither the London Interbank Offered Rate (“LIBOR”) (0.305% at July 31,2010) plus 3.0% or 4.5%.  The creditfacility contains several financial covenants common in such agreementsincluding tangible net worth requirements, limitations on the amount of fundeddebt to annual earnings before interest, taxes, depreciation and amortization,limitations on cash dividends, and debt service coverage requirements.  At July 31, 2010 the Company was incompliance with the covenants of the credit facility.

 

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7.  EARNINGS PER SHARE:

 

TheCompany computes basic earnings per common share by dividing net income by theweighted average number of shares of common stock outstanding during thereporting periods.  Dividing net incomeby the weighted average number of shares of common stock and dilutive potentialcommon stock outstanding during the reporting periods computes diluted earningsper common share.  A reconciliation ofnet income and weighted average shares used in computing basic and dilutedearnings 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 | ) |

 

Optionsto purchase 712,450 shares of common stock at an average exercise price of$5.82 and 1,269,900 shares of common stock at an average exercise price of$6.42 were not included in the computation of diluted earnings per share forthe three months ended July 31, 2010 and 2009, respectively, becauseinclusion of these options would be antidilutive.  Options to purchase 834,595 shares of commonstock at an average exercise price of $5.23 and 1,269,900 shares of common stockat an average exercise price of $6.42 were not included in the computation ofdiluted earnings per share for the nine months ended July 31, 2010 and2009, respectively, because inclusion of these options would be antidilutive.

 

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8.  CONTINGENCIES:

 

Inaddition to potential losses related to Nortel’s pre-petition receivables, theCompany may be subject to preference payment claims asserted by Nortel.  It is routine in bankruptcy proceedings forthe debtor in possession or bankruptcy trustee to assert a statutory “preferenceclaim” to seek to recover payments made by the bankrupt entity to creditorsduring the 90-day period immediately preceding the filing of the bankruptcypetition.  This period is known as the “preference period”.  Althoughthe debtor is entitled to make a claim based solely upon when the payments weremade, the payments are not recoverable if they were made in the debtor’sordinary course of dealings with the creditor.  Nortel has filed aschedule showing approximately $1.6 million in payments made to the Companyduring the preference period.  To dateNortel has not asserted a preference claim against the Company.  However,if a preference claim is brought, the Company believes it has good defenses toany such potential claim against it, including that the subject payments weremade in the ordinary course of the Company’s business dealings withNortel.  These defenses must be argued on each individual Company invoicepaid during the preference period.  The Company is unable at this time todetermine the extent, if any, of any material loss that might occur if a claimto recover preference payments is asserted.  Therefore, no provisionfor loss has been made beyond the amount discussed above related to unpaidinvoices at the time of the bankruptcy filing.

 

9.  CAPITAL LEASES:

 

During2008 the Company leased software licenses under an agreement that is classifiedas a capital lease. The book value of the licenses is included in the balancesheet as property, plant and equipment and was $139,492 at July 31,2010.  Accumulated amortization of theleased licenses at July 31, 2010 was $317,028.  Amortization under the capital lease isincluded in depreciation expense.  Thefuture minimum lease payments required under the capital lease and the presentvalue of the net minimum lease payments as of July 31, 2010, are asfollows:

 
| ** **                                           | ** ** | **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                   |       | $                                      | —     |   |

 

10.  ACQUISITIONS:

 

On May 24, 2010, the Company completed the purchase of theoperating assets of Hotel Technologies Solutions, Inc., d/b/a LoricaSolutions (“Lorica”), a privately-held company headquartered in Buffalo, NewYork.  Lorica is an emerging leader inthe delivery of high-speed internet access and network administration to thehospitality industry.  Under the terms ofthe purchase agreement, total consideration to be paid by the Company is $2.8million plus certain assumed liabilities. The purchase price included $833,000 paid in cash at closing; 397,878shares of XETA common stock valued at $1.5 million based on the May 21,2010 closing price of $3.77; five year warrants to purchase 150,000 shares ofXETA common stock at $3.77 valued at $279,000; and $167,000 in cash depositedinto an escrow account as required under the purchase agreement.  The acquisition is not material to theCompany’s financial position or results of operations.

 

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

 

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11.  SUBSEQUENT EVENTS:

 

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

 

On September 2, 2010, the Company completed the purchase of theoperating assets of Data-Com Telecomunications, Inc., (“Data-Com”) a NewJersey based privately held company providing communications equipment andrelated services to the greater New York City area.  The purchase price was $3.070 millioncash.  Of this amount, $604,000 was putinto escrow until certain tax liabilities are determined; customer overpaymentsare resolved; and the final value of the net assets purchased isestablished.  The acquisition is notmaterial to the Company’s financial position or results of operations.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**PreliminaryNote Regarding Forward-Looking Statements**

 

Thisreport contains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, relating to future events and ourfuture performance and results.  Many of these statements appear in thediscussions under the headings “Risk Factors,” and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”  All statements other than those that arepurely historical may be forward-looking statements.  Forward-lookingstatements can generally be identified by words such as “expects,” “anticipates,”“may,” “likely,” “plans,” “believes,” “intends,” “projects,” “estimates,” andsimilar words or expressions. Forward-looking statements are not guarantees of performance, but ratherreflect management’s current expectations, estimates, and forecasts about theindustry and markets in which we operate, and our assumptions and beliefs basedupon information currently available to management.  Investors arecautioned that all forward-looking statements are subject to certain risks anduncertainties which are difficult to predict or which we are unable to control,and that could cause actual results to differ materially from those projected,including but not limited to such factors as the condition of the U.S. economyand its impact on capital spending trends in the Company’s markets; whether theintegration of recently acquired businesses into that of the Company andrealization of anticipated synergies and growth opportunities from suchtransactions are successful; success in our overall strategy; the financialcondition of our suppliers and changes by them in their distribution strategiesand support; the Nortel Networks bankruptcy filing and the potential negativeimpact that it may have on the Company’s prepetition accounts receivable claimagainst Nortel or if Nortel succeeds in bringing a preference claim against theCompany; unpredictable quarter to quarter revenues; changes in Avaya’sstrategies regarding the provision of equipment and services to its customers,and in its policies regarding the availability of tier IV hardware and softwaresupport; inconsistent gross profit margins; availability of credit to financegrowth; intense competition and industry consolidation; dependence upon a fewlarge wholesale customers in the Company’s Managed Services offering; and theavailability and retention of revenue professionals and certifiedtechnicians.  These and other risks and uncertainties are discussed underthe heading “Risk Factors” under Part I of the Company’s Form 10-Kfor the fiscal year ended October 31, 2009 (filed with the Commission on January 8,2010) and in updates to such risk factors set forth in Item 1A of Part IIof this quarterly report.  As a result ofthese risks and uncertainties, actual results may differ materially andadversely from those expressed in forward-looking statements. Consequently, investors are cautioned to read and consider all forward-lookingstatements in conjunction with such risk factors and uncertainties.  ThePrivate Securities Litigation Reform Act of 1995 provides a safe-harbor forforward-looking statements made by the Company.

 

**Overview**

 

Strategy.

 

Inadvance of fiscal 2010, senior management conducted its periodic review of thestrategic direction of the Company.  Thisreview resulted in a threefold refinement of the strategic focus and directionof the organization including: continued emphasis on aggressive growth in ourmanaged services business; use of our unique position to search out and pursueorganic and acquisitive growth opportunities resulting from Avaya’s acquisitionof Nortel’s enterprise business (NES); and advance a longer-term businessinitiative focused on the sales, design, integration and maintenance and repairof collaborative technologies and advanced applications.

 

Managementbelieves these strategies are appropriate to fully realize the benefits of ourinvestments in high value talent and competencies, to capitalize on the marketrealignment resulting from Avaya’s acquisition of NES and to ready ourselves inanticipation of growth in demand for advanced applications and collaborativetechnologies.

 

Eventhough we are experiencing growth in our services revenue, the overall marketfor our products and services remains challenging.  While some of our customers are enjoyingimprovements in their business and are therefore purchasing and implementingnew communications systems, many others remain

 

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cautiouslyoptimistic about near-term economic improvement and are continuing to limit newspending and are furthering their efforts to reduce ongoing operatingcosts.  Consequently, we have notexperienced an overall improvement in purchases of new systems and relatedservices.  Additionally, some of ourmajor customers have faced unique challenges in their operations which haveslowed expected orders.  Finally, theacquisition of NES by Avaya has created a pause in some customers’ normalbuying patterns as they evaluate Avaya’s technology roadmap and servicestrategies.

 

OnMay 24, 2010, the Company completed the purchase of the operating assetsof Hotel Technologies Solutions, Inc., d/b/a Lorica Solutions (“Lorica”),a privately-held company headquartered in Buffalo, New York.  Lorica is an emerging leader in the deliveryof high-speed internet access and network administration to the hospitalityindustry.  The terms of the purchaseagreement are described in Note 10 of the Notes to Consolidated FinancialStatements.

 

OnAugust 2, 2010, the Company completed the purchase of the stock of PyramidCommunications Services, Inc. (“Pyramid”), a privately held companyheadquartered in Dallas, Texas.  Pyramidprovides communications equipment and related services with 2009 revenues inexcess of $10.0 million.  The terms ofthe purchase agreement are described in Note 11 of the Notes to ConsolidatedFinancial Statements.

 

Operating Summary.

 

In the third quarter of fiscal 2010, we recorded net income of $513,000on revenues of $20.9 million compared to a net loss of $8.6 million on revenuesof $17.2 million in the third quarter of last year.  For the first nine months of fiscal 2010, weearned $1.4 million in net income on revenues of $61.1 million compared to anet loss of $8.4 million on revenues of $53.5 million for the first nine monthsof last year.  In the third quarter offiscal 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 thefirst nine months of last year.  Apartfrom the impairment charges recorded in 2009, the improved 2010 resultsprimarily reflect an increase in revenues and gross profits partially offset byincreased selling, general and administrative costs.  We discuss this and other contributingfactors in more detail under “Results of Operations” below.

 

Financial Position Summary.

 

Since October 31, 2009, we have generated positive cash flows fromoperations of $2.4 million and we primarily used these cash flows to reduceborrowings, purchase the net operating assets of Lorica and make capitalexpenditures to support our operations. We have improved our working capital approximately 15%.  We discuss these and other financial items inmore detail under “Financial Condition” below.

 

The following discussion presents additional information regarding ourfinancial condition and results of operations for the three- and nine-monthperiods ended July 31, 2010 and 2009 and should be considered inconjunction with our above comments as well as the “Risk Factors” sectionbelow.

 

**Financial Condition**

 

During the first three fiscal quarters of 2010 our working capitalincreased by 15% to $13.2 million.  Wegenerated $2.4 million in cash flows from operations.  These cash flows included earnings andnon-cash charges of $3.2 million; a decrease in inventory of $338,000; anincrease in accrued liabilities of $483,000; and a decrease in deferred taxesof $814,000.  These positive cash flowitems were partially offset by an increase in accounts receivable of $324,000;a decrease in unearned revenue of $555,000; a decrease in accounts payable of$590,000; and other changes in working capital items.  These items netted to a decrease in cash of$956,000.  Non-cash charges includedamortization of $580,000; depreciation of $906,000; provisions for doubtfulaccounts receivable and obsolete inventories of $122,000; and stock-basedcompensation of $200,000.

 

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

 

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At July 31, 2010, our cash balance was $3.8 million and there wasno outstanding balance on our working capital revolver.  In accordance with the collateral basedefined in the credit facility, $8.5 million was available for borrowing on the$8.5 million facility at the end of the quarter.  The working capital revolver is scheduled tomature on November 5, 2010.  Weexpect to renew this instrument for a 12-month or longer period prior to theexpiration.  It is possible that therenewal could result in higher borrowing costs and/or reduced availability forunsecured borrowings.

 

We expect to utilize a variety of common financing tools to fundacquisitions.  We believe our cashbalances, expected free cash flows from operations, and available borrowingcapacity will be our primary sources of capital.  However, we also expect to employ sellerfinancing in the form of subordinated notes, earn-out agreements, indemnityhold-backs, and occasionally restricted stock and/or warrants.  The level to which we employ these variousmethods, particularly the use of our equity, will depend upon a multitude offactors which are unique to each negotiation. In addition to the available capacity under our working capital line ofcredit, we believe we have access to a variety of capital sources such asprivate placements of subordinated debt, and public or private sales of equityto finance investments beyond our current needs.

 

**Results of Operations**

 

In the third quarter of fiscal 2010 revenues were $20.9 millioncompared to $17.2 million in the third quarter 2009.  Our net income in the third quarter of fiscal2010 was $513,000, compared to a net loss of $8.6 million in the same quarter ayear ago.  Apart from the impairmentcharges on goodwill and other assets of $14.0 million recorded in the thirdquarter of fiscal 2009, these results primarily reflect increased services andequipment revenues partially offset by higher selling, general andadministrative costs.  In the first ninemonths of the year, revenues were $61.1 million compared to $53.5 million forthe first nine months of fiscal 2009. Our net income for the first nine months of fiscal 2010 was $1.4 millioncompared to a net loss of $8.4 million in the first nine months of fiscal2009.  The year-to-date results, excludingthe impairment charge recorded in 2009, primarily reflect our strong first andthird quarter results in all of our major revenue and gross profitcategories.  The narrative below providesfurther explanation of these results.

 

Systems Sales.

 

Inthe third quarter of fiscal 2010 systems sales increased approximately $2.0million or 31% compared to the same period last year.  This increase includes a $3.3 million or 81%increase in sales of systems to commercial customers and a $1.3 million or 50%decrease in sales of systems to hospitality customers.  Year-to-date systems sales increased $2.2million or 10% compared to last year. This increase includes an increase in sales of systems to commercialcustomers of $6.5 million or 41% which was offset by a decrease in sales ofsystems to hospitality customers of $4.2 million or 58%.  The third quarter increase in systems salesreflects a large project with one of our major customers in the educationvertical market.  Orders for systems toother commercial customers are above last year’s pace but reflect the generalunpredictable nature of this segment of our business and reluctance on the partof some customers to make significant new investments in technology.  In addition, uncertain U.S. economicconditions continue to present complex challenges to our hospitality customersas evidenced by the decline in revenues in this sector.  The hospitality industry as a whole isexperiencing cyclical weakness in demand and has limited its spending on newcommunications equipment and solutions.

 

Services Revenues.

 

Services revenues consist of the following:

 
| ** **                    | ** ** | **For the Three Months Ended  July 31,** | ** ** | **For the Nine Months Ended  July 31,** | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **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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Maintenance and repair revenues increased 12% in the third quarter andyear-to-date periods.  This year-to-dateperformance reflects the continued success of our wholesale services programsand repair revenues as well as the addition to our base of maintenancecustomers associated with the purchase of Lorica in the third quarter of fiscal2010.  We continue to aggressively marketour national service footprint and multi-product line technical capabilities toexisting and potential wholesale service partners such as network serviceproviders, and large voice and data integrators.  We also continue to market our service capabilitiesto end-users.  We expect growth in theseprograms to positively impact our maintenance and repair revenues for theforeseeable future.

 

Implementation revenues increased 28% in the third fiscal quarterreflecting an increase in revenues from our Professional Services Organization(“PSO”) and relatively flat installation revenues.  For the year-to-date period, Implementationrevenues increased 36% reflecting an increase in revenues from PSO.  We attribute this to increasing demand formore complex communications systems requiring significant fee-generating designand engineering services.  In the nearterm, Implementation revenues will continue to be closely aligned with thesale of new systems.  From a long termperspective, however, as customers displace conventional communications platformsand adopt more complex systems, we anticipate growth in this area of ourbusiness through the fee-based utilization of these highly skilled technicalresources.

 

Cabling revenues increased 8% and 9%, respectively in the third fiscalquarter and year-to-date periods.  Theseincreases are primarily from a new wholesale service program added late infiscal 2009.

 

Gross Margins.

 

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

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

 

Gross margins on systems sales in the third quarterand the year-to-date periods are above our target of 23% to 25% for systemsrevenues.  Our consistent performanceabove our expected targets in this area is due to disciplined pricing practicesand pricing support received from our manufacturers in the form ofproject-specific discounts and incentive rebates which are recorded asreductions to cost of goods sold.  These discountsand incentives are material to our gross margins.

 

Gross margins earned on Services revenues primarily reflect an increasein recurring service revenues combined with improved cost controls, the use ofthird party Quality Service Partners, and improved utilization of ourprofessional services personnel for consulting and fee-based engagements.  These items contributed to gross Servicesmargins in our target range of 30-35%.

 

The final component of our gross margins is the margins earned on otherrevenues and our corporate cost of goods sold. We earn the majority of other revenues from the sale of Avayamaintenance contracts on which we earn either a commission or grossprofit.  We have no continuing service obligationassociated with these revenues and gross profits.  This is an unpredictable revenue stream thatdepends on the expiration dates of existing contracts, installation dates ofnew systems, customer type as defined by Avaya, and number of years thatcustomers contract for services.  Otherrevenues may also include sales and cost of goods sold on equipment or servicessold outside our normal provisioning processes. These revenues vary in both sales volume and gross margins earned.  Corporate cost of goods sold represents ourmaterial logistics and purchasing functions that support all of our revenuesegments.

 

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Operating Expenses.

 

Our total operating expenses in the third quarter were $5.4 million or25.8% of revenues compared to$4.7 million or 27.5% of revenues in the thirdquarter of fiscal 2009 excluding $14.0 million in impairment charges recordedin the third quarter of fiscal 2009.  Our operating expenses were 24.8% of revenues in the first threequarters of fiscal 2010 compared to 26.0% last year, excluding the impairmentcharges.    As discussed in the overviewabove, we have made strategic choices to focus on aggressively expanding ourmanaged services business and on expanding through acquisitions.  We have increased our expenditures to supportthese strategies.  These expenditurescoupled with slower than expected growth in our systems sales and increasedinvestments in our Information Technology group to increase efficiencies andimprove customer satisfaction has resulted in our operating expenses as apercentage of revenues to continue to exceed our targets.  We consider it tactically appropriate, givenour strong cash flows, to support operating expenses above our targets in thenear term to capitalize on these opportunities to expand our revenues andincrease our net profit margins.

 

Interest Expense and Other Income.

 

Net interest and other income was $16,000 in the third quarter offiscal 2010 compared to $22,000 in net other expense in the third quarter offiscal 2009.  Net interest and otherincome was $43,000 for the nine-month period ended July 31, 2010 comparedto $65,000 in net other expense in the same period last year.  This reflects both reduced debt levels andlower interest rates.

 

Tax Provision.

 

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

 

**ITEM4.   CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls and Procedures.* Based onan evaluation conducted as of July 31, 2010 by our management, includingour Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”),our CEO and CFO have concluded that our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) are effective toreasonably ensure that information required to be disclosed in reports that wefile or submit under the Exchange Act, is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms, and that such information is accumulated andcommunicated to our management, including the CEO and CFO, as appropriate toallow timely decisions regarding required disclosure.

 

*Changes in Internal Controls*.  There were no changes in our internalcontrols during the last fiscal quarter that have materially affected, orare reasonably likely to materially affect, these controls over financialreporting.

 

**PART II.  OTHERINFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

None.

 

**ITEM 1A.  RISK FACTORS.**

 

The information presented below is an update to the “Risk Factors”included in the Company’s Annual Report on Form 10-K for the fiscal yearended October 31, 2009 and should be read in conjunction therewith.  Except as set forth below, the Risk Factorsincluded in the Company’s Form 10-K for its 2009 fiscal year have notmaterially changed.

 

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**Avaya’s recently implemented requirements regarding minimumlevel service agreements and hardware and software upgrade requirements couldhave 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 levelsto access Tier IV support, and to maintain their software at no more than twotrailing major version releases than the current version.  The impact of these changesto our business will be negative, but the materiality of the impact is uncertainat this time.  These impacts couldinclude a significant decline in our services gross margins if we are requiredto purchase Avaya service contracts on behalf of all of our customers.  Conversely, if we chose to forego suchpurchases on behalf of our customers, we risk reduced customer satisfaction dueto the lack of access to Avaya’s Tier IV support. We might also experiencereduced sales of new Avaya systems if customers choose to abandon the productline due to increased costs for the mandatory Avaya maintenance contract.  Avaya has provided some transition relief inthe form of blanket contracts and other exceptions to its stated policy, but itis too early to determine with confidence the long-term impact of these changeson our business.  At this time, noassurance can be given that these policy changes will not have a material,adverse impact on our operating results beginning as soon as fiscal 2011.

 

**Nortel’sChapter 11 Bankruptcy filing and subsequent sale of its enterprise solutionbusiness to Avaya may negatively impact our revenues and/or financialcondition.**

 

Nortelfiled a voluntary petition for Chapter 11 bankruptcy protection onJanuary 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 ourbusiness, 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.                                                                                                                      |

 

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**The acquisition and integration of businesses by the Companymay not produce the desired financial and/or operating results.**

 

We have recently completed the acquisition ofthe operating assets of LoricaSolutions and the stock of Pyramid Communication Services, Inc.  These developments are a part of our statedstrategy to take advantage of the current disruption in our market by acquiringassets that increase our market share and establish a presence in the advancedcommunications applications market segment. Integrating new operating assets into an existing organization is acomplex business proposition.   Expectedsynergies and growth often do not materialize as planned.  We used existing cash balances to fund theacquisitions and their integration costs. Furthermore, we will devote significant time and effort to improve theprobability of success for these investments. However, no assurance can be given that these acquisitions will meet ourexpectations for revenues and operating results, or that our capital could havebeen used more efficiently to improve our financial condition or operatingresults.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

 

None.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

 

None.

 

**ITEM 5.  OTHER INFORMATION.**

 

None.

 

**ITEM 6.   EXHIBITS.**

 

Exhibits(filed herewith):

 
| **SEC Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                  |
|--------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |       |                                                                                                                                                                                                                             |
| 2.1                      |       | Asset Purchase Agreement dated  May 10, 2010 between XETA Technologies, Inc. as Purchaser, Hotel  Technology Solutions, Inc. as Seller, and Seller Principals.*                                                   |
|                     |       |                                                                                                                                                                                                                             |
|                     |       | PORTIONS  OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT  REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH  THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT. |
|                     |       |                                                                                                                                                                                                                             |
| 2.2                      |       | Stock Purchase Agreement dated July 9, 2010 by and among  Sellers, Pyramid Communications Services, Inc. and XETA  Technologies, Inc.*                                                                            |
|                     |       |                                                                                                                                                                                                                             |
|                     |       | PORTIONS  OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT  REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH  THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT. |
|                     |       |                                                                                                                                                                                                                             |
| 31.1                     |       | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive  Officer                                                                                                                                                     |
|                     |       |                                                                                                                                                                                                                             |
| 31.2                     |       | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial  Officer                                                                                                                                                     |

 

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

 

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| * |   | 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. |
|---|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                 | XETA  Technologies, Inc. |
|--------------------------------------|-------------------------------|
|                                 | (Registrant)                  |
|                                 |                          |
|                                 |                          |   |
| Dated:   September 3, 2010 | By:                           | /s/ Greg D. Forrest |
|                                 |                          | Greg D. Forrest |
|                                 |                          | Chief Executive Officer |
|                                 |                          |   |
|                                 |                          |   |
| Dated:   September 3, 2010 | By:                           | /s/ Robert B. Wagner |
|                                 |                          | Robert B. Wagner |
|                                 |                          | Chief Financial Officer |

 

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EXHIBIT INDEX

 
| **SEC Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                               |
|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |       |                                                                                                                                                                                                                          |
| 2.1                      |       | Asset Purchase Agreement dated May 10, 2010 between XETA  Technologies, Inc. as Purchaser, Hotel Technology Solutions, Inc.  as Seller, and Seller Principals.*                                                |
|                     |       |                                                                                                                                                                                                                          |
|                     |       | PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A  CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH  THE COMMISSION WITH THE COMPANY’S APPLICATION FOR CONFIDENTIAL TREATMENT.  |
|                     |       |                                                                                                                                                                                                                          |
| 2.2                      |       | Stock Purchase Agreement dated July 9, 2010 by and among  Sellers, Pyramid Communications Services, Inc. and XETA  Technologies, Inc.*                                                                         |
|                     |       |                                                                                                                                                                                                                          |
|                     |       | PORTIONS  OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT  REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH  THE COMPANY’S APPLICATION FOR CONFIDENTIAL TREATMENT. |
|                     |       |                                                                                                                                                                                                                          |
| 31.1                     |       | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive  Officer                                                                                                                                                  |
|                     |       |                                                                                                                                                                                                                          |
| 31.2                     |       | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial  Officer                                                                                                                                                  |
|                     |       |                                                                                                                                                                                                                          |
| 32.1                     |       | Certification of Chief Executive Officer Pursuant to Title 18, United  States Code, Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                            |
|                     |       |                                                                                                                                                                                                                          |
| 32.2                     |       | Certification of Chief Financial Officer Pursuant to Title 18, United  States Code, Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                            |

 

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| * |   | 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. |
|---|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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