Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

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

 

**Forthe quarterly period ended April 30, 2009**

** **

**OR**

** **

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

** **

**CommissionFile Number 0-16231**

 

 

**XETATechnologies, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Oklahoma**                                 | ** ** | **73-1130045**       |
|----------------------------------------------|------------|----------------------|
| (State  or other jurisdiction of             |       | (I.R.S.  Employee    |
| incorporation  or organization)              |       | Identification  No.) |
|                                         |       |                 |
| **1814 W.  Tacoma Street, Broken Arrow, OK** | ** ** | **74012-1406**       |
| (Address  of principal executive offices)    |       | (Zip  Code)          |

 

**918-664-8200**

(Registrant’stelephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes xNo o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every

Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the

preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o No o

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes oNo x

 

Asof May 28, 2009, there were 10,223,861 shares of the registrant’s commonstock, par value $0.001, outstanding

 

 

 

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Table of Contents

 

INDEX

 
| ** **                          | **PAGE**                                                             |
|-------------------------------------|----------------------------------------------------------------------|
| PART I. FINANCIAL  INFORMATION | ** **                                                           |
|                                |                                                                 |   |   |
|                                | ITEM 1. FINANCIAL  STATEMENTS (Unaudited)                            |   |
|                                |                                                                 |   |   |
|                                |                                                                 | Consolidated Balance Sheets - April 30, 2009 and  October 31, 2008 | 3 |
|                                |                                                                 |   |   |
|                                |                                                                 | Consolidated Statements of Operations - For the Three  and Six Months Ended April 30, 2009 and 2008 | 4 |
|                                |                                                                 |   |   |
|                                |                                                                 | Consolidated Statement of Shareholders’ Equity - For  the Six Months Ended April 30, 2009 | 5 |
|                                |                                                                 |   |   |
|                                |                                                                 | Consolidated Statements of Cash Flows - For the Six  Months Ended April 30, 2009 and 2008 | 6 |
|                                |                                                                 |   |   |
|                                |                                                                 | Notes to Consolidated Financial Statements | 7 |
|                                |                                                                 |   |   |
|                                | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS                    | 14 |
|                                |                                                                 |   |   |
|                                | ITEM 4.  CONTROLS AND PROCEDURES                                     | 18 |
|                                |                                                                 |   |   |
| PART II.  OTHER INFORMATION    |                                                                 |
|                                |                                                                 |   |   |
|                                | ITEM 1. LEGAL  PROCEEDINGS                                           | 18 |
|                                |                                                                 |   |   |
|                                | ITEM 1A. RISK  FACTORS                                               | 19 |
|                                |                                                                 |   |   |
|                                | ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 19 |
|                                |                                                                 |   |   |
|                                | ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                             | 20 |
|                                |                                                                 |   |   |
|                                | ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         | 20 |
|                                |                                                                 |   |   |
|                                | ITEM 5. OTHER  INFORMATION                                           | 21 |
|                                |                                                                 |   |   |
|                                | ITEM 6.  EXHIBITS                                                    | 21 |

 

2

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XETA TECHNOLOGIES,INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                        | ** ** | **(UNAUDITED)**         | ** ** | ** **                | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                                                                        | ** ** | **April 30, 2009** | ** ** | **October 31, 2008** | ** ** |
|                                                                                                                              |       |                    |       |                      |       |
| ASSETS                                                                                                                            |       |
|                                                                                                                              |       |                    |       |                      |       |
| Current assets:                                                                                                                   |       |                    |       |                      |       |
| Cash and cash  equivalents                                                                                                        |       | $                       | 5,683      |                      | $          | 63,639 |   |
| Current portion  of net investment in sales-type leases and other receivables                                                     |       | 1,418,232               |       | 353,216                   |       |
| Trade accounts  receivable, net                                                                                                   |       | 14,826,699              |       | 19,995,498                |       |
| Inventories, net                                                                                                                  |       | 5,106,116               |       | 5,236,565                 |       |
| Deferred tax  asset                                                                                                               |       | 772,453                 |       | 588,926                   |       |
| Prepaid taxes                                                                                                                     |       | 23,774                  |       | 64,593                    |       |
| Prepaid expenses  and other assets                                                                                                |       | 1,886,039               |       | 1,608,113                 |       |
| Total current  assets                                                                                                             |       | 24,038,996              |       | 27,910,550                |       |
|                                                                                                                              |       |                    |       |                      |       |
| Noncurrent  assets:                                                                                                               |       |                    |       |                      |       |
| Goodwill                                                                                                                          |       | 26,873,751              |       | 26,825,498                |       |
| Intangible  assets, net                                                                                                           |       | 803,121                 |       | 828,825                   |       |
| Net investment  in sales-type leases, less current portion above                                                                  |       | 150,341                 |       | 103,037                   |       |
| Property,  plant & equipment, net                                                                                        |       | 10,229,969              |       | 10,722,539                |       |
| Other assets                                                                                                                      |       | 631                     |       | 2,271                     |       |
| Total noncurrent  assets                                                                                                          |       | 38,057,813              |       | 38,482,170                |       |
|                                                                                                                              |       |                    |       |                      |       |
| Total assets                                                                                                                      |       | $                       | 62,096,809 |                      | $          | 66,392,720 |   |
|                                                                                                                              |       |                    |       |                      |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                         |       |
|                                                                                                                              |       |                    |       |                      |       |
| Current  liabilities:                                                                                                             |       |                    |       |                      |       |
| Current portion  of long-term debt                                                                                                |       | $                       | 1,269,020  |                      | $          | 1,354,565 |   |
| Revolving line  of credit                                                                                                         |       | 759,269                 |       | 2,524,130                 |       |
| Accounts payable                                                                                                                  |       | 4,944,842               |       | 6,691,550                 |       |
| Current portion  of obligations under capital lease                                                                               |       | 151,120                 |       | 148,225                   |       |
| Current unearned  service revenue                                                                                                 |       | 3,309,534               |       | 3,237,296                 |       |
| Accrued  liabilities                                                                                                              |       | 3,436,736               |       | 4,593,725                 |       |
| Total current  liabilities                                                                                                        |       | 13,870,521              |       | 18,549,491                |       |
|                                                                                                                              |       |                    |       |                      |       |
| Noncurrent liabilities:                                                                                                           |       |                    |       |                      |       |
| Accrued  long-term liability                                                                                                      |       | 144,100                 |       | 144,100                   |       |
| Long-term  portion of obligations under capital lease                                                                             |       | 183,857                 |       | 260,148                   |       |
| Noncurrent  unearned service revenue                                                                                              |       | 70,044                  |       | 56,393                    |       |
| Noncurrent  deferred tax liability                                                                                                |       | 5,711,383               |       | 5,545,692                 |       |
| Total noncurrent  liabilities                                                                                                     |       | 6,109,384               |       | 6,006,333                 |       |
|                                                                                                                              |       |                    |       |                      |       |
| Contingencies                                                                                                                     |       |                    |       |                      |       |
|                                                                                                                              |       |                    |       |                      |       |
| Shareholders’  equity:                                                                                                       |       |                    |       |                      |       |
| Preferred stock;  $.10 par value; 50,000 shares authorized, 0 issued                                                              |       | —                  |       | —                    |       |
| Common stock;  $.001 par value; 50,000,000 shares authorized, 11,256,193 issued at April 30,  2009 and October 31, 2008 |       | 11,255                  |       | 11,255                    |       |
| Paid-in capital                                                                                                                   |       | 13,558,183              |       | 13,493,395                |       |
| Retained  earnings                                                                                                                |       | 30,725,270              |       | 30,539,714                |       |
| Less treasury  stock, at cost (993,695 shares at April 30, 2009 and 1,001,883 shares at  October 31, 2008)              |       | (2,177,804              | )          | (2,207,468                | )          |
| Total  shareholders’ equity                                                                                                  |       | 42,116,904              |       | 41,836,896                |       |
| Total  liabilities and shareholders’ equity                                                                                  |       | $                       | 62,096,809 |                      | $          | 66,392,720 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

3

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XETA TECHNOLOGIES,INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 
| ** **                                        | ** ** | **For the Three Months  Ended April 30,** | ** ** | **For the Six Months  Ended April 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                       | ** ** | **2008**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Systems sales                                     |       | $                                              | 7,789,138  |                                         | $          | 10,271,761 |   | $ | 16,374,891 |   | $ | 17,985,920 |   |
| Services                                          |       | 9,841,649                                      |       | 10,134,470                                   |       | 19,834,882 |   | 19,859,412 |   |
| Other revenues                                    |       | 125,816                                        |       | 405,592                                      |       | 126,855 |   | 916,226 |   |
| Net sales and  service revenues                   |       | 17,756,603                                     |       | 20,811,823                                   |       | 36,336,628 |   | 38,761,558 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Cost of systems  sales                            |       | 5,809,523                                      |       | 7,541,560                                    |       | 12,151,888 |   | 13,328,382 |   |
| Services costs                                    |       | 6,768,814                                      |       | 7,600,057                                    |       | 13,752,553 |   | 14,730,981 |   |
| Cost of other  revenues & corporate COGS |       | 435,275                                        |       | 483,972                                      |       | 883,045 |   | 925,351 |   |
| Total cost of  sales and service                  |       | 13,013,612                                     |       | 15,625,589                                   |       | 26,787,486 |   | 28,984,714 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Gross profit                                      |       | 4,742,991                                      |       | 5,186,234                                    |       | 9,549,142 |   | 9,776,844 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Operating  expenses                               |       |                                           |       |                                         |       |   |   |   |   |
| Selling, general  and administrative              |       | 4,081,197                                      |       | 4,263,500                                    |       | 8,537,306 |   | 7,925,762 |   |
| Amortization                                      |       | 335,006                                        |       | 254,513                                      |       | 657,257 |   | 457,411 |   |
| Total operating  expenses                         |       | 4,416,203                                      |       | 4,518,013                                    |       | 9,194,563 |   | 8,383,173 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Income from  operations                           |       | 326,788                                        |       | 668,221                                      |       | 354,579 |   | 1,393,671 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Interest expense                                  |       | (28,498                                        | )          | (68,731                                      | )          | (58,401 | ) | (171,716 | ) |
| Interest and  other income                        |       | 3,998                                          |       | 9,531                                        |       | 15,378 |   | 27,295 |   |
| Total interest  and other expense                 |       | (24,500                                        | )          | (59,200                                      | )          | (43,023 | ) | (144,421 | ) |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Income before  provision for income taxes         |       | 302,288                                        |       | 609,021                                      |       | 311,556 |   | 1,249,250 |   |
| Provision for  income taxes                       |       | 119,000                                        |       | 238,000                                      |       | 126,000 |   | 489,000 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Net income                                        |       | $                                              | 183,288    |                                         | $          | 371,021 |   | $ | 185,556 |   | $ | 760,250 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Earnings per  share                               |       |                                           |       |                                         |       |   |   |   |   |
| Basic                                             |       | $                                              | 0.02       |                                         | $          | 0.04 |   | $ | 0.02 |   | $ | 0.07 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Diluted                                           |       | $                                              | 0.02       |                                         | $          | 0.04 |   | $ | 0.02 |   | $ | 0.07 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Weighted average  shares outstanding              |       | 10,225,395                                     |       | 10,254,310                                   |       | 10,223,944 |   | 10,231,120 |   |
|                                              |       |                                           |       |                                         |       |   |   |   |   |
| Weighted average  equivalent shares               |       | 10,225,411                                     |       | 10,263,297                                   |       | 10,223,973 |   | 10,246,272 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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XETA TECHNOLOGIES,INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 
| ** **                                         | ** ** | **Common Stock**  | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** |
|----------------------------------------------------|------------|-------------------|------------|--------------------|------------|------------|------------|------------|------------|---------------------|------------|
| ** **                                         | ** ** | **Shares Issued** | ** ** | **Par Value**      | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Paid-in Capital** | ** ** | **Retained Earnings** | ** ** | **Total** | ** ** |
|                                               |       |              |       |               |       |       |       |       |       |                |       |   |   |   |   |
| Balance-  October 31, 2008                    |       | 11,256,193        |       | $                  | 11,255     |       | 1,001,883  |       | $          | (2,207,468          | )          | $ | 13,493,395 |   | $ | 30,539,714 |   | $ | 41,836,896 |   |
|                                               |       |              |       |               |       |       |       |       |       |                |       |   |   |   |   |
| Purchase of  treasury stock                        |       | —            |       | —             |       | 30,728     |       | (55,951    | )          | —              |       | — |   | (55,951 | ) |
| Issuance of  restricted common stock from treasury |       | —            |       | —             |       | (38,916    | )          | 85,615     |       | (85,615             | )          | — |   | — |   |
| Stock based  compensation                          |       | —            |       | —             |       | —     |       | —     |       | 150,403             |       | — |   | 150,403 |   |
| Net income                                         |       | —            |       | —             |       | —     |       | —     |       | —              |       | 185,556 |   | 185,556 |   |
|                                               |       |              |       |               |       |       |       |       |       |                |       |   |   |   |   |
| Balance- April 30,  2009                      |       | 11,256,193        |       | $                  | 11,255     |       | 993,695    |       | $          | (2,177,804          | )          | $ | 13,558,183 |   | $ | 30,725,270 |   | $ | 42,116,904 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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XETA TECHNOLOGIES,INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 
| ** **                                                                                   | ** ** | **For the Six Months  Ended April 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
| Cash flows from  operating activities:                                                       |       |                                         |       |   |   |
| Net income                                                                                   |       | $                                            | 185,556    |   | $ | 760,250 |   |
|                                                                                         |       |                                         |       |   |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                         |       |   |   |
| Depreciation                                                                                 |       | 454,306                                      |       | 338,743 |   |
| Amortization                                                                                 |       | 657,260                                      |       | 457,415 |   |
| Stock based  compensation                                                                    |       | 144,598                                      |       | 116,561 |   |
| Loss on sale of  assets                                                                      |       | 3,764                                        |       | 425 |   |
| Provision for  returns & doubtful accounts receivable                               |       | 380,000                                      |       | — |   |
| Provision for  excess and obsolete inventory                                                 |       | 51,000                                       |       | 51,000 |   |
| Increase in  deferred tax liability                                                          |       | 193,479                                      |       | 176,611 |   |
| Change in assets  and liabilities:                                                           |       |                                         |       |   |   |
| Increase in net  investment in sales-type leases & other receivables                |       | (851,209                                     | )          | (204,772 | ) |
| Decrease  (increase) in trade accounts receivable                                            |       | 5,397,361                                    |       | (2,987,711 | ) |
| Decrease  (increase) in inventories                                                          |       | 323,383                                      |       | (596,390 | ) |
| (Increase)  decrease in deferred tax asset                                                   |       | (183,527                                     | )          | 289,105 |   |
| Increase in  prepaid expenses and other assets                                               |       | (153,289                                     | )          | (245,140 | ) |
| Decrease in  prepaid taxes                                                                   |       | 40,819                                       |       | 7,294 |   |
| (Decrease)  increase in accounts payable                                                     |       | (1,796,759                                   | )          | 1,579,670 |   |
| (Decrease)  increase in unearned revenue                                                     |       | (334,108                                     | )          | 241,806 |   |
| Decrease in  accrued liabilities                                                             |       | (815,269                                     | )          | (1,376,433 | ) |
| Total  adjustments                                                                           |       | 3,511,809                                    |       | (2,151,816 | ) |
|                                                                                         |       |                                         |       |   |   |
| Net cash  provided by (used in) operating activities                                         |       | 3,697,365                                    |       | (1,391,566 | ) |
|                                                                                         |       |                                         |       |   |   |
| Cash flows from  investing activities:                                                       |       |                                         |       |   |   |
| Additions to  property, plant & equipment                                           |       | (328,675                                     | )          | (718,893 | ) |
| Proceeds from  sale of assets                                                                |       | 5,064                                        |       | — |   |
| Acquisitions,  net of cash acquired                                                          |       | (701,957                                     | )          | — |   |
| Investment in  capitalized service contracts                                                 |       | (750,000                                     | )          | — |   |
| Net cash used in  investing activities                                                       |       | (1,775,568                                   | )          | (718,893 | ) |
|                                                                                         |       |                                         |       |   |   |
| Cash flows from  financing activities:                                                       |       |                                         |       |   |   |
| Principal  payments on debt                                                                  |       | (85,545                                      | )          | (85,544 | ) |
| Net borrowings  on revolving line of credit                                                  |       | (1,764,861                                   | )          | 1,828,278 |   |
| Payments on  capital lease obligations                                                       |       | (73,396                                      | )          | — |   |
| Payments to  acquire treasury stock                                                          |       | (55,951                                      | )          | — |   |
| Exercise of  stock options                                                                   |       | —                                       |       | 90,215 |   |
| Net cash (used  in) provided by financing activities                                         |       | (1,979,753                                   | )          | 1,832,949 |   |
|                                                                                         |       |                                         |       |   |   |
| Net decrease in  cash and cash equivalents                                                   |       | (57,956                                      | )          | (277,510 | ) |
|                                                                                         |       |                                         |       |   |   |
| Cash and cash  equivalents, beginning of period                                              |       | 63,639                                       |       | 402,918 |   |
| Cash and cash  equivalents, end of period                                                    |       | $                                            | 5,683      |   | $ | 125,408 |   |
|                                                                                         |       |                                         |       |   |   |
| Supplemental  disclosure of cash flow information:                                           |       |                                         |       |   |   |
|                                                                                         |       |                                         |       |   |   |
| Cash paid during  the period for interest                                                    |       | $                                            | 65,595     |   | $ | 179,779 |   |
| Cash paid during  the period for income taxes                                                |       | $                                            | 79,491     |   | $ | 15,958 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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**XETATECHNOLOGIES, INC. AND SUBSIDIARY**

**Notesto Consolidated Financial Statements**

**April 30,2009**

(Unaudited)

 

1.  BASIS OF PRESENTATION:

 

XETA Technologies, Inc.(“XETA” or the “Company”) is a leading integrator of advanced communicationstechnologies with nationwide sales and service. XETA serves a diverse group ofbusiness clients in sales, engineering, project management, implementation, andservice support.  The Company sellsproducts produced by a variety of manufacturers including Avaya, Inc. (“Avaya”),Nortel Networks Corporation (“Nortel”), and Mitel Corporation (“Mitel”).  In addition, the Company manufactures andmarkets a line of proprietary call accounting systems to the hospitalityindustry.  XETA is an Oklahomacorporation.

 

The Company prepared theaccompanying unaudited consolidated financial statements pursuant to the rules andregulations of the Securities and Exchange Commission (the “Commission”).  Certain information and footnote disclosuresnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to those rules and regulations,although the Company believes that the disclosures are adequate to reasonablyinsure the information 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, Commission File No. 0-16231,which was filed with the Commission on January 23, 2009.  Management believes that the financialstatements contain all adjustments necessary 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.

 

Segment Information

 

The Company has threereportable segments:  services,commercial system sales, and hospitality system sales.  Services revenues represent revenues earnedfrom installing and maintaining systems for customers in both the commercialand hospitality segments.  The Companydefines commercial system sales as sales to the non-hospitality industry.

 

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

 

The following is atabulation of business segment information for the three months ended April 30,2009 and 2008.

 
| ** **    | ** ** | **Services  Revenues** | ** ** | **Commercial  Systems  Sales** | ** ** | **Hospitality  Systems  Sales** | ** ** | **Other  Revenue** | ** ** | **Total**   | ** ** |
|---------------|------------|------------------------|------------|--------------------------------|------------|---------------------------------|------------|--------------------|------------|-------------|------------|
| **2009**      |       |                   |       |                           |       |                            |       |               |       |        |       |
| Sales         |       | $                      | 9,841,649  |                           | $          | 5,279,778                       |       | $                  | 2,509,360  |        | $          | 125,816 |   | $ | 17,756,603 |   |
| Cost of sales |       | (6,768,814             | )          | (3,961,332                     | )          | (1,848,191                      | )          | (435,275           | )          | (13,013,612 | )          |
| Gross profit  |       | $                      | 3,072,835  |                           | $          | 1,318,446                       |       | $                  | 661,169    |        | $          | (309,459 | ) | $ | 4,742,991 |   |
|          |       |                   |       |                           |       |                            |       |               |       |        |       |
| **2008**      |       |                   |       |                           |       |                            |       |               |       |        |       |
| Sales         |       | $                      | 10,134,470 |                           | $          | 8,775,074                       |       | $                  | 1,496,687  |        | $          | 405,592 |   | $ | 20,811,823 |   |
| Cost of sales |       | (7,600,057             | )          | (6,483,890                     | )          | (1,057,670                      | )          | (483,972           | )          | (15,625,589 | )          |
| Gross profit  |       | $                      | 2,534,413  |                           | $          | 2,291,184                       |       | $                  | 439,017    |        | $          | (78,380 | ) | $ | 5,186,234 |   |

 

The following is atabulation of business segment information for the six months ended April 30,2009 and 2008.

 

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| ** **    | ** ** | **Services  Revenues** | ** **      | **Commercial  Systems  Sales** | ** ** | **Hospitality  Systems  Sales** | ** ** | **Other  Revenue** | ** **      | **Total**   | ** ** |
|---------------|------------|------------------------|-----------------|--------------------------------|------------|---------------------------------|------------|--------------------|-----------------|-------------|------------|
| **2009**      |       |                   |            |                           |       |                            |       |               |            |        |       |
| Sales         |       | $                      | 19,834,882      |                           | $          | 11,576,483                      |       | $                  | 4,798,408       |        | $          | 126,855 |   | $ | 36,336,628 |   |
| Cost of sales |       | (13,752,553            | )               | (8,763,099                     | )          | (3,388,789                      | )          | (883,045           | )               | (26,787,486 | )          |
| Gross profit  |       | $                      |  6,082,329 |                           | $          | 2,813,384                       |       | $                  | 1,409,619       |        | $          | (756,190 | ) | $ | 9,549,142 |   |
|          |       |                   |            |                           |       |                            |       |               |            |        |       |
| **2008**      |       |                   |            |                           |       |                            |       |               |            |        |       |
| Sales         |       | $                      | 19,859,412      |                           | $          | 14,805,009                      |       | $                  |  3,180,911 |        | $          | 916,226 |   | $ | 38,761,558 |   |
| Cost of sales |       | (14,730,981            | )               | (11,085,549                    | )          | (2,242,833                      | )          | (925,351           | )               | (28,984,714 | )          |
| Gross profit  |       | $                      | 5,128,431       |                           | $          | 3,719,460                       |       | $                  | 938,078         |        | $          | (9,125 | ) | $ | 9,776,844 |   |

 

Stock-Based CompensationPlans

 

The Company accounts forstock-based compensation in accordance with Statement of Financial AccountingStandards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”).  SFAS No. 123(R) requires companiesto measure all employee stock-based compensation awards using a fair valuemethod and recognize compensation cost in its financial statements.  The Company recognizes the fair value ofstock-based compensation awards as selling, general and administrative expenseas appropriate in the consolidated statements of operations on a straight-linebasis over the vesting period. Compensation expense was recognized in the statements of operations asfollows:

 
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Three months  ended April 30, |       | $        | 74,233     |     | $          | 62,045 |   |
|                               |       |     |       |     |       |
| Six months ended  April 30,   |       | $        | 144,598    |     | $          | 116,561 |   |

 

Use of Estimates

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the U.S. requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and 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 could differ from thoseestimates.

 

New AccountingPronouncements

 

In April 2009the FASB issued FASB Staff Position on Financial Accounting Standard No. 115-2and No. 124-2, “Recognition andPresentation of Other-Than-Temporary Impairments”, which amends theother-than-temporary impairment guidance in U.S. GAAP for debt securities.  The intent of the FSP is to provide guidanceon the presentation and disclosure of other-than-temporary impairments on debtand equity securities in the financial statements; it does not amend existingrecognition and measurement guidance related to other-than-temporaryimpairments of equity securities.  TheFSP is effective for financial statements issued for fiscal years ending after June 15,2009.  The implementation of this FSP isnot expected to have a material impact on the Company’s financial position orresults of operations.

 

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

 

On November 1,2008 the Company adopted Statement of Financial Standards No. 157, “FairValue Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in accordance withaccounting principles generally accepted in the United States, and expandsdisclosures about fair value measurements.  This statement does notrequire any new fair value measurements; rather, it applies under otheraccounting pronouncements that require or permit fair value 

 

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measurements. Theadoption of SFAS No. 157 did not have a material impact on the Company’sconsolidated financial position or results of operations.

 

In December 2007the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS No. 141(R)”). Under SFAS No. 141(R),an entity is required to recognize the assets acquired, liabilities assumed,contractual contingencies, and contingent consideration at their fair value onthe acquisition date. It further requires that acquisition-related costs arerecognized 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 adoption of SFAS No. 141(R) will change theaccounting treatment for business combinations on a prospective basis beginningin the first quarter of fiscal year 2010.

 

In December 2007the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests,which will be recharacterized as non-controlling interests and classified as acomponent of equity.  SFAS No. 160 is effective for us on aprospective basis for business combinations with an acquisition date beginningin the first quarter of fiscal year 2010.  As of April 30, 2009, theCompany did not have any minority interests; therefore the adoption of SFAS No. 160is not expected to have an impact on the Company’s consolidated financialstatements.

 

On February 20,2008 the FASB issued FASB Staff Position (“FSP”) on Financial AccountingStandards No. 140-3, “Accounting for Transfers of Financial Assets andRepurchase Financing Transactions”. The FSP provides guidance on the accountingfor a transfer of a financial asset and a repurchase financing. Repurchase financing is a repurchase agreement that relates to a previouslytransferred financial asset between the same counterparties (or consolidatedaffiliates of either counterparty), that is entered into contemporaneouslywith, or in contemplation of, the initial transfer.  Under the FSP, atransferor and transferee will not separately account for a transfer of afinancial asset and a related repurchase financing unless: (a) the twotransactions have a valid and distinct business or economic purpose for beingentered into separately; and (b) the repurchase financing does not resultin the initial transferor regaining control over the financial asset. Aninitial transfer of a financial asset and repurchase financing that are enteredinto contemporaneously with, or in contemplation of, one another shall beconsidered linked unless all of the following criteria are met at the inceptionof the transaction:

 

·                  The initial transfer and the repurchase financing are not contractuallycontingent on one another.

·                  The repurchase financing provides the initial transferor with recourseto the initial transferee upon default.

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

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

 

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

 

In March 2008the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments andHedging Activities, an amendment of SFAS No. 133”, (“SFAS No. 161”).This statement requires that objectives for using derivative instruments bedisclosed in terms of underlying risk and accounting designation.  TheCompany is required to adopt SFAS No. 161 on or before November 1,2009.  The Company currently does not participate in any derivativeinstruments or hedging activities as defined under SFAS No. 133 andtherefore it is unlikely that the adoption of SFAS No. 161 will have anyimpact on the Company’s consolidated financial statements.

 

In April 2008the FASB issued FASB Staff Position on Financial Accounting Standard No. 142-3,“Determination of the Useful Life of Intangible Assets”, which amends thefactors that should be 

 

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considered indeveloping renewal or extension assumptions used to determine the useful lifeof intangible assets under SFAS No. 142 “Goodwill and Other IntangibleAssets”.  The intent of this FSP is to improve the consistency between theuseful life of a recognized intangible asset under SFAS No. 142 and theperiod of the expected cash flows used to measure the fair value of the assetunder SFAS No. 141 (revised 2007) “Business Combinations” and other U.S.generally accepted accounting principles.  The Company will adopt this FSPin the first quarter of fiscal 2010 and will apply the guidance prospectivelyto intangible assets acquired after adoption.

 

In May 2008the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“SFAS No. 162”). SFAS No. 162 identifiesthe sources of accounting principles and the framework for selecting theprinciples used in the preparation of financial statements. SFAS No. 162became effective on November 15, 2008 following the SEC’s approval of thePublic Company Accounting Oversight Board amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples”. The implementation of this standard did not have a material impacton the Company’s consolidated financial position and results of operations.

 

2.  ACCOUNTS RECEIVABLE:

 

Accounts receivableconsist of the following:

 
| ** **                          | ** ** | **April 30,  2009** | ** ** | **(Audited)  October 31,  2008** | ** ** |
|-------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|
|                                |       |                     |       |                                  |       |
| Trade accounts  receivables         |       | $                        | 15,379,313 |                                  | $          | 20,188,378 |   |
| Less reserve for  doubtful accounts |       | (552,614                 | )          | (192,880                              | )          |
| Net trade  accounts receivables     |       | $                        | 14,826,699 |                                  | $          | 19,995,498 |   |

 

On January 14, 2009Nortel filed for bankruptcy protection in the United States.  At the time ofNortel’s filing, they owed approximately $685,000 for services rendered underthe Company’s wholesale managed services program in which the Company isengaged by Nortel to provide field technical services to Nortel’s end-usercustomers.  At the time of filing thisform 10-Q, Nortel has not filed its reorganization plan; therefore our abilityto assess the probability of recovering pre-petition amounts due islimited.  As of April 30, 2009, we have recorded $350,000 as areserve against possible bad debts.   We are following developments in the bankruptcy case and willassert our available legal rights and defenses when appropriate.

 

3.  INVENTORIES:

 

Inventoriesare stated at the lower of cost (first-in, first-out or average) or market andconsist of the following:

 
| ** **                                         | ** ** | **April 30,  2009** | ** ** | **(Audited)  October 31,  2008** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|
|                                               |       |                     |       |                                  |       |
| Finished goods  and spare parts                    |       | $                        | 5,987,733  |                                  | $          | 6,084,830 |   |
| Less- reserve  for excess and obsolete inventories |       | (881,617                 | )          | (848,265                              | )          |
| Total  inventories, net                            |       | $                        | 5,106,116  |                                  | $          | 5,236,565 |   |

 

4.  PROPERTY, PLANT AND EQUIPMENT:

 

Property, plant andequipment consist of the following:

 

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| ** **                                                    | ** ** | **Estimated  Useful  Lives** | ** ** | **April 30,  2009** | ** ** | **(Audited)  October 31,  2008** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|---------------------------------------|------------|
|                                                          |       |                         |       |                     |       |                                  |       |
| Building and  building improvements                           |       | 3-20                         |       | $                        | 3,118,424  |                                  | $          | 3,054,563 |   |
| Data processing  and computer field equipment                 |       | 2-7                          |       | 3,069,525                |       | 3,351,229                             |       |
| Software  development costs, work-in-process                  |       | N/A                          |       | 1,752,121                |       | 2,069,234                             |       |
| Software  development costs of components placed into service |       | 3-10                         |       | 7,087,714                |       | 6,631,805                             |       |
| Computer  hardware                                            |       | 3-5                          |       | 627,168                  |       | 615,657                               |       |
| Land                                                          |       | —                       |       | 611,582                  |       | 611,582                               |       |
| Office furniture                                              |       | 5-7                          |       | 848,337                  |       | 944,048                               |       |
| Auto                                                          |       | 5                            |       | 502,521                  |       | 516,185                               |       |
| Other                                                         |       | 3-7                          |       | 257,274                  |       | 239,533                               |       |
|                                                          |       |                         |       |                     |       |                                  |       |
| Total property,  plant and equipment                          |       |                         |       | 17,874,666               |       | 18,033,836                            |       |
| Less-  accumulated depreciation and amortization              |       |                         |       | (7,644,697               | )          | (7,311,297                            | )          |
|                                                          |       |                         |       |                     |       |                                  |       |
| Total property,  plant and equipment, net                     |       |                         |       | $                        | 10,229,969 |                                  | $          | 10,722,539 |   |

 

5.  INCOME TAXES:

 

Thetax provision reflects the effective Federal tax rate plus the composite stateincome tax rates adjusted for states that require minimum tax payments even iftax losses are incurred.  Generally, weexpect our tax provision rate to be approximately 40%.

 

6.  CREDIT AGREEMENTS:

 

The Company has a creditfacility with a commercial bank that includes a term loan and a $7.5 millionrevolving line of credit.  The facilitymatures on September 30, 2009.  Theterm loan, which is collateralized with a first mortgage on the Broken Arrow,Oklahoma, headquarters, amortizes based on a 13 year life. The revolving lineof credit is used to finance growth in working capital and is collateralized byqualifying trade accounts receivable and inventories.

 

At April 30, 2009and October 31, 2008, the Company had approximately $759,000 and $2.524million, respectively, outstanding on the revolving line of credit.  The Company had approximately $6.7 millionavailable under the revolving line of credit at April 30, 2009.  Advance rates are defined in the agreement,but are generally at the rate of 80% on qualified trade accounts receivable and40% of qualified inventories.  Long termdebt consisted of the following:

 
| ** **                                                                                                                                                                                                | ** ** | **April 30,  2009** | ** ** | **(Audited)  October 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|
|                                                                                                                                                                                                      |       |                     |       |                                  |       |
| Term note,  payable in monthly installments of $14,257 plus interest, plus a fixed  payment of $1,198,061 due September 30, 2009, collateralized by a first  mortgage on the Company’s building |       | $                        | 1,269,020  |                                  | $          | 1,354,565 |   |
|                                                                                                                                                                                                      |       |                     |       |                                  |       |
| Less-current  maturities                                                                                                                                                                                  |       | 1,269,020                |       | 1,354,565                             |       |
|                                                                                                                                                                                                      |       |                     |       |                                  |       |
| Total long-term  debt, less current maturities                                                                                                                                                            |       | $                        | —     |                                  | $          | — |   |

 

Interest on alloutstanding debt under the credit facility accrues at either a) the LondonInterbank Offered Rate (“LIBOR”) (0.418% at April 30, 2009) plus 1.25% to2.75% depending on the Company’s funded debt to cash flow ratio, or b) the bank’sprime rate (4.0% at April 30, 2009) minus 0% to minus 1.125% also 

 

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depending on the Company’sfunded debt to cash flow ratio.  At April 30,2009 the Company was paying 2.875% on the revolving line of credit borrowingsand 3.00% on the mortgage note.  Thecredit facility 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 capital spending, and debt service coverage requirements.  At April 30, 2009 the Company was incompliance with the covenants of the credit facility.

 

7.  EARNINGS PER SHARE:

 

The Company computesbasic earnings per common share by dividing net income by the weighted average numberof shares of common stock outstanding during the reporting periods.  Dividing net income by the weighted averagenumber of shares of common stock and dilutive potential common stockoutstanding during the reporting periods computes diluted earnings per commonshare.  A reconciliation of net incomeand weighted average shares used in computing basic and diluted earnings pershare is as follows:

 
| ** **                        | ** ** | **For the Three Months Ended April 30, 2009** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **Income  (Numerator)**                            | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
| Basic EPS                         |       |                                               |       |   |   |   |   |
| Net income                        |       | $                                                  | 183,288    |   | 10,225,395 |   | $ | 0.02 |   |
| Dilutive effect  of stock options |       |                                               |       | 16 |   |   |   |
|                              |       |                                               |       |   |   |   |   |
| Diluted EPS                       |       |                                               |       |   |   |   |   |
| Net income                        |       | $                                                  | 183,288    |   | 10,225,411 |   | $ | 0.02 |   |

 
| ** **                        | ** ** | **For the Three Months Ended April 30, 2008** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **Income  (Numerator)**                            | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
| Basic EPS                         |       |                                               |       |   |   |   |   |
| Net income                        |       | $                                                  | 371,021    |   | 10,254,310 |   | $ | 0.04 |   |
| Dilutive effect  of stock options |       |                                               |       | 8,987 |   |   |   |
|                              |       |                                               |       |   |   |   |   |
| Diluted EPS                       |       |                                               |       |   |   |   |   |
| Net income                        |       | $                                                  | 371,021    |   | 10,263,297 |   | $ | 0.04 |   |

 

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| ** **                        | ** ** | **For the Six Months Ended April 30, 2009** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **Income  (Numerator)**                          | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
| Basic EPS                         |       |                                             |       |   |   |   |   |
| Net income                        |       | $                                                | 185,556    |   | 10,223,944 |   | $ | 0.02 |   |
| Dilutive effect  of stock options |       |                                             |       | 29 |   |   |   |
|                              |       |                                             |       |   |   |   |   |
| Diluted EPS                       |       |                                             |       |   |   |   |   |
| Net income                        |       | $                                                | 185,556    |   | 10,223,973 |   | $ | 0.02 |   |

 
| ** **                        | ** ** | **For the Six Months Ended April 30, 2008** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **Income  (Numerator)**                          | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
| Basic EPS                         |       |                                             |       |   |   |   |   |
| Net income                        |       | $                                                | 760,250    |   | 10,231,120 |   | $ | 0.07 |   |
| Dilutive effect  of stock options |       |                                             |       | 15,152 |   |   |   |
|                              |       |                                             |       |   |   |   |   |
| Diluted EPS                       |       |                                             |       |   |   |   |   |
| Net income                        |       | $                                                | 760,250    |   | 10,246,272 |   | $ | 0.07 |   |

 

Options to purchase1,398,000 shares of common stock at an average exercise price of $6.06 and844,900 shares of common stock at an average exercise price of $8.08 were notincluded in the computation of diluted earnings per share for the three monthsended April 30, 2009 and 2008, respectively, because inclusion of theseoptions would be antidilutive.  Optionsto purchase 1,398,000 shares of common stock at an average exercise price of$6.06 and 828,636 shares of common stock at an average exercise price of $8.16were not included in the computation of diluted earnings per share for the six monthsended April 30, 2009 and 2008, respectively, because inclusion of theseoptions would be antidilutive.

 

8.  CAPITAL LEASES:

 

During 2008, the Companyleased software licenses under an agreement that is classified as a capitallease. The book value of the licenses is included in the balance sheet asproperty, plant and equipment and was $329,709 at April 30, 2009.  Accumulated amortization of the leasedlicenses at April 30, 2009 was $126,811. Amortization under the capital lease is included in depreciationexpense.  The future minimum leasepayments required under the capital lease and the present value of the netminimum lease payments as of April 30, 2009, are as follows:

 
| ** **                                           | ** ** | **Capital  Lease Payments** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
|                                                 |       |                        |       |
| 1 Year                                               |       | $                           | 161,435    |   |
| 2 Years                                              |       | 161,435                     |       |
| 3  Years                                        |       | 26,906                      |       |
| Total minimum  lease payments                        |       | 349,776                     |       |
| Less- imputed  interest                              |       | 14,799                      |       |
| Present value of  minimum payments                   |       | 334,977                     |       |
| Less-current  maturities of capital lease obligation |       | 151,120                     |       |
| Long-term  capital lease obligation                  |       | $                           | 183,857    |   |

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**Preliminary Note Regarding Forward-LookingStatements**

** **

In the followingdiscussion, we make forward-looking statements concerning future performance,events and results. Other than purely historical statements, all others arelikely forward-looking.  Forward-lookingstatements generally include words such as “expects,” “anticipates,” “may,” “plans,”“believes,” “intends,” “projects,” “estimates,” “targets,” “should” and similarexpressions.  Such statements reflect ourperspective on the industry and markets in which we operate.  Any statements containing estimates andforecasts are not guarantees of performance, but rather, our assumptions andbeliefs based upon information currently available to us.  These statements are subject to risks and uncertaintiesthat are difficult to predict or beyond our control.  Examples of these risks include: thecondition of U.S. economy and its impact on capital spending; reducedavailability of credit; the Nortel Networks bankruptcy filing; the financialcondition of our suppliers and changes in their distribution strategies andsupport; our ability to maintain and improve current gross profit margins;unpredictable quarter to quarter revenues; continuing market success of theMitel product and services offerings; intense competition; industry consolidation;our dependence upon a few large wholesale customers in our Managed Servicesoffering; and our ability to attract and retain talented sales, operational andtechnical personnel.  These and otherrisks and uncertainties are discussed under the heading “Risk Factors” under Part Iof the Company’s Form 10-K for the fiscal year ended October 31, 2008(filed with the Commission on January 23, 2009), and in updates to suchrisk factors set forth in Item 1A of Part II of our quarterly reportsduring fiscal 2009.  Because of theserisks and uncertainties, actual results may differ materially and adverselyfrom those expressed in forward-looking statements.  Consequently, we caution investors to readand consider all forward-looking statements in conjunction with such riskfactors and uncertainties.  The PrivateSecurities Litigation Reform Act of 1995 provides a safe-harbor forforward-looking statements made by the Company.

 

# **Overview**

# ** **

Strategy.

At the beginning offiscal 2009 we adopted five primary strategies: continue to acquire market share through targeted sales activities; takeadvantage of Avaya’s new channel-centric go-to-market strategy; focus on fastgrowing applications such as unified communications; focus on industryverticals such as hospitality, healthcare and education; and augment growththrough targeted acquisitions.

 

In addition to thesestrategies, senior management initiated an internal program to improveoperational methods and practices to produce leverage in our operating results,particularly in our selling, general, and administrative expenses.  The purpose of this effort is to identifyinternal opportunities to reduce costs. These efforts are ongoing, and include development of new and refinedprocesses; organize back office activities for improved labor utilization; useinternal systems and technologies to automate routine activities; and reviewworkforce utilization to ensure appropriate staffing composition.

 

In April 2009 XETApurchased the assets of Summatis Communications, LLC (“Summatis”) located inSouthboro, MA.  Summatis providescommunications solutions, integration and maintenance services primarilytargeted at the Nortel product line.  Theacquisition strengthens our presence in the northeastern U.S. and adds to ourNortel competencies.  While theacquisition is not material to our financial position or results of operations,it represents an incremental step in our overall acquisitions strategy.

 

On January 14, 2009Nortel Networks Corporation filed for bankruptcy protection in the UnitedStates Bankruptcy Court for the District of Delaware.  Nortel is one of our major suppliers andrepresents a significant portion of our business.  As such this filing is of considerableconcern.  At the time of filing this form10-Q, our post-petition relationship with Nortel continues withoutinterruption.  However, managementrecognizes the potential impact of Nortel’s filing on the Company’s financialperformance (see Item 1A. “Risk Factors” below).  Nortel owes XETA approximately $685,000 inpre-petition accounts receivable.  Todate, Nortel has not filed its reorganization plan.  This limits our ability to assess theprobability of recovering pre-petition amounts due.  As of April 30, 2009, we have recorded$350,000 as a 

 

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reserve against possiblebad debts.  We are following developmentsin the bankruptcy case and will assert our legal rights and defenses asappropriate.

 

OperatingSummary.

Inthe second quarter of fiscal 2009, we earned net income of $183,000 on revenuesof $17.8 million compared to net income of $371,000 on revenues of $20.8million in the second quarter of last year.   For the first six months of fiscal 2009, we earned $186,000 in netincome on revenues of $36.3 million compared to net income of $760,000 onrevenues of $38.8 million.  These resultsreflect the challenging macroeconomic conditions and their influence primarilyon our commercial systems sales.  Wediscuss this and other contributing factors in more detail under “Results ofOperations” below.

 

FinancialPosition Summary.

SinceOctober 31, 2008, our financial condition has improved as evidenced by thegeneration of positive cash flows from operations.  We discuss these and other financial items inmore detail under “Financial Condition” below.

 

Thefollowing discussion presents additional information regarding our financialcondition and results of operations for the three- and six-month periods ended April 30,2009 and 2008 and should be considered in conjunction with our above commentsas well as the “Risk Factors” section below.

 

# **Financial Condition**

# ** **

Ourfinancial condition improved during the first two fiscal quarters of 2009 asour working capital grew by 8.6% to $10.2 million.  In addition we generated $3.70 million incash flows from operations.  These cashflows included earnings and non-cash charges of $1.88 million; a decrease inaccounts receivable of $5.40 million; a decrease in inventory of $323,000; andan increase in deferred tax liabilities of $193,000.  These increases were partially offset by adecrease in accounts payable of $1.80 million; a decrease in accruedliabilities of $815,000; and other changes in working capital items, whichnetted a decrease in cash of $1.48 million. Non-cash charges included depreciation of $454,000; amortization of$657,000; stock-based compensation of $145,000; a loss on the sale of assets of$4,000; a provision for doubtful accounts receivable of $380,000; and aprovision for obsolete inventory of $51,000.

 

Weused these positive cash flows to reduce borrowings on our working capital lineof credit by $1.765 million: to make asset purchases of capitalized hospitalityservice contracts as well as certain net assets of Summatis, together totaling$1.452 million; reduce our mortgage balance through scheduled principalpayments by $86,000; fund other financing and investing activities of $129,000;and acquire capital assets of $329,000. The acquisition of capital assets included $179,000 spent as part ofnormal replacement of our Information Technology infrastructure andheadquarters facility improvements.  Theremaining $150,000 was spent on our Oracle implementation.

 

AtApril 30, 2009, the balance on our working capital revolver was $759,000,with $6.7 million additional borrowings available.  We believe that this capacity is sufficientto support our operating requirements for the foreseeable future.  The working capital revolver and the mortgageon our headquarters facility are scheduled to mature on September 30,2009. We expect to renew these instruments prior to their expiration.  Given current credit market conditions, it islikely that such renewals could result in higher borrowing costs and/or reducedavailability for unsecured borrowings. In addition to the available capacity under our working capital line ofcredit, we believe we may have access to a variety of capital sources such asbank debt, private placements of subordinated debt, and public or private salesof equity.

 

# **Results of Operations**

# ** **

Inthe second quarter of fiscal 2009, revenues decreased $3.1 million or 15%compared to the second quarter 2008, and net income decreased $188,000 or51%.  In the first six months of theyear, revenues decreased $2.4 million or 6% and earnings declined $575,000 or76%.  These results reflect lower salesof commercial systems and lower levels of commissions earned from the sale of Avayapost-warranty maintenance contracts.. The year-to-date results were also impacted by the $350,000 bad debtprovision in response to Nortel’s bankruptcy filing.  The narrative below provides furtherexplanation of these results.

 

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SystemsSales.

In the second quarter offiscal 2009, systems sales decreased approximately $2.5 million or 24% comparedto the same period last year.  Thisdecrease includes a $3.5 million or 40% decrease in sales of systems tocommercial customers and a $1.0 million or 68% increase in sales of systems tohospitality customers.  Year-to-datesystems sales decreased $1.6 million or 9% compared to last year.  This decrease includes a decrease in sales ofsystems to commercial customers of $3.2 million or 22% and an increase in salesof systems to hospitality customers of $1.6 million or 51%.  The decrease in system sales to commercialcustomers reflects difficult comparisons related to the revenues earned fromthe Miami-Dade County Public School’s (“M-DCPS”) project.  Additionally macroeconomic conditions andNortel’s bankruptcy impacted our sales efforts.

 

Throughout fiscal 2008,we enjoyed strong commercial systems sales, installation revenues, and cablingrevenues generated by the series of orders received from M-DCPS.  In total, these orders generated over $10million in revenues for the Company during the year.  We have not received a similar order duringfiscal 2009, making comparisons to last year’s results more difficult.  Customers continue to reduce capital spendingin response to recessionary conditions, and access to credit remainsproblematic.  As these conditions haveintensified, customers have limited their capital spending to necessitypurchases and investments with clear, rapid returns.  Finally, uncertainty around the Nortelbankruptcy continues to dampen demand for equipment in this product line.

 

Thequarterly and year to date growth in sales of systems to hospitality customers,particularly during a challenging hospitality market, reflects our continuedsuccess in this niche market.  Resultssupport our strategy to expand our product offering to Mitel products which hasprovided us with the opportunity to work with hotel chains and propertymanagement companies that have previously standardized on the Mitel productline.  While we anticipate continuedsuccess in the hospitality market, given economic conditions, we expect downwardpressure on revenues in this segment.  Assuch revenues may be at or less than historical levels in the last half of thefiscal year.

 

ServicesRevenues.

Servicesrevenues consist of the following:

 
| ** **                   | ** ** | **For the Three Months Ended  April 30,** | ** ** | **For the Six Months Ended  April 30,** | ** ** |
|------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                       | ** ** | **2008**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Contract &  T&M |       | $                                              | 7,050,000  |                                         | $          | 7,028,000 |   | $ | 14,026,000 |   | $ | 14,236,000 |   |
| Implementation               |       | 2,271,000                                      |       | 2,344,000                                    |       | 4,457,000 |   | 4,386,000 |   |
| Cabling                      |       | 520,000                                        |       | 762,000                                      |       | 1,352,000 |   | 1,237,000 |   |
| Total Services  revenues     |       | $                                              | 9,841,000  |                                         | $          | 10,134,000 |   | $ | 19,835,000 |   | $ | 19,859,000 |   |

 

Contractand time-and-materials (T&M) revenues increased 0.3% and decreased 2%,respectively in the second quarter and year-to-date periods.  This year-to-date performance reflectsrelatively flat revenues in our wholesale services programs and a modestdecline in T&M service revenues.  Webelieve T&M revenues were influenced by general economic conditions ascustomers reduced spending on non-critical services.  We continue to aggressively market ournational service footprint and multi-product line technical capabilities toend-users, network service providers, and large integrators of voice and datatechnologies.  In the second quarter, wesecured new service programs with Marriott International and Lockheed MartinCorporation. Additionally, we acquired customer relationships fromSummatis.  We expect these new programsand relationships to positively impact our Contract & T&M revenuesin the third fiscal quarter.

 

Implementationrevenues decreased 3% and increased 2%, respectively in the second fiscalquarter and year-to-date periods.  Theseresults were achieved despite significant deceases in commercial systems sales,traditionally the primary driver of these revenues.  We attribute year-to-date performance toincreasing demand for more complex communications systems.  These projects require significantfee-generating design and engineering services provided by our ProfessionalServices Organization (“PSO”).  Long termas customers displace conventional communications platforms and adopt morecomplex systems, we anticipate growth in this area of our business through thefee-based utilization of these highly skilled technical resources.

 

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Cablingrevenues decreased 32% and increased 9%, respectively in the second fiscalquarter and year-to-date periods.  Thesecond quarter decline in cabling revenues is primarily associated with thedifficult comparisons to fiscal 2008 which were helped significantly by theM-DCPS orders as discussed above. Generally, we are pleased with the beneficial year-to-date growth in cablingrevenues and continue to market our national structured cabling capabilities.

 

GrossMargins.

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

 
| ** **                    | ** ** | **For the  Three  Months Ended  April 30,** | ** ** | **For the  Six  Months Ended  April 30,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| **Gross  Margins**            | ** ** | **2009**                                         | ** ** | **2008**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Services  revenues            |       | 31.2                                             | %          | 25.0                                           | %          | 30.7 | % | 25.8 | % |
| Systems sales                 |       | 25.4                                             | %          | 26.6                                           | %          | 25.8 | % | 25.9 | % |
| Other revenues                |       | 40.2                                             | %          | 79.1                                           | %          | -24.5 | % | 84.6 | % |
| Corporate cost  of goods sold |       | -2.0                                             | %          | -1.9                                           | %          | -2.0 | % | -2.0 | % |
| Total                         |       | 26.7                                             | %          | 24.9                                           | %          | 26.3 | % | 25.2 | % |

 

Gross margins earned on Services revenues reflectimproved cost controls and on-boarding the new Samsung service program.  In addition during the period we experiencedimproved utilization of our PSO consulting and design resources on fee-basedengagements.  Expanding these billableconsulting services for these high-value resources is an important aspect ofour services strategy.

 

Gross margins on systems sales in the secondquarter and the year-to-date periods are above our target of 23% to 25% forsystems revenues.  We continue to receiveconsiderable pricing support from our manufactures in the form ofproject-specific discounts and incentive rebates.  These incentives are material to our grossmargins and we work diligently to maximize this support; however,no assurance can be given that future support will continue at historicallevels.

 

Thefinal component of our gross margins is the margins earned on other revenuesand our corporate cost of goods sold.  Weearn the majority of other revenues from the sale of Avaya maintenancecontracts on which we earn either a commission or gross profit.  We have no continuing service obligationassociated with these revenues and gross profits.  In the first half of fiscal 2009 weexperienced a dramatic drop in other revenues as compared to the same periodlast year.  Some decline in this segmentwas expected as we benefitted from accelerated customer decisions throughout2008.  In 2008 many customers acceleratedtheir purchases or renewals of Avaya service contracts in anticipation ofmanufacturer price increases for these services.  This is an unpredictable revenue stream thatdepends on the expiration dates of existing contracts, installation dates ofnew systems, the customer type as defined by Avaya, and the number of yearsthat customers contract for services. While no assurance can be given, we expect sales of Avaya servicecontracts to return to pre fiscal 2008 levels. Other revenues may also include sales and cost of goods sold onequipment or services sold outside our normal provisioning processes. Theserevenues 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 revenue segments.

 

OperatingExpenses.

Ourtotal operating expenses decreased $102,000 or 2% in the second quarter offiscal 2009 compared to the second quarter of fiscal 2008.  Operating expenses were 24.9% of revenues inthe second quarter compared to 21.7% in the second quarter last year.  Operating expenses increased $811,000 or 10%for the first half of fiscal 2009 compared to the same period a year ago.  Operating expenses were 25.3% of revenues inthe first half of fiscal 2009 compared to 21.6% last year.  The growth in operating expenses in the firsthalf of fiscal 2009 reflects the following factors:

 

·                  Asignificant bad debt provision in response to the Nortel bankruptcy filing

·                  Increasedlegal fees to support litigation and board governance activities

·                  Increasedamortization of: the Oracle platform in association with its expandedutilization; and intangible assets associated with recent acquisitions ofservice contracts and customer lists

 

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Thegrowth of operating expenses as a percentage of revenues is concerning,however; we deemed it tactically appropriate, given our strong cash flows, tosupport operating expenses above our targets in the near term.  This tactic positions us to take advantage ofimproving economic conditions in subsequent quarters.  In the longer term we continue to targetoperating expenses of 18% to 20% of revenues over the next two to four years aswe realize economies of scale.

 

InterestExpense and Other Income.

Netinterest and other expense was $25,000 in the second quarter of fiscal 2009compared to $59,000 in net other expense in the second quarter of fiscal2008.  Net interest and other expense was$43,000 for the six-month period ended April 30, 2009 compared to $144,000in net other expense in the same period last year.  This decrease reflects both lower interestrates and a reduction in borrowings.

 

TaxProvision.

Thetax provision reflects the effective Federal tax rate plus the composite stateincome tax rates adjusted for states that require minimum tax payments even iftax losses are incurred.  Generally, weexpect our tax provision rate to be approximately 40%.

 

| **ITEM  4.** | ** ** | **CONTROLS AND PROCEDURES** |
|--------------|------------|-----------------------------|

 

*Evaluation of Disclosure Controls and Procedures.* Basedon an evaluation conducted as of April 30, 2009 by our management,including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”),our CEO and CFO have concluded that our disclosure controls and procedures (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 or in other factors that could materially affect, or is reasonablylikely to materially affect, these controls subsequent to the date of theirevaluation.

 

**PART II.  OTHERINFORMATION**

 

| **ITEM 1.** | ** ** | **LEGAL PROCEEDINGS.** |
|-------------|------------|------------------------|

 

During the fiscalquarter covered by this report, the arbitration claim filed in April 2008by Design Business Communications, Inc., d/b/a/ American Telephone (“AMTEL”)against us and Hitachi Telecom (USA) Inc. (“HITEL”) alleging a breach of AMTEL’sAuthorized Distributorship Agreement with HITEL (“Distributor Agreement”), waslargely resolved pursuant to the terms of the settlement agreement entered intoby all three parties in November 2008.  (A full description of thealleged breach, which was based upon an order by AMTEL for 48 discontinuedphones, is set forth under “Item 3. Legal Proceedings” in the Company’s Form 10-Kfiled January 23, 2009).  During the quarter, XETA delivered anagreed upon number of new phone sets to AMTEL and AMTEL paid XETA the agreedprice for the phones, all in accordance with the terms of the settlementagreement.   The settlement agreement also requires AMTEL to file adismissal of the arbitration, which remains to be filed as of the date of this10-Q report.

 

Additionally, we areinvolved as a plaintiff in another matter which we consider to be routine andincidental to the operation of our business.  We do not believe thisproceeding will have a material affect on our financial position or results ofoperations.

 

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| **ITEM 1A.** | ** ** | **RISK FACTORS.** |
|--------------|------------|-------------------|

 

Theinformation presented below is an update to the “Risk Factors” included in theCompany’s Annual Report on Form 10-K for the fiscal year ended October 31,2008 and should be read in conjunction therewith.  Except as set forth below, the Risk Factorsincluded in the Company’s Form 10-K for its 2008 fiscal year have notmaterially changed.

 

**Ourbusiness is affected by capital spending. Current economic conditions and theability of our customers to access credit may reduce capital spending over thenext twelve months and beyond.**

 

The U.S. economyis mired in a recessionary contraction and, despite efforts by the FederalGovernment to stabilize the banking and financial systems, credit availabilityremains limited for nearly all enterprises, hence the outlook for corporateprofits is uncertain.  These factors are contributing to a high degree ofuncertainty concerning capital spending in 2009.  Because our business isaffected by capital spending for technology and equipment, we may continue toexperience declining demand for our products. This could have a material, negative impact on our operating results andfinancial condition.

 

**Nortel’sChapter 11 bankruptcy filing may result in both a short-term and long-termfinancial loss for the Company.**

 

Nortel filed avoluntary petition for Chapter 11 bankruptcy protection on January 14,2009.  We are owed approximately $685,000 in pre-petition accountsreceivable.  Based on filings approved bythe bankruptcy court allowing Nortel to fund post-petition business operations,we plan to continue to provide services to Nortel’s end-user customers underour wholesale services relationship, which currently produces approximately $3million in annual revenues.  If ourpre-petition claims are not collectible either in whole or in large part, wecould experience material, negative operating results in the near term. Furthermore, it is impossible to predict the long term impact of Nortel’sbankruptcy filing on our managed services revenues or our Nortel equipmentbusiness.  As such, our ongoing revenues and future financial resultscould be materially impaired in the event that Nortel is unable to fund itsfuture operations; end-users elect to abandon their Nortel equipment for otherproducts; Nortel implements dramatic changes to its business plan andstrategies that negatively affect our relationship with Nortel as a businesspartner and/or vendor; the U.S. and global economic crisis negatively impactsNortel’s ability to reorganize operations; and/or Nortel is unable to continueas debtor in possession or to emerge from bankruptcy.

 

**Our manufacturers’ strategies regarding theprovision of equipment and services to their customers may change dramaticallyand could have a material impact on our operating results.**

 

Avayais repositioning itself as a hardware and software manufacturer providing awide range of voice communications hardware and applications to itscustomers.  As part of this strategy,Avaya is segmenting its hardware maintenance and software support.  The new software support offerings includetechnical support for specific voice applications and upgrade services toensure customers can access all software patches and upgrades.  Currently, we earn revenues from some of ourcustomers, particularly hospitality customers, to provide the products andservices now being included by Avaya in its new software supportofferings.    These changes could have amaterial, negative impact on our operating results if our revenues or marginsare reduced in response to these mandated changes by Avaya.

 

Asa result of its bankruptcy Nortel could revise its market strategy, and arevision could have a material, negative impact on our operating results if ourrevenues or margins are reduced as a result of a change in strategy.  While we do not currently anticipate changesin Nortel’s strategy, we cannot provide any assurance that the Nortel businessrelationship will produce beneficial contributions to our financial performanceas described in our earlier filings.

 

| **ITEM 2.** | ** ** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE  OF PROCEEDS.** |
|-------------|------------|-------------------------------------------------------------------|

 

(a) None.

 

(b) None.

 

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(c) Issuer Purchasesof Equity Securities

 

OnOctober 29, 2008, the Board of Directors approved a stock repurchaseprogram authorizing the Company to use up to $1,000,000 to repurchase itsoutstanding common stock on the open market.  Since the inception of the program, we haverepurchased a total of 30,728 shares of our common stock for a total cashinvestment of $55,951.  This program does not have an expirationdate.  The following table presentsrepurchase activity for the second quarter of fiscal 2009:

 
| **Fiscal  Period** | ** ** | **Total Number of Shares  Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total   Number of   Shares   Purchased   as Part of   Publicly   Announced  Program** | ** ** | **Approximate   Dollar Value   of Shares   that May Yet   Be Purchased   Under the  Program** | ** ** |
|--------------------|------------|---------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
|               |       |                                  |       |                              |       |                                                                                         |       |                                                                                                                   |       |
| February 2009 |       | 2,846                                 |       | $                                 | 1.37       |                                                                                         | 2,846      |                                                                                                                   | $          |  948,014 |   |
| March 2009    |       | 820                                   |       | 1.44                              |       | 820                                                                                          |       | 946,834                                                                                                                |       |
| April 2009    |       | 1,528                                 |       | 1.82                              |       | 1,528                                                                                        |       | 944,049                                                                                                                |       |
| Total              |       | 5,194                                 |       | $                                 | 1.51       |                                                                                         | 5,194      |                                                                                                                   | $          | 944,049 |   |

 

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

 

None.

 

| **ITEM 4.** | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS.** |
|-------------|------------|-----------------------------------------------------------|

 

On April 7, 2009, atour Annual Meeting of Shareholders, the following directors were elected to theBoard of Directors.  Votes cast for eachnominee were as follows:

 
| **Nominee**             | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-------------------------|------------|-----------|------------|-------------|------------|-------------|------------|
|                    |       |      |       |        |       |        |       |
| Donald T. Duke          |       | 7,817,176 |       | 1,738,809   |       | 27,245      |       |
| Greg D. Forrest         |       | 9,305,397 |       | 250,484     |       | 27,349      |       |
| S. Lee Crawley          |       | 9,295,186 |       | 259,630     |       | 28,414      |       |
| Robert D.  Hisrich      |       | 8,171,554 |       | 1,383,716   |       | 27,960      |       |
| Richard R.  Devenuti    |       | 9,152,282 |       | 355,952     |       | 74,996      |       |
| Ronald L.  Siegenthaler |       | 7,929,454 |       | 1,623,089   |       | 30,687      |       |
| Ozarslan A.  Tangun     |       | 9,187,854 |       | 366,331     |       | 29,045      |       |

 

The shareholders voted at theAnnual Meeting to ratify the selection of HoganTaylor LLP as our independentauditors for the 2009 fiscal year, with votes cast as follows:

 
| **For**   | ** ** | **Against** | ** ** | **Withhold** | ** ** |
|-----------|------------|-------------|------------|--------------|------------|
| 9,403,009 |       | 23,819      |       | 156,402      |       |

 

The shareholders also voted at theAnnual Meeting to approve a stockoption exchange program under which eligible Company employees may be offeredthe opportunity to exchange their eligible stock purchase options under theCompany’s existing equity compensation plans for a smaller number of new optionsat a lower exercise price, with votes cast as follows:

 
| **For**   | ** ** | **Against** | ** ** | **Withhold** | ** ** | **Broker Non  votes** | ** ** |
|-----------|------------|-------------|------------|--------------|------------|-----------------------|------------|
| 3,530,396 |       | 1,615,560   |       | 224,037      |       | 4,213,237             |       |

 

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| **ITEM 5.** | ** ** | **OTHER INFORMATION.** |
|-------------|------------|------------------------|

 

(a) None.

 

| **ITEM  6.** | ** ** | **EXHIBITS.** |
|--------------|------------|---------------|

 

Exhibits(filed herewith):

 
| **SEC Exhibit No.** | ** ** | **Description**                                                                                                                                                                     |
|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |       |                                                                                                                                                                                |
| 31.1                     |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer                                                                                                        |
|                     |       |                                                                                                                                                                                |
| 31.2                     |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer                                                                                                        |
|                     |       |                                                                                                                                                                                |
| 32.1                     |       | Certification  of Chief Executive Officer Pursuant to Title 18, United States Code,  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|                     |       |                                                                                                                                                                                |
| 32.2                     |       | Certification  of Chief Financial Officer Pursuant to Title 18, United States Code,  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

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:  May 29, 2009 | By:                          | /s/ Greg D. Forrest |
|                           |                         | Greg D. Forrest |
|                           |                         | Chief Executive Officer |
|                           |                         |
| Dated:  May 29, 2009 | By:                          | /s/ Robert B. Wagner |
|                           |                         | Robert B. Wagner |
|                           |                         | Chief Financial Officer |

 

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EXHIBIT INDEX

 
| **SEC Exhibit No.** | ** ** | **Description**                                                                                                                                                                     |
|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |       |                                                                                                                                                                                |
| 31.1                     |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer                                                                                                        |
|                     |       |                                                                                                                                                                                |
| 31.2                     |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer                                                                                                        |
|                     |       |                                                                                                                                                                                |
| 32.1                     |       | Certification  of Chief Executive Officer Pursuant to Title 18, United States Code,  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|                     |       |                                                                                                                                                                                |
| 32.2                     |       | Certification  of Chief Financial Officer Pursuant to Title 18, United States Code,  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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