UNITED STATES SECURITIES AND EXCHANGE COMMISSION

~~SECURITIES~~Washington, ~~AND~~D.C. ~~EXCHANGE COMMISSION~~20549

~~Washington,~~FORM ~~D.C. 20549~~10-Q

~~FORM 10-Q~~þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~x QUARTERLY REPORT~~For ~~PURSUANT~~the TOquarterly ~~SECTION 13~~period ORended 15January 31, ~~(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~2011

~~For the quarterly period ended July 31, 2010~~OR

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

~~o TRANSITION~~ ~~REPORT~~Commission ~~PURSUANT~~File TONumber ~~SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF~~0-16231 ~~1934~~

~~Commission~~XETA ~~File~~Technologies, ~~Number 0-16231~~Inc.

~~XETA~~ (Exact ~~Technologies, Inc.~~name of registrant as specified in its charter)

(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

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

(Registrant’s telephone number, including area code)

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

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

~~918-664-8200~~Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

~~(Registrant’s~~Yes ~~telephone~~þ No ~~number, including area code)~~o

~~(Former~~Indicate ~~name,~~by ~~former~~check ~~address~~mark whether the registrant has submitted electronically and ~~former~~posted ~~fiscal~~on ~~year~~its corporate Web site, if ~~changed~~any, ~~since~~every Interactive Data File required to be submitted and posted ~~last~~pursuant ~~report~~to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

~~Indicate by~~Not ~~check~~applicable mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No oþ

Indicate by check mark whether the registrant ~~has~~is ~~submitted~~a ~~electronically~~large ~~and~~accelerated ~~posted on its corporate Web site~~filer, ifan ~~any~~accelerated filer, ~~every~~a ~~Interactive~~non-accelerated ~~Data~~filer ~~File~~or ~~required~~a tosmaller ~~be submitted~~reporting ~~and~~company ~~posted~~(as ~~pursuant~~defined toby Rule ~~405 of Regulation S~~12b-T2 ~~(§232.405~~ of ~~this~~ ~~chapter) during~~ the ~~preceding 12 months (or for such shorter period that~~ ~~the~~Exchange ~~registrant was required to submit and post such files~~Act). ~~Yes o No x~~

~~Indicate~~Large byaccelerated ~~check mark~~filer ~~whether~~o ~~the~~Accelerated ~~registrant~~filer iso ~~a large~~ Non-accelerated filer, ano ~~accelerated~~(Do ~~filer, a~~not ~~non-accelerated~~check ~~filer~~if or a smaller reporting company) ~~(as~~Smaller ~~defined~~reporting ~~by Rule 12b-2~~company ~~of the Exchange Act).~~þ

~~Large~~Indicate ~~accelerated~~by ~~filer~~check omark ~~Accelerated~~whether ~~filer~~the oregistrant ~~Non-accelerated~~is ~~filer~~a oshell ~~Smaller reporting~~ company x (Doas ~~not~~defined ~~check~~in ifRule 12b-2 aof the ~~smaller~~Exchange ~~reporting company~~Act).

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

As of ~~August~~March 233, ~~2010~~2011 there were 10,~~699~~779,~~186~~757 shares of the registrant’s common stock, par value $0.001, outstanding.

~~Table~~INDEX ~~of Contents~~

INDEX


	PAGE

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

Consolidated Balance Sheets — January 31, 2011 and October 31, 2010		3

Consolidated Statements of Operations — For the Three Months Ended January 31, 2011 and 2010		4

Consolidated Statement of Shareholders’ Equity — For the Three Months Ended January 31, 2011		5

Consolidated Statements of Cash Flows — For the Three Months Ended January 31, 2011 and 2010		6

Notes to Consolidated Financial Statements		7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS		13

ITEM 4. CONTROLS AND PROCEDURES		17

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		17

ITEM 1A. RISK FACTORS		18

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		19

ITEM 5. OTHER INFORMATION		19

ITEM 6. EXHIBITS		20

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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

2Table of Contents

~~Table~~XETA ofTECHNOLOGIES, INC. AND SUBSIDIARIES ~~Contents~~

~~XETA~~CONSOLIDATED ~~TECHNOLOGIES, INC.~~BALANCE ~~AND SUBSIDIARY~~SHEETS

CONSOLIDATED BALANCE SHEETS


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

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

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


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

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


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


LIABILITIES AND SHAREHOLDERS’ EQUITY

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

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


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

Total noncurrent liabilities		705,999			460,461


Contingencies

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

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

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

	(UNAUDITED)
	July 31, 2010			October 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	3,765,276		$	4,731,926
Current portion of net investment in sales-type leases and other receivables	1,207,697			470,025
Trade accounts receivable, net	14,540,631			13,832,452
Inventories, net	4,864,340			5,036,198
Deferred tax asset	1,325,200			1,136,351
Prepaid taxes	65,613			39,784
Prepaid expenses and other assets	2,271,230			2,057,514
Total current assets	28,039,987			27,304,250
Noncurrent assets:
Goodwill	14,303,926			12,031,975
Intangible assets, net	1,032,017			570,740
Net investment in sales-type leases and other receivables, less current portion above	327,404			335,413
Property, plant & equipment, net	6,655,190			6,825,916
Deferred tax asset	—			739,216
Total noncurrent assets	22,318,537			20,503,260
Total assets	$	50,358,524		$	47,807,510
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	—		$	1,183,475
Accounts payable	5,997,032			5,785,225
Current portion of obligations under capital lease	145,155			154,072
Current unearned services revenue	4,729,261			5,194,601
Accrued liabilities	3,950,248			3,444,396
Total current liabilities	14,821,696			15,761,769
Noncurrent liabilities:
Accrued long-term liability	144,100			144,100
Long-term portion of obligations under capital lease	—			106,076
Noncurrent unearned services revenue	49,215			36,691
Noncurrent deferred tax liability	222,417			—
Total noncurrent liabilities	415,732			286,867
Contingencies
Shareholders’ equity:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued	—			—
Common stock; $.001 par value; 50,000,000 shares authorized, 11,654,071 issued at July 31, 2010 and 11,256,193 issued at October 31, 2009	11,653			11,255
Paid-in capital	15,623,224			13,704,460
Retained earnings	21,581,086			20,223,169
Less treasury stock, at cost (954,885 shares at July 31, 2010 and 993,763 shares at October 31, 2009)	(2,094,867		)	(2,180,010		)
Total shareholders’ equity	35,121,096			31,758,874
Total liabilities and shareholders’ equity	$	50,358,524		$	47,807,510

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

~~The accompanying notes are an integral part~~3 ~~of these consolidated financial statements.~~

3Table of Contents

~~Table~~XETA ofTECHNOLOGIES, INC. AND SUBSIDIARIES ~~Contents~~

~~XETA~~CONSOLIDATED ~~TECHNOLOGIES, INC.~~STATEMENTS ~~AND~~OF ~~SUBSIDIARY~~OPERATIONS

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~(UNAUDITED)

(UNAUDITED)


	For the Three Months
	Ended January 31,
	2011			2010

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

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


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

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


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


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

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


Income from operations		846,376			1,026,703

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

Net interest and other income		93,568			15,085

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


Net income	$	570,944		$	632,788


Earnings per share
Basic	$	0.05		$	0.06


Diluted	$	0.05		$	0.06


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


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

	For the Three Months						For the Nine Months
	Ended July 31,						Ended July 31,
	2010			2009			2010			2009
Systems sales	$	8,536,584		$	6,522,569		$	25,146,279		$	22,897,460
Services	12,166,889			10,524,397			35,661,654			30,359,279
Other revenues	188,300			136,271			325,980			263,126
Net sales and services revenues	20,891,773			17,183,237			61,133,913			53,519,865
Cost of systems sales	6,021,390			4,639,749			18,270,980			16,791,637
Services costs	8,223,095			7,505,892			24,236,849			21,258,445
Cost of other revenues & corporate COGS	434,436			425,480			1,287,991			1,308,525
Total cost of sales and services	14,678,921			12,571,121			43,795,820			39,358,607
Gross profit	6,212,852			4,612,116			17,338,093			14,161,258
Operating expenses
Selling, general and administrative	5,178,574			4,388,488			14,566,200			12,925,794
Amortization	206,386			344,727			580,471			1,001,984
Impairment of goodwill & other assets	—			14,000,000			—			14,000,000
Total operating expenses	5,384,960			18,733,215			15,146,671			27,927,778
Income (loss) from operations	827,892			(14,121,099		)	2,191,422			(13,766,520		)
Interest expense	(4,372		)	(20,810		)	(15,286		)	(79,211		)
Interest and other income (expense)	20,254			(1,159		)	58,781			14,219
Net interest and other income (expense)	15,882			(21,969		)	43,495			(64,992		)
Income (loss) before provision for income taxes	843,774			(14,143,068		)	2,234,917			(13,831,512		)
Provision (benefit) for income taxes	331,000			(5,544,000		)	877,000			(5,418,000		)
Net income (loss)	$	512,774		$	(8,599,068	)	$	1,357,917		$	(8,413,512	)
Earnings (loss) per share
Basic	$	0.05		$	(0.84	)	$	0.13		$	(0.82	)
Diluted	$	0.05		$	(0.84	)	$	0.13		$	(0.82	)
Weighted average shares outstanding	10,533,335			10,223,753			10,328,689			10,223,881
Weighted average equivalent shares	10,611,403			10,223,753			10,386,218			10,223,881

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

~~The~~4 ~~accompanying notes are an integral part of these consolidated financial statements.~~

4Table of Contents

~~Table~~XETA ofTECHNOLOGIES, INC. AND SUBSIDIARIES ~~Contents~~

~~XETA~~CONSOLIDATED ~~TECHNOLOGIES, INC.~~STATEMENT ~~AND~~OF ~~SUBSIDIARY~~SHAREHOLDERS’ EQUITY

~~CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY~~(UNAUDITED)

(UNAUDITED)


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

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

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


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

	Common Stock			Treasury Stock
	Shares Issued	Par Value		Shares		Amount			Paid-in Capital			Retained Earnings		Total
Balance- October 31, 2009	11,256,193	$	11,255	993,763		$	(2,180,010	)	$	13,704,460		$	20,223,169	$	31,758,874
Issuance of restricted common stock from treasury	—	—		(38,878	)	85,143			(85,143		)	—		—
Issuance of common stock	397,878	398		—		—			1,499,602			—		1,500,000
Issuance of warrants	—	—		—		—			279,000			—		279,000
Stock-based compensation	—	—		—		—			225,305			—		225,305
Net income	—	—		—		—			—			1,357,917		1,357,917
Balance- July 31, 2010	11,654,071	$	11,653	954,885		$	(2,094,867	)	$	15,623,224		$	21,581,086	$	35,121,096

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

~~The accompanying notes are an integral part of these consolidated~~5 ~~financial statements.~~

5Table of Contents

~~Table~~XETA ofTECHNOLOGIES, INC. AND SUBSIDIARIES ~~Contents~~

~~XETA~~CONSOLIDATED ~~TECHNOLOGIES, INC.~~STATEMENTS ~~AND~~OF ~~SUBSIDIARY~~CASH FLOWS

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~(UNAUDITED)

(UNAUDITED)


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


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

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


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


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

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


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

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


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

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

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


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

	For the Nine Months
	Ended July 31,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	1,357,917		$	(8,413,512	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	906,435			722,944
Amortization	580,471			1,001,984
Impairment of goodwill & other assets	—			14,000,000
Stock-based compensation	200,240			219,476
Loss on sale of assets	—			3,764
Provision for returns & doubtful accounts receivable	45,000			395,000
Provision for excess and obsolete inventory	76,500			76,500
Deferred taxes	814,466			(5,547,052		)
Change in assets and liabilities:
Increase in net investment in sales-type leases & other receivables	(729,663		)	(7,440		)
(Increase) decrease in trade accounts receivable	(323,541		)	8,628,795
Decrease in inventories	338,080			295,968
(Increase) decrease in prepaid expenses and other assets	(200,708		)	109,831
(Increase) decrease in prepaid taxes	(25,829		)	31,219
Decrease in accounts payable	(589,907		)	(2,739,735		)
Decrease in unearned revenue	(554,824		)	(446,734		)
Increase (decrease) in accrued liabilities	483,251			(408,020		)
Total adjustments	1,019,971			16,336,500
Net cash provided by operating activities	2,377,888			7,922,988
Cash flows from investing activities:
Additions to property, plant & equipment	(1,046,070		)	(636,586		)
Proceeds from sale of assets	—			5,064
Acquisitions, net of cash acquired	(1,000,000		)	(802,887		)
Investment in capitalized service contracts	—			(750,000		)
Net cash used in investing activities	(2,046,070		)	(2,184,409		)
Cash flows from financing activities:
Principal payments on debt	(1,183,475		)	(128,317		)
Net payments on revolving line of credit	—			(2,524,130		)
Payments on capital lease obligations	(114,993		)	(110,630		)
Payments to acquire treasury stock	—			(58,157		)
Net cash used in financing activities	(1,298,468		)	(2,821,234		)
Net (decrease) increase in cash and cash equivalents	(966,650		)	2,917,345
Cash and cash equivalents, beginning of period	4,731,926			63,639
Cash and cash equivalents, end of period	$	3,765,276		$	2,980,984
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	22,679		$	87,523
Cash paid during the period for income taxes	$	47,582		$	102,095
Non-cash investing and financing activity:
Issuance of common stock for acquisition	$	1,500,000		$	—
Issuance of warrants for acquisition	$	279,000		$	—

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

~~The accompanying notes are an integral part of these consolidated~~6 ~~financial statements.~~

6Table of Contents

~~Table of~~XETA ~~Contents~~TECHNOLOGIES, INC. AND SUBSIDIARIES

~~XETA~~Notes ~~TECHNOLOGIES, INC.~~to ~~AND~~Consolidated ~~SUBSIDIARY~~Financial Statements

~~Notes~~January 31, ~~to Consolidated Financial Statements~~2011

~~July 31, 2010~~(Unaudited)

~~(Unaudited)~~1. BASIS OF PRESENTATION:

1XETA Technologies, Inc. ~~BASIS~~ OF(“XETA”, ~~PRESENTATION:~~the “Company”, “we”, “us”, or “our”), an Oklahoma corporation formed in 1981, is a leading provider of advanced communications solutions with nationwide sales and service. We provide a wide variety of applications including voice messaging, wireless voice and data solutions, video applications, contact center solutions, unified communication, and high speed internet access solutions to hospitality and conference center customers. We sell and/or support communications solutions produced by several manufacturers including Avaya, Inc. (“Avaya”), Mitel Corporation (“Mitel”), Samsung Business Communications Systems (“Samsung”), Juniper Networks, Polycom, Microsoft and ShoreTel Corporation (“ShoreTel”).

~~XETA~~The Company prepared the accompanying unaudited consolidated financial statements pursuant to the ~~Technologies, Inc.~~rules ~~(“XETA”,~~and regulations of the ~~“Company”,~~Securities ~~“we”,~~and ~~“us”,~~Exchange orCommission (the “~~our~~Commission”),. anCertain ~~Oklahoma~~information ~~corporation~~and ~~formed~~footnote disclosures normally included in ~~1981,~~annual isfinancial astatements ~~leading~~prepared ~~integrator~~in accordance with accounting principles generally accepted in the United States of ~~advanced~~America have been ~~communications~~condensed ~~technologies~~or ~~with~~omitted ~~nationwide~~pursuant ~~sales~~to those rules and ~~service~~regulations. ~~XETA provides~~ ~~sales,~~The ~~design,~~Company ~~project~~believes ~~management,~~that ~~implementation,~~the disclosures ~~and~~are ~~maintenance services~~reasonably inadequate ~~support~~to ofensure the ~~products~~information itis ~~represents~~not misleading. ~~The~~ ~~Company~~Management suggests ~~sells~~that ~~and/or~~these ~~supports~~condensed ~~products produced~~financial bystatements ~~several~~be ~~manufacturers~~read ~~including~~in ~~Avaya, Inc.~~conjunction ~~(“Avaya”),~~with ~~Mitel~~the consolidated ~~Corporation~~financial ~~(“Mitel”),~~statements and ~~Samsung~~the ~~Business~~notes ~~Communications~~thereto ~~Systems~~made ~~(“Samsung”). Through~~a ~~its~~part ~~recent acquisition~~ of the ~~assets~~Company’s Annual Report on Form 10-K. ofThe ~~Hotel~~Company ~~Technology~~filed ~~Solutions, Inc~~the 10-K as Commission File No. 0-16231, ~~(“Lorica”)~~with the ~~Company~~Commission ~~provides~~on ~~high~~January 25, 2011 ~~speed~~and ~~internet~~subsequently ~~access~~amended on January 28, ~~network~~2011 ~~monitoring~~and ~~services~~February 25, ~~and~~2011. ~~guest~~Management ~~help~~believes ~~desk~~that the ~~services~~financial tostatements contain the ~~hospitality~~necessary ~~industry.~~ adjustments for a fair statement of the results for the ~~The~~interim ~~Company~~periods ~~also~~presented. ~~manufactures~~All ~~and~~adjustments ~~markets~~were of a ~~line~~normal ofrecurring ~~proprietary~~nature. ~~call~~The results of ~~accounting~~operations ~~systems~~for tothe interim period are not necessarily indicative of the ~~hospitality~~results ~~industry~~for the entire fiscal year.

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

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

The ~~following~~ ~~methods~~carrying value of cash and ~~assumptions~~cash ~~were~~equivalents, ~~used~~customer todeposits, ~~estimate~~trade ~~the~~accounts ~~fair~~receivable, ~~value~~sales-type ofleases, ~~each class~~accounts ofpayable ~~financial~~and ~~instruments~~short-term ~~for~~debt ~~which~~approximate ittheir isrespective ~~practicable~~fair values due to ~~estimate~~their ~~the value:~~short maturities.

~~The carrying~~Based ~~value~~upon ofthe ~~cash~~borrowing ~~and~~rates ~~cash~~currently ~~equivalents,~~available ~~customer~~to ~~deposits,~~the ~~trade~~Company ~~accounts receivable,~~for ~~sales-type~~bank ~~leases,~~loans ~~accounts~~with ~~payable~~similar terms and ~~short-term~~average ~~debt~~maturities, ~~approximate their~~the ~~respective~~ fair ~~values~~value ~~due~~of tothe ~~their~~long-term ~~short~~debt ~~maturities~~approximates the carrying value.

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

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

The ~~Company~~ ~~has~~reporting ~~three~~segments ~~reportable~~follow ~~segments:~~the ~~services,~~same ~~commercial~~accounting ~~system~~policies ~~sales,~~used ~~and hospitality~~for ~~system~~the ~~sales. Services~~Company’s consolidated ~~revenues~~financial ~~represent~~statements ~~revenues~~and ~~earned~~are ~~from~~described ~~installing~~in ~~and~~the ~~maintaining~~Summary ~~systems~~of ~~for customers~~Significant inAccounting ~~both~~Policies in the Company’s ~~commercial~~Form ~~and~~10-K ~~hospitality~~described ~~segments~~above. ~~The~~ Company ~~defines~~management ~~commercial~~evaluates ~~system~~a ~~sales~~segment’s performance based on asgross ~~sales~~margins. Assets are not allocated to the ~~non-hospitality~~segments. ~~industry~~Sales outside of the U.S. are immaterial.

~~The~~7 reporting segments follow the same accounting policies used for the Company’s consolidated financial statements and are described in the Summary of Significant Accounting Policies in the Company’s Form 10-K described above. Company management evaluates a segment’s performance based on gross margins. Assets are not allocated to the segments. Sales outside of the U.S. are immaterial.

7Table of Contents

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

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


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

2010
Sales	$	12,116,857		$	10,038,581		$	828,477		$	60,228		$	23,044,143
Cost of sales		(8,231,080	)		(7,540,985	)		(535,602	)		(397,635	)		(16,705,302	)
Gross profit	$	3,885,777		$	2,497,596		$	292,875		$	(337,407	)	$	6,338,841

	Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total
2010
Sales	$	12,166,889		$	7,296,428		$	1,240,156		$	188,300		$	20,891,773
Cost of sales	(8,223,095		)	(5,136,934		)	(884,456		)	(434,436		)	(14,678,921		)
Gross profit	$	3,943,794		$	2,159,494		$	355,700		$	(246,136	)	$	6,212,852
2009
Sales	$	10,524,397		$	4,032,103		$	2,490,466		$	136,271		$	17,183,237
Cost of sales	(7,505,892		)	(2,828,437		)	(1,811,312		)	(425,480		)	(12,571,121		)
Gross profit	$	3,018,505		$	1,203,666		$	679,154		$	(289,209	)	$	4,612,116

Stock-Based Compensation Plans

The Company applies the provisions of ASC 718, “Compensation — Stock Compensation”, which requires ~~following~~companies isto measure all employee stock-based compensation awards using a ~~tabulation~~fair ofvalue ~~business~~method ~~segment~~and recognize ~~information~~compensation ~~for~~cost in its financial statements. The Company recognizes the ~~nine~~fair ~~months~~value of ~~ended~~stock-based ~~July 31~~compensation awards as selling, ~~2010~~general and ~~2009~~administrative expense in the consolidated statements of operations on a straight-line basis over the vesting period. Compensation expense was recognized in the statements of operations as follows:

	Services Revenues			Commercial Systems Sales			Hospitality Systems Sales			Other Revenue			Total
	2011				2010
2010
Three months ended January 31,	$	70,999			$	74,060
Sales	$	35,661,654		$	22,062,341		$	3,083,938		$	325,980		$	61,133,913
Cost of sales	(24,236,849		)	(16,134,299		)	(2,136,681		)	(1,287,991		)	(43,795,820		)
Gross profit	$	11,424,805		$	5,928,042		$	947,257		$	(962,011	)	$	17,338,093
2009
Sales	$	30,359,279		$	15,608,586		$	7,288,874		$	263,126		$	53,519,865
Cost of sales	(21,258,445		)	(11,591,536		)	(5,200,101		)	(1,308,525		)	(39,358,607		)
Gross profit	$	9,100,834		$	4,017,050		$	2,088,773		$	(1,045,399	)	$	14,161,258

~~Stock-Based Compensation~~Use ~~Plans~~of Estimates

The ~~Company~~ ~~applies~~preparation of the ~~provisions~~financial ofstatements ~~ASC~~conforms ~~718,~~to ~~“Compensation~~the —accounting ~~Stock~~principles ~~Compensation”,~~generally ~~which~~accepted in the U.S., and requires ~~companies~~management to ~~measure~~make ~~all~~estimates ~~employee~~and ~~stock-based~~assumptions ~~compensation~~affecting the ~~awards~~reported ~~using~~amounts aof ~~fair~~assets ~~value method~~ and ~~recognize~~liabilities: ~~compensation~~disclosure ~~cost~~of incontingent ~~its financial~~assets ~~statements. The~~and ~~Company~~liabilities ~~recognizes~~at the date ~~fair value~~ of ~~stock-based compensation~~the ~~awards~~financial asstatements; ~~selling, general~~ and ~~administrative expense in~~ the ~~consolidated~~ ~~statements~~reported amounts of ~~operations~~revenues onand aexpenses ~~straight-line~~during ~~basis over~~ the ~~vesting~~ reporting period. ~~Compensation~~ ~~expense~~Actual ~~was~~results ~~recognized~~may indiffer ~~the~~from ~~statements~~these ofestimates. ~~operations as follows:~~

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

New Accounting Pronouncements

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

~~The preparation~~In ofDecember 2010 the ~~financial~~FASB ~~statements~~issued ~~conforms~~ASU to2010-28, ~~the~~“Intangibles ~~accounting~~— ~~principles~~Goodwill ~~generally~~and Other (Topic 350): When ~~accepted~~to inPerform Step 2 of the ~~U.S.,~~Goodwill ~~and~~Impairment ~~requires~~Test ~~management~~for toReporting ~~make~~Units ~~estimates~~with ~~and~~Zero ~~assumptions~~or Negative ~~affecting~~Carrying ~~the~~Amounts”. ~~reported~~ASU ~~amounts~~2010-28 modifies Step 1 of ~~assets~~the ~~and~~goodwill ~~liabilities:~~impairment ~~disclosure~~test offor reporting units ~~contingent~~with ~~assets~~zero ~~and~~or ~~liabilities~~negative atcarrying ~~the~~amounts ~~date~~by requiring an entity to perform Step 2 of the ~~financial~~goodwill impairment ~~statements;~~test ~~and the~~if ~~reported~~it ~~amounts~~is ofmore ~~revenues~~likely ~~and~~than ~~expenses~~not ~~during~~that ~~the~~a ~~reporting~~goodwill ~~period~~impairment exists. ~~Actual~~ ~~results~~This ~~may~~update ~~differ~~will be ~~from~~effective ~~these~~for fiscal years ~~estimates~~beginning after December 15, 2010. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

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

In ~~July~~ October ~~2010~~2009 the ~~Financial Accounting Standards Board (“~~FASB”) issued ~~Accounting~~ ~~Standards Update (“~~ASU”) ~~2010~~2009-2013, “~~Receivables~~Revenue ~~(Topic~~Recognition ~~310):~~— ~~Disclosure~~Multiple-Deliverable ~~about the~~Revenue ~~Credit~~Arrangements”. ~~Quality~~The ofguidance ~~Financing~~in ~~Receivables and the Allowance for Credit Losses”.~~ ASU ~~2010~~2009-2013 ~~requires~~amends ~~disclosures designed~~the tocriteria ~~enhance~~for ~~transparency~~separating ~~regarding~~consideration ~~credit losses and the credit quality~~in ofmultiple-deliverable ~~loan and lease receivables~~arrangements. ~~Disclosures~~ ~~include~~The anguidance ~~evaluation~~eliminates of the ~~nature~~estimated offair ~~credit~~value ~~risk~~approach ~~inherent~~for inrevenue ~~the~~allocation ~~entity’s~~between ~~financing receivables; how~~ the ~~risk~~separate isunits ~~analyzed~~of toaccounting ~~arrive at the allowance for credit losses~~ and ~~the~~replaces ~~changes~~it ~~and~~with ~~reasons~~a ~~for changes in the~~sales-based ~~allowance~~approach ~~for~~referred ~~credit~~so ~~losses. Under~~as ~~this guidance,~~ the ~~allowance~~relative-selling-price ~~for~~method. ~~credit~~ASU ~~losses~~2009-13 ~~and~~expands ~~fair~~required ~~value~~disclosures related ~~are~~ to bea ~~disclosed~~company’s ~~by portfolio segment. ASU 2010~~multiple-20deliverable ~~will~~revenue ~~be effective for fiscal years beginning on or after December 31, 2010~~arrangements. The adoption of this guidance did is not ~~expected to~~ have ana material impact on the Company’s consolidated financial statements.

~~In February 2010~~Other ~~the~~accounting ~~FASB~~standards ~~issued~~that ~~ASU~~have ~~2010-09,~~been ~~“Subsequent~~issued ~~Events:~~or ~~Amendments to~~proposed ~~Certain~~that ~~Recognition~~do ~~and~~not ~~Disclosure~~require ~~Requirements”. The guidance~~adoption inuntil ~~ASU~~a future ~~2010-09~~date ~~removes~~are ~~the~~not ~~requirement~~expected ~~for SEC filers~~ to ~~disclose the date through which subsequent events~~ have ~~been evaluated. The adoption of this update did not have~~ a material impact on ~~the~~our ~~Company’s~~consolidated financial ~~position or results of~~statements ~~operations~~upon adoption.

~~In November 2009 the Company adopted Accounting Standards Codification (“ASC”) 810, “Consolidation”~~2. ~~ASC~~ ~~810~~ACCOUNTS ~~changes the accounting and reporting for minority~~RECEIVABLE: interests, which are now recharacterized as non-controlling interests and classified as a component of equity. The Company does not have any minority interests; therefore the adoption of this statement did not have an impact on the Company’s consolidated financial statements.

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

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


				(Audited)
	January 31,			October 31,
	2011			2010

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

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

~~In October~~On January ~~2009~~14, ~~the FASB issued ASU~~ 2009~~-13~~, ~~“Revenue~~Nortel ~~Recognition~~Networks -Corporation ~~Multiple-Deliverable Revenue~~filed ~~Arrangements”. The~~for ~~guidance~~bankruptcy protection in ~~ASU~~ ~~2009-13~~the ~~amends~~United States ~~the~~Bankruptcy ~~criteria~~Court for ~~separating~~the ~~consideration~~District inof ~~multiple-deliverable arrangements~~Delaware. ~~The~~ ~~guidance~~Subsequent ~~eliminates~~ to the ~~estimated~~filing ~~fair value approach for revenue allocation between~~ the ~~separate~~administrators ~~units~~ of ~~accounting~~the ~~and~~bankruptcy ~~replaces~~adopted ~~it with~~ a ~~sales-based~~business ~~approach~~disposal ~~referred~~strategy. soUnder as the ~~relative-selling-price~~strategy, ~~method.~~the ~~ASU 2009-13 expands required disclosures~~administrators ~~related~~segmented toNortel ainto ~~company’s~~three ~~multiple-deliverable~~primary ~~revenue~~business ~~arrangements. ASU~~units: ~~2009-13~~Virtual isService ~~effective~~Switches, ~~prospectively~~CDMA ~~for~~businesses and ~~fiscal~~Enterprise ~~years~~Solutions. ~~beginning~~We onconducted orall ~~after~~of ~~June 15,~~our ~~2010. The Company~~Nortel isbusiness ~~currently~~through ~~assessing~~ the ~~impact~~Enterprise ~~that~~Solutions ~~adoption will have on required~~unit ~~disclosures,~~which ~~its~~was ~~financial~~purchased ~~position~~by ~~and~~Avaya ~~results~~in ~~of operations~~December 2009.

~~Other~~Nortel owes XETA approximately $700,000 in pre-petition accounts receivable. On July 17, 2009 the ~~accounting~~bankruptcy ~~standards~~court granted XETA’s request for offset of $116,000 in charges owed to Nortel at the time of the filing. In fiscal year 2009, the Company recorded $350,000 as a reserve against possible Nortel bad debts. Nortel filed its plan of reorganization on July 12, 2010 (the “Nortel Plan”). XETA’s claim is classified as a Class 3 claim, “General Unsecured Claims”. The Nortel Plan states that ~~have~~priority ~~been~~non-tax ~~issued~~claims orand ~~proposed~~secured claims will be paid in full, but that doClass 3 claims ~~not~~will ~~require~~be impaired. No indication or estimate is given as to the potential extent of the ~~adoption~~impairment. ~~until~~According to the Nortel Plan, XETA and other Class 3 claimants will receive a ~~future~~pro ~~date~~rata share ~~are~~of ~~not~~the ~~expected~~assets of Nortel at the time the Nortel Plan goes into affect but the Administrator has provided no guidance as to ~~have~~an aexpected ~~material~~payout ~~impact~~level. Based on ~~our~~the information presently ~~consolidated~~available, ~~financial~~the ~~statements~~Company ~~upon~~can ~~adoption~~make no further determination regarding the adequacy of its reserve in this matter. The Company will continue to carefully follow developments associated with the bankruptcy case and will assert its legal rights and defenses as appropriate.

23. ~~ACCOUNTS~~ ~~RECEIVABLE~~INVENTORIES:

~~Trade accounts~~Inventories ~~receivable~~are stated at the lower of average cost or market and consist of the following:

	July 31, 2010			(Audited) October 31, 2009
					(Audited)
Trade accounts receivable	$	15,090,558		$	14,393,681
	January 31,				October 31,
Less- reserve for doubtful accounts	(549,927		)	(561,229		)
	2011				2010
Net trade accounts receivable	$	14,540,631		$	13,832,452
Finished goods and spare parts	$	7,546,349			$	7,785,951
Less- reserve for excess and obsolete inventories		(1,116,827	)			(1,070,875	)
Total inventories, net	$	6,429,522			$	6,715,076

~~On January 14, 2009, Nortel Networks Corporation filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware~~4. ~~Subsequent~~ ~~to the filing the administrators of the bankruptcy adopted a business disposal strategy. Under the strategy~~PROPERTY, ~~the~~PLANT ~~administrators~~AND ~~segmented Nortel into three primary business units~~EQUIPMENT: ~~Virtual Service Switches, CDMA businesses and Enterprise Solutions. We~~ ~~conducted all of our Nortel business through the Enterprise Solutions unit.~~

~~On December 18~~Property, ~~2009,~~plant Avaya completed the purchase of Nortel’s Enterprise Solutions business unit. Nortel owes XETA approximately $700,000 in pre-petition accounts receivable. On July 17, 2009 the bankruptcy court granted XETA’s request for offset of $116,000 in charges owed to Nortel at the time of the filing. In fiscal year 2009, the Company recorded $350,000 as a reserve against possible Nortel bad debts. Nortel filed its plan of reorganization on July 12, 2010 (the “Nortel Plan”). XETA’s claim is classified as a Class 3 claim, “General Unsecured Claims”. The Nortel Plan states that priority non-tax claims and ~~secured~~equipment ~~claims~~consist ~~will be paid in full, but that Class 3 claims will be impaired. No indication or estimate is given as to the potential extent~~ of the ~~impairment.~~ following: According to the Nortel Plan, XETA and other Class 3 claimants will receive a pro rata share of the assets of Nortel at the time the Nortel Plan goes into affect. The next significant action in this matter is expected to be Nortel’s filing of a Disclosure Statement in mid-September providing more information regarding Nortel’s assets and potentially an estimate of payouts to Class 3 creditors. Based on the information presently available, the Company can make no further determination regarding the adequacy of its reserve in this matter. The Company will continue to carefully follow developments associated with the bankruptcy case and will assert its legal rights and defenses as appropriate.

3. INVENTORIES:


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

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


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


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

~~Inventories~~5. ~~are~~INCOME ~~stated at the lower of average cost or market and consist of the following~~TAXES:

	July 31, 2010			(Audited) October 31, 2009
Finished goods and spare parts	$	5,899,077		$	5,977,703
Less- reserve for excess and obsolete inventories	(1,034,737		)	(941,505		)
Total inventories, net	$	4,864,340		$	5,036,198

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

106. CREDIT AGREEMENTS:

~~Table~~At January 31, 2011 the Company’s credit facility consisted of a loan agreement with a commercial ~~Contents~~bank including a $8.5 million revolving credit agreement collateralized by trade accounts receivable, inventories, and real estate. The facility matures on November 5, 2011. Advance rates are defined in the agreement, but are generally at the rate of 75% on qualified trade accounts receivable and 50% of qualified inventories and real estate. The credit facility contains several financial covenants common in such agreements including tangible net worth requirements, limitations on the amount of funded debt to annual earnings before interest, taxes, depreciation and amortization, limitations on cash dividends, and debt service coverage requirements. Interest on the loan agreement accrues at the greater of either a) the London Interbank Offered Rate (“LIBOR”) (0.26% at January 31, 2011) plus 3.00% or b) 4.5%. The outstanding balance on the revolving line of credit was $3.4 million at January 31, 2011. At January 31, 2011 we were in compliance with the covenants of the credit facility.

~~4. PROPERTY, PLANT AND EQUIPMENT:~~10

Property, plantTable and equipment consist of the following:Contents

	Estimated Useful Lives	July 31, 2010			(Audited) October 31, 2009
Building and building improvements	3-20	$	3,378,035		$	3,253,693
Data processing and computer field equipment	2-7	3,977,439			3,248,126
Software development costs, work-in-process	N/A	227,862			197,097
Software development costs of components placed into service	3-10	2,731,310			2,697,806
Hardware	3-5	643,635			643,635
Land	—	611,582			611,582
Office furniture	5-7	813,556			779,588
Auto	5	545,548			537,300
Other	3-7	145,779			149,484
Total property, plant and equipment		13,074,746			12,118,311
Less- accumulated depreciation and amortization		(6,419,556		)	(5,292,395		)
Total property, plant and equipment, net		$	6,655,190		$	6,825,916

At January 31, 2011 the Company was paying 4.5% on the revolving line of credit borrowings.

5On August 2, 2010 the Company purchased the common stock of Pyramid Communications Services, Inc. ~~INCOME~~ The ~~TAXES:~~purchase price included subordinated promissory notes payable to the sellers in quarterly installments through July 31, 2012 bearing interest at 3% per year. At January 31, 2011 the total notes payable was $510,000. We reduced our balance through scheduled principal payments by $83,000 in the first quarter of fiscal 2011.

~~The tax provision reflects the effective Federal tax rate plus the composite state income tax rates adjusted for states that require minimum tax payments even if tax losses are incurred~~7. ~~Generally,~~ weEARNINGS ~~expect~~PER ~~our tax provision rate to be approximately 40%.~~SHARE:

6The Company computes basic earnings per common share by dividing net income by the weighted average number of shares of common stock outstanding during the reporting periods. ~~CREDIT~~ ~~AGREEMENTS~~Dividing net income by the weighted average number of shares of common stock and dilutive potential common stock outstanding during the reporting periods computes diluted earnings per common share. A reconciliation of net income and weighted average shares used in computing basic and diluted earnings per share is as follows:

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


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

Dilutive effect of stock options				68,162


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

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


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

Dilutive effect of stock options				39,956


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

	July 31, 2010		(Audited) October 31, 2009
Term note, payable with a fixed payment of $1,183,475 due November 30, 2009, collateralized by a first mortgage on the Company’s building	$	—	$	1,183,475
Less-current maturities	—		1,183,475
Total long-term debt, less current maturities	$	—	$	—

Options to purchase 715,500 shares of common stock at an average exercise price of $4.71 and 993,438 shares of common stock at an average exercise price of $6.63 were not included in the computation of diluted earnings per share for the three months ended January 31, 2011 and 2010, respectively, because inclusion of these options would be antidilutive.

~~Interest on all outstanding debt under the credit facility accrues at the greater of either the London Interbank Offered Rate (“LIBOR”) (0~~8.~~305%~~ atCAPITAL ~~July 31,~~LEASES: 2010) plus 3.0% or 4.5%. The credit facility contains several financial covenants common in such agreements including tangible net worth requirements, limitations on the amount of funded debt to annual earnings before interest, taxes, depreciation and amortization, limitations on cash dividends, and debt service coverage requirements. At July 31, 2010 the Company was in compliance with the covenants of the credit facility.

11During 2008 the Company leased software licenses under an agreement that is classified as a capital lease. The book value of the licenses is included in the balance sheet as property, plant, and equipment and was $63,406 at January 31, 2011. Accumulated amortization of the licenses at January 31, 2011 was $393,114. Amortization of assets under the capital lease is included in depreciation expense. As of January 31, 2011 the future minimum lease payments required under the lease is $67,265 and the present value of the net minimum lease payments is $66,618. At January, 31, 2011 future minimum lease payments required under a vehicle lease assumed in a recent acquisition is $12,410 and the present value of the lease payments is $12,005.

~~Table of~~11 ~~Contents~~

7. EARNINGSTable PERof SHARE:Contents

~~The Company computes basic earnings per common share by dividing net income by the weighted average number of shares of common stock outstanding during the reporting periods~~9. ~~Dividing~~ net income by the weighted average number of shares of common stock and dilutive potential common stock outstanding during the reporting periods computes diluted earnings per common share. A reconciliation of net income and weighted average shares used in computing basic and diluted earnings per share is as followsACQUISITIONS:

	For the Three Months Ended July 31, 2010
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	512,774	10,533,335	$	0.05
Dilutive effect of stock options			78,068
Diluted EPS
Net income	$	512,774	10,611,403	$	0.05

On November 19, 2010, the Company completed the purchase of certain operating assets of New Vision Comunications, Inc., (“New Vision”) a privately-held company based in Omaha, Nebraska providing communications equipment and related services. The purchase price included $331,000 paid in cash at closing and a hold-back of $45,000 to be paid to the seller subject to reductions related to the final value of the net assets purchased.

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

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

	For the Nine Months Ended July 31, 2010
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Net income	$	1,357,917	10,328,689	$	0.13
Dilutive effect of stock options			57,529
Diluted EPS
Net income	$	1,357,917	10,386,218	$	0.13

10. SUBSEQUENT EVENT:

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

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

~~Options to~~At ~~purchase~~the ~~712~~effective time of the Merger,~~450~~ ~~shares~~each share of XETA common stock atissued anand ~~average~~outstanding immediately ~~exercise~~prior ~~price~~to the effective time (other than shares held in the treasury of XETA or any ~~$5.82~~subsidiary of XETA and ~~1,269,900~~any shares ofowned ~~common~~by ~~stock~~PAETEC ator anany ~~average~~of ~~exercise~~its ~~price~~subsidiaries) ofwill be automatically converted into the right to receive $65.4250 ~~were~~in ~~not~~cash, ~~included~~without ininterest (the ~~computation~~“Merger ofConsideration”). In ~~diluted~~addition, ~~earnings~~immediately ~~per~~prior ~~share~~to ~~for~~ the ~~three~~effective ~~months~~time ~~ended~~of ~~July 31~~the Merger, ~~2010~~all ~~and~~remaining ~~2009,~~forfeiture restrictions ~~respectively,~~applicable ~~because inclusion~~to restricted shares of ~~these~~XETA ~~options~~common ~~would~~stock will expire and the holders thereof will be ~~antidilutive~~entitled to receive the Merger Consideration with respect to each such share. ~~Options~~ Certain options to purchase ~~834,595~~ shares of XETA common stock atoutstanding animmediately ~~average~~prior ~~exercise~~to ~~price~~the effective oftime $5shall become fully vested immediately prior to the effective time.23 Holders of warrants and ~~1,269,900~~vested ~~shares~~options ofwill ~~common~~be ~~stock at~~entitled anto ~~average~~receive ~~exercise~~(in ~~price~~each case, in accordance with the terms of ~~$6.42~~their ~~were~~respective ~~not~~plans ~~included~~and inagreements) the ~~computation~~product of (i) the number of shares of XETA common ~~diluted~~stock ~~earnings~~that ~~per~~would ~~share~~have ~~for~~been acquired upon the ~~nine~~exercise ~~months~~of ~~ended~~the ~~July 31~~stock option or warrant, ~~2010~~multiplied ~~and~~by ~~2009~~(ii) the excess, ~~respectively~~if any, ~~because~~of ~~inclusion~~the Merger Consideration over the exercise price to acquire a share of XETA ~~these~~common ~~options~~stock ~~would~~under such option or warrant. The Merger Consideration will be ~~antidilutive~~approximately $61 million in the aggregate.

12The consummation of the Merger is subject to customary conditions, including, without limitation, (a) approval by the holders of a majority of the outstanding shares of XETA’s common stock entitled to vote on the Merger, (b) receipt of any required antitrust or regulatory approvals (including, if applicable, the expiration or termination, as the case may be, of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976), and (c) the absence of any law, regulation, order or injunction prohibiting the Merger. Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers and other qualifying disclosures which are not necessarily reflected in the Merger Agreement), (ii) the other party’s compliance with its covenants and agreements contained in the Merger Agreement, (iii) there not being holders of more than 15% of the outstanding shares of XETA common stock properly exercising appraisal rights and (iv) there not having been a material adverse effect on the business, financial condition or results of operations of XETA and its subsidiaries (subject to certain limitations) or the ability of XETA to consummate the transactions under the Merger Agreement that has not been cured.

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

~~8. CONTINGENCIES:~~12

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

9On February 14 and 16, 2011, three separate putative stockholder class action complaints were filed in the District Court of Tulsa County, State of Oklahoma against the Company, the members of our board of directors, and PAETEC Holding Corp. ~~CAPITAL~~ ~~LEASES:~~(“PAETEC”) and its indirect subsidiary Hera Corporation (“Hera”). The lawsuits concern the proposed merger with PAETEC, and generally assert claims alleging, among other things, that each member of our board of directors breached his fiduciary duties by agreeing to the terms of the merger and by allegedly failing to provide stockholders with material information related to the proposed merger; and that PAETEC and Hera aided and abetted the alleged breaches of fiduciary duty by the members of the Company’s board of directors. The lawsuits seek, among other things, class action certification and monetary and injunctive relief. The Company believes that all claims asserted in the lawsuits are without merit and are merely opportunistic.

~~During 2008~~ITEM ~~the Company leased software licenses under an agreement that is classified as a capital lease~~2. ~~The~~MANAGEMENT’S ~~book~~DISCUSSION ~~value~~AND ofANALYSIS ~~the~~OF ~~licenses~~FINANCIAL isCONDITION ~~included~~AND inRESULTS ~~the~~OF balance sheet as property, plant and equipment and was $139,492 at July 31, 2010. Accumulated amortization of the leased licenses at July 31, 2010 was $317,028. Amortization under the capital lease is included in depreciation expense. The future minimum lease payments required under the capital lease and the present value of the net minimum lease payments as of July 31, 2010, are as follows:OPERATIONS

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

Preliminary Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, relating to future events and our future performance and results. Many of these statements appear in the discussions under the headings “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than those that are purely historical may be forward-looking statements. Forward-looking statements can generally be identified by words such as “expects,” “anticipates,” “may,” “likely,” “plans,” “believes,” “intends,” “projects,” “estimates,” and similar words or expressions. Forward-looking statements are not guarantees of performance, but rather reflect management’s current expectations, estimates, and forecasts about the industry and markets in which we operate, and our assumptions and beliefs based upon information currently available to management. Investors are cautioned that all forward-looking statements are subject to certain risks and uncertainties which are difficult to predict or which we are unable to control, and that could cause actual results to differ materially from those projected, including but not limited to such factors as failure to obtain shareholder approval or failure to satisfy other conditions required for the consummation of the pending merger; failure or delay in consummation of the pending merger for other reasons; changes in laws or regulations; the condition of the U.S. economy and its impact on capital spending in our markets; the successful integration of recently acquired businesses into ours and realization of anticipated synergies and growth opportunities from these transactions; changes in Avaya’s marketing and dealer channel strategy; unpredictable quarter to quarter revenues; continuing success of our Mitel product and service offerings; our ability to maintain and improve upon current gross profit margins; intense competition and industry consolidation; dependence upon a few large wholesale customers for the recent growth in our Managed Services offering; and the availability and retention of revenue professionals and certified technicians. These and other risks and uncertainties are discussed under the heading “Risk Factors” under Part I of the Company’s Form 10-K for the fiscal year ended October 31, 2010 (filed with the Commission on January 25, 2011 and amended on January 28, 2011 and February 25, 2011) and in updates to such risk factors set forth in Item 1A of Part II of this quarterly report. ~~ACQUISITIONS:~~

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

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

13On February 8, 2011 we entered into a merger agreement with PAETEC Holding Corp., a Delaware corporation (“PAETEC”), and Hera Corporation, an Oklahoma corporation and an indirect wholly-owned subsidiary of PAETEC (“Hera”). Under the terms and subject to the conditions of the Merger Agreement, Hera will merge with and into XETA (the “Merger”), with XETA surviving the Merger as an indirect wholly-owned subsidiary of PAETEC. Our shareholders will receive $5.50 in cash for each share of stock held upon approval of the merger by our shareholders. Additional terms and conditions of the proposed merger are provided in Note 10 to the Condensed Consolidated Notes to Financial Statements above.

~~Table of~~13 ~~Contents~~

11. SUBSEQUENTTable EVENTS:of Contents

OnPAETEC ~~August 2,~~offers ~~2010,~~a ~~the~~comprehensive ~~Company~~suite ~~completed the purchase~~ of ~~100%~~IP, ~~of the voting stock of Pyramid Communications Services~~voice, ~~Inc.,~~ ~~(“Pyramid”) a Dallas~~data, ~~Texas based privately held company providing communications equipment~~ and ~~related~~Internet services~~. Pyramid’s~~, ~~2009 revenues~~as ~~exceeded~~well ~~$10.0 million. The~~as ~~purchase~~enterprise ~~price~~communications ~~included~~management ~~$1.8~~software, ~~million~~network ~~paid~~security ~~in cash at closing; $675~~solutions,~~000~~ ~~in subordinated promissory notes payable to the sellers in eight quarterly installments bearing interest at three percent per year; $200~~CPE,~~000~~ inand ~~cash~~managed ~~deposited~~services. ~~into~~We anwill ~~escrow~~become ~~account~~a aspart ~~required~~of ~~under~~PAETEC’s ~~the~~managed ~~purchase~~services ~~agreement;~~portfolio ~~and $100,000~~which ~~payable~~consists ~~to the former CEO~~ of ~~Pyramid~~a ~~in thirty six monthly~~wide ~~installments~~variety ~~under~~of ~~personal~~products ~~goodwill~~including ~~and~~hosted ~~non-compete agreements. Additionally~~services, ~~the~~service ~~Company~~lifecycle ~~retired~~management ~~$648~~software,~~222~~ ~~in principal~~ and ~~accrued interest on Pyramid~~Allworx IP-PBX’s. ~~outstanding~~These ~~line~~managed ofservices ~~credit~~can ~~with~~be ~~its bank. The~~sold ~~Company~~on ~~used~~a ~~$2.65~~stand-alone ~~million~~basis, ~~from existing~~but ~~cash~~is ~~balances~~often tobundled ~~fund~~with ~~the~~a variety ~~purchase~~of ~~price. The~~PAETEC’s ~~acquisition~~network isservices ~~not material~~ to ~~the Company’s~~drive ~~financial~~more ~~position~~revenues orand ~~results~~deeper ofrelationships ~~operations~~with customers.

OnThe ~~September 2,~~Merger ~~2010,~~is ~~the~~expected ~~Company~~to ~~completed~~close in the ~~purchase~~third offiscal ~~the~~quarter. The merger agreement includes ~~operating~~covenants ~~assets~~by ofus ~~Data-Com~~to ~~Telecomunications, Inc.,~~conduct ~~(“Data-Com”)~~business ain ~~New~~the ordinary course during the interim period between the ~~Jersey~~execution ~~based~~of ~~privately~~the ~~held~~Merger ~~company~~Agreement ~~providing~~and ~~communications~~consummation ~~equipment~~of the Merger and ~~related~~ ~~services~~not to ~~the~~engage ~~greater~~in ~~New~~certain ~~York~~types of ~~City~~transactions ~~area~~during such period. ~~The~~ ~~purchase~~Additionally, ~~price~~while ~~was~~integration ~~$3.070~~planning ~~million cash. Of~~is ongoing during this ~~amount~~period, ~~$604,000~~none ~~was~~of ~~put into~~our ~~escrow~~operations ~~until~~can ~~certain~~be ~~tax~~integrated ~~liabilities~~into ~~are~~PAETEC’s ~~determined;~~prior ~~customer~~to ~~overpayments are~~the ~~resolved;~~closing ~~and~~of the transaction. ~~final~~As ~~value~~a result of ~~the~~these ~~net~~factors, ~~assets~~we ~~purchased~~are ~~is established. The~~operating ~~acquisition~~in isa ~~not material~~manner toconsistent ~~the~~with ~~Company’s~~previously stated strategic, financial ~~position~~and oroperating ~~results of operations~~goals.

14Strategy.

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

~~ITEM~~Historically, 2our revenues have been closely associated with a few major vendors such as Avaya, Nortel, and Hitachi. ~~MANAGEMENT’S~~Our ~~DISCUSSION~~strategy ~~AND~~to ~~ANALYSIS~~increase OFour ~~FINANCIAL~~services ~~CONDITION~~revenues ~~AND~~coupled ~~RESULTS~~with OFrapid ~~OPERATIONS~~changes in our market requires us to diversify our relationships to more manufacturers as well as develop new customer relationships, particularly related to our managed services business. As a result, in the last two years we have expanded our relationships with manufacturers from five to seventeen, greatly increasing the number of hardware and software applications we sell. We have also expanded our service offerings to include more data-centric services such as managed network services, hospitality guest support services (help desk), wireless long-range bridging, data security consulting, and environment virtualization. These changes are creating opportunities for us to earn additional revenues from existing customers as well as create opportunities with new customers. We believe these expanded capabilities will lead to improved predictiablitily and profitability in our business and will help to diversify our revenues.

~~Preliminary~~In fiscal 2010, we initiated a corporate development effort to identify and make investments which ~~Note~~create ~~Regarding~~rapid ~~Forward-Looking~~scale ~~Statements~~and scope to our business. As a result of those efforts we completed the acquisition of three companies and absorbed the operating assets of a fourth business unit which was being dissolved by its owner. These acquisitions provided: (i) new geographic presence for us in the northeastern and southwestern regions of the country; (ii) new high speed product and service offering for our hospitality vertical market; and (iii) personnel and applications to launch our new network operations center. We expect to continue to use cash flows and debt financing to further these corporate development activies in fiscal 2011.

~~This report~~On ~~contains~~November 19, ~~forward-looking~~2010, ~~statements~~we ~~within~~completed the ~~meaning~~purchase of ~~the~~certain ~~Private Securities~~operating ~~Litigation~~assets ~~Reform Act~~ of ~~1995,~~New ~~relating to future events and our~~Vision ~~future performance and results. Many of these statements appear in the discussions under the headings “Risk Factors~~Comunications,” ~~and “Management’s Discussion and Analysis of Financial Condition and Results of Operations~~Inc.~~” All~~ ~~statements other than those that are purely historical may be forward-looking statements. Forward-looking statements can generally be identified by words such as~~ (“~~expects,”~~New ~~“anticipates,~~Vision” ~~“may~~),” ~~“likely,”~~a ~~“plans,” “believes,” “intends,” “projects,” “estimates,” and similar words or expressions. Forward~~privately-~~looking~~held ~~statements~~company ~~are~~based ~~not guarantees of performance, but rather reflect management’s current expectations, estimates, and forecasts about the industry and markets~~ in ~~which we operate~~Omaha, ~~and~~Nebraska ~~our assumptions and beliefs based~~providing ~~upon~~communications ~~information~~equipment ~~currently available to management. Investors are cautioned that all forward-looking statements are subject to certain risks~~ and ~~uncertainties~~ ~~which~~related are difficult to predict or which we are unable to control, and that could cause actual results to differ materially from those projected, including but not limited to such factors as the condition of the Uservices.S. ~~economy and~~The ~~its~~terms ~~impact on capital spending trends in the Company’s markets; whether the integration~~ of ~~recently acquired businesses into that of~~ the ~~Company~~purchase ~~and realization~~agreement ~~of anticipated synergies and growth opportunities from such transactions~~ are ~~successful; success in our overall strategy; the financial~~described ~~condition of our suppliers and changes by them~~ in ~~their~~Note ~~distribution~~9 strategies and support; the Nortel Networks bankruptcy filing and the potential negative impact that it may have on the Company’s prepetition accounts receivable claim against Nortel or if Nortel succeeds in bringing a preference claim against the Company; unpredictable quarter to quarter revenues; changes in Avaya’s strategies regarding the provision of ~~equipment and services to its customers, and in its policies regarding~~ the ~~availability~~Notes ~~of tier IV hardware and software support; inconsistent gross profit margins; availability of credit~~ to ~~finance growth;~~Consolidated ~~intense~~Financial competition and industry consolidation; dependence upon a few large wholesale customers in the Company’s Managed Services offering; and the availability and retention of revenue professionals and certified techniciansStatements. ~~These and other risks and uncertainties are discussed under~~ the heading “Risk Factors” under Part I of the Company’s Form 10-K for the fiscal year ended October 31, 2009 (filed with the Commission on January 8, 2010) and in updates to such risk factors set forth in Item 1A of Part II of this quarterly report. As a result of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, investors are cautioned to read and consider all forward-looking statements in conjunction with such risk factors and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements made by the Company.

~~Overview~~Operating Summary.

~~Strategy~~In the first quarter of fiscal 2011, we recorded net income of $571,000 on revenues of $27.4 million compared to net income of $633,000 on revenues of $23.0 million in the first quarter of last year. The 2011 results primarily reflect an increase in revenues and gross profits offset by increased selling, general and administrative costs, including $324,000 in costs associated with the PAETEC merger process and other corporate development activities. We discuss this and other contributing factors in more detail under “Results of Operations” below.

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

~~Management believes~~Since ~~these~~October 31, ~~strategies~~2010, ~~are~~our ~~appropriate~~working tocapital ~~fully~~position ~~realize~~remained ~~the~~relatively ~~benefits~~unchanged ofat ~~our~~$7.6 million. ~~investments~~Cash infrom ~~high~~operations ~~value talent~~ and ~~competencies,~~net toborrowing ~~capitalize~~ on the ~~market~~revolving line of credit was primarily used to reduce ~~realignment~~accounts payable, ~~resulting~~make ~~from~~capital ~~Avaya’s~~expenditures ~~acquisition~~to ofsupport ~~NES~~our operations and topurchase ~~ready~~the ~~ourselves~~net ~~in anticipation~~operating assets of ~~growth~~New inVision. ~~demand~~We ~~for~~discuss ~~advanced~~these ~~applications~~ and ~~collaborative~~other financial items in more detail under “Financial ~~technologies~~Condition” below.

~~Even~~14 though we are experiencing growth in our services revenue, the overall market for our products and services remains challenging. While some of our customers are enjoying improvements in their business and are therefore purchasing and implementing new communications systems, many others remain

15Table of Contents

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

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

~~On May~~At January 2431, ~~2010,~~2011 ~~the~~our ~~Company~~working ~~completed~~capital ~~the~~was ~~purchase~~$7.6 million ofcompared ~~the~~to ~~operating~~$7.5 million ~~assets of~~at ~~Hotel Technologies Solutions,~~October ~~Inc.~~31, ~~d/b/a Lorica Solutions (“Lorica”),~~ a2010. ~~privately-held~~We ~~company~~used ~~headquartered~~our incash ~~Buffalo,~~balances ~~New~~and ~~York~~$1. ~~Lorica~~6 million isshort-term borrowings anfrom ~~emerging~~our ~~leader~~$8.5 inmillion ~~the~~line ~~delivery~~ of ~~high-speed~~credit ~~internet~~to ~~access~~fund ~~and~~our ~~network~~operating ~~administration~~activities, toacquisition ~~the~~activities ~~hospitality industry. The~~and ~~terms~~capital ~~of the purchase~~expenditures ~~agreement~~during ~~are described in Note 10 of~~ the ~~Notes to Consolidated Financial Statements~~quarter.

~~On August 2,~~Our ~~2010,~~capital ~~the~~expenditures ~~Company~~in ~~completed~~ the ~~purchase~~first ofquarter ~~the~~were ~~stock~~$1.2 million ofwhich ~~Pyramid Communications~~included ~~Services~~approximately $688, ~~Inc.~~000 in expenditures to build our new network operations center (“~~Pyramid~~NOC”) in Hazelwood, Missouri. The NOC facility provides a ~~privately~~platform ~~held~~for ~~company headquartered~~a invariety ~~Dallas,~~of ~~Texas. Pyramid~~new revenue streams including proactive ~~provides~~network ~~communications~~monitoring, ~~equipment~~remote break/fix of network devices, and ~~related~~help desk services. ~~with~~The ~~2009~~expenditures above ~~revenues~~included remodeling a small area in our headquarters facility to create redundancy for the ~~excess~~NOC. We used cash of $10331,000 to purchase the net operating assets of New Vision.0 ~~million~~This small acquisition provides us with new personnel and applications to integrate Microsoft applications more effectively with other products and applications we sell. The ~~terms~~remaining ofcapital expenditures ~~the~~made ~~purchase~~in ~~agreement~~the ~~are~~first ~~described~~quarter inwere ~~Note~~for 11implementation of ~~the~~a ~~Notes~~CRM tool to ~~Consolidated~~increase our sale management ~~Financial~~capabilities ~~Statements~~and to support normal replacement cycles of technology infrastructure.

~~Operating~~At ~~Summary~~January 31, 2011, our cash balance was $722,000 and we had a $3.4 million outstanding balance on our line of credit. In accordance with the collateral base defined in the credit facility, $5.1 million was available for borrowing on the facility at the end of the quarter. At January 31, 2011, we were in compliance with the covenants of the credit facility.

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

~~Financial~~In ~~Position~~the ~~Summary~~first quarter of fiscal 2011 revenues were $27.4 million compared to $23.0 million in the first quarter 2010. Our net income in the first quarter of fiscal 2011 was $571,000, compared to a net income of $633,000 in the same quarter a year ago. Our 2011 results include $324,000 in professional fees associated with the process which led to the merger agreement with PAETEC as well as other corporate development activities. Without these costs, our net income would have been $769,000 in the first quarter of fiscal 2011, a 21% increase over the first quarter of fiscal 2010. The narrative below provides further explanation of these results.

~~Since~~Systems ~~October 31, 2009, we have generated positive cash flows from operations of $2~~Sales.~~4 million and we primarily used these cash flows to reduce~~ borrowings, purchase the net operating assets of Lorica and make capital expenditures to support our operations. We have improved our working capital approximately 15%. We discuss these and other financial items in more detail under “Financial Condition” below.

~~The~~In ~~following~~the ~~discussion~~first ~~presents~~quarter ~~additional~~of ~~information~~fiscal ~~regarding~~2011 ~~our~~systems sales increased approximately $1.1 million or 10% ~~financial~~compared ~~condition~~to ~~and~~the ~~results~~same period last year. This increase includes a $1.4 million or 175% increase in sales of ~~operations~~systems ~~for~~to ~~the~~hospitality ~~three-~~customers and ~~nine-month~~a $328,000 or 3% decrease in sales of systems to ~~periods~~commercial ~~ended~~customers. ~~July 31,~~The ~~2010~~increase in our hospotitality systems sales reflects a modest rebound in that market sector and ~~2009~~a large sale of voice and ~~should~~data beequipment ~~considered~~to a UK-based hospitality location in the first quarter. This sale was made possible as a result of the acquisition of Lorica in ~~conjunction~~fiscal ~~with~~2010 and will generate recurring network monitoring fees through our ~~above~~new ~~comments~~NOC asonce installation ~~well~~is ascomplete in fiscal 2011. The decrease in sales of systems to commercial customers reflects continued softness in the ~~“Risk~~overall ~~Factors”~~economy ~~section~~coupled with shipping delays by Avaya. Orders ~~below~~affected by these delays are expect to ship in our second fiscal quarter.

~~Financial Condition~~15

DuringTable the first three fiscal quarters of 2010 our working capital increased by 15% to $13.2 million. We generated $2.4 million in cash flows from operations. These cash flows included earnings and non-cash charges of $3.2 million; a decrease in inventory of $338,000; an increase in accrued liabilities of $483,000; and a decrease in deferred taxes of $814,000. These positive cash flow items were partially offset by an increase in accounts receivable of $324,000; a decrease in unearned revenue of $555,000; a decrease in accounts payable of $590,000; and other changes in working capital items. These items netted to a decrease in cash of $956,000. Non-cash charges included amortization of $580,000; depreciation of $906,000; provisions for doubtful accounts receivable and obsolete inventories of $122,000; and stock-based compensation of $200,000.Contents

WeServices ~~used these positive cash flows to pay off term debt of $1~~Revenues.~~2 million;~~ to purchases the net operating assets of Lorica of $1.0 million, acquire capital assets of $1.1 million; and fund other financing and investing activities of $115,000. The acquisition of capital assets was part of normal replacement of Information Technology infrastructure and headquarters facility improvements.

16Services revenues consist of the following:

Table of Contents


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

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

AtMaintenance ~~July 31,~~and ~~2010,~~repair ~~our~~revenues ~~cash~~increased ~~balance~~37% ~~was~~in $3the first quarter.8 ~~million~~This ~~and~~increase ~~there~~reflects ~~was~~the nocontinued ~~outstanding~~success ~~balance~~of on our ~~working~~wholesale ~~capital~~services ~~revolver. In~~programs ~~accordance~~and ~~with~~repair ~~the~~revenues ~~collateral~~as ~~base defined~~well inas the ~~credit~~addition ~~facility,~~to our ~~$8.5~~base ~~million~~of ~~was~~maintenance ~~available~~customers ~~for~~associated ~~borrowing~~with onacquisitions in the third and fourth quarters of $8fiscal 2010.5 ~~million~~We ~~facility~~continue atto ~~the~~aggressively ~~end~~market ofour ~~the~~national ~~quarter. The~~service ~~working~~footprint ~~capital~~and ~~revolver~~multi-product line istechnical ~~scheduled~~capabilities to ~~mature~~ onexisting ~~November 5,~~and ~~2010. We expect~~potential towholesale ~~renew~~service ~~this~~partners ~~instrument~~such ~~for~~as anetwork service ~~12-month~~providers, orand ~~longer~~large ~~period~~voice ~~prior~~and todata ~~the expiration~~integrators. It isWe ~~possible~~also ~~that~~continue ~~the~~to market our service ~~renewal~~capabilities ~~could~~to ~~result~~end-users. We expect growth in ~~higher~~these ~~borrowing~~programs ~~costs~~to positively impact our maintenance and~~/or~~ ~~reduced~~repair ~~availability~~revenues for ~~unsecured~~ ~~borrowings~~the foreseeable future.

WeImplementation ~~expect~~revenues toincreased ~~utilize~~9% ain ~~variety~~the offirst ~~common~~fiscal ~~financing~~quarter ~~tools~~reflecting toan ~~fund acquisitions. We~~increase ~~believe our cash~~in ~~balances,~~installation ~~expected~~revenues ~~free~~and ~~cash~~relatively ~~flows~~flat revenues from ~~operations,~~our ~~and~~Professional ~~available~~Services ~~borrowing~~Organization ~~capacity~~(“PSO”). ~~will~~In bethe ~~our~~near ~~primary sources of capital. However~~term, weImplementation ~~also~~revenues ~~expect~~will continue to ~~employ~~be ~~seller financing~~closely inaligned with the sale ~~form~~ of ~~subordinated~~new ~~notes,~~systems. ~~earn-out~~From ~~agreements,~~a ~~indemnity hold-backs,~~long ~~and~~term ~~occasionally~~perspective, ~~restricted~~we ~~stock~~are expanding and~~/or~~ ~~warrants. The~~diversifying ~~level~~our ~~to which we employ these various~~service ~~methods,~~offerings ~~particularly~~to ~~the~~a ~~use~~more ofdata- ~~our~~and ~~equity,~~consulting-centric ~~will~~model. ~~depend~~The ~~upon~~recent aconstruction ~~multitude~~ of ~~factors~~ ~~which~~the ~~are~~NOC ~~unique~~ to ~~each negotiation.~~ Inprovide ~~addition~~proactive todata ~~the~~and ~~available~~voice ~~capacity~~network ~~under~~monitoring ~~our~~and ~~working~~help ~~capital~~desk ~~line~~services ~~of credit,~~is wea ~~believe~~direct weoutcome ~~have~~of our ~~access~~strategy to abecome ~~variety~~more ofrelevant ~~capital~~to ~~sources~~the ~~such~~needs ~~as private placements~~ of ~~subordinated~~CIO’s ~~debt,~~ and ~~public~~reduce orour ~~private~~dependency ~~sales~~on ~~of equity~~systems sales to ~~finance~~drive ~~investments~~implementation ~~beyond~~and ~~our~~PSO ~~current needs~~revenues.

~~Results~~Cabling revenues increased 6% in the first fiscal quarter of ~~Operations~~2011.

InGross ~~the third quarter of fiscal 2010 revenues were $20~~Margins.~~9 million~~ compared to $17.2 million in the third quarter 2009. Our net income in the third quarter of fiscal 2010 was $513,000, compared to a net loss of $8.6 million in the same quarter a year ago. Apart from the impairment charges on goodwill and other assets of $14.0 million recorded in the third quarter of fiscal 2009, these results primarily reflect increased services and equipment revenues partially offset by higher selling, general and administrative costs. In the first nine months of the year, revenues were $61.1 million compared to $53.5 million for the first nine months of fiscal 2009. Our net income for the first nine months of fiscal 2010 was $1.4 million compared to a net loss of $8.4 million in the first nine months of fiscal 2009. The year-to-date results, excluding the impairment charge recorded in 2009, primarily reflect our strong first and third quarter results in all of our major revenue and gross profit categories. The narrative below provides further explanation of these results.

~~Systems~~The ~~Sales.~~table below presents the gross margins earned on our primary revenue streams:

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


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

~~Services~~Gross ~~Revenues~~margins on systems sales in the first quarter are above our target of 23% to 25% for systems revenues. While we experience a wide range of gross margins on individual systems sales, our consistent overall performance above our expected targets in this area is due to disciplined pricing practices and pricing support received from our manufacturers in the form of project-specific discounts and incentive rebates which are recorded as reductions to cost of goods sold. These discounts and incentives are material to our gross margins. Despite our success in maintaining our equipment margins within or exceeding our targets, we continue to believe we will face increasing pressure on these margins as our market evolves.

~~Services~~Our service margins declined in the first quarter due to uneven distribution of implementation revenues ~~consist~~during the quarter, the short-term impact of the ~~following:~~start-up of our network operations center, and general inefficiencies from integrating newly acquired operations into our existing systems and processes. Revenues earned from implementation of new systems was weak in the second half of the quarter resulting in lower margins due to the fixed cost structure of this portion of our business. We took steps to address the inefficiencies in our service delivery model in the first quarter as we continued to integrate the operations of the fiscal 2010 acquisitions. These steps included some reductions in technical force where there was overlap with legacy operations. We expect steady improvement of these issues throughout fiscal 2011 as integration efforts continue.

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

The final components of our gross margins are the margins earned on other revenues and our corporate cost of goods sold. We earn the majority of other revenues from the sale of Avaya maintenance contracts on which we earn either a commission or gross profit. We have no continuing service obligation associated with these revenues and gross profits. This is an unpredictable revenue stream that depends on the expiration dates of existing contracts, installation dates of new systems, customer type as defined by Avaya, and number of years that customers contract for services. These revenues increased by $62,000 or 103% in the first quarter of fiscal 2011 compared to the prior year. Despite this increase, these results were lower than our expectation as many customers have delayed decisions regaring long-term Avaya service contracts until there is more clarity regarding Avaya’s product and service strategies. These revenues vary in both sales volume and gross margins earned. Corporate cost of goods sold represents our material logistics and purchasing functions that support all of our revenue segments.

1716

~~Maintenance~~Operating ~~and repair revenues increased 12% in the third quarter and year-to-date periods~~Expenses. ~~This year-to-date~~ performance reflects the continued success of our wholesale services programs and repair revenues as well as the addition to our base of maintenance customers associated with the purchase of Lorica in the third quarter of fiscal 2010. We continue to aggressively market our national service footprint and multi-product line technical capabilities to existing and potential wholesale service partners such as network service providers, and large voice and data integrators. We also continue to market our service capabilities to end-users. We expect growth in these programs to positively impact our maintenance and repair revenues for the foreseeable future.

~~Implementation~~Our ~~revenues~~total ~~increased~~operating ~~28%~~expenses in the ~~third~~first ~~fiscal~~ quarter ~~reflecting~~ anwere ~~increase~~$6.1 million inor ~~revenues~~22.4% ~~from~~of ~~our~~revenues ~~Professional Services Organization~~compared ~~(“PSO”)~~to ~~and~~$5.3 million ~~relatively~~or ~~flat~~23.1% ~~installation~~of revenues~~. For~~ in the ~~year-to-date~~first ~~period, Implementation revenues~~quarter ~~increased~~of ~~36%~~fiscal ~~reflecting~~2010. anThe ~~increase~~modest improvement in ~~revenues~~operating ~~from~~expenses ~~PSO. We~~as ~~attribute~~a ~~this~~percent toof ~~increasing~~revenues ~~demand~~was ~~for more~~realized ~~complex~~despite ~~communications~~$324,000 ~~systems~~in ~~requiring significant fee~~non-~~generating design~~recurring ~~and~~expenses ~~engineering~~for ~~services. In~~professional ~~the~~fees ~~near term, Implementation~~and ~~revenues~~other ~~will~~costs ~~continue~~related to bethe ~~closely~~PAETEC ~~aligned~~merger ~~with~~and ~~the~~other corporate ~~sale~~development ofactivities. ~~new~~These ~~systems. From~~expenses aincluded ~~long~~professional ~~term perspective,~~fees ~~however,~~such as ~~customers~~investment ~~displace~~banking ~~conventional communications platforms~~ and legal ~~adopt~~fees, ~~more~~tax ~~complex systems~~services, weand ~~anticipate~~travel ~~growth~~costs indirectly ~~this~~associated ~~area~~with ofintegration ~~our business through the fee-based utilization of these highly skilled technical resources~~activities.

~~Cabling~~Interest ~~revenues~~Expense ~~increased 8%~~ and ~~9%,~~Other ~~respectively in the third fiscal quarter and year-to-date periods~~Income. ~~These~~ ~~increases are primarily from a new wholesale service program added late in fiscal 2009.~~

~~Gross~~Net ~~Margins~~interest and other income was $94,000 in the first quarter of fiscal 2011 compared to $15,000 in net other income in the first quarter of fiscal 2010.

~~The~~Tax ~~table below presents the gross margins earned on our primary~~Provision. ~~revenue streams:~~

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

~~Gross~~ITEM ~~margins on systems sales in the third quarter and the year-to-date periods are above our target of 23% to 25% for systems revenues~~4. ~~Our~~ ~~consistent~~CONTROLS ~~performance above~~AND our expected targets in this area is due to disciplined pricing practices and pricing support received from our manufacturers in the form of project-specific discounts and incentive rebates which are recorded as reductions to cost of goods sold. These discounts and incentives are material to our gross margins.PROCEDURES

~~Gross~~Evaluation ~~margins~~of ~~earned~~Disclosure onControls ~~Services~~and ~~revenues~~Procedures. ~~primarily~~Based ~~reflect~~on an ~~increase in~~evaluation ~~recurring~~conducted ~~service~~as ~~revenues~~of ~~combined~~January 31, ~~with~~2011 ~~improved~~by ~~cost~~our ~~controls~~management, ~~the~~including ~~use~~our ~~of third~~Chief ~~party~~Executive ~~Quality~~Officer ~~Service~~(“CEO”) ~~Partners~~and our Chief Financial Officer (“CFO”), our CEO and ~~improved~~CFO ~~utilization~~have ofconcluded that our ~~professional~~ ~~services~~disclosure ~~personnel~~controls ~~for~~and ~~consulting~~procedures (as defined in Rules 13a-15(e) and ~~fee~~15d-~~based~~15(e) ~~engagements. These~~under ~~items~~the ~~contributed~~Securities Exchange Act of 1934, as amended (the “Exchange Act”) are effective to ~~gross~~reasonably ~~Services~~ensure that information required to be disclosed in ~~margins~~reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our ~~target~~management, ~~range~~including ofthe ~~30-35%~~CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

~~The~~Changes ~~final~~in ~~component~~Internal ofControls. ~~our~~There ~~gross~~were ~~margins~~no ischanges ~~the~~in ~~margins earned on other revenues and~~ our ~~corporate~~internal ~~cost~~controls ofduring ~~goods sold. We earn~~ the ~~majority of other revenues from the sale of Avaya~~last ~~maintenance~~fiscal ~~contracts~~quarter onthat ~~which we earn either a commission or gross profit. We~~ have nomaterially ~~continuing service obligation associated with these revenues and gross profits. This is an unpredictable revenue stream that depends on the expiration dates of existing contracts~~affected, ~~installation~~or ~~dates~~are ~~of new~~reasonably ~~systems,~~likely ~~customer~~to ~~type~~materially ~~as defined by Avaya~~affect, ~~and number of years that~~these ~~customers~~controls ~~contract~~over ~~for~~financial ~~services~~reporting. ~~Other~~ revenues may also include sales and cost of goods sold on equipment or services sold outside our normal provisioning processes. These revenues vary in both sales volume and gross margins earned. Corporate cost of goods sold represents our material logistics and purchasing functions that support all of our revenue segments.

18PART II. OTHER INFORMATION

~~Table~~ITEM ~~of Contents~~1. LEGAL PROCEEDINGS.

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

~~Our total operating expenses in the third quarter were $5.4 million or~~17 25.8% of revenues compared to$4.7 million or 27.5% of revenues in the third quarter of fiscal 2009 excluding $14.0 million in impairment charges recorded in the third quarter of fiscal 2009. Our operating expenses were 24.8% of revenues in the first three quarters of fiscal 2010 compared to 26.0% last year, excluding the impairment charges. As discussed in the overview above, we have made strategic choices to focus on aggressively expanding our managed services business and on expanding through acquisitions. We have increased our expenditures to support these strategies. These expenditures coupled with slower than expected growth in our systems sales and increased investments in our Information Technology group to increase efficiencies and improve customer satisfaction has resulted in our operating expenses as a percentage of revenues to continue to exceed our targets. We consider it tactically appropriate, given our strong cash flows, to support operating expenses above our targets in the near term to capitalize on these opportunities to expand our revenues and increase our net profit margins.

InterestTable Expenseof and Other Income.Contents

~~Net~~ITEM ~~interest and other income was $16,000 in the third quarter of fiscal 2010 compared to $22,000 in net other expense in the third quarter of fiscal 2009~~1A. ~~Net~~ ~~interest~~RISK ~~and other income was $43,000 for the nine-month period ended July 31, 2010 compared to $65,000 in net other expense in the same period last year~~FACTORS. ~~This reflects both reduced debt levels and lower interest rates.~~

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

The ~~tax~~proposed ~~provision~~merger ~~reflects~~with ~~the~~PAETEC ~~effective~~is ~~Federal~~subject ~~tax~~to ~~rate~~satisfaction ~~plus~~or ~~the composite~~waiver ~~state~~of ~~income~~certain ~~tax rates adjusted for states that require minimum tax~~customary ~~payments~~conditions, ~~even~~including ifthe ~~tax~~approval ~~losses~~of ~~are~~the ~~incurred. Generally,~~merger weby ~~expect~~ our ~~tax provision rate to be approximately 40%~~stockholders.

~~ITEM~~Until 4all conditions to the merger agreement are satisfied, we cannot be certain that the proposed merger will close. ~~CONTROLS~~We ~~AND~~will ~~PROCEDURES~~incur significant transaction costs relating to the proposed merger, whether or not the merger is completed. Completion of the merger is subject to the satisfaction or waiver of certain customary conditions set forth in the merger agreement, including without limitation the approval of the merger agreement by our stockholders, receipt of any required antitrust approvals (or termination or expiration of applicable waiting periods), the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the merger agreement. The transaction is expected to close in the third quarter of fiscal 2011. However, no assurances can be given that the transaction contemplated by the merger agreement will be consummated or, if not consummated, that we will enter into a comparable or superior transaction with another party.

~~Evaluation~~Our offuture ~~Disclosure~~business ~~Controls~~ and ~~Procedures. Based~~financial ~~on an~~position ~~evaluation~~may conducted as of July 31, 2010 by our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are effective to reasonably ensure that information required to be ~~disclosed~~adversely inaffected ~~reports~~if ~~that we file or submit under~~ the ~~Exchange~~merger ~~Act,~~ is ~~recorded, processed, summarized and~~not reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosurecompleted.

~~Changes~~If inthe ~~Internal~~merger ~~Controls. There~~agreement ~~were~~with noPAETEC ~~changes~~is interminated ~~our~~and ~~internal~~the merger is not consummated, we will have ~~controls~~incurred ~~during~~substantial expenses without realizing the ~~last~~expected ~~fiscal~~benefits ~~quarter~~of ~~that~~the ~~have~~merger. ~~materially~~In ~~affected~~addition, or ~~are~~we ~~reasonably~~may ~~likely~~also tobe ~~materially~~subject ~~affect,~~to ~~these~~additional ~~controls~~risks ~~over~~including, ~~financial~~without limitation: ~~reporting.~~

~~PART II~~• upon termination of the merger agreement under specified circumstances, we may be required to pay PAETEC a termination fee of $1. ~~OTHER INFORMATION~~92 million; • substantial costs related to the merger, such as legal, accounting and financial advisory fees, must be paid regardless of whether the merger is completed; and • potential disruption to the current plan, operations, businesses and distraction of our workforce and management team.

~~ITEM~~Litigation 1.related ~~LEGAL~~to ~~PROCEEDINGS~~the Merger could adversely affect our financial results.

~~None~~Several putative stockholder class action complaints were filed against us, the members of our board of directors, and PAETEC in connection with the proposed merger. The cost of defending such lawsuits and paying any judgment or settlement in connection therewith could have an adverse impact on our financial results in the event these amounts exceed our insurance limits or are not covered by those limits.

~~ITEM~~The ~~1A.~~proposed ~~RISK~~merger ~~FACTORS~~creates unique risks in the time leading up to closing, and there are also risks of completing the conditions to closing.

The ~~information~~merger ~~presented~~agreement ~~below~~generally isrequires anus ~~update~~ to operate our business in the ~~“Risk~~ordinary ~~Factors”~~course pending ~~included~~consummation inof the ~~Company~~proposed merger, but restricts us, without PAETEC’s ~~Annual~~consent, ~~Report~~from ontaking certain ~~Form 10-K~~specified ~~for~~actions until the ~~fiscal~~merger ~~year ended~~is ~~October 31~~complete or the merger agreement is terminated. Additionally, ~~2009~~matters ~~and~~relating ~~should~~to bethe ~~read~~merger inmay ~~conjunction~~require ~~therewith. Except~~substantial ascommitments ~~set~~of ~~forth~~time ~~below~~and resources, ~~the~~which ~~Risk~~could ~~Factors~~otherwise have been devoted to other beneficial opportunities. There may ~~included~~also be potential difficulties in employee retention pending consummation of the ~~Company’s~~merger. ~~Form 10-K~~Any ~~for~~loss of ~~its~~business ~~2009~~opportunities ~~fiscal~~or ~~year~~key personnel could have ~~not~~an adverse impact on future business, and, as ~~materially~~a ~~changed~~result, result in lower future sales and earnings.

1918

~~Avaya’s~~If ~~recently~~we ~~implemented~~are ~~requirements~~unable ~~regarding~~to ~~minimum level~~complete ~~service~~our ~~agreements~~proposed ~~and~~merger ~~hardware~~our ~~and~~stock ~~software~~price ~~upgrade requirements~~ could ~~have~~ ~~a material, negative impact on our services gross margins~~suffer.

Avaya implemented new policies, effective July 1, 2010, requiring all customers to contract with Avaya for minimum service levels to access Tier IV support, and to maintain their software at no more than two trailing major version releases than the current version. The ~~impact~~termination of ~~these changes to our business will be negative, but~~ the ~~materiality~~merger ofagreement ~~the~~would ~~impact~~likely isresult ~~uncertain at~~in ~~this time. These impacts could include~~ a ~~significant~~ decline in our ~~services~~stock ~~gross~~price ~~margins~~to ~~if we are required~~the toextent ~~purchase~~that ~~Avaya service contracts on behalf of all of~~ our ~~customers. Conversely,~~stock ifprice wereflects ~~chose~~a tomarket ~~forego~~assumption ~~such purchases~~that ~~on behalf of our customers,~~ we ~~risk~~will ~~reduced~~complete ~~customer satisfaction due to~~ the ~~lack~~merger ofand ~~access to Avaya’s Tier IV support. We might also experience~~our ~~reduced~~stockholders ~~sales~~will ofreceive ~~new Avaya systems if customers choose to abandon~~ the ~~product line~~merger ~~due~~consideration tospecified ~~increased costs for the mandatory Avaya maintenance contract. Avaya has provided some transition relief~~ in ~~the~~ ~~form of blanket contracts and other exceptions to its stated policy, but it is too early to determine with confidence~~ the ~~long-term~~merger ~~impact of these changes on our business~~agreement. ~~At this time, no~~ ~~assurance can be given that these policy changes will not have a material, adverse impact on our operating results beginning as soon as fiscal 2011.~~

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

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

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

20ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

~~Table of Contents~~None.

~~The~~ITEM ~~acquisition~~3. ~~and~~DEFAULTS ~~integration~~UPON ofSENIOR ~~businesses by the Company may not produce the desired financial and/or operating results~~SECURITIES.

~~We have recently completed the acquisition of the operating assets of Lorica Solutions and the stock of Pyramid Communication Services, Inc~~None. ~~These developments are a part of our stated~~ strategy to take advantage of the current disruption in our market by acquiring assets that increase our market share and establish a presence in the advanced communications applications market segment. Integrating new operating assets into an existing organization is a complex business proposition. Expected synergies and growth often do not materialize as planned. We used existing cash balances to fund the acquisitions and their integration costs. Furthermore, we will devote significant time and effort to improve the probability of success for these investments. However, no assurance can be given that these acquisitions will meet our expectations for revenues and operating results, or that our capital could have been used more efficiently to improve our financial condition or operating results.

ITEM 25. ~~UNREGISTERED~~OTHER ~~SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~INFORMATION.

None.

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES.~~19

None.Table of Contents

ITEM 56. ~~OTHER INFORMATION~~EXHIBITS.

~~None.~~Exhibits (filed herewith):

ITEM 6. EXHIBITS.


SEC Exhibit No.		Description

	2.1	Agreement and Plan of Merger among PAETEC Holding Corp., Hera Corporation and XETA Technologies, Inc. dated Feburary 8, 2011 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the U. S. Securities and Exchange Commission on February 10, 2011).

	3.1	Amendment to Section 2.1 of the Company’s Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 10, 2011)

	31.1	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.

~~Exhibits~~20 ~~(filed herewith):~~

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

21SIGNATURES

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

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.
	XETA Technologies, Inc. (Registrant)
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.
Dated: March 4, 2011	By:	/s/ Greg D. Forrest
		Greg D. Forrest
		Chief Executive Officer
Dated: March 4, 2011	By:	/s/ Robert B. Wagner
		Robert B. Wagner
		Chief Financial Officer

* The schedules to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A list of the omitted schedules appears at the end of the Exhibit. The Registrant hereby agrees to furnish a copy of any omitted schedules to the Commission upon request.21

22Table of Contents

~~Table of~~EXHIBIT ~~Contents~~INDEX

SIGNATURES


SEC Exhibit No.		Description

	2.1	Agreement and Plan of Merger among PAETEC Holding Corp., Hera Corporation and XETA Technologies, Inc. dated Feburary 8, 2011 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the U. S. Securities and Exchange Commission on February 10, 2011).

	3.1	Amendment to Section 2.1 of the Company’s Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 10, 2011)

	31.1	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.

~~Pursuant~~22 ~~to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

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

Table of Contents

EXHIBIT INDEX

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

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