10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended October 31, 2010

OR

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

Commission file number 0-16231

XETA Technologies, Inc.

(Exact name of registrant as specified in its charter)

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

918-664-8200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Not applicable þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the Nasdaq closing price on April 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $32,386,758.

The number of shares outstanding of the registrant’s Common Stock as of December 17, 2010 was 19,730,236.

TABLE OF CONTENTS

PART I
	ITEM 1. BUSINESS
	ITEM 1A. RISK FACTORS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 9B. OTHER INFORMATION
PART III
	ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
	ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Exhibit 2.1
Exhibit 10.1
Exhibit 10.9
Exhibit 10.10
Exhibit 21
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held April 5, 2011 are incorporated by reference into Part III, Items 10 through 14 hereof.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements relating to future events and our future performance and results. Many of these statements appear in the discussions under the headings “Business,” “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”, “plans,” “believes,” “intends,” “projects,” “estimates,” and similar words or expressions. Forward-looking statements are not guarantees of performance, but rather reflect our 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 us. These statements are subject to risks and uncertainties which are difficult to predict or which we are unable to control, including but not limited to such factors as the successful integration of recently acquired businesses and realization of anticipated synergies and growth opportunities from these transactions, the condition of the U.S. economy and its impact on capital spending trends in our markets, the financial condition of our suppliers and changes by them in their distribution strategies and support, the impact of Nortel’s bankruptcy proceedings on our pre-petition accounts receivable from Nortel and on the market for Nortel products, unpredictable revenue levels from quarter to quarter, inconsistent gross profit margins, continuing acceptance and success of the Mitel product and services offering, availability of credit to finance growth, intense competition and industry consolidation, dependence upon a few large wholesale customers in our Managed Services offering, the availability and retention of revenue professionals and certified technicians, and other risks and uncertainties specifically discussed under the heading “Risk Factors” under Part I of this 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.

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PART I

ITEM 1. BUSINESS

Development and Description of Business

XETA Technologies, Inc. (“XETA”, 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”).

In fiscal 2010, we implemented a strategy to use our unique market position as a national partner of Avaya and Nortel and our strong balance sheet to pursue acquisitive growth opportunities. As a result of our successful execution of this strategy, we completed three acquisitions in the second half of fiscal 2010 and absorbed the key employees and fixed assets of an additional strategic asset that was abandoned by its previous owner. These acquisitions all address our strategic initiative to advance our business from its historic roots in voice networks and services into the broader unified communications and data networking market, including consultative services. Our acquisition of the assets of Hotel Technologies Solutions, Inc., d/b/a Lorica Solutions (“Lorica”), a privately-held company headquartered in Buffalo, New York, in May, 2010 provided us with a high speed internet access product and service offering and an additional recurring revenue stream in the hospitality vertical market. It also provided us with a platform to resume development of a line of proprietary products to further expand our already strong brand in this market. The acquisition of Pyramid Communications Services, Inc. (“Pyramid”), a privately held company headquartered in Dallas, Texas and the acquisition of the operating assets of Data-Com Telecommunications, Inc. (“Data-Com”), a New Jersey based privately held company, provided us with additional geographic coverage, important new customer relationships, new streams of recurring revenues, and broadened our manufacturer relationships. Finally, we absorbed certain sales and technical employees and a small amount of strategic assets which were being divested by their owner. We have used these assets and personnel to form our new Network Operations Center (“NOC”) and related product offerings around data and voice network monitoring and help desk services. The terms of these purchase agreements are described in Note 16 of the Notes to Consolidated Financial Statements.

We market our products and services to a variety of companies such as enterprise-class multi-location, mid market and large companies located throughout the United States. We also market our solutions and services to several vertical markets such as hospitality, education, Federal government, and healthcare, including a line of proprietary call accounting systems to the hospitality industry.

We provide a wide variety of services to support our customers including professional services such as network architecture and engineering, contact center consulting, wireless solution architecture and information security consulting. We also offer white label solutions deployment, re-badging, traditional MAC services, and maintenance contracts. Beginning in late 2010, we began offering services such as proactive monitoring, remediation and help desk services through our new Network Operations Center (“NOC”).

We deliver our services through a nationwide network of Company-employed design engineers, service technicians and qualified third party service providers. Our service delivery is coordinated in our contact center, which operates 24-hours per day, 7-days-per-week and is located at our headquarters in Broken Arrow, Oklahoma and our NOC is located in Hazelwood, Missouri. Our national technical footprint and 24-hour services are well-suited to address the communication needs of large, multi-location, national, or super-regional customers.

Large enterprises often have a combination of manufacturer platforms in their communications equipment portfolios. As such our ability to sell and service the leading communication platforms is an important competitive advantage. Because of our extensive array of products and services, we enjoy multiple sales opportunities with these customers. These include new equipment installations, implementation of advanced applications, and various service relationships.

An important element of our sales strategy is to continually search for opportunities to expand business relationships with current customers. Our sales teams continually monitor and assess our customer’s communications needs, proposing appropriate technologies to address those needs, establishing or expanding the service relationship, and proposing equipment and service solutions to other divisions or subsidiaries.

Under our wholesale services offering, we collaborate with manufacturers, network service providers and systems integrators to provide services to their end-user customers. In many instances, we provide field resources to carry out on-site service activities. Under a full outsourcing arrangement we may provide a broader range of services. These services include call center support, help desk services, remote technical support, on-site labor and spare parts. Our wholesale services business initiative has succeeded because we provide excellent service to end-user customers, and are willing to create and execute flexible service programs and billing arrangements.

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We strive to align our Company’s sales, marketing, and services programs with those of our manufacturing partners. As the composition of the market evolves in response to Avaya’s acquisition of Nortel, our cogent and well crafted sales plan is of even greater importance. We have developed sales and service programs to assist customers in supporting their existing investments or migrating their portfolios to alternative technologies. Our sales teams will continue to search for market opportunities resulting from the consolidation of Avaya and Nortel. Uncertainties in the market may also result in acceleration in our acquisitions particularly in the Nortel partner community.

Commercial Systems Sales

We sell communications solutions to the commercial market, school districts, the Federal government, and to the healthcare market. These solutions are designed to maximize the effectiveness of our customers’ communications systems through the use of advanced technologies. By deploying advanced communications technologies and consolidating voice and data traffic on a common infrastructure our customers can reduce their total communications costs. In addition, through the use of integrated applications they can also improve employee productivity. With the adoption of IP telephony by most enterprise level customers, new, advanced applications such as Unified Communications systems and collaboration software are widely available. These advanced applications combine voice, voice mail, presence, instant messaging, and video applications and seamlessly integrates them on the desktop with other data applications such as MS Outlook™.

We sell these systems under dealer agreements with Avaya, Mitel, and Shortel. These manufacturers have significant installed bases in the communications equipment market and are migrating their customers from traditional telephony systems to server based platforms. To support our sales efforts we receive incentive payments from the manufacturers to offset certain product costs, training expenses, and specific sales and marketing expenses. We purchase Avaya products through major distributors and receive additional price incentives from these distributors. These incentive payments are material to our business. We purchase Mitel and Shortel systems directly from the manufacturer from whom we also earn certain discounts and incentive payments. We sell data networking products to the commercial market under non-exclusive dealer agreements with Avaya, Samsung, Juniper Systems, Cisco Systems Inc., and Hewlett-Packard Company. As a result of an acquisition in fiscal 2010, we became a distributor of Samsung Communications Systems, whose systems are sold primarily to small and mid-sized businesses. We support Samsung dealers with new systems and technical support.

Hospitality Products

Communications Systems. We sell communications systems to the hospitality industry through nationwide, non-exclusive dealer agreements with Avaya and Mitel. In addition to most of the features available on commercial systems, the systems sold to hospitality customers include hospitality-specific software, which integrates with nearly all aspects of the property’s operations. We offer a variety of related products such as voice mail systems, analog telephones, uninterruptible power supplies, announcement systems, and others, most of which also have hospitality-specific features. The majority of these additional products are sold in conjunction with the sale of new communications systems and, with the exception of voicemail systems, are purchased from regional and national suppliers.

Proprietary Products. We sell a line of proprietary products to the hospitality industry. The Lorica Room Center (“LRC”) is a converged IP-based managed network which was designed specifically for the lodging industry. We also provide high speed internet access, network monitoring services, and guest help desk services to the hospitality industry. We sell call accounting products under the Virtual XL^Ò and Virtual XL.2™ product names. The “VXL” series is a PC-based system designed to operate on a property’s local or wide area network. If that network is connected to the Internet, the VXL can also be accessed via an Internet connection. The original VXL is a rack-mounted, server-style system and is marketed under the name Virtual XL.2™ (“VXL”). The VXL systems are our latest in a series of call accounting products we have successfully marketed since the Company’s inception. Many of those earlier products remain in operation at customer locations and are under maintenance contracts with us or generate time-and-materials (“T&M”) revenues. These revenues and the related gross profits are material to our business.

Sales of communications systems and products to the hospitality industry represented 5%, 13%, and 10% of total revenues in fiscal 2010, 2009 and 2008, respectively. Marriott International, Host Marriott, and other Marriott-affiliated companies (“Marriott”) represent a single customer relationship for our Company and a major contributor to our hospitality revenues. Revenues earned from sales of hospitality systems sold to Marriott represented 30%, 20%, and 21% of our sales of hospitality systems in fiscal 2010, 2009, and 2008, respectively.

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Services

Services revenue is our largest revenue stream. Because a majority of these revenues are recurring and produce generally higher margins, this portion of our business is of vital importance to our operating results. Our services offerings include nation-wide customer service, project management, professional services, installation, consulting, white label managed services, managed network services, help desk services and structured cabling implementation. The geographic reach and technical breadth of our services organization are key differentiators between us and our competitors.

Our services organization includes our National Service Center (“NSC”) located at our headquarters in Broken Arrow, Oklahoma. The NSC supports our commercial and hospitality customers who have purchased maintenance contracts on their systems, our wholesale services offerings, as well as other customers who engage us on hourly time-and-material or per occurrence basis. We employ a network of highly trained technicians who are strategically located in major metropolitan areas and can be dispatched to customer locations or to install new systems. We also employ design and implementation engineers, referred to as our Professional Services Organization (“PSO”), to design voice, data, and converged solutions to meet specific customer requirements. Much of the work done by the PSO is pre-sales design and is often not recovered in revenues. While this activity represents a significant investment, we believe that by hiring the most qualified personnel possible to provide these services we create a competitive advantage.

In late 2010, we opened a NOC in Hazelwood, Missouri to provide a variety of new services including proactive and remedial network monitoring and help desk services. The NSC also has redundant NOC facilities.

For Avaya, Nortel, and Mitel communications systems sold to hospitality customers, we sell XETA maintenance contracts. For our proprietary products, we offer post-warranty service contracts under one-year and multi-year service contracts. The revenues earned from the sale of our maintenance contracts are an important part of our business model as they provide a predictable stream of profitable recurring revenue. We earn a significant portion of our repair and maintenance services revenues from hospitality customers who maintain service contracts on their systems.

To our non-hospitality end-users of Nortel equipment, we sell XETA maintenance contracts. We aggressively market our services capabilities to existing and potential wholesale customers. Our largest wholesale customers are systems integrators and network service providers who have outsourcing contracts with large enterprise and government entities and use us to augment their service capabilities.

For Avaya products sold to non-hospitality customers, we sell Avaya’s post-warranty maintenance contracts, for which we earn a commission. These commissions are recorded as “Other Revenues” in our financial statements and are material to our gross profits and net income.

For our distributed products, we pass on the manufacturer’s limited warranty, which is generally one year in length. Labor costs associated with fulfilling the warranty requirements are generally borne by us. For our proprietary products sold to the hospitality industry, we provide a limited one-year parts and labor warranty.

Marketing

We market our products and services primarily through our direct sales force to a wide variety of customers including large national companies, mid-size companies, hospitality industry, education market, Federal government, and the healthcare industry. Because the technology we sell is typically an application running on an existing data network, the focus is toward data networking decision makers, many of whom are at the executive level of their organization. These executives may have long-standing relationships with their data products and services dealers.

In addition to marketing directly to end-users, we also have a significant sales and marketing effort dedicated to our wholesale services. This area of our business has experienced significant growth in recent years and is a key contributor to our increase in services revenues. Under these offerings we partner with manufacturers, network services companies, and systems integrators to provide a variety of technical and outsourced services to our partners’ end-user customers. We make considerable investments in sales and technical resources to create relationships with current and potential wholesale partners. Once those relationships are established, we jointly market our capabilities with our partners to end-users who have requested bids for new services or are renewing existing contracts.

Another important aspect of our marketing effort centers on our relationships with our manufacturers. Our most important manufacturer relationship is with Avaya, which also includes the legacy Nortel product line. Avaya is rapidly deploying changes to its go to market and channel strategies to more effectively compete as a software and unified communications centric manufacturer. Some of these changes are creating opportunities for us to introduce new products to customers in the form of system upgrades or replacements, reduce our costs associated with complex delivery of technical support and increase our revenues earned from the sale of Avaya maintenance contracts. We are adjusting our marketing strategies to maximize our benefit from Avaya’s changes while also working to minimize the inherent risks associated with such strategy shifts (those risks are discussed in ITEM 1.A “Risk Factors” below).

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As a national dealer, we have certain technical and geographical capabilities that help differentiate us in the marketplace and we aggressively market these capabilities to the manufacturers we represent. The manufacturers utilize us in a variety of ways, from fulfilling certain customer orders to handling entire customer relationships. We have carefully positioned ourselves as a leading dealer by achieving the highest level of certification with each manufacturer, building our in-house engineering capabilities, providing nationwide implementation services, and through access to our 24-hour, 7 days-per-week service center.

Our marketing efforts to the hospitality industry rely heavily on our experience and reputation in that industry. Over the course of serving this market for more than 29 years, we have built strong long-term relationships with a wide range of key decision makers responsible for the purchase of hotel communications technology. We have relationships with nearly all hotel chains and major hospitality property management companies. We target our hospitality marketing efforts at strengthening and deepening these relationships.

Competition

Commercial. The market for Commercial communications systems, applications and services has evolved due to the convergence of voice and data networks and the speed at which new applications are being introduced. Our market has always been highly competitive, and all of the manufacturers we represent have extensive dealer networks which include larger organizations with significantly more marketing and financial resources than us. Avaya, in particular has an extensive dealer organization, including the Regional Bell Operating Companies, nationwide dealers similar to us, and smaller regional dealers. In addition, we also face competition from dealers of other communications’ technology manufacturers such as Cisco Systems, Inc. and Alcatel-Lucent. With the addition of data products dealers, particularly Cisco dealers, competition has increased. Many of our new competitors have long-standing relationships with the Information Technology (“IT”) decision makers of our customers, increasing the ferocity of the competition.

Hospitality. We face similar competitive pressures to those discussed above in our hospitality business. However, since the hospitality market is a small niche market, we believe our most effective advantages are the performance and reliability of our proprietary call accounting systems and our high level of service commitment to this niche market.

We assemble the Virtual XL^Ò and Virtual XL.2™ systems, our proprietary call accounting systems, which are sold exclusively to the hospitality industry. The LRC system is assembled by a third party manufacturer. These systems are assembled from an inventory of components, parts and sub-assemblies obtained from various suppliers. These components are purchased from a variety of regional and national distributors at prices that fluctuate based on demand and volumes purchased. Some components, although widely distributed, are manufactured by a single, usually foreign, source and are therefore subject to shortages and price fluctuations if manufacturing is interrupted. We maintain adequate inventories of components to mitigate short-term shortages and believe the ultimate risk of long-term shortages is minimal.

All of the other products we sell are purchased as finished goods from the manufacturers’ distributors.

Employees

We employed 467 and 372 employees at December 1, 2010 and 2009, respectively.

Copyrights, Patents and Trademarks

We own registered United States trademarks on the following names for use in the marketing of our hospitality services and systems: “XETA,” “XPERT,” “XL,” “Virtual XL,” and “Room Center”. All of these trademarks are on the principal register of the United States Patent and Trademark Office.

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ITEM 1A. RISK FACTORS

Our business and prospects are subject to risks and uncertainties. The following items are representative of the risks, uncertainties and assumptions that could affect our business, future performance and the outcome of our forward-looking statements.

Our largest manufacturing partner is implementing a broad range of strategic initiatives some of which could have a material, negative impact on our gross margins.

Avaya has made or announced several changes in their marketing and dealer channel strategy including changes in pricing, mandatory contractual agreements to engage with Avaya technical support and certain limitations on dealers’ service offerings. These changes are potentially disruptive to our business as they require adjustments to our marketing strategies as well as to day-to-day operating interactions with Avaya. Additionally, there is inherent risk to customer relationships when manufacturers adjust their product and service strategies over a rapid timeline. We have already experienced some erosion in our service margins as a result of the changes implemented in 2010 and one of our significant customers has standardized on another of our manufacturer’s platform in reaction to changes implemented by Avaya within the past year. No assurance can be given that the various strategic shifts at Avaya will not cause a material, negative impact to our results of operations.

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

During fiscal 2010, we completed the acquisition of three businesses in separate transactions. These acquisitions 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. Expected synergies and growth often do not materialize as planned. Furthermore, we will continue to 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 not have been used more efficiently to improve our financial condition or operating results.

Our business is affected by capital spending. Economic conditions may continue to inhibit capital spending over the next twelve months and beyond.

The U.S. economy is struggling to emerge from a severe recessionary contraction creating continued uncertainty in the outlook for corporate capital spending. Because our business relies on capital spending for technology and equipment, we may continue to experience lumpy demand for our products. This could have a material, negative impact on our operating results and financial condition.

We may experience higher than normal bad debt losses as a result of economic conditions and may experience lower revenues as a result of limiting our extension of credit to customers.

The economic downturn and tight credit markets have resulted in some of our customers experiencing difficulty in paying their obligations to us, particularly obligations related to the purchase of new systems. While we monitor credit reports and payment histories carefully, we cannot eliminate all of the risks associated with the extension of credit. As a result, we may experience higher rates of bad debt in the near future and we may also experience lower revenues as a result of tightening our credit standards.

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Our revenue for a particular period is difficult to predict, and a shortfall in revenue can harm our operating results.

Our systems sales, implementation, cabling, and other revenues for a particular quarter are difficult to predict. Our total revenues may decline or grow at a slower rate than in past periods. We have experienced periods during which shipments have exceeded net bookings, or manufacturing issues have delayed shipments, resulting in erratic revenues. The timing of orders, primarily in our systems sales, can also impact our quarter to quarter business and operating results. As a result, our operating results could vary materially from quarter to quarter based on the receipt of orders, and the ultimate recognition of revenue. We set our operating expenses based primarily on forecasted revenues. An unexpected shortfall in revenues could lead to lower than expected operating results if we are unable to quickly reduce these fixed expenses in response to short-term business changes. Any of these factors could have a material adverse impact on our operations and financial results.

The value of our product and services offerings to the hospitality market is declining and our repair and maintenance revenues associated with this line of business are under significant pressure.

Increasing use of cell phones by guests has caused a rapid decline in hotels’ revenues and gross profits earned from long distance and other telephone-related fees. This development has severely reduced the importance of PBX and call accounting systems in hotels. Additionally, many of the new voice applications have limited value in the hospitality market. As a result, there is not a compelling financial reason or guest-driven need to replace existing equipment. The primary uses of guest room phones are to access hotel amenities such as the front desk or room service or to call other guests. Additionally, guest room phones are necessary to satisfy laws mandating access to 911 services in all guest rooms. Manufacturers who enjoy a significant share of the installed base of systems in the hospitality market are in competition with startup firms to develop low cost, shared, network dial tone that will meet the needs of hotel properties at prices that will produce a sufficient return on their investment. While we are carefully monitoring these developments, there is no assurance that hotel’s spending on PBX and call accounting systems and associated maintenance services will not drop dramatically resulting in a material, negative impact on our operating results.

Success in our overall strategy, a key component of which is to focus on the marketing of advanced communications products and applications and related services, may be difficult or even prevented by a variety of factors.

Expansion of our net profit margins and increasing our shareholders’ return on investment over the long term is highly dependent upon our ability to become a leader in the sale, implementation, and ongoing maintenance of advanced communications products and applications. Because of their sophistication and complex integration with both network and desktop software applications, including Microsoft Office products such as Outlook, these products are expected to earn higher margins than our current products. To succeed in these dynamic markets, we must continue to: train our sales employees on the capabilities and technical specifications of these new technologies; train our services technicians to support these products and applications; develop relationships with new types of qualified service providers to supplement our internal capabilities; and develop new relationships with different disciplines, and at higher management levels, within our customers’ organizations.

We cannot predict whether: (i) the demand for advanced communications products, applications, and services, including IP telephony systems and UC, will grow as fast as anticipated; (ii) other new technologies may cause the market to evolve in a manner different than we expect; or (iii) technologies developed by manufacturers that we do not represent may become more accepted as the industry standard.

Finally, we cannot predict the impact of economic conditions on the adoption of these technologies. We believe that most customers will likely limit their capital investments to those with anticipated paybacks of one year or less until it is clearer that an economic recovery is underway and competitive pressures begin to drive technology decision-making again. While UC and other collaboration-oriented voice applications are predicted to enhance user productivity and improve the security of certain intra-company communications, the return rate on these investments is yet unproven, therefore customers may choose to delay investment.

We may experience severe declines in our services revenues from the loss of a major wholesale services customer.

Our wholesale services revenues are generated from a few large customers who contract with us to provide a variety of services for specific end-user customers. Typically, the end-user customer is a large corporation as well. Our experience to date in these arrangements indicates that we may experience severe reductions in service revenues in the event that either the end-user or our customer selects a different service provider or changes their operating strategy regarding the delivery of these services. The loss of one of our wholesale managed service customers could have a sudden, material, adverse effect on our operating results.

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

Nortel filed a voluntary petition for Chapter 11 bankruptcy protection on January 14, 2009. On July 12, 2010, Nortel filed its plan of reorganization which was essentially a plan of liquidation. 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, 2010 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.

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We face intense competition fueled by rapid changes in the technologies and markets in which we operate.

The market for our products and services is highly competitive and subject to rapidly changing technologies. As the industry continues to evolve and new technologies and products are introduced, new participants enter the market and existing competitors search for ways to strengthen their positions and expand their offerings. There is a developing trend toward consolidation, which could result in the creation of stronger competitors better able to compete as a sole-source vendor for customers. While we believe that through our transformation and expansion during the last few years, we are well positioned to compete effectively in the marketplace; our failure to maintain or enhance this position could adversely affect our business and results of operations.

The success of our business depends on our ability to recruit and retain highly skilled personnel.

Our ability to attract, train, motivate and retain highly skilled and qualified technical and sales personnel is critical to our success. Competition for such employees in the rapidly changing communications industry is fierce. As we have transformed our company into an integrator of advanced communications solutions we have invested heavily in the hiring and training of personnel to sell and service our portfolio of products and services. If we are unable to retain our skilled employees or to hire additional qualified personnel when needed, it could adversely impact our ability to implement our strategies.

The technology we sell is highly complex and changes rapidly, increasing our reliance upon the manufacturers for technical assistance and increasing the risk that our inventories on hand will become obsolete.

The communications equipment we sell is highly complex and requires significant technical resources to design, install, and maintain. This complexity may require us to rely heavily upon the manufacturers’ technical staff to support the installation and maintenance of communications systems. This reliance may result in lower services revenue or lower profit margins earned on our services revenue. In addition to their complexity, the systems are evolving rapidly as product enhancements are introduced by the manufacturers. These rapid changes present risks that our inventory on hand will become obsolete, resulting in the need to reduce sales margins to sell the equipment or in direct write-offs in the value of the equipment. Any of these results would be detrimental to our profitability.

The loss of our highest level dealer certifications with any of our manufacturers could negatively impact our ability to differentiate our products and services in the market and could negatively impact our operating results.

We hold the highest level of dealer certifications with Avaya and Mitel. These certifications are based on technical and sales capabilities and purchasing volumes and are reviewed annually. We emphasize the fact that we are one of the few providers in our market to have the highest certification level with each manufacturer and we believe that this is a significant differentiator with some customers who have two or more of the manufacturers’ products in their installed base. Additionally, as a result of these certifications we receive enhanced manufacturer incentive payments which are material to our operating results. While we expect to maintain the technical capabilities, sales skill sets, and purchasing volumes to secure our certifications, a downgrade could have a material impact on our reputation in the market and negatively impact our operating results.

The introduction of new products could result in reduced revenues, reduced gross margins, reduced customer satisfaction, and longer collection periods.

We sell a variety of highly complex products that incorporate leading-edge hardware and software technology. Early versions of these products, which we are selling currently, can contain software defects or “bugs” that can cause the products to not function as intended. We will be dependent upon our suppliers of these technologies to fix these problems. The inability of the manufacturer to quickly correct these problems could result in damage to our reputation, reduced revenues, reduced customer satisfaction, delays in payments from customers for products purchased, and potential liabilities.

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A significant portion of our expected growth in services revenues is dependent upon our relationship with a few wholesale customers.

Much of the growth in our services revenue is coming from a few wholesale service customers using us as a subcontractor to service many of their high profile end-user customers. We believe our relationship with these companies is strong and our performance ratings have been excellent. However, our experience is that end-users’ decisions to maintain their service agreements with our wholesale service customers depends on factors which are beyond our control. Therefore we can provide no assurance that we will not experience sudden declines in our maintenance and repair services revenues due to the loss of large contracts by our wholesale customers.

Hitachi’s decision to cease manufacturing communications systems for the hospitality market has caused some uncertainty with respect to our future relationship with our Hitachi installed base of hospitality customers.

Hitachi, once one of the leading suppliers of traditional PBX systems to the hospitality market, ceased selling systems to this market in March 2005. We have many long-time hospitality customers with significant portfolios of Hitachi systems in their properties. In addition, we have several hundred Hitachi systems under service contracts generating recurring contract revenues and gross profits. Over the next four to six years, most of these customers will have to transition their communications systems to new platforms. The transition presents a risk to us that another vendor may be selected to install and service their communications systems. In response we have added the Mitel product line to mitigate the impact to our operating results due to Hitachi’s exit from the hospitality market.

While Hitachi’s exit created some uncertainty in our relationship with existing customers, we believe our relationship with our Hitachi customers is strong. Consequently, we believe that in most instances we will be in a favorable position to supply a new system to our customers when they decide to replace their Hitachi system. Additionally, during the third quarter of fiscal 2006 we acquired the remaining assets and liabilities of Hitachi’s U.S. hospitality market. Included in the acquired assets was a substantial inventory of new and refurbished parts and equipment enabling us to serve our Hitachi customers. Despite these mitigating factors, no assurance can be given that Hitachi’s exit from this market will not negatively impact our financial results in the future.

We are connecting our products to our customer’s computer networks and integrating these products to other customer-owned software applications such as the Microsoft Office Suite. In most cases, we are integrating our products to mission-critical networks and systems such as contact centers owned by the customer. Problems with the implementation of these products could cause operational disruption, loss of revenues and gross profits for our customers.

IP-based products and advanced voice applications are typically connected to our customers’ existing local and wide area networks. While we believe the risk of our products disrupting other traffic or affecting performance of these networks is low, such problems could occur. Such an event could cause significant disruption to our customers’ operations, including loss of revenue, or the inability to access critical services such as 911 emergency services. In turn, these disruptions could result in reduced customer satisfaction, delays in payments from customers for products and services purchased, damage to our reputation, and potential liabilities.

We expect our gross margins to vary over time.

Our gross margins are affected by a variety of factors, including changes in customer and product mix, increased price competition, changes in vendor incentive programs, and changes in shipment volume. We expect these factors to cause our gross margins to be inconsistent in quarter-to-quarter and year-to-year comparisons.

If our dealer agreements with the original equipment manufacturers are terminated prematurely or unexpectedly, our business could be adversely affected.

We sell communications systems under dealer agreements with various manufacturers such as Avaya, Mitel and Shortel. We are a major dealer for many manufacturers and we consider our relationship with them to be good. Nevertheless, if our strategic relationship with our manufacturers were to be terminated prematurely or unexpectedly, our operating results would be adversely impacted. Furthermore, these agreements require that we meet certain volume commitments to earn the pricing incentives provided in the dealer agreements. Failure to meet these requirements could have material adverse consequences on our gross margins and overall operating results.

We are dependent upon a few suppliers.

Our growth and ability to meet customer demand depends in part on our capability to obtain timely deliveries of products from suppliers. Avaya utilizes a two-tier distribution model whereby a few third-party companies (super distributors) distribute their products to their dealer communities. The limited amount of distribution available for these product lines increases our risk of interruptions in the supply of these products.

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We may incur goodwill and other asset impairments in the event our business was to suffer a severe decline.

We are required to evaluate the fair value of each of our reporting units annually to determine if the fair value is less than the carrying value of those reporting units. If we determine that is the case, then an impairment loss will be recorded in our statement of operations. In fiscal year 2010, after completing the annual impairment test, management determined that the fair value of each reporting unit was greater than our carrying value and therefore no impairment had occurred. In fiscal year 2009, management determined that the goodwill associated with our commercial equipment sales reporting unit was impaired and we recorded an impairment charge of $14.8 million. We could experience further deterioration in this area of our business or other areas of our business, which might result in additional impairment of our remaining goodwill balances. Additional impairment charges could have a material adverse effect on our financial condition and results of operations.

Our stock price may continue to be volatile.

Historically, our stock is not widely followed by investment analysts and is subject to price and trading volume volatility. This volatility is sometimes tied to overall market conditions and may or may not reflect our financial performance. It is likely that this volatility will continue.

Our business is subject to the risks of tornadoes and other natural catastrophic events and to interruptions caused by man-made problems such as computer viruses or terrorism.

Our corporate headquarters and NSC are located in northeastern Oklahoma, a region known as “tornado alley”. The region is also frequently the victim of significant ice storms. A significant natural disaster, such as a tornado or prolonged ice storm could have a material adverse impact on our business, operating results, and financial condition. In addition, despite our implementation of network security measures, our servers are vulnerable to computer viruses, hacking, and similar disruptions from unauthorized tampering of our computer systems. Any such event could also cause a similar material adverse impact. In addition, acts of war or terrorism could have a material adverse impact on our business, operating results and financial condition. The continued threat of terrorism and associated security and military response, or any future acts of terrorism may further disrupt the national economy and create additional uncertainties. To the extent that such disruptions or uncertainties might result in delays or cancellations of customer orders, or impact the assembly or shipment of our products, business, operating results and financial condition could be materially and adversely affected.

We may be subject to infringement claims and litigation, which could cause us to incur significant expenses or prevent us from selling certain products and services.

Third parties, including customers, may assert claims or initiate legal action against our manufacturers, suppliers, customers or us, alleging that the products we sell infringe on another’s proprietary rights. Regardless of merit, such claims can be time-consuming, expensive, and/or require us to enter into costly license agreements. In some instances, a successful claim could prevent us from selling a particular product or service. We have not conducted patent searches on the third party-products we distribute to independently determine if they infringe on another party’s proprietary rights. Nor would it be practical or cost-effective for us to do so. Rather, we rely on infringement indemnities provided by the equipment manufacturers. However, because these indemnities are not absolute and in some instances have limits of coverage, no assurance can be given that in the event of a claim our indemnification by the equipment manufacturer will be adequate to hold us harmless, or that we are entitled to indemnification by the equipment manufacturer.

If any infringement or other intellectual property claim is brought against us, and succeeds, whether it is based on a third-party’s equipment that we distribute or on our own proprietary products, our business, operating results and financial condition could be materially and adversely affected.

We are subject to a variety of other general risks and uncertainties inherent in doing business.

In addition to the specific factors discussed above, we are subject to risks that are inherent to doing business. These include growth rates, general economic and political conditions, customer satisfaction with the quality of our services, costs of obtaining insurance, unexpected death of key employees, changes in employment laws and regulations, changes in tax laws and regulations, and other events that can impact revenues and the cost of doing business.

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ITEM 2. PROPERTIES

Our principal executive offices and the NSC are located in a 37,000 square foot, Company-owned, single story building located on a 13-acre tract of land in a suburban business park near Tulsa, Oklahoma. This facility also houses a warehouse and assembly area.

We have additional leased facilities located in Hazelwood, Missouri. In addition to our primary warehouse and shipping operation, this facility houses sales staff, technical design, professional services and installation support personnel. We lease office space for branch offices in Richardson, Texas; Flanders, New Jersey; Carrolton, Texas; and Southborough, Massachusetts. These facilities primarily house sales and technical personnel. We also lease other office space throughout the U.S. for sales, consulting, and technical staff.

ITEM 3. LEGAL PROCEEDINGS

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the Nasdaq Global Market under the symbol “XETA.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported on the Nasdaq National Market.

	2010				2009
Quarter Ended:	High		Low		High		Low
January 31	$	3.15	$	2.27	$	2.21	$	1.25
April 30	$	3.99	$	2.85	$	2.05	$	1.06
July 31	$	3.95	$	3.05	$	3.00	$	1.66
October 31	$	3.64	$	2.60	$	2.98	$	2.05

We have never paid cash dividends on our common stock. Payment of cash dividends is dependent upon our earnings, capital requirements, overall financial condition and other factors deemed relevant by the Board of Directors. Currently, we are prohibited by our credit facility from paying cash dividends.

In 2008 the Board of Directors approved a stock repurchase program in which up to $1 million could be used to repurchase our common stock in open market. During fiscal year 2009, we repurchased a total of 30,796 shares of our common stock for a total cash investment of $58,157. There was no repurchase activity during fiscal 2010 and the program was withdrawn by the Board of Directors.

As of November 16, 2010, there were approximately 170 shareholders of record of our common stock. We believe that the number of beneficial owners of our common stock who hold in street name is in excess of 1,500.

EQUITY COMPENSATION PLAN INFORMATION

						Number of securities
						remaining available for
						future issuance under
	Number of securities to be			Weighted-average		equity compensation
	issued upon exercise of			exercise price of		plans (excluding
	outstanding options,			outstanding options,		securities reflected in
	warrants and rights			warrants and rights		column (a))
Plan Category	(a)			(b)		(c)
Equity compensation plans approved by security holders		527,284		$	2.93		2,489,207	(1)
Warrants issued in acquisition		150,000			3.77		0
Equity compensation plans not approved by security holders		240,000	(2)	$	7.43		0
Total		917,284		$	4.24		2,489,207

(1)	The 2004 Plan includes an evergreen feature in which 3% of the total outstanding shares are added to the total shares available for issuance. The evergreen feature does not apply to incentive stock options. Consequently, there are 530,000 shares available to be issued as incentive stock options under the 2004 Plan.
(2)	All of these options were granted as part of an initial compensation package to certain former officers upon their hiring. These options vested over three years. Of the total 240,000 shares, 200,000 are exercisable until August 1, 2011 and the remainder are exercisable until February 28, 2013.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

In fiscal 2010, we implemented a strategy to use our unique market position and strong balance sheet to pursue acquisitive growth opportunities. As a result of our successful execution of this strategy, we completed three acquisitions in the second half of fiscal 2010 and absorbed the key employees and fixed assets of an additional strategic asset that was abandoned by its previous owner. These successes plus organic revenue growth of 12% enabled us to record $85.7 million in revenues in fiscal 2010, up 20% from fiscal 2009.

The acquisitions completed in fiscal 2010 all address our strategic initiative to advance our business from its historic roots in voice networks and services into the broader unified communications and data networking market, including consulting services. Our acquisition of the assets of Hotel Technologies Solutions, Inc., d/b/a Lorica Solutions (“Lorica”), a privately-held company headquartered in Buffalo, New York, in May, 2010 provided us with a high speed internet access product and service offering and a help desk service offering in the hospitality vertical market. It also provided us with a platform to resume development of a line of proprietary products to further expand our already strong brand in this market. The acquisition of Pyramid Communications Services, Inc. (“Pyramid”), a privately held company headquartered in Dallas, Texas and the acquisition of the operating assets of Data-Com Telecommunications, Inc. (“Data-Com”), a New Jersey based privately held company, provided us with additional geographic coverage, important new customer relationships, new streams of recurring revenues, and broadened our manufacturer relationships. Finally, we absorbed certain sales and technical employees and a small amount of strategic assets which were being abandoned by their owner. We have used these assets and personnel to form our new Network Operations Center (“NOC”) and related product offerings around data and voice network monitoring and help desk services. The terms of these purchase agreements are described in Note 16 of the Notes to Consolidated Financial Statements.

The discussion that follows provides more details regarding the factors and trends that affected our financial results, liquidity, and capital resources in fiscal 2010 when compared to the previous year.

Results of Operations

FISCAL YEAR 2010 COMPARED TO FISCAL YEAR 2009.

Revenues for fiscal 2010 were $85.7 million compared to $71.6 million in fiscal 2009, a 20% increase. Net income for fiscal 2010 was $1.4 million compared to a net loss of $10.3 million in fiscal 2009, which included $14.8 million ($9.0 million after-tax) in impairment charges against our Goodwill and $3.0 million ($1.8 million after-tax) in impairment charges against our ERP system. Without these one-time charges, our net income in fiscal 2009 would have been $505,000. Discussed below are the major revenue, gross margin, and operating expense items that affected our financial results during fiscal 2010.

Services Revenues. Revenues earned from our services business were $51.3 million in fiscal 2010 compared to $41.1 million in fiscal 2009, a 25% increase. This increase reflects a 21% or $6.1 million increase in maintenance and repair revenues, a 37% or $3.5 million increase in implementation revenues, and a 23% or $611,000 increase in structured cabling revenues.

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The increase in our maintenance and repair services business, which include revenues earned from maintenance contracts and time-and-materials (“T&M”) charges reflects the continued success of our wholesale services programs as well as the addition to our base of maintenance customers associated with the purchase of Lorica, Pyramid and Data-Com. We 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. Under these offerings we partner with manufacturers, network services companies, and systems integrators to provide a variety of technical services to our partners’ end-user customers. Typically in these relationships, we are filling gaps in geographic or technical competence for our wholesale partner. Our national service footprint and strong technical capabilities make us an attractive partner to these large organizations who have won large outsourcing contracts with end-users. We have invested heavily in sales and technical resources to create relationships with current and potential wholesale partners. Once those relationships are established, we jointly market our capabilities with our partners to end-users who have requested bids for new services or are renewing existing contracts. The wholesale services segment is a highly competitive market and because of their size and prominence end-users can demand both favorable pricing and high service levels. In most cases, our service performance is measured monthly, quarterly and/or annually by our partner. To date, our service ratings have been excellent. However, our experience indicates that end-users expect excellent service ratings, and pricing drives most purchase decisions. As a result, we have limited influence in contract negotiations between our wholesale partners and end-users. This is a key difference between the direct and wholesale services offerings. We expect growth in our wholesale services business to include large contract wins that are partially offset by the occasional loss of a large wholesale services contract.

Our implementation revenues reflect an increase in revenues from our Professional Services Organization (“PSO”) and relatively flat installation revenues. We attribute this to increasing demand for more complex communications systems requiring significant fee-generating design and engineering services. Additionally, we continue to build the capabilities and breadth of our PSO organization to enable us to provide more high value products and services to our customers, particularly advanced communications applications such as unified communications solutions and video conferencing as well as data networking assessment, design, and monitoring. In the near term, Implementation revenues will continue to be closely aligned with the sale of new systems. From a long term perspective, however, as we broaden our product and service offerings and as customers displace conventional communications platforms and adopt more complex systems, we anticipate growth in this area of our business through the fee-based utilization of our highly skilled technical resources.

Our structured cabling revenues increased 23% in fiscal 2010. The increase is primarily from a new wholesale service program added late in fiscal 2009.

Systems Sales. Sales of systems were $34.0 million in fiscal 2010 compared to $30.1 million in fiscal 2009, a 13% increase. Sales of systems to commercial customers were $29.9 million in fiscal 2010, a 42% increase compared to fiscal 2009. Sales of systems to hospitality customers were $4.2 million in fiscal 2010, a 54% decrease compared to the prior year.

Sales of systems to commercial customers reflect a $2.6 million increase with one of our major customers in the education vertical market. While orders for systems to other commercial customers are above last year’s pace, systems revenues continue to 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.

Our hospitality sector experienced a delayed reaction to the deep recession in 2009. Because of spending momentum and new construction and major renovation projects already committed in 2009, we enjoyed a strong year in sales of new systems to this market. In 2010, capital spending in hospitality was severely curtailed resulting in the steep reduction in our sales of systems in this market segment. While no assurance can be given, we are expecting an improvement in this area of our business in fiscal 2011.

Other Revenues. Other revenues were $360,000 in fiscal 2010 compared to $396,000 in fiscal 2009. Other revenues consist of commissions earned on the sale of Avaya maintenance contracts. The decrease in other revenues is attributable to a decrease in the sales of Avaya post-warranty maintenance contracts. Under our dealer agreement with Avaya, we are paid a commission on sales of their maintenance contracts to the Avaya customer base. The commission value on the sale of a maintenance contract is based on the size and length of the contract and the underlying equipment covered under the agreement. This is an unpredictable revenue stream that depends on the expiration dates of existing contracts, installation dates of new systems, the customer type as defined by Avaya, and the number of years that customers contract for services.

Gross Margins. Gross margins were 27.4% in fiscal 2010 compared to 27.2% in fiscal 2009.

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The gross margins earned on services revenues were 30.9% in fiscal 2010 compared to 31.1% in fiscal 2009. Our service margins declined in the fourth quarter due to the short-term impact of the start-up of our network operations center and general inefficiencies from integrating newly acquired operations into our existing systems and processes. We expect steady improvement of these issues throughout fiscal 2011 and integration efforts continue. Overall, our service margins have been expanding reflecting an increase in recurring service revenues combined with improved cost controls, improved utilization of variable labor through the use of third party Quality Service Partners, and improved utilization of our professional services personnel for consulting and fee-based engagements. Despite the additional costs associated with our new businesses, our services margins were within our target range of 30%-35%.

Gross margins on systems sales were 26.4% in fiscal 2010 compared to 26.6% in fiscal 2009. These margins are slightly higher than our expectations of 23%-25% and reflect our continued focus on systems sales margins through controls around contract acceptance and margin reviews. We work closely with our manufacturers and distributors to maximize vendor support through rebate, promotion, and competitive discount programs. These discounts and incentives are material to our gross margins. The Systems sales market is highly competitive and downward pressure on margins is a constant in this segment of our business. We believe the techniques and disciplines we employ around contract acceptance and margin reviews will enable us to maintain our gross margins on systems sales. However, we can give no assurance regarding possible changes in our vendor support programs or other market factors that could either increase or lower margins.

A final component to our gross margins is the margins earned on other revenues. These include costs incurred to market and administer the Avaya post-warranty maintenance contracts that we sell and our corporate cost of goods sold expenses. While we earn a commission on the sale of Avaya post-warranty maintenance contracts which has no direct cost of goods sold, we incur costs in marketing and administration of these contracts before submitting them to Avaya. Corporate cost of goods sold represents the cost of our material logistics, warehousing, advance replacement of service spare parts, and purchasing functions. Corporate cost of goods sold was 1.7% of revenues in fiscal 2010 compared to 2.0% of revenues in fiscal 2009.

Operating Expenses. Operating expenses were $21.3 million or 24.9% of revenues in fiscal 2010 compared to $36.4 million, including $17.8 million in impairment charges, or 50.8% of revenues in fiscal 2009. Excluding the impairment charges, operating expenses were 25.9% of revenues in fiscal 2009. The modest improvement in operating expenses as a percent of revenues was realized despite an increase of over $500,000 in investment in IT related activities and $617,000 in non-recurring expenses for professional fees and other costs related to recently completed and new corporate development activities. Integration expenses included professional fees such as legal, tax and valuation services, finder’s fees, consulting fees paid to outside contractors for integration and due diligence services, and travel costs directly associated with integration activities. Additionally, vendor support payments earned in fiscal 2010 were approximately $670,000 lower than in fiscal 2009 due to additional payments received in 2009 to assist in the transition of Nortel to Avaya and the on-boarding of new manufacturer relationships such as Mitel. These support payments are not directly associated with specific transactions, but are to assist in the marketing of the manufacturer’s products and the promotion of their brand. As a result, these payments are recorded as offsets to our operating expenses.

Interest Expense and Other Income. Interest expense consists primarily of interest paid or accrued on our credit facility. Interest expense was $36,000 in fiscal 2010 compared to $100,000 in fiscal 2009. This reduction reflects both lower interest rates and lower average borrowing during the year. Net other income in fiscal 2010 was approximately $139,000 compared to net other income of approximately $28,000 in fiscal 2009. Most of this increase was the result of a note agreement with a customer which generated interest and late fee income in fiscal 2010. This note was paid in full by the customer in early fiscal 2011.

Income Tax Expense. We have recorded a combined Federal and state tax provision of approximately 39.0% in fiscal 2010 and 39.2% in fiscal 2009. This rate reflects the effective Federal tax rate plus the estimated composite state income tax rate.

Operating Margins. Our net income as a percent of revenues in fiscal 2010 was 1.6%. In fiscal 2009, excluding the impact of the non-cash impairment charges, net income as a percentage of revenues was 0.7%. This increase reflects a 108 basis point improvement in operating expenses as percent of revenues, a 22 basis point increase in other income, and a 16 basis point improvement in gross profit margin (all on a pre-tax basis). We believe operating margins can be improved to the 4% to 6% range through continued expansion of our more predictable and recurring revenue streams, better use of technology, and improved management of sales resources.

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FISCAL YEAR 2009 COMPARED TO FISCAL YEAR 2008.

Revenues for fiscal 2009 were $71.6 million compared to $84.3 million in fiscal 2008, a 15% decrease. The net loss for fiscal 2009 was $10.3 million compared to net income of $2.1 million in fiscal 2008. Discussed below are the major revenue, gross margin, and operating expense items that affected our financial results during fiscal 2009.

Services Revenues. Revenues earned from our services business were $41.1 million in fiscal 2009 compared to $43.5 million in fiscal 2008, a 6% decrease. This decline reflected a 1% or $228,000 decrease in maintenance and repair revenues, a 15% or $1.6 million decrease in implementation revenues, and a 17% or $538,000 decrease in structured cabling revenues.

The decreases in our maintenance and repair services business consisted of relatively flat contract maintenance revenues and a decrease in T&M revenues of 5%. The decrease in our implementation revenues in fiscal 2009 reflected the difficult comparison to fiscal 2008 which provided over $3 million in implementation revenues associated with the Miami-Dade County Public School’s (“M-DCPS”) orders. Our structured cabling revenues decreased 17% in fiscal 2009. This decline was a difficult comparison to our structured cabling revenues in fiscal 2008 due to the significant contribution to these revenues by the M-DCPS orders during fiscal 2008.

Systems Sales. Sales of systems were $30.1 million in fiscal 2009 compared to $38.9 million in fiscal 2008, a 23% decrease. Sales of systems to commercial customers were $21.1 million in fiscal 2009, a 30% decrease compared to fiscal 2008. Sales of systems to hospitality customers were $9.0 million in fiscal 2009, a 5% increase compared to fiscal 2008.

The decrease in sales of systems to commercial customers was primarily attributable to the completion of the M-DCPS contract which produced $1.7 million in equipment revenues during fiscal 2009 compared to $9.4 million during fiscal 2008. Additionally, macro-economic conditions and uncertainty around the Nortel bankruptcy dampened capital spending on technology.

The increased sales of systems to hospitality customers in fiscal 2009 reflected our continued success in this relatively mature niche market despite considerable economic challenges in the hospitality segment and the successful execution of our strategy to expand into the Mitel product offering.

Other Revenues. Other revenues were $396,000 in fiscal 2009 compared to $1.9 million in fiscal 2008. The decrease in other revenues was attributable to a decrease in the sales of Avaya post-warranty maintenance contracts.

Gross Margins. Gross margins were 27.2% in fiscal 2009 compared to 26.4% in fiscal 2008.

The gross margins earned on services revenues were 31.1% in fiscal 2009 compared to 28.3% in fiscal 2008. Gross margins earned on Services revenues reflected mixed results between improved margins earned on maintenance and repair services and structured cabling, which were offset by lower margins on implementations. Gross margins on systems sales were 26.6% in fiscal 2009 compared to 26.2% in fiscal 2008.

A final component to our gross margins was the margins earned on other revenues. (See discussion of gross margins on other revenues in the caption “Gross Margins” under “FISCAL YEAR 2010 COMPARED TO FISCAL YEAR 2009” above for an explanation of composition of these margins). Corporate cost of goods sold was 2.0% of revenues in fiscal 2009 compared to 1.8% of revenues in fiscal 2008.

Operating Expenses. Operating expenses, which included $17.8 million in impairment charges, were $36.4 million or 50.8% of revenues in fiscal 2009 compared to $18.6 million or 22.0% of revenues in fiscal 2008. Excluding the impairment charges, operating expenses were 25.9% of revenues in fiscal 2009. The increase in operating expenses included a $17.8 million impairment charge, a bad debt provision of $350,000 in specific response to the Nortel bankruptcy filing, increased legal fees to support litigation and board governance activities, increased amortization of our ERP system and increased amortization of intangible assets associated with recent acquisitions of service contracts and customer lists.

Interest Expense and Other Income. Interest expense was $100,000 in fiscal 2009 compared to $334,000 in fiscal 2008 reflecting both lower interest rates and lower average borrowing during the year. The cash cycle on the M-DCPS project was extremely long and forced us to borrow heavily on our revolving line of credit in fiscal 2008 to meet working capital needs. Net other income in fiscal 2009 was approximately $28,000 compared to net other income of approximately $24,000 in fiscal 2008.

Income Tax Expense. We recorded a combined Federal and state tax provision of approximately 39.2% in fiscal 2009 and fiscal 2008. This rate reflected the effective Federal tax rate plus the estimated composite state income tax rate.

Operating Margins. Our net loss as a percent of revenues in fiscal 2009 was a negative 14.4%. Excluding the impact of the non-cash impairment charges in fiscal 2009, our net income as a percentage of revenues was 0.7% compared to net income as a percent of revenues of 2.4% in fiscal 2008.

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Liquidity and Capital Resources

At October 31, 2010 our working capital was $7.5 million compared to $11.5 million at October 31, 2009. We used our beginning cash balance of $4.7 million, cash generated from operations of $4.3 million, short-term borrowings from our line of credit, subordinated notes, and equity to fund our acquisitions and capital expenditures during the year.

To purchase the net operating assets of Lorica, the net operating assets of Data-Com and the stock of Pyramid we paid $6.3 million in cash from existing cash balances and short-term borrowings on our line of credit. In addition, we issued $675,000 in subordinated notes to the previous owners of Pyramid as part of the consideration in that transaction. The notes are payable in 8 quarterly installments and carry a 3% interest rate. Finally, we issued 397,898 shares of common stock valued at $1.5 million and 150,000 warrants to purchase common stock at $3.77 to the previous owners of Lorica. The warrants have a term of 5 years from the May 21, 2010 closing date and were valued at $279,000.

We acquired capital assets of $1.3 million which were primarily supporting normal replacement cycles of technology infrastructure and support of newly acquired operating assets. We also retired $1.1 million in previously issued term debt as part of the establishment of a new credit facility in early fiscal 2010.

At October 31, 2010, our cash balance was $1.0 million and we owed $1.8 million outstanding balance on our line of credit. In accordance with the collateral base defined in the credit facility, $6.7 million was available for borrowing on the facility at the end of the year. At October 31, 2010, we were in compliance with the covenants of the credit facility and on November 5, 2010 we renewed our loan agreement for a one year term on substantially the same terms and conditions.

In addition to the current available capacity under our working capital line of credit, we believe our current assets support additional short-term borrowing capacity and our real estate holdings support an additional $3.0 to $3.5 million in term debt. Additionally, we may have access to a variety of capital sources such as private placements of subordinated debt, and public or private sales of equity.

We have a variety of financing tools at our disposal to fund acquisitions. We believe our cash balances, expected free cash flows from operations, and available borrowing capacity will be our primary sources of capital. However, we also expect to employ financial tools such as subordinated seller notes, earn-out agreements, indemnity hold-backs, and occasionally restricted stock and/or warrants. The level to which we employ these various methods, particularly the use of our equity, will depend upon a multitude of factors which are unique to each negotiation.

Recent Accounting Pronouncements

See Notes to Consolidated Financial Statements, Note 1: Business and Summary of Significant Accounting Policies for a discussion of the impact of new accounting standards on the Company’s consolidated financial statements.

Application of Critical Accounting Policies

Our financial statements are prepared based on the application of generally accepted accounting principles in the U.S. These accounting principles require us to exercise considerable judgment about future events that affect the amounts reported throughout our financial statements. Actual events could unfold quite differently than our judgments predicted. Therefore, the estimates and assumptions inherent in the financial statements included in this report could be materially different once actual events unfold. We believe the following policies may involve a higher degree of judgment and complexity in their application and represent critical accounting policies used in the preparation of our financial statements. If different assumptions or estimates were used, our financial statements could be materially different from those included in this report.

Revenue Recognition. We recognize revenues from equipment sales based on shipment of the equipment, which is generally easily determined. Revenues from implementation and service activities are recognized based upon completion of the activity, which sometimes requires judgment on our part. Revenues from maintenance contracts are recognized ratably over the term of the underlying contract.

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Collectability of Accounts Receivable. We must make judgments about the collectability of our accounts receivable to be able to present them at their net realizable value on the balance sheet. To do this, we carefully analyze the aging of our customer accounts, try to understand why accounts have not been paid, and review historical bad debt problems. From this analysis, we record an estimated allowance for receivables that we believe will ultimately become uncollectible. We actively manage our accounts receivable to minimize our credit risks and believe that our current allowance for doubtful accounts is fairly stated.

Realizability of Inventory Values. We make judgments about the ultimate realizability of our inventory in order to record our inventory at its lower of cost or market. These judgments involve reviewing current demand for our products in comparison to present inventory levels and reviewing inventory costs compared to current market values. We maintain a significant inventory of used and refurbished parts for which these assessments require a high degree of judgment.

Goodwill and Other Long-lived Assets. We have a significant amount of goodwill on our balance sheet resulting from acquisitions made between fiscal years 2000 and 2010. The Company accounts for goodwill under the provisions of Accounting Standards Codification (“ASC”) 350, “Intangibles — Goodwill and Other”. Goodwill recorded as a part of a business combination is not amortized, but instead is subject to at least an annual assessment for impairment by applying a fair-value-based test. The test for goodwill impairment is a two-step analysis process. The first step of the analysis is to determine if a potential impairment exists for a reporting unit by comparing the fair value of the unit with the carrying value of the unit. The goodwill of the reporting unit is not considered to have a potential impairment if the fair value of a reporting unit exceeds its carrying amount and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds the fair value of the unit, the second step is performed to determine if goodwill is impaired and to measure the amount, if any, of impairment loss to recognize. The second step of the analysis compares the implied fair value of goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined by allocating all the assets and liabilities, including any unrecognized intangible assets, to the reporting unit. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. If the carrying amount of goodwill exceeds the implied fair value, goodwill is considered impaired and an impairment loss is recognized in an amount equal to the excess of the carrying amount over the implied fair value.

We conducted these impairment tests on August 1 for fiscal year 2010. We engaged an independent valuation consultant to assist in the valuation of the commercial systems sales and services reporting units. The Company used a combination of evaluations to estimate the fair value of its reporting units, including the following: a) an income approach by which forecasted future cash flows are discounted to present value; b) a market approach by which comparable companies values are compared to the applicable reporting unit’s values; and c) a market approach by which the Company’s own market capitalization is applied to the applicable reporting unit. This examination also requires a great amount of subjectivity and assumptions. Based on the work performed, we determined that the fair value of each reporting unit was greater than its carrying value and therefore no impairment had occurred.

For fiscal 2009 the Company conducted an interim test for impairment as of July 31, 2009. The Company engaged a consultant to assist in the valuation and based on the results of this work, the Company determined that the carrying value of the commercial systems sales reporting unit was impaired, and the services reporting unit was not impaired. The Company recorded an impairment charge of $14.8 million against its commercial systems sales reporting unit.

We have recorded property, equipment, and capitalized software costs at historical cost less accumulated depreciation or amortization. The determination of useful economic lives and whether or not these assets are impaired involves significant judgment. In accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”, an impairment loss on long-lived assets used in operations is recorded when events and circumstances indicate that the carrying amount of the asset may not be recoverable. During fiscal year 2010, it was determined that no impairment had occurred. In fiscal 2009, an impairment charge of $3.0 million was recorded to reduce the carrying value of certain identifiable assets related to our ERP platform. We estimated that the full cost of the system could not be reasonably recovered based on near-term projected financial results. The impairment charge reduced the carrying value of this asset to the mid-point of our estimate of the replacement cost of an ERP system that would be adequate for the Company’s current and near-term operating needs.

Accruals for Contractual Obligations and Contingent Liabilities. On products assembled or installed by us, we have varying degrees of warranty obligations. We use historical trends and make other judgments to estimate our liability for such obligations. We also must record estimated liabilities for many forms of Federal, state, and local taxes. Our ultimate liability for these taxes depends upon a number of factors, including the interpretation of statutes and the mix of our taxable income between higher and lower taxing jurisdictions. In the normal course of business, we can be a party to threatened or actual litigation. In such cases, we evaluate our potential liability, if any, and determine if an estimate of that liability should be recorded in our financial statements. Estimating both the probability of our liability and the potential amount of the liability are highly subjective exercises and are evaluated frequently as the underlying circumstances change.

18

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial information required by this Item is incorporated by reference to the financial statements listed in Items 15(a)(1) and 15(a)(2), which financial statements appear at Pages F-1 through F-21 at the end of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, an evaluation of 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”)) as of the end of our fiscal year ended October 31, 2010. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“Commission”) rules and forms.

Changes in Internal Controls

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore, there were no corrective actions taken.

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of a company are being made only in accordance with authorizations of management and directors of a company; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of October 31, 2010. In making this assessment, our management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment, our management believes that, as of October 31, 2010, our internal control over financial reporting was effective based on those criteria.

We acquired the assets of Lorica in May, 2010 and the assets of DataCom in September, 2010. Additionally, we acquired 100% of the capital stock of Pyramid in August, 2010 (the “Acquired Companies”). We have excluded the Acquired Companies from our annual assessment of and conclusion on the effectiveness of internal control over financial reporting. The Acquired Companies accounted for 9 percent of our total assets as of October 31, 2010 and approximately 7 percent of our consolidated revenues for the year ended October 31, 2010.

19

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this Item relating to directors is incorporated by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission (the “Commission”) not later than 120 days after the close of our fiscal year ended October 31, 2010 (the “Proxy Statement”), under the section “Proposal 1—Election of Directors.”

Information relating to executive officers required by this Item is incorporated by reference to the Proxy Statement under the section “Executive Officers.”

Other information required by this Item is incorporated by reference to the Proxy Statement under the section “Section 16(a) Beneficial Ownership Reporting Compliance,” and to the discussions “Code of Ethics,” “Nominating Committee” and “Audit Committee” under the section “Corporate Governance.”

We have adopted a financial code of ethics that applies to our CEO, CFO, controller, principal accounting officer and any other employee performing similar functions. This financial code of ethics is posted on our website. The Internet address for our website is www.xeta.com, and the financial code of ethics may be found on the Investor Relations page under “Governance.”

We will satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, at the address and location specified above.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item is incorporated by reference to the Proxy Statement under the sections “Executive Compensation” and “Director Compensation,” and to the discussion “Compensation Committee Interlocks” under the section “Corporate Governance”.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information relating to Equity Compensation Plans required by this Item is included in Part II of this Report in the table entitled “Equity Compensation Plan Information” under the caption “Market for the Registrant’s Common Stock and Related Stockholder Matters.”

Other information required by this Item is incorporated by reference to the Proxy Statement under the section “Security Ownership of Certain Beneficial Owners and Management.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this Item is incorporated by reference to the Proxy Statement under the section “Certain Relationships and Related Transaction” and to the discussion “Director Independence” under the section “Corporate Governance.”

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by this Item is incorporated by reference to the discussion in the Proxy Statement “Fees and Independence” under the section “Proposal 2—Independent Public Accountants.”

20

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The following documents are filed as a part of this report:

(a)(1) Financial Statements — The following financial statements are included with this report:

	Page
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Financial Statements
Consolidated Balance Sheets — October 31, 2010 and 2009		F-2
Consolidated Statements of Operations — For the Years Ended October 31, 2010, 2009 and 2008		F-3
Consolidated Statement of Shareholders’ Equity — For the Years Ended October 31, 2010, 2009 and 2008		F-4
Consolidated Statements of Cash Flows — For the Years Ended October 31, 2010, 2009 and 2008		F-5
Notes to Consolidated Financial Statements		F-6

(a)(2)	Financial Statement Schedules — None.
(a)(3)	Exhibits — The following exhibits are included with this report or incorporated herein by reference:

No.			Description
	2.1	*	Asset Purchase Agreement dated August 23, 2010 between XETA Technologies, Inc. as Purchaser, Data-Com Telecommunications Inc. as Seller, and Seller Principal.
			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 XETA Technologies, Inc. as Purchaser, Pyramid Communications Services Inc., and Pyramid’s six individual shareholders as Sellers (incorporated by reference to Exhibit 2.2 to XETA’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2010).
	2.3		Asset Purchase Agreement dated May 10, 2010 between XETA Technologies, Inc. as Purchaser, Hotel Technology Solutions, Inc. as Seller, and Seller Principals (incorporated by reference to Exhibit 2.1 to XETA’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2010).
	3	(i)	Restated Certificate of Incorporation (incorporated by reference to Exhibit 3(i) to XETA’s Annual Report on Form 10-K for the year ended October 31, 2004).
	3	(ii)	Amended and Restated Bylaws as adopted January 23, 2008 (incorporated by reference to Exhibit 3(ii) to XETA’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2008).
	10.1	*†	XETA Technologies, Inc. Executive Change in Control Severance Plan
	10.2	†	XETA Technologies, Inc. 2004 Omnibus Stock Incentive Plan as amended and restated December 18, 2008 (the “2004 Omnibus Plan”) (incorporated by reference to Exhibit 10.1 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2008).

21

No.			Description
	10.3	†	Form of Restricted Stock Award Agreement under the 2004 Omnibus Plan (incorporated by reference to Exhibit 10.2 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2009).
	10.4	†	Form of Stock Option Award Agreement under the 2004 Omnibus Plan (incorporated by reference to Exhibit 99(d)(4) to XETA’s SC TO-I filed September 17, 2009).
	10.5	†	XETA Technologies 2000 Stock Option Plan as amended and restated December 30, 2008 (the “2000 Plan”) (incorporated by reference to Exhibit 10.5 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2008).
	10.6	†	Form of Stock Purchase Option Agreement under the 2000 Plan (incorporated by reference to Exhibit 99(d)(2) to XETA’s SC TO-I filed September 17, 2009).
	10.7		Avaya Inc. Reseller Master Terms and Conditions effective as of August 6, 2003 between Avaya Inc. and XETA Technologies, Inc. (incorporated by reference to Exhibit 10.6 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2003).
	10.8		Mitel authorized PARTNER Agreement dated September 28, 2007 between Mitel Networks Inc. and XETA Technologies, Inc. (incorporated by reference to Exhibit 10.8 to XETA’s Annual Report on Form 10-K for the fiscal year ended October 31, 2009).
	10.9	*	North America Reseller Agreement Acknowledgement dated September 27, 2010 between XETA Technologies, Inc. and ShoreTel, Inc.
	10.10	*	Reseller Agreement Addendum dated September 28, 2010 between XETA Technologies, Inc. and ShoreTel, 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.
	10.11		First Amendment to Loan Agreement between Commerce Bank, N.A. and XETA Technologies, Inc. dated November 5, 2010 (incorporated by reference to Exhibit 10.1 to XETA’s Current Report on Form 8-K filed November 10, 2010).
	10.12		Loan Agreement between Commerce Bank and XETA Technologies, Inc. dated November 6, 2009 (incorporated by reference to Exhibit 10.1 to XETA’s Current Report on Form 8-K filed November 12, 2009).
	10.13		Promissory Note payable to Commerce Bank for $8,500,000 dated November 6, 2009 (incorporated by reference to Exhibit 10.2 to XETA’s Current Report on Form 8-K filed November 12, 2009).
	21	*	Subsidiaries of XETA Technologies, Inc.
	23.1	*	Consent of HoganTaylor LLP.
	31.1	*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Indicates Exhibits filed with this report.
†	Indicates management contract or compensatory plan or arrangement.

22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
January 21, 2011	By:	/s/ Greg D. Forrest Greg D. Forrest, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

January 21, 2011	/s/ Greg D. Forrest Greg D. Forrest, Chief Executive Officer and President
January 21, 2011	/s/ Robert B. Wagner Robert B. Wagner, Chief Financial Officer and Executive Director of Operations
January 18, 2011	/s/ Donald T. Duke Donald T. Duke, Director
January 18, 2011	/s/ Ronald L. Siegenthaler Ronald L. Siegenthaler, Director
January 18, 2011	/s/ S. Lee Crawley S. Lee Crawley, Director

23

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

XETA Technologies, Inc.

We have audited the accompanying consolidated balance sheets of XETA Technologies, Inc. and subsidiaries as of October 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XETA Technologies, Inc. and subsidiaries as of October 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2010, in conformity with U.S. generally accepted accounting principles.

/s/ HOGANTAYLOR LLP

Tulsa, Oklahoma
January 24, 2011

F-1

XETA TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	October 31, 2010			October 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	1,003,180		$	4,731,926
Current portion of net investment in sales-type leases and other receivables		996,148			470,025
Trade accounts receivable, net		17,805,992			13,832,452
Inventories, net		6,715,076			5,036,198
Deferred tax asset		1,168,544			1,136,351
Prepaid taxes		69,980			39,784
Prepaid expenses and other assets		2,402,111			2,057,514
Total current assets		30,161,031			27,304,250
Noncurrent assets:
Goodwill		17,783,911			12,031,975
Intangible assets, net		3,161,791			570,740
Net investment in sales-type leases and other receivables, less current portion above		326,454			335,413
Property, plant & equipment, net		6,931,927			6,825,916
Deferred tax asset		—			739,216
Total noncurrent assets		28,204,083			20,503,260
Total assets	$	58,365,114		$	47,807,510
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	337,500		$	1,183,475
Revolving line of credit		1,756,361			—
Accounts payable		10,031,900			5,785,225
Current portion of obligations under capital lease		122,401			154,072
Current unearned services revenue		6,529,330			5,194,601
Accrued liabilities		3,883,303			3,444,396
Total current liabilities		22,660,795			15,761,769
Noncurrent liabilities:
Long-term debt, less current portion above		255,315			—
Accrued long-term liability		144,100			144,100
Long-term portion of obligations under capital lease		—			106,076
Noncurrent unearned services revenue		48,629			36,691
Noncurrent deferred tax liability		12,417			—
Total noncurrent liabilities		460,461			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 October 31, 2010 and 11,256,193 issued at October 31, 2009		11,653			11,255
Paid-in capital		15,662,689			13,704,460
Retained earnings		21,596,383			20,223,169
Less treasury stock, at cost (923,835 shares at October 31, 2010 and 993,763 shares at October 31, 2009)		(2,026,867	)		(2,180,010	)
Total shareholders’ equity		35,243,858			31,758,874
Total liabilities and shareholders’ equity	$	58,365,114		$	47,807,510

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

F-2

XETA TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Years
	Ended October 31,
	2010			2009			2008
Systems sales	$	34,014,571		$	30,095,844		$	38,900,301
Services		51,304,187			41,080,689			43,483,939
Other revenues		359,525			395,878			1,936,639
Net sales and services revenues		85,678,283			71,572,411			84,320,879
Cost of systems sales		25,023,057			22,079,858			28,719,969
Services costs		35,450,671			28,291,495			31,178,401
Cost of other revenues & corporate COGS		1,751,244			1,720,115			2,166,374
Total cost of sales and services		62,224,972			52,091,468			62,064,744
Gross profit		23,453,311			19,480,943			22,256,135
Operating expenses
Selling, general and administrative		20,436,520			17,370,765			17,547,088
Amortization		868,054			1,201,176			1,018,186
Impairment of goodwill & other assets		—			17,800,000			—
Total operating expenses		21,304,574			36,371,941			18,565,274
Income (loss) from operations		2,148,737			(16,890,998	)		3,690,861
Interest expense		(36,452	)		(99,657	)		(334,072	)
Interest and other income		138,929			28,110			23,645
Net interest and other income (expense)		102,477			(71,547	)		(310,427	)
Income (loss) before provision (benefit) for income taxes		2,251,214			(16,962,545	)		3,380,434
Provision (benefit) for income taxes		878,000			(6,646,000	)		1,324,000
Net income (loss)	$	1,373,214		$	(10,316,545	)	$	2,056,434
Earnings (loss) per share
Basic	$	0.13		$	(1.01	)	$	0.20
Diluted	$	0.13		$	(1.01	)	$	0.20
Weighted average shares outstanding		10,402,261			10,223,626			10,249,671
Weighted average equivalent shares		10,478,377			10,223,626			10,249,671

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

F-3

XETA TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

	Common Stock				Treasury Stock
	Shares Issued		Par Value		Shares			Amount			Paid-in Capital			Retained Earnings			Total
Balance- October 31, 2007		11,233,529	$	11,233		1,018,788		$	(2,244,659	)	$	13,189,311		$	28,483,280		$	39,439,165
Stock options exercised $.001 par value		22,664		22		—			—			90,193			—			90,215
Issuance of restricted common stock from treasury		—		—		(16,905	)		37,191			(37,191	)		—			—
Tax benefit of stock options		—		—		—			—			4,032			—			4,032
Stock based compensation		—		—		—			—			247,050			—			247,050
Net Income		—		—		—			—			—			2,056,434			2,056,434
Balance- October 31, 2008		11,256,193	$	11,255		1,001,883		$	(2,207,468	)	$	13,493,395		$	30,539,714		$	41,836,896
Purchase of treasury stock, at cost		—		—		30,796			(58,157	)		—			—			(58,157	)
Issuance of restricted common stock from treasury		—		—		(38,916	)		85,615			(85,615	)		—			—
Stock based compensation		—		—		—			—			296,680			—			296,680
Net loss		—		—		—			—			—			(10,316,545	)		(10,316,545	)
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 (net of 10,950 forfeited shares)		—		—		(69,928	)		153,143			(153,143	)		—			—
Issuance of common stock		397,878		398		—			—			1,499,602			—			1,500,000
Issuance of warrants		—		—		—			—			279,000			—			279,000
Stock-based compensation		—		—		—			—			332,770			—			332,770
Net income		—		—		—			—			—			1,373,214			1,373,214
Balance- October 31, 2010		11,654,071	$	11,653		923,835		$	(2,026,867	)	$	15,662,689		$	21,596,383		$	35,243,858

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

F-4

XETA TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years
	Ended October 31,
	2010			2009			2008
Cash flows from operating activities:
Net income (loss)	$	1,373,214		$	(10,316,545	)	$	2,056,434
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,249,761			1,026,069			744,003
Amortization		868,054			1,201,174			1,018,189
Impairment of goodwill & other assets		—			17,800,000			—
Stock-based compensation		302,467			283,909			247,050
Loss on sale of assets		—			3,764			425
Provision for returns & doubtful accounts receivable		63,226			460,000			22,924
Provision for excess and obsolete inventory		102,000			102,000			102,000
Deferred taxes		815,466			(6,776,757	)		1,300,716
Change in assets and liabilities:
(Increase) decrease in net investment in sales-type leases & other receivables		(517,164	)		(89,400	)		170,273
(Increase) decrease in trade accounts receivable		(1,321,905	)		6,114,067			(3,748,230	)
(Increase) decrease in inventories		(566,609	)		343,114			(962,714	)
Increase in prepaid expenses and other assets		(183,239	)		(325,375	)		(1,092,627	)
(Increase) decrease in prepaid taxes		(30,196	)		24,809			(44,856	)
Increase (decrease) in accounts payable		2,079,034			(956,376	)		1,021,231
Increase in unearned revenue		209,993			1,517,735			925,638
Decrease in accrued liabilities		(192,121	)		(398,628	)		(88,289	)
Total adjustments		2,878,767			20,330,105			(384,267	)
Net cash provided by operating activities		4,251,981			10,013,560			1,672,167
Cash flows from investing activities:
Additions to property, plant & equipment		(1,345,332	)		(895,848	)		(1,294,415	)
Proceeds from sale of assets		—			5,064			—
Acquisitions, net of cash acquired		(6,319,665	)		(802,887	)		—
Investment in capitalized service contracts		—			(750,000	)		(353,481	)
Net cash used in investing activities		(7,664,997	)		(2,443,671	)		(1,647,896	)
Cash flows from financing activities:
Principal payments on debt		(1,355,815	)		(171,090	)		(171,088	)
Net proceeds (payments) on revolving line of credit		1,201,829			(2,524,130	)		(234,530	)
Payments on capital lease obligations		(161,744	)		(148,225	)		(48,147	)
Payments to acquire treasury stock		—			(58,157	)		—
Exercise of stock options		—			—			90,215
Net cash used in financing activities		(315,730	)		(2,901,602	)		(363,550	)
Net (decrease) increase in cash and cash equivalents		(3,728,746	)		4,668,287			(339,279	)
Cash and cash equivalents, beginning of period		4,731,926			63,639			402,918
Cash and cash equivalents, end of period	$	1,003,180		$	4,731,926		$	63,639
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	37,351		$	101,276		$	346,045
Cash paid during the period for income taxes	$	49,332		$	110,210		$	68,108
Non-cash investing and financing activity:
Non-collateralized obligation to purchase service contracts	$	—		$	—		$	750,000
Capital lease obligations incurred	$	—		$	—		$	456,520
Issuance of common stock for acquisition	$	1,500,000		$	—		$	—
Issuance of warrants for acquisition	$	279,000		$	—		$	—
Issuance and assumption of debt and line of credit for acquisition	$	1,319,687

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

F-5

XETA TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2010

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Business

XETA Technologies, Inc. (“XETA” or the “Company”) is a leading integrator of advanced communications solutions with nationwide sales and service. XETA provides 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. The Company sells and/or supports 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”). The Company also manufactures and markets a line of proprietary call accounting systems to the hospitality industry. Through its recent acquisition of the assets of Hotel Technology Solutions, Inc. (“Lorica”) the Company provides high speed internet access, network monitoring services, and guest help desk services to the hospitality industry. The Company also manufactures and markets a line of proprietary call accounting systems to the hospitality industry. XETA is an Oklahoma corporation.

Pyramid Communication Services, Inc. is a wholly-owned subsidiary of XETA purchased on August 2, 2010. Xetacom, Inc. is a wholly-owned dormant subsidiary of the Company.

Cash and Cash Equivalents

Cash and cash equivalents consist of money-market accounts and commercial bank accounts.

Fair Value of Financial Instruments

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

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

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

Revenue Recognition

The Company earns revenues from the sale and installation of communications systems, the sale of maintenance contracts, and the sale of services on a time-and-materials (“T&M”) basis. The Company typically sells communications systems under single contracts to provide the equipment and the implementation services; however, the installation and any associated professional services and project management services are priced independently from the equipment based on the market price for those services. The installation of the systems sold by the Company can be outsourced to a third party either by the Company under a subcontractor arrangement or by the customer under arrangements in which vendors bid separately for the provision of the equipment from the installation and related services. Accounting Standards Codification (“ASC”) 605-25, “Revenue Recognition — Multiple-Element Arrangements”, addresses certain aspects of accounting by a vendor for arrangements with multiple revenue-generating elements, such as those including products with installation. Revenue is recognized for each element of the transaction based on its relative fair value. The revenue associated with each delivered element should be recognized separately if it has stand-alone value to the customer, there is evidence of the fair value of the undelivered element, the delivery or performance of the undelivered element is considered probable and performance is substantially under the Company’s control and is not essential to the functionality of the delivered element. Under these guidelines, the Company recognizes systems sales revenue upon shipment of the equipment and implementation services revenues upon completion of the installation of the system. Services revenues earned from maintenance contracts are recognized ratably over the term of the underlying contract on a straight-line basis. Revenues earned from services provided on a T&M basis are recognized as those services are provided. The Company recognizes revenue from sales-type leases as discussed below under the caption “Lease Accounting.” Revenues are reported net of applicable sales and use tax imposed on the related transaction.

F-6

Shipping and Handling Fees

Freight billed to customers is included in net sales and service revenues in the consolidated statements of operations, while freight billed by vendors is included in cost of sales in the consolidated statements of operations.

Accounting for Manufacturer Incentives

The Company receives various forms of incentive payments, rebates, and negotiated price discounts from the manufacturers of the products sold. Rebates and negotiated price discounts directly related to specific customer sales are recorded as a reduction in the cost of goods sold on those systems sales. Rebates and other incentives designed to offset marketing expenses and certain growth initiatives supported by the manufacturer are recorded as contra expense to the related expenditure. All incentive payments are recorded when earned under the specific rules of the incentive plan.

Lease Accounting

A small portion (less than 1%) of the Company’s revenues has been generated using sales-type leases. The Company sells some of its call accounting systems to the hospitality industry under sales-type leases to be paid over three, four and five-year periods. Because the present value (computed at the rate implicit in the lease) of the minimum payments under these sales-type leases equals or exceeds 90 percent of the fair market value of the systems and/or the length of the lease exceeds 75 percent of the estimated economic life of the equipment, the Company recognizes the net effect of these transactions as a sale.

The Company records interest income from its sales-type lease receivables. Interest income from a sales-type lease represents that portion of the aggregate payments to be received over the life of the lease that exceeds the present value of such payments using a discount factor equal to the rate implicit in the underlying lease.

Accounts Receivable

Accounts receivable are recorded at amounts billed to customers less an allowance for doubtful accounts. Management monitors the payment status of all customer balances and considers an account to be delinquent once it has aged sixty days past the due date. The allowance for doubtful accounts is adjusted based on management’s assessment of collection trends, aging of customer balances, and any specific disputes. For the year ended October 31, 2010, the Company recorded bad debt expense of $63,226. For the year ended October 31, 2009, the Company recorded bad debt expense of $460,000 which included $350,000 provided for potential uncollectible amounts associated with Nortel’s bankruptcy filing. This matter is discussed more fully in Note 2. The Company recorded bad debt expense of $22,924 for the year ended October 31, 2008.

Property, Plant & Equipment

The Company capitalizes the cost of all significant property, plant and equipment additions including equipment manufactured by the Company and installed at customer locations under certain system service agreements. Depreciation is computed over the estimated useful life of the asset or the terms of the lease for leasehold improvements, whichever is shorter, on a straight-line basis. When assets are retired or sold, the cost of the assets and the related accumulated depreciation is removed from the accounts and any resulting gain or loss is included in other income. Maintenance and repair costs are expensed as incurred. Interest costs related to an investment in long-lived assets are capitalized as part of the cost of the asset during the period the asset is being prepared for use. The Company did not capitalize any interest costs in fiscal years 2010, 2009 or 2008.

Software Development Costs

External direct costs of software development, payroll and payroll-related costs for time spent on the project by employees directly associated with the development, and interest costs incurred during the development after the “preliminary project stage” has been completed are capitalized. At October 31, 2010 the capitalized value of our developed ERP software was $3.5 million and other capitalized software was $100,000.

F-7

In the third fiscal quarter of fiscal 2009, management determined that its ERP system and the related investment were over-adequate for its current and near-term operating needs. The ERP system was originally purchased in 2001 during a period of hyper-growth and the Company expected to be significantly larger within three-to-five years. Those growth expectations did not materialize. Furthermore, the economic downturn represented a setback in the Company’s growth curve. As a result, management determined that it was likely the investment in the ERP system would not be realized within a reasonable time-frame and was therefore impaired. At the time of the impairment charge, the net book value of the Company’s ERP investment was $6.5 million. The Company used various outside sources and its current vendor to estimate the replacement cost of an ERP system that would be adequate for the Company’s current and near-term operating needs. This research yielded an estimated replacement cost of $3.5 million and an impairment charge of $3.0 million was recorded in the third fiscal quarter of the year.

The Company has segregated the cost of the developed software into four groups with estimated useful lives of three, five, seven and ten years. Amortization costs of $522,000, $931,000, and $906,000 were recognized in fiscal years 2010, 2009 and 2008, respectively.

Stock-Based Compensation Plans

The Company applies the provisions of ASC 718, “Compensation — Stock Compensation”, which requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. The Company recognizes the fair value of stock-based compensation awards as selling, general and administrative expense in the consolidated statements of operations on a straight-line basis over the vesting period. We recognized compensation expense of $302,000, $284,000, and $247,000 for the fiscal years 2010, 2009, and 2008, respectively.

Income Taxes

Income tax expense is based on pretax income. Deferred income taxes are computed using the asset-liability method in accordance with ASC 740, “Income Taxes”, and are provided on all temporary differences between the financial basis and the tax basis of the Company’s assets and liabilities. The Company accounts for any uncertain tax positions, including issues related to the recognition and measurement of those tax positions, in accordance with the tax position guidance in ASC 740. Generally, the Company is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years before 2008.

Unearned Revenue and Warranty

For proprietary systems sold, the Company typically provides a one-year warranty from the date of installation of the system. The Company defers a portion of each system sale to be recognized as service revenue during the warranty period. The amount deferred is generally equal to the sales price of a maintenance contract for the type of system under warranty and the length of the warranty period. The Company also records deposits received on sales orders and prepayments for maintenance contracts as unearned revenues.

Most of the systems sold by the Company are manufactured by third parties. In these instances the Company passes on the manufacturers’ warranties to its customers and therefore does not maintain a warranty reserve for this equipment. The Company maintains a small reserve for occasional labor costs associated with fulfilling warranty requests from customers.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segment Information

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

F-8

The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements and are described in the summary of significant accounting policies. Company management evaluates a segment’s performance based upon gross margins. Assets are not allocated to the segments. Sales to customers located outside of the U.S. are immaterial.

The following is a tabulation of business segment information for 2010, 2009 and 2008:

			Commercial		Hospitality
	Services		System		System		Other
	Revenues		Sales		Sales		Revenue			Total
2010
Sales	$	51,304,187	$	29,859,523	$	4,155,048	$	359,525		$	85,678,283
Cost of sales		35,450,671		22,114,348		2,908,709		1,751,244			62,224,972
Gross profit	$	15,853,516	$	7,745,175	$	1,246,339	$	(1,391,719	)	$	23,453,311
2009
Sales	$	41,080,689	$	21,062,073	$	9,033,771	$	395,878		$	71,572,411
Cost of sales		28,291,495		15,675,673		6,404,185		1,720,115			52,091,468
Gross profit	$	12,789,194	$	5,386,400	$	2,629,586	$	(1,324,237	)	$	19,480,943
2008
Sales	$	43,483,939	$	30,266,493	$	8,633,808	$	1,936,639		$	84,320,879
Cost of sales		31,178,401		22,536,512		6,183,457		2,166,374			62,064,744
Gross profit	$	12,305,538	$	7,729,981	$	2,450,351	$	(229,735	)	$	22,256,135

Recently Issued Accounting Pronouncements

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

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

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

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

F-9

In October 2009 the FASB issued ASU 2009-13, “Revenue Recognition — Multiple-Deliverable Revenue Arrangements”. The guidance in ASU 2009-13 amends the criteria for separating consideration in multiple-deliverable arrangements. The guidance eliminates the estimated fair value approach for revenue allocation between the separate units of accounting and replaces it with a sales-based approach referred so as the relative-selling-price method. ASU 2009-13 expands required disclosures related to a company’s multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for fiscal years beginning on or after June 15, 2010. The Company is currently assessing the impact that adoption will have on required disclosures, its financial position and results of operations.

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

Goodwill

Goodwill recorded as a part of a business combination is not amortized, but instead is subject to at least an annual assessment for impairment by applying a fair-value-based test. The test for goodwill impairment is a two-step analysis process. The first step of the analysis is to determine if a potential impairment exists for a reporting unit by comparing the fair value of the unit with the carrying value of the unit. The goodwill of the reporting unit is not considered to have a potential impairment if the fair value of a reporting unit exceeds its carrying amount in which case the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds the fair value of the unit impairment is indicated and the second step is performed to measure the amount, if any, of impairment loss to recognize. The second step of the analysis compares the implied fair value of goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined by allocating all the assets and liabilities, including any unrecognized intangible assets, to the reporting unit. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. If the carrying amount of goodwill exceeds the implied fair value, goodwill is considered impaired and an impairment loss is recognized in an amount equal to the excess of the carrying amount over the implied fair value.

Fiscal 2010. We conducted these impairment tests on August 1 for fiscal year 2010. We engaged an independent valuation consultant to assist in the valuation of the commercial systems sales and services reporting units. The Company used a combination of evaluations to estimate the fair value of its reporting units, including the following: a) an income approach by which forecasted future cash flows are discounted to present value; b) a market approach by which comparable companies values are compared to the applicable reporting unit’s values; and c) a market approach by which the Company’s own market capitalization is applied to the applicable reporting unit. The impairment test also requires a great amount of subjectivity and assumptions. Based on the work performed, we determined that the fair value of our reporting units was greater than the carrying values and therefore no impairment had occurred.

Fiscal 2009. Macro-economic conditions negatively impacted our commercial systems business beginning in the first quarter of fiscal 2009. Those conditions worsened significantly in the third fiscal quarter. Also, uncertainty regarding the ultimate disposition of the Nortel product line grew as Nortel began divesting its assets, including assets which are strategic to the Company’s operations. Finally, the Company’s sustained decline in market capitalization continued, reflecting market uncertainty regarding the value of the Company’s operations. This combination of factors prompted the Company to conduct an interim test for impairment as of July 31, 2009. The Company engaged a consultant to assist in the valuation of the commercial systems sales and services reporting units. The Company used a combination of evaluations to estimate the fair value of its reporting units, including the following: a) an income approach by which forecasted future cash flows are discounted to present value; b) a market approach by which comparable companies values are compared to the applicable reporting unit’s values; and c) a market approach by which the Company’s own market capitalization is applied to the applicable reporting unit. Based on the results of this work, the Company determined that the carrying value of the commercial systems sales reporting unit was impaired, and the services reporting unit was not impaired. The Company recorded an impairment charge of $11 million against its commercial systems sales reporting unit as an initial estimate at the end of the third quarter. The Company completed its evaluation of the fair value of this reporting unit including performing the step II analysis required by ASC 350 during the fourth quarter and increased the total goodwill impairment charge to $14.8 million.

The tax basis goodwill associated with the acquisition of U.S. Technologies, Inc. (which occurred November 30, 1999) exceeded the goodwill recorded on the financial statements by $1,462,000. The Company is reducing the carrying value of goodwill recorded on the financial statements each accounting period to record the tax benefit realized due to the excess of tax-deductible goodwill over the reported amount of goodwill, which resulted from a difference in the valuation dates used for common stock given in the acquisition. Accrued income taxes and deferred tax liabilities are being reduced as well. The Company reduced the carrying value of goodwill by $55,576 for the impact of the basis difference for both the years ended October 31, 2010 and 2009.

F-10

The changes in the carrying value of goodwill for fiscal 2010 and 2009 are as follows:

	Commercial						Hospitality
	Systems						Systems
	Sales			Services			Sales		Other			Total
Balance, November 1, 2008		17,962,263			8,645,946			—		217,289		$	26,825,498
Goodwill acquired		37,232			24,821			—		—			62,053
Amortization of book versus tax basis difference		(41,680	)		(13,340	)		—		(556	)		(55,576	)
Impairment of Goodwill		(14,800,000	)		—			—		—			(14,800,000	)
Balance, October 31, 2009		3,157,815			8,657,427			—		216,733			12,031,975
Goodwill acquired		2,309,349			2,934,496			563,667		—			5,807,512
Amortization of book versus tax basis difference		(41,680	)		(13,340	)		—		(556	)		(55,576	)
Balance, October 31, 2010	$	5,425,484		$	11,578,583		$	563,667	$	216,177		$	17,783,911

Other Intangible Assets

	As of October 31, 2010				As of October 31, 2009
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Acquired customer lists and other	$	4,010,353	$	848,562	$	1,076,352	$	505,612

Amortization expense of intangible assets was $342,949, $270,155 and $112,501 for the years ended October 31, 2010, 2009 and 2008, respectively. The estimated amortization expense of intangible assets is $663,000, $614,000, $524,000, $440,000 and $440,000 for fiscal years ended October 31, 2011, 2012, 2013, 2014 and 2015, respectively.

2. ACCOUNTS RECEIVABLE:

Trade accounts receivable consist of the following at October 31:

	2010		2009
Trade accounts receivables	$	18,352,519	$	14,393,681
Less- reserve for doubtful accounts		546,527		561,229
Trade receivables, net	$	17,805,992	$	13,832,452

Adjustments to the reserve for doubtful accounts consist of the following at October 31:

	2010			2009			2008
Balance, beginning of period	$	561,229		$	192,880		$	175,844
Provision for doubtful accounts		63,226			460,000			22,924
Net write-offs		(77,728	)		(91,651	)		(5,888	)
Balance, end of period	$	546,727		$	561,229		$	192,880

F-11

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

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

3. INVENTORIES:

Inventories are stated at the lower of weighted-average cost or market and consist of the following components at October 31:

	2010		2009
Finished goods and spare parts	$	7,785,951	$	5,977,703
Less- reserve for excess and obsolete inventories		1,070,875		941,505
Total inventories, net	$	6,715,076	$	5,036,198

Adjustments to the reserve for excess and obsolete inventories consist of the following:

	2010		2009			2008
Balance, beginning of period	$	941,505	$	848,265		$	771,653
Provision for excess and obsolete inventories		102,000		102,000			102,000
Adjustments to inventories		27,370		(8,760	)		(25,388	)
Balance, end of period	$	1,070,875	$	941,505		$	848,265

Adjustments to inventories in 2010, 2009 and 2008 included write-offs of obsolete inventory and adjustments to certain inventory values to lower of cost or market.

4. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following at October 31:

	Estimated
	Useful Lives	2010			2009
Building and building improvements	3-20	$	3,379,059		$	3,253,693
Data processing and computer field equipment	1-7		4,438,556			3,248,126
Software development costs, work-in-process	N/A		272,097			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		880,635			779,588
Auto	5		710,608			537,300
Other	3-7		156,131			149,484
Total property, plant and equipment			13,823,613			12,118,311
Less- accumulated depreciation and amortization			(6,891,686	)		(5,292,395	)
Total property, plant and equipment, net		$	6,931,927		$	6,825,916

F-12

Amortization expense of software placed in service was approximately $522,000, $931,000 and $906,000 for the years ended October 31, 2010, 2009 and 2008, respectively. Estimated amortization expense of software currently placed in service is approximately $549,000 annually for fiscal years 2011 through 2015, respectively.

5. ACCRUED LIABILITIES:

Current accrued liabilities consist of the following at October 31:

	2010		2009
Vacation	$	1,007,448	$	792,958
Commissions		747,810		789,184
Contingent payment		156,249		85,916
Bonuses		490,546		283,467
Sales taxes		9,184		71,072
Payroll		336,820		187,066
Interest		7,408		8,308
Other		1,127,838		1,226,425
Total current accrued liabilities	$	3,883,303	$	3,444,396

6. UNEARNED SERVICES REVENUE:

Unearned services revenue consists of the following at October 31:

	2010		2009
Service contracts	$	3,396,495	$	2,465,485
Warranty service		2,181,846		1,158,102
Customer deposits		909,235		1,529,260
Other		41,754		41,754
Total current unearned services revenue		6,529,330		5,194,601
Noncurrent unearned services revenue		48,629		36,691
Total unearned services revenue	$	6,577,959	$	5,231,292

7. INCOME TAXES:

The income tax provision for the years ended October 31, 2010, 2009, and 2008, consists of the following:

	2010		2009			2008
Current provision — Federal	$	—	$	—		$	28,034
Current provision — State		85,000		80,000			23,161
Deferred provision (benefit)		793,000		(6,726,000	)		1,272,805
Total provision (benefit)	$	878,000	$	(6,646,000	)	$	1,324,000

F-13

The reconciliation of the statutory income tax rate to the effective income tax rate is as follows:

	Year Ended
	October 31,
	2010			2009			2008
Statutory rate		34	%		34	%		34	%
State income taxes, net of Federal benefit		5	%		5	%		5	%
Effective rate		39	%		39	%		39	%

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of October 31 are presented below:

	2010		2009
Deferred tax assets:
Net operating loss carry forward	$	1,036,830	$	1,183,015
Currently nondeductible reserves		691,577		569,871
Accrued liabilities		516,501		566,305
Prepaid service contracts		34,704		40,651
Stock based compensation expense		374,384		255,816
Other		47,950		51,302
Total deferred tax asset		2,701,946		2,666,960
Deferred tax liabilities:
Intangible assets		773,822		68,483
Depreciation		766,097		701,034
Tax income to be recognized on sales-type lease contracts		5,900		21,876
Total deferred tax liability		1,545,819		791,393
Net deferred tax asset	$	1,156,127	$	1,875,567

	2010			2009
Net deferred tax asset as presented on the balance sheet:
Current deferred tax asset	$	1,168,544		$	1,136,351
Noncurrent deferred tax (liability) asset		(12,417	)		739,216
Net deferred tax asset	$	1,156,127		$	1,875,567

The Company has net operating losses of approximately $2.7 million which begin expiring in 2025. Management believes that future operating income will be sufficient to realize these loss carry forwards and that no valuation allowance is required.

8. CREDIT AGREEMENTS:

At October 31, 2010 the Company’s credit facility consisted of a loan agreement with a commercial bank including a $8.5 million revolving credit agreement collateralized by trade accounts receivable, inventories, and real estate. 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 new loan agreement accrues at the greater of either a) the London Interbank Offered Rate (“LIBOR”) (0.25% at October 31, 2010) plus 3.00% or b) 4.5%. The outstanding balance on the revolving line of credit was $1.8 million at October 31, 2010 and the Company did not have an outstanding balance on the revolving line of credit at October 31, 2009. At October 31, 2010, we were in compliance with the covenants of the credit facility. On November 5, 2010 our loan agreement was renewed for a one year term on substantially the same terms and conditions.

F-14

At October 31, 2010 the Company was paying 4.5% on the revolving line of credit borrowings.

On August 2, 2010, the Company purchased the common stock of Pyramid Communications Services, Inc. The purchase price included $675,000 in subordinated promissory notes payable to the sellers in eight quarterly installments bearing interest at 3% per year. In fiscal 2010 we reduced our subordinated promissory notes balance through scheduled principal payments by $82,000.

9. STOCK-BASED INCENTIVE AWARDS:

In fiscal 2004 the Company’s stockholders approved the “2004 Omnibus Stock Incentive Plan” (“2004 Plan”) for officers, directors and employees. The 2004 Plan authorizes the grant of up to 600,000 shares of common stock and includes an evergreen feature so that such number will automatically increase on November 1 of each year during the term of the 2004 Plan by three percent of the total number of outstanding shares of common stock outstanding on the previous October 31. Awards available for issuance under the 2004 Plan include nonqualified and incentive stock options, restricted stock, and other stock-based incentive awards such as stock appreciation rights or phantom stock. The evergreen feature does not apply to incentive stock options. The 2004 Plan is administered by the Compensation Committee of the Board of Directors.

In fiscal 2000 the Company’s shareholders approved a stock option plan (“2000 Plan”) for officers, directors and key employees. Under the 2000 Plan, the Board of Directors, or a committee thereof, determine the option price, not to be less than fair market value at the date of grant, number of options granted, and the vesting period. The 2000 Plan expired in fiscal 2010 and although there are outstanding grants, no new grants can be made under this plan.

During the fourth quarter of fiscal 2009, the Company made a tender offer to holders of certain underwater options which had an exercise price greater than $2.95, but not higher than $4.14, in exchange for a new option with an exercise price of $2.54, a term of 6 years, and a vesting schedule of 50% after one year of service and 25% after two and three years of service, respectively. The exchange ratio, the number of old options surrendered for each new option, was calculated based on the fair values of the options surrendered and issued under a value-for-value exchange. No additional compensation expense was recognized as a result of the option exchange. Under the program 292,100 options were surrendered out of a total eligible number of 386,800 options in exchange for 198,999 new options with terms outlined above.

The following table summarizes information concerning options outstanding under the 2004, 2000 and 1988 Plans including the related transactions for the fiscal years ended October 31, 2008, 2009, and 2010:

				Weighted		Weighted Average
				Average		Fair Value of
	Number			Exercise Price		Options Granted
Balance, October 31, 2007		658,368		$	6.50
Granted		80,000		$	4.08	$	2.45
Exercised		(22,664	)	$	3.98
Forfeited		(52,604	)	$	6.43
Balance, October 31, 2008		663,100		$	6.41
Granted		120,000		$	1.76	$	1.10
Issued under Option Exchange		198,999		$	2.54	$	1.18
Forfeited		(12,900	)	$	4.59
Cancelled in Option Exchange		(292,100	)	$	3.44
Balance, October 31, 2009		677,099		$	5.81
Granted		10,000		$	2.70	$	1.29
Forfeited		(159,815	)	$	15.12
Balance, October 31, 2010		527,284		$	2.93
Exercisable at October 31, 2010		294,932		$	3.48
Exercisable at October 31, 2009		338,100		$	9.28
Exercisable at October 31, 2008		335,600		$	9.53

F-15

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing method with the following weighted average assumption:

	Year Ended October 30,
	2010			2009			2008
Expected dividend yield		0.00	%		0.00	%		0.00	%
Expected volatility		57.30	%		62.48	%		63.39	%
Expected life (years)		4.50			4.63			5.50
Risk-free interest rate		1.83	%		2.14	%		3.46	%

The 294,932 options outstanding and exercisable at October 31, 2010 under the 2004 Plan and the 2000 Plan had an aggregate intrinsic value of $142,806. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. Exercise prices for options outstanding at October 31, 2010, ranged from $1.59 to $10.50. The weighted-average fair value of options vested in fiscal 2010, 2009 and 2008 was $1.18, $1.86 and $2.24 per share, respectively.

The Company has also granted options outside the 1988 Plan, 2000 Plan, and 2004 Plan to certain officers and directors typically as an inducement to accept employment or a seat on the Board. These options generally expire ten years from the date of grant and are exercisable over the period stated in each option. The following table summarizes information concerning options outstanding under various Officer and Director Plans (“O&D Plans”) including the related transactions for the fiscal years ended October 31, 2008, 2009, and 2010:

				Weighted Average
	Number			Exercise Price
Balance, October 31, 2008		630,000		$	6.48
Forfeited		(180,000	)	$	5.81
Balance, October 31, 2009		450,000		$	6.75
Forfeited		(210,000	)	$	5.97
Balance, October 31, 2010		240,000		$	7.43
Exercisable at October 31, 2010		240,000		$	7.43
Exercisable at October 31, 2009		450,000		$	6.75
Exercisable at October 31, 2008		630,000		$	6.48

The 240,000 options outstanding and exercisable at October 31, 2010 under the O&D Plans had no intrinsic value. Exercise prices for options outstanding at October 31, 2010, ranged from $5.82 to $15.53. All the shares issued under the O&D Plans were vested prior to fiscal 2008.

The following is a summary of all stock options outstanding as of October 31, 2010:

	Options Outstanding						Options Exercisable
					Weighted
					Average
	Number		Weighted		Remaining		Number		Weighted
Range of	Outstanding at		Average		Contractual		Exercisable at		Average
Exercise Prices	October 31, 2010		Exercise Price		Life (Years)		October 31, 2010		Exercise Price
$1.59		10,000	$	1.59		8.47		—		—
$1.77		110,000	$	1.77		4.63		—		—
$2.54		184,734	$	2.54		4.96		92,382	$	2.54
$2.70		10,000	$	2.70		5.09		—		—
$2.95		70,000	$	2.95		0.97		70,000	$	2.95
$3.25		25,000	$	3.25		3.68		25,000	$	3.25
$3.63		90,800	$	3.63		0.99		90,800	$	3.63
$4.30		10,000	$	4.30		3.26		—		—
$5.81		200,000	$	5.81		0.75		200,000	$	5.81
$9.00 – 15.53		56,750	$	14.04		1.66		56,750	$	14.04

F-16

Restricted Stock

Shares of restricted stock have been granted out of the 2004 Plan to certain key employees and executives to provide long-term incentive compensation opportunities. The restricted shares vest in equal portions over three years. The fair value of our restricted shares is determined based on the closing price of our stock on the date of grant and is recognized straight line over the vesting period. Restricted shares issued to key employees and directors were 80,878 and 38,916 in fiscal years 2010 and 2009, respectively. In late fiscal 2008, the Compensation Committee of the Board of Directors established equity ownership targets for senior executives and directors and designated a portion of any annual bonuses or director fees, respectively to be paid in shares restricted stock if the executive has not met his targets. Included in the shares above are restricted shares issued in fiscal 2010 and 2009 to executives and directors in lieu of cash bonuses were 12,878 and 24,416, respectively.

A summary of restricted stock activity under the 2004 Plan is as follows:

				Weighted
				Average		Aggregate
	Number of			Grant Date		Intrinsic
	Shares			Fair Value		Value
Balance, October 31, 2008		16,905		$	4.03
Granted		38,916		$	1.75	$	97,290
Balance, October 31, 2009		55,821		$	2.44
Granted		80,878		$	1.29	$	287,117
Vested		(27,252	)
Forfeited		(10,950	)
Balance, October 31, 2010		98,497		$	1.60
Vested at October 31, 2010		—		$	—	$	—
Vested at October 31, 2009		5,635		$	4.03	$	14,088

At October 31, 2010 there was $60,704 of unrecognized compensation expense related to restricted stock that is expected to be recognized over a weighted-average period of 1.5 years.

10. EARNINGS PER SHARE:

All basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the reporting period. A reconciliation of net income and weighted average shares used in computing basic and diluted earnings per share is as follows:

	For the Year Ended October 31, 2010
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS
Net income	$	1,373,214		10,402,261	$	0.13
Dilutive effect of stock options				76,116
Diluted EPS
Net income	$	1,373,214		10,478,377	$	0.13

F-17

	For the Year Ended October 31, 2009
	Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
Basic EPS
Net loss	$	(10,316,545	)		10,223,626	$	(1.01	)
Dilutive effect of stock options					—
Diluted EPS
Net loss	$	(10,316,545	)		10,223,626	$	(1.01	)

	For the Year Ended October 31, 2008
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS
Net income	$	2,056,434		10,249,671	$	0.20
Dilutive effect of stock options				—
Diluted EPS
Net income	$	2,056,434		10,249,671	$	0.20

For the years ended October 31, 2010, 2009, and 2008, respectively, stock options for 723,202 shares at an average exercise price of $4.75, 1,333,880 shares at an average exercise price of $6.16, and 1,016,940 shares at an average exercise price of $7.33, were excluded from the calculation of earnings per share because they were antidilutive.

11. FINANCING RECEIVABLES:

A small portion of the Company’s systems sales are made under sales-type lease agreements with the end-users of the equipment. These receivables are secured by the cash flows under the leases and the equipment installed at the customers’ premises.

12. MAJOR CUSTOMERS, SUPPLIERS AND CONCENTRATIONS OF CREDIT RISK:

Marriott International, Host Marriott, and other affiliated companies (“Marriott”) represent a single customer relationship for our Company and are a major customer. Revenues earned from Marriott represented 8%, 10%, and 8% of our total revenues in fiscal 2010, 2009 and 2008, respectively. Miami-Dade County Public School systems (“M-DCPS”) is a major customer and revenues earned from M-DCPS represented 9%, 5%, and 16% of our total revenues in fiscal years 2010, 2009, and 2008, respectively.

The Company extends credit to its customers in the normal course of business, including under its sales-type lease program. As a result, the Company is subject to changes in the economic and regulatory environments or other conditions, which in turn may impact the Company’s overall credit risk. However, the Company sells to a wide variety of customers and, except for its hospitality customers, does not focus its sales and marketing efforts on any particular industry. Management considers the Company’s credit risk to be satisfactorily diversified and believes that the allowance for doubtful accounts is adequate to absorb estimated losses at October 31, 2010.

The majority of the Company’s systems sales are derived from sales of equipment designed and marketed by Avaya or Mitel. As such, the Company is subject to the risks associated with these companies’ financial condition, ability to continue to develop and market leading-edge technology systems, and the soundness of their long-term product strategies. Avaya has outsourced their manufacturing operations to a single manufacturer. Thus, the Company is subject to certain additional risks such as those that might be caused if the manufacturer incurs financial difficulties or if man-made or natural disasters impact their manufacturing facilities. The Company believes its Avaya purchases could be quickly converted to the other available distributors without a material disruption to its business. Mitel products are purchased directly from Mitel to receive certain additional pricing advantages, but the products can be purchased from a variety of distributors as well.

F-18

13. EMPLOYMENT AGREEMENTS:

The Company has two incentive compensation plans: one for sales professionals and sales management and the Employee Bonus Plan (“EBP”) for other key employees. The bonus plan for sales personnel is based on either gross profit generated or a percentage of their “contribution”, defined as the gross profit generated less their direct and allocated sales expenses. The Company paid $458,812, $366,397 and $474,634 during 2010, 2009 and 2008, respectively, under the sales professionals’ bonus plan. The Employee Bonus Plan (“EBP”) provides an annual incentive compensation opportunity for senior executives and other employees designated by senior executives and the Board of Directors as key employees. The purpose of the EBP is to provide an incentive for senior executives and to reward key employees for leadership and excellent performance. In fiscal 2010, 2009 and 2008, the Company accrued bonuses of approximately $337,000, $151,000 and $418,000, respectively.

The Company has an agreement with its Executive Director of Strategic Relationships and Managed Services (“EDMS”) to provide two weeks of severance for each year of service and continuance of paid health–care benefits for six months in the event the EDMS is separated from the Company without cause and provided a general release of liability is executed by the EDMS and the Company.

To encourage cooperation and retention, the Company has provided salary guarantees to certain key employees of the acquired businesses. The guarantees are for a period of one year from the acquisition date provided the employee is separated for reasons other than cause. At October 31, 2010 there were such four agreements in place.

On December 9, 2010, the Company’s Board of Directors adopted an Executive Change in Control Severance Plan (the “Severance Plan”). The Severance Plan will provide benefits to those employees designated by the Board to participate in the plan (the “Participant”). Severance benefits are triggered under the Severance Plan upon the Participant’s termination of employment with the Company and its subsidiaries upon an “involuntary termination of employment” during the one-year period following a change in control (defined in the Severance Plan). An involuntary termination of employment is defined under the Severance Plan as a termination of the Participant’s employment by the Company or its subsidiaries for reasons other than “cause,” or as a voluntary termination of employment by the Participant for “a good reason event.” For purposes of the Severance Plan, “cause” means (a) the conviction of the Participant for any felony involving dishonesty, fraud or breach of trust, (b) intentional disclosure of the Company’s confidential information contrary to Company policies, (c) intentional engagement in any competitive activity which would constitute a breach of the Participant’s duty of loyalty, (d) the willful and continued failure of Participant to substantially perform his or her duties for the Company (other than as a result of incapacity due to physical or mental illness); or (e) the willful engagement by the Participant in gross misconduct in the performance of his or her duties that materially injures the Company. For purposes of the Severance Plan, a “good reason event” means the occurrence after a change in control of any one of the following events or conditions: (a) a change (other than a nominal one) in the Participant’s position or duties as they were in effect immediately before the change in control, (b) the Company assigns the Participant any duties inconsistent with, or takes action that materially diminishes, the Participant’s position, authority, duties or responsibilities in effect immediately before the change in control; (c) the Company materially reduces the Participant’s base salary or annual cash compensation; (d) the Participant is relocated to a workplace more than a 50-mile radius outside of the Participant’s workplace prior to the change in control; or (e) the Company breaches a provision of the Severance Plan which results in a material adverse effect on the Participant.

The Severance Plan provides for a single sum cash payment based on a multiple of the Participant’s annual cash compensation, which includes his (i) base salary, plus (ii) the annual cash incentive award established by the Board (or if such annual cash incentive has not been established, then the greater of the Participant’s previous year’s annual cash incentive award or the average of such awards for generally the preceding three years). The multiple is one and one-half times annual cash compensation for the Company’s Chief Executive Officer and one times annual cash compensation for all other Participants. The Severance Plan also provides for continued life and medical insurance coverage for twelve months following the date of the Participant’s involuntary termination subject to certain conditions and limitations set forth in the Severance Plan. In order to be entitled to receive severance benefits, the Participant is required by the Severance Plan to execute and deliver to the Company a release and waiver of claims against the Company and to continue to abide by applicable Company policies regarding confidential information, non-disclosure and other policies that survive termination of employment.

The Company has the right to terminate or amend the Severance Plan at any time without the consent of the Participant, except during the one year period following a change in control.

14. CONTINGENCIES:

F-19

Operating Lease Commitments

Future minimum commitments under non-cancelable operating leases for office space and equipment are approximately $640,000, $539,000 $278,000, $204,000 and $202,000 in fiscal years 2011 through 2015, respectively.

Capital Lease Commitments

During 2008 the Company leased software licenses under an agreement that is classified as a capital lease. The book value of the licenses is included in the balance sheet as property, plant, and equipment and was $101,449 at October 31, 2010. Accumulated amortization of the licenses at October 31, 2010 was $355,071. Amortization of assets under the capital lease is included in depreciation expense. As of October 31, 2010 the future minimum lease payments required under the lease is $107,624 and the present value of the net minimum lease payments is $106,076. At October, 31, 2010 future minimum lease payments required under a vehicle lease assumed in a recent acquisition is $17,064 and the present value of the lease payments is $16,325.

15. RETIREMENT PLAN:

The Company has a 401(k) retirement plan (“Plan”). Historically, in addition to employee contributions, the Company made discretionary matching and profit sharing contributions to the Plan based on percentages set by the Board of Directors. The Company’s discretionary matching contributions were suspended in the third fiscal quarter of fiscal 2009 and no contributions were made to the Plan by the Company during fiscal 2010. The Company made contributions to the Plan of approximately $521,000 and $712,000 for the years ended October 31, 2009, and 2008, respectively.

As part of its acquisition of Pyramid on August 2, 2010 (described in Note 16 below), the Company also has a 401(k) for legacy Pyramid employees (“Pyramid Plan”). No discretionary matching or profit sharing contributions were made to the Pyramid Plan between the closing date and October 31. 2010. The Company expects to merge the Pyramid Plan into the Plan during fiscal 2011.

16. ACQUISITIONS:

On May 24, 2010, the Company completed the purchase of the 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 was $2.6 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 $20,000 in cash released to the buyer from an escrow account as required under the purchase agreement.

On August 2, 2010, the Company completed the purchase of 100% of the voting stock of Pyramid Communications Services, Inc., (“Pyramid”) a Dallas, Texas based privately held company providing communications equipment and related services. Pyramid’s 2009 revenues exceeded $10.0 million. The purchase price included $1.8 million paid in cash at closing; $675,000 in subordinated promissory notes payable to the sellers in eight quarterly installments bearing interest at three percent per year; $200,000 in cash deposited into an escrow account as required under the purchase agreement; and $150,000 payable to the former CEO of Pyramid in thirty-six monthly installments under personal goodwill and non-compete agreements. Additionally, the Company retired $648,222 in principal and accrued interest on Pyramid’s outstanding line of credit with its bank.

F-20

On September 2, 2010, the Company completed the purchase of the operating assets of Data-Com Telecomunications, Inc., (“Data-Com”) a New Jersey based privately held company providing communications equipment and related services to the greater New York City area. The purchase price was $3.57 million paid in cash at closing. Of this amount, $604,000 was put into escrow until certain tax liabilities are determined; customer overpayments are resolved; and the final value of the net assets purchased is established.

The fair values of the assets acquired and liabilities assumed for these acquisitions 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 date of the acquisitions.

F-21

EX-2.1

Exhibit 2.1

EXECUTION COPY

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (“Agreement”) is made and entered into as of the 23^rd day of August, 2010, by and among XETA TECHNOLOGIES, INC., an Oklahoma corporation (“Purchaser”), DATA-COM TELECOMMUNICATIONS, INC., a New York corporation (“Seller”) and MICHAEL DURKIN (the “Seller Principal”), joining herein for the purpose of making the representations and warranties made by him pursuant to Article V hereof.

Recitals:

A. Seller is a New York metro technology solutions provider offering a full range of communications and networking solutions, including but not limited to IP Telephony, unified communications, and unified messaging (the “Business”).

B. Seller desires to sell and convey to Purchaser, and Purchaser desires to purchase and acquire from Seller as a going concern, substantially all of the assets of Seller used in the Business, together with all associated goodwill, on the terms more particularly hereinafter set forth.

Terms and Conditions

In consideration of the foregoing premises, which are hereby incorporated by reference herein as operative terms of this Agreement, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows:

ARTICLE I
DEFINED TERMS AND INTERPRETATION

Section 1.1 Definitions. Capitalized terms used in this Agreement shall have the following meanings:

(a) “Accounts Receivable” has the meaning assigned in Section 2.1(a).

(b) “Agreement” has the meaning assigned in the Preamble.

(c) “Affiliate” of a specified Person means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the specified Person.

(d) “AR Dispute Resolution Period” has the meaning assigned in Section 2.9(b).

(e) “AR Shortfall” has the meaning assigned in Section 2.9(b).

(f) “Asserting Party” has the meaning assigned in Section 10.4.

(g) “Assets” has the meaning assigned in Section 2.1.

(h) “Assignment and Assumption Agreement” has the meaning assigned in Section 2.4(i).

(i) “Assignment and Assumption of Lease” has the meaning assigned in Section 2.4(i).

(j) “Assignment and Assumption of Warehouse Lease” has the meaning assigned in Section 2.4(i).

(k) “Assumed Contract Obligations” shall mean the liabilities and obligations existing or arising under the Major Assigned Contracts which Purchaser shall assume pursuant to the Assignment and Assumption Agreement.

(l) “Assumed Liabilities” has the meaning assigned in Section 2.4.

(m) “Bank Consent” has the meaning assigned in Section 7.3.

(n) “Basket” has the meaning assigned in Section 10.4,

(o) “Bill of Sale” has the meaning assigned in Section 8.9(a)(ii).

(p) “Board Approval” has the meaning assigned in Section 6.2.

(q) “Books and Records” has the meaning assigned in Section 2.1(j).

(r) “Business” has the meaning assigned in the Recitals.

(s) “Business Day” means a day other than a Saturday, Sunday or U.S. federal or Oklahoma or New York state holiday on which banks are generally closed for business.

(t) “Cash Portion of the Purchase Consideration” shall have the meaning assigned in Section 2.3(a).

(u) “Closing” has the meaning assigned in Section 3.1(a).

(v) “Closing Date” has the meaning assigned in Section 3.1(b).

(w) “Closing Date Balance Sheet” has the meaning assigned in Section 2.6(a).

(x) “Closing Date Balance Sheet Liabilities” has the meaning assigned in Section 2.4.

(y) “Code” means the Internal Revenue Code of 1986, as amended.

(z) “Current Liabilities” means the accounts payable and accrued expenses set forth in the Closing Date Balance Sheet, as the case may be.

(aa) “Customer Overpayments Fund” means that portion of the Escrow Amount consisting of $54,000 reserved for the refund of overpayments by former Customers of Seller who shall become customers of Purchaser by virtue of the consummation of this Agreement and the assignments of customer contracts contemplated herein.

(bb) “Determination Date” has the meaning assigned in Section 2.8(a).

(cc) “Doubtful Accounts” has the meaning assigned in Section 2.2(c).

(dd) “Due Diligence Information” has the meaning assigned in Section 7.3.

2

(ee) “Durkin Lease” means Seller’s current office space lease with Durkin Realty, LLC covering the premises located at 354 Route 206 South, Flanders, New Jersey 07836.

(ff) “Effective Time” has the meaning assigned in Section 3.1(b).

(gg) “Encumbrances” means all liens, mortgages, pledges, security interests, conditional sales agreements, charges, options, preemptive rights, rights of first refusal, reservations, restrictions or other encumbrances or material defects in title.

(dd) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

(ee) “Escrow Agent” means Triad Bank, N.A. of Tulsa, Oklahoma

(ff) “Escrow Agreement” has the meaning assigned in Section 2.3(b)(i).

(hh) “Escrow Amount” has the meaning assigned in Section 2.3(b)(i).

(ii) “Evaluator” has the meaning assigned in Section 2.7.

(jj) “Excluded Assets” has the meaning assigned in Section 2.2.

(kk) “Final Determination” has the meaning assigned in Section 10.9.

(ll) “Final Net Acquired Assets Value” has the meaning assigned in Section 2.6(c).

(mm) “Final Report” has the meaning assigned in Section 2.9(b).

(nn) “GAAP” means generally accepted accounting principles in the United States, applied on a basis consistent with prior periods.

(oo) “Governmental Authority” means any federal, state, local or foreign government, political subdivision or governmental or regulatory authority, agency, board, bureau, commission, instrumentality or court or quasi-governmental authority.

(pp) “Indemnification Period” has the meaning assigned in Section 10.1.

(qq) “Initial Report” has the meaning assigned in Section 2.9(b).

(rr) “Inventory” has the meaning assigned in Section 2.1(c).

(ss) “Key Employees” shall have the meaning assigned in Section 4.1.

(tt) “Law” or “Laws” means any and all federal, state, local or foreign statutes, laws, ordinances, proclamations, codes, regulations, legal doctrines, published requirements, orders, decrees, judgments, injunctions and rules of any Governmental Authority, including, without limitation, those covering environmental, Tax, energy, safety, health, transportation, bribery, record keeping, zoning, discrimination, antitrust and wage and hour matters, in each case as amended and in effect from time to time.

(uu) “Loss” or “Losses” means all liabilities, losses, claims, damages, actions, suits, proceedings, demands, assessments, adjustments, fees, costs and expenses (including specifically, but without limitation, reasonable attorneys’ fees and costs and expenses of investigation), net of (i) income Tax effects with respect thereto (including, without limitation, income Tax benefits recognized in connection therewith and income Taxes upon any indemnification recovery thereof) and (ii) insurance proceeds.

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(vv) “Major Assigned Contracts” has the meaning assigned in Section 2.1(b).

(ww) “Net Acquired Assets Value” means the value of the Assets minus the amount of the Closing Date Balance Sheet Current Liabilities. For purposes of calculating the Net Acquired Assets Value, the Accounts Receivable shall be valued at their face value (net of reasonable and customary allowance for doubtful accounts), the inventory shall be valued at the lower of cost or market, and all other Assets shall be valued at book value all in accordance with GAAP.

(xx) “Nonassignable Asset” has the meaning assigned in Section 3.5.

(yy) “Non-Competition Agreement” has the meaning assigned in Section 8.9(a)(i).

(zz) “Objection Notice” has the meaning assigned in Section 2.6(b).

(aaa) “Permits” has the meaning assigned in Section 5.10.

(bbb) “Permitted Encumbrances” means Encumbrances (a) for Taxes or other governmental charges not yet due and payable or which are being contested in good faith and by appropriate proceedings, (b) securing obligations incurred in the ordinary course of business which are not past due and are included among the Assumed Liabilities (including those imposed by law, UCC-1 financing statements filed under the Uniform Commercial Code, mechanics’, materialmens’, landlords’, warehousemens’ and carriers’ liens) or are being contested in good faith, (c) that are reflected, reserved against or otherwise disclosed in the Required Financial Information and are included among the Assumed Liabilities, or which are created under any contract or lease to which Seller is a party, (d) purchase money security interests incurred in connection with the purchase of assets in the ordinary course of business and are included among the Assumed Liabilities, (e) arising under zoning, building codes, and other land use laws regulating the use or occupancy of such real property used by Seller or the activities conducted thereon that are imposed by any Governmental Authority having jurisdiction over such real property, excluding existing violations of such codes, laws or regulations, (f) easements, covenants, conditions, restrictions, and other similar matters of record affecting title to real property leased by the Seller and other title defects that do not or would not materially impair the value, use or occupancy of such real property, (g) that are related to immaterial properties or assets or otherwise would not materially detract from the value, or interfere with the present use, of the property subject thereto or affected thereby, (h) rights and licenses granted to others in any intellectual property or software of the Seller, or (ix) restrictions placed on any intellectual property or software of the Seller licensed by any third party.

(ccc) Person” means an individual, partnership, venture, unincorporated association, organization, syndicate, corporation, limited liability company, or other entity, trust, trustee, executor, administrator or other legal or personal representative or any government or any agency or political subdivision thereof.

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(ddd) “Purchase Consideration” shall have the meaning assigned in Section 2.3(a).

(eee) “Purchase Consideration Increase” has the meaning assigned in Section 2.8(a).

(fff) “Purchase Consideration Reduction” has the meaning assigned in Section 2.8(b).

(ggg) “Purchaser” has the meaning assigned in the Preamble.

(hhh) “Purchaser Ancillary Agreements” has the meaning assigned in Section 6.2.

(iii) “Purchaser’s Conditions to Closing” has the meaning assigned in Section 6.2.

(jjj) “Rental Period” has the meaning assigned in Section 7.9.

(kkk) “Required Financial Information” shall have the meaning assigned in Section 5.6 hereof.

(lll) “Responding Party” has the meaning assigned in Section 10.6.

(mmm) “Returned AR” has the meaning assigned in Section 2.9(c).

(nnn) “Review Period” shall have the meaning assigned in Section 2.6(b).

(ooo) “Sales Tax Escrow Amount” means the aggregate amount which Seller and Purchaser shall be instructed by the States of New Jersey and New York to deposit into escrow in connection with this transaction pursuant to Purchaser’s filing of any required notice of bulk sale in either or both of said states.

(ppp) “SEC” means the United States Securities and Exchange Commission.

(qqq) “Seller” has the meaning ascribed in the Preamble.

(rrr) “Seller Ancillary Agreements” has the meaning assigned in Section 5.2.

(sss) “Seller Principal” means Michael Durkin.

(ttt) “Subject Assets” has the meaning assigned in Section 7.9.

(uuu) “Taxes” means all taxes, charges, fees, levies or other assessments including, without limitation, income, gross receipts, excise, property, sales, withholding, social security, unemployment, occupation, use, service, service use, license, payroll, franchise, transfer and recording taxes, fees and charges, imposed by the United States or any state, local or foreign government or subdivision or agency thereof, whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable to or imposed with respect to any such taxes, charges, fees, levies or other assessments.

(vvv) “UCC” means the Uniform Commercial Code as the same is in force in the jurisdiction implicated in any particular reference herein.

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(www) “Warehouse Lease” means Seller’s current warehouse space lease with Durkin Realty, LLC, covering the premises located at 430 Sand Shore Road, Unit 8, Hackettstown, New Jersey 07840.

Section 1.2 Interpretation. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires:

(a) The terms defined in Article I and elsewhere in this Agreement include the plural as well as the singular;

(b) Words of the masculine gender in this Agreement shall be deemed and construed to include correlative words of the feminine and neuter genders and words of the neuter gender shall be deemed and construed to include correlative words of the masculine and feminine genders;

(c) The words “herein,” “hereof,” and “hereunder” and other words of similar import refer to this Agreement as a whole, including all Schedules and Exhibits, and not to any particular Article, Section or other subdivision;

(d) The terms “include,” “includes” and “including” are not limiting and the term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or;”

(e) The term “material adverse effect,” shall mean any change, circumstance, fact, event or effect that is adverse and material (i) to the Business, the Assets (taken as a whole), the condition (financial or otherwise) or results of operations of Seller, or the ability of Seller to perform its obligations hereunder, except to the extent any such change, circumstance, fact, event or effect is attributable to (A) changes affecting the industry generally in which the Seller operates (and not specifically relating to the Business), (B) changes in Law that become effective after the execution of this Agreement (whether or not such change in Law is retroactive to a time prior to the execution of this Agreement), (C) any event, occurrence, fact, condition or effect which affects the economies or political environment generally in the jurisdictions in which the Seller operates or is present, or (D) the announcement, implementation or closing of the transactions contemplated by this Agreement, or (ii) the ability of Purchaser to conduct the Business after the Closing Date substantially as the Business has been conducted by Seller prior to the Closing Date; and

(f) Whenever a statement of any party is qualified by that party’s knowledge, “knowledge” means the actual personal knowledge of the person making such statement at the time or times that such statement is made and that knowledge or awareness of facts, circumstances or other matters contained or referred to in such statements of which the person making the statement would or should be aware upon the exercise of reasonable care. If the statement is made by a corporation, the knowledge of the corporation’s officers and directors, or any of them, shall be imputed to the corporation.

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ARTICLE II
TERMS OF PURCHASE

Section 2.1 Acquisition of the Assets. Upon the terms and subject to the conditions of this Agreement, Seller agrees to sell, convey, transfer, assign and deliver to Purchaser at the Closing, and Purchaser agrees to purchase from Seller, all of the assets of Seller used in the Business, other than the Excluded Assets (collectively, the “Assets”), specifically including but not limited to:

(a) all accounts and notes receivable, instruments and chattel paper specifically identified or described in Schedule 2.1 (a) hereto attached, including, without limitation, the rebates payable by Nortel, or its successor Avaya, to Seller (the “Accounts Receivable”), which does not include any of the Doubtful Accounts;

(b) all right, title and interest of Seller in, to and under all material existing contracts and agreements, written and verbal to which the Seller is a party, including, without limitation, those contracts and agreements set forth in Schedule 2.1(b) (the “Major Assigned Contracts”);

(c) all inventory (including, without limitation, supplies, spare parts and components) listed in Schedule 2.1(c) (“Inventory”);

(d) all customer lists, sales records, credit data and other information relating to customers of the Business currently maintained by Seller;

(e) [Item intentionally omitted.];

(f) all equipment, as identified or described by item or type in Schedule 2.1(f) hereto attached;

(g) all real property and leaseholds, as described in Schedule 2.1(g) hereto attached;

(h) all software and intellectual property, including those patents, trademarks and copyrights described in Schedule 2.1(h), to the extent, if any, owned or licensed, and transferable, by Seller;

(i) to the extent transferrable, all permits and licenses held by Seller that are specifically described in Schedule 2.1(i) hereto attached;

(j) copies of all relevant books, records, papers and instruments of whatever nature and wherever located that relate to the Business or which are required or necessary for Purchaser to conduct the Business from and after the Closing in the manner in which it was being conducted by Seller before the Closing, to the extent in Seller’s possession or subject to its right of control, and copies of all sales funnels, open orders, files and records containing financial, Tax, technical support and other information pertinent to the operation of the Business (the “Books and Records”);

(k) the goodwill of the Business as a going concern;

(l) all right, title and interest, if any possessed by Seller, in and to the name “DATA-COM TELECOMMUNICATIONS”; and

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(m) Seller’s prepaid expenses; excluding, however, insurance, Taxes, utilities and prepaid expenses specifically incurred with respect to any Excluded Assets.

Section 2.2 Excluded Assets. Notwithstanding anything in Section 2.1 to the contrary, the following assets shall be retained by Seller, and Purchaser shall not be obligated to purchase or acquire or deemed to have purchased or acquired any interest whatsoever in any of the following assets (collectively, “Excluded Assets”):

(a) Seller’s rights under this Asset Purchase Agreement;

(b) All cash and cash equivalents of Seller, including, without limitation, any deposits paid by Seller (including any security deposits) and any bank accounts;

(c) The accounts receivables listed in Schedule 2.2(c) (“Doubtful Accounts”);

(d) The corporate charter, qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, stock transfer books, blank stock certificates, and other documents relating to the organization, maintenance and existence of Seller as a corporation;

(e) All rights and interests of Seller under, and any funds and other property held in any trust or other funding vehicle pursuant to, any “employee benefit plan” (within the meaning of Section 3(3) of ERISA) or any other bonus, stock purchase, stock option, stock appreciation, termination, severance, lay-off, leave of absence, disability, insurance, pension, profit sharing, retirement, vacation or holiday pay, workers compensation, deferred compensation or other employee or welfare benefit plan, agreement or arrangement of Seller applicable to current or former employees of Seller;

(f) All claims and causes of action with respect to Tax refunds or other Tax benefits which relate to the period prior to the Closing Date;

(g) All rights, claims, benefits and other interests of Seller in, to and under any and all insurance policies maintained by or for the benefit of Seller which accrue, or arise in connection with an event occurring, prior to the Closing Date;

(h) The following items of personal property: (i) one (1) 2007 Mercedes S550, VIN #################; (ii) one (1) 2007 Mercedes GL450, VIN ################; (iii) one (1) 2006 PT Cruiser, VIN #################; (iv) one (1) 2007 Toyota Highlander, VIN #################; (v) the laptop, monitor, printer and cell phone (and cell phone number) used by #### #####; (vi) the laptop, monitor and cell phone (and cell phone number) used by ### ##########; (vii) the five (5) personal computers, ten (10) monitors, one (1) laptop, one (1), printer and two (2) cell phones (and cell phone numbers) used by Seller Principal; and (viii) the seven (7) 2003 Ford vans listed in Schedule 2.2(h);

(i) Seller’s prepaid expenses relating to insurance, Taxes, utilities and any prepaid expenses specifically incurred with respect to any other Excluded Assets;

(j) The receivable relating to the advance made by Seller to ##### ####### in the amount of $6,842.76;

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(k) Any accounts or notes receivable from obligors affiliated with Seller by common control; and

(l) Any property constituting a Non-Assignable Asset.

Section 2.3 Purchase Consideration.

(a) Subject to the conditions and adjustments hereinafter set forth, the total purchase consideration for the Assets (the “Purchase Consideration”) shall be the sum of (i) $3,070,000, which amount is based on figures currently available, q.v. Section 2.5(b), and is subject to adjustment pursuant to Section 2.8, Section 2.9 and Section 2.10 hereof (the “Cash Portion of the Purchase Consideration”), and (ii) the amount of the Assumed Liabilities.

(b) The Cash Portion of the Purchase Consideration shall be paid as follows:

(i) The sum of Three Hundred Four Thousand Dollars ($304,000) plus the amount of any Sales Tax Escrow Amount (together with any other amounts added by subsequent written agreement of the parties, collectively, the “Escrow Amount”) shall be deposited into escrow pursuant to the terms of an Escrow Agreement in the form of Exhibit A hereto attached (the “Escrow Agreement”), pending (A) completion of Closing Date Balance Sheet and the calculation of the Final Net Acquired Assets Value, pursuant to Sections 2.6 and 2.8, (B) the collection of the Accounts Receivable by Purchaser pursuant to Section 2.9, and (C) the disbursement of the Customer Overpayments Fund pursuant to Section 2.10;

(ii) Any amounts to be payable at Closing to third parties, such as JP Morgan-Chase, for the release of outstanding Encumbrances on the Assets, which are not Permitted Encumbrances shall be withheld by Purchaser and paid to such creditors by wire transfer, as agreed upon by Purchaser and Seller, as part of the Closing; and

(iii) The balance of the Cash Portion of the Purchase Consideration shall be paid by Purchaser to Seller at Closing to an account designated in writing by Seller.

(c) All amounts payable by Purchaser pursuant to this Section 2.3 shall be paid by wire transfer of immediately available funds.

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Section 2.4 Assumed Liabilities. In addition to payment of the Cash Portion of the Purchase Consideration, Purchaser shall assume, pay, perform and discharge, as and when due, the following liabilities and obligations of Seller, but no others, effective as of the Effective Time (the “Assumed Liabilities”):

(i) the Assumed Contract Obligations pursuant to an assignment and assumption agreement in the form attached hereto as Exhibit B (the “Assignment and Assumption Agreement”); provided, however, the Durkin Lease shall be assumed by Purchaser pursuant to an Assignment, Assumption and Amendment of Lease by and among Purchaser, Seller and Durkin Realty, LLC in the form attached hereto as Exhibit C (the “Assignment and Assumption of Lease”) and the Warehouse Lease shall be assumed by Purchaser pursuant to an Assignment and Assumption of Warehouse Lease Agreement among Seller, Purchaser and Durkin Realty, LLC in the form attached hereto as Exhibit D (the “Assignment and Assumption of Warehouse Lease”),

(ii) periodic payments due under operating leases (if any) for any of the Assets, service obligations arising by virtue of deferred revenues, accounts payable and accrued expenses of Seller all as reflected in Seller’s Closing Date Balance Sheet, as the same may be adjusted pursuant to the terms of this Agreement, including, without limitation, those accounts payable, trade payables and accrued expenses set forth on Schedule 2.4 attached hereto (the “Closing Date Balance Sheet Liabilities”); provided that for purposes of determining the Assumed Liabilities, the Closing Date Balance Sheet Liabilities shall be deemed to exclude any Tax liability which relates to sales of goods or services by Purchaser prior to the Closing Date, is past due as of the Closing Date or which is subject to any uncertain Tax positions within meaning of ASC 740, “Income Taxes,” and

(iii) any liability relating to a warranty claim asserted by a customer of Seller for services rendered, or equipment sold, to such customer by Seller, prior to the Closing Date.

Section 2.5 Allocation of Purchase Consideration.

(a) Subject to any adjustments required by Section 2.8, Section 2.9 or Section 2.10 hereof, the parties to this Agreement shall initially allocate the Purchase Consideration among the Assets and associated goodwill as follows:

Accounts Receivable	$	*
Inventory	$	*
Equipment	$	*
Goodwill Assumed Liabilities +	$	*

(b) The figures above are preliminary and will be updated and finalized after Closing (but not later than the close of the Review Period (as hereinafter defined) based upon the Closing Date Balance Sheet and adjustments, if any, made in accordance with Sections 2.8, 2.9 and 2.10 hereof (“Final Allocation”); provided, however, in making a determination of the Final Net Acquired Assets Value Purchaser and Seller agree that, insofar as the valuation of inventory is concerned, (i) no items will be deemed “obsolete” which are not identified as such by yellow-highlighting on the Physical Stock Taking Report dated as of 7/24/10 attached hereto as Schedule 2.5(b) and (ii) the market price per unit determined for each item by Purchaser in arriving at its valuation for items in inventory as of said date and listed in said report shall not be subject to change, so that the Inventory value reflected in Section 2.5(a) will not be changed except by virtue of changes in quantity of items on hand from those reflected in the Physical Stock Taking Report as of 7/24/10 versus those on hand as of the Closing Balance Sheet Date.

* The asterisk (*) indicates that material has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 of the rules to the Securities and Exchange Act of 1934, as amended.

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(c) The parties agree to file any and all applicable tax returns and other required related tax schedules in accordance with such Final Allocation and Section 1060 of the Internal Revenue Code and will not adopt or otherwise assert tax positions inconsistent therewith. Purchaser and Seller shall each prepare and file its Form 8594 for the taxable year in which the Closing takes place, consistent with the requirements set forth in this Section 2.5.

Section 2.6 Closing Date Balance Sheet; Review.

(a) No later than forty-five (45) days after the Closing Date, Seller shall provide Purchaser with a balance sheet of the Business dated as of the Closing Date that sets forth the Net Acquired Assets Value as of the Closing Date (“Closing Date Balance Sheet”), prepared in accordance with GAAP, except for the omission of detailed footnotes, and warranted as accurate and materially complete by the Seller Principal, which shall include all necessary accruals representing Seller’s ongoing obligations, including and all deferred revenues, accrued commissions, accrued vacations, warranty obligations and sales taxes payable. After the Closing Date, at the Seller’s reasonable request, Purchaser shall assist the Seller in the preparation of the Closing Date Balance Sheet and shall provide Seller any information reasonably requested.

(b) Purchaser shall have forty-five (45) days after delivery of the Closing Date Balance Sheet (the “Review Period”) to review the Closing Date Balance Sheet. Prior to the expiration of the Review Period, Purchaser shall provide Seller with a written notice that shall specify in reasonable detail all disputed items set forth in the Closing Date Balance Sheet and the Net Acquired Assets Value set forth therein, and the basis for any such dispute regarding the accuracy of the Closing Date Balance Sheet or the calculation of the Net Acquired Assets Value (the “Objection Notice”). Unless Purchaser delivers an Objection Notice within the Review Period, the Closing Date Balance Sheet shall be deemed accepted and binding upon the parties hereto.

(c) Following delivery of the Objection Notice, Seller and Purchaser shall promptly attempt to resolve all disputed items in good faith. Any resolution between Purchaser and Seller as to any disputed items set forth in the Objection Notice shall be in writing and shall be final, binding and conclusive on all parties hereto. If a resolution of all the objections set forth in the Objection Notice has not been effected within thirty (30) days from receipt of the Objection Notice by Seller (or longer, as mutually agreed by the parties), Seller and Purchaser shall submit such remaining objections to the Evaluator (as defined in Section 2.7 below) within two (2) Business Days following the expiration of such 30-day period.         *        . The Evaluator shall determine and resolve only those issues still in dispute. The determination of the Evaluator with respect to such disputed items shall be completed within thirty (30) days after the submission of the dispute to the Evaluator, or as soon thereafter as possible, and shall be final and binding upon the parties hereto. (The Net Acquired Assets Value as finally determined in accordance with this Section 2.6, whether mutually agreed upon by Seller and Purchaser, or established by the Evaluator, shall be referred to as the “Final Net Acquired Assets Value.”)

* The asterisk (*) indicates that material has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 of the rules to the Securities and Exchange Act of 1934, as amended.

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Section 2.7 Evaluator. Seller’s         *         and Purchaser’s         *        , shall jointly select         *         (“Evaluator”) to arbitrate any disputed items set forth in the Objection Notice, which the parties have been unable to resolve with the period set forth in Section 2.6 hereof and to make a final determination of such disputed items and the Final Net Acquired Assets Value.         *        .

Section 2.8 Purchase Consideration Adjustment; Escrow Payments.

(a) If the Final Net Acquired Assets Value is greater than zero, then, the Cash Portion of the Purchase Consideration shall be increased by an amount equal to such excess (the “Purchase Consideration Increase”). In the event of a Purchase Consideration Increase, the Escrow Agent shall pay to Seller, pursuant to the Escrow Agreement, the Escrow Amount. Purchaser shall pay to Seller, on or prior to the date that is five (5) Business Days after the date on which the Final Net Assets Value was finally determined (the “Determination Date”), by wire transfer of immediately available funds to an account designated in writing by Purchaser, an amount equal to the Purchase Consideration Increase.

(b) If the Final Net Acquired Assets Value is less than zero, then, the Cash Portion of the Purchase Consideration shall be reduced by an amount equal to such shortfall (the “Purchase Consideration Reduction”) and Purchaser shall be entitled to receive an immediate disbursement from escrow as more particularly set forth in Section 2.8(d)(i) below.

(c) Purchaser and Seller shall jointly notify the Escrow Agent, in accordance with the terms and conditions of the Escrow Agreement, of the Purchase Consideration Increase or Purchase Consideration Reduction, on or prior to a date that is three (3) Business Days after the Determination Date.

(d) In the event of a Purchase Consideration Reduction,

(i) the Escrow Agent shall pay to Purchaser, pursuant to the Escrow Agreement, from the Escrow Amount an amount equal to the lesser of (A) the Escrow Amount or (B) the amount of the Purchase Consideration Reduction.

(ii) Any amount of the Purchase Consideration Reduction not paid by the Escrow Agent to Purchaser pursuant to the Escrow Agreement shall be paid to Purchaser by Seller within five (5) Business Days after the Determination Date by wire transfer of immediately available funds to an account designated in writing by Purchaser.

* The asterisk (*) indicates that material has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 of the rules to the Securities and Exchange Act of 1934, as amended.

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(e) Any remaining Escrow Amount not paid to Purchaser pursuant to Section 2.8(d)(i), shall be maintained by the Escrow Agent until the expiration of the Collection Period and the disbursement of the Customer Overpayments Fund, pursuant to the terms and conditions of the Escrow Agreement and the preparation and submission of all reports required by the provisions of Section 2.9(b) and Section 2.10 below.

Section 2.9 Collection of Accounts Receivable.

(a) Purchaser shall continue to make reasonable, good faith commercial efforts to collect the Accounts Receivable, including the Accounts Receivable it has deemed during the Review Period to be uncollectible, until a date that is six (6) months after the Closing Date (the “Collection Period”). Seller shall have the right to assist Purchaser in the collection of the Accounts Receivable during the Collection Period. During the Review Period, an Account Receivable will be deemed uncollectible, at Purchaser’s discretion, if it becomes more than ninety (90) days past due or if Purchaser determines that such Account Receivable is disputed by the account debtor or represents amounts due with respect to a canceled contract. In addition, during the Review Period, Purchaser may declare any account debtor’s entire Accounts Receivable balance uncollectible if, at any time during the Review Period, more than ten percent (10%) of such account debtor’s total balance becomes more than ninety (90) days’ past due.

(b) Upon the expiration of the Collection Period (or as soon as is practicable thereafter), Purchaser shall deliver to Seller an initial report (the “Initial Report”) setting forth the amount of the Accounts Receivable that have not been collected by Purchaser, including those Accounts Receivable that have been deemed by Purchaser to be uncollectible (the “AR Shortfall”). The Cash Portion of the Purchase Consideration shall be reduced by the amount of any AR Shortfall (as finally determined), including any accrued rebates under Nortel incentive plans. Seller shall have ten (10) Business Days from the receipt of the Initial Report to review the same. For the purpose of such review, Purchaser agrees to permit, or to cause Purchaser’s accountant to permit, Seller and its accountants access to examine all invoices, records, working papers, schedules and other documentation related to the Accounts Receivable. In the event that Seller perceives any discrepancy of the AR Shortfall set forth on the Initial Report, Seller may dispute such discrepancy and Purchaser and Seller agree to work diligently to resolve such discrepancy within ten (10) Business Days of the date Seller asserts such discrepancy (“AR Dispute Resolution Period”). Promptly after the close of the AR Dispute Resolution Period discrepancies, Purchaser shall circulate a revised report (the “Final Report”) setting forth the AR Shortfall reflecting any adjustments arising from the parties’ resolution of any discrepancies. If Seller does not dispute the Initial Report, the Initial Report shall be deemed to be the Final Report.

(c) Seller shall refund to Purchaser the amount of such AR Shortfall by causing an amount equal to the AR Shortfall to be disbursed from the remaining portion of the Escrow Amount, if any, in accordance with the Escrow Agreement, and to the extent the Escrow Amount is insufficient to cover such amount, Seller shall make a payment in immediately available funds to Purchaser for the unpaid portion of the AR Shortfall amount. Any excess Escrow Amount not otherwise payable to Purchaser hereunder, shall be paid to Seller. Notwithstanding anything to the contrary contained herein, the calculation of the AR Shortfall shall exclude any uncollected Accounts Receivable which was taken into consideration in the calculation of the Final Net Acquired Assets Value. Purchaser shall return to Seller all uncollected Accounts Receivable which comprise the AR Shortfall or which are taken into consideration in the calculation of the Final Net Acquired Assets Value (the “Returned AR”). Seller shall then have the right to collect all of any unpaid, or the unpaid portion of, any Accounts Receivable for which Seller has refunded to Purchaser the AR Shortfall.

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(d) From and after the Closing, (i) Seller shall deliver to Purchaser any checks or other forms of payment tendered to Seller in payment of any Accounts Receivable (other than any payment of any Returned AR) and (ii) Purchaser shall deliver to Seller any checks or other forms of payment tendered to Purchaser in payment of any Returned AR.

Section 2.10 Customer Overpayments.

(a) The Customer Overpayments Fund shall be held in escrow by the Escrow Agent and shall be specifically reserved for the payment by Purchaser of bona fide demands for refund of overpayments after the Closing by any customer set forth on Schedule 2.10 attached hereto (each a “Customer”), alleging that such Customer remitted excess payments to Seller prior to the Closing Date.

(b) Purchaser shall not take any action to suggest to a Customer that it may have a right to a refund for overpayments previously made by such Customer to Seller. In the event, however, that a Customer voluntarily makes such an unsolicited refund demand on Purchaser (a “Refund Demand”) Purchaser shall advise Seller in writing of such Refund Demand at least ten (10) days prior to honoring any such refund request during which time Seller may verify that it has not, in fact, already paid the amounts to which such customer is entitled.

(c) Amounts remaining in the Customer Overpayments Fund at the close of business on the second (2^nd) anniversary of the Closing Date shall be paid by the Escrow Agent to Seller.

Section 2.11 Transition Items. Seller and Purchaser hereby agree to the following terms in relation to this transition of responsibility after the Closing Date:

(a) Seller will use commercially reasonable efforts, for a period of sixty (60) days following the Closing Date, to cooperate with Purchaser’s sales and service representatives to ensure a smooth transition of the Business to Purchaser. This cooperation shall include but not be limited to participating in joint conference calls with customers and Purchaser’s sales and/or services representatives as reasonably requested by Purchaser.

(b) Seller will use commercially reasonable efforts, for a period of sixty (60) days following the Closing Date, to cooperate with Purchaser and customers to transition all sales funnels, active quotations, and order backlogs that are part of the Assets.

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ARTICLE III
THE CLOSING

Section 3.1 Closing Time and Place.

(a) The consummation of the transactions contemplated by this Agreement (“Closing”) shall take place on the last Business Day of August 2010, assuming each party to this Agreement shall have indicated to the other that it has satisfied or stands ready to satisfy all conditions of Closing for which it is responsible, or within two (2) Business Days thereafter, or at such other time and place as Seller and Purchaser shall mutually agree, but not later than September 3, 2010.

(b) The Closing shall take place at Purchaser’s offices in Broken Arrow, Oklahoma 74012 or by the electronic delivery or other mutually agreeable transmission of all duly executed required documentation, and the date on which the Closing shall occur is hereinafter called the “Closing Date” and the Closing shall be deemed effective for all purposes as of 12:01 a.m., Eastern Daylight Time, on September 1, 2010 (“Effective Time”).

(c) Unless the Closing shall take place on the last Business Day of given month or the first Business Day of the following month, Seller will refrain from uttering any instrument or initiating any wire transfer for the disbursement or payment of funds, after the Effective Time, for an amount of $5,000 without Purchaser’s prior written consent.

Section 3.2 Seller’s Deliveries. At the Closing, Seller will deliver to Purchaser all of the items described in Section 8.9 hereof. At or after the Closing, Seller shall execute and deliver to Purchaser such other instruments of transfer as shall be reasonably necessary or appropriate to vest in Purchaser good title to the Assets, and to comply with the purposes and intent of this Agreement.

Section 3.3 Purchaser’s Deliveries. At the Closing, Purchaser will deliver to Seller all of the items described in Section 9.4 hereof.

Section 3.4 Further Assurances. Seller and Purchaser agree that they shall, at any time and from time to time after the Closing, upon request of the other party, do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may reasonably be required to carry out the purposes and intents of this Agreement. No action taken or document executed pursuant to this section shall increase the liability of Seller or Purchaser beyond that contemplated by any other provision of this Agreement.

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Section 3.5 Consents. To the extent that the sale, assignment or transfer of any of the Assets shall require the consent of another Person, this Agreement shall not constitute an agreement to sell, assign or transfer the same if any attempted sale, assignment or transfer is prohibited by applicable Law or would constitute a breach of, or in any way affect the rights of Seller or Purchaser with respect to, such Asset (any such Asset being referred to as a “Nonassignable Asset”). Seller agrees that it will use commercially reasonable efforts, and Purchaser shall cooperate with Seller in all reasonable respects, to obtain the consent and to resolve all impracticalities of sale, assignment or transfer necessary to sell, assign and transfer any and all Nonassignable Assets in accordance with this Agreement; provided that, in the event that Purchaser shall determine prior to Closing that Seller will be unable to obtain and deliver any necessary consent to the assignment by Seller to Purchaser of any Major Assigned Contract, Purchaser shall have the right to terminate this Agreement pursuant to Section 11.1 hereof. Seller shall have no liability to Purchaser for failure to obtain any such third-party consent necessary to sell, assign and transfer any and all Nonassignable Assets; provided, that, Seller complies with its obligations under this Section. Pending the procurement of any necessary third-party consent, Seller will use its reasonable efforts to provide, or cause to be provided, to Purchaser the full claims, rights and benefits of or under such Nonassignable Assets. To the extent that Purchaser is provided the benefits pursuant to this Section 3.5 of any Nonassignable Asset, Purchaser shall perform for the benefit of the other Persons that are parties thereto the obligations thereunder of Seller and pay, discharge and satisfy any related liabilities that, but for the lack of an authorization, approval, consent or waiver to assign such liabilities to Purchaser, would be Assumed Liabilities.

ARTICLE IV
EMPLOYMENT MATTERS

Section 4.1 Employees. Neither Purchaser nor any of its Affiliates shall have any liability in respect of any salary, severance, health, welfare, retirement, or any other benefits relating to employment of Seller’s employees, or the employees of Seller’s predecessors or successors, before or after Closing. Purchaser and/or its Affiliates agrees to offer employment to all of Sellers’ employees deemed by Purchaser as key to the successful continuation of the Business and listed on Schedule 4.1 attached hereto (the “Key Employees”), conditioned on the consummation of the sale of the Assets pursuant hereto. Seller hereby authorizes Purchaser to offer such employment to such Key Employees upon the Closing, waives any rights Seller may have to prohibit such Key Employees from being employed by Purchaser (subject to the closing of the transactions contemplated hereby), and shall not offer new employment to any such Key Employees who accept such employment with Purchaser during such time that such Key Employees are employed by Purchaser or its Affiliates. Any Key Employees of Seller hired by Purchaser after the Closing will be hired as employees of Purchaser on such terms as Purchaser may elect in its sole discretion. Nothing in this Section 4.1 shall be deemed to be a contract for the benefit of any employee.

Section 4.2 Medical Coverage. Seller shall retain, in accordance with its applicable employee plans, responsibility for, and shall continue to pay, all hospital, medical, life insurance, disability and other employee welfare benefit plan expenses and benefits for each employee of Seller hired by Purchaser, to the extent of Seller’s responsibility to its employees and their covered dependents (or the applicable requirements under COBRA) pursuant to applicable Law or the terms of such employee plans, for the period prior to the Closing Date.

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Section 4.3 Indemnification. Subject to the provisions of Article X, Seller shall defend, indemnify and hold harmless Purchaser, its corporate Affiliates, and their respective directors, officers and employees, successors and assigns against and in respect of any Losses arising out of, or relating to, any of the following, in each case solely, to the extent such Losses arise, or relate to, any period prior to the Closing Date: (i) any claim for wrongful discharge or breach of any written employment contract or written plan or policy arising from any termination of the employment of any employee by Seller; (ii) any claim for severance benefits or termination pay or continued employment arising out of or resulting from any employee’s employment by Seller; (iii) any claims relating to Purchaser’s obligations as a “successor” to the Business and claims for withdrawal liability, each with respect to any multi-employer pension plans; and (iv) any liability that may arise as a result of Seller or any of its subsidiaries being a member of a “controlled group” or an “affiliated service group” (within the meaning of Sections 414(b), (c), (m) or (o) of the Code), or being under “common control” (within the meaning of Section 4001 of the Employee Retirement Insurance Security Act). The applicable Indemnification Period for the provisions of clauses (i) and (ii) of this Section 4.3 shall be a period of twelve (12) months after the Closing Date and the indemnification period for the provisions of clauses (iii) and (iv) of this Section 4.3 shall be the statutory period of limitations applicable to claim giving rise to the need for such indemnification.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SELLER
PRINCIPAL

Seller and the Seller Principal hereby represent and warrant to Purchaser as follows:

Section 5.1 Organization and Qualification. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of New York. Attached as Schedule 5.1 are true, correct, and complete copies of Seller’s Certificate of Incorporation and Bylaws, and all amendments thereto. Seller has the requisite power and authority to own, lease and operate its assets and properties and to carry on the Business as currently being conducted, and is in good standing in the State of New Jersey and in each other jurisdiction in which the operation of the Business requires it to be registered unless the failure to be so registered would not have a material adverse effect on Seller.

Section 5.2 Authority. Seller has the requisite corporate power and authority to enter into this Agreement and each agreement contemplated hereby to which it is a party (collectively, the “Seller Ancillary Agreements”), and to effect the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the Seller Ancillary Agreements have been duly approved by Seller’s Board of Directors and its stockholders. No additional corporate proceeding on the part of Seller is necessary to authorize the execution and delivery of this Agreement and the Seller Ancillary Agreements and the consummation by Seller of the transactions contemplated hereby and thereby.

Section 5.3 Enforceability. This Agreement and the Seller Ancillary Agreements have been duly and validly executed and delivered by Seller and, assuming the due authorization, execution and delivery hereof by Purchaser and any other party thereto, constitute, to Seller’s and the Seller Principal’s knowledge, a valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and subject, as to enforceability, to general principles of equity.

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Section 5.4 Non-Contravention. Except as set forth on Schedule 5.4, the execution and delivery of this Agreement and the Seller Ancillary Agreements by Seller do not, and the consummation by Seller of the transactions contemplated hereby and thereby will not, (i) violate or result in a breach of any provision of, (ii) constitute a default under, (iii) result in the termination of, (iv) accelerate the performance required by, (v) result in a right of termination or acceleration under, or (vi) result in the creation of any Encumbrance (other than Permitted Encumbrances) upon any of the Assets, under any of the terms, conditions or provisions of, (X) Seller’s Certificate of Incorporation or Bylaws, (Y) any Laws applicable to Seller or any of the Assets, or (Z) any material instrument or agreement to which Seller is now a party or by which Seller or any of the Assets may be bound or affected, other than violations that would not result in a material adverse effect on the Seller.

Section 5.5 Consents. No declaration, filing or registration with, notice to, or authorization, consent or approval of, any Governmental Authority or third party is necessary for the execution and delivery of this Agreement and the Seller Ancillary Agreements by Seller, or the consummation by Seller of the transactions contemplated hereby or thereby, except as set forth in Schedule 5.5 and except for such authorizations, consents or approvals which, if not made or obtained, as the case may be, would not have a material adverse affect on Seller.

Section 5.6 Financial Information. Seller has delivered to Purchaser all financial information requested by Purchaser regarding the Business, including but not limited to Seller’s financial statements for the years ended December 31, 2007, 2008 and 2009 (“Required Financial Information”).

Section 5.7 Assets. Except as set forth in Schedule 5.7, Seller has good and marketable title to all of the Assets, whether real, personal, mixed, tangible or intangible. Except as set forth on Schedule 5.7, all the Assets are free and clear of restrictions on or conditions to transfer or assignment, and free and clear of Encumbrances other than Permitted Encumbrances.

Section 5.8 Inventories. The items of Inventory being sold under this Agreement exist in fact, and were purchased in the ordinary course of business, are in good and usable condition, and are not stale or obsolete.

Section 5.9 Contracts. The Major Assigned Contracts are valid and binding obligations of Seller in all material respects and, to Seller’s knowledge, of the other parties thereto, in accordance with their respective terms and conditions. True and correct copies of all Major Assigned Contracts have been made available or delivered to Purchaser. Except as otherwise indicated in Schedule 5.5 or Schedule 5.9, (i) neither Seller nor, to Seller’s knowledge and the Seller Principal’s knowledge, any other party to any such Major Assigned Contract has given notice of termination or taken any action inconsistent with the continuance of, is now in violation or breach of, or in default in complying with, any material provision thereof and (ii) the consent of any other party to such contract, agreement, instrument, lease or license is not required to validly effect the assignment, transfer or conveyance thereof from Seller to Purchaser.

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Section 5.10 Permits. Schedule 5.10 contains an accurate list of all material licenses, franchises, permits and other governmental authorizations held by Seller (the “Permits”). The Permits are valid, and Seller has not received any written notice that any Governmental Authority intends to cancel, terminate or decline to renew any such Permit. The Permits are all the permits that are required by Law for the operation of the Business as currently conducted, except any Permit the lack or loss of which to have would not have a material adverse effect on the Business. Seller has conducted and is conducting the Business in substantial compliance with the requirements, standards, criteria and conditions set forth in the Permits.

Section 5.11 Trade Restrictions and Confidentiality Agreements. Schedule 5.11 sets forth all agreements containing covenants not to compete or solicit employees or to maintain the confidentiality of information to which Seller or, to Seller’s or the Seller Principal’s knowledge, any of Seller’s employees, is bound or under which Seller has any rights.

Section 5.12 Litigation and Legal Compliance. Except as set forth in Schedule 5.12, there is no material claim, action, suit or proceeding, pending or, to the knowledge of Seller or the Seller Principal, threatened, against or affecting Seller, at law or in equity, or before or by any Governmental Authority having jurisdiction over Seller which, if successful, would reasonably be expected to have a material adverse effect on Seller. No written notice of any claim, action, suit or proceeding, whether pending or threatened, has been received by the Seller and, to Seller’s knowledge, there is no basis therefor. Seller has conducted and is conducting the Business in compliance with all Laws applicable to Seller, the Assets or the operation of the Business, other than any noncompliance that would not reasonably be expected to have a material adverse effect on the Business.

Section 5.13 Taxes. Except as set forth on Schedule 5.13, Seller has timely filed all requisite federal, state, local and other Tax returns for all fiscal periods for which the applicable statute of limitations has not expired, and has duly paid in full or made adequate provision in the Required Financial Information for the payment of all Taxes for all periods for which the applicable statute of limitations has not expired. Seller has duly withheld and paid or remitted all Taxes required to have been withheld and paid prior to the Closing Date in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other Person that required withholding under any applicable Law, including, without limitation, any amounts required to be withheld or collected with respect to social security, unemployment compensation, sales or use Taxes or workers’ compensation. To Seller’s and the Seller Principal’s knowledge, there are no examinations in progress or claims against Seller relating to Taxes for any period or periods prior to and including the Closing Date and no written notice of any claim for Taxes, whether pending or threatened, has been received by Seller or the Seller Principal. Seller has not granted or been requested to grant any extension of the limitation period applicable to any claim for Taxes or assessments with respect to Taxes. Seller is not a party to any Tax allocation or sharing agreement and is not otherwise liable or obligated to indemnify any Person with respect to any Taxes.

Section 5.14 Solvency. Seller is currently able to pay, and is paying, its debts in general as they come due.

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Section 5.15 Change of Name and Location. During the past five (5) years, except as described in Schedule 5.15, Seller has not conducted the Business under any name or been legally located at any location other than as follows:

Name	Legal Location
Data-Com Telecommunications	354 Route 206 South Flanders, New Jersey 07836
	75 Broad Street New York, NY 10004
	430 Sand Shore Road, Unit 8 Hackettstown, NJ 07840
	1435 Morris Avenue Union, New Jersey 07083

Section 5.16 Books and Records. The Books and Records are complete and correct in all material respects, have been maintained in accordance with sound business practices, and all of them have been made available for inspection by Purchaser.

Section 5.17 No Brokers. Neither Seller nor any party acting on the behalf of Seller has paid or become obligated to pay any fee or commission to any broker, finder, consultant or intermediary for or on account of the transactions contemplated by this Agreement, except for Penn Valley Group, whose fee or commission shall be the sole responsibility and obligation of Seller.

Section 5.18 Locations. Except as to items that may be out for service or repair or with sales representatives for marketing purposes, all tangible personal property included in the Assets is currently found at the locations set forth in Schedule 5.15.

Section 5.19 Warranty Claims. Except as set forth in Schedule 5.19, there are no material warranty claims for defective services performed by the Business existing, pending or, to the knowledge of Seller or the Seller Principal, threatened against the Business or Seller.

Section 5.20 No Other Representations. Except for the representations and warranties of Seller and the Seller Principal specifically contained in this Article V, Seller and the Seller Principal make no representation or warranty of any kind whatsoever, express or implied. Seller shall not have or be subject to any liability to Purchaser or any other Person arising from the distribution to Purchaser, or Purchaser’s use or reliance upon, any Due Diligence Information (as hereinafter defined) information, documents or materials made available to Purchaser in any “data rooms” (virtual or otherwise), management presentations or in any other form in expectation of, or in connection with, the transactions contemplated hereby.

ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PURCHASER

Purchaser represents and warrants to Seller as follows:

Section 6.1 Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the State of Oklahoma. Attached as Schedule 6.1 are true, correct, and complete copies of Purchaser’s Certificate of Incorporation and Bylaws.

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Section 6.2 Authority. Purchaser has the requisite corporate power and authority to enter into this Agreement and each agreement contemplated hereby to which Purchaser is a party (collectively, the “Purchaser Ancillary Agreements”), and to effect the transactions contemplated hereby and thereby. Once approved by Purchaser’s Board of Directors (the “Board Approval”), no additional corporate proceedings on the part of Purchaser will be necessary to authorize the execution and delivery of this Agreement and, subject to the satisfaction of Purchaser’s conditions to closing as set forth in Article VIII hereof (“Purchaser’s Conditions to Closing”), the consummation by Purchaser of the transactions contemplated hereby. In executing this Agreement, Purchaser’s President and Chief Executive Officer has no reason to believe that such Board approval will not be obtained.

Section 6.3 Enforceability. This Agreement and the Purchaser Ancillary Agreements have been duly and validly executed and delivered by Purchaser, and, assuming the due authorization, execution and delivery by Seller and any other party thereto, are the valid and binding agreement of Purchaser, enforceable against Purchaser in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and subject, as to enforceability, to general principles of equity.

Section 6.4 Non-Contravention. The execution and delivery of this Agreement and the Purchaser Ancillary Agreements by Purchaser do not, and the consummation by Purchaser of the transactions contemplated hereby and thereby will not, violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under any of the terms, conditions or provisions of (i) Purchaser’s Certificate of Incorporation or Bylaws, (ii) any Law applicable to Purchaser or any of its properties or assets or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Purchaser is now a party or by which Purchaser or any of its properties or assets may be bound or affected other than Purchaser’s secured credit agreement with its bank lender, Commerce Bank, N.A.

Section 6.5 Consents. Except as set forth on Schedule 6.5, no declaration, filing or registration with, or notice to, or authorization, consent or approval of, any Governmental Authority or other third party is necessary for the execution and delivery of this Agreement and the Purchaser Ancillary Agreements by Purchaser or the consummation by Purchaser of the transactions contemplated hereby and thereby.

Section 6.6 No Implied Representations. Notwithstanding anything to the contrary contained in this Agreement, Purchaser has not made any representation or warranty whatsoever, express or implied, other than those representations and warranties of Purchaser expressly set forth in this Agreement.

Section 6.7 Litigation. There is no suit, action, administrative proceeding or other proceeding or governmental investigation pending, or to Purchaser’s knowledge, threatened against Purchaser that, if adversely determined to Purchaser could have a material adverse effect on the ability of Purchaser to perform its obligations hereunder.

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Section 6.8 Availability of Funds. Purchaser has cash available or borrowing facilities that are sufficient to enable it to consummate the transactions contemplated by this Agreement and to pay the Purchase Consideration and the consideration payable pursuant to the Non-Competition Agreement.

Section 6.9 No Competing Transactions Pending. Purchaser is not currently involved in negotiations for the acquisition, whether by purchase of stock or of assets, of any other business that is competitive with the Business.

Section 6.10 No Brokers. Neither Purchaser nor any party acting on the behalf of Purchaser has paid or become obligated to pay any fee or commission to any broker, finder, consultant or intermediary for or on account of the transactions contemplated by this Agreement

ARTICLE VII
CERTAIN COVENANTS

Section 7.1 Conduct of Business and Confidentiality. From the date of this Agreement to the Closing Date, or the earlier termination of this Agreement, Seller shall conduct the Business in its normal and regular manner, and will not enter into any contract except as may be required in the ordinary course of business. Except with respect to disclosure to their respective attorneys, financial advisors, officers and employees with a need to know, or as otherwise required by Law, the parties hereto shall insure that the existence of this Agreement is kept in strictest confidence prior to Closing, and no party hereto shall disclose the terms hereof to any Person before Closing, without the other party’s prior written consent and prior review of such proposed disclosure (including, but not limited to, Purchaser’s news release and SEC filings).

Section 7.2 Future Cooperation; Tax Matters. Seller and Purchaser shall each deliver or cause to be delivered to the other following the Closing such additional instruments as the other may reasonably request for the purpose of fully carrying out this Agreement. Seller will cooperate and use commercially reasonable efforts to cause its officers, directors and employees to cooperate with Purchaser at and after the Closing Date in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all Tax periods prior to the Closing Date. Purchaser will provide Seller with access to such of Seller’s books and records relative to the Business as may be reasonably requested by Seller in connection with federal, state and local Tax matters relating to Tax periods ending prior to the Closing Date. The party requesting cooperation, information or actions under this Section 7.2 shall reimburse the other party for all reasonable out-of-pocket costs and expenses actually paid or incurred in connection therewith, which costs and expenses shall not, however, include per diem charges for employees or allocations of overhead charges.

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Section 7.3 Access; Due Diligence Examination. Between the date of this Agreement and the Closing Date, or the earlier termination of this Agreement, Seller shall provide Purchaser and its authorized representatives with reasonable access, upon reasonable prior notice during normal business hours and in such manner as shall not unduly to disrupt Seller’s normal business activities, to any and all premises, properties, Major Assigned Contracts, commitments, Books and Records and affairs of the Business and shall cause its officers and employees to furnish Purchaser any and all financial, technical and operating data, all accounting and business records and all legal documents and other information pertaining to the Business as Purchaser, its representatives and advisors, may from time to time reasonably request to verify the existence, condition, value and ownership of the Assets, the amount, nature and scope of the Assumed Liabilities, and the prospects of the Business (“Due Diligence Information”). Purchaser shall also have the right to interview Seller’s Key Employees, and such of its customers, vendors and suppliers, as Purchaser and its representatives and advisors shall deem reasonably necessary for purpose of evaluating and successfully consummating this transaction (subject to Seller’s participation in any such interview); provided that, notwithstanding anything to the contrary contained herein, Purchaser shall refrain from discussing or disclosing the existence of this Agreement or the transactions contemplated hereby this transaction with any of Seller’s customers, vendors or suppliers, and any of the Key Employees other than Jim McKenna, until Purchaser has obtained the Board Approval and the consent of Commerce Bank, N.A. (“Bank Consent”) to the consummation of the transactions contemplated hereby subject to the satisfaction of Purchaser’s Conditions to Closing.

Section 7.4 Preservation and Continuity of Representations. Seller and the Seller Principal hereby covenant with Purchaser that from and after the date of this Agreement and through the Closing Date or the earlier termination of the Agreement, Seller and the Seller Principal shall make commercially reasonable efforts to ensure that all of their respective representations and warranties set forth in Article V hereof shall be true in all material respects as of the Closing Date as if repeated at and as of such time, and shall notify Purchaser promptly of any material adverse effect or deviation in or from any of the representations and warranties herein from the date of this Agreement through the Closing Date (or the earlier termination of this Agreement); provided, however, that unless such material adverse effect or deviation permits Purchaser to terminate this Agreement pursuant to Section 11.1 hereof, written notice of any development pursuant to this Section 7.4 shall be deemed to qualify the representations and warranties made by Seller in Article V hereof and to update the Seller’s Schedules to this Agreement and no breach of any representation or warranty shall be deemed to have occurred as a result of the material adverse effect or deviation duly described in such notice.

Section 7.5 Effect of Purchaser’s Due Diligence. Purchaser’s due diligence review shall not relieve Seller or the Seller Principal of any duties concerning its or his respective representations and warranties, and in the case of Seller its covenants and agreements contained in this Agreement.

Section 7.6 Filings with SEC. Between the date of this Agreement and the Closing Date or the earlier termination of this Agreement, or promptly thereafter, Purchaser may be required or think itself constrained to make certain news releases or filings with the SEC. To the extent that information concerning Seller is required to be included in such filings as required by applicable Law or SEC rules, Seller shall supply or cause Seller’s auditors and other advisors to supply such information, in the manner and form reasonably requested by Purchaser, at Purchaser’s cost, promptly and in any event not later than twenty (20) days after receipt of such request. Until such time as Purchaser shall have filed its Current Report on Form 8-K disclosing the consummation of the transactions to be effected by this Agreement, Seller shall be afforded the opportunity to review, in advance, and to propose for Purchaser’s consideration reasonable additions to, and modifications in, the information and disclosures to be contained in any such news release or SEC filing relating to such transactions, and in furtherance of such opportunity Seller shall be afforded reasonable notice and time (not to exceed one (1) Business Day) to review drafts of each such news release or filing, and to consult with Seller’s legal counsel, auditors and other advisors relative thereto. Notwithstanding anything to the contrary contained herein, Purchaser hereby agrees that is shall not make any public filings or disclosures regarding the transactions contemplated hereby without having first obtained the Board Approval and the Bank Consent.

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Section 7.7 Maintenance of Books and Records. Each of the parties hereto shall preserve until the sixth (6^th) anniversary of the Closing Date all records possessed or to be possessed by such party relating to any of the Assets, the Assumed Liabilities or the Business prior to the date hereof. After the Closing Date, any party having legitimate need for access to such records shall, upon prior reasonable request specifying such need, be provided with access during regular business hours to (i) the officers and employees of such party, and (ii) the books of account and records of such party, but, in each such case, only to the extent relating to the Assets, the Assumed Liabilities or the Business prior to the Closing Date; provided, however, that the foregoing right of access shall not be exercised in a manner unreasonably interfering with the normal operations and business of the party required to afford such access.

Section 7.8 Updated Schedules. Immediately prior to the Closing, Seller shall deliver to Purchaser an updated Schedule 2.1(a) and Schedule 2.1(c), which shall reflect those items contained on each of those respective Schedules as of the Closing Date. Such updated schedules shall be attached hereto as Schedule 2.1(a) and Schedule 2.1(c), respectively.

Section 7.9 Buyout. Purchaser hereby acknowledges and agrees that in the event that Purchaser fails to occupy the premises located at 354 Route 206 South, Flanders, New Jersey 07836 for a period of twenty-five (25) complete consecutive months after the Closing Date (the “Rental Period”), Seller or Seller Principal shall have the option to acquire, on an “as is, where is” basis, all Assets comprised of furniture and fixtures located thereat (the “Subject Assets”) for consideration in the amount of $1.00. During the Rental Period, Purchaser agrees that is shall maintain the Subject Assets in good repair, reasonable wear and tear excepted, and shall not transfer or dispose of the Subject Assets during the Rental Period.

ARTICLE VIII
CONDITIONS TO PURCHASER’S OBLIGATION TO CLOSE;
SELLER’S DELIVERIES

Each and every obligation of Purchaser under this Agreement that has to be performed on or after the date hereof shall be subject to the satisfaction or waiver by Purchaser on or before the Closing Date of the following conditions:

Section 8.1 Representations. The representations and warranties made by Seller and the Seller Principal as set forth in Article V in this Agreement shall be correct in all material respects on and as of the Closing Date, except for representations and warranties that by their terms can speak only as of a specified date, with the same force and effect as though such representations and warranties had been made on the Closing Date. If requested by Purchaser, Seller shall have delivered to Purchaser a certificate to that effect dated the Closing Date and signed by an officer of Seller and the Seller Principal.

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Section 8.2 Performance. All the terms, covenants and conditions of this Agreement to be complied with or performed by Seller on or before the Closing Date shall have been fully complied with or performed in all material respects or waived by Purchaser.

Section 8.3 Waiting Periods; Governmental Approvals. All necessary governmental or regulatory approvals specified on Schedule 5.5, the absence of which would have a material adverse effect upon the conduct of the Business by Purchaser or Purchaser’s ownership or control of the Assets or the Business, shall have been obtained, and (x) no suit, action or proceeding by any Governmental Authority shall be pending and (y) Purchaser shall not have been advised in writing by any Governmental Authority that such Governmental Authority intends to file or commence any suit, action or proceeding, which, in either case, seeks to enjoin, restrain or prohibit the consummation of the transactions contemplated by this Agreement or to impose limitations on the ability of Purchaser to exercise full rights of ownership of the Assets or require the divestiture by Purchaser of any of the Assets. Purchaser shall deliver to Seller copies of any writing referred to in this section promptly upon receipt, but in no event less than ten (10) days following receipt.

Section 8.4 Proceedings. As of the Closing Date there shall exist no contingency or any pending or threatened litigation which could, in Purchaser’s reasonable judgment, have a material adverse effect on the Business or which attempts to restrain, prohibit or otherwise interfere with this Agreement, the consummation of the transaction contemplated hereby or the ownership of the Assets by Purchaser or which otherwise questions the legality or validity of the transactions contemplated hereby.

Section 8.5 Business and Legal Matters. Seller shall have obtained and furnished Purchaser with evidence of, or Purchaser shall have obtained:

(a) subject to the provisions of Section 7.3 hereof, from each of Seller’s customers which is a party to any of the Major Assigned Contracts, such customer’s consent to the assignment thereof to Purchaser, which consent shall have been sought by Seller and Purchaser by means of letter notification introducing Purchaser to each such customer and notifying each of Seller’s intended assignment of such Major Assigned Contract to Purchaser upon consummation of Purchaser’s acquisition of the Assets;

(b) acceptance of employment with Purchaser, on terms acceptable to Purchaser, by Jim McKenna;

(c) mutually acceptable extensions, as deemed reasonably necessary by Purchaser, of any and all Major Assigned Contracts with all key suppliers and vendors of the Business;

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(d) the negotiation of (i) certain amendments to the Durkin Lease, including, without limitation, an option to renew the lease term for an additional         *         term with a         *         increase in the lease rate and the payment of a security deposit, as more fully set forth in the Assignment and Assumption of Lease, and (ii) the negotiation of certain amendments to the Warehouse Lease, including, a reduction in the remaining term of the Warehouse Lease to         *         from and after the Closing Date, as more fully set forth in the Assignment and Assumption of Warehouse Lease; and

(e) the consents of any third party or any Governmental Authority set forth on Schedule 5.5 or Schedule 5.9 shall have been obtained by Seller and the consents set forth on Schedule 6.5 shall have been obtained by Purchaser.

Section 8.6 No Material Adverse Change. Purchaser shall be satisfied at Closing that between the date hereof and the Closing Date, (a) there has been no material adverse effect in Seller or the Business, (b) the contracts, current billings, and deferred revenues of the Business are sufficient to support recurring monthly maintenance revenues of $268,000; and (c) Seller has not incurred aggregate capital expenditures in excess of $25,000 since March 31, 2010.

Section 8.7 Opinion of Counsel. Purchaser shall have been provided with an opinion, containing customary qualifications and other limitations, from counsel to Seller substantially to the effect that:

(a) Seller is a corporation validly existing and, based solely on the Good Standing Certificate of Seller issued by the Department of State of the State of New York on July 30, 2010, was in good standing under the laws of the State of New York as of that date. Seller is duly qualified as a foreign corporation, and based solely on the Good Standing Certificate of Seller issued by the Department of Treasury of the State of new Jersey on July 28, 2010, was in good standing as a foreign corporation in the State of New Jersey as of that date.

(b) The execution and delivery by Seller of the Agreement, Bill of Sale and all other the Seller Ancillary Agreements) (collectively, the “Transaction Documents”), and the consummation of the transactions contemplated thereby, have been duly and validly authorized by all requisite corporate action taken on the part of Seller, its Board of Directors and stockholders, and no other corporate proceeding on the part of Seller, its Board of Directors or stockholders is necessary to authorize the Transaction Documents or the consummation of the transactions contemplated thereby.

(c) Each of the Transaction Documents to which Seller is a party has been duly executed and delivered by Seller, and such Transaction Documents constitute the valid and binding obligations of Seller, to the extent Seller is a party thereto, enforceable against Seller in accordance with their respective terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and subject, as to enforceability, to general principles of equity.

(d) Seller’s execution and delivery of the Transaction Documents do not, and Seller’s performance of its obligations thereunder will not, violate or result in a breach of any term of Seller’s Certificate of Incorporation or Bylaws or of any law, statute, rule, or regulation of the United States, New York or New Jersey.

* The asterisk (*) indicates that material has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 of the rules to the Securities and Exchange Act of 1934, as amended.

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Section 8.8 Corporate Approvals.

(a) Purchaser shall have determined, after any necessary consultation with its legal counsel, that the risks associated with asserted and unasserted claims relative to the Acquired Assets and any goodwill of the Business, are acceptable and, in accordance with Purchaser’s corporate governance policies, the proposed acquisition and this Agreement, and Purchaser’s performance hereunder, shall have been approved by Resolutions duly adopted by Purchaser’s Board of Directors authorizing the transactions to be effected by Purchaser pursuant to this Agreement; and

(b) Seller’s performance of this Agreement and the transactions to be effected hereby shall have been approved by Resolutions duly adopted by Seller’s Board of Directors and stockholders authorizing the transactions to be effected by Seller pursuant to this Agreement.

Section 8.9 Closing Items. Purchaser shall have received all of the following items:

(a) (i) the Non-Competition Agreement duly executed by Seller and the Seller Principal in the form of Exhibit E attached hereto, that requires payment by Purchaser of consideration in the amount of Five Hundred Thousand Dollars ($500,000) (the “Non-Competition Agreement”); (ii) the Bill of Sale in the form of Exhibit F attached hereto, duly executed by Seller; (iii) all titles to any motor vehicles included in the Assets with assignments duly signed by Seller with any necessary acknowledgment; (iv) the Assignment and Assumption Agreement duly executed by Seller; (v) the Escrow Agreement, duly executed by Seller and the Escrow Agent; (vi) the Assignment and Assumption of Lease, duly executed by Seller and the Durkin Realty, LLC; (vii) the Assignment and Assumption of Warehouse Agreement, duly executed by Seller and Durkin Realty, LLC, (viii) any and all consents required or contemplated by Section 8.5(e) and (ix) this Agreement duly executed by Seller;

(b) evidence satisfactory to Purchaser to the effect that all outstanding Encumbrances covering any of the Assets and all outstanding UCC financing statements, amendments and assignments covering any of the Assets, have been released and/or terminated as of the Closing Date, or will be promptly thereafter, other than those relating to the Assumed Liabilities or the Permitted Encumbrances;

(c) true and correct copies of resolutions duly adopted and approved by Seller’s Board of Directors and its stockholders, authorizing the transactions to be effected by Seller pursuant to this Agreement; and

(d) all such other certificates and documents consistent with this Agreement as Purchaser or its counsel shall have reasonably requested from Seller or the Seller Principal, including but not limited certification from the State of New Jersey and New York confirming receipt of Purchaser’s notification of bulk sale in each of such state with each such states written certification instructing Seller and Purchaser as to the amount of any Sales Tax Escrow Amount, which is to be included in the Escrow Amount pursuant to Section 2.3(b)(i) hereof.

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ARTICLE IX
CONDITIONS TO SELLER’S OBLIGATION TO CLOSE;
PURCHASER’S DELIVERIES

Each and every obligation of Seller under this Agreement to be performed on or after the date hereof shall be subject to the satisfaction or waiver by Seller on or before the Closing Date of the following conditions:

Section 9.1 Representations. The representations and warranties made by Purchaser set forth in Article VI in this Agreement shall be correct in all material respects on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on the Closing Date. If requested by Seller, Purchaser shall have delivered to Seller a certificate to that effect dated the Closing Date and signed by an officer of Purchaser.

Section 9.2 Performance. All the terms, covenants and conditions of this Agreement to be complied with or performed by Purchaser on or before the Closing Date shall have been fully complied with or performed in all material respects or waived by Seller. Purchaser shall have delivered to Seller a certificate to that effect dated the Closing Date and signed by an officer of Purchaser.

Section 9.3 Proceedings. Prior to the Closing Date, no material litigation shall have been initiated or threatened by any Governmental Authority or any other Person questioning the legality of the transactions contemplated by this Agreement or otherwise interfering with this Agreement which, in the reasonable opinion of counsel to Seller, makes it undesirable to proceed with such transactions.

Section 9.4 Closing Documents. Seller shall have received from Purchaser the following items:

(a) (i) the Non-Competition Agreement duly executed by Purchaser, (ii) the Assignment and Assumption Agreement duly executed by Purchaser, (iii) the Escrow Agreement, duly executed by Purchaser and the Escrow Agent, (iv) the Assignment and Assumption of Lease, duly executed by Purchaser and Durkin Realty, LLC, (v) the Assignment and Assumption of Warehouse Agreement, duly executed by Purchaser and Durkin Realty, LLC, (vi) this Asset Purchase Agreement duly executed by Purchaser, (vii) receipt of the Cash Portion of the Purchase Consideration (less the Escrow Amount and any amounts payable to creditors to discharge Encumbrances on the Assets which are not Permitted Encumbrances), (viii) evidence of payment of the Escrow Amount to the Escrow Agent, and (ix) contemporaneous payment of the non-competition payment payable to Seller Principal pursuant to the Non-Competition Agreement;

(b) In a form and content reasonably satisfactory to Seller, a certificate of the Secretary or an Assistant Secretary of Purchaser, dated as of the Closing Date and certifying the resolutions of Purchaser’s Board of Directors attached thereto duly approving and authorizing the execution, delivery and performance of this Agreement and the Purchaser Ancillary Agreements and the transactions and agreements contemplated hereby or thereby; and

(c) all such other certificates and documents consistent with this Agreement as Seller or its counsel shall have reasonably requested.

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Section 9.5 Consents. Purchaser shall have obtained and furnished Seller with evidence of the consents set forth on Schedule 6.5 and Seller shall have obtained and furnished Purchaser with evidence of the consents set forth on Schedule 5.5 and Schedule 5.9.

ARTICLE X
INDEMNIFICATION

Section 10.1 Survival of Representations and Warranties. The parties hereto agree that (a) their respective representations and warranties contained herein shall survive the Closing for a period of         *         after the Closing Date, except that those representations and warranties made by Seller with respect to Taxes (Section 5.13) shall survive the Closing until the expiration of the applicable statute of limitations and (b) all covenants, agreements and obligations contained in this Agreement shall survive in accordance with their terms or applicable law (in each case, the applicable “Indemnification Period”).

Section 10.2 Indemnification by the Seller. Subject to the other provisions of this Article X, Seller agrees to save and indemnify Purchaser against, and hold it harmless from, any and all Losses that may be incurred by Purchaser by reason of, or in connection with, any action, claim or proceeding relating to such Losses, arising from the breach of any of Seller’s representations, warranties, covenants, or agreements, contained herein, including those forth in Section 4.3, a claim for which is asserted in writing by Purchaser during the applicable Indemnification Period pursuant to Section 10.1 or Section 4.3, as the case shall be.

Section 10.3 Indemnification by Purchaser. Purchaser agrees to save and indemnify Seller against and to hold it harmless from any and all Losses arising from (i) the breach of any of Purchaser’s representations, warranties, covenants or agreements contained herein or the Exhibits hereto, (ii) Purchaser’s failure to perform the Assumed Liabilities when and as due after Closing, (iii) the operation of the Business after the Closing Date, (iv) the ownership of the Assets after the Closing Date, or (v) any suit, action, proceeding, claim or investigation pending or threatened against or affecting the Assets or the Business which arises from any matter or state of facts arising after the Closing and relating to facts and circumstances not in existence prior to the Closing, a claim for which is asserted in writing by Seller during the applicable Indemnification Period.

Section 10.4 Limitations on Recoverable Losses. Claims for Losses arising under Section 10.1 or Section 4.3 (a) may be made only with respect to claims arising during the applicable Indemnification Period; (b) must be made, if at all, by giving the written notice described in Section 10.6 within ten (10) days after the close of the Indemnification Period applicable with respect to such claim; (c) may be made only after the aggregate amount of the Losses incurred by the party asserting a right to indemnification (the “Asserting Party”) exceeds         *         (the “Basket”). Notwithstanding anything to the contrary herein, the maximum aggregate indemnification obligation of Seller pursuant to this Article X or Section 4.3, for claims or Losses shall not exceed an amount equal to the Purchase Consideration.

* The asterisk (*) indicates that material has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 of the rules to the Securities and Exchange Act of 1934, as amended.

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Section 10.5 Claims. All claims for indemnification hereunder shall be computed net of the present value of all readily ascertainable future Tax benefits associated therewith. No claim for indemnification shall be made for matters adequately covered by insurance.

Section 10.6 Defense of Claims. An Asserting Party shall notify the party putatively required to provide indemnification (the “Responding Party”) with reasonable promptness of any claim for Losses asserted against it in respect of which the Responding Party may be liable under this Agreement, which notification shall be accompanied by a written statement setting forth the basis of such claim and the manner of calculation thereof. The Responding Party shall have the right, at its election, to defend or compromise any such claim at its own expense with counsel of its choice; provided, however, that (i) such counsel shall have been approved by the Asserting Party, which approval shall not be unreasonably withheld or delayed; (ii) the Asserting Party may participate in such defense if it so chooses with its own counsel and at its own expense; and (iii) any such defense or compromise shall be conducted in a manner which is reasonable and not prejudicial to the Asserting Party’s interest in such matter. In the event the Responding Party does not undertake to defend or compromise the claim, the Responding Party shall promptly notify the Asserting Party of its intention not to undertake to defend or compromise the claim, and the Responding Party shall be bound by (a) the final decree of any court of competent jurisdiction deciding the validity and amount of the claim asserted against the Asserting Party, and (b) any compromise of such claim made with the prior consent of the Responding Party, which shall not be unreasonably withheld or delayed.

Section 10.7 Survival of Indemnities. The indemnities set forth in Section 4.3, Section 10.2 and Section 10.3 shall survive until the expiration of the applicable statute of limitations, except for the indemnities set forth in Section 4.3, Section 10.2 and Section 10.3 that pertain to a breach of a representation, warranty, covenant or agreement by a party hereto, each of which indemnities shall survive until the expiration of the Indemnification Period applicable thereto.

Section 10.8 Extension of Time. To the extent that an Asserting Party delivers written notice of a claim for Losses against a Responding Party prior to the expiration of the applicable Indemnification Period, reasonably identifying the basis for the claim and the amount of any reasonably ascertainable Losses, the Indemnification Period shall be extended for such claim until such claim is resolved by a Final Determination (as defined below).

Section 10.9 Final Determination. For the purposes of this Agreement, a “Final Determination” shall exist when (i) the Asserting Party and the Responding Party agree in writing upon the amount, or (ii) a court of competent jurisdiction shall have made a final, non-appealable, determination on the merits with respect thereto. The Asserting Party will assign to the Responding Party any claims against which the Asserting Party has been indemnified and paid as provided herein, and the Responding Party shall in all respects be subrogated to the rights of the Asserting Party in connection therewith.

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Section 10.10 Exclusive Remedy. After the Closing, the rights set forth in this Article X will be the exclusive with respect to any and all claims relating to this Agreement, the Assets, the Excluded Assets, the Assumed Liabilities or the transactions contemplated hereby (other than claims of, or causes of action arising from, fraud) hereof and will be in lieu of contract remedies, but the parties otherwise will have available to them all other remedies available under Law, including specific performance or other equitable remedies.

ARTICLE XI
TERMINATION

Section 11.1 General. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Closing Date:

(a) By mutual written consent of Seller and Purchaser;

(b) By Purchaser if, through no fault of Purchaser, any of Purchaser’s Conditions to Closing, or the requirement that it obtain the Board Approval and the Bank Consent, shall not have been fulfilled, or shall become incapable of fulfillment, on or prior to the earlier of the date on which Purchaser would otherwise be required to file an SEC 8-K report with respect to this Agreement or September 3, 2010, and unsatisfied condition or requirement shall not have been waived by Purchaser;

(c) By Seller if, through no fault of Seller, any of the conditions set forth in Article IX shall not have been fulfilled, or shall become incapable of fulfillment, on or prior to September 3, 2010, and shall not have been waived by Seller;

(d) By Purchaser or Seller, if the Closing Date shall not have occurred on or prior to September 3, 2010 (or such later date as shall have been approved by the parties), unless such failure of such occurrence shall be due to the failure of the party seeking to terminate this Agreement to perform or observe in good faith the covenants, agreements and conditions hereof to be performed or observed by such party at or before the Closing Date;

(e) By Purchaser or Seller, if any representation or warranty given or made in this Agreement by the other party hereto was untrue in any material respect as of the Closing Date, or as of the date given; or

(f) By Purchaser or Seller, if the other party hereto shall have materially breached or failed in any respect to comply with any of its covenants, agreements or obligations hereunder and such failure remains uncured for a period of five (5) Business Days following receipt of written notice thereof by the offending party.

Section 11.2 Effect. In the event of termination or abandonment by reason of Section 11.1, this Agreement shall forthwith become void, all further obligations of the parties under this Agreement (other than those contained in Section 7.9 (Buyout), Section 12.8 (Expenses), Section 12.9 (Confidential Information), Section 12.10 (Publicity), and Section 12.11 (Equitable Relief), which shall survive in accordance with their terms), shall be terminated without further force and effect and without further liability of one party to the other by reason of this Agreement; provided, that, nothing herein shall relieve any party from liability for such party’s willful breach of this Agreement.

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ARTICLE XII
MISCELLANEOUS

Section 12.1 Entire Agreement. This Agreement (including the Schedules and Exhibits hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among Seller and Purchaser, superseding any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement may be modified or amended only by a written instrument executed by Seller and Purchaser, acting through their respective officers and duly authorized by their respective Boards of Directors.

Section 12.2 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. Facsimile or e-mail transmission of any signed original document and/or retransmission of any signed facsimile or e-mail transmission will be deemed the same as delivery of an original. At the request of any party, the parties will confirm facsimile or e-mail transmissions by signing a duplicate original document.

Section 12.3 Notices. Any notice or other communication hereunder may be sent by any means (including facsimile or email or other electronic means, provided that receipt thereof is acknowledged and confirmed by the recipient) and shall be effective upon receipt; except that, if sent via domestic certified mail or via overnight courier such as Federal Express, said notice shall be conclusively deemed to have been received by a party hereto and be effective on the earlier of (a) the actual date of receipt, or, if earlier, (b) the third Business Day following the date given to the post office or courier for delivery. Such notices and communications shall be addressed to such party at the address set forth below:

If to Purchaser:	XETA Technologies, Inc. 1814 West Tacoma Broken Arrow, Oklahoma 74012-1406 Attn: Greg D. Forrest, President and CEO Ph.: (918) 664-8200 Fax: (918) 664-6876
With copy to:	Barber & Bartz, P.C. 525 S. Main, Suite 800 Tulsa, Oklahoma 74103-4511 Attention: Robert L. Bearer, Esq. Phone: (918) 599-7755 Fax: (918) 599-7756

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If to Seller or the Seller Principal:	c/o Data-Com Telecommunications, Inc. Attn: Mr. Michael Durkin, President and CEO 354 Route 206 South Flanders, New Jersey 07836 Phone: (908) 206-8912
With copy to:	Edward B. Stevenson, Esq. Herrick, Feinstein LLP One Gateway Center Newark, New Jersey 07102 Phone: (973) 274-2025 Fax: (973) 274-6420

or such other address as any party hereto shall specify pursuant to this Section 12.3 from time to time.

Section 12.4 Rights and Remedies. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver.

Section 12.5 Reformation and Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable, but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby.

Section 12.6 Governing Law and Jurisdiction. This Agreement shall be construed in accordance with the laws of the State of Oklahoma without regard to its principles regarding conflicts of law. All actions and proceedings arising out of, or relating to, Section 12.11 of this Agreement shall be heard and determined in any federal or state court sitting in the State of New Jersey or in Tulsa County, State of Oklahoma at the choice of the plaintiff in such action. Each of the parties hereto: (i) consents and submits to the personal jurisdiction of any of such courts in any such action or proceeding; (ii) consents to the service of any complaint, summons, notice or other process relating to any such action or proceeding by delivery thereof to such party by hand or by certified mail, delivered or addressed as set forth in Section 12.3 and (iii) waives any claim or defense in any such action or proceeding based on any alleged lack of personal jurisdiction, improper venue or forum non conveniens or any similar basis.

Section 12.7 Further Assurances. Each party will, upon reasonable request of the other party, from time to time after the Closing, execute and deliver to the other all such further documents and instruments, and will do or use its reasonable efforts to cause to be done such other acts, as such other party may reasonably request more completely to consummate and make effective the contemplated transactions.

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Section 12.8 Expenses. Each party shall pay its own expenses in connection with this Agreement and the transactions contemplated by this Agreement. All sales, transfer, recordation and documentary taxes and fees that may be payable in connection with the transactions contemplated by this Agreement shall be payable by Seller. The fees of the Escrow Agent shall be paid solely by Purchaser.

Section 12.9 Confidential Information. Each party agrees that it and its representatives shall hold in strict confidence, and shall not use for its own account or for the account of others, nor divulge or disclose to any Person without a need to know, any information and documents received from the other party and, if the transactions herein contemplated are not consummated, each party will continue to hold such information and documents in strict confidence and shall return to such other party all such documents then in such receiving party’s possession (including the Schedules and Exhibits to this Agreement) without retaining copies thereof. Purchaser will use all information provided to it or gathered by it during its due diligence review and evaluation of Seller and the Business solely for the purpose of such review and evaluation, and will disclose such information only to such of its directors, officers, employees, representatives, advisors and agents as have a need to know the same in order to perform their professional and managerial duties to Purchaser and for the purpose of evaluating and consummating the transaction contemplated hereby. In the event this transaction is not consummated, Purchaser will return to Seller all materials containing any such received from Seller and will certify to Seller in writing that all copies of such materials have been destroyed. Purchaser will not use any such information to compete with Seller in the event the transaction is not consummated or for any purpose other than as set forth above. The provisions of this Section 12.9, shall survive termination of this Agreement; provided, that each party’s obligations under this Section 12.9 to refrain from such use and to maintain such confidentiality shall not apply to any information or documents that are (a) in the public domain when furnished by the other, or (b) required to be disclosed by applicable Law, where the party whose information is to be disclosed has had notice thereof and a reasonable opportunity to appear and object to such disclosure.

Section 12.10 Publicity. Seller and Purchaser each agree that, without the written consent of the other, neither will independently issue a news release or otherwise publicly disclose the nature or existence of the transactions contemplated by this Agreement (including but not limited to the Purchase Consideration) except as may be required by Law. Any public announcement of this Agreement or the purchase of the Assets hereunder will be made by Purchaser and Seller jointly and simultaneously, and the wording of any such announcement will be mutually agreed upon unless, in the reasonable judgment of counsel for Purchaser, any laws, rules or regulations to which Purchaser is subject (including the rules of NASDAQ and of the SEC) mandate other wording, in which event such other Laws, rules or regulations as interpreted by Purchaser and its counsel shall control subject to Seller’s reasonable opportunity to review and propose changes as set forth in Section 7.6 hereof. Notwithstanding anything to the contrary contained herein, any news release or other public disclosure shall be subject to Purchaser’s having first obtained the Board Approval and the consent of Commerce Bank, N.A. to the consummation of the transactions contemplated hereby.

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Section 12.11 Equitable Relief. Each party recognizes that the other is likely to suffer irreparable damage if the provisions of Sections 12.9 or 12.10 are not specifically enforced. In the event of a dispute concerning any of these sections, each party agrees that the other may, without posting bond or security, obtain an temporary or permanent injunction restraining the consummation of any action or transaction prohibited thereby pending determination of such dispute. The provisions of Sections 12.9 and 12.10 shall likewise be enforceable by a decree of specific performance. In the event of litigation relating to such sections, if the court determines that either party or any of its employees, agents or representatives has breached any provisions thereof, the injured party shall be entitled to recover from the breaching party its reasonable fees, costs, and expenses (including reasonable attorneys’ fees) incurred in connection with the prosecution of any equitable or legal proceedings and any appeal therefrom.

Section 12.12 Dispute Resolution. Subject to Section 12.11, any dispute under this Agreement which is not settled by mutual agreement among the parties hereto, shall be finally settled by binding arbitration, conducted by and in accordance with the rules then in effect of the American Arbitration Association. The costs of the arbitration, including administrative and arbitrators’ fees, shall be shared equally by the parties. Each party shall bear its own expenses and attorneys’ and witness’ fees. The prevailing party in any arbitration, as determined by the arbitration panel, shall be entitled to an award against the other party in the amount of the prevailing party’s costs and reasonable attorneys’ fees. In making any such award, the arbitration panel shall take into consideration the outcome of the proceeding and the reasonableness of the conduct of each such party in connection with the dispute, in light of the facts known to such party at the time such party engaged in such conduct. The arbitration panel shall not have authority to award punitive damages. The arbitration shall be held in Newark, New Jersey or Tulsa, Oklahoma, at the choice of the party initiating the arbitration.

Section 12.13 Captions. The captions and headings in this Agreement are for convenience only and will not be considered in interpreting any provision of this Agreement. Unless otherwise indicated, all article and section references are to the articles and sections of this Agreement and all references to day are to calendar days. Whenever under the terms of this Agreement, the time for performance of a covenant or condition falls upon a Saturday, Sunday or U.S. federal or Oklahoma or New York state holiday, such time for performance will be extended to the next Business Day.

Section 12.14 Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

Section 12.15 Successors. This Agreement and all of the provisions of this Agreement shall be binding upon and inure to the benefit of Purchaser, Seller, and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned by any of the parties to this Agreement without the prior written consent of the other parties. Nothing contained in this Agreement, express or implied, is intended to confer upon any person or entity other than the parties to this Agreement and their successors in interest and permitted assignees (if any), any rights or remedies under or by reason of this Agreement.

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Section 12.16 Waiver. Either Purchaser or Seller shall have the right to waive any one or more conditions precedent to Closing and to proceed with the transactions contemplated by this Agreement, without, however, releasing the other of its obligations from any liability for loss or damage sustained by reason of any such breach of any representation, warranty or covenant.

Section 12.17 Exhibits. The Schedules and Exhibits referred to in this Agreement are incorporated by reference into this Agreement.

[Remainder of Page Intentionally Left Blank. Signature Page Follows.]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

“Purchaser”		“Seller”
XETA TECHNOLOGIES, INC.		DATA-COM TELECOMMUNICATIONS, INC.
By:	/s/ Greg Forrest	By:	/s/ Michael Durkin
	Name: Greg D. Forrest		Name: Michael Durkin
	Title: President and CEO		Title: President and CEO
		/s/ Michael Durkin
		Michael Durkin, individually, Solely joining herein for purpose of making the representations and warranties made by him in Article V hereof

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List of Schedules and Exhibits

Schedules
Schedule 2.1(a)	Accounts, Notes Receivable, Etc.
Schedule 2.1(b)	Major Assigned Contracts
Schedule 2.1(c)	Inventory
Schedule 2.1(f)	Equipment
Schedule 2.1(g)	Real Property and Leaseholds
Schedule 2.1(h)	Software and Intellectual Property
Schedule 2.1(i)	Permits and Licenses
Schedule 2.2(c)	Doubtful Accounts
Schedule 2.2(h)	Excluded Vans
Schedule 2.4	Assumed Liabilities
Schedule 2.5(b)	Physical Stock Taking Report as of 7/24/10
Schedule 2.10	Customers
Schedule 4.1	Key Employees
Schedule 5.1	Seller’s Organization and Qualification
Schedule 5.4	Non-contravention
Schedule 5.5	Consents
Schedule 5.7	Assets
Schedule 5.9	Contracts
Schedule 5.10	Permits
Schedule 5.11	Trade Restrictions and Confidentiality Agreements
Schedule 5.12	Litigation and Legal Compliance
Schedule 5.13	Taxes
Schedule 5.15	Change of Name and Location
Schedule 5.19	Warranty Claims
Schedule 6.1	Purchaser’s Corporate Documents
Schedule 6.5	Purchaser’s Consents

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Exhibits
Exhibit A	Escrow Agreement
Exhibit B	Assignment and Assumption Agreement
Exhibit C	Assignment and Assumption of Lease
Exhibit D	Assignment and Assumption of Warehouse Lease
Exhibit E	Non-Competition Agreement
Exhibit F	Bill of Sale

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EX-10.1

Exhibit 10.1

XETA TECHNOLOGIES, INC.
EXECUTIVE CHANGE IN CONTROL SEVERANCE PLAN

XETA Technologies, Inc. (hereinafter the “Company”) hereby adopts the XETA Technologies, Inc. Executive Change in Control Severance Plan (the “Plan”), effective upon the date the Board adopts the Plan.

ARTICLE 1
DEFINITIONS

1.1 “Annual Cash Compensation” means the Participant’s Base Salary plus the annual cash incentive as established by the Board. If annual cash incentive has not been established, the Annual Cash Compensation will mean the Participant’s Base Salary plus the greater of (i) the annual cash incentive earned by the Participant, excluding commissions, in the preceding fiscal year or (ii) the average of the annual cash incentive earned by the Participant, excluding commissions, over the three consecutive fiscal years of the Company immediately preceding the Employment Termination Date (or, if the Participant has been employed for fewer than three fiscal years by the Company, the average of all annual cash incentive earned by the Participant, excluding commissions, for the fiscal years immediately preceding the Employment Termination Date).

1.2 “Base Salary” means the Participant’s annual gross salary before any deductions, exclusions or any deferrals or contributions under any Company plan or program, but excluding bonuses, commissions, incentive compensation, deferred compensation, employee benefits, expense reimbursements or any other non-salary form of compensation being received by a Participant.

1.3 “Board” means the Board of Directors of the Company.

1.4 “Cause” means (a) the conviction of the Participant for any felony involving dishonesty, fraud or breach of trust, (b) intentional disclosure of company’s confidential information contrary to companies policies, (c) intentional engagement in any competitive activity which would constitute a breach of your duty of loyalty, (d) the willful and continued failure to substantially perform your duties for company (other than as a result of incapacity due to physical or mental illness); or (d) the willful engagement by the Participant in gross misconduct in the performance of his or her duties that materially injures the Company. For purposes of this paragraph, and act, or a failure to act, shall not be deemed willful or intentional, as those terms are defined herein, unless it is done, or omitted to be done, by you in bad faith or without a reasonable belief that your action or omission was in the best interest of company. “Cause” also includes any of the above grounds for dismissal regardless of whether company learns of it before or after terminating your employment.

1.5 “Change in Control” means the occurrence of any of the following after the Effective Date:

(a) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (“Exchange Act”)) is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the combined voting power of the then-outstanding Voting Stock of the Company.

(b) A majority of the Board ceases to be comprised of “Incumbent Directors.” The term “Incumbent Directors” means the individuals who, as of the date hereof, are Directors of the Company and any individual becoming a Director subsequent to the date hereof whose election, nomination for election by the Company’s shareholders, or appointment, was approved by a vote of a majority of the then Incumbent Directors (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination).

(c) The consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the consolidated assets of the Company (each, a “Business Combination Transaction”) immediately after which the Voting Stock of the Company outstanding immediately prior to such Business Combination Transaction does not continue to represent (either by remaining outstanding or by being converted into Voting Stock of the entity surviving, resulting from, or succeeding to all or substantially all of the Company’s consolidated assets as a result of, such Business Combination Transaction or any parent of such entity), at least 50% of the combined voting power of the then outstanding shares of Voting Stock of (i) the entity surviving, resulting from, or succeeding to all or substantially all of the Company’s consolidated assets as a result of, such Business Combination Transaction or (ii) any parent of any such entity (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries). The term “Voting Stock” means securities entitled to vote generally in the election of Directors.

1.6 “Code” means the Internal Revenue Code of 1986, as amended.

1.7 “Company” means XETA Technologies, Inc., an Oklahoma corporation and any Successor, whether the liability of such Successor under the Plan is established by contract or occurs by operation of law.

1.8 “Effective Date” means the date on which the Plan is adopted by the Board.

1.9 “Employment Termination Date” means the date on which the employment relationship between the Participant and the Company and its Subsidiaries is terminated due to an Involuntary Termination.

1.10 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

1.11 “Good Reason Event” means the occurrence of one or more of the following events or conditions after the occurrence of a Change in Control:

(a) the Company removes the Participant from, or fails to re-elect or appoint the Participant to, any duties or position with the Company that were assigned or held by the Participant immediately before the occurrence of the Change in Control, except that a nominal change in the Participant’s title that is merely descriptive and does not affect rank or status shall not constitute such an event;

(b) the Company or a Subsidiary assigns to the Participant any duties inconsistent with the Participant’s position (including offices, titles and reporting requirements), authority, duties or responsibilities with the Company or a Subsidiary in effect immediately before the occurrence of the Change in Control;

(c) the Company takes any action that results in a material diminution of the Participant’s position, authority, duties or responsibilities with the Company or a Subsidiary in effect immediately before the occurrence of the Change in Control, or otherwise takes any action that materially interferes therewith;

(d) the Company materially reduces the Participant’s Base Salary or the Participant’s Annual Cash Compensation as in effect immediately prior to such reduction;

(e) the Company or a Subsidiary relocates the Participant’s principal workplace to an area that is located outside of a radius of 50 miles from the location of the Participant’s principal workplace immediately prior to the Change in Control; or

(f) the Company fails to honor any provision of this Plan which failure has a material adverse effect on the Participant.

1.12 “Involuntary Termination” means the termination of a Participant’s employment relationship with the Company and each Subsidiary (a) by the Company or a Subsidiary for any reason other than Cause, or (b) by the Participant on account of a Good Reason Event. For purposes of the Plan, a Participant’s termination will not be considered to be on account of a Good Reason Event unless the Participant terminates employment no more than 30 days following such Good Reason Event. A Participant shall not be deemed to have incurred an Involuntary Termination by reason of the transfer of the Participant’s employment between the Company and any of its Subsidiaries, or among Subsidiaries. The Plan Administrator shall determine, in its sole discretion, whether a Participant’s termination of employment from the Company or any Subsidiary constitutes an Involuntary Termination. For purposes of the Plan, a Participant will not be considered to have terminated his or her employment relationship unless the termination of employment qualifies as a Separation from Service.

1.13 “Participant” means an employee of the Company or a Subsidiary who is identified by the Board as a participant in the Plan pursuant to Section 2.2 of the Plan.

1.14 “Plan” means the XETA Technologies, Inc. Executive Change in Control Severance Plan, as set forth herein and as amended from time to time.

1.15 “Plan Administrator” means the Company; however, the Company may designate any individual or a committee to administer the Plan in accordance with the provisions of Article 7.

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1.16 “Release” means the Release Agreement in substantially the form attached hereto as Exhibit A and made a part hereof for all purposes.

1.17 “Subsidiary” means a corporation, partnership, limited liability company or other entity in which the Company owns directly or indirectly more than 50% of the outstanding shares of voting stock or other voting interest.

ARTICLE 2
ELIGIBILITY

2.1 Individuals eligible to participate in the Plan shall be limited solely to employees of the Company or any Subsidiary.

2.2 The Board, in its sole discretion and from time to time, shall determine which employees of the Company or any Subsidiary are participants in the Plan. The Board shall have the sole discretion to add or remove individuals as Participants in the Plan.

ARTICLE 3
SEVERANCE BENEFITS

3.1 Subject to Article 4 and Section 10.8 of the Plan, upon an Involuntary Termination within one year following the date of a Change in Control, a Participant shall be entitled to the following benefits:

(a) A single sum cash payment equal to a multiple of the Participant’s Annual Cash Compensation, but in any case, not exceeding four times the Participant’s Base Salary. The multiples are determined by the Participant’s position at the Company as follows:

a. One and one-half times for the Chief Executive Officer of the Company

b. One times for other Participants as defined in Section 1.13

(b) For a period of twelve (12) months following the Participant’s Employment Termination Date (“Continuation Period”), the Company shall reimburse the Participant for the cost to continue on behalf of the Participant and his or her dependents and beneficiaries basic life insurance, medical, dental, vision and hospitalization benefits (including any benefit under any individual benefit arrangement that covers medical, dental or hospitalization expenses not otherwise covered under any general Company plan) provided (x) to the Employee at any time during the 120-day period prior to the Participant’s Employment Termination Date or at any time thereafter or (y) to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 3.1(b) during the Continuation Period shall be no less favorable to the Participant and his or her dependents and beneficiaries, than the most favorable of such coverages and benefits during any of the periods referred to in clauses (x) or (y) above. Notwithstanding anything else to the contrary in this Section 3.1(b), if any benefits provided to the Participant by the Company under this Section 3.1(b) are taxable to the Participant, then, with the exception of medical insurance benefits, the value of the aggregate amount of such taxable benefits provided to the Participant pursuant to this Section 3.1(b) during the six month period following the date of termination of employment shall be limited to the amount specified by Internal Revenue Code §402(g)(1)(B) for the year of the date of termination of employment (e.g. $16,500 in 2010). The Participant shall pay the cost of any benefits that exceed the amount specified in the prior sentence during the six-month period following the date of termination. The Company shall reimburse the Participant for all expenses paid by the Participant for such coverage on the first business day that is more than six months following termination of employment. The reimbursement of the cost of disability insurance, life insurance, the reimbursement of the cost of taxable medical, dental, vision and hospitalization benefits after the end of the period during which the Participant would be entitled to continuation coverage under the Company’s group health plan under Section 4980B of the Code (COBRA), and the reimbursement of any other taxable benefits provided under this Section 3.1(b), shall comply with the requirement that non-qualified deferred compensation be paid on a specified date or pursuant to a fixed schedule, which requires that (1) the amount of benefits or reimbursements provided during one calendar year shall not affect the amount of benefits or reimbursements to be provided in any other calendar year, (2) the reimbursement of any eligible expense shall be made no later than the last day of the calendar year following the year in which the expense was incurred, and (3) the right to reimbursement or benefits hereunder is not subject to liquidation or exchange for another benefit. If the basic life insurance coverage cannot be continued through the end of the Continuation Period due to restrictions in the general Company plan, in lieu of coverage, the Company will make a payment to the Participant equal to 125% of the effective annual premium upon the Participant’s Employment Termination Date.

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3.2 No benefits shall be payable under this Plan due to termination of employment on account of (i) death, (ii) disability, (iii) voluntary termination not for Good Reason Event, (iv) involuntary termination for Cause, and (v) any other termination of employment not considered to be an Involuntary Termination of Employment, within one year following the date of the Change in Control.

3.3 Benefits under the Plan shall not be taken into account as compensation for purposes of determining contributions or benefits under any other employee benefit plan of the Company or a Subsidiary. In addition, Benefits under the Plan shall be reduced by any severance, termination or similar payments payable to a Participant pursuant to any employment, change in control, severance or similar agreement with the Company or a Subsidiary.

ARTICLE 4
TIME OF SEVERANCE PAYMENT

4.1. Subject to Sections 4.2 and 10.8 of the Plan, the Company shall provide to the Participant the benefits described in Section 3.1(a) commencing on the 60th day after the date of the Participant’s Involuntary Termination.

4.2 If the Participant fails to furnish an executed Release, or if the Release furnished by the Participant has not become effective and irrevocable by the date payment of benefits is to otherwise commence under Section 4.1, the Participant shall not be entitled to any benefits described in Section 3.1(a) of the Plan and any benefits which commenced on the Participant’s Employment Termination Date under Section 3.1(b) shall cease and the Participant shall no longer be eligible to receive such benefits.

ARTICLE 5
LIMITATION ON PAYMENT OF BENEFITS

Notwithstanding any provision of this Plan to the contrary, if any amount or benefit to be paid or provided under this Plan would be an “Excess Parachute Payment,” within the meaning of Section 280G of the Code but for the application of this sentence, then the payments and benefits to be paid or provided under this Plan will be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction will be made only if and to the extent that such reduction would result in an increase in the aggregate payment and benefits to be provided, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, any tax imposed by any comparable provision of state law, and any applicable federal, state and local income and employment taxes). The determination of whether any reduction in such payments or benefits to be provided under this Plan or otherwise is required pursuant to the preceding sentence will be made at the expense of the Company by the Company’s independent accountants in effect prior to the Change in Control. The fact that the Participant’s right to payments or benefits may be reduced by reason of the limitations contained in this Article will not of itself limit or otherwise affect any other rights of the Participant under Plan. In the event that any payment or benefit intended to be provided under this Plan or otherwise is required to be reduced pursuant to this Article, the Company will effect such reduction by first reducing the benefits described in Section 3.1(a), then, to the extent necessary, by reducing the benefits described in Section 3.1(b).

ARTICLE 6
UNFUNDED ARRANGEMENT

The plan is unfunded, and all benefits payable hereunder will be paid, as needed, from the general assets of the Company. The Plan is only a general corporate commitment and each Participant must rely upon the general credit of the Company for the fulfillment of its obligations hereunder. Under all circumstances the rights of Participants to any asset held by the Company will be no greater than the rights expressed in this Plan. Nothing contained in this Plan shall constitute a guarantee by the Company that the assets of the Company will be sufficient to pay any benefits under this Plan or would place the Participant in a secured position ahead of general creditors of the Company; the Participants are unsecured creditors of the Company with respect to their Plan benefits, and the Plan constitutes a promise by the Company to make benefit payments in the future to eligible Participants. No specific assets of the Company have been or shall be set aside, or shall in any way be transferred to a trust or shall be pledged in any way for the performance of the Company’s obligations under the Plan which would remove such assets from being subject to the general creditors of the Company.

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ARTICLE 7
ADMINISTRATION OF THE PLAN

7.1 The Plan Administrator shall have the full power and authority to administer the Plan, carry out its terms and conditions and effectuate its purposes. The Plan Administrator shall be the “named fiduciary,” as such term is defined in ERISA, of the Plan, with responsibility for administration of the Plan.

7.2 The Plan Administrator shall serve without compensation for its services as such. However, all reasonable expenses of the Plan Administrator shall be paid or reimbursed by the Company upon proper documentation. The Plan Administrator shall be indemnified by the Company against personal liability for actions taken in good faith in the discharge of duties as the Plan Administrator.

7.3 The Plan Administrator shall keep all individual and group records relating to participants and former participants and all other records necessary for the proper operation of the Plan. Such records shall be made available to the Company and to each Participant for examination during business hours except that a Participant shall examine only such records as pertain exclusively to the examining Participant and to the Plan. The Plan Administrator shall prepare and shall file as required by law or regulation all reports, forms, documents and other items required by ERISA, and every other relevant statute, each as amended, and all regulations thereunder (except that the Company, as payor of the Benefits, shall prepare and distribute to the proper recipients all forms relating to withholding of income or wage taxes, Social Security taxes, and other amounts which may be similarly reportable).

ARTICLE 8
AMENDMENT OR TERMINATION

The Board reserves the right to amend or terminate the Plan at any time and in any manner without the consent of any affected individual, which right includes, without limitation, the right to change the individuals who are eligible to participate in the Plan from time to time. Notwithstanding the foregoing, (i) for a period of one year following a Change in Control, the Plan may not be terminated or amended in any manner adverse to any eligible Participant without the written consent of each affected Participant and (ii) any amendment to or termination of the Plan will not adversely affect the benefits otherwise payable to a Participant whose Employment Termination Date occurred prior to the date of such amendment or termination.

ARTICLE 9
CLAIMS PROCEDURES

9.1 Claim for Benefits. When a Benefit is due, a Claimant may submit a claim for Benefits to the office designated by the Plan Administrator to receive claims. For purposes of this Article, “Claimant” means a Participant or an authorized representative of a Participant who makes a claim for Benefits under the Plan.

9.2 Deadline for Notifications of Claim Determinations. If a Claimant’s claim for Benefits under the Plan is denied in whole or in part, the Plan Administrator will provide to the Claimant a written notice of the claim decision within 90 days of receipt of the claim. This 90-day period may be extended one time by the Plan Administrator for up to 90 days, provided that the Plan Administrator notifies the Claimant, prior to the expiration of such 90-day period, of the circumstances requiring the extension of time and the date by which the Plan Administrator expects to render a decision. Claims not acted upon within the time prescribed herein shall be deemed denied for purposes of proceeding to the review stage.

9.3 Contents of Notices of Claims Denials. When a claim is denied (an adverse determination) in full or in part, the Plan Administrator will provide the Claimant a written or electronic notification of the denial within the time frame specified in Section 9.2. This notice will:

(a) explain the specific reasons for the adverse determination;

(b) reference the specific Plan provisions on which the adverse determination is based;

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(c) provide a description of any additional material or information necessary for the Claimant to complete the claim and an explanation of why such material or information is necessary; and

(d) provide a description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse claims determination on review.

9.4 Appeals of Denied Claims. The Claimant will have 60 days after receiving the notice that the Claimant’s claim is denied to appeal the adverse determination in writing to the Plan Administrator. The Claimant may submit written comments, documents, records, and other information relevant to the claim, and such information will be taken into account during the review, without regard to whether it was submitted or considered in the initial claim determination. In addition, the Claimant will be provided, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the claim. If no appeal of the adverse determination is made in writing to the Plan Administrator within 60 days after the Claimant’s receipt of the notice of denial, the denial of the claim is final.

9.5 Deadlines for Notifications of Appeals Determinations. The Administrator will notify the Claimant of its determination on review of an adverse claim determination within a reasonable period of time, but not later than 60 days from receipt of a request for review of the adverse determination. This 60-day period may be extended one time by the Plan Administrator for up to 60 days, provided that the Plan Administrator notifies the Claimant, prior to the expiration of such 60-day period, of the circumstances requiring the extension of time and the date by which the Plan Administrator expects to render a decision.

9.6 Contents of Notices of Final Claims Determinations. Notice of the Plan’s claims decision will be given in writing or electronically. If the Claimant’s claim is denied in whole or in part the notification will include:

(a) the specific reasons for the denial;

(b reference to the specific Plan provisions on which the decision was based;

(c) a statement of the Claimant’s right to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the claim; and

(d) a statement of the Claimant’s right to bring a civil action in court under section 502(a) of ERISA.

ARTICLE 10
MISCELLANEOUS

10.1 Tax Withholding. The Company will calculate the deductions from the amount of the benefit otherwise payable under the Plan for any taxes required to be withheld by federal, state or local government and shall cause them to be withheld.

10.2 Plan Not an Employment Contract. The adoption and maintenance of the Plan is not a contract between the Company and its employees, which gives any employee the right to be retained in its employment. Likewise, it is not intended to interfere with the rights of the Company to discharge any employee at any time or to interfere with the employee’s right to terminate his or her employment at any time.

10.3 Alienation Prohibited. No benefits hereunder shall be subject to anticipation or assignment by a Participant, to attachment by, interference with, or control of any creditor of a Participant, or to being taken or reached by any legal or equitable process in satisfaction of any debt or liability of a Participant prior to its actual receipt by the Participant. Any attempted conveyance, transfer, assignment, mortgage, pledge, or encumbrance of the benefits hereunder prior to payment thereof shall be void.

10.4 Gender and Number. If the context requires it, words of one gender when used in the Plan shall include the other genders, and words used in the singular or plural shall include the other.

10.5 Severability. If any provision of the Plan is determined to be invalid or unenforceable, that determination shall not affect the validity or enforceability of any other provision.

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10.6 Successors. This Plan shall be binding upon and inure to the benefit of the Company and any of its successors or assigns. The Company shall require any successor to or assignee of (whether direct or indirect, by purchase, merger, consolidation or otherwise) all or substantially all of the assets or businesses of the Company (i) to assume unconditionally and expressly this Plan and (ii) to agree to perform or to cause to be performed all of the obligations under this Plan in the same manner and to the same extent as would have been required of the Company had no assignment or succession occurred.

10.7 Assignment; Binding Effect. This Plan shall be binding upon any Successor. The Company shall not assign any of its obligations under the Plan unless (a) such assignment is to a Successor, and (b) the requirements of Section 10.6 are fulfilled.

10.8 Compliance with Section 409A of the Code. Deferred Compensation. It is intended that benefits payable hereunder, whether in form or operation, do not constitute “deferred compensation” within the meaning of Code Section 409A and therefore, the benefits are intended to be exempt from the requirements applicable to deferred compensation under section 409A of the Code and the regulations thereunder.

(a) Benefits that are not intended to constitute deferred compensation. With respect to benefits payable hereunder that are not intended to constitute deferred compensation within the meaning of Code Section 409A, (i) to the extent necessary and permitted under Code Section 409A, the Company is authorized to amend this Plan so that the Plan as modified and the benefits payable under the modified Plan, remain exempt from the requirements applicable to deferred compensation under Code Section 409A of the Code (ii) the Committee shall take no action otherwise permitted under the Plan to the extent such action shall cause such benefits to be treated as deferred compensation within the meaning of Code Section 409A. The Plan Administrator, in its sole discretion, shall determine to what extent if any, this Plan shall be required to be so modified. Notwithstanding any provision to the contrary, such modification shall be made without prior notice to or consent of Participants.

(b) Benefits that constitute deferred compensation. With respect to benefits payable hereunder that constitute deferred compensation within the meaning of Code Section 409A by form or operation (including, but not limited to, benefits referenced under paragraph (a) above that the Plan Administrator determines is a form of deferred compensation), (i) to the extent necessary the Company is authorized to amend this Plan so that the Plan as modified and the benefits payable under the modified Plan, complies with the requirements applicable to deferred compensation under Code Section 409A and (ii) the Plan Administrator shall take no action otherwise permitted under the Plan to the extent such action shall cause benefits payable herunder to no longer comply with the requirements applicable to deferred compensation under Code Section 409A. The Plan Administrator, in its sole discretion, shall determine to what extent if any, this Plan shall be required to be so modified. Notwithstanding any provision to the contrary, such modification or substitution shall be made without prior notice to or consent of Participants.

(c) Treatment of specified employees. If a Participant is a “specified employee” as defined under Code Section 409A and the Participant’s benefits are to be paid or provided on account of the Participant’s Separation from Service (for reasons other than death) and such benefits constitute “deferred compensation” as defined under Code Section 409A, then any portion of the Participant’s benefits that would otherwise be paid or provided during the six-month period commencing on the Participant’s Separation from Service shall be paid or provided as soon as practicable following the conclusion of the six-month period (or following the Participant’s death if it occurs during such six-month period).

10.9 Governing Law. The provisions of the Plan shall be governed by the laws of the State of Oklahoma and, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction. Participants under this Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Oklahoma to resolve any and all issues that may arise out of or relate to the Plan.

XETA TECHNOLOGIES INC.
By:	/s/ Greg Forrest
	Title: President and CEO

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Exhibit A

XETA TECHNOLOGIES, INC.
EXECUTIVE CHANGE IN CONTROL SEVERANCE PLAN

RELEASE AGREEMENT

This RELEASE is executed by  _____  (the “Employee”) in consideration of the severance benefits provided under the XETA Technologies, Inc. Executive Change in Control Severance Plan (the “Plan”), and as a condition to the receipt of such benefits. For purposes of this Release, the term “Company” means XETA Technologies, Inc. and any Successor (as defined in the Plan).

NOW THEREFORE, the Employee provides the following release:

1. Release by Employee. I,  _____, on behalf of myself and my heirs and assigns, in consideration of the Company’s payment of the severance benefits in the amount of $                     (less any amounts that the Company is required to withhold under applicable laws) and the welfare benefits described in Section 3.1(b) of the Plan to be furnished to me pursuant to the Plan, the sufficiency of which is hereby acknowledged, and as a material inducement to the Company to enter into this Release hereby release and forever discharge the Company, and its directors, officers, shareholders, partners, representatives, agents, employees, predecessors, successors, affiliates, divisions, subsidiaries and related entities and their respective directors, officers, shareholders, agents, representatives and employees, from all claims of any nature whatsoever waivable by applicable law, from the beginning of time to the date of the execution of this Release, known or unknown, suspected or unsuspected, including but not limited to all claims arising out of, based upon, or relating to my employment with the Company, or compensation for that employment. I understand that the consideration provided for in the Plan exceeds anything of value to which I am already entitled without the Plan.

Without limiting the generality of the foregoing, I understand and agree that this Release includes, but is not limited to, claims based on or relating to: (a) any express or implied employment contract; (b) wrongful discharge; (c) termination in breach of public policy; (d) age discrimination under the Age Discrimination in Employment Act of 1967, as amended; (e) claims of discrimination, harassment or retaliation under Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, or any other law which prohibits discrimination based on race, color, age, ancestry, national origin, sex, sexual orientation, religion, mental or physical disabilities, or marital status; (f) any other federal, state or local laws or regulations prohibiting employment discrimination; (g) personal injury, defamation, assault, battery, invasion of privacy, fraud, intentional or negligent misrepresentation of fact, intentional or negligent infliction of emotional distress, or false imprisonment; (h) claims for additional wages, compensation, severance pay or bonuses; and (i) claims for attorneys’ fees or costs.

I UNDERSTAND THAT THIS RELEASE COVERS BOTH CLAIMS THAT I KNOW ABOUT AND THOSE THAT I MAY NOT KNOW ABOUT.

2. Additional Issues Associated with Scope of Release. I understand that I am only waiving those claims that I have as of the date I sign this Release, and not any claims that might arise in the future. I also understand that this Release does not release or discharge claims that are not waivable by applicable law. Also excluded from the scope of this Release are any rights I have to any vested benefits under the Company’s benefit plans, including but not limited to the Company’s 401(k) Plan. Further, nothing in this Release prohibits me from filing a charge with the EEOC or participating in an investigation or proceeding of the EEOC. However, I am waiving the right to any personal monetary recovery or other personal relief should the EEOC or any other agency pursue alleged charges in part or entirely on my behalf.

3. No Knowledge of Legal Violations. I further assert that during my employment with the Company and activities regarding any company or organization affiliated with the Company, that I have no information or knowledge of any legal irregularity, violation, or alleged violation of any law, regulation, statute, or ordinance of any kind resulting from the operations of the Company, or any other company or organization affiliated with the Company. I have never reported any such irregularity or violation to any superior with respect to the Company or any company or organization affiliated with the Company.

4. Advisement to Consult with an Attorney and Forty-five (45) Day Review Period. I acknowledge that I am hereby advised in writing to consult with an attorney prior to executing this Release to discuss the contents of this document and its meaning. I understand that I have forty-five (45) days after receiving this Release to consider this waiver and release of my rights. I understand the terms and conditions of this Release in full, agree to abide by this, and knowingly and voluntarily execute it without hidden reservations.

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5. Seven (7) Day Revocation Period. I understand that I will have seven (7) days after I sign this Release during which I can revoke my signature and cancel my acceptance of the benefits under the Plan for any reason, and that this Release shall not become effective or enforceable until after this revocation period has expired. I understand that I may revoke or rescind this Release by providing written notice of revocation to the Company’s General Counsel, [name, address, fax number], within the 7-day revocation period. I understand that I will not be entitled to any severance benefits under the Plan until the end of the 7-day revocation period.

6. Governing Law. The provisions of the Plan and this Release shall be governed by the laws of the State of Oklahoma and, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction. Participants under this Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Oklahoma to resolve any and all issues that may arise out of or relate to the Plan or this Release.

7. Continuing Obligations After Separation from Employment. I agree that before and after my separation from employment, I will continue to abide by any Company policies and procedures relating to confidentiality, inventions, non-disclosure and/or other employment obligations that survive the termination of my employment. I agree that I will continue to be bound by all post-employment obligations as required by the Company’s policies and procedures or as required in any other written agreement between myself and the Company. I agree that the Plan and this Release do not affect or diminish in any manner any of my post-employment obligations to the Company, including, but not limited to, those specifically described within this Release.

8. Entire Agreement. I understand that the Plan and this Release contain the entire agreement and understanding between me and the Company regarding my employment and separation from that employment and that no other covenants or promises have been made except those contained in the Plan and this Release. The Plan and this document supersede all other agreements and arrangements between the Company and me, whether written or oral.

9. Attorneys’ Fees. I further agree I am fully responsible for any attorneys’ fees incurred by me in consulting with an attorney of my choice in connection with my review or execution of this document.

10. Severability. I agree that should any court or arbitrator determine that any clause, sentence, provision, paragraph, or part of this Release is illegal, invalid, or unenforceable, that court’s or arbitrator’s determination shall not affect, impair, or invalidate the remainder of the Release, and the remainder of the Release will remain in full force and effect.

11. Headings. I understand that all headings used in this Release are intended for convenience and reference only and do not in any manner amplify, limit, modify or amend the Release. A court or arbitrator shall not use any headings in the construction or interpretation of any section of the Release.

EXECUTED in multiple originals this  _____  day of                     ,                     .

Signature of Employee

WITNESS

NON-REVOCATION STATEMENT

I,                                         , acknowledge that at least seven (7) days have expired since the execution of the Release Agreement by me on the  _____  day of                     ,                     , and I knowingly and voluntarily elect not to revoke this waiver and release of my rights under the Age Discrimination in Employment Act, as amended, 29 U.S.C. § 621 et seq.

EXECUTED in multiple originals this  _____  day of                     ,                     .

Signature of Employee

ii

EX-10.9

Exhibit 10.9

North America Reseller Agreement Acknowledgment

North America Reseller Agreement Acknowledgment

XETA Technologies
Reseller Name
1814 West Tacoma
Address
Broken Arrow OK 74012			918-664-8200
City	State	Zip	Telephone	Fax

As of the 27th day of September, 2010 (“Effective Date”) the Reseller identified above (“Reseller”) hereby agrees to the terms and conditions (including those contained in any exhibits thereto) of the ShoreTel, Inc. (“ShoreTel”) North America Reseller Agreement (“Reseller Agreement”) posted at http://partners.shoretel.com/manage/.

Reseller agrees that ShoreTel may amend the terms and conditions of the Reseller Agreement from time to time and that the terms and conditions applicable to Reseller and its relationship with ShoreTel and any purchase orders placed by Reseller at any given time will be those in effect on the web page at such time.

Reseller agrees that Exhibit A hereto shall be incorporated into and made part of the Reseller Agreement.

Reseller further agrees that by executing this Acknowledgment any existing reseller contracts between ShoreTel and Reseller are terminated and that this Reseller Agreement supersedes all previous reseller contracts between ShoreTel and Reseller.

Reseller certifies that it has read and agreed to the provisions set forth in this Acknowledgment and to the terms and conditions posted at http://partners.shoretel.com/manage/ and the undersigned is duly authorized to sign this Acknowledgment.

Reseller Acknowledgement of Agreement

Reseller:	XETA Technologies
Signature:	/s/ Robert B. Wagner
Print Name:	Robert B. Wagner
Title:	Chief Financial Officer
Date:	September 27, 2010

Effective 10/01/2008 -Confidential and Proprietary-

EX-10.10

Exhibit 10.10

Reseller Agreement
Addendum

Reseller: XETA Technologies

Agreement Number: __________________________________________________
(Agreement number will be provided by ShoreTel Contract Admin)     

THIS ADDENDUM IS AN INTEGRAL PART OF THE RESELLER AGREEMENT BETWEEN SHORETEL, INC. AND THE ABOVE-NAMED RESELLER AND IS INCORPORTED THEREIN BY REFERENCE.

(1) The parties agree to modify Section 1.1 (Appointment) to add the following at the end of such section:

[ * ].

(2) The parties agree to modify Section 2.4 (Return) so that the second sentence therein is amended and restated as follows:

Any Products that are not rejected within [ * ] of receipt, or any Products that have been commercially used, are deemed accepted by Partner and are not returnable without prior written authorization from ShoreTel.

(3) The parties agree to amend and restate Section 4,7 (Leads) as follows:

ShoreTel may provide Partner with customer leads from time to time, as provided by section 5.1. [ * ] Partner also agrees to promptly respond to sales leads introduced by ShoreTel and to provide weekly feedback to ShoreTel on the disposition of such leads.

(4) The parties agree to modify Section 4.9 (Demonstration Systems) so that the [ * ] therein is amended and restated as follows:

[ * ].

(5) The parties agree to modify Section 9.1 (Term of Agreement) [ * ]:

Either party may elect to terminate this Agreement upon the giving of at least [ * ] written notice before the end of the Initial Term or any Renewal Term.

(6) The parties agree to [ * ]

IN WITNESS WHEREOF, the parties have executed this Addendum as of the latest date set forth below.

Reseller Name: XETA Technologies		ShoreTel, Inc
By:	/s/ Robert B. Wagner	By:
	Name: Robert B. Wagner		Name:
	Title: Chief Financial Officer		Title:
Date:	9/28/10	Date:

* The asterisk (*) indicates that material has been omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 of the rules to the Securities and Exchange Act of 1934, as amended.

EX-21

EXHIBIT 21

Subsidiaries of the Company

Pyramid Communication Services, Inc.

XETACom, Inc., an Oklahoma corporation

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 33-62173, 333-44544 and 333-116745 on Form S-8 of XETA Technologies, Inc. of our report dated January 24, 2011, relating to our audits of the consolidated financial statements, which appear in the Annual Report on Form 10-K of XETA Technologies, Inc. as of October 31, 2010 and 2009, and for each of the three years in the period ended October 31, 2010.

Tulsa, Oklahoma
January 24, 2011

EX-31.1

Exhibit 31.1

PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
Under Rule 13a-14 (a) / 15d-14 (a)

I, Greg D. Forrest, certify that:

1. I have reviewed this annual report on Form 10-K of XETA Technologies, Inc;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit/finance committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: January 21, 2011

/s/ Greg D. Forrest Greg D. Forrest

Chief Executive Officer

EX-31.2

Exhibit 31.2

PRINCIPAL FINANCIAL OFFICER CERTIFICATION
Under Rule 13a-14 (a) / 15d-14 (a)

I, Robert B. Wagner, certify that:

1. I have reviewed this annual report on Form 10-K of XETA Technologies, Inc;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit/finance committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: January 21, 2011

/s/ Robert B. Wagner Robert B. Wagner

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of XETA Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended October 31, 2010, as filed with the Securities and Exchange Commission (the “Report”), I, Greg D. Forrest, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Greg D. Forrest  

Greg D. Forrest 

Chief Executive Officer
January 21, 2011 

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of XETA Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended October 31, 2010, as filed with the Securities and Exchange Commission (the “Report”), I, Robert B. Wagner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert B. Wagner  

Robert B. Wagner 

Chief Financial Officer
January 21, 2011